<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997
REGISTRATION NO. 333-35759
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BMJ MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 65-0676079
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
4800 NORTH FEDERAL HIGHWAY, SUITE 104D
BOCA RATON, FLORIDA 33431
(561) 391-1311
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NARESH NAGPAL, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
4800 NORTH FEDERAL HIGHWAY, SUITE 104D
BOCA RATON, FLORIDA 33431
(561) 391-1311
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With copies to:
<TABLE>
<S> <C>
LAWRENCE G. GRAEV, ESQ. ROBERT ROSENMAN, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP JOHN W. WHITE, ESQ.
30 ROCKEFELLER PLAZA CRAVATH, SWAINE & MOORE
NEW YORK, NEW YORK 10112 825 EIGHTH AVENUE
(212) 408-2400 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this 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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock (par value $.001 per share).. 5,750,000 shares $9.00 $51,750,000 $15,682
</TABLE>
(1) Includes 750,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) $10,455 of the registration fee has previously been paid.
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE 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 NOVEMBER 6, 1997
PROSPECTUS
5,000,000 SHARES
BMJ MEDICAL MANAGEMENT, INC.
COMMON STOCK
All of the 5,000,000 shares of Common Stock offered hereby are being issued
and sold by 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 $7.00 and $9.00 per share. See 'Underwriting' for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for the Common Stock to be quoted and
traded on the Nasdaq National Market ('Nasdaq') under the symbol BONS.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' COMMENCING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total(3).............................................. $ $ $
</TABLE>
(1) Does not include a $ non-accountable expense allowance to be
received by the Underwriters. See 'Underwriting' for indemnification
arrangements with the several Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See 'Underwriting.'
----------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT& QUIST
RAYMOND JAMES & ASSOCIATES, INC.
VOLPE BROWN WHELAN & COMPANY
, 1997
<PAGE>
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 under the Securities Act, including
amendments thereto, relating to the Common Stock offered hereby has been filed
by the Company with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and exhibits and schedules filed as a part thereof. A copy of the Registration
Statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
all or any portion of the Registration Statement may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. The Commission maintains a WorldWide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
Such reports, proxy and information statements and other information may be
found on the Commission's site address, http: //www.sec.gov. Copies of such
material also can be obtained from the Company upon request.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
------------------------
Forward-Looking Statements. Certain statements contained in this
Prospectus, including statements regarding the anticipated development and
expansion of the Company's business, the intent, belief or current expectations
of the Company, its directors or its officers, primarily with respect to the
future operating performance of the Company and other statements contained
herein regarding matters that are not historical facts are 'forward-looking'
statements. Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, the potential inability to affiliate with
physician practices, the potential termination of contractual relationships,
fluctuations in the volume of procedures performed by the practices' physicians,
changes in the reimbursement rates for those services, uncertainty about the
ability to collect the appropriate fees for services provided or ordered by the
practices' physicians, as well as other risks detailed in 'Risk Factors,'
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business.'
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS AND PENALTY
BIDS. SEE 'UNDERWRITING.'
2
<PAGE>
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. Investors should carefully consider the
information set forth under the heading 'Risk Factors.' As used herein, the term
the 'Company' refers to BMJ Medical Management, Inc., a Delaware corporation;
the term 'Existing Practices' collectively refers to the 24 Practices that have
affiliated with the Company via management services agreements as of the date of
this Prospectus; and the term 'Practices' includes the Existing Practices and
other practices with which the Company may affiliate in the future. Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
The Company is principally a physician practice management company (a
'PPM') that provides management services to physician practices that focus on
musculoskeletal care, which involves the medical and surgical treatment of
conditions relating to bones, muscles, joints and related connective tissues.
The broad spectrum of musculoskeletal care offered by the physician practices
ranges from acute procedures, such as spine or other complex surgeries, to the
treatment of chronic conditions, such as arthritis and back pain. The management
services provided by the Company include physician practice and network
development, marketing, payor contracting and financial, administrative and
clinical information management. In addition, the Company, through its wholly
owned subsidiary, OMNI Acquisition Corporation ('OMNI'), operates an Independent
Physician Association (the 'IPA') that negotiates and administers payor
contracts for the delivery of health care services by physicians and physician
practices that focus on musculoskeletal care on behalf of a specified patient
population. Since its formation in January 1996, the Company has affiliated (the
'Affiliation Transactions') by entering into management services agreements (the
'Management Services Agreements') with 24 Existing Practices comprising 112
doctors practicing in Arizona, California, Florida, Pennsylvania and Texas and
operates an IPA with 42 physicians in Arizona.
The market for musculoskeletal care in the United States is significant and
growing. According to the American Academy of Orthopaedic Surgeons (the 'AAOS'),
total direct costs associated with the delivery of musculoskeletal care exceeded
$60 billion in 1988 and increased to approximately $72 billion in 1992. The
increase in expenditures can be attributed to various factors, including
improvements in medical technology, more active lifestyles which have resulted
in the growth of sports medicine and the overall aging of the population. In
1992, the 65-and-over age group represented approximately 12% of the U.S.
population, but accounted for more than half of all musculoskeletal care
expenditures. Historically, surgical and non-surgical orthopaedic specialists
have maintained separate practices; recently, however, musculoskeletal
physicians have begun to follow the consolidation trend seen elsewhere in the
health care industry.
The Company's goal is to develop the leading musculoskeletal network in
each of its markets by aligning the Company's interests with those of the
Practices' physicians. The Company has divided the United States into three
geographic regions, and selects specific markets based primarily on population
size, which must be large enough to support a viable musculoskeletal physician
network. The Company's strategy consists of (i) expanding into targeted new
markets by affiliating with leading musculoskeletal practices; (ii) continuing
to develop its existing markets by strengthening and expanding the Practices in
order to achieve significant local market presence; (iii) introducing ancillary
services to expand the breadth of care directly offered by the Practices'
physicians; and (iv) developing and implementing a disease management
information system to foster curative and palliative regimens, improve provider
and patient access to resources and technology and deliver cost-effective,
quality care. The Company's long-term strategy includes developing and
implementing a musculoskeletal disease management program.
Under the Management Services Agreements, the Company provides management,
administrative and development services to the Existing Practices, while the
Existing Practices retain, among other things, sole responsibility for all
aspects of the practice of medicine. The Company's revenues under the Management
Services Agreements are typically based on a specified percentage of Practice
revenues, generally 10% to 15%, rather than on a percentage of net operating
income. In addition, the Company typically assumes the Practices' clinic
overhead expenses and charges them back to the Practices at actual cost, and
receives two-thirds of savings
3
<PAGE>
realized through the Company's purchasing power. The Company seeks to develop
and maintain long-term relationships with the Practices by providing physician
performance incentives through equity ownership in the Company, ensuring
physician clinical autonomy and participation in Practice governance and
delivering national support services on a regional basis. The Company believes
that its affiliation model, versus other existing models, provides less
financial risk to the Company while enhancing its relationships with the
Practices' physicians.
In addition to a Management Services Agreement, the Company typically
enters into an asset purchase agreement (the 'Asset Purchase Agreement'), a
restricted stock agreement (the 'Restricted Stock Agreement') and a stockholder
noncompetition agreement (the 'Stockholder Noncompetition Agreement') with a
Practice that affiliates with the Company. Under the Asset Purchase Agreement,
the Company purchases from the Practice all of those assets used by the Practice
in the operation of the Practice. The Restricted Stock Agreement governs the
Common Stock issued by the Company to the physician owners of the Practice as
partial consideration for affiliating with the Company. Under the Stockholder
Noncompetition Agreement, the Practice's physicians agree not to compete with or
disclose confidential information about the Company. See 'Business--Contractual
Agreements with Practices.' The Company will use approximately $11.2 million of
the proceeds to repay outstanding notes issued to four Practices in Affiliation
Transactions. See 'Use of Proceeds' and 'Certain Transactions--Affiliation
Transactions'.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................ 5,000,000 shares
Common Stock to be outstanding after the offering.............. 20,630,000 shares(1)
Use of proceeds................................................ Repayment of debt and general corporate
purposes. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol......................... BONS
</TABLE>
- ------------------
(1) Excludes 1,228,000 shares of Common Stock issuable upon exercise of
outstanding options to purchase Common Stock with a weighted average
exercise price of $0.39 per share and 321,665 shares of Common Stock
issuable upon exercise of outstanding warrants to purchase Common Stock with
a weighted average exercise price of $3.44 per share. See 'Management' and
'Certain Transactions.'
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED PRO FORMA
YEAR ENDED PRO FORMA AS
DECEMBER 31, AS ADJUSTED(1)(2) JUNE 30, ADJUSTED(2)(3)
------------ YEAR ENDED ------------------------ SIX MONTHS ENDED
1996 DECEMBER 31, 1996 1996 1997 JUNE 30, 1997
------------ ----------------- ---------- ---------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Practice revenue, net................... $ 6,029 $91,218 $ -- $ 19,907 $ 48,437
Less: physician and other provider
services.............................. (2,912) (31,987) -- (9,509) (15,019)
------------ ------- ---------- ---------- -------
Management fee revenue.................. 3,117 59,231 -- 10,398 33,418
Costs and expenses:
Medical support services.............. 2,844 49,342 -- 9,541 26,816
General and administrative............ 1,278 1,278 51 2,139 2,139
Depreciation and amortization......... 104 1,705 1 300 1,024
Interest expense (income), net........ -- 40 -- 294 20
------------ ------- ---------- ---------- -------
Total costs and expenses............ 4,226 52,365 52 12,274 29,999
------------ ------- ---------- ---------- -------
Income (loss) before income taxes....... (1,109) 6,866 (52) (1,876) 3,419
Income taxes(4)......................... -- 2,609 -- -- 1,300
------------ ------- ---------- ---------- -------
Net income (loss)....................... $ (1,109) $ 4,257 $ (52) $ (1,876) $ 2,119
------------ ------- ---------- ---------- -------
------------ ------- ---------- ---------- -------
Net income (loss) per common share:
Primary............................... $ (0.09) $ 0.19 $ 0.00 $ (0.15) $ 0.10
Diluted............................... $ (0.09) $ 0.19 $ 0.00 $ (0.15) $ 0.09
Weighted average common shares
outstanding:
Primary............................... 11,852 21,914 11,217 12,480 21,914
Diluted............................... 11,852 22,470 11,217 12,480 22,470
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
------- --------------- ------------------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 6,915 $ 7,094 $ 10,910
Working capital..................................................... 7,490 1,799 24,955
Total assets........................................................ 27,899 61,855 65,671
Long-term debt, less current portion................................ 6,540 16,305 4,061
Total stockholders' equity.......................................... 11,546 20,452 55,852
OTHER OPERATING DATA:
Number of Practices................................................. 8 24 24
Number of physicians................................................ 57 112 112
</TABLE>
- ------------------
The unaudited pro forma financial information presented does not purport to
(i) represent what the results of operations or financial condition of the
Company would actually have been if the transactions reflected therein had in
fact occurred on the assumed dates or (ii) project the future results of
operations or financial condition of the Company.
(1) Gives effect to the Affiliation Transactions as if they had occurred on
January 1, 1996. See 'The Company,' 'Pro Forma Financial Information' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
(2) Gives effect to this offering (the 'Offering') as if it had occurred at
January 1, 1996 at an assumed initial public offering price of $8.00 per
share and the receipt and application of the estimated net proceeds
therefrom. See 'Use of Proceeds' and 'Capitalization.'
(3) Gives effect to the Affiliation Transactions completed in 1997 (the '1997
Affiliation Transactions') as if they had occurred on January 1, 1997. See
'The Company,' 'Pro Forma Financial Information' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
(4) Gives effect to the 1997 Affiliation Transactions completed after June 30,
1997 as if such transactions had occurred on June 30, 1997. See 'The
Company,' 'Management's Discussion and Analysis of Financial Condition and
Results of Operations,' 'Pro Forma Financial Information' and
'Capitalization.'
(5) Gives effect to the completion of this Offering at an assumed initial public
offering price of $8.00 per share and the receipt and application of the
estimated net proceeds therefrom as if such transactions had occurred on
June 30, 1997. See 'Use of Proceeds' and 'Capitalization.'
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business,' as well as in the Prospectus generally. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Prospectus generally.
Lack of Significant Combined Operating History. The Company was
incorporated in January 1996 and, prior to its affiliation with the first
Existing Practice in July 1996, had no history of operations or earnings. Before
affiliating with the Company, the Existing Practices operated as independent
entities, and there can be no assurance that the Company will be able to
integrate and manage profitably the assets and personnel of the Existing
Practices or of any other Practices. In addition, there can be no assurance that
the Company's affiliation with any Practice will not result in a loss of
patients or other unanticipated adverse consequences, any of these events could
have a material adverse effect on the Company. Prior to the Company's
acquisition of the IPA in October 1997, the Company had no history of operating
an IPA. There can be no assurance that the Company will be able to successfully
and profitably manage payor contracting on behalf of the IPA. Additionally,
there can be no assurance that the Company's affiliation with the IPA will not
result in the termination of the agreements pursuant to which the physicians
affiliated with the IPA provide services to enrollees of health care plans and
other specified patient populations (the 'IPA Provider Agreements') or other
unanticipated adverse consequences, any of which could have a material adverse
effect on the Company. The Company's strategy is predicated on its ability to
achieve significant consolidation of Practices and to sustain and enhance the
profitability of such Practices. There can be no assurance that the Company's
personnel, systems and infrastructure will be sufficient to achieve effective
and profitable management of the Practices under the Management Services
Agreements or to implement effectively the Company's strategies. See
'Business--Strategy' and 'Management.'
Dependence on the Practices and Physicians. The Company's revenues are
dependent on its affiliation through Management Services Agreements with the
Practices and on the success of the Practices, including the IPA. There can be
no assurance that the Practices will maintain successful operations, that they
will not terminate their Management Services Agreements or that key physicians
in a particular Practice will continue to affiliate with such Practice. On a pro
forma basis for the year ended December 31, 1996 and the six months ended June
30, 1997, the Company received approximately 18% and 17%, respectively, of its
total revenue from management fees paid by the Southern California Orthopedic
Institute Medical Group ('SCOI'). The termination of the SCOI Management
Services Agreement would have a material adverse effect on the Company. For a
further description of the Management Services Agreements, including a
description of their termination provisions and noncompetition arrangements with
the Practices' physicians, see 'Business--Contractual Agreements with the
Practices.' For a discussion of circumstances under which a Management Services
Agreement may be rendered unenforceable, see '--Government Regulation.'
Some of the Existing Practices derive a significant portion of their
revenue from a limited number of physicians. The physicians are employees of the
Practices, not of the Company, and there can be no assurance that the Company or
the Existing Practices will maintain cooperative relationships with key members
of any such Practice. In addition, key members of a Practice could retire,
become disabled or otherwise become unable or unwilling to continue generating
revenues at the current level or practicing medicine with such Practice. The
loss by a Practice of one or more key members would have a material adverse
effect on the revenue of such Practice and on the Company. The Company has the
right under the Management Services Agreements to obtain and maintain life
insurance in the amount of $500,000 on the life of each licensed physician
employed by each Practice for the benefit of the Company. Nonetheless, the loss
of revenue by any Practice as a result of a physician's death could have a
material adverse effect on the Company. Additionally, although the Company has
entered into noncompetition agreements with each Practice and its respective
physicians, there can be no assurance as to the enforceability of such
noncompetition agreements.
6
<PAGE>
Rescission Rights. The Company has entered into a Management Services
Agreement with South Texas Spinal Clinic, P.A. ('STSC') which permits STSC and
the individual physicians to rescind the Affiliation Transaction on (i) November
1, 1998 if the Company has not affiliated with an aggregate of 16 physicians in
San Antonio, Texas by such date and (ii) November 1, 2003. In addition, the
Management Services Agreements for five other Existing Practices comprising
eight physicians contain provisions that permit such Existing Practices to
rescind their Affiliation Transactions on their respective seventh
anniversaries.
Risk of Termination. The Management Services Agreement may be terminated
by either party if the other party (a) files a petition in bankruptcy or other
similar events occur, or (b) defaults in any material respect in the performance
of any duty or obligation under the Management Services Agreement, which default
is not cured within a specified period after receipt of notice thereof or (c)
any of the representations and warranties made by such party in the Management
Services Agreement is materially untrue or misleading and such party fails to
correct such matter after receipt of written notice thereof. The Company also
has the right to terminate the Management Services Agreement in the event that
the Practice is excluded from participation in the Medicaid or Medicare program
for any reason. Either party may also terminate the Management Services
Agreement if such party determines that the structure of the Management Services
Agreement violates any state or federal laws or regulations existing at such
time and that an amendment to the Management Services Agreement will be unable
to correct such defect.
Risks Related to the IPA Provider Agreements. There can be no assurance
that the IPA will maintain successful operations, that agreements between the
IPA and payors ('IPA Payor Agreements') will not be terminated, that the IPA
will successfully enter into additional IPA Payor Agreements or that the IPA
Provider Agreements will not be terminated. Each IPA Provider Agreement now in
effect permits the physician member to terminate the agreement without cause
upon 90 days' written notice to the IPA. Because the IPA contracts with payors
to arrange for specialty provider services sufficient to furnish care as needed
to a specified patient population, termination of IPA Provider Agreements could
jeopardize the IPA's ability to satisfy its obligations under IPA Payor
Agreements, and may result in termination of those agreements. Any termination
of IPA Provider Agreements or IPA Payor Agreements could have a material adverse
effect on the Company.
Risks Related to New Affiliations and Expansion. The Company is exposed to
significant growth-related risks because an essential element of its strategy is
to affiliate with and/or to merge affiliated musculoskeletal practices and to
expand the business of such practices. The Company's strategy also involves
assisting the Practices in recruiting physicians, expansion and development of
the IPA and, to the extent permitted by applicable law, contracting with or
establishing ancillary musculoskeletal facilities (the 'Ancillary Service
Facilities'), such as ambulatory surgery, physical therapy and magnetic
resonance imaging ('MRI') centers and mobile units, and contracting with
associated providers. Identifying appropriate physician group practices,
individual physicians and ancillary providers and facilities, and proposing,
negotiating and implementing economically attractive affiliations with such
practices, physicians and providers, as well as merging such practices, can be a
lengthy, complex and costly process. The failure of the Company to affiliate
with additional musculoskeletal practices or merge practices would have a
material adverse effect on the Company's ability to execute its expansion
strategy. Moreover, future affiliations or mergers, if any, may not contribute
to the Company's profitability or otherwise facilitate the successful
implementation of the Company's overall strategy. See 'Business--Strategy.'
The Company's expansion is also dependent upon factors such as the ability
of the Company and the Practices to (i) adapt the Company's arrangements with
the Practices to comply with current and future legal requirements, including
state prohibitions on fee-splitting and corporate practice of medicine, state
and federal limitations on physicians ordering ancillary services from, or
referring patients to, facilities with which such physicians have a financial
relationship, state and federal anti-kickback provisions and state regulation of
the business of insurance; (ii) obtain regulatory approval and certificates of
need, where necessary; and (iii) comply with licensing requirements applicable
to physicians and to facilities operated, and services offered, by physicians.
No assurance can be given that the application of current laws or changes in
legal requirements would not have a material adverse effect on the Company.
Moreover, the Company and the Practices may not be able to obtain and maintain
all necessary regulatory approvals or comply with all applicable laws,
regulations and licensing requirements. See '--Government Regulation' and
'Business--Government Regulation and Supervision.'
7
<PAGE>
Since its inception, the Company's business has grown rapidly. Continued
rapid growth through affiliation and expansion could impair the Company's
ability to efficiently provide its management services to the Practices to
adequately manage and supervise its employees and to effectively operate the
IPA. There can be no assurance that the Company will be able to expand its
infrastructure and management to achieve planned growth. In addition, the
Company may be unable to retain personnel or acquire other resources necessary
to service growth adequately. Moreover, the Company is still in the process of
integrating the Practices that have affiliated with the Company to date and no
assurance can be given that the Company will be successful in integrating all of
such Practices or any Practices that affiliate with the Company in the future.
Risks Associated with Ancillary Service Facilities. To date, the Company
has not opened any Ancillary Service Facilities. The Company is unable to
predict whether it will be able to obtain the critical mass in any particular
market needed to establish Ancillary Service Facilities and, if so, whether the
Company and/or the Practices will be able to consistently minimize costs and
maintain a sufficient volume of patient visits to the Ancillary Service
Facilities for such facilities to be profitable. Moreover, such facilities must
be structured and operated to comply with various federal and state laws. Future
judicial or regulatory interpretation could adversely affect such operations.
See '--Government Regulation.'
Dependence on Information Systems. No assurance can be given that the
Company will be able to enhance existing and/or implement new information
systems that can be integrated with the Practices' existing operational,
financial and clinical information gathering systems. In addition to their
integral role in helping the Practices realize operating efficiencies, such new
systems are critical to developing and implementing a disease management
information database. See 'Business--Strategy.' To develop its network, the
Company must continue to invest in and administer sophisticated management
information systems. The Company may experience unanticipated delays,
complications and expenses in implementing, integrating and operating such
systems. Furthermore, such systems may require modifications, improvements or
replacements as the Company expands and as new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during periods of
implementation. Moreover, implementation of such systems is subject to the
availability of information technology and skilled personnel to assist the
Company in creating and implementing the system. The failure to successfully
implement and maintain operational, financial and clinical information systems
would have a material adverse effect on the Company. See 'Business--BMJ
Operations.'
Reductions in Third Party Reimbursements. The health care industry is
experiencing a trend toward cost containment as third party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, seek to impose lower reimbursement and utilization rates and
to negotiate reduced capitated payment schedules with service providers. Further
reductions in payments to health care providers or other changes in
reimbursement for health care services could have a material adverse effect on
the Practices and/or the IPA and, as a result, on the Company. These reductions
could result from changes in current reimbursement rates or from a shift in
clinical protocols to non-surgical solutions for orthopaedic conditions. The
Company may not be able to successfully offset any or all of the payment
reductions that may occur.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ('RBRVS') payment methodology for heath care
provider services. RBRVS is a fee schedule that, except for certain geographical
and other adjustments, pays similarly situated health care providers the same
amount for the same services. The RBRVS is subject to annual increases or
decreases at the discretion of Congress or the federal Health Care Financing
Administration ('HCFA'). To date, the implementation of RBRVS has reduced
payment rates for certain of the procedures historically provided by the
Existing Practices. Furthermore, HCFA is required by law to recalibrate the
practice expense component of the RBRVS over the next four years in a way that
will have positive effects on payments to primary care providers but will
decrease payments for most services provided by specialists, including many
services provided by the Existing Practices. For the six months ended June 30,
1997, the net practice revenue from Medicare constituted approximately 12% of
the aggregate net practice revenue of the Existing Practices. RBRVS types of
payment systems have also been adopted by certain private third party payors and
may become a predominant payment methodology. Wider implementation of such
programs would reduce payments from private third party payors, and could
indirectly reduce revenue to the Company.
8
<PAGE>
Rates paid by private third party payors are based on established health
care provider and hospital charges and are generally higher than Medicare
payment rates. A change in the patient mix of any of the Practices that results
in a decrease in patients covered by private insurance could have a material
adverse effect on the Practices and, as a result, on the Company.
Government Regulation. Existing and future federal and state regulation of
health care, including the relationships among health care providers such as
physicians and other clinicians, could have a material adverse effect on the
Company's financial condition and results of operations. While the Company
believes that its operations are conducted in material compliance with
applicable laws, it has not received or applied for a legal opinion from counsel
or from any federal or state judicial or regulatory authority to this effect,
and many aspects of the Company's business operations have not been the subject
of state or federal regulatory interpretation. The laws applicable to the
Company are subject to evolving interpretations, and therefore there can be no
assurance that a review of the Company's operations by federal or state judicial
or regulatory authorities would not result in a determination that the Company,
or one of the Practices has violated one or more provisions of federal or state
law. Any such determination could have a material adverse effect on the Company.
Expansion of the operations of the Company to certain jurisdictions may
require modification of the Company's form of relationship with the Practices,
which could have a material adverse effect on the Company. Furthermore, the
Company's ability to expand into, or to continue to operate within, certain
jurisdictions may depend on the Company's ability to modify its or the
Practices' operational structure to conform to such jurisdictions' regulatory
framework or to obtain necessary approvals, licenses and/or permits. Any
limitation on the Company's ability to expand could have a material adverse
effect on the Company. See 'Business-- Government Regulation and Supervision.'
Physician Self-Referral Laws. The federal Self-Referral Law (also
known as the 'Stark Law') imposes restrictions on physicians' referrals for
designated health services reimbursable by Medicare or Medicaid to entities with
which any such physician (or an immediate family member of such physician) has a
financial relationship, whether through an ownership, debt or compensation
arrangement. Many states, including several of the states in which the Company
conducts business, also have adopted self-referral laws. Unlike the Stark Law,
however, many state self-referral laws are not limited to Medicare or Medicaid
reimbursed services. In addition, state self-referral laws may apply to all
health care services, not just certain designated health services, and state
self-referral laws may apply only to ownership relationships and not to
compensation relationships. State workers' compensation laws also may contain
self-referral prohibitions. Unless a statutory exception applies, if a physician
has a financial relationship in or with the Company, then that physician is
prohibited from referring patients to any Ancillary Service Facilities owned (or
possibly managed) by the Company for the furnishing of designated health
services or other health care services as defined by federal or state law. In
addition, neither the Company nor the physician is authorized to bill for
services furnished to such physician's patients by the Company or at such
Ancillary Service Facilities where there is no exception available for the
physician's financial relationship with the Company. Penalties for violating
these restrictions usually are limited to civil penalties. State laws also may
require a physician to disclose to patients the nature of the physician's
financial relationship with the Company and any Ancillary Service Facilities
prior to recommending the Company and any Ancillary Service Facilities to that
patient.
In the preamble to the adoption of certain regulations regarding the Stark
Law, adopted when such law only regulated clinical laboratory services, HCFA
stated that it would not recognize any group in which the physicians were in
multiple corporate entities as a 'group practice' under the Stark Law. In
November 1996, the Company affiliated with SCOI, a partnership comprised of
individual physician members as well as single member professional corporations
('P.C.s'). The use of P.C.s as partners at SCOI was historical and designed to
accommodate practice structures that existed prior to the creation of SCOI.
Recently, at the Eighteenth Annual Institute on Medicare and Medicaid Payment
Issues, co-sponsored by the American Academy of Healthcare Attorneys and
National Health Lawyer's Association, an HCFA representative stated that HCFA
will recognize a 'group practice' consisting of multiple physician entities,
such as P.C.s, provided that each P.C. or other physician entity is limited to
one physician member. Nevertheless, given HCFA's prior written statement and
HCFA's position that its written comments on the Stark Law as applied to
clinical laboratories reflect its view on the Stark Law in its current expanded
form, it may be necessary to restructure SCOI before any Stark-designated health
services are provided. Failure to do so would result in the risk of the
penalties described above, or the
9
<PAGE>
inability of SCOI to provide Stark-designated health services, either of which
could have a material adverse effect on the Company. See 'Business--Government
Regulation and Supervision.'
Fraud and Abuse. The anti-kickback provisions of the Social Security
Act, as well as anti-kickback laws adopted by many states, including the states
in which the Company conducts business, prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration in return for, or as
an inducement for, certain referrals of patients for items or services covered
by health benefits programs. State laws governing workers' compensation may also
contain anti-kickback prohibitions. In addition, federal law and some state laws
impose significant penalties for false or improper billings. These anti-kickback
and false claims laws are commonly referred to as the fraud and abuse laws.
Violations of any of these laws may result in substantial civil or criminal
penalties, and, in the case of violations of federal laws, exclusion from
participation in the Medicare and Medicaid programs. Such exclusion and
penalties, if applied to the Company, its Ancillary Service Facilities or the
Practices, would have a material adverse effect on the Company. Further, the
application of these laws is subject to modification by statutory amendment or
promulgation of regulations and any such change could have a material adverse
effect on the Company.
State Regulation of the Practices. The laws of many states, including
one or more of the states in which the Company conducts business: (i) prohibit
business corporations, such as the Company, from practicing medicine or
exercising control over the medical judgments or decisions of physicians and
from engaging in certain financial arrangements involving the division of
professional fees earned by physicians (commonly referred to as
'fee-splitting'); (ii) require entities seeking to provide certain ancillary
services (including ambulatory surgery) to be licensed and/or to have obtained a
certificate of need related to the service; and (iii) require licensure or
certification of, and regulate provider networks that agree to provide or
arrange for the provision of certain health services to members of health care
plans. These laws and their interpretations vary from state to state and are
enforced by both the courts and regulatory authorities, each of which has broad
discretion. In particular, with regard to the corporate practice of medicine,
Texas and California have taken the position that control by a management
company over certain business aspects of a medical practice is effectively the
prohibited practice of medicine by the management company. In addition, recent
developments in Florida's fee-splitting law have changed how management
arrangements may be structured there. The Company has obtained a draft of an
order of the State of Florida Board of Medicine that takes the position that a
management services fee based on a percentage of revenues violates Florida's
prohibition on fee splitting by licensed professionals. The Company has included
such percentage fees in all of its Management Services Agreements with
physicians in Florida. Counsel to the Board of Medicine has informed the Company
that on October 19, 1997, the Board adopted the position in the draft order and
will soon issue a final order with only minor revisions. Thus, no assurance can
be given that the Company's Management Services Agreements based on such
percentage fees will be enforceable. To avoid this risk, the Company will seek
to restructure such agreements in Florida to comply with the order, but such
modifications, or the failure to obtain agreement on such modifications, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Violations of state laws regulating the Practices
could result in censure or loss of license for the physician, civil or criminal
penalties, or other sanctions. The licensure or certificate of need laws of
applicable states could also preclude the Company from expanding its operated or
managed services to include certain ancillary services, which could have a
material adverse effect on the Company. In addition, a determination in any
state that the Company is engaged in the corporate practice of medicine or any
unlawful fee-splitting arrangement could render any Management Services
Agreement or IPA Provider Agreement between the Company and a Practice located
in such state unenforceable or subject to modification, which could have a
material adverse effect on the Company. There can be no assurance that
regulatory authorities or other parties will not assert that the Company or a
Practice is engaged in the business of insurance or the corporate practice of
medicine in such states or that the management and administrative fees paid to
the Company by the Practices constitute unlawful fee-splitting or the corporate
practice of medicine. If such a claim were asserted successfully, the Company
could be subject to civil and criminal penalties and the Company or the
Practices could be required to restructure their contractual arrangements. Such
results or the inability of the Company or the Practices to restructure their
relationships to comply with such prohibitions could have a material adverse
effect on the Company's financial condition and results of operations. See
'Business--Government Regulation and Supervision--State Law.'
10
<PAGE>
In Texas, it is unlawful to provide 'staff leasing services' without a
license issued by the State. The Company believes that the provision of
non-physician personnel to STSC in connection with the Management Services
Agreement between the Company and STSC constitutes staff leasing services
subject to licensure under Texas law. The Company filed an application on
October 14, 1997 for such license, but there can be no guaranty that the State
of Texas will approve the Company's application. Failure to obtain a license to
provide staff leasing services may result in criminal penalties, may prevent the
Company from providing personnel to STSC and may, therefore, have a material
adverse effect on the Company.
Antitrust Issues. Because the Practices remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
that prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal and division of market. The Company intends to comply with such
state and federal laws as may affect its development of integrated health care
delivery networks, but there can be no assurance that a review of the Company's
business by courts or regulatory authorities would not result in a determination
that could adversely affect the operation of the Company and the Practices.
Numerous Reform Initiatives. In addition to extensive existing
government health care regulation, there are numerous initiatives on the federal
and state levels for comprehensive reforms affecting the payment for, and
availability of, health care services. These initiatives include reductions in
Medicare and Medicaid payments, trends in adopting managed care for Medicare,
Medicaid and workers' compensation patients, regulation of entities that provide
managed care, and additional prohibitions related to financial relationships
between health care providers that are in a position to generate business for
each other. Certain of these health care proposals, if adopted, could have a
material adverse effect on the Company.
In the recently enacted Balanced Budget Act of 1997 (the '1997 Budget
Bill') and Health Insurance Portability and Accountability Act of 1996
('HIPAA'), Congress has responded to perceived fraud and abuse in the Medicare
and Medicaid programs. This legislation has fortified the government's
enforcement authority with increased resources and greater civil and criminal
penalties for offenses. It is anticipated that there will be further restrictive
legislative and regulatory measures to reduce fraud, waste and abuse in the
Medicare and Medicaid programs. There can be no assurance that any such
legislation will not have a material impact on the Company. See '--Reliance on
Affiliation and Expansion,' '--Reductions in Third Party Reimbursements' and
'Business--Government Regulation and Supervision.'
Changes in Workers' Compensation Market. Legislative reforms in some
states permit employers to designate health plans such as HMOs to cover workers'
compensation claimants. Because many health plans have the capacity to manage
health care for workers' compensation claimants, such legislation may intensify
competition in the market served by the Company. Within the past few years,
several states have experienced decreases in the number of workers' compensation
claims and the average cost per claim, both of which have been reflected in
workers' compensation insurance premium rate reductions in those states. The
Company believes that declines in workers' compensation costs in these states
are due principally to intensified efforts by payors to manage and control claim
costs, improved risk management by employers and legislative reforms. In Florida
(a state in which the Company does business), all workers' compensation services
must be provided under a managed care arrangement approved by Florida's Agency
for Health Care Administration. If declines in workers' compensation costs occur
in many states and persist over the long-term, they may have an adverse impact
on the Company's business and results of operations. A number of states,
including California and Pennsylvania (states in which the Company does
business), have regulations such as anti-kickback and self-referral laws that
are specific to the workers' compensation program. See 'Business--Payor
Contracting-- Workers' Compensation' and 'Business--Government Regulation and
Supervision.'
Potential Risks of Managed Care Contracts. As more patients enter into
health care coverage arrangements with managed care payors, no assurance can be
given that the Company will be able to negotiate contracts on behalf of the
Practices with health maintenance organizations ('HMOs'), employer groups and
other private third party payors. The inability of the Company to enter into
such arrangements on behalf of the Practices, or unfavorable terms that may be
contained in such arrangements, could have a material adverse effect on the
Company.
The Company may seek to negotiate with third party payors on behalf of the
Practices and other physicians or group practices willing to permit the Company
to negotiate on their behalf. The Company anticipates that, in
11
<PAGE>
the future, the payor contracts entered into on behalf of the Practices and any
related network physicians may include contracts based on capitated fee
arrangements. Under some of these types of contracts, a health care provider
agrees either to accept a predetermined dollar amount per member per month in
exchange for undertaking to provide all covered services to patients or to
provide treatment on an episode of care basis. Such health care providers bear
the risk, generally subject to certain loss limits, that the aggregate costs of
providing medical services will not exceed the predetermined amounts. Some
agreements may also contain 'shared risk' provisions under which the Practices
may earn additional compensation based on utilization control of institutional,
ancillary and other services to patients, and the Practices may be required to
bear a portion of any loss in connection with such 'shared risk' provisions. If
patients or enrollees covered by such contracts require more frequent or, in
certain instances, more extensive care than anticipated, there could be a
material adverse effect on a Practice and, therefore, on the Company. Revenue
negotiated under risk-sharing or capitated contracts could be insufficient to
cover the costs of the health care services provided. Any such reduction or
elimination of earnings to the Practices under such fee arrangements could have
a material adverse effect on the Company.
No assurance can be given that the Company, the Practices or the IPA will
be able to establish or maintain satisfactory relationships with managed care
and other third party payors, many of which already have existing provider
structures in place and may not be able or willing to change their provider
networks. In addition, any significant loss of revenue by the Practices as a
result of the termination of third party payor contracts or otherwise would have
a material adverse effect on the Company. See 'Business--Government Regulation
and Supervision.'
Need for Additional Funds. The Company's expansion and acquisition
strategy will require substantial capital, and no assurance can be given that
the Company will be able to raise additional funds through debt financing or the
issuance of equity or debt securities. Sufficient funds may not be available on
terms acceptable to the Company, if at all. If equity securities are issued,
either to raise funds or in connection with future affiliations, dilution to the
Company's stockholders may result, and if additional funds are raised through
the incurrence of debt, the Company may become subject to restrictions on its
operation and finances. Such restrictions may have a material adverse effect on,
among other things, the Company's ability to pursue its affiliation and
expansion strategy. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources.'
Risks Related to Intangible Assets. The Company has a significant amount
of intangible assets. As a result of the Affiliation Transactions, intangible
assets (net of accumulated amortization) of approximately $7.3 million have been
recorded on the Company's balance sheet as of June 30, 1997. Affiliations that
result in the recognition of intangible assets will cause amortization expense
to increase further. Although the Company's net unamortized balance of
intangible assets acquired and anticipated to be acquired was not considered to
be impaired as of June 30, 1997, any future determination that a significant
impairment has occurred would require the write-off of the impaired portion of
unamortized intangible assets, which could have a material adverse effect on the
Company's results of operations. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
Intense Competition. Competition for affiliation with additional
musculoskeletal physician practices is intense and may limit the availability of
suitable practices with which the Company may be able to affiliate. Several
companies with established operating histories and greater resources than the
Company, including multi-specialty companies, companies that specialize in
orthopedics, some hospitals, IPAs, clinics and HMOs, are pursuing activities
similar to those of the Company. The Company may not be able to compete
effectively with such competitors, additional competitors could enter the market
and such competition could make it more difficult and costly to affiliate with,
and provide management services to, musculoskeletal physician practices on terms
beneficial to the Company. The Company also believes that changes in
governmental and private reimbursement policies, among other factors, have
resulted in increased competition among providers of medical services. The
Practices face competition from several sources, including sole practitioners,
single and multi-specialty groups, hospitals and managed care organizations. The
Company's strategy includes the development of Ancillary Service Facilities.
Pursuit of this strategy will subject the Company to competition with other
providers of such facilities, some of which will have greater financial
resources and experience than the Company. There can be no assurance that the
Company or the Practices will be able to compete effectively in the markets they
serve. See 'Business--Competition.'
12
<PAGE>
Dependence on Key Personnel. The Company is dependent upon the ability and
experience of its executive officers and key personnel, including Dr. Naresh
Nagpal, the Company's President and Chief Executive Officer, for the management
of the Company and the implementation of its business strategy. The Company
currently has an employment contract with Dr. Nagpal. Because of the difficulty
in finding an adequate replacement for Dr. Nagpal, the loss of his services,
regardless of whether he may choose to compete with the Company, 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. See
'Management--Employment Agreements.'
Exposure to Professional Liability. Due to the nature of its business, the
Company from time to time may become a defendant in medical malpractice
lawsuits, and may become subject to the attendant risk of substantial damage
awards. Direct claims, suits or complaints could be asserted against the Company
relating to services delivered by the Practices (including claims with regard to
services rendered by the Existing Practices prior to the Affiliation
Transactions). While the Company has attempted to address these risks by
maintaining malpractice and other types of insurance, with coverage limits of
$1,000,000 per individual claim and $3,000,000 in the aggregate, on behalf of
itself and the Existing Practices, there can be no assurance that any claim
asserted against the Company, any of the Existing Practices, or any other
Practice will be covered by, or will not exceed the coverage limits of,
applicable insurance. However, the Company may not be able to maintain insurance
in the future at a cost that is acceptable to the Company, or at all. A
successful malpractice claim against any of the Practices, even if covered by
insurance, or any claim made against the Company that is not fully covered by
insurance, could have a material adverse effect on the Company. See
'Business--Corporate Liability and Insurance.'
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 the Offering. The initial public offering price will be
determined by negotiations among the Company and Hambrecht & Quist LLC, Raymond
James & Associates, Inc. and Volpe Brown Whelan & Company, LLC and may not be
indicative of the market price for the Common Stock after the Offering. See
'Underwriting' for factors to be considered in determining the initial public
offering price. From time to time after the Offering, there may be significant
volatility in the market price of the Common Stock. Deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the health care industry or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and have often been unrelated to the operating
performance of these companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following the Offering. Any such fluctuations that
occur following completion of the Offering may adversely affect the market price
of the Common Stock.
Shares Eligible for Future Sale. The market price of the Common Stock of
the Company could be materially adversely affected by the sale of substantial
amounts of the Common Stock in the public market following the Offering. After
giving effect to the shares of Common Stock offered hereby, the Company will
have outstanding 20,630,000 shares of Common Stock. Of these shares, all of the
shares of Common Stock sold in the Offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the 'Securities Act'),
except for any shares purchased by 'affiliates,' as that term is defined under
the Securities Act, of the Company. The remaining 15,630,000 shares are
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act. Of these restricted shares, 5,526,501 shares will be eligible
for sale pursuant to Rule 144 in December 1997 and the balance will be eligible
for sale at various times in 1998. See 'Shares Eligible for Future Sale.'
The Company and the officers, directors and certain other stockholders of
the Company, who upon completion of the Offering will own in the aggregate
shares of Common Stock, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, issue, sell, offer, contract to
sell, make any short sale, pledge, issue or sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock, or securities exchangeable for or convertible into or exercisable for any
rights to purchase or acquire any shares of Common Stock during the 180-day
period following the date of this Prospectus, except that such stockholders
13
<PAGE>
may transfer securities pursuant to bona fide gifts and the Company may issue,
and grant options to purchase, shares of Common Stock under its current stock
option plan and may issue shares of Common Stock in connection with affiliation
transactions, provided such shares are subject to the 180-day lock-up agreement.
Certain holders of shares of Common Stock outstanding on the date of this
Prospectus have certain registration rights with respect to such shares and
additional shares that may be issued to such persons upon exercise of options
and warrants (subject to certain limitations on the number of shares such
holders are entitled to have registered under any registration statement),
although all such holders have agreed to refrain from selling their shares
during the lock-up period. In addition, the Company intends to register
approximately 2,000,000 shares of Common Stock reserved for issuance under the
BMJ Medical Management, Inc. 1996 Stock Option Plan (the 'Option Plan') as soon
as practicable after completion of the Offering. See 'Management' and
'Underwriting.'
Control by Existing Stockholders. Following the completion of the
Offering, the officers and directors of the Company and the physician owners of
the Existing Practices will beneficially own approximately 81% of the
outstanding shares of Common Stock. Following the Offering, such persons may
effectively be able to control the affairs of the Company, including the ability
to delay or prevent a change of control of the Company. See 'Principal
Stockholders.'
Potential Anti-Takeover Effects of Charter and By-laws Provisions; Possible
Issuances of Preferred Stock. Certain provisions of the Restated Certificate of
Incorporation (the 'Certificate of Incorporation') and by-laws (the 'By-laws')
of the Company that will become operative upon the closing of this Offering may
be deemed to have anti-takeover effects and may delay, deter or prevent a change
in control of the Company that a stockholder might consider in his/her best
interest. These provisions (i) classify the Company's Board of Directors into
three classes, each of which will serve for different three-year periods; (ii)
provide that only the Board of Directors or certain members thereof or officers
of the Company may call special meetings of the stockholders; and (iii)
authorize the issuance of 'blank check' preferred stock having such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. See 'Description of Capital Stock.'
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
Offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock of $5.29 per share. See 'Dilution.'
14
<PAGE>
THE COMPANY
The Company was founded by Dr. Nagpal in January 1996. Since its inception,
the Company has expanded its network through Affiliation Transactions and
through the addition of physicians to its Existing Practices to reach a total of
24 Existing Practices comprising 112 physicians in five states as of the date of
this Prospectus.
In July 1996, the Company affiliated with its first Practice, Lehigh Valley
Bone, Muscle and Joint Group, LLC ('LVBMJ'), comprising five physicians. In
November 1996, the Company affiliated with STSC and SCOI, resulting in the
addition of a total of 29 physicians located in Texas and California. The
Company affiliated with Lauderdale Orthopaedic Surgeons ('LOS') and Tri-City
Orthopedic Surgery Medical Group, Inc. ('Tri-City') in April 1997, Fishman &
Stashak, M.D.'s, P.A. (d/b/a Gold Coast Orthopaedics) ('Gold Coast') in June
1997 and Sun Valley Orthopaedic Surgeons ('Sun Valley') in July 1997, resulting
in the addition of a total of 23 physicians. In September 1997, the Company
affiliated with Broward Institute of Orthopaedic Specialties, P.A. ('BIOS') and
Orthopaedic Surgery Associates, P.A. ('OSA'), resulting in the addition of a
total of 15 physicians. In addition to the foregoing Affiliation Transactions,
the Company has affiliated with 15 other Practices comprising 40 additional
physicians. In order to finance the Affiliation Transactions and provide for its
working capital needs, the Company has raised approximately $49.9 million
through a series of equity and debt financings. See 'Risk Factors--Lack of
Significant Combined Operating History' and 'Certain Transactions--Equity and
Debt Financings.'
The Company was incorporated under the laws of Delaware in January 1996.
The Company's principal executive offices are located at 4800 North Federal
Highway, Suite 104D, Boca Raton, Florida 33431 and its telephone number is (561)
391-1311.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are estimated to be $35.7 million ($41.3 million if
the Underwriters' over-allotment option is exercised in full), based on an
assumed initial public offering price of $8.00 per share and after deducting
estimated underwriting discounts and expenses of the Offering. The Company
intends to use approximately $33.0 million of the net proceeds to repay certain
indebtedness and the remaining net proceeds for general corporate purposes,
including possible future affiliations.
The indebtedness being repaid consists of (i) approximately $11.1 million
(the 'HCFP Debt') outstanding under several loan and security agreements
(collectively, the 'HCFP Loan Agreements') between the Company and HCFP Funding,
Inc. ('HCFP Funding'), an affiliate of Health Care Financial Partners; (ii)
approximately $5.0 million of subordinated debt (the 'Comdisco Loan')
outstanding under a Subordinated Loan and Security Agreement (the 'Comdisco Loan
Agreement') between the Company and Comdisco, Inc. ('Comdisco'); (iii)
approximately $1.5 million of subordinated debt (the 'Galtney Loan') outstanding
under a Subordinated Loan and Security Agreement (the 'Galtney Loan Agreement')
between the Company and Galtney Corporate Services, Inc. ('Galtney'); (iv)
approximately $3.4 million of subordinated debt due to certain stockholders
('the Stockholder Debt'); (v) approximately $11.2 million of notes payable to
physician groups issued in connection with Affiliation Transactions (the
'Physician Notes'); and (vi) approximately $800,000 of subordinated debt owed to
Dr. Nagpal (the 'Nagpal Debt'). See 'Certain Transactions--Equity and Debt
Financings.'
The HCFP Debt was incurred for working capital purposes and to finance
Affiliation Transactions, bears interest at rates ranging from 10 1/4% to 12%
per annum and matures from 1998 to 2000. The indebtedness under the Comdisco
Loan and the Galtney Loan was incurred to finance Affiliation Transactions,
bears interest at 14% per annum and matures on December 31, 2000. The
Stockholder Debt was incurred to finance Affiliation Transactions, bears
interest at the prime rate plus 3.5% (12% at October 31, 1997) and matures on
January 10, 1998. The Physician Notes were issued in connection with Affiliation
Transactions, bear interest at rates ranging from 6% to 11% and mature between
December 1997 and March 1998. The Nagpal Debt was also incurred to finance
Affiliation Transactions, bears interest at 8% per annum and is payable on
demand.
Pending use of the remaining net proceeds for general corporate purposes,
the Company intends to invest such net proceeds in short-term, investment grade,
interest-bearing securities. The Company continues to review and evaluate
additional Practices for purposes of future Affiliation Transactions, but as of
the date of this Prospectus has not entered into agreements with any such
Practices.
DIVIDEND POLICY
The Company has never paid or declared dividends on the Common Stock and
does not anticipate paying any dividends on the Common Stock in the foreseeable
future. The Company is prohibited from paying dividends on the Common Stock
under the terms of the HCFP Loan Agreements and the Debenture Purchase Agreement
(as defined). See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Liquidity and Capital Resources' and 'Certain
Transactions--Equity and Debt Financings.'
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
June 30, 1997, the pro forma capitalization of the Company at June 30, 1997
after giving effect to the Affiliation Transactions and the pro forma
capitalization as adjusted to give effect to the sale of the 5,000,000 shares of
Common Stock offered hereby (based on an assumed initial public offering price
of $8.00 per share and after deducting estimated underwriting discounts and
expenses of the Offering), the application of the net proceeds therefrom and the
automatic conversion of all outstanding shares of preferred stock into shares of
Common Stock. See 'Use of Proceeds' and 'Description of Capital Stock.' The
table should be read in conjunction with the Pro Forma Financial Information and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the historical financial statements of the Company and the
Existing Practices appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term debt and capital
lease obligations.......................................................... $ 1,418 $19,355 $ 15
------- --------- -----------
------- --------- -----------
Long-term debt and capital lease obligations, less current portion........... $ 6,540 $16,305 $ 4,061
Stockholders' equity:
Convertible preferred stock--3,976,406 shares authorized, issued and
outstanding; 4,184,740 shares authorized, issued and outstanding pro
forma; and no shares issued and outstanding pro forma as adjusted....... 40 42 --
Common stock, $.001 par value--25,000,000 shares authorized; 8,311,462
shares issued and outstanding; 11,445,331 shares issued and outstanding
pro forma; and 20,630,071 shares issued and outstanding pro forma as
adjusted(1)............................................................. 9 12 21
Additional paid-in capital................................................. 14,482 23,383 59,116
Accumulated deficit........................................................ (2,985) (2,985) (3,285)
------- --------- -----------
Total stockholders' equity.............................................. 11,546 20,452 55,852
------- --------- -----------
Total capitalization............................................... $18,086 $36,757 $59,913
------- --------- -----------
------- --------- -----------
</TABLE>
- ------------------
(1) The shares issued and outstanding pro forma gives effect to the net
cancellation of 145,139 shares in September 1997. Excludes 1,228,000 shares
issuable upon exercise of outstanding options with a weighted average
exercise price of $0.39 per share and 321,665 shares of Common Stock
issuable upon exercise of outstanding warrants to purchase Common Stock with
a weighted average exercise price of $3.44 per share. See 'Management' and
'Certain Transactions.'
17
<PAGE>
DILUTION
As of June 30, 1997, the pro forma net tangible book value of the Company
was approximately $20,452,000, or approximately $1.31 per share. Pro forma 'net
tangible book value per share' represents the amount of the Company's total pro
forma tangible assets less the Company's total pro forma liabilities divided by
the number of shares of Common Stock outstanding, after giving effect to the
conversion of all outstanding shares of Preferred Stock (including accrued
dividends) into shares of Common Stock. After giving effect to the sale of
5,000,000 shares of Common Stock offered by the Company hereby based on an
assumed initial public offering price of $8.00 per share and after deducting
estimated underwriting discounts and expenses of the Offering, the pro forma net
tangible book value of the Company at June 30, 1997 would have been
approximately $55,852,000 or approximately $2.71 per share of Common Stock,
representing an immediate increase in pro forma net tangible book value of $1.40
per share to existing stockholders and an immediate, substantial dilution of
$5.29 per share to persons purchasing shares of Common Stock offered hereby. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................................ $8.00
Pro forma net tangible book value per share at June 30, 1997......................... $1.31
Increase attributable to price paid by new investors per share....................... 1.40
-----
Pro forma net tangible book value per share after the Offering......................... 2.71
-----
Dilution per share to new investors.................................................... $5.29
-----
-----
</TABLE>
The following table sets forth, as of June 30, 1997, the pro forma number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price paid per share by existing
stockholders and purchasers of shares of Common Stock offered hereby, after
giving effect to (i) the sale of 5,000,000 shares of Common Stock offered hereby
based on an assumed initial public offering price of $8.00 per share and before
deducting estimated underwriting discounts and expenses of the Offering and (ii)
the conversion of all outstanding shares of Preferred Stock of the Company into
shares of Common Stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ 15,630,071 75.8% $23,132,000 36.6% $1.48
New investors................................ 5,000,000 24.2 40,000,000 63.4 8.00
---------- ------- ----------- -------
Total................................. 20,630,071 100.0% $63,132,000 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>
The foregoing computations do not include the effect of the issuance of
1,228,000 shares of Common Stock issuable upon exercise of outstanding options
with a weighted average exercise price of $0.39 per share and 321,665 shares of
Common Stock issuable upon exercise of outstanding warrants with a weighted
average exercise price of $3.44 per share. To the extent such options and
warrants are exercised, there will be further dilution to the new investors. See
'Management' and 'Certain Transactions.'
18
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The pro forma statement of operations for the six months ended June 30,
1997 gives effect to (i) the 1997 Affiliation Transactions and (ii) receipt and
application of the estimated net proceeds from this Offering at an assumed
initial public offering price of $8.00 per share as if such transactions had
occurred on January 1, 1996. The pro forma statement of operations for the year
ended December 31, 1996 gives effect to (i) the Affiliation Transactions and
(ii) the receipt and application of the estimated net proceeds from this
Offering as if such transactions had occurred on January 1, 1996. The pro forma
balance sheet as of June 30, 1997 gives effect to (i) the 1997 Affiliation
Transactions, (ii) the receipt and application of the estimated net proceeds
from this Offering, (iii) the conversion of all outstanding Preferred Stock and
other outstanding equity securities into Common Stock concurrently with the
Offering as if all of such transactions had occurred on June 30, 1997. The pro
forma financial information is based on the financial statements of the Company,
after giving effect to the assumptions and adjustments in the accompanying notes
to the pro forma financial information. Although such information is based on
preliminary allocations of the consideration paid in connection with the 1997
Affiliation Transactions, the Company does not expect that the final allocations
will be materially different from such preliminary allocations.
The pro forma financial information has been prepared by management based
on the historical financial statements of the Company and the Existing Practices
at and for the year ended December 31, 1996 and the six months ended June 30,
1997, adjusted where necessary to reflect the Affiliation Transactions as if the
related Management Service Agreements had been in effect during the entire
periods presented. The pro forma financial information is presented for
illustrative purposes and does not purport to represent what the results of
operations or financial condition of the Company for the periods or at the dates
presented would have been if such transactions had been consummated as of such
dates and is not indicative of the results that may be obtained in the future.
BMJ MEDICAL MANAGEMENT, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1997 AFFILIATIONS (A)
------------------------------------------------------------------------
THE GOLD SUN
COMPANY(B) TRI-CITY LOS COAST VALLEY BIOS OSA
---------- ----------- ----------- ----------- ------ ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Patient revenues, net..................... $ 19,907 $ 1,240 $ 1,600 $ 1,609 $1,358 $3,555 $ 3,497
Less: physician and other provider
services................................. (9,509) (702) (813) (1,005) (782) (1,098 ) (1,097)
----- --- --- --- ------ ------- ---
Management fee revenue.................... 10,398 538 787 604 576 2,457 2,400
Costs and expenses:
Medical support services................. 9,541 538 787 604 576 2,457 2,400
General and administrative............... 2,139 -- -- -- -- -- --
Depreciation and amortization............ 300 -- -- -- -- -- --
Interest expense (income), net........... 294 -- -- -- -- -- --
----- --- --- --- ------ ------- ---
Total costs and expenses................ 12,274 538 787 604 576 2,457 2,400
----- --- --- --- ------ ------- ---
(Loss) income before income taxes......... (1,876) -- -- -- -- -- --
----- --- --- --- ------ ------- ---
Income taxes.............................. -- -- -- -- -- -- --
----- --- --- --- ------ ------- ---
Net (loss) income......................... $ (1,876) $ -- $ -- $ -- $ -- $ -- $ --
----- --- --- --- ------ ------- ---
----- --- --- --- ------ ------- ---
Net (loss) income per common share:
Primary.................................. $ (0.15)
Diluted.................................. $ (0.15)
Weighted average common shares
outstanding:
Primary.................................. 12,480
Diluted.................................. 12,480
<CAPTION>
PRO FORMA
OTHER PRO FORMA OFFERING AS
AFFILIATIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Patient revenues, net..................... $ 15,671 $ -- $ 48,437 $ -- $ 48,437
Less: physician and other provider (4,805)(d)
services................................. (5,758) (940)(c) (15,019 ) -- (15,019 )
----- ----- --------- ----- ---------
Management fee revenue.................... 9,913 (5,745) 33,418 -- 33,418
Costs and expenses:
Medical support services................. 9,913 -- 26,816 -- 26,816
General and administrative............... -- -- 2,139 -- 2,139
Depreciation and amortization............ -- 724(e) 1,024 -- 1,024
Interest expense (income), net........... -- 1,912(f) 2,206 (2,186)(h) 20
----- ----- --------- ----- ---------
Total costs and expenses................ 9,913 2,636 32,185 (2,186) 30,185
----- ----- --------- ----- ---------
(Loss) income before income taxes......... -- (3,109) 1,233 2,186 3,419
----- ----- --------- ----- ---------
Income taxes.............................. -- 469(g) 469 831(h) 1,300
----- ----- --------- ----- ---------
Net (loss) income......................... $ -- $(3,578) $ 764 $ 1,355 $ 2,119
----- ----- --------- ----- ---------
----- ----- --------- ----- ---------
Net (loss) income per common share:
Primary.................................. $ 0.10
Diluted.................................. $ 0.09
Weighted average common shares
outstanding:
Primary.................................. 21,914
Diluted.................................. 22,470
</TABLE>
19
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 AFFILIATIONS (a)
1996 AFFILIATIONS (a) -----------------------------------------------------------
THE ---------------------------------- SUN
COMPANY(b) LVBMJ SCOI STSC TRI-CITY LOS GOLD COAST VALLEY BIOS
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Patient revenues,
net................ $ 6,029 $ 1,540 $17,907 $6,027 $ 3,478 $ 6,365 $ 3,434 $ 2,468 $7,615
Less: physician and
other provider
services........... (2,912) (716) (9,141) (4,399) (1,658) (4,055) (2,050) (1,384) (2,353)
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
Management fee
revenue............ 3,117 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262
Costs and expenses:
Medical support
services.......... 2,844 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262
General and
administrative.... 1,278 -- -- -- -- -- -- -- --
Depreciation and
amortization...... 104 -- -- -- -- -- -- -- --
Interest expense
(income), net..... -- -- -- -- -- -- -- -- --
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
Total costs and
expenses........ 4,226 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
(Loss) income before
income taxes....... (1,109) -- -- -- -- -- -- -- --
Income taxes........ -- -- -- -- -- -- -- -- --
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
Net (loss) income... $ (1,109) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
---------- ----------- ----------- ------ ----------- ----------- ----------- ------- -------
Net (loss) income per common share:
Primary............ $ (0.09)
Diluted............ $ (0.09)
Weighted average shares outstanding:
Primary............ 11,852
Diluted............ 11,852
<CAPTION>
PRO FORMA
OTHER PRO FORMA OFFERING AS
OSA AFFILIATIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
----------- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Patient revenues,
net................ $ 5,470 $ 27,885 $ -- $ 91,218 $ -- $ 91,218
Less: physician and
other provider (8,079)(d)
services........... (2,658) (10,279) (1,537)(c) (31,987) -- (31,987)
----------- ------------ ----------- --------- ----------- ---------
Management fee
revenue............ 5,814 17,606 9,616 59,231 -- 59,231
Costs and expenses:
Medical support
services.......... 5,814 17,606 -- 49,342 -- 49,342
General and
administrative.... -- -- -- 1,278 -- 1,278
Depreciation and
amortization...... -- -- 1,601(e) 1,705 -- 1,705
Interest expense
(income), net..... -- -- 4,262(f) 4,262 (4,222)(h) 40
----------- ------------ ----------- --------- ----------- ---------
Total costs and
expenses........ 5,814 17,606 5,863 56,787 (4,222) 52,365
----------- ------------ ----------- --------- ----------- ---------
(Loss) income before
income taxes....... -- -- 3,753 2,644 4,222 6,866
Income taxes........ -- -- 1,005(f) 1,005 1,604 (h) 2,609
----------- ------------ ----------- --------- ----------- ---------
Net (loss) income... $ -- $ -- $ 2,748 $ 1,639 $ 2,618 $ 4,257
----------- ------------ ----------- --------- ----------- ---------
----------- ------------ ----------- --------- ----------- ---------
Net (loss) income per
common share:
Primary............ $ 0.19
Diluted............ $ 0.19
Weighted average shares outstanding
Primary............ 21,914
Diluted............ 22,470
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
Practice revenue represents the revenue of the Existing Practices and the
ambulatory surgery center reported at the estimated realizable amounts from
patients, third party payors and others for services rendered, net of
contractual and other adjustments. Management fee revenue represents practice
revenue less amounts retained by the Existing Practices (consisting of physician
and other provider services costs, principally compensation and fees paid to
physicians pursuant to the Management Services Agreements). Under each
Management Services Agreement, the Company assumes responsibility for the
management of the non-medical operations of the Practice, employs substantially
all of the non-professional personnel utilized by the Practice and may provide
the Practice with the facilities and equipment used in its medical practice.
The Company's operating expenses consist of the expenses incurred in
fulfilling its obligations under the Management Services Agreements. These
expenses include medical support services (principally clinic overhead expenses
that would have been incurred by the Existing Practices, including
non-professional employee salaries, employee benefits, medical supplies,
malpractice insurance premiums, rent and other expenses related to clinic
operations) and general and administrative expenses (personnel and
administrative expenses in connection with maintaining a corporate office that
provides management, contracting, administrative, marketing and development
services to the Existing Practices). The Practices' operating expenses prior to
affiliation with the Company consist of the clinic overhead expenses, including
non-professional employee salaries, employee benefits, medical supplies,
malpractice insurance premiums, rent, depreciation and amortization and general
and administrative expenses related to clinic operations which have been
presented as medical support services.
(a) The 1996 Affiliations column presents historical information for
the portion of the year preceding the Practices' affiliation with the
Company recognizing that the Practices typically distribute any net income
to the physicians as compensation which is included in physician and other
provider services. In the pro forma statement of operations for the year
ended December 31, 1996, the 1997 Affiliations columns present historical
information of the 1997 Affiliation Transactions for the year ended
December 31, 1996, recognizing that the Practices typically distribute any
net income to the physicians as compensation which is included in physician
and other provider services. In the pro forma statement of operations for
the six months ended June 30, 1997, the 1997 Affiliations column presents
historical information of the 1997 Affiliation Transactions for the portion
of the year preceding the Practices' affiliation with the Company
recognizing that the Practices typically distribute any net income to the
physicians as compensation which is included in physician and other
provider services.
The Other Affiliations column presents the information from the following
practices:
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PHYSICIAN
PATIENT AND OTHER MANAGEMENT MEDICAL
REVENUES, PROVIDER FEE SUPPORT
PRACTICE NET SERVICES REVENUE SERVICES
- ------------------------------------------------------------------ --------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower Orthopedics................................................. $ 376 $ 150 $ 226 $ 226
Clive Segil, M.D.................................................. 285 100 185 185
R.C. Watson, M.D.................................................. 441 169 272 272
Swnson Orthopedics................................................ 316 126 190 190
Lake Tahoe Sports................................................. 270 89 181 181
San Antonio Bone & Joint.......................................... 196 71 125 125
Stockdale Podiatry 1,008 397 611 611
John Zimmerman, M.D............................................... 338 141 197 197
Broward Orthpedic Specialists..................................... 3,651 1,165 2,486 2,486
Jeffrey Beitler, M.D.............................................. 252 69 183 183
Michael Abrahams, M.D............................................. 633 266 367 367
Physical Medicine and Rehabilitation.............................. 953 321 632 632
Kramer & Maehrer, LLC............................................. 412 261 151 151
Lighthouse Orthopaedics........................................... 3,774 1,145 2,629 2,629
Valley Sports & Arthritis Surgeons................................ 2,227 790 1,437 1,437
Orthopaedic Management Network, Inc. (OMNI IPA)................... 539 498 41 41
--------- ---------- ---------- --------
Totals.......................................................... $15,671 $5,758 $9,913 $9,913
--------- ---------- ---------- --------
--------- ---------- ---------- --------
</TABLE>
21
<PAGE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PHYSICIAN
AND
PATIENT OTHER MANAGEMENT MEDICAL
REVENUES, PROVIDER FEE SUPPORT
PRACTICE NET SERVICES REVENUE SERVICES
- ------------------------------------------------------------------- --------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower Orthopedics.................................................. $ 536 $ 214 $ 322 $ 322
Clive Segil, M.D................................................... 535 187 348 348
R.C. Watson, M.D................................................... 610 244 366 366
Swanson Orthopedics................................................ 550 180 370 370
Lake Tahoe Sports.................................................. 618 236 382 382
San Antonio Bone & Joint........................................... 464 167 297 297
Stockdale Podiatry................................................. 1,856 731 1,125 1,125
John Zimmerman, M.D................................................ 676 283 393 393
Broward Orthopedic Specialists..................................... 6,407 2,044 4,363 4,363
Jeffrey Beitler, M.D............................................... 501 138 363 363
Michael Abrahams, M.D.............................................. 1,398 587 811 811
Physical Medicine and Rehabilitation............................... 1,600 539 1,061 1,061
Kramer & Maehrer, LLC.............................................. 749 474 275 275
Lighthouse Orthopaedics............................................ 5,747 1,743 4,004 4,004
Valley Sports & Arthritis Surgeons................................. 4,687 1,663 3,024 3,024
Orthopaedic Management Network, Inc. (OMNI IPA).................... 951 849 102 102
--------- --------- ---------- -------
Totals........................................................... $27,885 $10,279 $ 17,606 $17,606
--------- --------- ---------- -------
--------- --------- ---------- -------
</TABLE>
(b) In the pro forma statement of operations for the year ended
December 31, 1996, the Company column includes the operations of the
Existing Practices that affiliated with the Company in 1996 from the date
of affiliation and all actual expenses related to corporate infrastructure,
which were primarily general and administrative expenses. In the pro forma
statement of operations for the six months ended June 30, 1997, the Company
column includes all operations of the Existing Practices that affiliated
with the Company in 1996 and the operations of the Existing Practices that
affiliated with the Company in the first six months of 1997 from the date
of affiliation and all actual expenses related to corporate infrastructure,
which were primarily general and administrative expenses. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
(c) Reflects the impact of applying the provisions of the SCOI
Management Services Agreement and the amended and restated LVBMJ Management
Services Agreement relating to management fees payable to the Company
retroactively to January 1, 1996 and 1997 whereby the management fees are
adjusted to 10% of net collected revenue.
(d) Reflects the impact of applying the provisions of the Management
Services Agreements relating to the portion of the management fees payable
to the Company that are based on a percentage of revenue.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
PRACTICE 1996 1997
- --------------------------------------------------------------------------------------- ------------ ----------
(IN THOUSANDS)
--------------------------
<S> <C> <C>
LVBMJ/Orthopaedic Associates of Bethlehem.............................................. $ 154 $ 939
Southern California Orthopedic Institute............................................... 596 353
COSI................................................................................... -- 68
South Texas Spinal Clinic.............................................................. 633 210
Tri-City Orthopedics................................................................... 348 124
Lauderdale Orthopaedic Surgeons........................................................ 637 160
Gold Cost Orthopedics.................................................................. 515 241
Sun Valley Orthopaedics................................................................ 247 136
Tower Orthopedics...................................................................... 53 37
Clive Segil, M.D....................................................................... 53 29
R.C. Watson, M.D....................................................................... 61 45
Swanson Orthopedics.................................................................... 55 31
Lake Tahoe Sports...................................................................... 62 27
San Antonio Bone & Joint............................................................... 53 23
Stockdale Podiatry..................................................................... 185 101
John Zimmerman, M.D.................................................................... 68 34
Broward Orthopedic Specialists......................................................... 961 548
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
PRACTICE 1996 1997
- --------------------------------------------------------------------------------------- ------------ ----------
(IN THOUSANDS)
--------------------------
<S> <C> <C>
Jeffrey Beitler, M.D................................................................... 50 25
Michael Abrahams, M.D.................................................................. 210 95
Physical Medicine and Rehabilitation................................................... 160 95
Kramer & Maehrer, LLC.................................................................. 75 41
Broward Institute of Orthopaedic Specialties (b)....................................... 609 284
Lighthouse Orthopaedics................................................................ 718 472
Orthopaedic Surgery Associates......................................................... 1,059 437
Valley Sports & Arthritis Surgeons..................................................... 469 223
Orthopaedic Management Network, Inc. (Omni IPA)........................................ 48 27
------------ ----------
Totals............................................................................... $8,079 $4,805
------------ ----------
------------ ----------
</TABLE>
(e) Reflects increase in depreciation and amortization expense for
intangible assets and furniture, fixtures and equipment based upon the
Affiliation Transactions as if they had all occurred on January 1, 1996 and
January 1, 1997. The intangible assets related to all the affiliations
total approximately $29.4 million at June 30, 1997 and are being amortized
over periods ranging from 7 to 25 years. The adjustment by Practice is as
follows (see Note 2 to the financial statements for the allocation of
consideration in the Affiliation Transactions):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
PRACTICE 1996 30, 1997
- -------------------------------------------------------------------------------------- ------------ ----------
(IN THOUSANDS)
--------------------------
<S> <C> <C>
LVBMJ/Orthopaedic Associates of Bethlehem............................................. $ 7 $ --
Southern California Orthopedic Institute.............................................. 52 --
COSI.................................................................................. 9 2
South Texas Spinal Clinic............................................................. 45 --
Tri-City Orthopedics.................................................................. 19 5
Lauderdale Orthopaedic Surgeons....................................................... 39 10
Gold Cost Orthopedics................................................................. 97 41
Sun Valley Orthopaedics............................................................... 42 21
Tower Orthopedics..................................................................... 6 2
Clive Segil, M.D...................................................................... 17 7
R.C. Watson, M.D...................................................................... 11 6
Swanson Orthopedics................................................................... 10 5
Lake Tahoe Sports..................................................................... 12 6
San Antonio Bone & Joint.............................................................. 40 20
Stockdale Podiatry.................................................................... 29 15
John Zimmerman, M.D................................................................... 14 7
Broward Orthpedic Specialists......................................................... 238 119
Jeffrey Beitler, M.D.................................................................. 13 6
Michael Abrahams, M.D................................................................. 30 15
Physical Medicine and Rehabilitation.................................................. 56 28
Kramer & Maehrer, LLC................................................................. 13 6
Broward Institute of Orthopaedic Specialties.......................................... 185 92
Lighthouse Orthopaedics............................................................... 189 95
Orthopaedic Surgery Associates........................................................ 315 158
Valley Sports & Arthritis Surgeons.................................................... 96 48
Orthopaedic Management Network, Inc. (Omni IPA)....................................... 17 10
------------ -----
Totals.............................................................................. $1,601 $724
------------ -----
------------ -----
</TABLE>
(f) To record interest expense on debt issued in connection with the
Affiliation Transactions as if such transactions had occurred on January 1,
1996 and January 1, 1997.
(g) To reflect the estimated income tax effect at an effective rate of
approximately 38%.
(h) To eliminate interest expense assuming repayment of all
outstanding senior and subordinated indebtedness (other than the
Debentures) with a portion of the net proceeds of the Offering, net of
estimated federal and state income taxes at a rate of approximately 38%.
See 'Use of Proceeds.'
23
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
AFFILIATION PRO FORMA
AND OTHER OFFERING AS
THE COMPANY ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED(a)
----------- ----------- --------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 6,915 $17,801(c) $ 7,094 $ 3,816(a) $ 10,910
(17,622)(b)
Accounts receivable, net............... 10,319 8,778(b) 19,097 -- 19,097
Due from physician groups.............. 21 -- 21 -- 21
Prepaid expenses and other current
assets............................... 48 637(b) 685 -- 685
----------- ----------- --------- ----------- ------------
Total current assets................. 17,303 9,594 26,897 3,816 30,713
Furniture, fixtures and equipment, net... 2,546 2,282(b) 4,828 -- 4,828
Management Services Agreements, net...... 7,310 22,080(b) 29,390 -- 29,390
Other assets............................. 740 740 740
----------- ----------- --------- ----------- ------------
Total assets......................... $27,899 $33,956 $61,855 $ 3,816 $ 65,671
----------- ----------- --------- ----------- ------------
----------- ----------- --------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 353 $ -- $ 353 $ -- $ 353
Accrued expenses....................... 826 630(b) 1,456 -- 1,456
Accrued salaries and benefits.......... 841 -- 841 -- 841
Due to physician groups................ 6,375 (3,282)(b) 3,093 -- 3,093
Shareholder note payable............... 753 118(c) 871 (871)(a) --
Current portion of long-term debt and
capital lease obligations............ 665 11,151(b) 18,484 (18,469)(a) 15
-- 6,668(c) -- -- --
----------- ----------- --------- ----------- ------------
Total current liabilities............ 9,813 15,285 25,098 (19,340) 5,758
Long-term debt........................... 6,540 9,765(c) 16,305 (12,244)(a) 4,061
Stockholders' equity:
Convertible preferred stock............ 40 2(c) 42 (42)(a) --
Common stock........................... 9 3(b) 12 9(a) 21
Additional paid-in capital............. 14,482 1,248(c) 23,383 35,733(a) 59,116
7,653(b)
Deficit................................ (2,985) -- (2,985) (300)(a) (3,285)
----------- ----------- --------- ----------- ------------
Total stockholders' equity........... 11,546 8,906 20,452 35,400 55,852
----------- ----------- --------- ----------- ------------
Total liabilities and
stockholders' equity.......... $27,899 $33,956 $61,855 $ 3,816 $ 65,671
----------- ----------- --------- ----------- ------------
----------- ----------- --------- ----------- ------------
</TABLE>
NOTES TO PRO FORMA BALANCE SHEET
(a) To reflect (i) the net proceeds from the sale of shares of Common Stock
in the Offering estimated to be approximately $35.7 million (after deducting
underwriting discounts and estimated Offering expenses) and the repayment of
$33.0 million of indebtedness consisting of (A) approximately $11.1 million of
HCFP Debt including the $300,000 success fee due at the completion of the
Offering; (B) approximately $5.0 million of the Comdisco Loan; (C) approximately
$1.5 million of the Galtney Loan; (D) approximately $800,000 of the Nagpal Debt;
(E) approximately $3.4 million of the Stockholder Debt; and (F) approximately
$11.2 million of the Physician Notes and (ii) the conversion of the Preferred
Stock and all other outstanding equity securities into Common Stock upon the
closing of the Offering.
(b) To record the historical basis of the assets acquired and liabilities
assumed by the Company in the Affiliation Transactions. In connection with the
Affiliation Transactions, the Company issued 3,279,008 shares of common stock,
paid cash of approximately $17.6 million and issued $11.2 million of the
Physician Notes. The accounts receivable were recorded at net realizable value
and the furniture, fixtures and equipment was recorded at fair market value. In
connection with the recording of intangible assets, primarily Management
Services
24
<PAGE>
Agreements, the Company analyzed the nature of each Practice with which a
Management Services Agreement was entered into, including the number of
physicians in each Practice, number of offices and ability to recruit additional
physicians, the Practice's relative market position, the length of time each
Practice had been in existence and the term and enforceability of the Management
Services Agreement. The Management Services Agreements are for a term of 40
years and typically cannot be terminated by the Practice without cause,
consisting primarily of bankruptcy or material default. See Notes 1 and 2 to the
financial statements.
The breakdown of the Affiliation Transactions in the aggregate resulted in
total consideration of $36.4 million, consisting of cash of $17.6 million, notes
payable to physician groups of $11.2 million and Common Stock of $7.6 million.
Of such total consideration, $22.1 million was allocated to Management Services
Agreements, $8.8 million was allocated to accounts receivable, $.6 million was
allocated to other current assets, $2.3 million was allocated to furniture,
fixtures and equipment and $(2.6) million was allocated to accrued liability.
The Company believes that there is no material value allocable to the
employment and noncompete agreements entered into between the Existing Practices
and the individual physicians, because the primary economic beneficiaries of
these agreements are the Existing Practices, which are entities that the Company
does not legally control. The Company believes that the Existing Practices are
long-lived entities with an indeterminable life and that the physicians, patient
demographics and various contracts will be continuously replaced. The amounts
allocated to the Management Services Agreement are being amortized over periods
varying from 7 to 25 years.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the PPM industry, which the
Company expects will include a review of the consolidation of professional
corporation revenues and the accounting for business combinations. The Company
is unable to predict the impact, if any, that this review may have on the
Company's affiliation strategy, allocation of consideration related to
affiliations and amortization life assigned to intangible assets.
(c) To record $17.8 million raised after June 30, 1997. Of such amount,
$1.3 million was provided from the issuance of 208,333 shares of Series E
Preferred Stock and $16.5 million was provided from the Comdisco Loan,
additional HCFP Debt, Stockholder Debt, the Nagpal Debt, the Galtney Loan and
the Debentures. The Debentures are convertible into 555,556 shares of Common
Stock.
25
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data with respect to the Company's
statements of operations for the year ended December 31, 1996 and the balance
sheet data at December 31, 1996 have been derived from the financial statements
of the Company which have been audited by Ernst & Young LLP, independent
certified public accountants. The selected financial data presented below for
the six months ended June 30, 1996 and 1997 and the balance sheet data at June
30, 1997 are unaudited and were prepared by management of the Company on the
same basis as the audited financial statements appearing elsewhere in this
Prospectus and, in the opinion of management of the Company, include all
adjustments necessary to present fairly the information set forth therein. The
results for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997 or future
periods. The following data should be read in conjunction with 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ------------------
DECEMBER 31, 1996 1996 1997
----------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Practice revenue, net................................................... $ 6,029 $ -- $19,907
Less: physician and other provider services............................. (2,912) -- (9,509)
-------- ------- -------
Management fee revenue.................................................. 3,117 -- 10,398
Costs and expenses:
Medical support services............................................. 2,844 -- 9,541
General and administrative........................................... 1,278 51 2,139
Depreciation and amortization........................................ 104 1 300
Interest expense (income), net....................................... -- -- 294
-------- ------- -------
Total costs and expenses........................................... 4,226 52 12,274
Loss before income taxes................................................ (1,109) (52) (1,876)
Income taxes............................................................ -- -- --
-------- ------- -------
Net loss................................................................ $(1,109) $(52) $(1,876)
-------- ------- -------
-------- ------- -------
Net loss per common share............................................... $ (0.09) $0.00 $ (0.15)
-------- ------- -------
-------- ------- -------
Weighted average common shares outstanding.............................. 11,852 11,217 12,480
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(IN THOUSANDS, EXCEPT
OPERATING DATA)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,439 $ 6,915
Working capital........................................................................ 1,819 7,490
Total assets........................................................................... 13,675 27,899
Long-term debt, less current portion................................................... 59 6,540
Total stockholders' equity............................................................. 7,724 11,546
OTHER OPERATING DATA:
Number of Practices.................................................................... 3 8
Number of physicians................................................................... 34 57
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and notes thereto of the Company included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements. Discussions
containing such forward-looking statements may be found in the material set
forth below and under 'Business,' as well as in this Prospectus generally.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the risk factors set forth under 'Risk Factors' and the matters set
forth in this Prospectus generally.
OVERVIEW
The Company is a PPM that provides management services to physician
practices that focus on musculoskeletal care, which involves the medical and
surgical treatment of conditions relating to bones, muscles, joints and related
connective tissues. The broad spectrum of musculoskeletal care offered by the
physician practices ranges from acute procedures, such as spine or other complex
surgeries, to the treatment of chronic conditions, such as arthritis and back
pain. As of the date of this Prospectus, the Company has affiliated (the
'Affiliation Transactions') with 24 Existing Practices comprising 112 doctors
practicing in Arizona, California, Florida, Pennsylvania and Texas by entering
into Management Services Agreements. The Company was incorporated in Delaware in
January 1996 and affiliated with the first Existing Practice in July 1996. At
December 31, 1996, the Company had entered into Management Services Agreements
with three Existing Practices comprising 34 physicians at that time and 37
physicians as of the date of this Prospectus. During the first ten months of
1997, the Company entered into additional Management Services Agreements with 21
Existing Practices, comprising 75 physicians and acquired the IPA with 42
physicians in Phoenix, Arizona.
The total consideration paid to a Practice's physicians, once the Practice
has agreed to affiliate with the Company, is based on a multiple of the
Company's management fee plus the fair market value of the Practice's furniture,
fixtures and equipment and, subject to legal limitations regarding Medicare and
Medicaid receivables, the estimated net realizable value of its accounts
receivable. The consideration paid by the Company consists of Common Stock, cash
and the assumption of certain liabilities (principally notes payable to
financial institutions secured by receivables of the Practice, which notes are
repaid at the time the Affiliation Transaction is consummated). In exchange for
this consideration, the Practice enters into a 40-year Management Services
Agreement with the Company.
Practice revenue represents the revenue of the Existing Practices and the
COSI ambulatory surgery center reported at the estimated realizable amounts from
patients, third party payors and others for services rendered, net of
contractual and other adjustments. Management fee revenue represents Practice
revenue less amounts retained by the Existing Practices (consisting of physician
and other provider services costs, principally compensation and fees paid to
physicians and other health care providers) which are paid to the physicians
pursuant to the Management Services Agreements. Under each Management Services
Agreement, the Company assumes responsibility for the management of the
non-medical operations of the Practice, employs substantially all of the
non-professional personnel utilized by the Practice and may provide the Practice
with the facilities and equipment used in its medical practice. For a more
detailed discussion of the rights and obligations of the parties to the
Management Services Agreements, see 'Business--Contractual Agreements With the
Practices--Management Services Agreement.'
The Company's management fee revenue constitutes a stated percentage of
each Practice's net collected revenue, except that under one Management Services
Agreement the Company's management fee is based on the Existing Practice's net
operating income. See 'Certain Transactions--Affiliation Transactions.'
Accordingly, the Company's revenues are dependent on the Existing Practices'
revenues, which must be billed and collected. The percentage of revenue paid to
the Company as a management fee is generally 10% to 15% of the net collected
revenue of the Practice. The management fees and an amount equal to 100% of the
clinic expenses are reflected as management fee revenue earned by the Company.
27
<PAGE>
The Company's operating expenses consist primarily of the expenses incurred
in fulfilling its obligations under the Management Services Agreements. These
expenses include medical support services (principally clinic overhead expenses
that would have been incurred by the Existing Practices, including
non-professional employee salaries, employee benefits, medical supplies,
malpractice insurance premiums, building and equipment rental and other expenses
related to clinic operations) and general and administrative expenses (personnel
and administrative expenses in connection with maintaining a corporate office
function that provides management, contracting, administrative, marketing and
development services to the Existing Practices).
As a result of the Company's rapid growth, costs and expenses exceeded
management fee revenue due to the start-up nature of the Company. The level of
these costs and expenses are expected to continue to increase as affiliations
with additional Practices are achieved and the Company adds to its management
infrastructure.
RESULTS OF OPERATIONS
The following table sets forth the percentages of the Existing Practices'
revenue represented by certain items reflected in the Company's consolidated
statements of operations. As a result of the Company's limited period of
existence and affiliation with the Existing Practices, the Company does not
believe that comparisons between periods and percentage relationships within the
periods set forth below are meaningful.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
Practice revenue, net........................................................... 100.0% 100.0%
Less: physician and other provider services..................................... 48.3 47.8
------ ------
Management fee revenue.......................................................... 51.7 52.2
Costs and expenses:
Medical support services...................................................... 47.2 47.9
General and administrative.................................................... 21.2 12.2
Depreciation and amortization................................................. 1.7 1.5
------ ------
Total costs and expenses................................................... 70.1 61.6
------ ------
Loss before income taxes........................................................ (18.4) (9.4)
Income taxes.................................................................... -- --
------ ------
Net loss........................................................................ (18.4)% (9.4)%
------ ------
------ ------
</TABLE>
Practice Revenue, Net. For the year ended December 31, 1996, net practice
revenue was $6.0 million arising from Affiliation Transactions with LVBMJ on
July 1, 1996 and SCOI and STSC on November 1, 1996 ('the 1996 Affiliations').
For the six months ended June 30, 1997, net practice revenue was $19.9 million
arising from the 1996 Affiliations and affiliations with five additional
Practices comprising 21 physicians at April 1, 1997 (LOS and Tri-City) and June
1, 1997 (Gold Coast and two additional Practices in Los Angeles, CA).
Physician and Other Provider Services. Physician and other provider
services for the year ended December 31, 1996 was $2.9 million consisting of
compensation and fees paid to physicians and other health care providers
pursuant to Management Services Agreements entered into on July 1, 1996 and
November 1, 1996. For the six months ended June 30, 1997, physician and other
provider services was $9.5 million, reflecting the effect of the 1996
Affiliations and affiliations with five additional Practices pursuant to
Management Services Agreements executed in the first six months of 1997.
Management Fee Revenue. Management fee revenue for the year ended December
31, 1996 was $3.1 million as a result of the factors set forth above. For the
six months ended June 30, 1997, management fee revenue was $10.4 million as a
result of the factors set forth above.
Medical Support Services. Medical support services, principally clinic
overhead expenses, was $2.8 million for the year ended December 31, 1996,
resulting from the 1996 Affiliations. For the six months ended June 30, 1997,
medical support services was $9.5 million, reflecting the 1996 Affiliations,
plus the effect of five additional Management Services Agreements executed in
the first six months of 1997.
General and Administrative. General and administrative expenses for the
year ended December 31, 1996 was $1.3 million, reflecting the expenses incurred
in establishing a corporate office. These expenses consisted of
28
<PAGE>
labor costs, group benefits, accounting, legal, rent and other expenses,
substantially all of which were incurred after July 1, 1996 (the date of the
first Affiliation Transaction). For the six months ended June 30, 1997, general
and administrative expenses were $2.4 million, of which $1.8 million were
incurred in the three months ended June 30, 1997, reflecting the Company's
increased development of corporate infrastructure to support the additional
affiliations as they occur. While the Company expects that general and
administrative expenses will continue to increase as more Practices affiliate
with the Company, it also expects them to continue to decline as a percentage of
both practice revenue and management fee revenue.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $104,000, substantially all of which was incurred
after July 1, 1996. The depreciation expense relates to acquired furniture,
fixtures and equipment and the amortization relates to Management Services
Agreements. For the six months ended June 30, 1997, depreciation and
amortization was $300,000, reflecting the additional Affiliation Transactions
entered into in the first six months of 1997. The Company expects that
depreciation and amortization expenses will continue to increase significantly
as additional Practices affiliate with the Company, but may remain relatively
constant as a percentage of both practice revenue and management fee revenue.
Although the Company's net unamortized balance of intangible assets acquired
($7.3 million at June 30, 1997) is not considered to be impaired, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material adverse effect on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 and June 30, 1997, the Company had $1.8 million and
$7.5 million, respectively, in working capital and $1.4 million and $6.9
million, respectively, in cash and cash equivalents. The Company's principal
sources of liquidity as of December 31, 1996 and June 30, 1997 consisted of the
cash and cash equivalents and net accounts receivable of $5.8 million and $10.3
million, respectively.
The Company has financed its Affiliation Transactions, capital expenditures
and working capital needs since its inception through a combination of (i)
private placements of capital stock; (ii) borrowings from institutional lenders;
and (iii) short-term borrowings from stockholders.
For the year ended December 31, 1996 and the six months ended June 30,
1997, cash used in operations was $1.0 million and $1.2 million, respectively,
resulting primarily from net operating losses adjusted for non-cash expenses.
Cash used in investing activities for the year ended December 31, 1996 and
the six months ended June 30, 1997 was $4.6 million and $8.0 million,
respectively, relating primarily to Affiliation Transactions resulting in
increases in accounts receivable, intangible assets and furniture, fixtures and
equipment.
Cash provided by financing activities for the year ended December 31, 1996
and the six months ended June 30, 1997 was $7.1 million and $14.7 million,
respectively. For the year ended December 31, 1996, substantially all of the
cash provided resulted from proceeds from the issuance by the Company of two
series of Preferred Stock. For the six months ended June 30, 1997, cash provided
by financing activities resulted primarily from $7.8 million in net borrowings
and $5.0 million in proceeds from the issuance of three series of preferred
stock.
Beginning in March 1997, the Company entered into the HCFP Loan Agreements
with HCFP Funding, secured by the accounts receivable acquired from Existing
Practices. The Company may borrow up to an aggregate of $17.0 million under HCFP
Loan Agreements, subject to a borrowing base of 85% of eligible accounts
receivable. In connection with the Offering, the Company will repay all
outstanding amounts under the HCFP Loan Agreements. See 'Use of Proceeds.'
Borrowings under the HCFP Loan Agreements bear interest at the prime rate plus
1.75% per annum. The HCFP Loan Agreements require the Company to maintain a
prescribed level of tangible net worth, place limitations on indebtedness,
liens, and investments and prohibit the payment of dividends.
On June 30, 1997, the Company entered into an additional HCFP Loan
Agreement secured by a pledge of all of the assets of the Company. The Company
may borrow up to $3.3 million under such agreement for Practice affiliations.
Borrowings under such agreement bear interest at the prime rate plus 3.5%.
Interest only is payable
29
<PAGE>
through December 31, 1997, at which time the loan converts to a term loan
repayable in 36 monthly installments. In addition, in connection with such
agreement the Company issued warrants to HCFP to purchase 40,000 shares of the
Common Stock.
In August 1997, the Company borrowed an aggregate of $6.5 million under the
Comdisco Loan Agreement and the Galtney Loan Agreement to fund Practice
affiliations. The Comdisco Loan and the Galtney Loan both have three year terms,
bear interest at 14% per annum and are secured by a second lien on all of the
Company's tangible and intangible personal property. On September 9, 1997, the
Company issued $4.0 million principal amount of its 6% convertible debentures
due 2000 (the 'Debentures') to fund Practice affiliations. The Debentures are
convertible into Common Stock. See 'Certain Transactions.'
On October 14, 1997, the Company obtained short-term financing in the form
of a secured term note for $2.5 million payable to HCFP Funding to fund Practice
affiliations, secured by a lien on substantially all of the assets of the
Company. The loan bears interest at the prime rate plus 3.5% (12% at October 31,
1997). Interest only is payable through December 31, 1997 and the entire
principal sum is due and payable on January 10, 1998. In connection with this
loan agreement, the Company will pay HCFP Funding a fee in the amount of
$300,000 on the maturity date.
On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3.4 million from certain stockholders, including Dr.
Nagpal, to fund Practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggreagte of 67,500
shares of Common Stock at an exercise price of $0.01 per share. Outstanding
loans bear interest at the prime rate plus 3.5% (12% at October 31, 1997). The
principal of and accrued interest on such loans are due and payable January 10,
1998.
During October 1997, in connection with several Practice affiliations, the
Company issued promissory notes to the physicians in the aggregate amount of
approximately $11.2 million. These outstanding promissory notes bear interest at
rates ranging from 6% to 11%. Substantially all of these promissory notes are
due and payable either on the date of the completion of the Offering or at
various maturity dates ranging from December 31, 1997 to March 31, 1998.
The Company's affiliation and expansion programs will require substantial
capital resources. In addition, the operations and expansion of the Practices,
including the addition of Ancillary Service Facilities, and of the IPA will
require ongoing capital expenditures. The financing of future affiliations and
business expansion is anticipated to be provided by a combination of the
proceeds of the Offering, borrowings under the HCFP Loan Agreements and cash
flows from operations. The Company believes that the combination of these
sources will be sufficient to meet its currently anticipated operating and
capital expenditure requirements and working capital needs through 1998. In
order to meet its affiliation and expansion goals as well as its long-term
liquidity needs, the Company expects to incur, from time to time, additional
short-term and long-term indebtedness and to issue additional debt and equity
securities, the availability and terms of which will depend upon market and
other conditions. See 'Risk Factors--Risks Related to Intangible Assets.'
REIMBURSEMENT RATES
The health care industry is experiencing a trend toward cost containment as
payors seek to improve lower reimbursement and utilization rates with providers.
Further reductions in payments to health care providers or other changes in
reimbursement for health care services could adversely affect the Practices with
which the Company is affiliated and adversely affect the Company's results of
operations.
30
<PAGE>
BUSINESS
GENERAL
The Company is principally a PPM that provides management services to
physician practices that focus on musculoskeletal care, which involves the
medical and surgical treatment of conditions relating to bones, muscles, joints
and related connective tissues. The broad spectrum of musculoskeletal care
offered by the physician practices ranges from acute procedures, such as spine
or other complex surgeries, to the treatment of chronic conditions, such as
arthritis and back pain. The management services provided by the Company include
physician practice and network development, marketing, payor contracting and
financial, administrative and clinical information management. As of the date of
this Prospectus, the Company has entered into Affiliation Transactions by
entering into Management Services Agreements with 24 Managed Practices
comprising 112 physicians practicing in Arizona, California, Florida,
Pennsylvania and Texas and owns and operates one IPA with 42 physicians in
Phoenix, Arizona.
INDUSTRY OVERVIEW
The market for muscoloskeletal care in the United States is significant and
growing. According to the AAOS, total direct costs associated with the delivery
of musculoskeletal care exceeded $60 billion in 1988 and increased to
approximately $72 billion in 1992. The increase in expenditures can be
attributed to various factors, including improvements in medical technology,
more active lifestyles which have resulted in the growth of sports medicine and
the overall aging of the population. In 1992, the 65-and-over age group
represented approximately 12% of the U.S. population, but accounted for more
than half of all musculoskeletal care expenditures.
Musculoskeletal care is provided by a variety of medical and surgical
specialists. Although the orthopaedic surgeon is the primary musculoskeletal
provider, musculoskeletal care is also provided by physiatrists,
rheumatologists, podiatrists, occupational medicine physicians, rehabilitative
therapists, neurosurgeons and neurologists. In addition, there are a number of
subspecialties of orthopaedics, including adult reconstructive (joint
replacement) surgery, spinal care, sports medicine, foot and ankle care, hand
and upper extremity care, pediatrics and trauma care. The AAOS estimates that in
1995 there were approximately 23,000 orthopaedic surgeons, as well as
approximately 5,500 physiatrists, 3,500 rheumatologists, 3,000 occupational
medicine physicians, 4,900 neurosurgeons and 11,400 neurologists in the United
States.
Historically, most orthopaedic procedures have been performed on an
inpatient basis. Recently, however, there has been a trend towards handling
these procedures on an outpatient basis. The Company believes this trend may be
attributable to a number of factors: less invasive surgery with the arthroscope
and new anaesthetic techniques have significantly reduced post-operation trauma;
outpatient procedures are less costly and thus more desirable to both patients
and payors; outpatient settings represent a 'health environment' which promotes
wellness and improved patient attitudes; and outpatient settings foster
preventive team situations which minimize waste and improve efficiency. For
these reasons, the Company believes that the trend toward treatment in the
outpatient setting will continue to increase in the foreseeable future.
According to AAOS, in 1996, the principal payors for musculoskeletal care
were Medicare and Medicaid at 27% (combined), managed care, including discounted
fee-for-service and capitation, at 26%, private pay (indemnity insurers) at 23%
and workers' compensation at 17%. Reflecting the emergence of managed care, the
percentage of payments by private payors declined from 39% in 1988 to 23% in
1996, while payments from managed care sources increased from 12% to 26%. This
shift from private pay to managed care reimbursement has added the complexity of
managing the clinical and administrative aspects of the physicians' practices
and increased the emphasis on managing practices more efficiently.
Historically, surgical and non-surgical orthopaedic specialists have
maintained separate practices; recently, however, musculoskeletal physicians
have begun to follow the consolidation trend seen elsewhere in the health care
industry. The AAOS estimates that approximately 3-5% of all orthopaedic
practices have affiliated with PPMs as of February 1997. Consolidated practices
increasingly are utilizing a separate professional management company to handle
practice management functions such as staffing, information systems, managed
care contracting, leasing, purchasing and marketing, thereby enabling the
physicians to focus on providing high quality medical services. Several factors
have contributed to the trend toward affiliation with PPMs by
31
<PAGE>
musculoskeletal physicians. These factors include the increasing complexity of
managing a practice due, in part, to the increase in managed care contracting,
the need for cost-effective management of patient care, the economies of scale
achievable in such areas as administration, purchasing and marketing, the desire
to capture revenues from ancillary services and in-network referrals and the
growing importance of capital resources to acquire and maintain state-of-the-art
equipment, clinical facilities and management information systems.
STRATEGY
The Company's goal is to develop the leading musculoskeletal network in
each of its markets by aligning the Company's interests with those of the
Practices' physicians. Key components of the Company's strategy are:
Expand Into New Markets. The Company intends to expand into targeted new
markets by establishing relationships and affiliations with the most qualified
practices in such markets. The Company targets markets that have a large enough
population to support a viable musculoskeletal physician network. The Company
generally seeks to affiliate initially with platform practices in new markets.
Platform practices generally consist of at least five physicians who have the
demonstrated ability to grow in their market. Potential affiliation candidates
are evaluated on a variety of factors, including, but not limited to, physician
credentials and reputation, the practice's competitive market position,
specialty and subspecialty mix of physicians, historical financial performance,
growth potential, the local demographics potential and potential for development
of Ancillary Service Facilities.
Continue to Develop Existing Markets. The Company strengthens its market
positions by (i) providing uniform financial reporting systems to the Practices;
(ii) implementing uniform practice management systems to facilitate the
collection of financial and clinical data; (iii) investing in new clinical
equipment such as EMGs and bone densitometers; (iv) increasing the number of
physicians and diversifying the subspecialties in a Managed Practice; (v)
developing satellite offices to accommodate increased patient flow; (vi)
committing capital to develop or acquire Ancillary Service Facilities; and (vii)
expanding revenues through additional payor contracting and focused marketing on
a regional basis. The Company believes these services will enable the physicians
to devote more time to the practice of medicine and the strategic development of
their practice, thereby increasing revenues and creating greater efficiencies in
the operation of each Practice.
Introduce Ancillary Service Facilities. Ancillary Service Facilities will
provide such services as ambulatory surgery, physical therapy and MRI services.
Once the Practices or a network in a particular market have achieved a
significant local presence, the Company plans to introduce Ancillary Service
Facilities by assisting the Practices in developing such facilities. The first
Ancillary Service Facility is planned to open in late 1997 (a mobile MRI unit in
San Antonio, Texas) and additional Ancillary Service Facilities are planned to
be opened in 1998 in other markets. In addition, the Company currently manages
one physician-owned ambulatory surgery center which was under development by the
physicians prior to their involvement with the Company and for which the Company
receives a 10% management fee. For a discussion of the applicability of the
Stark Law to the operation of the Ancillary Service Facilities, see
'Business--Governmental Regulation and Supervision--The Stark Self-Referral
Laws.'
Develop Disease Management and Clinical Information System. Following the
implementation of a uniform practice management system, the Company has a
two-step strategy for creating a disease management and clinical information
system. The Company is in the process of developing standard procedures for
gathering clinical and financial information, such as personal patient data,
physician and procedure identifier codes, payor class and amounts charged and
reimbursed. The Company's goal is to establish a non-patient identifiable
information database across all Practices pursuant to which efficiencies may be
achieved by gathering, interpreting and sharing clinical information,
standardizing referral patterns and treatment protocols within a physician
network and coordinating the needs of the patient population in any geographic
market. Utilization of the database is expected to result in an increased
ability to control and predict the cost of care for various patient diagnoses.
The Company believes that its network of musculoskeletal physicians with access
to reliable clinical outcome information will make the Company more attractive
to payors because the Company will be able to demonstrate cost-effective quality
care.
32
<PAGE>
BMJ OPERATIONS
Existing Practices. Since commencing operations in January 1996 until
October 31, 1997, the Company has affiliated with 24 Existing Practices,
comprising 112 physicians, in Arizona, California, Florida, Pennsylvania and
Texas, and owns and operates one IPA, comprising 42 physicians, in Phoenix,
Arizona. Approximately 83% of the physicians at the Managed Practices are
orthopaedic surgeons.
The following table sets forth certain information concerning the Existing
Practices.
<TABLE>
<CAPTION>
ADDITIONAL PRACTICES
IN
NUMBER/SPECIALITIES MARKET SINCE
OF PHYSICIANS AFFILIATION
EFFECTIVE ------------------- NUMBER OF ---------------------
AFFILIATION AT OCTOBER 31, SATELLITE NUMBER OF NUMBER OF
REGION PRACTICE MARKET DATE 1997 OFFICES PRACTICES PHYSICIANS
- -------- ----------- --------------------- ---------- ------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Eastern LVBMJ Bethlehem, PA 7/1/96 6 Orthopaedics 0 2 7
1 Physiatry
1 Spine surgery
LOS Ft. Lauderdale, FL 4/1/97 6 Orthopaedics 2 5 23
1 Podiatry
Gold Coast Palm Beach 6/1/97 5 Orthopaedics 0 2 11
County, FL
Central STSC San Antonio, TX 11/1/96 6 Orthopaedics 9 1 1
1 Physiatry
Western SCOI Los Angeles, CA 11/1/96 20 Orthopaedics 4 7 10*
2 Physiatry
Tri-City Oceanside, CA 4/1/97 7 Orthopaedics 0 0 0
Sun Valley Sun City, AZ 7/1/97 4 Orthopaedics 0 0 0**
</TABLE>
- ------------------
* Includes three doctors and three separate practices in South Lake Tahoe,
California.
** Does not include the IPA with 42 physicians in Phoenix, Arizona.
Regional Business Model. While health care has become an increasingly
significant national issue, it is still delivered on a local level. Therefore,
in order to execute its growth and operating strategies, the Company has divided
the United States into the eastern, central, and western regions. The Company
believes that its regional business model benefits both the Company and the
Practices. Local management teams allow the Company to better understand the
specific characteristics of a region, such as the demographics, the payor mix,
the competitive landscape and the managed care environment, thus enabling the
Company to be more effective in marketing to patients and negotiating with third
party payors and suppliers. In addition, the regional management team is able to
develop and maintain long-term relationships with both the Practices' physicians
and local entities such as hospitals, managed care networks, suppliers and
non-musculoskeletal physician groups. The Company believes that due to its
regional business model, it is better equipped to develop relationships with
such local entities than PPMs with centralized business models.
A regional vice president is responsible for a management team that
supervises the development of each market within a region. The regional
management team coordinates market expansion initiatives and integration of
administrative services within the region. The regional team provides management
and network services related to the following: (i) integration and transition;
(ii) physician services including cost containment and operating efficiencies;
(iii) ancillary services development and management; (iv) physician recruitment
and professional development; (v) workers' compensation; and (vi) payor
contracting.
Affiliation Structure. The Company believes its affiliation model aligns
the interests of the Company and the Practices' physicians by (i) providing
equity ownership in the Company to the physicians; (ii) assuring that the
physicians and the Company share in the profits from the Ancillary Service
Facilities and Practice cost savings; (iii) focusing on revenue enhancement; and
(iv) reducing the amount of time the physicians must spend on administrative
matters, thereby enabling them to dedicate more of their efforts to the delivery
of health care services. Additionally, each Practice retains professional
autonomy and control over its medical practice through continued ownership and
participation in Practice governance.
The total consideration paid to a Practice's physicians, once the Practice
has agreed to affiliate with the Company, is based on a multiple of the
Company's management fee plus the fair market value of the Practice's
33
<PAGE>
assets, including furniture, fixtures and equipment and, subject to legal
limitations regarding Medicare and Medicaid receivables, the estimated net
realizable value of its accounts receivable. See 'Business--Contractual
Agreements with the Practices--Asset Purchase Agreement.' The multiple of the
Company's management fee is determined by reference to a number of factors,
including the geographic location of the Practice, the size and specialty mix of
the Practice, the Practice's competitive market position, the Practice's
historical financial performance and the potential for the development of
Ancillary Service Facilities. See '--Strategy--Expand into New Markets.' The
total consideration paid by the Company consists of Common Stock, cash and the
assumption of certain liabilities (principally notes payable to financial
institutions secured by receivables of the Practice, which notes are repaid at
the time the Affiliation Transaction is consummated). In exchange for this
consideration, the Practice enters into a 40-year Management Services Agreement
with the Company.
The revenue to the Company from a Practice is typically based on a
specified percentage (typically 10% to 15%) of the Practice's revenues (rather
than on a percentage of the net operating income of the Practice) plus
reimbursement of the Practice's overhead expenses and two-thirds of the cost
savings the Company is able to achieve through its purchasing power. See
'Certain Transactions--Affiliation Transactions.' In addition, the Company will
be responsible for arranging the funding of Ancillary Service Facilities when
appropriate and will, subject to applicable laws, share appropriately in the
profits from such facilities.
Upon affiliating with a Practice, the Company assumes the management of
substantially all aspects of the Practice's operations other than the provision
of medical services. Pursuant to the Management Services Agreements, the Company
assists the Practices in the preparation of operating budgets and capital
project analyses, the coordination of group purchases of medical supplies and
insurance and the introduction of physician candidates. The Company provides the
full range of administrative services required for a Practice's day-to-day
non-medical operations, including management and monitoring of the Practice's
billing and collection, accounting, payroll, legal services, recordkeeping, cash
flow activity, physician recruiting, payor contracting and marketing.
Comprehensive administrative support should facilitate more effective billing
and collections, and, as the Company grows, economies of scale in effecting
purchases. In addition, the Company plans to integrate the Practices' management
information systems into a single system that will expand the financial and
clinical reporting capabilities of each of the Practices and facilitate the
analysis of data collected.
The Company believes that through its affiliation with Practices across
multiple markets it can achieve benefits in the aggregate purchasing of products
and services for the Practices. The Company believes that, in particular, it can
assist the Practices in reducing its purchasing expenses such as insurance,
medical equipment and clinical and administrative supplies. Pursuant to the
Management Services Agreements, the Company receives two-thirds of any such cost
savings.
Financial and Practice Management Systems. To date, the Company has
implemented an interconnected financial accounting system in the Practices. This
system allows the Company to analyze the financial aspects of the Practices from
a centralized location and ensure uniformity with respect to financial
classifications at the Practice level.
The Company receives daily cash receipts related to the collection of
patient accounts receivable and revenues. The Company utilizes these funds to
pay the clinic overhead expenses (medical support services) as they are incurred
and pays to the Practice a physician draw based upon a predetermined percentage
of estimated net collected revenue. Annually, the cash actually collected and
paid as physician draw, medical support services or management fee is reconciled
with the Practice and any over/under payments are settled.
The Company believes that the implementation of a uniform practice
management system will enable it to monitor the operations of the Practices in a
cost-effective manner, enhance utilization of the Practices, develop practice
protocols and provide the Company with a competitive advantage in negotiating
contracts with third party payors. The Company is currently reviewing various
practice management software programs and expects to select and implement such a
program within 12 to 18 months following completion of the Offering.
The Company believes that the implementation of the practice management
system, together with the integrated financial accounting system, will enable it
to gather data that will be the foundation for a disease management and clinical
information system. The Company intends to capture, retain and use such
information in accordance with applicable legal and ethical requirements
regarding the confidentiality of medical records. The
34
<PAGE>
Company further believes that such a system will facilitate the collection of
clinical information such as type of injuries reported, patient characteristics
and diagnoses of injuries, that will improve provider and patient access to
resources and technology, facilitate quantitative analysis of outcome quality
and cost and eventually allow for the development of curative and palliative
regimens based on such information. The Company intends to obtain the informed,
written consent of each patient for whom information will be included in the
database.
Staffing and Facilities. The Company employs most of the Practices'
non-professional personnel. These non-professional personnel, along with
additional personnel at the Company's headquarters, manage the day-to-day
non-medical operations of each of the Practices, including, among other things,
secretarial, bookkeeping, scheduling and other routine services. Under the
Management Services Agreements, the Company must provide facilities and
equipment to the Practices and, to this end, the Company assumes the Practice's
existing leases for the facilities and equipment and purchases the assets, or a
leasehold interest in the assets, utilized by the Practice.
DEVELOPMENT OF ANCILLARY SERVICE FACILITIES
Within each market, the Company plans to establish Ancillary Service
Facilities including, ambulatory surgery centers, physical therapy facilities
and MRI centers and mobile units. In order to establish such facilities, the
Company has designated professionals within each market to locate sites,
identify acquisition opportunities and otherwise arrange for the provision of
the ancillary services. Additionally, the Company's regional management teams
are responsible for marketing the Ancillary Service Facilities to payors and
referral sources and staffing, operating and financial management of the
facilities. For risks associated with the establishment of Ancillary Service
Facilities, see 'Risk Factors--Reliance on New Affiliations and Expansion.' For
a discussion of the applicability of the Stark Law to the operation of the
Ancillary Service Facilities, see 'Business--Governmental Regulation and
Supervision--The Stark Self-Referral Laws.'
PAYOR MIX OF EXISTING PRACTICES
The Company's Practices derive revenue from a broad mix of third party
payors. This payor mix is a result of a number of underlying trends in the
patient base of musculoskeletal specialists. A significant portion of
reimbursement to physicians in musculoskeletal practices is derived from
workers' compensation insurance programs, which generally pay higher
reimbursements per procedure than health insurance payors and are generally not
subject to co-payments and deductibles. The Company believes that reimbursement
from workers' compensation payors will continue to represent a substantial
portion of practice revenues because of broader definitions of work-related
injuries, the shift of medical costs from health insurance payors to workers'
compensation payors, aging of the work force, and the requirement that employers
pay the total cost of medical treatment for work-related injuries.
The following table sets forth the payor mix of the Existing Practices for
the six months ended June 30, 1997:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
-------------
<S> <C>
Workers' compensation................................................ 27%
Medicare(1).......................................................... 17
Private payors and managed care(2)................................... 56
</TABLE>
- ------------------
(1) Includes 2% attributable to Medicaid.
(2) Includes managed care, substantially all of which is on a fee-for-service
basis.
Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. Provider reimbursement methods vary on a state-by-state basis. A
majority of states have adopted fee schedules pursuant to which all health care
providers are uniformly reimbursed. The fee schedules are set by each state and
generally prescribe the maximum amounts that may be reimbursed for a designated
procedure. In most states without fee schedules, health care providers are
reimbursed based on usual, customary and reasonable fees charged in the state in
which the services are provided. In Florida (a state in which the Company does
35
<PAGE>
business), state law mandates that all workers' compensation services be
provided under a managed care arrangement approved by Florida's Agency for
Healthcare Administration.
Medicare. The federal government has implemented, through the Medicare
program, the RBRVS payment methodology for health care provider services. RBRVS
is a fee schedule that, except for certain geographical and other adjustments,
pays similarly situated health care providers the same amount for the same
services. The RBRVS is subject to annual increases or decreases at the
discretion of Congress or HCFA. To date, the implementation of RBRVS has reduced
payment rates for certain of the procedures historically provided by the
Existing Practices. Furthermore, it is expected that, within the next year, HCFA
will be required by law to recalibrate the practice expense component of the
RBRVS over the next four years in a way that will have positive effects on
payments to primary care providers, but will decrease payments for most services
provided by specialists, including many services provided by the Existing
Practices.
Managed Care Payors. An increasing portion of the net revenue of the
Existing Practices is derived from managed care payors which make payments under
discounted fee-for-service and capitation arrangements. Although rates paid by
managed care payors are generally lower than commercial indemnity rates, managed
care payors can provide access to large patient volumes. To date, the Company
has not entered into any contracts on behalf of the Managed Practices with
managed care payors; however, the Company intends to seek to negotiate both
discounted fee-for-service and capitated contracts on behalf of the Practices.
Discounted fee-for-service contracts involve negotiated rates for specified
procedures and services. Under capitated arrangements, providers deliver health
care services to managed care enrollees and typically bear all or a portion of
the risk that the cost of such services may exceed capitated payments.
Private Payors. Rates paid by private third party payors are based on
established health care provider and hospital charges and are generally higher
than Medicare payment rates. Recently, RBRVS types of payment systems have been
adopted by certain private third party payors and may become a predominant
payment methodology. Wider implementation of such programs would reduce payments
from private third party payors, and could indirectly reduce revenue to the
Company.
CONTRACTUAL AGREEMENTS WITH THE PRACTICES
The Company has entered into Management Services Agreements and, in most
cases, Asset Purchase Agreements, Restricted Stock Agreements and Stockholder
Noncompetition Agreements (collectively, the 'Affiliation Agreements'), with
each of the Existing Practices, and intends to enter into Affiliation Agreements
with each additional Practice, to provide management, administrative and
development services. The following summary of the Affiliation Agreements is
intended to be a general summary of the form of the Affiliation Agreements. The
actual terms of the individual Affiliation Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
respects from the description below as a result of negotiations with the
individual Practices and the requirements of local regulations. The Management
Services Agreements and certain related agreements are filed as exhibits to the
registration statement of which this Prospectus forms a part. The following
summary is qualified in its entirety by reference to such exhibits. For a
discussion of circumstances under which a Management Services Agreement may be
rendered unenforceable, see 'Risk Factors--Government Regulation.'
Management Services Agreement. Under the Management Services Agreement,
the Practices are solely responsible for all aspects of the practice of medicine
and the Company has the primary responsibility for the business and
administrative aspects of the Practices. Pursuant to the Management Services
Agreements, the Company provides or arranges for various management,
administrative and development services relating to the day-to-day non-medical
operations of the Practices. Pursuant to the Management Services Agreements, the
Company acts as the exclusive manager and administrator of non-medical services
relating to the operation of the Practices. Subject to matters for which the
Practices maintain responsibility or which are governed by the Operations
Committee (as defined herein) of the Practices, the Company (i) bills patients,
insurance companies and other third party payors and collects, on behalf of the
Practices, the fees for medical and other services rendered, including goods and
supplies sold by the Practices; (ii) provides or arranges for, as necessary,
clerical, accounting, purchasing, payroll, legal, bookkeeping and computer
services, personnel, information management, preparation of certain tax returns,
printing, postage and duplication services and medical transcribing services;
36
<PAGE>
(iii) supervises and maintains custody of substantially all files and records
(medical records of the Practices remain the property of the Practices); (iv)
provides facilities and equipment for the Practices; (v) prepares, in
consultation with the Operations Committee and the Practices, all operating and
capital expenditure budgets; (vi) orders and purchases inventory and medical
supplies as reasonably requested by the Practices; (vii) implements, in
consultation with the Operations Committee and the Practices, national and local
public relations or advertising programs; (viii) provides financial and business
assistance in the negotiation, establishment, supervision and maintenance of
contracts and relationships with managed care and other similar providers and
payors; (ix) recruits on behalf of the Practices' physician employees and other
medical professionals; and (x) ensures that all medical and technical personnel
have the licenses, credentials, approvals and other certifications needed to
perform their respective duties.
Under the Management Services Agreements, the Practices retain the
responsibility for, among other things providing professional services to
patients in compliance with the ethical standards, laws and regulations to which
they are subject. In addition, the Practices maintain exclusive control of all
aspects of the practice of medicine and the delivery of medical services.
The revenue to the Company from a Practice is typically based on a
specified percentage (typically 10-15%) of the Practice's revenues (rather than
on a percentage of the net operating income of the Practice) plus reimbursement
of the Practice's overhead expenses and two-thirds of cost savings that the
Company is able to achieve through its purchasing power. See 'Certain
Transactions--Affiliation Transactions.' In addition, the Company will be
responsible for arranging the funding of Ancillary Service Facilities when
appropriate and will, subject to applicable laws, share appropriately in the
profits from such facilities.
Each Management Services Agreement has an initial term of 40 years, with
automatic extensions (unless at least six months' notice is given) of additional
five-year terms. The Management Services Agreement may be terminated by either
party if the other party (a) files a petition in bankruptcy or other similar
events occur, or (b) defaults in any material respect in the performance of any
duty or obligation under the Management Services Agreement, which default is not
cured within a specified period after receipt of notice thereof or (c) any of
the representations and warranties made by such party in the Management Services
Agreement is materially untrue or misleading and such party fails to correct
such matter after receipt of written notice thereof. The Company also has the
right to terminate the Management Services Agreement in the event that the
Practice is excluded from participation in the Medicaid or Medicare program for
any reason. Either party may also terminate the Management Services Agreement if
such party determines that the structure of the Management Services Agreement
violates any state or federal laws or regulations existing at such time and that
an amendment to the Management Services Agreement will be unable to correct such
defect.
Upon termination of the Management Services Agreement, neither party is
obligated to the other party except as set forth below. In the event of such
termination, the Company is required to complete, within four months after the
termination date, the annual settlement of the respective obligations of the
Company and Practice for the period prior to the termination date. Furthermore,
following any such termination, the Company must sell to the Practice all of the
Company's interest in the assets that are located in the offices of the Practice
and used in connection with the medical practice. The purchase price for all of
such assets will be agreed upon by the parties; however, if an agreement is not
reached, the purchase price will be determined by an independent appraisal.
Under the Management Services Agreement, the Company is entitled to receive all
of the revenues collected by the Practice during the 90-day period following
termination of the agreement.
The Company has entered into a Management Services Agreement with STSC that
permits STSC and the individual physicians to rescind the Affiliation
Transaction on (i) November 1, 1998 if the Company has not affiliated with an
aggregate of 16 physicians in San Antonio, Texas by such date and (ii) November
1, 2003. In the event of a rescission of the Affiliation Transaction, the
transaction will be unwound, with the assets (other than the accounts
receivable) acquired by the Company being returned to the Existing Practice and
the purchase price paid therefor being returned to the Company. The physician
owners and the employed physicians, if any, who received Common Stock of the
Company in connection with the Affiliation Transaction (including any
transferees of such persons) will be required to return such capital stock to
the Company. In addition, the Management Services Agreements for five other
Existing Practices comprising eight physicians contain
37
<PAGE>
provisions that permit such Existing Practices to rescind their Affiliation
Transactions on their respective seventh anniversaries. See 'Risk
Factors--Rescission Rights.'
Under the Management Services Agreement, the Practice agrees generally not
to, at any time prior to the second anniversary of the termination of the
Management Services Agreement, compete with the Company by providing services to
other medical groups similar to those provided by the Company under the
Management Services Agreement or by entering into a management relationship with
another provider of non-professional management services that provides such
services to multiple physician groups. The Company and the Practice agree not to
disclose to third parties any confidential information relating to the other
party.
Asset Purchase Agreement. Subject to the terms and conditions of an asset
purchase agreement (the 'Asset Purchase Agreement'), the Company purchases from
the Practice all of those assets used by the Practice in the operation of the
medical practice, including medical equipment, furniture, trade fixtures, office
equipment, supplies, and, subject to legal limitations regarding Medicare and
Medicaid receivables, outstanding accounts receivable. Pursuant to an assignment
and assumption agreement entered into as a condition to the Asset Purchase
Agreement, the Company also acquires a leasehold interest in certain assets
leased by the Practice, including offices and equipment. The Company also
assumes certain liabilities related to any leased equipment and leased offices.
The purchase price paid by the Company under the Asset Purchase Agreement is
customarily determined by the parties after an appraisal of the assets being
acquired. Under the Asset Purchase Agreement, the Practice agrees to indemnify
the Company for any losses resulting from the operation of such medical practice
prior to the effectiveness of the affiliation of such Practice with the Company.
Restricted Stock Agreement. The Company issues Common Stock to the
physician owners of the Practice as partial consideration for affiliating with
the Company. Such Common Stock is issued pursuant to the terms and conditions
set forth in a restricted stock agreement (the 'Restricted Stock Agreement'),
which terms include annual vesting of 25% of the Common Stock each year in a
four year period, a right of first refusal for the Company in the event the
physician decides to sell such Common Stock and the authority of the Company's
Board of Directors to prevent a physician's sale of such Common Stock to a
competitor of the Company. The Restricted Stock Agreement further provides that
the shares of Common Stock issued by the Company to the physicians remain issued
and outstanding regardless of whether such physicians remain with the Practice,
but the rights of the individual physicians to such shares (as opposed to the
right of the Practice) will vest equally over four years, with the Practice
retaining the right to utilize unvested shares to recruit new physicians. Under
certain circumstances, including termination of the Management Services
Agreement or a physician's death, permanent disability or cessation of active
practice, the Company has the right to repurchase all or any part of the
unvested shares of Common Stock held by such physician. If the Company elects to
repurchase such unvested shares, the price per share is the original value of
such Common Stock as set forth in the Restricted Stock Agreement. The Company
may also issue Common Stock to employed physicians and other key personnel of
the Practice pursuant to a Restricted Stock Agreement containing substantially
similar terms.
Stockholder Noncompetition Agreement. Under a non-competition agreement
(the 'Stockholder Non-competition Agreement'), each physician owner and
employed physician of the Practice agrees not to (i) compete directly or
indirectly with the Practice in
the provision of medical services or with the Company in the provision of
practice management services for a period of two years after termination of his
affiliation with the Practice and within a 25 mile radius of any of the
Practice's offices; or (ii) disclose any confidential information of the Company
or the Practice. Each physician further agrees to indemnify the Company and the
Practice for any damages they may suffer as a result of the physician's failure
to abide by the foregoing covenants. There can be no assurance as to the
enforceability of the Noncompetition Agreements.
COMPETITION
The Company competes with many other entities to affiliate with
musculoskeletal practices. Several companies that have established operating
histories and greater resources than the Company are pursuing the acquisition of
the assets of both general and specialty practices and the management of such
practices. Other PPMs and some hospitals, clinics, HMOs and provider networks
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, that
additional competitors will not enter the market, or that such competition will
not make it more
38
<PAGE>
difficult to affiliate with, and to enter into agreements to provide management
services to, medical practices on terms beneficial to the Company.
The Practices and the IPA will compete with local musculoskeletal care
service providers as well as some managed care organizations. The Company
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition for consumers of medical
services. The Company believes that the cost, accessibility and quality of
services provided are the principal factors that affect competition. There can
be no assurance that the Practices or the IPA will be able to compete
effectively in the markets that they serve. The inability of the Practices or
the IPA to compete effectively would have a material adverse effect on the
Company.
Further, the Practices and the IPA compete with other providers for
musculoskeletal managed care contracts. The Company believes that trends toward
managed care have resulted in increased competition for such contracts. Other
practices and management service organizations may have more experience than the
Practices, the IPA and the Company in obtaining such contracts. There can be no
assurance that the Company and the Practices will be able to successfully obtain
sufficient managed care contracts to compete effectively in the markets they
serve. The inability of the Practices to compete effectively for and obtain such
contracts could materially adversely affect the Company. See 'Risk
Factors--Intense Competition.'
GOVERNMENT REGULATION AND SUPERVISION
The delivery of health care services is regulated at both the federal and
state level. The laws applicable to the Company are subject to evolving
interpretations, and therefore there can be no assurance that a review of the
Company's operations by federal or state judicial or regulatory authorities
would not result in a determination that the Company, the IPA or one of the
Practices has violated one or more provisions of federal or state law. Any such
determination could have a material adverse effect on the Company.
Federal Law
Among the significant federal laws that apply to the Company's activities
are those that prohibit: (a) the filing of false or improper claims with a
federally funded health program; (b) unlawful inducements for the referral of
business reimbursable under most federally funded health programs; (c) fraud in
regard to payment or service in any health program; and (d) the billing for the
provision of certain Medicare or Medicaid covered items or services where such
items or services were provided based upon a referral to the providing entity by
a physician who has, or whose immediate family member has, a financial
relationship with that entity that does not fall within an applicable exception.
False and Other Improper Claims. Under numerous federal laws, including
the Federal False Claims Act (the 'False Claims Act'), the federal government is
authorized to impose criminal, civil and administrative penalties on any health
care provider that files a false claim for reimbursement from a federally funded
health program (such as Medicare or Medicaid). The False Claims Act provides for
a civil penalty of not less than $5,000 and not more than $10,000 per false
claim and between two to three times the amount of damages depending on the
facts and circumstances. The Medicare civil monetary penalty is now ten thousand
dollars ($10,000) per false item or service claimed. Recently enacted federal
legislation also imposes federal criminal penalties on persons who file false or
fraudulent claims with private insurers. While the criminal statutes are
generally reserved for instances of fraud, the civil and administrative penalty
statutes are being applied by the government in an increasingly broad range of
circumstances. Civil sanctions may be imposed if the claimant knew or should
have known that billing was improper. The government also has taken the position
that claiming reimbursement for services that are substandard is a violation of
these false claims statutes if the claimant knew or should have known that the
care was substandard or rendered under improper circumstances. Private persons
may bring civil actions to enforce the False Claims Act. Under certain lower
court decisions, claims derived from a violation of the Anti-Kickback Statute
(as defined herein) or the Stark Law have been deemed to be, or may under
certain circumstances be construed to be, false claims.
The Stark Self-Referral Law. The Stark Law prohibits a physician from
referring a patient for certain designated health services reimbursable by
Medicare or Medicaid to an entity with which the physician (or the physician's
immediate family member) has a financial relationship, whether through
ownership, debt or
39
<PAGE>
compensation arrangements. Designated health services means clinical laboratory
services, physical therapy services, occupational therapy services, radiology
(including magnetic resonance imaging, computerized axial tomography scans and
ultrasound services), radiation therapy services and supplies, durable medical
equipment and supplies, parenteral and enteral nutrients, equipment, and
supplies, prosthetics, orthotics, and prosthetic devices, home health services
and supplies, outpatient prescription drugs, and inpatient and outpatient
hospital services. Referrals for services other than designated health services
and the furnishing of physicians' services that do not involve any designated
health services are not subject to the Stark Law. The term 'referral' under the
Stark Law means more than merely recommending a vendor for designated health
services to a patient; referrals are defined to include the request or
establishment of a plan of care by a physician which includes the provision of
designated health services. Consequently, the ordering of designated health
services within a physician's medical group can constitute a referral within the
meaning of the Stark Law.
Further, unless an exception is met, both the health care entity that
furnishes the services and the physician who makes the referral are prohibited
from billing Medicare or Medicaid for services rendered to Medicare or Medicaid
beneficiaries in violation of the Stark Law. The Stark Law is a civil statute
which does not include criminal penalties. Violations of the Stark Law could
result in significant civil sanctions, including denial of payment, refunds of
amounts collected in violation of the statute and civil money penalties of up to
fifteen thousand dollars ($15,000) for each bill or claim for a service a person
knows or should know is a service for which payment may not be made. The Stark
Law also includes civil money penalties of up to one hundred thousand dollars
($100,000) for each arrangement or scheme which the physician or entity knows or
should know has a principal purpose of assuring referrals which, if directly
made, would violate the Stark Law proscription. Both penalty provisions also
provide for exclusion from the Medicare and Medicaid programs.
The Company currently does not directly provide any designated health
services as that term currently is defined under the Stark Law; however, one or
more of the Practices may provide designated health services within their
offices. Because the Company provides management services and managed care
contracting services to the Practices for a fee, there can be no assurance that
the Company will not be deemed to be providing designated health services within
each Practice. If the Company is held to be the provider of such designated
health services within each Practice, the Stark Law will require that the
arrangements between the Company and the physicians in each Practice that
provide designated health services be structured to meet a Stark Law exception.
Under this scenario, the physicians' ability to order designated health services
within the Practices and the ability of the Practices to bill Medicare or
Medicaid for such designated health services will be permissible only if the
financial arrangements under the Management Services Agreements or IPA Provider
Agreements entered into by the Company and the Practices meet certain exceptions
set forth in the Stark Law. The Company believes that the financial arrangements
under the Management Services Agreements or IPA Provider Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by the courts or regulatory authorities would not result in a
contrary determination. Also, to the extent that the Company in the future owns,
manages or operates Ancillary Service Facilities that provide designated health
services, the Stark Law may require the arrangements for the Company's
acquisition of certain non-clinical assets of the Practices and its Management
Services Agreements or IPA Provider Agreements with each Practice to be
structured to meet Stark Law exceptions in order for the physicians within each
Practice to refer patients to the Ancillary Service Facilities for designated
health services.
It is also possible that, as a result of the Company's Management Services
Agreements and IPA Provider Agreements with the Practices, the physicians in the
Practices will be deemed to have indirect financial interests in Practices by
virtue of the physicians' ownership interests in the Company. Under such
interpretation of the Stark Law, the physicians' ability to order and bill for
designated health services provided within the Practices and the ability of the
Practices to bill Medicare or Medicaid for such designated health services will
be permissible only if an exception under the Stark Law is applicable. The
current Stark Law exception related to physicians' ownership interests in
entities to which they refer patients may be relevant to the physicians' ability
to make referrals for designated health services to any Ancillary Service
Facilities owned or managed by the Company in the future. The Company will not
be in a position to meet that exception related to investment interests until
the Company's stockholders' equity exceeds $75 million.
The Stark Law also governs the physicians' ability to refer patients for
designated health services within the Practices in light of the physicians'
ongoing compensation and ownership arrangements with such Practices. An
40
<PAGE>
exception for in-office ancillary services requires that the Practices meet
certain structural and operational requirements on an ongoing basis in order to
bill for in-office ancillary designated health services rendered by employed or
contracted physicians. A key feature of the in-office ancillary services
exception is the Stark Laws definition of a 'group practice.' HCFA has announced
its intention to publish proposed regulations in the near future which, among
other things, are expected to focus on the definition of 'group practice.' Any
adverse changes to the group practice definition may have a material adverse
effect on the Company by severely limiting the Practices' ability to bill the
Medicare and Medicaid Programs for certain ancillary services furnished by the
Practices.
In the preamble to the adoption of certain regulations regarding the Stark
Law, adopted when such law regulated only clinical laboratory services, HCFA
stated that it would not recognize any group in which the physicians were in
multiple corporate entities as a 'group practice' under the Stark Law. SCOI is a
partnership comprised of individual physician members as well as P.C.s. The use
of P.C.s as partners at SCOI was historical and designed to accommodate practice
structures that existed prior to the creation of SCOI. Recently, at the
Eighteenth Annual Institute on Medicare and Medicaid Payment Issues,
co-sponsored by the American Academy of Healthcare Attorneys and the National
Health Lawyers Association, an HCFA representative stated that HCFA will
recognize a group practice consisting of multiple physician entities, such as
P.C.s, provided that each such P.C. or other physician entity is limited to one
physician member. Nevertheless, given HCFA's prior written statement and HCFA's
position that its written comments on the Stark Law as applied to clinical
laboratories reflect its view on the Stark Law in its current expanded form, it
may be necessary to restructure SCOI before any Stark-designated health services
are provided. Failure to do so would result in the risk of the penalties
described above, or the inability of SCOI to provide Stark-designated health
services, either of which would have a material adverse effect on the Company.
In the recently enacted 1997 Budget Bill, Congress directed the Secretary
of the U.S. Department of Health and Human Services ('HHS') to issue advisory
opinions as to whether a referral relating to designated health services (other
than clinical laboratory services) is prohibited under the Stark Law. The
advisory opinion mechanism is authorized beginning on or about November 3, 1997.
An advisory opinion issued by the Secretary will be binding as to the Secretary
and the party or parties requesting the opinion. The Company has no present
intention to seek an advisory opinion from HHS, HCFA or any other governmental
authority regarding its current operations, arrangements with physicians or the
referral activities of physicians in the Practices.
Federal Anti-Kickback Statute. A federal law commonly known as the
'Anti-Kickback Statute' prohibits the offer, solicitation, payment or receipt of
anything of value (direct or indirect, overt or covert, in cash or in kind)
which is intended to induce business for which payment may be made under a
federal health care program. A 'federal health care program' is any plan or
program that provides health benefits, whether directly, through insurance, or
otherwise, which is funded directly, in whole or in part, by the United States
Government (e.g., Medicare, Medicaid, and CHAMPUS). Excluded from the definition
of federal health care program is the Federal Employee Health Benefits Program.
The type of remuneration covered by the Anti-Kickback Statute is very broad. It
includes not only kickbacks, bribes and rebates, but also proscribes any such
remuneration, whether made directly or indirectly, overtly or covertly, in cash
or in kind. Moreover, prohibited conduct includes not only remuneration intended
to induce referrals, but also remuneration intended to induce the purchasing,
leasing, arranging or ordering of any goods, facilities, services, or items paid
for by a federal health care program. The Anti-Kickback Statute has been
interpreted broadly by a number of courts to prohibit remuneration that is
offered or paid for otherwise legitimate purposes if one purpose of the payment
is to induce referrals. Even bona fide investment interests in a health care
provider may be questioned under the Anti-Kickback Statute if the government
concludes that the opportunity to invest was offered as an inducement for
referrals.
In part to address concerns regarding the implementation of the
Anti-Kickback Statute, in 1991 the federal government published regulations that
provide exceptions or 'safe harbors' for certain transactions that are deemed
not to violate the Anti-Kickback Statute. Among the safe harbors included in the
regulations are transactions involving the sale of physician practices,
management and personal services agreements and employee relationships. Congress
recently added a significant new statutory exception related to 'remuneration
between an organization and an individual or entity' if the organization is a
Medicare risk contracting organization or if the remuneration is provided
pursuant to a written agreement that places the individual or entity at
substantial financial risk for the cost or utilization of services. Regulations
implementing the foregoing statute
41
<PAGE>
have not yet been adopted, but are expected to be enacted soon. The failure of
an activity to qualify under a safe harbor provision, while potentially leading
to greater regulatory scrutiny, does not render the activity automatically
illegal under the Anti-Kickback Statute. Conduct falling outside the safe
harbors will be judged by government regulators on a case-by-case basis based on
the specific facts and circumstances.
Each offense under the Anti-Kickback Statute is classified as a felony and
is punishable by a criminal fine of up to twenty-five thousand dollars ($25,000)
and/or imprisonment of up to five (5) years; a civil money penalty of fifty
thousand dollars ($50,000) for each violation and/or civil damages of not more
than three times the total amount of remuneration offered, paid, solicited or
received may be imposed without regard to whether any portion of such
remuneration was for a lawful purpose. Both the offeror and the recipient of the
illegal remuneration are potentially liable. In addition, violators are subject
to civil exclusion from participation in the federal health care programs,
regardless of whether they also have been convicted under the criminal penalty
provisions or have been found liable under the civil monetary penalty provisions
of the Anti-Kickback Statute. Also, there is a risk that, in a civil lawsuit to
enforce a contract that contains a structure in violation of the Anti-Kickback
law, a court might conclude that the contract is unenforceable as against public
policy.
There are several aspects of the Company's relationships with the
physicians and the Practices to which the Anti-Kickback Statute may be relevant.
In some instances, for example, the government may construe some of the
Company's marketing and managed care contracting activities as arranging for the
referral of patients to the physicians with whom the Company has a Management
Services Agreement or IPA Provider Agreement. Further, any referral of patients
between physicians within the Practices and between the Practices could be
construed as a referral to which the Anti-Kickback Statute applies. Although
neither the investments in the Company by physicians nor the Management Services
Agreements or the IPA Provider Agreements between the Company and the Practices
qualify for protection under the statutory exception or the safe harbor
regulations described above, the Company does not believe that these activities
fall within the type of activities the Anti-Kickback Statute were intended to
prohibit. The Company also does not believe that referral activities within the
Practices violate the Anti-Kickback Statute. A determination that the Company
has violated the Anti-Kickback Statute would have a material adverse effect on
the Company.
As a component of the recently enacted HIPAA, Congress directed the
Secretary of the U.S. Department of Health and Human Services to issue advisory
opinions regarding compliance with the Anti-Kickback Statute. The advisory
opinion mechanism is authorized for a trial period, beginning six months after
the date of enactment, August 21, 1996. Advisory opinions are available
concerning what constitutes prohibited remuneration within the meaning of the
Anti-Kickback Statute, whether an arrangement satisfies the statutory exceptions
to the Anti-Kickback Statute, whether an arrangement meets a safe harbor, what
constitutes an illegal inducement to reduce or limit services to individuals
entitled to benefits covered by the Anti-Kickback Statute, and whether an
activity constitutes grounds for the imposition of a civil or criminal penalty
under the applicable exclusion, civil money penalty and criminal provisions.
Advisory opinions, however, will not assess fair market value for any goods,
services or property or determine whether an individual is a bona fide employee
within the meaning of the Internal Revenue Code. The statutory language makes
clear that advisory opinions are available for both proposed and existing
arrangements. The failure of a party to seek an advisory opinion, however, may
not be introduced into evidence to prove that the party intended to violate the
Anti-Kickback Statute. The Company has not sought, and has no present intention
to seek an advisory opinion regarding any aspect of its current operations or
arrangements with physicians.
PIP Regulations. HCFA has issued final regulations (the 'PIP regulations')
covering the use of physician incentive plans ('PIPs') by HMOs and other managed
care contractors and subcontractors that contract to arrange for services to
Medicare or Medicaid beneficiaries ('Organizations'), potentially including the
Company. Any Organization that contracts with a physician group that places the
individual physician members of the group at substantial financial risk for the
provision of services that the group does not directly provide (e.g., a primary
care group takes risk but subcontracts with a specialty group to provide certain
services), must satisfy certain disclosure, survey and stop-loss requirements.
Under the PIP regulations, payments of any kind, direct or indirect, to induce
providers to reduce or limit covered or medically necessary services are
prohibited ('Prohibited Payments'). Further, where there are no Prohibited
Payments, but there is risk sharing among participating providers related to
utilization of services by their patients, the regulations contain three groups
of requirements: (i) requirements for physician incentive plans that place
physicians at 'substantial financial risk';
42
<PAGE>
(ii) disclosure requirements for all Organizations with PIPs; and (iii)
requirements related to subcontracting arrangements. In the case of substantial
financial risk (defined in the regulations according to several methods, but
essentially risk in excess of 25% of the maximum payments anticipated under a
plan with less than 25,000 covered lives), Organizations must conduct enrollee
surveys and ensure that all providers have specified stop-loss protection. The
violation of the requirements of the PIP regulations may result in a variety of
sanctions, including suspension of enrollment of new Medicaid or Medicare
members, or a civil monetary penalty of $25,000 for each determination of
noncompliance. In addition, because of the increasing public concerns regarding
PIPs, the PIP regulations may become the model for the industry as a whole.
Although the Company currently has no contracts that require compliance with the
PIP regulations, the new regulations, by limiting the amount of risk that may be
imposed upon physicians in certain arrangements, could affect the ability of the
Company to meaningfully reduce the costs of providing services.
Antitrust. Because the Practices that affiliate with the Company remain
separate legal entities, they may be deemed competitors subject to a range of
antitrust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and divisions of markets. In particular, the
antitrust laws have been interpreted by the Federal Trade Commission ('FTC') and
the United States Department of Justice ('DOJ') to prohibit joint negotiation by
competitors of price terms in the absence of financial risk that is shared among
the competitors, other financial integration or substantial clinical integration
among the competitors. The Company intends to comply with such state and federal
laws as may affect its development of, and contracting for, integrated health
care delivery networks (and in particular its IPA) and will utilize the DOJ and
FTC approved 'messenger model'--which avoids joint price negotiations--for those
agreements that do not involve sufficient financial or clinical integration.
Nevertheless, there can be no assurance that a review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operation of the Company and the Practices.
State Law
State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions on referrals than the Stark Law. These various state self-referral
laws have different requirements. Some states, for example, only prohibit
referrals when the physician's financial relationship with a health care
provider is based upon an investment interest. Other state laws apply only to a
limited number of designated health services or, alternatively, to all health
care services furnished by a provider. Some states do not prohibit referrals at
all, but require only that a patient be informed of the financial relationship
before the referral is made. The following provides a brief review of the
self-referral laws in each of the states in which the Company does business:
Arizona law requires that physicians, when making referrals to an entity they
own that is not part of their group practice, disclose to patients (i) that the
physician has a direct financial interest in the separate diagnostic or
treatment agency or non-routine goods or services that such patient is being
prescribed, and (ii) that the prescribed treatment, goods or services are
available on a competitive basis from other agencies. California's self-referral
law is very similar to the Stark Law, covering similar designated health
services and with similar exceptions. In addition, California requires
physicians to make a disclosure in the event of a referral to a provider in
which the physician or his or her family has a significant beneficial interest.
In the context of a group practice, this requirement may be met by providing a
written disclosure to each patient or posting a notice in a common area that
advises patients of the shared interests of the members of the group in any
services referred within the group and of the availability of other providers to
provide any such services. California has a separate self-referral law with
respect to care that is covered under worker's compensation insurance. The
covered services are identical with the services covered under its general
anti-self-referral law, and many of the exceptions are similar. Pennsylvania's
worker's compensation statute also prohibits the referral of patients from a
provider to a person or an entity with which the provider has a financial
relationship. Other than this provision of the worker's compensation statute and
Pennsylvania's requirement that providers make certain disclosures to patients
where a financial interest exists in the entity or with the person to which a
referral is made, Pennsylvania does not have a specific self-referral law. The
Pennsylvania worker's compensation self-referral law applies all of the
exceptions, including the group practice exception, applicable under the federal
Stark Law. Florida's Patient Self-Referral Act of 1992 prohibits health care
providers, including physicians, from referring a patient for the provision of
designated health care services, and in some circumstances any health care
services, to an entity in which the health care provider has an investment
interest, unless an exception, such as for
43
<PAGE>
referrals within a group practice, applies. Texas law does not have a specific
self-referral law. Failure to comply with the foregoing laws may result in loss
of licensure, which would be imposed against the physicians in the Practices, or
other civil or criminal penalties, which may be imposed against the physicians
in the Practices and, where the Company is deemed to make or receive referrals,
against the Company. In addition, any determination that any Management Services
Agreement violates any of the foregoing laws may result in such agreement being
unenforceable. Additional risks under state self-referral laws could arise,
however, to the extent that the Company or the Practices undertake to own,
manage or operate any Ancillary Service Facilities to which the physicians
within the Practices may wish to refer patients.
State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Some state laws governing workers'
compensation and other insurance also include an anti-kickback prohibition. The
following provides a brief review of the anti-kickback laws of the states in
which the Company does business: Arizona law considers it unprofessional conduct
for a physician to divide fees for professional services with another health
care provider in return for a patient referral. Florida's Patient Brokering Law
prohibits any person, including health care providers, from offering or paying,
soliciting or receiving, any commission, bonus, rebate, kickback, or bribe, or
from engaging in any split-fee arrangement, in return for referring patients.
Exceptions include payment arrangements that are not prohibited by the federal
Anti-Kickback law, and financial arrangements within a group practice. The
California anti-kickback statute prohibits the offer or acceptance of any
compensation by a licensed provider as compensation or inducement for referring
patients, clients or customers. The Texas anti-kickback law applies to
remuneration or compensation for referrals made between a licensed provider and
an unlicensed person or entity, but permits any activity that complies with the
federal anti-Kickback Statute or any regulations promulgated thereunder. In
addition, the medical practice standards in Texas prohibit physicians from
paying any person 'for securing, soliciting, or drumming patients on patronage.'
The Pennsylvania insurance law prohibits insurance fraud, which is defined to
include a health care provider's giving of anything of value in consideration of
a referral with respect to services subject to insurance benefits or claims.
Because one of the goals of the Company is to grow the Practices, a court could
find that the percentage payments received by the Company are in fact unlawful
payments for referrals (even under California law, notwithstanding the explicit
provision in the law permitting percentages of gross revenue payments for
services other than the referral of patients). Failure to comply with the
foregoing laws may result in loss of licensure, which would be imposed against
the physicians in the Practices, or other civil or criminal penalties, which may
be imposed against the physicians in the Practices and, where the Company is
deemed to make or receive referrals, against the Company. In addition, any
determination that any Management Services Agreement violates any of the
foregoing laws may result in such Agreement being unenforceable.The laws in most
states regarding kickbacks have been subjected to limited judicial and
regulatory interpretation and therefore, no assurances can be given that the
Company's activities will be found to be in compliance. Noncompliance with such
laws could have a material adverse effect upon the Company and subject it and
the Practices' physicians to penalties and sanctions.
Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any division of a physician's fees, regardless of
whether the other party is a referral source. Some states have laws that
specifically address payments for services rendered to physicians based on a
percentage of revenues from the physician's practice. The following provides a
brief review of the fee-splitting laws in each of the states where the Company
does business: Arizona and Pennsylvania do not explicitly prohibit the sharing
of fees between physicians and non-professionals, but such fee-sharing may be a
factor in the determination as to whether Pennsylvania's corporate practice of
medicine doctrine has been violated. The Company has obtained a draft of an
order of the State of Florida Board of Medicine that takes the position that
such a percentage-based management services fee violates Florida's prohibition
on fee splitting by licensed professionals. The Company has included such
percentage fees in all of its Management Services Agreements with physicians in
Florida. Counsel to the Board of Medicine has informed the Company that on
October 19, 1997, the Board adopted the position in the draft order and will
soon issue a final order with only minor revisions. Thus, no assurance can be
given that the Company's Management Services Agreements based on such percentage
fees will be enforceable. To avoid this risk, the Company will seek to
restructure such agreements in Florida to comply with the order, but such
modifications, or the failure to
44
<PAGE>
obtain agreement on such modifications, could have a material adverse effect on
the Company. California explicitly permits payment for services (other than the
referral of patients) based on a 'percentage of gross revenue or similar type of
contractual arrangement' if the consideration is commensurate with the value of
the services furnished or with the fair rental value of any premises or
equipment leased or provided by the recipient to the payor. However, even if a
contractual arrangement is not unlawful fee splitting, it may still be deemed to
constitute an arrangement to pay for referrals, as analyzed above. Judicial
interpretation of the corporate practice of medicine doctrine in Texas has
suggested that payments of a percentage of profits from a physician's medical
practice to a management company is a factor indicative of the corporate
practice of medicine.
The Company is reimbursed by physicians in the Practices on whose behalf
the Company provides management services. There can be no certainty that, if
challenged, the Company and the Practices will be found to be in compliance with
each state's fee-splitting (or related corporate practice) laws. A determination
in any state that the Company is engaged in any unlawful fee-splitting
arrangement could render any Management Services Agreement or IPA Provider
Agreement between the Company and a Practice located in such state unenforceable
or subject to modification in a manner materially adverse to the Company.
Corporate Practice of Medicine. The laws of many states prohibit business
corporations, including the Company, from employing physicians, 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. Some states
interpret the 'practice of medicine' broadly to include activities of
corporations such as the Company that have an indirect impact on the practice of
medicine, even where the physician rendering the medical services is not an
employee of the corporation and the corporation exercises no discretion with
respect to the diagnosis or treatment of a particular patient. For example,
judicial interpretation of the corporate practice of medicine doctrine in Texas
has suggested that payments of a percentage of profits from a physician's
medical practice to a management company is a factor indicative of the corporate
practice of medicine.
The Company's practice management structure, which the Company believes is
consistent with standard practices for PPMs, uses an operations committee (the
'Operations Committee') of six members, three of whom are designated by each of
the Company and the Practice. Among other things, the Operations Committee
approves a budget, medical group costs, costs and expenses that exceed the
budget, the acquisition and replacement of equipment and the integration of new
technologies. In addition, the Company's explicit approval is required for
implementation or acquisition of new technologies or medical equipment if the
costs of such equipment or technology exceeds 5% of the management fee. Company
approval is also required for all new offices and new ancillary services. If a
new medical office is not profitable, the Company may, in its sole discretion,
close the new office. Finally, a change in control of the Practice requires the
consent of the Company (not to be unreasonably withheld). While these provisions
in the Company's Management Services Agreements are designed to give the Company
control over certain business transactions by the Practices, which explicitly
retain their professional independence, case law in Texas and California
(particularly the latter) has suggested that control of business operations
(such as the provisions discussed above) may so severely impact the professional
practice as to amount to the corporate practice of medicine. Other states,
including states in which the Company does business, could take a similar
position.
The Company's intent is not to exercise any responsibility on behalf of the
Practices' physicians that interferes with the physicians' independent patient
care and professional judgments. However, as noted, the laws and legal doctrines
relating to the corporate practice of medicine have been subjected to only
limited judicial and regulatory interpretation and there can be no assurance
that, if challenged, the Company would be considered to be in compliance with
all such laws and doctrines. A determination in any state that the Company is
engaged in the corporate practice of medicine could render any Management
Services Agreement or IPA Provider Agreement between the Company and a Practice
located in such state unenforceable or subject to modification in a manner
materially adverse to the Company.
The Company hires certain ancillary health personnel (nurses and
technicians) and leases their services back to the Practices in a manner that it
believes accords with applicable Medicare billing requirements. The Company's
ability to hire such ancillary personnel is subject to various state
regulations. The Company believes
45
<PAGE>
that its structure in this area is common among PPMs. Should such state
corporate practice laws be interpreted to prohibit such hiring by the Company,
the Company will be required to revise its relationship with such ancillary
personnel, and the relationship of the ancillary personnel to the Practice would
also have to be modified. Such modification in the forgoing relationships could
have a material adverse effect on the Company.
Texas Staff Leasing Services Law. Texas law requires any person offering
'staff leasing services' to obtain a license from the Texas Department of
Licensing and Regulation. The Company leases certain non-physician personnel to
STSC as part of the management services provided by the Company to STSC. The
Company believes that it must obtain a license to provide such services in
Texas, and filed the application on October 14, 1997 for such license. The
Company has no reason to believe that it does not comply with the license
criteria which require, among other things, that the Company demonstrate a
certain net worth (dependent upon the number of assigned employees that the
Company has) and that the contract between the Company and STSC contains certain
provisions.
Licensure and Certificate of Need Laws. Certain of the ancillary services
that the Company anticipates providing or managing on behalf of the Practices
are now or may in the future be subject to licensure or certificate of need laws
in various states. There can be no assurance that the Company or the Practices
will be able to obtain such licenses or certificates of need approval to the
extent required for the particular ancillary service. Failure to obtain such
licenses or certificates of need could have a material adverse effect on the
Company.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, they have
been construed in some states to apply to such companies and there can be no
assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that its proposed operations are in compliance with these laws in the
states in which it currently does business, but there can be no assurance that
future interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may expand
will not require licensure or a restructuring of some or all of the Company's
operations. See 'Risk Factors--Government Regulation.'
The National Association of Insurance Commissioners ('NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
practices are precluded from entering into capitated contracts directly with
employers, individuals and benefit plans unless they qualify to do business as
HMOs or insurance companies. The Existing Practices currently provide services
under very few capitated payment contracts. The Company intends to limit the
number of capitated payments or other risk-sharing arrangements into which it
enters on its own behalf or on behalf of the Practices. The Company expects to
make such arrangements only with HMOs or insurance companies. In addition, in
December 1996, the NAIC issued a white paper entitled 'Regulation of Health Risk
Bearing Entities,' which sets forth issues to be considered by state insurance
regulators when considering new regulations, and encourages that a uniform body
of regulation be adopted by the states. Certain states have enacted statutes or
adopted regulations affecting risk assumption in the health care industry. In
some states, including California, these statutes and regulations subject any
physician or physician network engaged in risk-based contracting, even if
through HMOs and insurance companies, 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 additional regulation at the state level
will be forthcoming in response to the NAIC initiatives.
The IPA that is owned by the Company operates as a specialty physician
network in Arizona, and contracts directly or indirectly with licensed HMOs or
insurance companies to arrange for the provision of specialty orthopedic
physician services on behalf of enrollees of the HMOs or insurance companies. In
return, the IPA accepts a fee from the relevant payor, which fee the IPA passes
along to the participating physician provider, less the IPA's fee (generally
13%) to compensate the IPA for its services. The two IPA Payor Agreements
currently
46
<PAGE>
in place with the IPA involve 'capitation' fees--a fixed per month per enrollee
for all designated orthopedic services. Arizona law does not permit a provider
network to enter into such agreement directly with enrollees, unions, employers
or other patient group on behalf of their members or employees, as applicable;
the direct acceptance of risk by such a network, under Arizona law, would
constitute the 'business of insurance' subject to licensure and regulation by
the Arizona Department of Insurance. However, where the capitation or other
risk-based payment is accepted by a provider network as a 'downstream' risk from
a licensed HMO or insurance company, the Arizona Department of Insurance has
indicated that such risk contracting would not subject the Company to licensure
or regulation by the Department. However, there can be no assurance that the
laws governing the business of insurance in Arizona will not be revised or
interpreted in a manner that would prohibit operation of the IPA under either
the IPA Payor Agreements or the IPA Provider Agreements, and in such event, the
Company would be required to modify or terminate its relationships with payors
or providers in Arizona. Such modification or termination could have a material
adverse effect on the Company.
FEDERAL AND STATE INITIATIVES
Fraud and Abuse. In the recently enacted 1997 Budget Bill and HIPAA,
Congress has responded to perceived fraud and abuse in the Medicare and Medicaid
programs. This legislation has fortified the government's enforcement authority
with increased resources and greater civil and criminal penalties for offenses.
It is anticipated that there will be further restrictive legislative and
regulatory measures to reduce fraud, waste and abuse in the Medicare and
Medicaid programs. There can be no assurance that any such legislation will not
have a material impact on the Company.
Health Care Reform. As a result of the continued escalation of health care
costs and the inability of many individuals to obtain insurance, numerous
proposals have been or may be introduced in Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material, on the Company.
Confidentiality of Patient Records. The confidentiality of patient records
and the circumstances under which such records may be released is subject to
substantial regulation under state and federal laws and regulations. To protect
patient confidentiality, data entries to the Company's databases delete any
patient identifiers, including name, address, hospital and physician. Further,
the Company obtains the informed, written consent of the patient to use or
disclose patient information where the Company believes that such consent is
necessary or appropriate. The Company believes that its procedures comply with
the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. Furthermore, the Health
Insurance Portability and Accountability Act of 1996 requires the Secretary of
Health and Human Services to recommend legislation or promulgate regulations
governing privacy standards for individually identifiable health information and
creates a federal criminal offense for knowing disclosure or misuse of such
information. These statutes and regulations may require holders of such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
would not materially restrict the ability of the Company to obtain patient
information originating from records.
EMPLOYEES
As of October 31, 1997, the Company had approximately 804 employees, of
whom 20 are located at the Company's headquarters, 9 are located in the regional
offices and 775 are located at the Existing Practices. The Company believes that
its relations with its employees are satisfactory.
PROPERTIES
The Company has a five-year lease for its headquarters in Boca Raton,
Florida, which provides for annual lease payments of approximately $63,000. In
addition, in connection with the Affiliation Transactions, the Company assumed
leases for the facilities utilized by the respective Existing Practices for
aggregate annual lease
47
<PAGE>
payments of approximately $2.0 million as of December 31, 1997. For additional
information, see 'Certain Transactions.'
LEGAL PROCEEDINGS
The Company is subject to legal proceedings in the ordinary course of its
business. The Company does not believe that any such legal proceedings will have
a material adverse effect on the Company, although there can be no assurance to
this effect. In addition, the Company may become subject to certain pending
claims as the result of successor liability in connection with the assumption of
certain liabilities of the Practices; nevertheless, the Company believes that
the ultimate resolution of such additional claims will not have a material
adverse effect on the Company. See 'Risk Factors--Exposure to Professional
Liability.'
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Practices, the Company may become subject to some medical
malpractice actions under various theories. There can be no assurance that
claims, suits or complaints relating to services and products provided by the
Practices will not be asserted against the Company in the future. The Company
maintains medical professional liability insurance and general liability
insurance and believes that such insurance will extend to professional liability
claims that may be asserted against employees of the Company that work on-site
at Practice locations. In addition, pursuant to the Management Services
Agreements, the Practices are required to maintain comprehensive professional
liability insurance. The availability and cost of such insurance has been
affected by various factors, many of which are beyond the control of the Company
and the Practices. The cost of such insurance to the Company and the Practices
may have a material adverse effect on the Company. In addition, successful
malpractice or other claims asserted against the Practices or the Company that
exceed applicable policy limits would have a material adverse effect on the
Company. See 'Risk Factors--Exposure to Professional Liability.'
48
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and other key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Naresh Nagpal, M.D. ................................. 47 President, Chief Executive Officer and Director
David H. Fater....................................... 50 Executive Vice President, Chief Financial Officer and
Director
David K. Ellwanger................................... 40 Senior Vice President of Operations
Sheldon Lutz......................................... 54 Senior Vice President of Corporate Development
Tony Anderson........................................ 39 Treasurer
Ronald Garey......................................... 42 Controller
Sherry Pulliam....................................... 42 Director of Financial Operations and Assistant
Treasurer
Glenn Cozen.......................................... 43 Vice President of Development, Western Region
Joanna Robben........................................ 37 Vice President of Development, Central Region
Keith Bolton......................................... 35 Vice President of Ancillary Services
Beth Landel.......................................... 33 Vice President of Ancillary Services
Lee Bodendorfer...................................... 47 Vice President of Operations, Eastern Region
Randolph Farber...................................... 38 Vice President of Operations, Western Region
Randal J. Farwell.................................... 37 Vice President of Development, Eastern Region
Brent E. Mellecker................................... 35 Vice President of Development, Central Region
Andrea Serrate....................................... 43 Vice President of Operations, Southwest Region
Georges Daou......................................... 36 Director
Stewart G. Eidelson, M.D............................. 47 Director
James M. Fox, M.D.(1)................................ 55 Director
Ann H. Lamont(1)..................................... 40 Director
Donald J. Lothrop.................................... 38 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
Naresh Nagpal, M.D. became President and Chief Executive Officer and a
director in March 1996. From September 1993 to August 1996, Dr. Nagpal served on
the board of directors of InPhyNet Medical Management Inc. ('IMMI'), a PPM. From
September 1993 to August 1995, Dr. Nagpal was the Senior Executive Vice
President and Chief Operating Officer of IMMI. From January 1985 to August 1993,
Dr. Nagpal was President of Acute Care Specialists, Inc. and its related
companies which are PPMs that provide services to several hospitals and
physicians. Dr. Nagpal was the Chairman of the Department of Emergency Medicine
at Barberton Citizens Hospital in Barberton, Ohio from January to June of 1992
and Chairman of the Department of Emergency Medicine at Audobon Regional Medical
Center in Louisville, Kentucky from July to December of 1992.
David H. Fater became Executive Vice President and Chief Financial Officer
in February 1997 and a director in April 1997. From June 1995 to January 1997,
Mr. Fater was the Executive Vice President and Chief Financial Officer of
Community Care of America, Inc. From January 1993 to April 1995, Mr. Fater was
the Executive Vice President and Chief Financial Officer of Coastal Physician
Group, Inc. ('Coastal'). Prior to that, Mr. Fater was a partner at Ernst &
Young, LLP.
In connection with Mr. Fater's position at Coastal, in May 1995 he was
named as one of several defendants in a stockholder class-action lawsuit filed
in the United States District Court for the Middle District of North Carolina,
Friedland v. Coastal Healthcare. The complaint, as amended, alleges that the
defendants violated federal securities laws through misrepresentations and
omissions of material facts concerning the Company's
49
<PAGE>
operations and financial condition. The defendants have filed an answer to the
complaint, denying the principal allegations contained therein.
David 'Deke' K. Ellwanger became Senior Vice President of Operations in
July 1997. From July 1994 to July 1997, Mr. Ellwanger was the Vice President of
Managed Care for MedPartners/InPhyNet Medical Management Inc. From August 1985
to June 1994, Mr. Ellwanger worked for Aetna Health Plans/PARTNERS National
Health Plans managing various HMO's and HMO acquisitions.
Sheldon Lutz became Senior Vice President of Corporate Development in
November 1997. From February 1992 until 1997, Mr. Lutz was the Vice President of
Development for Columbia/HCA Healthcare Corporation responsible for acquisitions
and joint ventures and development of a marketwide joint venture model.
Tony Anderson became Treasurer in May 1997. From May 1995 to April 1997,
Mr. Anderson was the Vice President and Chief Financial Officer of Florida
Physician Services. From September 1993 to April 1995, he was Vice President and
Director of Internal Audit for Coastal. From February 1989 to August 1993, Mr.
Anderson was Controller for AKZO Coatings, Inc.
Ronald Garey became Controller in August 1996. Mr. Garey was the
International Finance Manager for Whirlpool Corporation from August 1995 to July
1996. From June 1993 to July 1995, he was the Corporate Controller of Innovet,
Inc. From July 1985 to May 1993, Mr. Garey was the Assistant Controller for Dole
Fresh Fruit International.
Sherry Pulliam became Director of Financial Operations and Assistant
Treasurer in November 1996. From February 1985 to December 1995, Ms. Pulliam
functioned in several different positions for Coastal such as, Financial
Operations Manager (from June 1994 to December 1995), Assistant Treasurer (from
July 1993 to May 1994), Vice President of Mergers and Acquisitions (from April
1992 to June 1993) and Vice President and Controller for Coastal Emergency
Services, Inc., the largest subsidiary of Coastal (from May 1988 to March 1992).
From March 1996 to October 1996 Ms. Pulliam was engaged as a Consultant in
Corporate Development for Community Care of America, Inc.
Glenn Cozen joined the Company in March 1997 and is the Vice President of
Development in the Western Region. Since November 1986, Mr. Cozen has been the
Chief Financial Officer at SCOI.
Joanna Robben joined the Company in June 1997 and is the Vice President of
Development in the Central Region. From 1995 to May 1997, Ms. Robben was Vice
President of Network Strategy & Management and Executive Director of Government
Programs for CIGNA Healthcare. From 1990 to 1995 Ms. Robben worked with First
Health Strategies, Inc. (formerly ALTA Health Strategies, Inc.), most recently
as Vice President, Provider Networks. From 1985 to 1990, Ms. Robben was
Director, Network Marketing for Partners National Health Plans. Ms. Robben is
also a registered physical therapist in private practice from 1982 to 1994.
Keith Bolton became Vice President of Ancillary Services in April 1997. Mr.
Bolton was the Vice President of Corporate Development from April 1995 to March
1997, for Onecare Health Industries, Inc. From July 1993 to March 1995, he was
the Regional Vice President for Surgical Health Corporation. From March 1992 to
June 1993, Mr. Bolton was the President and Chief Executive Officer of Southern
California Surgery Centers, a small consulting firm.
Beth A. Landel became Vice President of Ancillary Services in July 1997.
From June 1995 to July 1997, Ms. Landel was with HealthSouth Corporation where
she was a Regional Director of Corporate Development for the State of Florida
and Maryland through Maine. From May 1994 to June 1995, Ms. Landel was with
Surgical Health Corporation and Physicians Health Corporation, a PPM, as
Regional Marketing and Managed Care Manager for the State of Florida. From
August 1992 to May 1994, Ms. Landel was Director of Managed Care for Wellington
Regional Medical Center, an acute hospital in the Universal Health Services
system.
Lee Bodendorfer joined the Company in April 1997 and is the Vice President
of Operations in the Eastern Region. Mr. Bodendorfer was the Executive Vice
President of Intellex Medical Management Systems, Inc. from February 1995 to
April 1997. From October 1993 to February 1995, he acted as Regional Practice
Administrator for Columbia/HCA. From June 1989 to October 1993, Mr. Bodendorfer
was the Managing Director for Melbourne Neurologic, P.A., a neurosurgical and
neurological group medical practice ('Melbourne'). During
50
<PAGE>
this period he also served as President and Board Chairman for Partners in
Rehabilitation, Inc., an industrial rehabilitation and chronic pain management
company and an affiliate of Melbourne. During this time he also served as
General Manager of South Brevard Imaging, Ltd., a limited partnership MRI.
Randolph Farber joined the Company in September 1997 and is the Vice
President of Operations in the Western Region. From 1994 to 1997, Mr. Farber was
an Executive Director for American Oncology Resources. From 1993 to 1994, Mr.
Farber was Assistant Vice President, Provider Relations for Lifeguard Group
Health Care. From 1982 to 1993, Mr. Farber was the Assistant Director, Provider
Relations for CIGNA Healthplans of California.
Randal J. Farwell joined the Company in December 1996 and is the Vice
President of Development for the Eastern Region. From February 1996 to December
1996, Mr. Farwell was the Vice President of Marketing for PhyMatrix Corporation.
He was Vice President of Development for MedPartners from March 1995 to February
1996. From August 1993 to March 1995, Mr. Farwell was the Executive Director of
Marketing and Network Development for Florida Specialty Care Network, Ltd. Prior
to that, Mr. Farwell was the Director of Advertising and Promotions for Industry
Publishers Inc., a southern Florida medical business publication.
Brent E. Mellecker joined the Company in April 1997 and is the Vice
President of Development for the Central Region. From June 1995 to March 1997,
Mr. Mellecker was Vice President of Sales and Marketing for Combined Orthopaedic
Specialists. He was a Practice Consultant at Health Directions from December
1993 to June 1995. Prior to that, Mr. Mellecker was the Director of Business
Development at Same Day Surgery.
Andrea Seratte joined the Company in February 1997 and is the Vice
President of Operations for the Southwest Region. From February 1995 to March
1997, Ms. Seratte was the sole proprietor of SHARP Consulting, a healthcare
consulting firm. From September 1993 to February 1995, Ms. Seratte was the Vice
president of Operations for the Rehab Managed Care division of NovaCare, a
managed care company. From March 1993 to September 1993, she was the Vice
President of Finance for the Hospital Division of NovaCare.
Georges Daou became a director in September 1997. Mr. Daou is a founder of
DAOU Systems, Inc. and has served as Chairman of the Board and Chief Executive
Officer of such company since 1987. Mr. Daou sits on the boards of various
healthcare and community organizations, including the College of Healthcare
Management Executives and the Healthcare Information Managers Association.
Stewart G. Eidelson, M.D. became a director in October 1997. Dr. Eidelson
is a shareholder of, and since 1990 has been an orthopaedic surgeon at, OSA.
James M. Fox, M.D. became a director in November 1996. Dr. Fox was a
founding partner of, and since 1992 has been an orthopaedic surgeon at, SCOI.
Ann H. Lamont became a director in May 1996. Ms. Lamont is a managing
member of each of the general partner of Oak Investment Partners VI, Limited
Partnership ('Oak Partners') and Oak VI Affiliates Fund, Limited Partnership
('Oak VI'). Since September 1983, Ms. Lamont has been a general partner or
managing member of the general partner of four other venture capital
partnerships affiliated with Oak Partners and Oak VI. Ms. Lamont currently
serves as a director on the board of ViroPharma, Incorporated.
Donald J. Lothrop became a director in May 1996. Since July 1994, Mr.
Lothrop has been a General Partner of Delphi Ventures, a privately held venture
capital firm. From January 1991 to July 1994, Mr. Lothrop was a Partner at
Marquette Venture Partners, Inc., a privately held venture capital partnership.
Mr. Lothrop currently serves as a director on the boards of Accordant Health
Services, Inc., Affiliated Research Centers, Inc., EXOGEN, Inc., Kelson
Physician Partners, Inc., Pacific Dental Benefits, Presidium Inc. and PriCare,
Inc.
NATIONAL PHYSICIAN ADVISORY BOARD
The Company has established a National Physician Advisory Board (the
'Advisory Board') which will provide oversight of certain matters including
responsibility for all patient care and clinical issues. The Advisory Board will
also have responsibility for providing guidance to the Company regarding the
development of its disease management system and protocols as well as all
professional issues. The Advisory Board will consist of seven to nine
musculoskeletal physicians from various parts of the country, including
physicians who are not affiliated with the Company.
51
<PAGE>
The initial members of the Advisory Board are:
<TABLE>
<CAPTION>
PHYSICIAN PRACTICE
----------------------------------------------------------------------------------- --------
<S> <C>
James Esch, M.D.................................................................... Tri-City
Gilbert R. Meadows, M.D............................................................ STSC
Ranjan Sachdev, M.D................................................................ LVBMJ
Martin Silverstein, M.D............................................................ LOS
Donald Wiss, M.D................................................................... SCOI
</TABLE>
DIRECTOR COMPENSATION AND COMMITTEES
The directors do not currently receive compensation for their service on
the Board of Directors or any committee thereof but are reimbursed for their
out-of-pocket expenses. Under the Company's Option Plan, non-employee directors
are eligible to receive option grants. See '--Stock Option Plan.'
The Board of Directors currently includes a Compensation Committee composed
of two directors, Ms. Lamont and Dr. Fox. The Board of Directors intends to
establish an Audit Committee prior to the Offering which will be composed of
three independent directors. The Compensation Committee determines compensation
for executive officers of the Company and administers the Company's Option Plan.
The Audit Committee will review the scope and results of audits and internal
accounting controls and all other tasks performed by the independent public
accountants of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the establishment of the Compensation Committee in February 1997,
the Board of Directors determined the compensation payable to the Company's
executive officers. Stock options have been granted to employees of the Company
and, at the end of fiscal 1996, the Board of Directors approved an incentive
bonus for Dr. Nagpal.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to the President and Chief Executive Officer of
the Company during the fiscal year ending December 31, 1996 (the only executive
officer of the Company during such year).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
---------------------------------- ------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- --------------------------------- ----------- ------- -------- ------------ ------------ ---------------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Naresh Nagpal, M.D. ............. 1996 225,000 67,500 -- -- --
President and Chief Executive
Officer
</TABLE>
OPTION GRANTS IN 1996
There were no options granted to the President and Chief Executive Officer
during the fiscal year ended December 31, 1996.
STOCK OPTION PLAN
In order to attract and motivate employees, consultants and directors to
use their best efforts on behalf of the Company, the Company may, pursuant to
its Option Plan, grant to its employees, consultants, and directors options to
purchase an aggregate of 2,000,000 shares of Common Stock (subject to adjustment
in certain circumstances). If any options expire or are canceled or terminated
without being exercised, the Company may, in accordance with the terms of the
Option Plan, grant additional options with respect to those shares of Common
Stock underlying the unexercised portion of such expired, canceled or terminated
options.
The Option Plan may be administered by the Board of Directors or by a
committee of the Board of the Directors (the 'Committee,' and references to the
Committee shall mean the Board of Directors, if a committee is not appointed).
Grants of Common Stock may consist of (i) options intended to qualify as
incentive stock
52
<PAGE>
options ('ISOs') or (ii) nonqualified stock options that are not intended so to
qualify ('NSOs'). Except as set forth below, the term of any such option is ten
years. Options may be granted to any employees (including officers and
directors) of the Company, members of the Board of Directors who are not
employees, and consultants and advisers who perform services to the Company or
any of its subsidiaries.
The option price of any ISO granted under the Option Plan will not be less
than the fair market value of the underlying shares of Common Stock on the date
of grant; provided that the price of an ISO granted to a person who owns more
than 10% of the total combined voting power of all classes of stock of the
Company must be at least equal to 110% of the fair market value of Common Stock
on the date of grant and, in such case, the ISO's term may not exceed five
years. The option price of an NSO will be determined by the Committee in its
sole discretion, and may be greater than, equal to or less than the fair market
value of the underlying shares of Common Stock on the date of grant; provided
that, subsequent to the initial public offering of the Company's Common Stock,
the price of the underlying shares may not be less than fair market value. A
grantee may pay the option price (i) in cash, (ii) by delivering shares of
Common Stock already owned by the grantee or vested options held by the grantee,
which, in either case, have a fair market value on the date of exercise equal to
the option price or (iii) by any combination of (i) and (ii) above. With respect
to any options, the Committee may impose such vesting and other conditions as
the Committee may deem appropriate, all of which terms and conditions must be
set forth in an option agreement between the Company and the grantee. Options
may be exercised by the grantee at any time during his employment or retention
by the Company or any subsidiary thereof and within a specified period after
termination of the grantee's employment or retention.
In the event of a change of control (as defined in the Option Plan), all
grantees will be afforded an opportunity to exercise the portion of their
respective options that are then vested and exercisable. Thereafter, any
unexercised and any unvested portion of all outstanding options will be
automatically terminated.
All options issued under the Option Plan will be granted subject to any
applicable federal, state and local withholding requirements. At the time of
exercise, the grantee must remit to the Company an amount sufficient to satisfy
the total amount of any such taxes required to be withheld by the Company with
respect to such exercised options.
The Board of Directors may amend or terminate the Option Plan at any time;
provided that, under certain circumstances the approval of the stockholders of
the Company may be required. As of August 31, 1997, the Company has granted
options under the Option Plan to purchase an aggregate of 1,303,000 shares of
Common Stock, of which 10,000 have been exercised, 90,000 have been canceled and
50,000 were issued to physicians. The Option Plan will terminate on May 6, 2006,
unless earlier terminated by the Board of Directors or extended by the Board of
Directors with the approval of the stockholders.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement dated as of May 6,
1996, as amended, with Dr. Nagpal (the 'Nagpal Employment Agreement'). Base
compensation under the Nagpal Employment Agreement is $225,000 per year, subject
to increase by the Board of Directors. In addition, the Board of Directors may
award an annual bonus to Dr. Nagpal in an amount of up to 30% of his base salary
based on the attainment of certain benchmarks. The Company may terminate Dr.
Nagpal's employment at any time and for any reason; provided that, if his
employment is terminated without cause (as defined in such agreement) or as a
result of his becoming permanently disabled, the Company must pay Dr. Nagpal a
severance amount determined in accordance with a formula contained in the
agreement.
Under the Nagpal Employment Agreement, Dr. Nagpal is prohibited from
directly or indirectly competing with the Company during the term of his
employment with the Company and for an additional year thereafter or as long as
the Company is making severance payments to him, however, there can be no
assurance as to the enforceability of such Agreement. The restraint on
competition by Dr. Nagpal is geographically limited to any state in the United
States in which the Company or any of its subsidiaries conducts business or
specifically plans to conduct business at the time of the termination of his
employment with the Company. Under the terms of the Nagpal Employment Agreement,
Dr. Nagpal acknowledges that any proprietary information (as defined in such
agreement) that he may develop is the sole property of the Company and agrees
not to disclose to, or use for the benefit of, any person or entity (other than
the Company) any of such proprietary information whether or not developed by
him.
53
<PAGE>
CERTAIN TRANSACTIONS
EQUITY AND DEBT FINANCINGS
In connection with its initial capitalization, the Company sold shares of
Common Stock and Series A Convertible Preferred Stock (the 'Series A Preferred
Stock') to each of the following persons and entities at a per share purchase
price of $.01 and $1.00, respectively: (a) Oak Partners purchased 146,580 and
325,733 shares of Common Stock and Series A Preferred Stock, respectively; (b)
Oak VI purchased 3,420 and 7,600 shares of Common Stock and Series A Preferred
Stock, respectively; (c) Delphi Ventures purchased 147,347 and 327,438 shares of
Common Stock and Series A Preferred Stock, respectively; (d) Delphi
BioInvestments III, L.P. ('Delphi BioInvestments') purchased 2,653 and 5,895
shares of Common Stock and Series A Preferred Stock, respectively; (e) Dr.
Nagpal purchased 850,000 and 333,333 shares of Common Stock and Series A
Preferred Stock, respectively and (f) Scheer & Co. purchased 25,000 shares of
Common Stock. Upon consummation of the Offering, all outstanding shares of
Series A Preferred Stock will automatically convert into an equal number of
shares of Common Stock.
During the period beginning November 1996 and ending in March 1997, the
Company raised additional working capital funds by issuing additional shares of
preferred stock. On November 12, 1996, the Company issued an aggregate of
2,000,001 shares of Series B Convertible Preferred Stock, $.01 par value (the
'Series B Preferred Stock'), to the following persons and entities in the
following amounts: Oak Partners, 651,467 shares; Oak VI, 15,200 shares; Delphi
Ventures, 654,877 shares; Delphi BioInvestments, 11,790 shares; and Dr. Nagpal,
666,667 shares. The investors paid an aggregate purchase price of $6,000,003 for
the Series B Preferred Stock. An additional $764,997 was raised by the Company
from the issuance of an aggregate of 254,999 shares of Series C Convertible
Preferred Stock, $.01 par value (the 'Series C Preferred Stock'), on January 22,
1997 and March 12, 1997 to certain of the SCOI physicians (including Dr. Fox,
one of the Company's directors), key employees and legal counsel of SCOI, an
employee of the Company, CGJR Health Care Private Equities, L.P., CGJR II, L.P.
and CGJR/MF III, L.P. Upon consummation of the Offering, all outstanding shares
of Series B Preferred Stock will automatically convert into Common Stock. On
January 14, 1997, the Company obtained short-term loans in the aggregate amount
of $999,999 from Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI
and Dr. Nagpal. In connection with such loans, the Company issued warrants to
the lenders to purchase an aggregate of 33,333 shares of Common Stock, which
warrants may be exercised at any time, in whole or in part, prior to January 14,
2002 at an exercise price of $3.00 per share. The Company borrowed an additional
$866,667 (of which $141,000 has been repaid) from Dr. Nagpal on January 10, 1997
and January 14, 1997. Each of the foregoing loans bears interest at 8% per
annum. Upon consummation of the Offering, all outstanding shares of Series C
Preferred Stock will automatically convert into Common Stock. On June 19, 1997,
pursuant to a letter agreement, the Company issued an aggregate of 188,072
shares of Series D Convertible Preferred Stock, $.01 par value (the 'Series D
Preferred Stock'), to Oak VI, Oak Partners, Delphi Ventures, Delphi
BioInvestments, and Dr. Nagpal in exchange for the cancellation of promissory
notes in the aggregate principal amount of $999,999, plus accrued interest,
previously issued by the Company to secure loans made by such investors to the
Company. Upon consummation of the Offering, all outstanding shares of Series D
Preferred Stock will automatically convert into Common Stock.
On June 19, 1997, pursuant to a letter agreement, the Company issued an
aggregate of 533,335 shares of Series E Convertible Preferred Stock, $.01 par
value (the 'Series E Preferred Stock'), to Oak VI, Oak Partners, Delphi
Ventures, Delphi BioInvestments, Dr. Nagpal, CGJR Health Care, CGJR II, and
CGJR/MF. The investors paid an aggregate purchase price of $3,200,010 for the
Series E Preferred Stock. Upon consummation of the Offering, all outstanding
shares of Series E Preferred Stock will automatically convert into Common Stock.
From March 1997 to November 1997, the Company entered into the HCFP Loan
Agreements with HCFP Funding. Each of the HCFP Loan Agreements is in the nature
of a revolving line of credit, with each such loan to be made against a
borrowing base equal to 85% of the qualified accounts receivable generated by
the subject Practice. Each HCFP Loan had an initial term of two years, subject
to renewals of one-year periods upon the mutual agreement of the parties, and
bears interest at the Base Rate (defined as 1.75% above the prime rate
designated by Fleet National Bank of Connecticut, N.A.), subject to increase
upon the occurrence of an event of default. In addition, upon the occurrence and
during the continuance of an event of default, the Company is prohibited from
declaring or paying cash dividends on its Common Stock. As security for
repayment of the
54
<PAGE>
HCFP Loans, the Company granted HCFP Funding a first priority lien and security
interest in its accounts receivable.
On June 30, 1997, the Company issued a secured term note in the aggregate
principal amount of $3,250,000 to HCFP Funding (the 'June HCFP Note'), which
bears interest at the Base Rate (defined as the prime rate designated by Fleet
National Bank of Connecticut plus 3.5%) (the 'Fleet Base Rate'), subject to
increase upon the occurrence of an event of default, with interest payable on
the last business day of each month for the first six months commencing July 31,
1997 through December 31, 1997. Commencing on January 31, 1998, the Company is
required to make 36 equal monthly installments of principal, plus accrued
interest at the Base Rate. The June HCFP Note is secured by a lien on
substantially all of the assets of the Company and $1.5 million of the Company's
obligations under the June HCFP Note are guaranteed by Dr. Nagpal, Delphi
Ventures III, L.P., Delphi BioInvestments III, L.P., Oak Investment Partners VI,
L.P. and Oak VI Affiliates Fund, L.P. In connection with such guarantees, the
Company issued warrants to purchase an aggregate of 13,332 shares of Common
Stock to such guarantors. In connection with the HCFP Note, the Company issued
warrants to purchase 40,000 shares (subject to increase) of Common Stock to HCFP
Funding at an exercise price of $.01 per share.
On August 1, 1997, the Company entered into the Comdisco Loan Agreement
pursuant to which Comdisco made the Comdisco Loan to the Company in the
principal amount of $5,000,000. To secure its obligations to Comdisco under the
Comdisco Loan Agreement, the Company granted to Comdisco a lien on all of the
Company's tangible and intangible personal property. The Comdisco Loan and the
liens granted to Comdisco (the 'Comdisco Liens') are subordinated in all
respects to the current and future indebtedness of the Company owing to HCFP
Funding. The Comdisco Liens rank pari passu with the liens granted to Galtney.
The Comdisco Loan initially bears interest at 14% per annum; provided, however,
that if an initial public offering of the Company's capital stock is not
consummated on or prior to December 31, 1997, the Comdisco Loan will, commencing
January 1, 1998, bear interest at 15% per annum. The Comdisco Loan may be
prepaid, in whole or in part, at any time, by the Company without penalty or
premium. Within 45 days of the effective date of an initial public offering of
the capital stock of the Company, the Company is obligated to prepay the
Comdisco Loan in full. The Comdisco Loan matures December 31, 2000. The Comdisco
Loan Agreement prohibits the Company from making or declaring any cash dividends
or making any distributions of any class of capital stock of the Company, except
pursuant to an employee repurchase plan or with the consent of Comdisco.
Further, in connection with the Comdisco Loan, the Company issued to Comdisco a
warrant to purchase up to 125,000 shares of the Company's Series E Preferred
Stock at a price per share equal to $6.00; provided, however, that if an initial
public offering of the Company's capital stock is not consummated on or prior to
December 31, 1997, then the number of shares of Series E Preferred Stock
issuable upon exercise of the warrant increases to 133,333. Upon the completion
of the Company's initial public offering, such warrant becomes exercisable for a
like number of shares of Common Stock. In addition, pursuant to a Stock Purchase
Agreement dated as of August 18, 1997, the Company issued 41,667 shares of
Series E Preferred Stock to Comdisco for an aggregate purchase price of
$250,000.
On August 1, 1997, the Company entered into an agreement (the 'Master Lease
Agreement') with Comdisco pursuant to which Comdisco agreed to purchase and
lease certain equipment to the Company on the terms and conditions contained in
the Master Lease Agreement. In connection with the Master Lease Agreement, the
Company issued to Comdisco a warrant to purchase up to 5,000 shares of the
Company's Series E Preferred Stock at a price per share equal to $6.00. Upon the
completion of the Company's initial public offering, such warrant becomes
exercisable for a like number of shares of Common Stock.
On August 21, 1997, the Company entered into the Galtney Loan Agreement
with Galtney pursuant to which Galtney made the Galtney Loan to the Company in
the principal amount of $1,500,000. To secure its obligations to Galtney under
the Galtney Loan Agreement, the Company granted to Galtney a lien on all of the
Company's tangible and intangible personal property. The Galtney Loan and the
liens granted to Galtney ('Galtney Liens') are subordinated in all respects to
the current and future indebtedness of the Company owing to HCFP Funding. The
Galtney Liens rank pari passu with the liens granted to Comdisco. The Galtney
Loan initially bears interest at 14% per annum; provided, however, that if an
initial public offering of the Company's capital stock is not consummated on or
prior to December 31, 1997, the Galtney Loan will, commencing January 1, 1998,
bear interest at 15% per annum. The Galtney Loan may be prepaid, in whole or in
part, at any time, by the Company without penalty or premium. Within 45 days of
the effective date of an initial public offering of the
55
<PAGE>
capital stock of the Company, the Company is obligated to prepay the Galtney
Loan in full. The Galtney Loan matures December 31, 2000. The Galtney Loan
Agreement prohibits the Company from making or declaring any cash dividends or
making any distributions of any class of capital stock of the Company, except
pursuant to an employee dividends repurchase plan or with the consent of
Galtney. Pursuant to the terms of the Galtney Loan Agreement, the outstanding
amount of the Galtney Loan is convertible into shares of Preferred Stock of the
Company at the option of Galtney after the Company completes a sale and issuance
of any shares of its Preferred Stock in connection with an equity financing (an
'Equity Financing') at any time after the earlier to occur of (i) a payment
default under the Galtney Loan Agreement or (ii) the failure of the Company to
consummate an initial public offering of its capital stock prior to December 31,
1997. Further, in connection with the Galtney Loan, the Company issued to
Galtney a warrant to purchase up to 37,500 shares of the Company's Series E
Preferred Stock at a price per share equal to $6.00; provided, however, that if
an initial public offering of the Company's capital stock is not consummated on
or prior to December 31, 1997, then the number of shares of Series E Preferred
Stock issuable upon exercise of the warrant increases to 40,000. In addition,
pursuant to a Stock Purchase Agreement dated as of July 31, 1997, the Company
issued 166,667 shares of Series E Preferred Stock to HIS Ventures, LLC, an
affiliate of Galtney, for an aggregate purchase price of $1,000,000. Upon the
completion of the Company's initial public offering, such warrant becomes
exercisable for a like number of shares of Common Stock.
On September 9, 1997, the Company issued and sold $4,000,000 in aggregate
principal amount of its subordinated convertible debentures due August 31, 2000
(the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement,
dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The
Debentures were purchased by Dr. Nagpal, Delphi Ventures, Delphi BioInvestments,
Oak Partners, Oak VI and Health Care Services-BMJ, LLC and H&Q Serv*is Ventures,
L.P., affiliates of Hambrecht & Quist, LLC. Pursuant to the terms of the
Debenture Purchase Agreement, the Debentures are subordinated in right of
payment to all indebtedness owing by the Company to HCFP Funding, the Comdisco
Loan and the Galtney Loan. The Debentures bear interest at 6% per annum and are
payable semi-annually on each December 31 and June 30. The unpaid principal
amount of the Debentures is due on August 31, 2000.
Except in very limited instances, the Company may not prepay the Debentures
prior to September 9, 1999. The Debentures are subject to prepayment at the
option of the holders of the Debentures upon the consummation of (i) a sale of
all or substantially all of the assets of the Company; (ii) a sale or transfer
of all or a majority of the outstanding Common Stock of the Company in any one
transaction or series of related transactions; or (iii) a merger or
consolidation of the Company with or into another entity. The Debentures are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price equal to $7.20 per share. Pursuant
to the terms of the Debenture Purchase Agreement, the holders of the Debentures
have rights of first offer on future issuances of capital stock of the Company
or other securities convertible into capital stock of the Company. The Debenture
Purchase Agreement places limitations on indebtedness and liens and prohibits
the payment of dividends.
On October 14, 1997, the Company issued a secured term note in the
principal amount of $2,500,000 to HCFP Funding (the 'October HCFP Note'), which
bears interest at the Fleet Base Rate, subject to increase upon the occurrence
of an event of default, with interest payable on the last business day of each
month commencing October 31, 1997 through December 31, 1997. The entire
principal sum is due and payable on January 10, 1998. Pursuant to the terms of
the October HCFP Note, the Company is also obligated to pay a fee in the amount
of $300,000 to HCFP Funding on the maturity date. The October HCFP Note is
secured by a lien on substantially all of the assets of the Company.
On October 15, 1997, the Company issued promissory notes (the 'October
Notes') in the aggregate principal amount of $3,375,000 to Dr. Nagpal, Delphi
Ventures, Delphi BioInvestments, Oak Partners, Oak IV and Dr. Fox (collectively,
the 'October Note Holders'). The October Notes bear interest at the Fleet Base
Rate, subject to increase upon the occurrence of an event of default. The entire
principal sum is due and payable on January 13, 1998. In connection with the
October Notes, the Company issued warrants to purchase 67,500 shares of Common
Stock to the October Note Holders at an exercise price of $.01 per share.
56
<PAGE>
AFFILIATION TRANSACTIONS
Eastern Region
Effective July 1, 1996, the Company entered into a Management Services
Agreement with LVBMJ in the State of Pennsylvania. Under the terms of the
initial Management Services Agreement between LVBMJ and the Company, the Company
received a fee equal to 50% of the net collected revenues of LVBMJ and became
responsible for all the clinic overhead expenses (medical support services).
Effective July 1, 1997, the Company and LVBMJ entered into an amended and
restated Management Services Agreement (the 'LVBMJ Agreement'), (the 'LVBMJ
Management Services Agreement'), under the terms of the LVBMJ Agreement the
Company is entitled to receive a fee equal to 10% of all cash and cash
equivalents received for professional services by the Practice during the period
in question net of refunds paid during such period ('Collections') plus
reimbursement of clinic overhead expenses and 66-2/3% of the cost savings the
Company is able to achieve through its purchasing power. As consideration to
LVBMJ for entering into the LVBMJ Management Services Agreement, the Company
issued an aggregate of 518,031 shares of Common Stock and options to purchase an
aggregate of 30,000 shares of Common Stock to the physician owners of LVBMJ
physicians and LVBMJ. The Company may be required to issue more shares of Common
Stock to the Practice in 1998 based on the Practice's actual Collections for a
specified twelve month period.
Effective April 1, 1997, the Company entered into a Management Services
Agreement (the 'LOS Management Services Agreement') with LOS. As consideration
to LOS for entering into the agreement, the Company issued an aggregate of
466,417 shares of its Common Stock and paid additional consideration of $389,709
to the LOS physicians. The Company may be required to issue more shares of
Common Stock to the Practice in 1998 based on the Practice's actual Collections
for a specified twelve month period. Under the terms of the LOS Management
Services Agreement, the Company is entitled to receive a fee equal to (i) the
aggregate of (A) 20% of net operating income (as defined in the LOS Management
Services Agreement) of the Practice, plus (B) 66-2/3% of the cost savings the
Company is able to achieve through its purchasing power. Notwithstanding the
foregoing, the Company is entitled to receive a guaranteed minimum annual
management fee of $400,000. The Company also purchased certain assets from LOS,
including the assumption of two leases, for an aggregate purchase price of
$2,250,000 (subject to adjustment based upon the Company's actual collection of
the purchased accounts receivable).
Effective June 1, 1997, the Company entered into a Management Services
Agreement (the 'Gold Coast Management Services Agreement') with Gold Coast
located in West Palm Beach, Florida, pursuant to which the Company issued
250,614 shares of Common Stock and paid no additional consideration to the
physician owners of Gold Coast. The Company may be required to issue more shares
of Common Stock to the Practice in 1998 based on the Practice's actual
Collections for a specified twelve month period. Under the terms of the Gold
Coast Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 15% of the Collections plus reimbursement of
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is
able to achieve through its purchasing power. In connection with the Gold Coast
Affiliation Transaction, the Company also entered into an Asset Purchase
Agreement, effective as of July 1, 1997, pursuant to which the Company purchased
certain assets (including accounts receivable) from Gold Coast for an aggregate
purchase price of $2,976,577.
Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'BOS Management Services Agreement') with Broward Orthopedic
Specialists, Inc. ('BOS'), Terrence Matthews, M.D., P.A., Wylie Scott, M.D.,
P.A., and Mitchell Seavey, M.D. located in Ft. Lauderdale, Florida, pursuant to
which the Company issued 625,768 shares of Common Stock and paid additional
consideration of $2,215,338 to the physician owners of BOS. The Company may be
required to issue more shares of Common Stock to the Practice in 1998 based on
the Practice's actual Collections for a specified twelve month period. Under the
terms of the BOS Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 15% of the Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. In connection with
the BOS Affiliation Transaction, the Company also entered into an Asset Purchase
Agreement, effective as of August 1, 1997, pursuant to which the Company
purchased certain assets (including accounts receivable) from BOS, Matthews,
Scott and Seavey for an aggregate purchase price of $2,020,000.
57
<PAGE>
Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'PM&R Management Services Agreement') with Physical Medicine and
Rehabilitation Associates, Inc. ('PM&R'), located in Delray Beach, Florida,
pursuant to which the Company issued 126,923 shares of Common Stock and paid no
additional consideration to the physician owners of PM&R. Under the terms of the
PM&R Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 10% of the Collections plus reimbursement of
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is
able to achieve through its purchasing power. In connection with the PM&R
Affiliation Transaction, the Company also entered into an Asset Purchase
Agreement, effective as of August 1, 1997, pursuant to which the Company
purchased certain assets (including accounts receivable) from PM&R, for an
aggregate purchase price of $830,700.
In October 1997, the Company entered into a Management Services Agreement
(the 'OSA Management Services Agreement') with OSA located in Boca Raton,
Florida, pursuant to which the Company issued 62,110 shares of Common Stock and
paid no additional consideration to the physician owners of OSA. The Company
may be required to issue more shares of Common Stock to OSA in 1998 and 1999.
Under the terms of the OSA Management Services Agreement, the Company is
entitled to receive a fee equal to the aggregate of (i) 12.5% of Collections
plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost
savings the Company is able to achieve through its purchasing power. In
connection with the OSA Affiliation Transaction, the Company also entered into
an Asset Purchase Agreement, effective as of September 1, 1997, pursuant to
which the Company purchased certain assets (including accounts receivable) from
OSA for an aggregate purchase price of $6,773,951 and issued 284,436 shares of
Common Stock to the physician owners of OSA.
In October 1997, the Company entered into a Management Services Agreement
(the 'BIOS Management Services Agreement') with BIOS located in Hollywood,
Florida. As consideration to BIOS for entering into the agreement, the Company
issued an aggregate of 255,237 shares of its Common Stock and no additional
consideration to the BIOS physicians. The Company may be required to issue more
shares of Common Stock to BIOS in 1998 based on BIOS's actual Collections for a
twelve month period. Under the terms of the BIOS Management Services Agreement,
the Company is entitled to receive a fee equal to (i) the aggregate of (A) 15%
of net operating income (as defined in the BIOS Management Services Agreement)
of the Practice, plus (B) 66-2/3% of the cost savings the Company is able to
achieve through its purchasing power. The Company also purchased certain assets
from BIOS for an aggregate purchase price of $2,691,563.
In October 1997, the Company entered into a Management Services Agreement
(the 'LOAS Management Services Agreement') with Lighthouse Orthopaedic
Associates, P.A. ('LOAS') located in Lighthouse Point, Florida. As consideration
to LOAS for entering into the agreement, the Company issued an aggregate of
52,972 shares of its Common Stock and paid no additional consideration to the
LOAS physicians. The Company may be required to issue more shares of Common
Stock to the Practice in 1998 based on the Practice's actual Collections for a
twelve month period. Under the terms of the LOAS Management Services Agreement,
the Company is entitled to receive a fee of (i) 12.5% of the Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. Notwithstanding the
foregoing, the Company is entitled to receive a guaranteed minimum annual
management fee of $535,000. In connection with the LOAS Affiliation Transaction,
the Company also entered into Asset Purchase Agreements, effective as of
September 1, 1997, pursuant to which the Company purchased certain assets
(including accounts receivable) from each of LOAS, certain affiliates of LOAS
and each of the physicians of LOAS, for an aggregate purchase price of
$3,949,970, and and issued an aggregate of 218,936 shares of Common Stock to the
physician owners of LOAS.
In October 1997, the Company entered into a Management Services Agreement
(the 'Valley Management Services Agreement') with Valley Sports and Arthritis
Surgeons ('Valley') located in Pennsylvania, pursuant to which the Company
issued 503,250 shares of Common Stock and paid no additional consideration to
the physician owners of Valley. The Company may be required to issue more
shares of Common Stock to Valley in 1998 based on Valley's actual Collections
for a twelve month period. Under the terms of the Valley Management Services
Agreement, the Company is entitled to receive a fee of (i) 10% of Collections
plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost
savings the Company is able to achieve through its purchasing power. In
connection with the Valley Affiliation Transaction, the Company also entered
58
<PAGE>
into an Asset Purchase Agreement, pursuant to which the Company purchased
certain assets (including accounts receivable) from Valley for an aggregate
purchase price of $897,727.
Other Eastern Region Affiliations
Effective July 1, 1997, the Company entered into a Management Services
Agreement with Kramer & Maehrer, LLC, located in Bethlehem, Pennsylvania. In
order to enhance the Company's presence in the Ft. Lauderdale market, the
Company entered into Management Services Agreements with Jeffrey Beitler, M.D.,
located in Adventura, Florida, and Michael Abrahams, M.D., located in
Plantation, Florida, effective as of September 1, 1997 and August 1, 1997,
respectively. Under the terms of these Management Services Agreements, the
Company is entitled to receive a fee equal to the aggregate of (i) 10% (15% in
the case of Dr. Abrahams) of the Collections plus reimbursement of clinic
overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to
achieve through its purchasing power.
Central Region
The Company's initial Affiliation Transaction in the central region was
with STSC. The Company entered into a Management Services Agreement with STSC
effective as of November 1, 1996, pursuant to which the Company issued 1,076,501
shares of Common Stock and deferred consideration of $915,835. Pursuant to the
STSC Management Services Agreement, the Company is entitled to receive a
management fee equal to an aggregate of (i) 11-1/2% of Collections of the
Practice (less certain lease payments) plus reimbursement of clinic overhead
expenses, plus (B) 66-2/3% of the cost savings the Company is able to achieve
through its purchasing power. The Company also entered into an asset purchase
agreement with STSC, pursuant to which the Company agreed to purchase certain
assets (including accounts receivable) and assume certain liabilities for a
purchase price of (i) $1,703,828 (subject to adjustment based upon the Company's
actual collection of the purchased accounts receivable) plus (ii) a future
payment of $446,327.
Other Central Region Affiliations
Effective July 1, 1997, the Company entered into a Management Services
Agreement with Eradio Arrendondo, M.D. located in San Antonio, Texas.
Western Region
Effective November 1, 1996, the Company entered into a Management Services
Agreement (the 'SCOI Management Services Agreement') with SCOI and, in
connection therewith, the Company issued 4,000,000 shares of Common Stock to the
physician owners and certain key employees of SCOI. Under the SCOI Management
Services Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 10% of the Collections of the Practice (if certain conditions
are met) less certain equipment lease payments plus reimbursement of clinic
overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to
achieve through its purchasing power. Simultaneously with the execution and
delivery of the SCOI Management Services Agreement and pursuant to an Asset
Purchase Agreement, the Company acquired certain assets (including the
outstanding accounts receivable), and assumed certain liabilities, of SCOI for
an aggregate purchase price of $5,930,897 (which included $2,224,000 of value of
accounts receivable purchased).
In a subsequent transaction with the Center for Orthopedic Surgery, Inc.
('COSI'), an outpatient surgery center in Van Nuys, California owned by the SCOI
physicians, the Company issued 550,000 shares of Common Stock to the physician
owners of COSI as consideration for the execution of the Management Services
Agreement entered into between COSI and the Company (the 'COSI Management
Services Agreement'). The number of shares issued to the physicians in
connection with each of the SCOI and COSI Affiliation Transactions is subject to
recalculation on the earlier to occur of the filing by the Company of a
registration statement containing a preliminary prospectus with the Commission
or November 1, 1997. The number of shares will be increased or decreased based
upon the respective revenue contribution of the SCOI and COSI practices at such
date as compared to the aggregate revenues of the entire musculoskeletal
practice network of the Company at such date.
59
<PAGE>
To expand its network in the western region, effective April 1, 1997, the
Company entered into a Management Services Agreement (the 'Tri-City Management
Services Agreement') with Tri-City, located in Oceanside, California, pursuant
to which the Company issued 402,723 shares of Common Stock and paid $202,900 to
the physician owners of Tri-City. Under the terms of the Tri-City Management
Services Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 10% of Collections of the Practice (less certain lease
payments) plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of
the cost savings the Company is able to achieve through its purchasing power. In
connection with the Tri-City Affiliation Transaction, the Company also entered
into three Asset Purchase Agreements with Tri-City or affiliates thereof, all
effective as of April 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from such parties for an aggregate
purchase price of $745,300 ($519,000 of which is subject to refund, based upon
the Company's actual collection of the purchased accounts receivable).
Effective July 1, 1997, the Company entered into a Management Services
Agreement (the 'Sun Valley Management Services Agreement') with Sun Valley
Orthopaedic Surgeons, an Arizona general partnership ('Sun Valley'), located in
Sun City, Arizona, pursuant to which the Company issued 157,807 shares of Common
Stock and paid no additional consideration to the physician owners of Sun
Valley. The Sun Valley Management Services Agreement requires the Company to pay
additional cash consideration to the physician owners of Sun Valley if the
current market value of the Company's Common Stock is not at least equal to a
specified price on the first anniversary of such agreement. Under the terms of
the Sun Valley Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 10% of the Collections plus reimbursement of clinic overhead
expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve
through its purchasing power. In connection with the Sun Valley Affiliation
Transaction, the Company also entered into an Asset Purchase Agreement,
effective as of July 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from Sun Valley for an aggregate purchase
price of $355,750.
Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'Stockdale Management Services Agreement') with Stockdale
Podiatry Group, Inc. ('Stockdale'), located in Bakersfield, California, pursuant
to which the Company issued 124,385 shares of Common Stock and paid additional
consideration of $300,435 to the physician owners of Stockdale. Under the terms
of the Stockdale Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of the Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. In connection with
the Stockdale Affiliation Transaction, the Company also entered into an Asset
Purchase Agreement, effective as of August 1, 1997, pursuant to which the
Company purchased certain assets (including accounts receivable) from Stockdale
for an aggregate purchase price of $516,065.
Other Western Region Affiliations
Effective June 1, 1997 in order to enhance the Company's presence in the
Los Angeles market area, the Company entered into separate Management Services
Agreements with H. Leon Brooks, M.D. and Clive Segil, M.D., both located in Los
Angeles, California. In addition, effective July 1, 1997, in order to establish
a presence in the Lake Tahoe area, the Company entered into separate Management
Services Agreements with R.C. Watson, M.D., Inc., Swanson Orthopedic Medical
Corporation and Lake Tahoe Sports Medicine Center, all located in South Lake
Tahoe, California. In addition, effective July 1, 1997, the Company entered into
a Management Services Agreement with Robert O. Wilson, M.D. located in Sun City,
Arizona. Effective August 1, 1997 the Company entered into a Management Services
Agreement with John Zimmerman, M.D. located in Bakersfield, California. Under
the terms of each of these Management Services Agreements, the Company is
entitled to receive a fee equal to the aggregate of (ii) 10% of the Collections
plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost
savings the Company is able to achieve through its purchasing power.
In October 1997, the Company acquired its IPA, Orthopaedic Management
Network, Inc., an Arizona corporation, in exchange for $63,000 in cash, the
assumption of $809,332 in accounts payable and accrued liabilities and the
issuance of 57,036 shares of Common Stock.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of the date of this Prospectus
and as adjusted to reflect the sale of the shares of Common Stock offered hereby
with respect to (i) each person known by the Company to own beneficially more
than 5% of the outstanding shares of Common Stock; (ii) each of the Company's
directors; and (iii) all directors and officers as a group. Unless otherwise
indicated, the address for each stockholder is c/o BMJ Medical Management, Inc.,
4800 North Federal Highway, Suite 104D, Boca Raton, Florida 33431.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------- ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Delphi Ventures III, L.P.(2) ..................................... 185,555 1.4% 1,414,912(3) 6.8%
3000 Sand Hill Road, Building One, Suite 135,
Menlo Park, California 94025
Oak Investment Partners VI, L.P.(4) .............................. 185,555 1.4 1,414,913(5) 6.8
One Gorham Island
Westport, Connecticut 06880
Naresh Nagpal, M.D................................................ 1,001,805(6) 8.6 2,231,163(6)(7) 10.7
David H. Fater.................................................... 0 -- 15,000(8) --
Georges Daou...................................................... 0 -- 0 --
Stewart G. Eidelson, M.D.......................................... 14,030 * 14,030 *
James M. Fox, M.D................................................. 403,208(9) 3.5 419,583(10) 2.0
Ann H. Lamont(4).................................................. 185,555(11) 1.4 1,414,913(5) 6.8
Donald J. Lothrop(2).............................................. 185,555(12) 1.4 1,414,912(3) 6.8
All officers and directors as a group (6 persons) (13)............ 1,790,153 14.9 5,509,601 26.7
</TABLE>
- ------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 11,445,331 shares of Common
Stock outstanding as of November 3, 1997 and 20,630,071 shares of Common
Stock outstanding upon consummation of the Offering. Beneficial ownership is
determined in accordance with the rules of the Commission and includes
voting and investment power with respect to securities. Securities subject
to options or warrants currently exercisable or exercisable within 60 days
of November 3, 1997 are deemed outstanding for purposes of computing the
percentage ownership of the person holding such options or warrants, but are
not deemed outstanding for purposes of computing the percentage 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) Includes (i) 2,653 shares of Common Stock owned by Delphi BioInvestments and
(ii) warrants to purchase 34,925.8 shares of Common Stock owned by the
stockholder and warrants to purchase 629.2 shares of Common Stock owned by
Delphi BioInvestments.
(3) Includes 1,207,616 shares of Preferred Stock owned by the stockholder and
21,741 shares of Preferred Stock owned by Delphi BioInvestments which
automatically convert into the same number of shares of Common Stock upon
completion of the Offering.
(4) Includes (i) 3,420 shares of Common Stock owned by Oak VI and (ii) warrants
to purchase 34,744.67 shares of Common Stock owned by the stockholder and
warrants to purchase 810.33 shares of Common Stock owned by Oak VI.
(5) Includes 1,201,329 shares of Preferred Stock owned by the stockholder and
28,029 shares of Preferred Stock owned by Oak VI all of which automatically
convert into the same number of shares of Common Stock upon completion of
the Offering.
61
<PAGE>
(6) Includes (i) 18,750 shares of Common Stock reserved for issuance upon
exercise of presently-exercisable stock options and (ii) warrants to
purchase 35,555 shares of Common Stock. Dr. Nagpal's shares are held in two
trusts for his children, the Prianker Nagpal Family Trust and the Zubin
Nagpal Family Trust. Dr. Nagpal is the grantor of each trust and Dr.
Nagpal's wife is the sole trustee of each trust.
(7) Includes 1,229,358 shares of Preferred Stock owned by the stockholder which
automatically convert into the same number of shares of Common Stock upon
completion of the Offering.
(8) Consists of 15,000 shares of Common Stock that vest automatically upon
completion of the Offering.
(9) Includes warrants to purchase 7,500 shares of Common Stock owned by the
stockholder.
(10) Includes 16,375 shares of Preferred Stock owned by the stockholder which
automatically convert into the same number of shares of Common Stock upon
completion of the Offering.
(11) Ms. Lamont, a director of the Company, is a managing member of each of the
general partner of Oak Investment and Oak VI. As such, Ms. Lamont may be
deemed to have an indirect pecuniary interest (within the meaning of Rule
16a-1 under the Exchange Act), in an indeterminate portion of the shares
beneficially owned by Oak Investment and Oak VI. All of the shares
indicated as owned by Ms. Lamont are owned beneficially by Oak Investment
and Oak VI and are included because of the affiliation of Ms. Lamont with
each of the partnerships. Ms. Lamont disclaims beneficial ownership of
these shares to the extent permitted under Rule 13d-3 under the Exchange
Act.
(12) Mr. Lothrop, a director of the Company, is a General Partner of Delphi
Ventures. As such, Mr. Lothrop may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act), in an
indeterminate portion of the shares beneficially owned by Delphi Ventures
and Delphi BioInvestments. All of the shares indicated as owned by Mr.
Lothrop are owned beneficially by Delphi Ventures and Delphi BioInvestments
and are included because of the affiliation of Mr. Lothrop with each of the
partnerships. Mr. Lothrop disclaims beneficial ownership of these shares to
the extent permitted under Rule 13d-3 under the Exchange Act.
(13) Includes beneficial ownership of an aggregate of 371,110 shares of Common
Stock and warrants to purchase Common Stock prior to the Offering and an
aggregate of 2,829,826 shares of Common Stock and warrants to purchase
Common Stock after the Offering attributable to the affiliation of Ms.
Lamont and Mr. Lothrop with the entities described in footnotes (11) and
(12) above.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of (i) shares of Common Stock and (ii) shares
of preferred stock, par value $.01 per share (the 'Preferred Stock'), which are
subject to future issuance as determined by the Board of Directors of the
Corporation.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
on which the holders of Common Stock are entitled to vote and do not have any
cumulative voting rights. Holders of Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of the
Company out of funds legally available therefor. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in the assets of the Company, if any, remaining
after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding class or series of preferred stock.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered by the Company hereby when issued will be, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject to
the Preferred Stock currently outstanding and any series of Preferred Stock
which the Company may issue in the future.
Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for inclusion on Nasdaq under the symbol BONS.
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services.
PREFERRED STOCK
As of September 1, 1997, the Company had five classes of authorized
Preferred Stock: (i) the Series A Preferred Stock; (ii) the Series B Preferred
Stock; (iii) the Series C Preferred Stock; (iv) the Series D Preferred Stock,
and (v) the Series E Preferred Stock. Each holder of Preferred Stock has the
right, at such holder's option, to convert any of his Preferred Stock into
Common Stock at the conversion price set forth in the Certificate of
Incorporation. Upon the consummation of the Offering, all outstanding shares of
Preferred Stock automatically convert into an equal number of shares of Common
Stock without any action on the part of the holders of such stock. Upon such
conversion, the holders of Preferred Stock are not entitled to payment of any
accrued but unpaid dividends.
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights, redemption
privileges, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the stockholders
of the Company. The issuance of Preferred Stock by the Board of Directors could
adversely affect the rights of holders of Common Stock. For example, the
issuance of Preferred Stock could result in a series of securities outstanding
that would have preferences over the Common Stock with respect to dividends and
in liquidation and that could (upon conversion or otherwise) enjoy all of the
rights appurtenant to Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy, consent or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue Preferred Stock without stockholder approval and with voting and
conversion rights which could adversely affect the voting power of holders of
Common Stock. There are no agreements or understandings for the issuance of
Preferred Stock, and the Board of Directors has no present intent to issue
Preferred Stock.
63
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation provides for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the Board of Directors will be elected each
year. Moreover, under Delaware Law, in the case of a corporation having a
classified board, stockholders may remove a director only for cause. This
provision, when coupled with the provision of the By-laws authorizing only the
Board of Directors to fill vacant directorships, will preclude a stockholder
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
SPECIAL MEETING OF STOCKHOLDERS
The Certificate of Incorporation provides that special meetings of
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board of Directors or the Chief Executive Officer. This
provision will make it more difficult for stockholders to take actions opposed
by the Board of Directors.
STOCKHOLDERS AGREEMENT
The Company entered into a Second Amended and Restated Stockholders
Agreement dated as of November 22, 1996 (the 'Stockholders Agreement'), with
certain of its stockholders, including Oak Partners, Oak VI, Delphi Ventures,
Delphi BioInvestments, Dr. Nagpal and the SCOI physicians. Under the
Stockholders Agreement, the stockholders party thereto agreed to vote their
shares to appoint to the Company's Board of Directors certain designees of such
stockholders. The stockholders (other than the SCOI physicians) also have the
following rights and obligations under the Stockholders Agreement: (i) a right
of first refusal with respect to issuances of the Company's capital stock or
securities convertible into capital stock; and (ii) transfer restrictions. Under
the terms of the Stockholders Agreement, 700,000 shares of Common Stock Dr.
Nagpal received on May 6, 1996 are subject to vesting over a 40-month period;
however, the vesting schedule is subject to acceleration in the following
circumstances: (i) termination of Dr. Nagpal's employment without cause prior to
December 31, 1996 but prior to January 1, 1998, 157,500 additional shares vest;
(ii) termination of Dr. Nagpal's employment without cause prior to December 31,
1997 but prior to January 1, 1999, 105,000 additional shares vest; (iii)
termination of Dr. Nagpal's employment as a result of his death or permanent
disability, 210,000 additional shares vest; (iv) simultaneously with the
effectiveness of a registration statement filed under the Securities Act, 50% of
the remaining unvested stock vests; and (v) simultaneously with any sale of a
majority of the capital stock or at least 50% of the assets of the Company, all
of the remaining unvested stock vests. In the event of the termination of Dr.
Nagpal's employment with the Company for any reason, the Company has the right
to repurchase from Dr. Nagpal all of the shares of unvested stock at a purchase
price equal to $.01 per share. The Stockholders Agreement terminates upon
consummation of the Offering.
REGISTRATION RIGHTS
The beneficial owners of 5,227,241 shares of Common Stock have the right to
request that the Company effect the registration of any or all of such shares or
to include any or all of such shares in any registration statement to be filed
by the Company relating to the registration of Common Stock under the Securities
Act (other than registration statements on Form S-4 or Form S-8). Upon such
request, the Company is required to file a registration statement covering such
shares or to include such shares in such registration statement, as applicable,
except that, in the case of a requested registration, the Company is not
obligated to file any registration statement initiated pursuant to a request by
any such owner within 180 days of a prior registration by the Company and the
Company's obligations to effect any such registration is subject to other
limitations.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ('Section 203') of the Delaware General Corporation Law (the
'DGCL') prevents an 'interested stockholder' (defined in Section 203, generally,
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a 'business combination' (as defined in Section 203) with a
publicly-held Delaware corporation for three years following the date such
person became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the
64
<PAGE>
corporation approved either the business combination or the transaction in which
the interested stockholder became an interested stockholder; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder.
DIRECTORS' LIABILITY
The Certificate of Incorporation contains provisions that eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty other than liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL or any transaction from which the director derived an improper personal
benefit. The Company's By-laws contain provisions requiring the indemnification
of the Company's directors and officers to the fullest extent permitted by
Section 145 of the DGCL, including circumstances in which indemnification is
otherwise discretionary. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the shares of Common Stock offered hereby, the
Company will have outstanding 20,630,000 shares of Common Stock. Of these
shares, all of the shares of Common Stock sold in the Offering will be freely
tradeable without restriction under the Securities Act, except for any shares
purchased by 'affiliates,' as that term is defined under the Securities Act, of
the Company. The remaining 15,630,000 shares are 'restricted securities' within
the meaning of Rule 144 promulgated under the Securities Act. Of these
restricted shares, 5,526,501 shares will be eligible for the sale pursuant to
Rule 144 in 1997 and the balance of the restricted shares will be eligible for
sale at various times in 1998.
The Company, its directors and officers and certain other stockholders of
the Company, who upon completion of the Offering will own in the aggregate
shares of Common Stock, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, issue, sell, offer, contract to
sell, make any short sale, pledge, issue or sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock, or securities exhangeable for or convertible into or exercisable for any
rights to purchase or acquire any shares of Common Stock during the 180-day
period following the date of this Prospectus, except that such stockholders may
transfer securities pursuant to bona fide gifts and the Company may issue, and
grant options to purchase, shares of Common Stock under its current stock option
plan and may issue shares of Common Stock, in connection with certain
affiliation transactions, provided such shares are subject to the 180-day
lock-up agreement. See 'Underwriting.'
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including any person who may be deemed to be an
'affiliate' of the Company, is entitled to sell within any three month period
'restricted' shares beneficially owned by him or her in an amount that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in shares of Common Stock during the four
calendar weeks preceding such sale, provided that at least one year has elapsed
since such shares were acquired from the Company or an affiliate of the Company.
Sales are also subject to certain requirements as to the manner of sale, notice
and the availability of current public information regarding the Company.
However, a person who has not been an 'affiliate' of the Company at any time
within three months prior to the sale is entitled to sell his or her shares
without regard to the volume limitations or other requirements of Rule 144,
provided that at least two years have elapsed since such shares were acquired
from the Company or an affiliate of the Company.
In general, under Rule 701 as currently in effect, any employee, officer,
director, consultant or advisor of the Company who purchased shares from the
Company pursuant to a written compensatory benefit plan or written contract
relating to compensation is eligible to resell such shares 90 days after the
effective date of the Offering in reliance upon Rule 144, but without the
requirement to comply with certain restrictions contained in such rule. Shares
of Common Stock obtained pursuant to Rule 701 may be sold by non-affiliates
without regard to the holding period, volume limitations, or information or
notice requirements of Rule 144, and by affiliates without regard to the holding
period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under its Option
Plan, as well as certain of the shares of Common Stock previously issued under
its Option Plan. This registration statement is expected to be filed as soon as
practicable after the date of this Prospectus and is expected to become
effective immediately upon filing. Shares of Common Stock covered by this
registration statement will be eligible for sale in the pubic market after the
effective date of such registration statement, subject to Rule 144 limitations
applicable to affiliates of the Company. See 'Management Stock Option Plan.'
The Company has granted registration rights to certain of its stockholders.
See 'Description of Capital Stock Registration Rights.'
Prior to the Offering, there has been no public market for the Common Stock
and it is impossible to predict with certainty the effect, if any, that market
sales of shares or the availability of such shares for sale will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
Common Stock in the public market may have an adverse impact on such market
price and could impair the Company's ability to raise capital through the sale
of its equity securities.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Raymond James & Associates, Inc. and Volpe Brown Whelan & Company, LLC have
severally agreed to purchase from the Company the following respective number of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC......................................................................
Raymond James & Associates, Inc............................................................
Volpe Brown Whelan & Company, LLC..........................................................
---------
Total................................................................................. 5,000,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain
other dealers. After the initial public offering of the shares, the offering
price and other selling terms may be changed by the Representatives of the
Underwriters. The Representatives have informed the Company that the
Underwriters do not intend to conform sales to accounts over which they exercise
discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of $ upon completion of the Offering.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate shares of Common Stock after
the Offering, have agreed that they will not, without prior written consent of
Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire
67
<PAGE>
Common Stock beneficially owned by them during the 180-day period following the
date of this Prospectus other than transfers pursuant to bona fide gifts. In
addition, the Company has agreed that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
directly or indirectly, sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock, or enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences or ownership of Common Stock, during the
180-day period following the date of this Prospectus, except that the Company
may issue, and grant options to purchase, shares of Common Stock under its
current stock option plan and may issue shares of Common Stock in connection
with certain affiliation transactions, provided such shares are subject to the
180-day lock-up agreement. Sales of such shares in the future could adversely
affect the market price of the Common Stock. Hambrecht & Quist LLC may, in its
sole discretion, release any of the shares subject to the lock-up agreements at
any time without notice.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees and persons with business relationships with the
Company, as well as others associated with such persons. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters on the same basis as all other
shares offered hereby.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant.
Certain persons participating in this offering may overallot 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 effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. 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 the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transaction may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
On September 9, 1997, Health Care Services-BMJ, LLC and H&Q Serv*is
Ventures, L.P., affiliates of Hambrecht & Quist LLC, purchased $2.5 million
aggregate principal amount of the Company's Debentures as part of a financing in
which the Company sold $4.0 million aggregate principal amount of Debentures to
seven investors. See 'Certain Transactions--Equity and Debt Financings.'
68
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon by
O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal matters will
be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The financial statements of the following entities appearing in this
Prospectus have been audited by Ernst & Young LLP, independent certified public
accountants, as set forth in their reports thereon also appearing elsewhere in
this Prospectus:
BMJ Medical Management, Inc.
Orthopaedic Associates of Bethlehem, Inc.
Southern California Orthopedic Institute Medical Group
South Texas Spinal Clinic, P.A.
Tri-City Orthopedic Surgery Medical Group, Inc.
Lauderdale Orthopaedic Surgeons
Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics
Sun Valley Orthopaedic Surgeons
Orthopaedic Surgery Associates, P.A.
Broward Institute of Orthopedic Specialties, P.A.
Such financial statements have been included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF BMJ MEDICAL MANAGEMENT, INC.
Report of Independent Certified Public Accountants......................................................... F-3
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited).......................................... F-4
Statements of Operations for the Year Ended December 31, 1996 and the Six Months Ended
June 30, 1996 and 1997 (Unaudited)....................................................................... F-5
Statements of Stockholders' Equity for the Year Ended December 31, 1996 and the Six Months Ended June 30,
1997 (Unaudited)......................................................................................... F-6
Statements of Cash Flows for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1996 and
1997 (Unaudited)......................................................................................... F-7
Notes to Financial Statements.............................................................................. F-8
FINANCIAL STATEMENTS OF ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
Report of Independent Auditors............................................................................. F-25
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996............................................. F-26
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-27
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Six Months Ended June 30, 1996....................................................................... F-28
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-29
Notes to Financial Statements.............................................................................. F-30
FINANCIAL STATEMENTS OF SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP
Report of Independent Auditors............................................................................. F-34
Balance Sheets at December 31, 1995 and October 31, 1996................................................... F-35
Statements of Operations and Changes in Partners' Capital for the Years Ended December 31, 1994 and 1995
and the Ten Months Ended October 31, 1996................................................................ F-36
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-37
Notes to Financial Statements.............................................................................. F-38
FINANCIAL STATEMENTS OF SOUTH TEXAS SPINAL CLINIC, P.A.
Report of Independent Auditors............................................................................. F-43
Balance Sheets at December 31, 1994 and 1995 and October 31, 1996.......................................... F-44
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-45
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Ten Months Ended October 31, 1996.................................................................... F-46
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-47
Notes to Financial Statements.............................................................................. F-48
FINANCIAL STATEMENTS OF TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC.
Report of Independent Certified Public Accountants......................................................... F-51
Balance Sheets at December 31, 1995 and 1996............................................................... F-52
Statements of Operations for the Years Ended December 31, 1995 and 1996.................................... F-53
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996.......................... F-54
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-55
Notes to Financial Statements.............................................................................. F-56
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF LAUDERDALE ORTHOPAEDIC SURGEONS
Report of Independent Certified Public Accountants......................................................... F-60
Balance Sheets at December 31, 1995 and 1996............................................................... F-61
Statements of Income and Change in Partners' Capital for the Years Ended December 31, 1995 and 1996........ F-62
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-63
Notes to Financial Statements.............................................................................. F-64
FINANCIAL STATEMENTS OF FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS
Report of Independent Certified Public Accountants......................................................... F-68
Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (Unaudited)................................. F-69
Statements of Income for the Years Ended December 31, 1995 and 1996 and the Six Months Ended June 30, 1996
and 1997 (Unaudited)..................................................................................... F-70
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and the Six Months Ended
June 30, 1997 (Unaudited)................................................................................ F-71
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-72
Notes to Financial Statements.............................................................................. F-73
FINANCIAL STATEMENTS OF SUN VALLEY ORTHOPAEDIC SURGEONS
Report of Independent Certified Public Accountants......................................................... F-77
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited).......................................... F-78
Statements of Operations and Changes in Partners' Capital for the Year Ended
December 31, 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)............................ F-79
Statements of Cash Flows for the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1996 and 1997 (Unaudited).................................................. F-80
Notes to Financial Statements.............................................................................. F-81
FINANCIAL STATEMENTS OF ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
Report of Independent Certified Public Accountants......................................................... F-84
Balance Sheet at December 31, 1996......................................................................... F-85
Statement of Income for the Year Ended December 31, 1996................................................... F-86
Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-87
Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-88
Notes to Financial Statements.............................................................................. F-89
FINANCIAL STATEMENTS OF BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
Report of Independent Certified Public Accountants......................................................... F-93
Balance Sheet at December 31, 1996......................................................................... F-94
Statement of Income for the Year Ended December 31, 1996................................................... F-95
Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-96
Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-97
Notes to Financial Statements.............................................................................. F-98
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
BMJ Medical Management, Inc.
We have audited the accompanying balance sheet of BMJ Medical Management Inc.,
(the Company) as of December 31, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the year 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 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 BMJ Medical Management, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
West Palm Beach, Florida
June 4, 1997
F-3
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,439,000 $ 6,915,000
Accounts receivable.............................................................. 5,817,000 10,319,000
Due from physician groups........................................................ 426,000 21,000
Prepaid expenses and other current assets........................................ 29,000 48,000
------------ -----------
Total current assets........................................................ 7,711,000 17,303,000
Furniture, fixtures and equipment, net............................................. 2,142,000 2,546,000
Management services agreements, net of accumulated amortization of $23,000 at
December 31, 1996 and $80,000 at June 30, 1997................................... 3,790,000 7,310,000
Other assets....................................................................... 32,000 740,000
------------ -----------
Total assets....................................................................... $ 13,675,000 $27,899,000
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 149,000 $ 353,000
Accrued expenses................................................................. 366,000 826,000
Accrued salaries and benefits.................................................... 383,000 841,000
Due to physician groups.......................................................... 4,936,000 6,375,000
Due to related party............................................................. 40,000 --
Shareholder note payable......................................................... -- 753,000
Current portion of long-term debt and capital lease obligations.................. 18,000 665,000
------------ -----------
Total current liabilities................................................... 5,892,000 9,813,000
Long-term debt and capital lease obligations, less current portion................. 59,000 6,540,000
commitments and contingencies......................................................
Stockholders' equity:
Convertible preferred stock--Series A, $.01 par value--999,999 shares authorized,
issued and outstanding........................................................ 10,000 10,000
Convertible preferred stock--Series B, $.01 par value--2,000,001 shares
authorized, issued and outstanding............................................ 20,000 20,000
Convertible preferred stock--Series C, $.01 par value--254,999 shares authorized,
issued and outstanding........................................................ -- 3,000
Convertible preferred stock--Series D, $.01 par value--188,072 shares authorized,
issued and outstanding........................................................ -- 2,000
Convertible preferred stock--Series E, $.01 par value--533,335 shares authorized,
issued and outstanding........................................................ -- 5,000
Preferred stock, $.01 par value--2,000,000 shares authorized, none issued and
outstanding................................................................... -- --
Common stock, $.001 par value--10,000,000 shares authorized and 6,701,501 shares
issued and outstanding at December 31, 1996; 25,000,000 shares authorized and
8,311,462 shares issued and outstanding at June 30, 1997...................... 7,000 9,000
Additional paid-in capital....................................................... 8,796,000 14,482,000
Accumulated deficit.............................................................. (1,109,000) (2,985,000)
------------ -----------
Total stockholders' equity......................................................... 7,724,000 11,546,000
------------ -----------
Total liabilities and stockholders' equity......................................... $ 13,675,000 $27,899,000
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------------------
1996 1996 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Practice revenue, net.................................... $ 6,029,000 $ -- $ 19,907,000
Less: physician and other provider services.............. 2,912,000 -- 9,509,000
----------- ------------ ------------
Management fee revenue................................... 3,117,000 -- 10,398,000
Costs and expenses:
Medical support services............................... 2,844,000 -- 9,541,000
General and administrative............................. 1,278,000 51,000 2,139,000
Depreciation and amortization 104,000 1,000 300,000
Interest expense (income), net......................... -- -- 294,000
----------- ------------ ------------
Total costs and expenses............................ 4,226,000 52,000 12,274,000
----------- ------------ ------------
Net loss................................................. $(1,109,000) $ (52,000) $ (1,876,000)
----------- ------------ ------------
----------- ------------ ------------
Net loss per share....................................... $ (0.09) $ 0.00 $ (0.15)
----------- ------------ ------------
----------- ------------ ------------
Weighted average number of common shares outstanding..... 11,852,000 11,217,000 12,480,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER SERIES A SERIES B SERIES C SERIES D SERIES E ADDITIONAL
OF PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON PAID-IN
SHARES STOCK STOCK STOCK STOCK STOCK STOCK CAPITAL
---------- --------- --------- --------- --------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Initial issuance of
convertible preferred
stock...................... 3,000,000 10,000 20,000 -- -- -- -- 6,970,000
Issuance of common stock..... 1,175,000 -- -- -- -- -- 1,000 11,000
Issuance of common stock
in connection with
management services
agreements................. 5,526,501 -- -- -- -- -- 6,000 1,815,000
Net loss..................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ------ -----------
Balance at December 31,
1996....................... 10,000 20,000 7,000 8,796,000
Issuance of convertible
preferred stock
(unaudited)................ 976,406 -- -- 3,000 2,000 5,000 -- 4,990,000
Issuance of common stock in
connection with management
services agreements
(unaudited)................ 1,604,961 -- -- -- -- -- 2,000 696,000
Net loss (unaudited)......... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ------ -----------
Balance at June 30, 1997
(unaudited)................ $10,000 $20,000 $ 3,000 $ 2,000 $ 5,000 $9,000 $14,482,000
--------- --------- --------- --------- --------- ------ -----------
--------- --------- --------- --------- --------- ------ -----------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
Balance at inception......... $ -- $ --
Initial issuance of
convertible preferred
stock...................... -- 7,000,000
Issuance of common stock..... -- 12,000
Issuance of common stock
in connection with
management services
agreements................. -- 1,821,000
Net loss..................... (1,109,000 ) (1,109,000)
----------- -----------
Balance at December 31,
1996....................... (1,109,000 ) 7,724,000
Issuance of convertible
preferred stock
(unaudited)................ -- 5,000,000
Issuance of common stock in
connection with management
services agreements
(unaudited)................ -- 698,000
Net loss (unaudited)......... (1,876,000 ) (1,876,000)
----------- -----------
Balance at June 30, 1997
(unaudited)................ $(2,985,000) $11,546,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------------
1996 1996 1997
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................... $(1,109,000) $ (52,000) $(1,876,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 74,000 1,000 228,000
Amortization......................................................... 30,000 -- 72,000
Interest expense converted to preferred stock........................ -- -- 34,000
Changes in operating assets and liabilities:
Accounts receivable............................................... 366,000 -- (458,000)
Due from physician groups......................................... (1,241,000) -- (337,000)
Prepaid expenses and other current assets......................... 2,000 -- (6,000)
Accounts payable.................................................. 149,000 -- 204,000
Accrued expenses.................................................. 366,000 -- 460,000
Accrued salaries and benefits..................................... 383,000 -- 458,000
----------- ---------- -----------
Net cash used in operating activities.................................. (980,000) (51,000) (1,221,000)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment......................... (697,000) (12,000) (92,000)
Payments for management services agreements............................ (206,000) -- (547,000)
Payments for deferred offering costs................................... -- -- (708,000)
Cash used for practice affiliations.................................... (3,707,000) -- (6,628,000)
Payments for deposits.................................................. (22,000) -- --
----------- ---------- -----------
Net cash used in investing activities.................................. (4,632,000) (12,000) (7,975,000)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock.............................. 7,000,000 1,000,000 4,966,000
Proceeds from debt issuance............................................ -- -- 7,128,000
Deferred consideration for management services agreements.............. -- -- (268,000)
Payments to related party.............................................. -- -- (154,000)
Proceeds from related party............................................ 40,000 -- 867,000
Proceeds from issuance of common stock................................. 11,000 8,000 220,000
Amounts due to physician groups........................................ -- -- 1,913,000
----------- ---------- -----------
Net cash provided by financing activities.............................. 7,051,000 1,008,000 14,672,000
----------- ---------- -----------
Net increase in cash and cash equivalents.............................. 1,439,000 945,000 5,476,000
Cash and cash equivalents at beginning of period....................... -- -- 1,439,000
----------- ---------- -----------
Cash and cash equivalents at end of period............................. $ 1,439,000 $ 945,000 $ 6,915,000
----------- ---------- -----------
----------- ---------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................................................... $ 9,000 $ -- $ 108,000
----------- ---------- -----------
----------- ---------- -----------
Stock issued upon execution of management services agreements.......... $ 1,822,000 $ -- $ 478,000
----------- ---------- -----------
----------- ---------- -----------
Noncash transactions from practice affiliations including accounts
receivable, management services agreements and due to/from
physicians........................................................... $ 5,720,000 $ -- $ 536,000
----------- ---------- -----------
----------- ---------- -----------
Equipment under capital lease obligations.............................. $ 77,000 $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION PERTAINING TO JUNE 30, 1997 AND TO THE
SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
BMJ Medical Management, Inc. (the Company), a Delaware corporation, is
engaged in operating and managing physician groups focusing exclusively on
musculoskeletal disease management. The Company manages physician groups under
long-term management services agreements (the Agreements) with affiliated
physician groups located in various states. The Company may also acquire certain
assets under Asset Purchase Agreements, primarily accounts receivable, and
furniture, fixtures and equipment of these groups. The cost of these assets is
determined based on their appraised or net realizable value. The Company was
incorporated in Delaware in January 1996 and entered into its first agreement in
July 1996 and two additional agreements in November 1996.
Under the Agreements, the Company provides a full range of administrative
services required for a physician group's day-to-day nonmedical operations and
employs substantially all of the nonmedical personnel utilized by the group. The
nonclinical services provided include, but are not limited to, practice
administration, practice support, data processing, business office management
including billing and collecting, marketing, accounting and the provision of
office space and equipment and the arrangement of group purchasing discounts for
medical and nonmedical supplies. The Company also assists the physician group in
the recruitment of additional physicians and negotiates managed care contracts
which must be approved by the group.
The terms of the Agreements are 40 years and automatically renew for
successive 5-year periods thereafter unless terminated by one of the parties. As
compensation for services provided by the Company, the Company generally
receives a percentage of the group's net collected revenue, reimbursement of all
nonmedical expenses of the practice incurred by the Company in supporting the
group, 66 2/3% of the cost savings the Company is able to achieve through its
purchasing power and a percentage of the profits from new ancillary services.
The laws of many states, including the states in which the Company
presently has agreements, prohibit business corporations from practicing
medicine or exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements with physicians.
The Company intends that, pursuant to the Agreements, it will not exercise any
responsibility on behalf of affiliated physicians that could be construed as
affecting the practice of medicine. Accordingly, the Company believes that its
operations do not violate applicable state laws relating to the corporate
practice of medicine.
BASIS OF PRESENTATION
The Company does not consolidate the operating results and accounts of the
physician groups since it does not own or control the groups it manages. The
Company believes that the Agreements provide it with the preponderance of the
net profits of the medical services furnished by the groups. Consequently, the
Company presents physician groups' revenue less amounts retained by the
physician groups as management fee revenue in the accompanying statements of
operations.
PRACTICE REVENUE, NET
Practice revenue, net, represents the gross revenue of the physician groups
and ambulatory surgery center from patients, third-party payors and others for
services rendered, net of contractual and other adjustments. Contractual
adjustments typically result from differences between the physician groups'
established rates for services and the amounts allowed by government sponsored
health care programs and other insurers.
F-8
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in future
periods as final settlements are determined. There are no material claims,
disputes, or other unsettled matters that exist to management's knowledge
concerning third-party reimbursements. In addition, management believes there
are no retroactive adjustments that would be material to the financial
statements. The Company estimates that approximately 15% and 12% of practice
revenue, net, was received under government sponsored health care programs
(principally, the Medicare and Medicaid programs) during the year ended December
31, 1996 and the six months ended June 30, 1997, respectively. The physician
groups have numerous agreements with managed care and other organizations to
provide physician services based on negotiated fee schedules.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
MANAGEMENT FEE REVENUE
Management fee revenue represents practice and ambulatory surgery center
revenue, net less amounts retained by the physician groups.
The Company's management fee revenue is comprised of three components: (i)
percentage of the physician groups' net collected revenue (generally ranging
from 10%-15%), plus (ii) 100% of the non-physician affiliated practice expenses
(generally ranging from 45%-55% of the physician groups' net collected revenue),
plus (iii) 66 2/3% of the cost savings the Company is able to achieve through
its purchasing power (generally related to medical malpractice insurance,
property and liability insurance, group benefits and certain major medical
supplies). The portion of the management fee revenue that represents a
percentage of net collected revenue is dependent upon the physician groups'
revenue which must be billed and collected.
Management fee revenue included in the accompanying statements of
operations is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Component based upon percentage of physician groups' net
collected revenues........................................... $1,079,000 $ 1,842,000
Reimbursement of non-physician affiliated practice expenses.... 2,038,000 8,556,000
------------ --------------
Management fee revenue......................................... $3,117,000 $ 10,398,000
------------ --------------
------------ --------------
</TABLE>
For the year ended December 31, 1996, 100% of the management fee revenue
was earned from three affiliated practices. Southern California Orthopedics
Institute Medical Group (SCOI); South Texas Spinal Clinic, P.A. (STSC); and
Lehigh Valley Bone, Muscle and Joint Group, LLC (LVBMJ) comprised approximately
52%, 23%, and 25% of management fee revenue, respectively. For the six months
ended June 30, 1997, these three groups comprised approximately 54%, 17%, and 9%
of management fee revenue, respectively.
F-9
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
COSTS AND EXPENSES
Medical support services represent costs incurred by the Company relative
to the operations of the physician groups including non-physician personnel
salaries and benefits, medical supplies, malpractice insurance premiums,
building and equipment rental expense, general and administrative expenses,
supplies, maintenance and repairs, insurance, utilities and other indirect
expenses.
General and administrative expenses represent primarily the salaries of
corporate headquarters personnel, rent, travel, and other administrative
expenses.
CASH AND CASH EQUIVALENTS
Cash in excess of daily requirements invested in short-term investments
with maturities of three months or less is considered to be cash equivalents for
financial statement purposes. Deposits in banks may exceed the amount of
insurance provided on such deposits. The Company performs reviews of the credit
worthiness of its depository banks. The Company has not experienced any losses
on its deposits of cash.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables purchased from the
medical groups for medical services provided by the physician groups. Risk of
collection is borne by the physician groups and any amounts paid by the Company
for accounts receivable that are ultimately uncollectible are reimbursed to the
Company by the physician groups.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets which range from three to seven years. Routine maintenance and repairs
are charged to expense as incurred and major renovations or improvements are
capitalized.
MANAGEMENT SERVICES AGREEMENTS
Management services agreements include consideration (cash, common stock or
other consideration) paid to the physician groups for entering into Agreements,
legal and accounting fees and other similar transaction costs. The Agreements
are for a term of 40 years and one agreement is subject to rescission by a
physician group on the seventh anniversary. The Company amortizes the costs of
entering into Agreements over periods ranging from seven to 25 years. Shares
issued to physician practices that are subject to performance criteria are
accounted for as compensation.
The Company periodically reviews its intangible assets to assess
recoverability and a charge will be recognized in the statement of operations if
a permanent impairment is determined to have occurred. Recoverability of
intangibles is determined based on undiscounted future operating cash flows from
the related business unit or activity. The amount of impairment, if any, would
be measured based on discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds. The assessment of the
recoverability of intangible assets will be affected if estimated future
operating cash flows are not achieved. The Company does not believe that any
impairment has occurred at December 31, 1996 or June 30, 1997.
DUE TO/FROM PHYSICIAN GROUPS
Due from physician groups represents amounts due to the Company for
collections made by the physician groups on behalf of the Company related to
purchased accounts receivable collections, unpaid management fees and other
short-term advances.
F-10
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Due to physician groups represents cash consideration related to the
Agreements that is payable at the earlier of the consummation of an Initial
Public Offering of the Company's common stock or the one year anniversary of the
execution of the Agreement as well as amounts due to the physician groups
related to the ongoing monthly purchases of accounts receivable.
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 as of 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.
INTERIM FINANCIAL STATEMENTS
The interim financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all normal and recurring adjustments necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows. The interim data disclosed in these notes to the financial statements is
also unaudited. The results of operations for the six months ended June 30, 1997
are not necessarily indicative of the results of operations that may be expected
for the entire year ending December 31, 1997.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, generally recognizes no compensation
expense for stock options granted.
Under the Company's stock option plans, the Company may grant stock options
for a fixed number of shares to independent consultants and contractors
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants using the fair
value method of FASB Statement No. 123 'Accounting for Stock-Based
Compensation.' The fair value for these options is estimated at the date of
grant using a stock option pricing model and recognized as compensation cost.
NET LOSS PER SHARE
For the year ended December 31, 1996, pursuant to the Securities and
Exchange Commission's Staff Accounting Bulletins, common shares and common
equivalent shares issued at prices below the estimated public offering price
during the 12 months immediately preceding the date of the proposed initial
filing of the registration statement, using the treasury stock method, have
been included in the calculation of common shares and common share equivalents
as if they were outstanding for all periods presented even when the effect is
antidilutive.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
SFAS No. 128, which applies to entities with publicly held common stock,
simplifies the standards for computing earnings per share previously required in
APB Opinion No. 15, Earnings per Share, and makes them comparable to
international earnings per share standards. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier adoption is not permitted. Management is
currently reviewing the provisions of SFAS No. 128; however, it does not believe
that adoption of this new accounting pronouncement will have a material impact
on the calculation and presentation of earnings per share.
F-11
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments as reported in the
accompanying balance sheet approximate their fair value primarily due to the
short-term nature of such financial instruments.
2. PRACTICE AFFILIATIONS
Effective July 1, 1996, the Company entered into an Affiliation Transaction
with Lehigh Valley Bone, Muscle and Joint Group, L.L.C. a Pennsylvania limited
liability company (LVBMJ), under which the Company would receive as a management
fee 50% of the net collected revenues of LVBMJ and would be responsible for all
the clinic overhead expenses (medical support services). Under the terms of the
Amended and Restated Management Services Agreement between LVBMJ and the
Company, effective July 1, 1997 (the LVBMJ Management Services Agreement), the
Company paid $324,582 in cash, issued 450,000 shares of Common Stock recorded at
$0.10 per share and 68,031 shares of Common Stock recorded at $1.20 per share,
based on independent valuations, and options to purchase 30,000 shares of Common
Stock representing consideration of $126,637 in connection with this
transaction. Effective July 1, 1997, the Company and LVBMJ amended and restated
their agreement to adjust the management fee to 10% of net collected revenues
plus reimbursement of clinic overhead expenses. The aggregate consideration of
$465,768, including transaction costs, has been allocated to the assets acquired
or expensed as follows: furniture, fixtures and equipment--$50,000, interest
expense--$4,582, and Management Services Agreement--$411,186. The Management
Services Agreement is being amortized over 25 years. The LVBMJ Management
Services Agreement provides that the Company may be required to issue more
shares of Common Stock as a additional consideration during 1998. The total
number of shares to be issued will depend on actual collections of the practice
during a specified twelve month period. The value of any subsequently issued
shares will be allocated to the LVBMJ Management Services Agreement.
On November 22, 1996, the Company entered into an Asset Purchase Agreement
and a Management Services Agreement (SCOI Management Services Agreement) with
Southern California Orthopedic Institute Medical Group, California general
partnership (SCOI), in exchange for $5,930,897 in cash and the issuance of
4,000,000 shares of Common Stock recorded at $0.35 per share, based on an
independent valuation, representing consideration of $1,400,000. The SCOI
Management Services Agreement calls for management fees to be earned by the
Company equal to 3 1/3% of the net collected revenues until certain conditions
are met at which time the management fee will increase to 6 2/3% of net
collected revenues until the filing of a preliminary prospectus for the initial
public offering of the Company's Common Stock with the Securities and Exchange
Commission at which time the management fee will increase to 10% of the net
collected revenues. For the period from November 1 through June 30, 1997, the
Company recognized management fees for SCOI of 3 1/3% of net collected revenues.
The number of shares issued in connection with this transaction, which exceed
3,000,000, are subject to recalculation at the earlier of the filing by the
Company of a preliminary prospectus with the Commission or November 1, 1997. On
April 1, 1997, the Company entered into a transaction with the Center for
Orthopedic Surgery, Inc., a California corporation (COSI), owned by SCOI
physicians, in exchange for 550,000 shares of Common Stock recorded at $0.40 per
share, based on an independent valuation, representing consideration or
$220,000. The number of shares issued in connection with this transaction are
also subject to recalculation at the later of the SCOI recalculation or January
1, 1998. The aggregate consideration of $7,671,999, including transaction costs
has been allocated to the assets acquired as follows: net accounts
receivable--$4,448,000, furniture, fixtures and equipment--$1,441,920,
supplies--$30,897, deposits--$10,080 and Management Services
Agreements--$1,741,102. The Management Services Agreements are being amortized
over 25 years. In accordance with the recalculation provisions, the Company
expects to issue approximately 900,000 additional shares of Common Stock to SCOI
physicians for both the SCOI and COSI recalculations, the exact amount of which
will be determined in the fourth quarter of 1997. These shares and 1,000,000 of
the original 4,000,000 shares issued in November 1996 in connection with the
SCOI transaction represent consideration based upon performance and will be
accounted for as compensation expense. Accordingly, the Company will
F-12
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
incur a charge of earnings in the fourth quarter of 1997 amounting to
approximately $9,500,000 relating to the resolution of this contingency and the
final settlement of the recalculation provisions.
On December 23, 1996, the Company entered into an Asset Purchase Agreement
and a Management Services Agreement (STSC Management Services Agreement) with
South Texas Spinal Clinic, P.A., a Texas professional association (STSC), in
exchange for the issuance of 1,076,501 shares of Common Stock recorded at $0.35
per share, based on an independent valuation, representing consideration of
$376,775 and cash of $3,065,990. The aggregate consideration of $3,484,231,
including transaction costs has been allocated to the assets acquired as
follows: net accounts receivable--$1,703,826, furniture, fixtures and
equipment--$425,000, supplies--$21,328 and Management Services
Agreement--$1,334,077. The STSC Management Services Agreement permits STSC and
individual physicians to rescind the Affiliation Transaction on (i) November 1,
1998 if the Company has not affiliated with an aggregate of sixteen physicians
in San Antonio, Texas by such date and (ii) November 1, 2003. In the event of a
rescission of the transaction, the transaction will be unwound, with the assets
(other than the accounts receivable) acquired by the Company being returned to
STSC and the purchase price paid therefore being returned to the Company. In
addition, the physician owners and the employed physicians, if any, who received
Common Stock of the Company in connection with the transaction will be required
to return such capital stock to the Company. The STSC Management Services
Agreement is being amortized over 7 years.
Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Tri-City Management Services
Agreement) with Tri-City Orthopedic Surgery Medical Group, Inc., a California
corporation (Tri-City), and two of its affiliates in exchange for $948,200 in
cash, the issuance of 402,723 shares of Common Stock recorded at $0.40 per
share, based on an independent valuation, representing consideration of
$161,089. The aggregate consideration of $1,162,598, including transaction costs
has been allocated to the assets acquired or expensed as follows: net accounts
receivable--$519,000, furniture, fixtures and equipment--$167,590, Management
Services Agreement--$476,008. The Tri-City Management Services Agreement is
being amortized over 25 years.
Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (LOS Management Services
Agreement) with Lauderdale Orthopaedic Surgeons, a Florida partnership, in
exchange for $2,750,334 in cash and the issuance of 498,348 shares of Common
Stock recorded at $0.40 per share, based on an independent valuation,
representing consideration of $199,339. The aggregate consideration of
$3,020,124, including transaction costs has been allocated to the assets
acquired or expensed as follows: accounts receivable-- $2,000,000, furniture,
fixtures and equipment--$103,915 Management Services Agreement--$916,209. The
LOS Management Services Agreement is being amortized over 25 years.
Effective June 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (GCO Management Services
Agreement) with Fishman and Stashak, M.D.'s, P.A. (GCO), a Florida professional
association, (d/b/a Gold Coast Orthopedics), Clive Segil, M.D. (Segil), a
California professional corporation, and H. Leon Brooks, M.D. (Brooks), a
California professional corporation, in exchange for an aggregate amount of
$3,885, 589 in cash, the issuance of 409,615 shares of Common Stock recorded at
$1.15 per share, based on an independent valuation, representing consideration
of $471,057. The aggregate consideration of $4,535,479, including transaction
costs has been allocated to the assets acquired or expensed as follows: accounts
receivable--$1,759,000, furniture, fixtures and equipment--$194,150,
supplies--$3,650 and Management Services Agreement--$2,578,679. The GCO
Management Services Agreement is being amortized over 25 years and the
Management Services Agreements for Segil and Brooks over 15 years. The GCO
agreement provides that the Company may be required to issue more shares of
Common Stock as additional consideration during 1998. The total number of shares
to be issued will depend on actual collections of the practice during a
specified twelve month period. The value of any subsequently issued shares will
be allocated to the Management Service Agreements.
F-13
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
Effective July 1, 1997, the Company entered into three separate Asset
Purchase Agreements and Management Services Agreement with Swanson Orthopedic
Medical Corporation, a professional corporation, Randy C. Watson, M.D., a
professional corporation and Lake Tahoe Sports Medicine Center, a medical
corporation, all located in South Lake Tahoe, California, in exchange for an
aggregate amount of $986,000 in cash and the issuance of 150,708 shares of
Common Stock recorded at $1.20 per share, based on an independent valuation,
representing consideration of $180,850. The aggregate consideration of
$1,281,234, including transaction costs has been allocated to the assets
acquired as follows: accounts receivable--$726,000, furniture, fixtures and
equipment--$67,200, supplies--$10,000, and Management Services
Agreement--$478,034. The Management Services Agreements are being amortized over
25 years.
Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Sun Valley
Orthopaedic Surgeons, an Arizona general partnership and Robert O. Wilson,
M.D.P.C., an Arizona professional corporation, both located in Sun City,
Arizona, in exchange for an aggregate amount of $616,125 in cash and the
issuance of 197,865 shares of Common Stock recorded at $1.20 per share, based on
an independent valuation, representing consideration of $237,438. Sun Valley
Orthopaedic Surgeons has the right to receive additional consideration if the
fair market value of the Company's Common Stock, as determined on July 1, 1998,
is less than $6.50. The additional consideration would be determined by
multiplying the per share dollar amount below $6.50 by 50,845 shares and would
be payable in full in cash no later than July 31, 1998. The Company has recorded
this liability at September 30, 1997. The aggregate consideration of $1,244,520,
including transaction costs has been allocated to the assets acquired as
follows: accounts receivable--$457,000, furniture, fixtures and
equipment--$67,500, supplies--$7,000, deposits-- $4,564, and Management Services
Agreement--$708,456. The Management Services Agreements are being amortized over
25 years.
Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Stockdale Podiatry
Group, Inc., a California professinal corporation and John C. Zimmerman, D.P.M.,
both located in Bakersfield, California, in exchange for an aggregate amount of
$1,032,842 in cash, a contractual obligation to pay John C. Zimmerman, M.D.
$78,858 in cash at a future specified date and the issuance of 169,493 shares of
Common Stock recorded at $1.20 per share, based on an independent valuation,
representing consideration of $203,392. The aggregate consideration of
$1,399,466, including transaction costs has been allocated to the assets
acquired or expensed as follows: accounts receivable--$637,200, furniture,
fixtures and equipment--$85,207, supplies--$10,000, and Management Services
Agreement--$667,059. The Management Services Agreements are being amortized over
25 years.
Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Kramer Management Services
Agreement) with Kramer & Maehrer, L.L.C., a Pennsylvania limited liability
company, in exchange for $45,981 in cash and the issuance of 72,600 shares of
Common Stock recorded at $1.20 per share, based on an independent valuation,
representing consideration of $87,120. The aggregate consideration of $136,127,
including transaction costs has been allocated to the assets acquired as
follows: furniture, fixtures and equipment--$45,981, Management Services
Agreement--$90,146. The Kramer Management Services Agreement is being amortized
over 25 years.
Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (SAB Management Services
Agreement) with San Antonio Bone and Joint Clinic, P.A., a Texas professional
association, in exchange for an aggregate amount of $288,978 in cash and the
issuance of 38,229 shares of Common Stock recorded at $1.20 per share, based on
an independent valuation, representing consideration of $45,875. The aggregate
consideration of $396,674, including transaction costs has been allocated to the
assets as follows: accounts receivable--$92,289, furniture, fixtures and
equipment--$175,801, supplies--$649, and Management Services
Agreement--$127,935. The SAB Management Services Agreement is being amortized
over 25 years.
F-14
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (PM & R Management Services
Agreement) with Physical Medicine and Rehabilitation Associates, Inc., a Florida
corporation, in exchange for $830,697 in cash and the issuance of 130,730 shares
of Common Stock recorded at $2.00 per share, based on an independent valuation,
representing consideration of $261,460. The aggregate consideration of
$1,207,112, including transaction costs has been allocated to the assets
acquired or expensed as follows: accounts receivable--$465,000, furniture,
fixtures and equipment--$165,000, deposits--$5,166, interest expense--$531 and
Management Services Agreement--$571,415. The PM & R Management Services
Agreement is being amortized over 25 years.
Effective August 1, 1997, the Company entered into separate Asset Purchase
Agreements with Broward Orthopaedic Specialists, Inc., a Florida corporation
(Broward), Terence Matthews, M.D. P.A., Wylie Scott, M.D. P.A. and Mitchell S.
Seavey, M.D. and a Management Services Agreement with Broward (Broward
Management Services Agreement), in exchange for $4,154,881 in cash, a promissory
note issued to Dr. Seavey for $283,502 and the issuance of 656,902 shares of
Common Stock recorded at $2.00 per share, based on an independent valuation,
representing consideration of $1,313,804. The aggregate consideration of
$5,795,213, including transaction costs has been allocated to the assets
acquired and expensed as follows: accounts receivable-- $1,635,000, furniture,
fixtures and equipment--$385,000, Management Services Agreement--$3,761,707, and
interest expense--$13,506. The Broward Management Services Agreement is being
amortized over 25 years.
Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Abrahams Management Services
Agreement) with Michael A. Abrahams, M.D. P.A., a Florida professional
association, in exchange for $620,004 in cash and the issuance of 95,384 shares
of Common Stock recorded at $2.00 per share, based on an independent valuation,
representing consideration of $190,768. The aggregate consideration of $857,388,
including transaction costs has been allocated to the assets acquired as
follows: accounts receivable--$285,000, furniture, fixtures and
equipment--$47,500, and Management Services Agreement--$524,888. The Abrahams
Management Services Agreement is being amortized over 25 years.
Effective September 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Beitler Management Services
Agreement) with Jeffrey Beitler, M.D. P.A., a Florida professional corporation,
in exchange for $275,000 in cash and the issuance of 36,492 shares of Common
Stock recorded at $2.25 per share, based on an independent valuation,
representing consideration of $82,107. The aggregate consideration of $377,107,
including transaction costs has been allocated to the assets acquired as
follows: accounts receivable--$200,000, furniture, fixtures and
equipment--$35,000, and Management Services Agreement--$142,107. The Beitler
Management Services Agreement is being amortized over 25 years.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (OSA Management Services Agreement) with
Orthopaedic Surgery Associates, P.A., a Florida professional corporation (OSA)
in exchange for $4,496,250 in cash, issuance of a promissory note for
$2,450,465, bearing interest at 8.5%, and the issuance of 282,254 shares of
Common Stock recorded at $3.35 per share, based on an independent valuation,
representing consideration of $945,551. The aggregate consideration of
$7,892,266 including transaction costs has been allocated to the assets acquired
as follows: accounts receivable-- $2,000,000, furniture, fixtures and
equipment--$500,000, and Management Services Agreement--$5,392,266. The OSA
Management Services Agreement is being amortized over 25 years.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (LOM Management Services Agreement) with
Lighthouse Orthopaedic Management Group, Inc (LOM), a Florida corporation, in
exchange for the issuance of promissory notes for $4,043,989, bearing interest
at 8.5% and the issuance of 294,072 shares of Common Stock recorded at $3.35 per
share, based on the independent valuation, representing consideration of
$985,141. The aggregate consideration of $5,029,130, including transaction costs
has been allocated to the assets acquired as follows: accounts
receivable--$1,300,000
F-15
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
furniture, fixtures, and equipment--$250,000, and Management Services
Agreement--$3,479,130. The LOM Management Services Agreement is being amortized
over 25 years.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (BIOS Management Services Agreement) with Broward
Institute of Orthopaedic Specialties, P.A., a Florida professional association
(BIOS), in exchange for $119,311 in cash, the issuance of promissory notes for
$3,396,252, bearing interest at 8%, and the issuance of 260,237 shares of Common
Stock recorded at $3.35 per share, based on an independent valuation,
representing consideration of $871,794. The aggregate consideration of
$4,387,357 including transaction costs has been allocated to the assets acquired
as follows: advances--$800,000, furniture, fixtures, and equipment--$281,197,
supplies--$56,851, deposits--$37,966 and Managements Services
Agreement--$3,211,343. The BIOS Management Services Agreement is being amortized
over 25 years.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (Valley Management Services Agreement) with Valley
Sports and Arthritis Surgeons (Valley), in exchange for a promissory note of
$897,727, bearing interest at 8.5% and the issuance of 503,250 shares of Common
Stock recorded at $3.35 per share, based on an independent valuation,
representing consideration of $1,685,888. The aggregate consideration of
$2,583,615 including transaction costs has been allocated to the assets acquired
as follows: accounts receivable--$630,000, furniture, fixtures, and
equipment--$120,833, supplies--$35,000, and Managements Services
Agreement--$1,797,782. The Valley Management Services Agreement is being
amortized over 25 years.
In October 1997, the Company acquired Orthopaedic Management Network, Inc.,
an Arizona corporation, in exchange for $63,000 in cash, the assumption of
$809,332 in accounts payable and accrued liabilities and the issuance of 57,036
shares of Common Stock recorded at $3.35 per share, based on independent
valuation, representing consideration of $191,071. The aggregate purchase price
of $1,063,403 including transaction costs, has been allocated to a Management
Services Agreement which is being amortized over 25 years.
The Agreements are subject to termination in the event of (i) bankruptcy of
the Company or the medical practice; (ii) default in any material respect in the
performance of either parties' obligations under the Agreement; (iii)
representations and warranties made by either party are untrue or misleading in
any material respect; (iv) the medical practice is excluded from the Medicare or
Medicaid programs; or (v) either party determines that the structure of the
Agreement violates any state or federal laws or regulations existing at such
time and that an amendment to the Agreement will be unable to correct such
defect. Upon termination of the Agreement, the transaction will be unwound with
the assets (other than accounts receivable) acquired by the Company being
returned to the physician group and the purchase price paid, therefore, being
returned to the Company.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Office, computer, and telephone equipment...................... $ 999,000 $1,293,000
Medical equipment.............................................. 659,000 920,000
Furniture and fixtures......................................... 558,000 635,000
Less: accumulated depreciation................................. 74,000 302,000
------------ --------------
Furniture, fixtures and equipment, net......................... $2,142,000 $2,546,000
------------ --------------
------------ --------------
</TABLE>
F-16
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. AMOUNTS DUE TO/FROM PHYSICIAN GROUPS
Amounts due from physician groups at December 31, 1996 and June 30, 1997
consists of practice collections and short-term advances.
Amounts due to physician groups at December 31, 1996 and June 30, 1997
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Amounts due for purchased receivables.......................... $1,064,000 $2,235,000
Amounts due as consideration for management services
agreements, excluding promissory notes....................... 3,872,000 4,140,000
------------ --------------
$4,936,000 $6,375,000
------------ --------------
------------ --------------
</TABLE>
5. PROFESSIONAL LIABILITY
The Company and the physician groups are insured with respect to medical
malpractice risks on a claims made basis, except for OAB which is on an
occurrence basis. The insurance contracts specify that coverage is available
only during the term of each insurance contract and cover only those claims
reported while the policies are in force. Management of the Company intends to
renew the existing claims made policies annually and expects to be able to
obtain such coverage. When coverage is not renewed, the Company and the
physician groups purchase and record the cost of an extended reporting period
endorsement to provide professional liability coverage for losses incurred prior
to, but reported subsequent to, the termination of the claims made policies.
Management believes that any claims asserted against the Company would not,
after consideration of professional liability coverage and amounts provided in
the financial statements, have a material adverse effect on the Company's
financial position or results of operations. Management is not aware of any
claims against the Company or the physician groups which might have a material
impact on the Company's financial position or results of operations.
6. LEASES
The Company is obligated under operating and capital lease agreements for
offices and certain equipment, which have terms ranging from three to ten years
and are considered reimbursable to the Company under the terms of the
Agreements. In some circumstances, these lease arrangements are with entities
owned or controlled
F-17
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES--(CONTINUED)
by physician stockholders. Future minimum payments under noncancelable capital
and operating leases with lease terms in excess of one year are summarized as
follows for the years ending December 31:
<TABLE>
<CAPTION>
CAPITAL
OPERATING EQUIPMENT
LEASES LEASES
----------- ---------
<S> <C> <C>
1997.............................................................. $ 2,331,000 $ 26,500
1998.............................................................. 2,296,000 22,000
1999.............................................................. 2,200,000 22,000
2000.............................................................. 2,045,000 22,000
2001.............................................................. 2,003,000 19,000
Thereafter........................................................ 7,997,000 --
----------- ---------
Total minimum lease obligations................................... $18,872,000 111,500
-----------
-----------
Less amount representing interest................................. 35,000
---------
Present value of minimum lease obligations........................ $ 76,500
---------
---------
</TABLE>
Rent expense for the year ended December 31, 1996 and the six months ended
June 30, 1997 under all operating leases was approximately $602,000 and
$1,696,000, respectively.
The Company has assumed leases between the affiliated medical practices and
entities controlled by equity owners in the related practices. Amounts charged
to expense for these leases was $193,000 in 1996 and $369,000 in 1997. The
commitments under these leases are included above.
On August 1, 1997, the Company entered into an agreement (the Master Lease
Agreement) with the lender of the $5 million loan pursuant to which the lender
agreed to purchase and lease certain equipment (up to $500,000) to the Company
on the terms and conditions contained in the Master Lease Agreement. In
connection with the Master Lease Agreement, the Company issued to the lender a
warrant to purchase up to 5,000 shares of the Company's Series E Preferred
Stock at a price per share equal to $6.00. Upon the completion of the Company's
initial public offering, such warrant becomes exercisable for a like number of s
hares of Common Stock.
7. STOCK OPTION PLAN
On May 6, 1996, and subsequently amended on May 30, 1997, the Company's
Board of Directors approved the 1996 Stock Option Plan (the Option Plan), which
provides for the granting of options to purchase up to 2,000,000 shares of the
Company's common stock. Both incentive stock options and nonqualified stock
options may be issued under the provisions of the Option Plan. Employees of the
Company and any future subsidiaries, members of the Board of Directors,
independent consultants and contractors and the physicians employed by the
medical groups with which the Company is affiliated through the Agreements are
eligible to participate in the Option Plan, which will terminate no later than
May 6, 2006. The granting and vesting of options under the Option Plan are
authorized by the Company's Board of Directors or a committee of the Board of
Directors. Under the terms of the Option Plan incentive stock options vest pro
rata over four years, except for options covering 475,000 shares which vest
immediately or at the completion of an initial public offering of the Company's
common stock, and expire ten years from the date of grant. The exercise price of
the options granted is generally the fair market value at the date of grant.
None of the incentive stock options were exercisable as of December 31, 1996.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of FASB Statement No. 123,
F-18
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
Accounting for Stock-Based Compensation. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk-free interest rate of
6%; dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of .68; and a weighted-average expected option life of
four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at inception...................................... -- $ --
Granted............................................................. 155,000 .19
Exercised........................................................... -- --
Canceled............................................................ -- --
---------
Options outstanding at December 31, 1996.............................. 155,000 .19
Granted............................................................. 878,000 .37
Exercised........................................................... (10,000) .01
Canceled............................................................ (40,000) .01
---------
Options outstanding at June 30, 1997.................................. 983,000 $.36
--------- --------
--------- --------
Exercisable at December 31, 1996...................................... --
---------
---------
Reserved for future option grants at December 31, 1996................ 1,845,000
---------
---------
Weighted average fair value of options granted during 1996............ $.14
--------
--------
</TABLE>
At December 31, 1996, the weighted average remaining contractual life of
stock options granted under the Option Plan is 9.7 years.
The pro forma effects of adopting SFAS No. 123's fair value based method
for the year ended December 31, 1996 were not materially different from the
corresponding APB Opinion No. 25 (APB No. 25) intrinsic value methodology
because the options granted in 1996 were primarily issued near year end and the
fair value of the Company's stock, as determined by an independent valuation,
was $0.35 as of December 31, 1996. Accordingly, pro forma stock-based
compensation in 1996 is substantially less than would result from a full year's
compensation expense amortization and a higher valuation of the common stock.
The effects of applying SFAS 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.
F-19
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
Effects of applying SFAS No. 123 during the six months ended June 30, 1997 is
not materially different from the APB No. 25 methodology. Additionally, the FASB
has added to its agenda a project regarding certain APB No. 25 issues, including
such things as incorporating the SFAS No. 123 grant date definition into APB No.
25, readdressing the criteria under broad-based plans qualifying for
noncompensatory accounting and defining what constitutes employees. The
resolution of these issues could result in modification in the Company's
accounting for stock-based compensation arrangements.
Shares of common stock reserved for future issuance at December 31, 1996 is
as follows:
<TABLE>
<S> <C>
Options..................................................... 2,000,000
Convertible preferred stock................................. 3,000,000
----------
5,000,000
----------
----------
</TABLE>
8. STOCKHOLDERS' EQUITY
On May 6, 1996, the Company issued 1,175,000 shares of $.001 par value
common stock for cash consideration of $.01 per share, which resulted in
proceeds to the Company of $12,000.
On May 6, 1996, the Company issued 999,999 shares of Series A convertible
preferred stock with a par value of $.01 for $1 per share, which resulted in
proceeds to the Company of $999,999. On November 12, 1996, the Company issued
2,000,001 shares of Series B convertible preferred stock with a par value of
$.01 for $3 per share, which resulted in proceeds to the Company of $6,000,003.
On January 29, 1997 and March 12, 1997, the Company raised approximately
$765,000 in connection with the issuance of an aggregate of 254,999 shares of
Series C convertible preferred stock, with a par value of $.01 per share.
On June 19, 1997, the Company issued 188,072 shares of Series D convertible
preferred stock with a par value of $.01 for $5.50 per share as repayment of a
$1,000,000 loan plus accrued interest that had been made to the Company by
certain stockholders on January 14, 1997. In connection with the original loan,
the stockholders received warrants to purchase 33,333 shares of the Company's
common stock at a price of $3.00 per share.
On June 19, July 31 and August 18, 1997, the Company issued an aggregate of
741,669 Shares of Series E convertible preferred stock with a par value of $.01
for $6.00 per share in exchange for $4,450,000.
All classes of convertible preferred stock have the right to share in any
dividends declared and paid or set aside for the common stock of the Company,
pro rata, in accordance with the number of shares of common stock into which
such shares of preferred stock are then convertible; liquidation preference of
the original issuance price per share; and voting rights equal to the number of
shares of common stock into which the preferred stock is then convertible. All
classes of preferred shares are convertible into common shares at a ratio of 1:1
and are automatically convertible upon the occurrence of a fully underwritten
public offering of shares of the Company's common stock. Upon such automatic
conversion, the holders of the convertible preferred stock are not entitled to
payment of any accrued but unpaid dividends.
The Company is a party to a Stockholders Agreement dated as of November 22,
1996 (the Stockholders Agreement), with certain of its stockholders, including
Oak Partners, Oak VI, Delphi Ventures, Delphi BioInvestments, Dr. Nagpal and the
SCOI physicians. Under the Stockholders Agreement, the stockholders agreed to
vote their shares to appoint to the Company's board of directors certain
designees of such stockholders. The stockholders (other than the SCOI
physicians) also have the right of first refusal with respect to issuances of
the Company's capital stock or securities convertible into capital stock and are
subject to various restrictions on transfers of the Company's securities. Under
the terms of the Stockholders Agreement, the 700,000 shares of
F-20
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
Common Stock that Dr. Nagpal acquired for cash on May 6, 1996, are subject to
vesting over a 40-month period subject to acceleration in certain circumstances.
In the event of the termination of Dr. Nagpal's employment with the Company for
any reason, the Company has the right to repurchase from Dr. Nagpal all of the
shares of unvested stock at a purchase price equal to $.01 per share. The
Stockholders Agreement terminates at the completion of an initial public
offering.
9. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109,
Accounting for Income Taxes. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Accrued compensation......................................... $ 174,000 $ 264,000
Net operating loss carryforwards............................. 284,000 780,000
------------ --------------
Deferred tax assets............................................ 458,000 1,044,000
Less valuation allowance....................................... 432,000 1,007,000
------------ --------------
Total deferred tax assets...................................... 26,000 37,000
Deferred tax liabilities:
Tax over book depreciation................................... (11,000) (15,000)
Amortization of intangible assets............................ (15,000) (22,000)
------------ --------------
Total deferred tax liabilities................................. (26,000) (37,000)
------------ --------------
Net deferred taxes............................................. $ -- $ --
------------ --------------
------------ --------------
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a $432,000 and $1,007,000 valuation allowance at December
31, 1996 and June 30, 1997, respectively, is necessary to reduce the deferred
tax assets to the amount that will more than likely not be realized. The change
in the valuation allowance for the current year is $432,000. On November 11,
1996, the Company had an ownership change as defined by Internal Revenue code
section 382 which caused the utilization of the net operating loss and tax
credits, at that time, to be limited to approximately $100,000 per year relating
to approximately $600,000 of the net operating losses at December 31, 1996. At
December 31, 1996 and June 30, 1997, the Company has available net operating
loss carryforwards of $734,000 and $2,020,000, which expire in the years 2011
and 2012, respectively.
F-21
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
<S> <C> <C>
Federal tax at statutory rate.................................. $ (377,000) $ (505,000)
State income tax, net of federal benefit....................... (52,000) (69,000)
Nondeductible items............................................ (3,000) (1,000)
Increase in valuation allowance................................ 432,000 575,000
------------ --------------
Income tax expense............................................. $ -- $ --
------------ --------------
------------ --------------
</TABLE>
10. BORROWINGS
Borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Borrowings under revolving lines of credit........................................... $ $4,128,000
Senior secured term note payable in monthly installments through December, 2000, plus
interest at prime plus 3.5%, 12% at June 30, 1997.................................. 3,000,000
Shareholder note payable............................................................. 753,000
Obligation under capital lease....................................................... 77,000 77,000
------------ ----------
77,000 7,958,000
Less current portion................................................................. 18,000 1,418,000
------------ ----------
$ 59,000 $6,540,000
------------ ----------
------------ ----------
</TABLE>
In January 1997, the Company obtained short-term loans in the aggregate
amount of $999,999 from its stockholders, including its President. In connection
with such loans, the Company issued warrants to such stockholders to purchase an
aggregate of 33,333 shares of Common Stock at an exercise price of $3.00 per
share. In June 1997, such loans were converted into 188,072 shares of Series D
Preferred Stock. Also, in January 1997, the Company issued a series of
promissory notes to the Company's President. The notes bear interest at a rate
of 8% and the outstanding loans are due on December 31, 1997. At June 30, 1997,
the balance outstanding was $753,000, which included $27,000 of accrued and
unpaid interest.
From March 1997 to October 1997, the Company entered into a series of
credit agreements with its senior lender secured by the accounts receivable
acquired from each of the affiliated physician groups. The Company may borrow up
to an aggregate limit of $17,000,000,subject to a borrowing base of 85% of
eligible accounts receivable. Outstanding loans bear interest at the prime rate
plus 1.75% (10-1/4% at June 30, 1997) and mature at various dates ranging from
March 1999 to October 1999. The credit agreements require the Company to
maintain a prescribed level of tangible net worth, place limitations on
indebtedness, liens and investments, and prohibit the payment of dividends. At
June 30, 1997, $4,128,000 was outstanding under these agreements.
On June 30, 1997, the Company obtained a credit facility to fund practice
affiliations with its senior lender secured by a lien on substantially all of
the assets of the Company. The Company may borrow up to $3,250,000 for Practice
Affiliations, of which $3,000,000 was outstanding as of June 30, 1997. The loan
bears interest at the prime rate plus 3.5% (12% at June 30, 1997). Interest only
is payable through December 31, 1997, at which time the loan converts to a term
loan repayable in 36 monthly installments. In addition, in September 1997 the
Company issued the senior lender warrants to purchase 40,000 shares of the
Company's common stock for nominal cash consideration. $1.5 million of the
Company's obligations under this facility are guaranteed by the
F-22
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. BORROWINGS--(CONTINUED)
Company's President and other stockholders, and in connection therewith the
Company issued warrants to purchase an aggregate of 13,332 shares of common
stock for nominal cash consideration.
On August 1, 1997 and August 22, 1997, the Company entered into
subordinated loan agreements, with two different lenders, in the principal
amounts of $5 million (the $5 million loan) and $1.5 million (the $1.5 million
loan). The loans are secured by liens on all of the Company's tangible and
intangible personal property. The loans mature on December 31, 2000, however,
within 45 days of the effective date of an initial public offering of the
Company's common stock, the Company is obligated to prepay the loans in full.
These loans and the liens granted to the respective lenders are subordinated in
all respects to the current and future indebtedness of the Company under the
affiliation credit facility described above. The loans initially bear interest
at 14% per annum, provided, however, that if an initial public offering of the
Company's capital stock is not consummated on or prior to December 31, 1997, the
loans will, commencing January 1, 1998, bear interest at 15% of per annum. The
loan agreements prohibit the Company from making or declaring any cash dividends
or making any distributions of any class of capital stock of the Company, except
pursuant to an employee repurchase plan or with the consent of the lender.
In connection with the $5 million and $1.5 million loans the Company issued
warrants to purchase up to 125,000 and 37,500 shares, respectively, of the
Company's Series E Preferred Stock at a price per share equal to $6.00;
provided, however, if an initial public offering of the Company's stock is not
consummated on or prior to December 31, 1997, the number of shares of Series E
Preferred Stock issuable upon exercise of the warrants increases to 133,333 and
40,000, respectively. Upon the completion of the Company's initial public
offering, such warrants become exercisable for a like number of shares of common
stock. In addition, pursuant to stock purchase agreements dated as of July 31,
1997 and August 18, 1997, the Company issued 166,667 and 41,667 shares,
respectively, of Series E Preferred Stock to the lenders for an aggregate
purchase price of $1,250,000.
The $1.5 million loan is convertible into shares of preferred stock of the
Company at the option of the lender after the Company completes a sale and
issuance of any shares of its preferred stock in connection with an equity
financing at any time after the earlier to occur of (i) a payment default under
the loan agreement or (ii) the failure of the Company to consummate an initial
public offering of its capital stock prior to December 31, 1997. The conversion
price will be equal to the purchase price per share paid by the purchasers in
such equity financings.
On September 9, 1997, the Company issued and sold $4,000,000 in aggregate
principal amount of its subordinated convertible debentures due August 31, 2000
(the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement,
dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The
Debentures were purchased by Dr. Nagpal, Delphi Ventures III, L.P., Delphi
BioInvestments, Oak Investment Partners VI, L.P., Oak VI Affiliates Fund,
Limited, and Health Care Services-BMJ, LLC and H&Q Serv(Registered) is Ventures,
L.P., affiliates of Hambrecht & Quist, LLC. Pursuant to the terms of the
Debenture Purchase Agreement, the Debentures are subordinated in right of
payment to all indebtedness of the Company under the loans described above. The
Debentures bear interest at 6% per annum and are payable semi-annually on each
December 31 and June 30. The unpaid principal amount of the Debentures is due on
August 31, 2000.
Except in very limited instances, the Company may not prepay the Debentures
prior to September 9, 1999. The Debentures are subject to prepayment at the
option of the holders of the Debentures upon the consummation of (i) a sale of
all or substantially all of the assets of the Company; (ii) a sale or transfer
of all or a majority of the outstanding Common Stock of the Company in any one
transaction or series of related transactions: or (iii) a merger or
consolidation of the Company with or into another entity. The Debentures are
convertible at any time at the option of the holders thereof into shares of
Common Stock at an initial conversion price equal to $7.20 per share. Pursuant
to the terms of the Debenture Purchase Agreement, the holders of the Debentures
have rights of first offer on future issuances of capital stock of the Company
or other securities convertible into capital stock of the Company (except with
respect to a public offering of shares of the Company's common stock). The
Debenture Purchase Agreement places limitations on indebtedness and liens and
prohibits the payment of dividends.
F-23
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. BORROWINGS--(CONTINUED)
On October 14, 1997, the Company obtained short-term financing in the form
of a secured term note to fund practice affiliations with its senior lender,
secured by a lien on substantially all of the assets of the Company. The Company
may borrow up to $2,500,000 for practice affiliations. Outstanding loans bear
interest at the prime rate plus 3.5% (12% at October 31, 1997). Interest only is
payable through December 31, 1997 and the entire principal sum is due and
payable on January 10, 1998. In connection with this loan agreement, the Company
will pay to the lender a fee in the amount of $300,000 on the maturity date. At
October 31, 1997, $2,514,167, including accrued interest, was outstanding under
this agreement.
On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3,375,000 from certain stockholders, including its
President, to fund practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggregate of 67,500
shares of Common Stock at an exercise price of $.01 per share. Outstanding loans
bear interest at the prime rate plus 3.5%. (12% at October 31, 1997). The
principal amounts and accrued interest are due and payable on January 10, 1998.
At October 31, 1997, $3,391,875, including accrued interest, was outstanding
under these agreements.
During October, 1997, in connection with several practice affiliations, the
Company issued promissory notes to the physicians that in the aggregate totaled
$11,147,832. These outstanding promissory notes bear interest ranging from 6% to
11%. Substantially all of these promissory notes are due and payable either on
the date of the Company's completion of an initial public offering or at various
maturity dates ranging from December 31, 1997 to March 31, 1998. At October 31,
1997, $11,156,840, including accrued interest, was outstanding under these
promissory notes.
11. COMMITMENTS
The Company has an employment agreement dated as of May 6, 1996, as
amended, with its President (the Employment Agreement). Base compensation under
the Employment Agreement is $225,000 per year, subject to increase by the Board
of Directors. In addition, the Board of Directors may award an annual bonus to
the President in an amount of up to 30% of his base salary based on the
attainment of certain benchmarks. The Company may terminate the President's
employment at any time and for any reason; provided that, if his employment is
terminated without cause (as defined in such agreement) or as a result of his
becoming permanently disabled, the Company must pay the President a severance
amount determined in accordance with a formula contained in the agreement.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Orthopaedic Associates of Bethlehem, Inc.
We have audited the accompanying balance sheets of Orthopaedic Associates of
Bethlehem, Inc. (OAB) as of December 31, 1994 and 1995 and June 30, 1996 and the
related statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1994 and 1995 and for the six months ended June 30,
1996. These financial statements are the responsibility of OAB'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 OAB at December 31, 1994 and
1995 and June 30, 1996 and the results of its operations and cash flows for the
years ended December 31, 1994 and 1995, and the six months ended June 30, 1996
in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Philadelphia, Pennsylvania
May 28, 1997, except for Note 13,
as to which the date is August 14, 1997
F-25
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................................................... $ 47,854 $ 3,698 $119,572
Accounts receivable, net................................................... 366,831 377,416 412,186
Other current assets....................................................... 131,411 160,354 110,934
-------- -------- --------
Total current assets......................................................... 546,096 541,468 642,692
Deferred tax asset........................................................... 15,000 54,100 16,800
Furniture and equipment, net................................................. 172,391 153,908 132,963
Other assets................................................................. 190,014 190,014 190,014
-------- -------- --------
Total assets................................................................. $923,501 $939,490 $982,469
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable............................................................... $ -- $173,000 $203,000
Capital lease obligations, current portion................................. 33,989 36,332 37,101
Accounts payable........................................................... 29,027 66,158 48,780
Accrued expenses........................................................... 125,383 44,684 45,166
Deferred tax liability, current portion.................................... 135,000 171,200 169,000
-------- -------- --------
Total current liabilities.................................................... 323,399 491,374 503,047
Capital lease obligation, noncurrent portion................................. 114,225 78,068 59,591
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 30,000 shares authorized; 4,166 shares
issued.................................................................. 4,166 4,166 4,166
Additional paid-in capital................................................. 112,079 112,079 112,079
Retained earnings.......................................................... 369,632 375,364 425,147
Treasury stock, 1996 and 1995--833 shares at cost.......................... -- (121,561) (121,561)
-------- -------- --------
Total stockholders' equity................................................... 485,877 370,048 419,831
-------- -------- --------
Total liabilities and stockholders' equity................................... $923,501 $939,490 $982,469
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-26
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED
1994 1995 JUNE 30, 1996
---------- ---------- -------------
<S> <C> <C> <C>
Net patient service revenue............................................ $2,527,957 $2,992,950 $ 1,540,205
Other income........................................................... 34,342 47,372 87,779
---------- ---------- -------------
Total revenues......................................................... 2,562,299 3,040,322 1,627,984
Costs and expenses:
Physician and other provider services................................ 1,553,725 1,639,675 720,358
Medical support services............................................. 893,595 1,012,713 577,503
Depreciation and amortization........................................ 42,183 42,049 20,945
Interest............................................................. 11,122 11,848 11,767
Rent................................................................. 28,575 39,353 66,602
Rent-related party................................................... 291,852 291,852 145,926
---------- ---------- -------------
Total costs and expenses............................................... 2,821,052 3,037,490 1,543,101
---------- ---------- -------------
(Loss) income before income taxes...................................... (258,753) 2,832 84,883
Income tax benefit (expense)........................................... 100,900 2,900 (35,100)
---------- ---------- -------------
Net (loss) income...................................................... $ (157,853) $ 5,732 $ 49,783
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......................... $3,333 $ 49,167 $ 527,485 $ -- $ 579,985
Issuance of common stock.......................... 833 62,912 -- -- 63,745
Net loss.......................................... -- -- (157,853) -- (157,853)
------ ---------- --------- --------- ---------
Balance, December 31, 1994.......................... 4,166 112,079 369,632 -- 485,877
Net income........................................ -- -- 5,732 -- 5,732
Treasury stock acquired........................... -- -- -- (121,561) (121,561)
------ ---------- --------- --------- ---------
Balance, December 31, 1995.......................... 4,166 112,079 375,364 (121,561) 370,048
Net income........................................ -- -- 49,783 -- 49,783
------ ---------- --------- --------- ---------
Balance, June 30, 1996.............................. $4,166 $ 112,079 $ 425,147 $(121,561) $ 419,831
------ ---------- --------- --------- ---------
------ ---------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-28
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
---------------------- JUNE 30,
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.......................................................... $(157,853) $ 5,732 $ 49,783
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization............................................ 42,183 42,049 20,945
Loss on disposal of equipment............................................ 5,115 -- --
Provision for deferred taxes............................................. (100,900) (2,900) 35,100
Changes in operating assets and liabilities:
Receivables........................................................... 78,537 (10,585) (34,770)
Other assets.......................................................... 7,357 (28,943) 49,420
Accounts payable...................................................... 17,787 37,131 (17,378)
Accrued expenses...................................................... 76,954 (80,699) 482
--------- --------- ----------
Net cash (used in) provided by operating activities........................ (30,820) (38,215) 103,582
INVESTING ACTIVITIES:
Purchases of furniture and equipment, net.................................. (23,898) (23,566) --
Collection of advances to shareholders..................................... 68,950 -- --
--------- --------- ----------
Net cash provided by (used in) investing activities........................ 45,052 (23,566) --
FINANCING ACTIVITIES:
Issuance of common stock................................................... 63,745 -- --
Purchase of treasury stock................................................. -- (121,561) --
Borrowings on line of credit............................................... -- 173,000 30,000
Payment on capital lease................................................... (31,786) (33,814) (17,708)
--------- --------- ----------
Net cash provided by financing activities.................................. 31,959 17,625 12,292
--------- --------- ----------
Net increase (decrease) in cash............................................ 46,191 (44,156) 115,874
Cash, beginning of period.................................................. 1,663 47,854 3,698
--------- --------- ----------
Cash, end of period........................................................ $ 47,854 $ 3,698 $119,572
--------- --------- ----------
--------- --------- ----------
SUPPLEMENTARY DISCLOSURES:
Interest paid.............................................................. $ 11,122 $ 11,848 $ 11,767
Income taxes paid.......................................................... $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-29
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
AND JUNE 30, 1996
1. DESCRIPTION OF THE BUSINESS
Orthopaedic Associates of Bethlehem, Inc. (OAB) is an orthopedic physician
practice which serves the Bethlehem, Pennsylvania area. OAB was organized as a
professional corporation under the laws of the Commonwealth of Pennsylvania (See
Note 13). All of OAB's issued and outstanding stock are owned by its practicing
orthopedic physicians.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Patient Service Revenue
Net patient service revenue is recorded as services are rendered at
established rates net of provision for bad debts and contractual adjustments.
Contractual adjustments arise due to the terms of certain reimbursement and
managed care contracts. Such adjustments represent the difference between
charges at established rates and estimated amounts to be reimbursed to OAB and
are recognized when the services are rendered.
Revenues from the Medicare and Medicaid programs accounted for
approximately 35% and 5%, respectively, of OAB's net operating revenues. Laws
and regulations governing the Medicare and Medicaid programs are complex and
subject to interpretation. OAB believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs.
Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated depreciation,
and are depreciated using the straight-line method over the estimated useful
lives of the assets, ranging from 5 to 7 years. Equipment under capital lease
obligations is amortized on the straight-line method over the shorter period of
the lease term or the estimated useful life of the equipment. Such amortization
is included in depreciation and amortization in the financial statements.
Concentration of Credit Risk
OAB grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physician and other health care providers.
Medical support services costs include all indirect costs associated with
the management and operations of the practice and all direct costs associated
with medical supplies and pharmaceuticals expenses.
F-30
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable................................................ $619,647 $671,558 $717,865
Less allowances for contractual adjustments and uncollectibles..... 252,816 294,142 305,679
-------- -------- --------
Accounts receivable, net........................................... $366,831 $377,416 $412,186
-------- -------- --------
-------- -------- --------
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Furniture and equipment............................................ $229,438 $253,003 $253,003
Furniture and equipment--capital leases............................ 180,000 180,000 180,000
-------- -------- --------
409,438 433,003 433,003
Less: Accumulated depreciation..................................... 201,047 207,095 210,040
Accumulated amortization...................................... 36,000 72,000 90,000
-------- -------- --------
$172,391 $153,908 $132,963
-------- -------- --------
-------- -------- --------
</TABLE>
5. OTHER ASSETS
Other assets consist of the amount advanced by OAB to three shareholders
for the purchase of life insurance. OAB is not the beneficiary of these
policies; however, the proceeds have been assigned to OAB to the extent of these
premiums paid. No interest is accrued on these loans.
6. NOTES PAYABLE
OAB has an unsecured $250,000 line of credit arrangement with a bank. At
June 30, 1996 and December 31, 1995, $203,000 and $173,000, respectively, was
outstanding under the line of credit. Interest is payable monthly at a variable
rate of interest (8.25% and 8.50% at June 30, 1996 and December 31, 1995,
respectively). Principal is payable upon demand. Repayment of the line of credit
is unconditionally guaranteed by the stockholders of OAB.
7. CAPITAL LEASE
OAB has a capital lease obligation, collateralized by the leased equipment,
with scheduled payments as of June 30, 1996 as follows:
<TABLE>
<S> <C>
1996........................................................................................ $21,024
1997........................................................................................ 42,048
1998........................................................................................ 42,048
---------
105,120
Less amount representing interest........................................................... (8,428)
---------
$96,692
---------
---------
</TABLE>
F-31
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED PARTY TRANSACTIONS
A. Lease Agreement
In June 1989, OAB entered into a ten-year sublease lease agreement with
Shoenersville Road Realty for the rental of office space. Under the lease
agreement OAB has the option to lease the office space for an additional term of
ten years. Rental payments required under the lease are subject to a fair market
rental value adjustment. The partners of Shoenersville Road Realty are also the
stockholders of OAB. Rental expense totaled $145,926 for the six months ended
June 30, 1996 and $291,852 for both of the years ended December 31, 1995 and
1994.
Future minimum rental payments under this operating lease as of June 30,
1996 are as follows:
<TABLE>
<S> <C>
1996........................................................................................ $145,926
1997........................................................................................ 291,852
1998........................................................................................ 291,852
1999........................................................................................ 145,926
---------
$875,556
---------
---------
</TABLE>
B. Stock Redemption
In 1995, OAB agreed to pay one of its physician stockholders $121,561 for
833 shares of common stock. This redemption represented approximately 20% of the
then outstanding shares and 20% of the stockholders' equity at the date of the
redemption.
9. INCOME TAXES
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax liabilities:
Cash to accrual adjustment............................................... $ 263,100 $ 269,700 $ 254,400
--------- --------- ---------
--------- --------- ---------
Deferred tax assets:
Net operating loss carryforwards......................................... $ 26,500 $ 66,700 $ 29,400
Cash to accrual adjustment............................................... 116,600 85,900 72,800
--------- --------- ---------
Total deferred tax assets.................................................. $ 143,100 $ 152,600 $ 102,200
--------- --------- ---------
--------- --------- ---------
Net deferred taxes......................................................... $(120,000) $(117,100) $(152,200)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of income tax (expense) benefit attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------ ENDED
1994 1995 JUNE 30, 1996
-------- ------ -------------
<S> <C> <C> <C>
Current............................................................ $ -- $ -- $ --
Deferred........................................................... 100,900 2,900 (35,100)
-------- ------ -------------
Income tax (expense) benefit....................................... $100,900 $2,900 $ (35,100)
-------- ------ -------------
-------- ------ -------------
</TABLE>
OAB's tax rate differs from the expected tax rate due principally to state
income taxes. State income tax (expense) benefits were $11,000, $4,400 and
$(5,400) for the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996, respectively.
F-32
<PAGE>
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
For the six months ended June 30, 1996 OAB has estimated income tax
(expense) benefit and net deferred taxes assuming that they have utilized
$78,000 and $65,000 in operating loss carryforwards for federal and state income
reporting purposes. At June 30, 1996 OAB has available federal and state
operating loss carryforwards of $73,000 and $60,000, respectively, which expire
in 2010 and 1998, respectively.
10. BENEFIT PLANS
OAB sponsors a defined contribution profit-sharing plan covering all
employees who meet prescribed eligibility requirements. Expenses amounted to
$165,000 and $129,000 in 1995 and 1994, respectively. This plan was terminated
effective December 31, 1995.
Effective January 1, 1996, OAB established a 401(k) plan for which OAB
matches a percentage of employee contributions. Expenses for the 401(k) plan
amounted to $25,818 for the six months ended June 30, 1996.
11. CONTINGENCIES
OAB is involved in various legal proceedings in the ordinary course of
business. OAB does not believe that the disposition of such legal proceedings
and disputes will have a material adverse effect on the financial position and
results of operation of OAB.
12. MALPRACTICE INSURANCE
OAB maintains professional liability coverage on behalf of its physicians
on an occurrence basis.
13. SUBSEQUENT EVENTS
Effective July 1, 1996, the physician stockholders of OAB transferred
substantially all operations of OAB to Lehigh Valley Bone, Muscle and Joint
Group, LLC (LVBMJ). LVBMJ is a limited liability company owned by the physician
stockholders of OAB, formed specifically to operate the transferred medical
practice. Additionally, on July 1, 1996, OAB changed its legal structure from a
professional corporation to a general purpose corporation and continues to
perform limited medical advisory services.
Effective July 1, 1996, the Company entered into an Affiliation Transaction
with LVBMJ. Under the terms of the Amended and Restated Management Services
Agreement between LVBMJ and the Company effective July 1, 1997 (the LVBMJ
Management Services Agreement), BMJ Medical Management, Inc. (BMJ) issued an
aggregate of 518,031 shares of common stock, recorded at $0.10 per share,
representing consideration of $51,803 and options to purchase 30,000 shares of
common stock at an exercise price of $0.25 per share.
On September 5, 1997, OAB sold to BMJ (a related party) its furniture and
equipment and transferred its rights and interest under equipment and office
space leases for $254,000. Proceeds of the sale were used to repay OAB's line of
credit. Based on the collection of accounts receivable balances and the
realization of other assets available, OAB has discharged substantially all its
other remaining liabilities. OAB has distributed substantially all of its
remaining stockholders' equity in the form of dividends and compensation.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Southern California Orthopedic Institute Medical Group,
a California General Partnership
We have audited the accompanying balance sheets of Southern California
Orthopedic Institute Medical Group, a California General Partnership (SCOI) as
of December 31, 1995 and October 31, 1996, and the related statements of
operations and changes in partners' capital, and cash flows for each of the two
years in the period ended December 31, 1995 and for the ten months ended October
31, 1996. These financial statements are the responsibility of SCOI'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 SCOI at December 31, 1995 and
October 31, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995 and for the ten months
ended October 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG, LLP
Los Angeles, California
May 23, 1997
F-34
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 251,345 $ 720,158
Patient accounts receivable, net................................................... 4,558,438 4,778,825
Due from partners and affiliates, net.............................................. 41,231 --
Prepaid expenses and other current assets.......................................... 140,523 266,826
------------ -----------
Total current assets................................................................. 4,991,537 5,765,809
Furniture, fixtures and equipment, net 709,814 586,997
Other assets......................................................................... 337,038 310,080
------------ -----------
Total assets......................................................................... $6,038,389 $ 6,662,886
------------ -----------
------------ -----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................................................... $ 120,398 $ 125,022
Due to partners and affiliates, net................................................ -- 284,773
Accrued expenses and other current liabilities..................................... 287,204 284,229
Current portion of long-term debt.................................................. 228,627 --
Deferred income.................................................................... 85,090 85,090
------------ -----------
Total current liabilities............................................................ 721,319 779,114
Deferred income...................................................................... 219,820 134,733
Accrued malpractice insurance claims................................................. 1,500,000 1,917,000
------------ -----------
2,441,139 2,830,847
Commitments and contingencies
Partners' capital.................................................................... 3,597,250 3,832,039
------------ -----------
Total liabilities and partners' capital.............................................. $6,038,389 $ 6,662,886
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-35
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- OCTOBER 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net patient service revenue......................................... $19,230,632 $20,025,718 $17,907,084
Other income........................................................ 149,318 153,923 162,512
----------- ----------- -----------
Total revenues...................................................... 19,379,950 20,179,641 18,069,596
Costs and expenses:
Physician and other provider services............................. 10,008,410 11,307,996 9,069,544
Medical support services.......................................... 7,406,706 7,621,997 6,846,899
Depreciation...................................................... 313,595 308,826 253,500
Interest.......................................................... 70,511 39,126 8,462
Rent.............................................................. 275,077 261,906 204,511
Rent--related party............................................... 1,615,678 1,666,243 1,451,891
----------- ----------- -----------
Total costs and expenses............................................ 19,689,977 21,206,094 17,834,807
----------- ----------- -----------
Net (loss) income................................................... (310,027) (1,026,453) 234,789
Beginning partners' capital......................................... 4,739,090 4,429,063 3,597,250
Capital contributions............................................... -- 194,640 --
----------- ----------- -----------
Ending partners' capital............................................ $ 4,429,063 $ 3,597,250 $ 3,832,039
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-36
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- OCTOBER 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................................... $ (310,027) $(1,026,453) $ 234,789
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation...................................................... 313,595 308,826 253,500
Amortization of deferred income................................... -- (93,432) (85,087)
Changes in operating assets and liabilities:
Patient accounts receivable.................................... (142,784) 287,667 (220,387)
Prepaid expenses and other assets.............................. (58,197) (17,215) (99,345)
Accounts payable............................................... 1,262 (85,930) 4,624
Accrued expenses and other current liabilities................. 441,688 518,480 414,025
----------- ----------- -----------
Net cash provided by (used in) operating activities................. 245,537 (108,057) 502,119
INVESTING ACTIVITIES:
Changes in due to/from partners and affiliates...................... 166,056 (171,832) 326,004
Purchases of furniture, fixtures and equipment...................... (85,220) (39,331) (130,683)
----------- ----------- -----------
Net cash provided by (used in) investing activities................. 80,836 (211,163) (195,321)
FINANCING ACTIVITIES:
Payments on long-term debt.......................................... (287,386) (316,503) (228,627)
Proceeds received for covenant not to compete....................... -- 398,342 --
Capital contributions............................................... -- 194,640 --
Net cash (used in) provided by financing activities................. (287,386) 276,479 (228,627)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................ 38,987 (42,741) 468,813
Cash and cash equivalents at beginning of period.................... 255,099 294,086 251,345
----------- ----------- -----------
Cash and cash equivalents at end of period.......................... $ 294,086 $ 251,345 $ 720,158
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-37
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
Southern California Orthopedic Institute Medical Group, a California
General Partnership (SCOI), is an orthopedic physician practice which serves
patients in Southern California. SCOI is organized as a general partnership
comprising individuals and professional corporations under the laws of the State
of California.
On November 1, 1996, SCOI agreed in principle to sell substantially all of
its assets (primarily patient accounts receivable and furniture, fixtures and
equipment) to BMJ Medical Management, Inc. (BMJ) and concurrent therewith
entered into a management services agreement (see Note 12 'Subsequent Event').
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Net patient service revenue consists of fees for services provided by the
medical group under contracts with health maintenance organizations and for
services rendered to patients covered under Medicare, Medi-Cal and private
insurance. Revenue is reported on the accrual basis in the period in which
services are provided at the amounts expected to be realized from Medicare,
Medi-Cal, managed care and other insurance programs.
Laws and regulations governing the Medicare and Medi-Cal programs are
complex and subject to interpretation. SCOI believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medi-Cal programs.
Costs and Expenses
Physician and other provider services costs primarily comprise compensation
and fees paid to physicians and other health care providers and include medical
supplies and pharmaceutical expenses.
Medical support services costs include all indirect costs associated with
the management and operations of the practice.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, including leasehold improvements, are
stated at cost, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Health and Dental Insurance
SCOI maintains a self-insured medical and dental plan for its employees.
Unpaid claims accruals, including claims incurred but not reported, are based on
the estimated ultimate cost of settlement, including claim settlement expense,
in accordance with SCOI's past experience. SCOI has a stop-loss insurance
contract to cover employee health claims in excess of an annual aggregate limit
based on monthly aggregate factors determined by the insurance company and the
number of employees covered ($430,062; $349,894, and $250,304 for the years
ended December 31, 1994 and 1995 and the ten months ended October 31, 1996,
respectively). Effective October 1, 1996, SCOI purchased commercial coverage for
employee health claims. At December 31, 1995 and October 31, 1996, SCOI did not
have significant claims outstanding.
F-38
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash Equivalents
Cash equivalents include money market funds and certificates of deposit
with a maturity of three months or less when purchased.
Allocations to Partners
Income and distributions to physician partners are made based upon a
formula as defined in Schedule 4.1 of the SCOI partnership agreement. The
formula generally allocates income based on net cash collections attributable to
each physician partner, net of allocated and direct expenses. Notwithstanding
the formula, physician partners receive a guaranteed minimum based on a
percentage of total collections. Distributions to partners totaling $7,575,129,
$9,745,019 and $7,692,077 for the two years ended December 31, 1995 and the ten
months ended October 31, 1996, respectively, were included in physician and
other provider services in the statements of operations and changes in partners'
capital.
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.
Financial Instruments
The carrying amounts of financial instruments as reported in the
accompanying balance sheets approximate their fair value primarily due to the
short-term nature of such financial instruments.
Concentrations of Credit Risk
Financial instruments which potentially subject SCOI to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. Concentration of credit risk with respect to accounts receivable are
limited, except with respect to programs under contract with the federal and
state governments, due to the large number of payors comprising SCOI's customer
base. As of October 31, 1996, SCOI had no significant concentrations of credit
risk.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Gross patient accounts receivable.......................................... $7,723,438 $ 8,099,825
Less allowances for contractual adjustments and uncollectible accounts..... 3,165,000 3,321,000
------------ -----------
$4,558,438 $ 4,778,825
------------ -----------
------------ -----------
</TABLE>
F-39
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Furniture, fixtures and equipment.......................................... $2,193,237 $ 2,137,488
Less accumulated depreciation.............................................. 1,483,423 1,550,491
------------ -----------
$ 709,814 $ 586,997
------------ -----------
------------ -----------
</TABLE>
5. LONG-TERM DEBT
Long-term debt comprises two loans for the purchase of furniture, fixtures
and equipment. The loans bear interest at 9.69% and are payable in 60 monthly
installments of $29,627 with final maturity in August 1996. The loans were
secured by SCOI's property and equipment.
Interest costs paid during the years ended December 31, 1994 and 1995 and
the ten months ended October 31, 1996, totaled $70,511, $39,126, and $8,462,
respectively.
6. LEASE COMMITMENTS
SCOI leases various equipment, clinic and office space under non-cancelable
operating leases expiring between 1997 and 2006 with related and independent
parties (see Note 11 'Related Parties'). Certain leases contain renewal options
and annual escalation clauses. Obligations under equipment and facility leases
with unrelated parties were assumed by BMJ in connection with the sale of SCOI's
assets on November 1, 1996 (see Note 12 'Subsequent Event'). At October 31,
1996, future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997..................................................................................... $1,805,636
1998..................................................................................... 1,790,849
1999..................................................................................... 1,718,358
2000..................................................................................... 1,599,342
2001..................................................................................... 1,599,342
Therafter................................................................................ 8,297,649
------------
Total minimum lease payments............................................................. $16,811,176
------------
------------
</TABLE>
7. INCOME TAXES
SCOI is organized as a partnership under the Internal Revenue Code and
applicable California Franchise Tax Code. As a result, in lieu of corporate
income tax, SCOI's taxable income is passed through to the partners and taxed at
the partner level. Accordingly, no provision or liability for income tax has
been reflected in the financial statements.
8. BENEFIT PLANS
SCOI sponsors a defined contribution plan (the Plan) for employees who meet
the minimum length of service and age requirements. The Plan was adopted on
January 1, 1996. Eligible employees may contribute up to 19% of their
compensation in the Plan year. SCOI may, at its discretion, match a portion of
employee contributions up to 4% of an employee's compensation. SCOI is
responsible for the administration of the Plan as the Plan administrator and
trustee. SCOI's contributions totaled $9,831 for the ten months ended October
1996.
F-40
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. CONTINGENCIES
SCOI is involved in various legal proceedings in the ordinary course of
business. SCOI does not believe that the disposition of such legal proceedings
and disputes will have a material adverse effect on the financial position and
results of operations of SCOI.
SCOI procures professional liability coverage on behalf of its physicians
on a claims made basis up to $1,000,000 per claim and $3,000,000 annual
aggregate per physician. The insurance contracts specify that coverage is
available only during the term of each insurance contract and cover only those
claims reported while the policies are in force. An estimate of losses for
incurred but unreported claims is recorded based upon historical experience.
Management of SCOI intends to renew the existing claims made policy annually and
expects to be able to obtain such coverage. If coverage is not renewed, SCOI
intends to purchase extended reporting period endorsements to provide
professional liability coverage for losses incurred prior to, but reported
subsequent to, the termination of the claims made policies. SCOI's policy has
been renewed through December 31, 1997.
10. DEFERRED INCOME
In July 1992, SCOI sold its rehabilitation and therapy business to
HealthSouth Rehabilitation Center of Van Nuys Limited Partnership (HealthSouth)
for cash. In connection with the sale, the Partnership and its physicians
entered into a covenant-not-to-compete for seven years ending July 31, 1999 for
$700,000, payable in 84 equal monthly installments. Consideration received is
recorded as revenue over the term of the agreement. On January 20, 1995,
HealthSouth elected to prepay its remaining obligations under the covenant
totaling $390,000. This amount has been recorded as deferred income on SCOI's
balance sheets and is amortized over the remaining term of the covenant.
11. RELATED PARTIES
Due to partners and affiliates includes undistributed guaranteed payments
totaling $162,699 and $475,000 at December 31, 1995 and October 31, 1996,
respectively. SCOI has notes receivable from several partners for capital
contributions. Such notes bear interest at prime rate plus one percent and
totaled $191,618 and $102,810, at December 31, 1995 and October 31, 1996,
respectively. SCOI also made advances to the Center for Orthopedic Surgery, Inc.
(COSI), an affiliated organization owned by certain physician partners. COSI is
an outpatient surgery center due to begin operations in May 1997. Amounts
outstanding at December 31, 1995 and October 31, 1996 were $12,312 and $87,417,
respectively.
SCOI leases its main facility and office space under a non-cancelable
operating lease from FDP Development, Inc. (FDP), an affiliate owned by the
partners of SCOI. The lease expires in July 2006 and provides for annual
adjustments based on the increases in the Consumer Price Index. Rental costs
paid to FDP totaled $1,615,678, $1,666,243, and $1,451,891, for the years ended
December 31, 1994 and 1995, and the ten months ended October 31, 1996,
respectively. SCOI maintains a security deposit with FDP in the amount of
$300,000 at December 31, 1995 and October 31, 1996.
12. SUBSEQUENT EVENTS
On November 1, 1996, SCOI sold its patient accounts receivable balances,
furniture, fixtures and equipment, and other minor assets to BMJ, a Delaware
corporation engaged in operating and financing physician groups focused
exclusively on musculoskeletal disease management. The carrying value of the
patient accounts receivable balances and property and equipment was $4,778,825
and $583,755, respectively. BMJ also assumed certain equipment and office lease
obligations with total future minimum lease payments of $553,460 at November 1,
1996, which are in turn subleased to SCOI. Total consideration for the sale was
$5,930,897 based on a preliminary estimate of the carrying values of the assets
sold at October 31, 1996, and is subject to purchase
F-41
<PAGE>
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP,
A CALIFORNIA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS--(CONTINUED)
price adjustments. $3,706,897 (the sales price of property and equipment and 50%
of the estimated carrying value of the receivable balances) was received in
cash. The balance of the consideration is based on actual collections of the
receivable balances and is due upon the earlier of an initial offering of BMJ's
common stock or November 1, 1997. SCOI realized a gain of $858,165 on the sale
of property and equipment.
Concurrent with the sale, SCOI entered into a 40 year management services
agreement (the Agreement) with BMJ on November 1, 1996. After the initial term,
the Agreement renews automatically for successive additional five year terms,
unless terminated by either party with 6 months written notice. As an incentive
for entering into the Agreement, the physician owners of the Company received
4,000,000 common shares in BMJ with an estimated fair value of $1,400,000. At
the earlier of an initial public offering of BMJ's common shares or November 1,
1998, the number of shares will be adjusted in accordance with a prescribed
formula based in part on SCOI's net cash collections in relation to other
medical groups managed by BMJ. Under the Agreement, BMJ will provide financial
management, information systems, marketing and public relations, risk
management, and administrative support for claims processing, utilization review
and quality control services. As compensation for these services, SCOI will
reimburse BMJ for the costs of such services in addition to a management fee
based on a percentage of collections of patient revenues generated after
November 1, 1996 (reduced by the medical equipment master lease payments) and
66-2/3% of professional practice cost savings as defined in the Agreement.
F-42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
South Texas Spinal Clinic, P.A.
We have audited the accompanying balance sheets of South Texas Spinal Clinic,
P.A. (STSC) as of December 31, 1994 and 1995 and October 31, 1996, and the
related statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1994 and 1995 and the ten months ended October 31,
1996. These financial statements are the responsibility of STSC'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 STSC at December 31, 1994 and
1995 and the ten months ended October 31, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
San Antonio, Texas
June 5, 1997
F-43
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- OCTOBER 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 56,205 $ 41,642 $ 430,452
Accounts receivable, net.......................................... 2,497,993 2,535,945 1,688,980
Prepaid expenses and other current assets......................... 18,680 23,705 21,809
----------- ----------- -----------
Total current assets................................................ 2,572,878 2,601,292 2,141,241
Furniture, fixtures, and equipment, net............................. 554,099 476,263 416,047
Other assets........................................................ 31,016 55,200 32,925
----------- ----------- -----------
Total assets........................................................ $ 3,157,993 $ 3,132,755 $ 2,590,213
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 125,000 $ 125,000 $ 104,166
Capital lease obligation, current portion......................... -- 3,153 3,464
Accounts payable.................................................. 132,733 91,904 515,287
Accounts payable--related party................................... -- 5,372 --
Accrued expenses and other current liabilities.................... 11,531 13,312 17,490
----------- ----------- -----------
Total current liabilities........................................... 269,264 238,741 640,407
Long-term debt, less current portion................................ 208,333 83,333 --
Capital lease obligation, less current portion...................... -- 6,442 3,530
Stockholders' equity:
Common stock, no par; 100,000 shares authorized; 2,500 shares
issued and outstanding......................................... 1,000 1,000 1,000
Retained earnings................................................. 2,679,396 2,803,239 1,945,276
----------- ----------- -----------
Total stockholders' equity.......................................... 2,680,396 2,804,239 1,946,276
----------- ----------- -----------
Total liabilities and stockholders' equity.......................... $ 3,157,993 $ 3,132,755 $ 2,590,213
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-44
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 31,
------------------------ ------------
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Operating revenue, net..................................... $6,973,761 $7,748,203 $6,027,164
Costs and expenses:
Physician and other provider services.................... 4,681,361 5,578,510 5,257,398
Medical support services................................. 971,812 1,060,037 1,073,446
Depreciation............................................. 88,065 90,012 74,914
Interest................................................. 36,956 27,529 13,375
Rent..................................................... 125,770 150,168 118,491
Rent-related party....................................... 711,892 718,104 347,503
---------- ---------- ------------
Total costs and expenses................................... 6,615,856 7,624,360 6,885,127
---------- ---------- ------------
Net income (loss).......................................... $ 357,905 $ 123,843 $ (857,963)
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes.
F-45
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER ADDITIONAL RETAINED
OF SHARES AMOUNT PAID-IN EARNINGS TOTAL
--------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993......................... 2,500 $1,000 $ -- $2,321,491 $2,322,491
Repurchase and retirement of common stock.......... -- -- -- -- --
Issuance of common stock........................... -- -- -- -- --
Net income......................................... -- -- -- 357,905 357,905
--------- ------ ---------- ---------- ----------
Balance at December 31, 1994......................... 2,500 1,000 -- 2,679,396 2,680,396
Repurchase and retirement of common stock.......... -- -- -- -- --
Issuance of common stock........................... -- -- -- -- --
Net income......................................... -- -- -- 123,843 123,843
--------- ------ ---------- ---------- ----------
Balance at December 31, 1995......................... 2,500 1,000 -- 2,803,239 2,804,239
Repurchase and retirement of common stock.......... -- -- -- -- --
Issuance of common stock........................... -- -- -- -- --
Net loss........................................... -- -- -- (857,963) (857,963)
--------- ------ ---------- ---------- ----------
Balance at October 31, 1996.......................... 2,500 $1,000 $ -- $1,945,276 $1,946,276
--------- ------ ---------- ---------- ----------
--------- ------ ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-46
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 31,
---------------------- ------------
1994 1995 1996
--------- --------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ 357,905 $ 123,843 $ (857,963)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation........................................................... 88,065 90,012 74,914
Changes in operating assets and liabilities:
Accounts receivable................................................. (214,029) (37,952) 846,965
Deferred charges and other assets................................... (52,734) (29,209) 24,171
Accounts payable.................................................... 96,391 (40,829) 423,383
Accrued expenses and other liabilities.............................. 4,363 7,153 (1,194)
--------- --------- ------------
Net cash provided by operating activities................................ 279,961 113,018 510,276
INVESTING ACTIVITIES
Purchases of property and equipment...................................... (5,608) (12,176) (14,698)
Property and equipment under capital lease............................... -- 9,595 (2,601)
--------- --------- ------------
Net cash used in investing activities.................................... (5,608) (2,581) (17,299)
FINANCING ACTIVITY
Payments on notes payable to banks....................................... (245,000) (125,000) (104,167)
--------- --------- ------------
Net cash used in financing activity...................................... (245,000) (125,000) (104,167)
--------- --------- ------------
Net increase (decrease) in cash.......................................... 29,353 (14,563) 388,810
Cash and cash equivalents at beginning of year........................... 26,852 56,205 41,642
--------- --------- ------------
Cash and cash equivalents at end of year................................. $ 56,205 $ 41,642 $ 430,452
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes.
F-47
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
TEN MONTHS ENDED OCTOBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
South Texas Spinal Clinic, P.A. (STSC) is an orthopedic physician practice
which services San Antonio, Texas, and the surrounding communities. STSC is
organized as a professional corporation (S corporation) under the laws of the
state of Texas.
Effective November 1, 1996, STSC entered into an agreement to sell
substantially all of the assets of STSC and enter into a management services
agreement with BMJ Medical Management, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.
Laws and regulations governing the Medicare program are complex and subject
to interpretation. STSC believes that it is in compliance with all applicable
laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare program.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five (5) to twenty (20)
years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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.
Presentation of Expenses
Physician and other provider services costs are composed primarily of
compensation and fees paid to physician and other health care providers and
include medical supplies and pharmaceutical expenses.
Medical support services costs include all indirect costs associated with
the management and operations of the practice.
F-48
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
------------------------ -----------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Gross patient accounts receivable........................... $3,122,491 $3,169,931 $ 2,711,718
Less allowances for contractual adjustments and
uncollectibles............................................ 624,498 633,986 1,022,738
---------- ---------- -----------
$2,497,993 $2,535,945 $ 1,688,980
---------- ---------- -----------
---------- ---------- -----------
Net revenue consists of the following:
<CAPTION>
DECEMBER 31, OCTOBER 31,
------------------------ -----------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Gross patient revenue....................................... $8,717,201 $9,685,260 $10,045,273
Less contractual adjustments and uncollectibles............. 1,743,440 1,937,052 4,018,109
---------- ---------- -----------
$6,973,761 $7,748,208 $ 6,027,164
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
4. FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Furniture, fixtures, and equipment................................. $674,272 $676,117 $ 690,815
Equipment under capital leases..................................... -- 10,330 10,330
-------- -------- -----------
674,272 686,447 701,145
Less accumulated depreciation and amortization..................... 120,173 210,184 285,098
-------- -------- -----------
$554,099 $476,263 $ 416,047
-------- -------- -----------
-------- -------- -----------
</TABLE>
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Note payable to bank with maturity date of August 26, 1997, with a
variable interest rate based upon the Prime rate as described in
the note agreement at each monthly payment date. (effective rate
of 8.5%, 9.5% and 9.25%, at December 31, 1994 and 1995 and
October 31, 1996, respectively).................................. $333,333 $208,333 $ 104,166
Less current maturities............................................ 125,000 125,000 104,166
-------- -------- -----------
$208,333 $ 83,333 $ --
-------- -------- -----------
-------- -------- -----------
</TABLE>
The note payable to the bank is collateralized by the assets of STSC. The
note payable requires STSC to comply with certain covenants. Actual interest
payments were $36,956, $27,246, and $12,583 during the years ended December 31,
1994, 1995, and the ten months ended October 31, 1996, respectively.
6. LEASE COMMITMENTS
STSC leases various equipment, clinic and office space, and office
buildings under operating leases and certain computer and medical equipment
under capital leases. Rent expenses charged to operations totaled approximately
$837,662, $868,272, and $460,623 during the years ended December 31, 1994, 1995,
and the ten months ended October 31, 1996, respectively.
F-49
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASE COMMITMENTS--(CONTINUED)
The lease commitments for the two months ending December 31, 1996 and for
the next five years ending December 31 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LEASES CAPITAL LEASES
LEASES PRINCIPAL INTEREST
--------- -------------- --------------
<S> <C> <C> <C>
1996......................................................... $ 77,778 $ 550 $129
1997......................................................... 471,963 3,526 547
1998......................................................... 442,126 2,916 138
1999......................................................... 419,015 -- --
2000......................................................... 402,237 -- --
2001......................................................... 388,524 -- --
</TABLE>
7. INCOME TAXES
STSC has historically not incurred significant tax liabilities for federal
income taxes. STSC has been organized as an S corporation and, accordingly,
income tax liabilities are the responsibility of the respective owners.
8. BENEFIT PLANS
STSC maintains a defined contribution plan for employees who meet the
minimum length of service and age requirements. Under the plan, STSC makes
contributions equal to 50% up to a maximum of 5% of the employee's contribution.
STSC is responsible for the administration of the plan as the plan administrator
and trustee. STSC's contributions totaled $216,660, $21,329, and $15,177 in the
years ended December 31, 1994, 1995, and the ten-month period ended October 31,
1996, respectively.
9. CONTINGENCIES
STSC is involved in various legal proceedings in the ordinary course of
business. STSC does not believe that the disposition of such legal proceedings
and disputes will have a material adverse effect on the financial position and
results of operations of STSC.
STSC procures professional liability coverage on behalf of its physicians
on a claims-made basis. The insurance contracts specify that coverage is
available only during the term of each insurance contract. Management of STSC
intends to renew the existing claims-made policy annually and expects to be able
to obtain such coverage. Whenever coverage is not renewed, STSC purchases an
extended reporting period endorsement to provide professional liability coverage
for losses incurred prior to, but reported subsequent to, the termination of the
claims-made policies.
10. RELATED PARTY TRANSACTIONS
STSC leases office space from Meadows Enterprises, an entity under common
ownership. Monthly rental expense is $29,498. Rental expenses for the periods
ending December 31, 1994, December 31, 1995, and October 31, 1996 were $294,842,
$361,104, and $311,653, respectively.
Meadows, Dennis, Denno, G.P., an entity under common ownership, provides
certain furniture, fixtures, and equipment for use in STSC's operations. STSC
pays rents to Meadows, Dennis, Denno, G.P. in excess of fair market value. Total
payments made during the years ended December 31, 1994, 1995, and the ten-month
period ended October 31, 1996 were $417,050, $357,000, and $35,850,
respectively.
F-50
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Tri-City Orthopedic Surgery
Medical Group, Inc.
We have audited the accompanying balance sheets of Tri-City Orthopedic Surgery
Medical Group, Inc. (Tri-City) as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of
Tri-City'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 Tri-City at 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.
ERNST & YOUNG, LLP
West Palm Beach, Florida
May 17, 1997
F-51
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 65,569 $ --
Accounts receivable, net................................................................ 544,056 538,503
Prepaid expenses and other current assets............................................... 31,520 30,976
-------- --------
Total current assets...................................................................... 641,145 569,479
Furniture, fixtures and equipment, net.................................................... 182,010 160,418
-------- --------
Total assets.............................................................................. $823,155 $729,897
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 50,703 $ 56,967
Accrued shareholders' salaries.......................................................... 245,398 182,159
Accrued expenses and other current liabilities.......................................... 183,404 222,960
Current portion of notes payable........................................................ 32,369 19,150
Deferred income taxes................................................................... 98,546 83,324
-------- --------
Total current liabilities................................................................. 610,420 564,560
Notes payable, less current portion....................................................... 22,058 2,908
Stockholders' equity:
Common stock, $10 par value--2,500 shares authorized, 360 shares issued and outstanding
in 1995 and 1996..................................................................... 3,600 3,600
Retained earnings....................................................................... 187,077 158,829
-------- --------
Total stockholders' equity................................................................ 190,677 162,429
-------- --------
Total liabilities and stockholders' equity................................................ $823,155 $729,897
-------- --------
-------- --------
</TABLE>
See accompanying notes
F-52
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net patient service revenue................................................... $ 3,643,823 $ 3,477,532
Costs and expenses:
Physician and other provider services....................................... 2,084,397 1,701,682
Medical support services.................................................... 1,546,366 1,460,504
Depreciation................................................................ 39,604 31,867
Interest.................................................................... 4,827 2,884
Rent--related party......................................................... 323,959 324,065
----------- -----------
Total costs and expenses...................................................... 3,999,153 3,521,002
----------- -----------
Loss before income taxes.................................................... (355,330) (43,470)
Income tax benefit.......................................................... 150,005 15,222
----------- -----------
Net loss...................................................................... $ (205,325) $ (28,248)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-53
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- TOTAL
NUMBER RETAINED STOCKHOLDERS'
OF SHARES AMOUNT EARNINGS EQUITY
---------- ------ --------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995...................................... 360 $3,600 $ 392,402 $ 396,002
Net loss...................................................... -- -- (205,325) (205,325)
--- ------ --------- -------------
Balance at December 31, 1995.................................... 360 3,600 187,077 190,677
Net loss...................................................... -- -- (28,248) (28,248)
--- ------ --------- -------------
Balance at December 31, 1996.................................... 360 3,600 158,829 162,429
--- ------ --------- -------------
--- ------ --------- -------------
</TABLE>
See accompanying notes.
F-54
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................................... $(205,325) $(28,248)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation............................................................................. 39,604 31,867
Income tax benefit....................................................................... (150,005) (15,222)
Changes in operating assets and liabilities:
Accounts receivable................................................................... 351,843 5,553
Prepaid expenses and other current assets............................................. (5,921) 544
Accounts payable...................................................................... 1,664 6,264
Accrued expenses and other current liabilities........................................ 43,761 (23,683)
--------- --------
Net cash provided by (used in) operating activities........................................ 75,621 (22,925)
INVESTING ACTIVITY:
Purchases of furniture, fixtures and equipment............................................. (11,288) (10,275)
--------- --------
Net cash used in investing activity........................................................ (11,288) (10,275)
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.................................................... -- --
Payments on notes payable.................................................................. (30,178) (32,369)
--------- --------
Net cash used in financing activities...................................................... (30,178) (32,369)
--------- --------
Net increase (decrease) in cash and
cash equivalents......................................................................... 34,155 (65,569)
Cash and cash equivalents at beginning of year............................................. 31,414 65,569
--------- --------
Cash and cash equivalents at end of year................................................... $ 65,569 $ --
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................................................... $ 4,827 $ 2,884
--------- --------
--------- --------
</TABLE>
See accompanying notes.
F-55
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF THE BUSINESS
Tri-City Orthopedic Surgery Medical Group, Inc. (Tri-City) was incorporated
as a C corporation on October 26, 1972 under the laws of the State of
California. Tri-City specializes in providing orthopedic medical and surgical
services and related medical and ancillary services in San Diego County.
Tri-City receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, health maintenance organizations, preferred provider
organizations and other private insurers, and directly from patients.
On April 1, 1997, Tri-City entered into a management services agreement
with BMJ Medical Management, Inc. and agreed to sell substantially all of its
assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third
party payors and others for services rendered.
Laws and regulations governing the Medicare and Medi-Cal programs are
complex and subject to interpretation. Tri-City believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medi-Cal programs.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to ten years.
Income Taxes
Tri-City accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax losses of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
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. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Medical support services costs include all indirect costs associated with
the management and operations of the practice and all direct costs associated
with medical supplies and pharmaceutical expenses.
F-56
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Gross patient accounts receivable............................................... $942,225 $889,189
Less allowances for contractual adjustments and uncollectibles.................. 398,169 350,686
-------- --------
$544,056 $538,503
-------- --------
-------- --------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment............................................... $211,229 $221,403
Automobiles..................................................................... 224,819 224,819
Leasehold improvements.......................................................... 15,331 15,432
-------- --------
451,379 461,654
Less accumulated depreciation and amortization.................................. 269,369 301,236
-------- --------
$182,010 $160,418
-------- --------
-------- --------
</TABLE>
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Bank promissory note, secured by an automobile, bearing interest at 4.90%,
principal and interest payable monthly at $734.50 through April 9, 1998......... $19,396 $11,354
Bank promissory note, secured by an automobile, bearing interest at 7.75%,
principal and interest payable monthly at $2,182.44 through May 31, 1997........ 35,031 10,704
------- -------
54,427 22,058
Less current portion.............................................................. 32,369 19,150
------- -------
$22,058 $ 2,908
------- -------
------- -------
</TABLE>
At December 31, 1996, annual principal payments on notes payable are as
follows:
<TABLE>
<S> <C>
1997............................................................................... $19,150
1998............................................................................... 2,908
-------
$22,058
-------
-------
</TABLE>
On December 23, 1996, Tri-City entered into an unsecured line of credit
arrangement with a bank which matures on March 30, 1998. The line of credit
permits borrowings up to $150,000 and is guaranteed by the
F-57
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE--(CONTINUED)
shareholders of Tri-City. Interest on the line of credit is payable monthly at
prime plus 1%, with the entire principal due at maturity. As of December 31,
1996, Tri-City had not drawn against the line of credit. On January 3, 1997 and
January 17, 1997, Tri-City drew $100,000 and $50,000, respectively, on the line
of credit.
6. LEASE COMMITMENTS
Tri-City leases various equipment, clinic and office space under operating
leases with a related party, Tri-City Orthopedic Building Partners (TCOBP), on a
month to month basis. Rent expense charged to operations totaled approximately
$324,000 during both 1995 and 1996.
Tri-City also leases an office building under a noncancelable lease with
TCOBP with future minimum rental commitments at December 31, 1996 as follows:
<TABLE>
<S> <C>
1997............................................................................ $ 228,936
1998............................................................................ 228,000
1999............................................................................ 228,000
2000............................................................................ 228,000
2001............................................................................ 228,000
Thereafter...................................................................... 3,021,000
----------
$4,161,936
----------
----------
</TABLE>
7. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- --------
<S> <C> <C>
Current........................................................................ $ -- $ --
Deferred....................................................................... (150,005) (15,222)
--------- --------
Total.......................................................................... $(150,005) $(15,222)
--------- --------
--------- --------
</TABLE>
F-58
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
Deferred income taxes reflected the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Tri-City's net deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Depreciation................................................................. $ 241 $ 1,978
Charitable contributions..................................................... 2,304 2,943
NOL carryforward............................................................. 7,477 3,371
--------- --------
Deferred tax assets.......................................................... 10,022 8,292
Less valuation allowance..................................................... -- --
--------- --------
Total deferred tax assets...................................................... 10,022 8,292
Deferred tax liabilities:
Net cash to accrual conversion................................................. (108,568) (91,616)
--------- --------
Total deferred tax liabilities................................................. (108,568) (91,616)
--------- --------
Total net deferred taxes....................................................... $ (98,546) $(83,324)
--------- --------
--------- --------
</TABLE>
At December 31, 1996, Tri-City has available net operating loss
carryforwards of $8,212, which expire in the years 2009 and 2011.
8. BENEFIT PLANS
Tri-City maintains a defined contribution plan under the provisions of
Section 401(k) of the Internal Revenue Code. Employees who meet the minimum
length of service and age requirements are eligible for participation. Tri-City
is responsible for the administration of the plan as the plan administrator and
trustee. Under the provisions of the plan, contributions by Tri-City are
discretionary. Tri-City did not make any contributions to the plan in 1995 or
1996.
9. CONTINGENCIES
Tri-City procures professional liability coverage on behalf of its
physicians on a claims made basis. The insurance contracts specify that coverage
is available only during the term of each insurance contract and cover only
those claims reported while the policies are in force. An estimate of losses for
incurred but unreported claims is recorded based upon historical experience.
Management of Tri-City intends to renew the existing claims made policy annually
and expects to be able to obtain such coverage. If coverage is not renewed,
Tri-City intends to purchase extended reporting period endorsements to provide
professional liability coverage for losses incurred prior to, but reported
subsequent to, the termination of the claims made policies.
10. SUBSEQUENT EVENT
In March 1997, Tri-City issued 60 shares of common stock to an orthopedic
physician who joined the practice.
F-59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners
Lauderdale Orthopaedic Surgeons
We have audited the accompanying balance sheets of Lauderdale Orthopaedic
Surgeons (LOS) as of December 31, 1995 and 1996, and the related statements of
income and changes in partners' capital, and cash flows for the years then
ended. These financial statements are the responsibility of LOS' 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 LOS at 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.
ERNST & YOUNG, LLP
West Palm Beach, Florida
May 21, 1997
F-60
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $ 35,426 $ 108,900
Investments available for sale...................................................... 55,929 77,796
Accounts receivable, net............................................................ 2,134,318 2,354,577
Prepaid expenses and other current assets........................................... 30,214 25,650
---------- ----------
Total current assets.................................................................. 2,255,887 2,566,923
Furniture, fixtures and equipment, net................................................ 177,058 143,695
Other assets.......................................................................... 877 585
---------- ----------
Total assets.......................................................................... $2,433,822 $2,711,203
---------- ----------
---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Patients refunds.................................................................... $ 402,073 $ 471,328
Accounts payable.................................................................... 138,328 78,645
Accrued expenses and other current liabilities...................................... 344,285 295,831
Current portion of long-term debt................................................... 100,000 100,000
---------- ----------
Total current liabilities............................................................. 984,686 945,804
Long-term debt, less current portion.................................................. 150,000 50,000
Commitments and contingencies.........................................................
Partners' capital..................................................................... 1,299,136 1,715,399
---------- ----------
Total liabilities and partners' capital............................................... $2,433,822 $2,711,203
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-61
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
STATEMENTS OF INCOME AND CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996
---------- ----------
<S> <C> <C>
Net patient service revenue..................................................... $5,980,594 $6,365,320
Other income.................................................................... 11,610 39,555
---------- ----------
Total revenue................................................................... 5,992,204 6,404,875
Costs and expenses:
Physician and other provider services......................................... 3,458,807 3,696,522
Medical support services...................................................... 1,606,300 1,771,864
Medical support services--related party....................................... 100,015 96,761
Depreciation.................................................................. 68,279 58,930
Interest...................................................................... 30,666 18,253
Rent.......................................................................... 135,042 151,053
Rent--related party........................................................... 206,000 212,867
---------- ----------
Total costs and expenses........................................................ 5,605,109 6,006,250
---------- ----------
Net income...................................................................... 387,095 398,625
---------- ----------
Partners' capital, beginning of year............................................ 894,995 1,299,136
Increase in unrealized gain on available for sale investments................... 17,046 17,638
---------- ----------
Partners' capital, end of year.................................................. $1,299,136 $1,715,399
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-62
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................................ $ 387,095 $ 398,625
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................ 68,279 58,930
Gain on sale of assets.................................................................. -- --
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (794,618) (220,259)
Physician and other provider costs receivable........................................ -- --
Prepaid expenses and other current assets............................................ (2,557) 4,564
Patients refunds..................................................................... 402,073 69,255
Accounts payable..................................................................... 35,895 (59,683)
Accrued expenses and other current
liabilities........................................................................ 45,950 (48,452)
--------- ---------
Net cash provided by operating activities................................................. 142,117 202,980
INVESTING ACTIVITIES:
Proceeds from sale of assets.............................................................. -- --
Purchases of furniture, fixtures and equipment............................................ (7,174) (25,274)
Purchases of investments available for sale............................................... (7,605) (4,232)
--------- ---------
Net cash used in investing activities..................................................... (14,779) (29,506)
FINANCING ACTIVITIES
Payments on note payable to bank.......................................................... (100,000) (100,000)
Partner distributions..................................................................... -- --
--------- ---------
Net cash used in financing activities..................................................... (100,000) (100,000)
--------- ---------
Net increase in cash...................................................................... 27,338 73,474
Cash at beginning of year................................................................. 8,088 35,426
--------- ---------
Cash at end of year....................................................................... $ 35,426 $ 108,900
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-63
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF THE BUSINESS
Lauderdale Orthopaedic Surgeons (LOS) is an orthopedic physician practice
which serves patients in Broward County, Florida. LOS is organized as a
partnership under the laws of the state of Florida.
On April 1, 1997, LOS agreed in principle to a management services
agreement with BMJ Medical Management, Inc. and agreed to sell substantially all
of its assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third
party payors and others for services rendered.
Laws and regulations governing the Medicare program are complex and subject
to interpretation. LOS believes that it is in compliance with all applicable
laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare program.
Investments Available for Sale
Investments available for sale are carried at fair market value, with
resulting unrealized holding gains and losses reported as a separate component
of partners' capital. Realized gains and losses and declines in value judged to
be other-than-temporary on investments available for sale are included in other
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on investments classified as available-for-sale
are included in other income.
Concentration of Credit Risk
LOS grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, including leasehold improvements, are
stated at cost, less accumulated depreciation, and are depreciated using the
straight line method over the estimated useful lives of the assets, ranging from
5 to 20 years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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-64
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Medical support services costs include all indirect costs associated with
the management and operations of the practice and all direct costs associated
with medical supplies and pharmaceutical expenses.
Financial Instruments
The carrying amounts of financial instruments as reported in the
accompanying balance sheets approximate their fair value primarily due to the
short-term nature of such financial instruments.
3. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consist of the following:
<TABLE>
<CAPTION>
GROSS
UNREALIZED FAIR
COST GAINS VALUE
------- ---------- -------
<S> <C> <C> <C>
December 31, 1995:
Corporate equities.................................................. $31,273 $ 24,656 $55,929
------- ---------- -------
------- ---------- -------
December 31, 1996:
Corporate equities.................................................. $35,505 $ 42,291 $77,796
------- ---------- -------
------- ---------- -------
</TABLE>
In accordance with Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities, unrealized
holding gains on available-for-sale securities of $24,656 and $42,291 are
included as a separate component of partners' capital at December 31, 1995 and
1996, respectively.
Gross realized gains and losses from the sale of investments available for
sale were not material for the years ended December 31, 1995 and 1996.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Gross patient accounts receivable........................... $ 4,662,946 $ 5,300,172
Less allowances for contractual adjustments and
uncollectibles............................................ 2,528,628 2,945,595
----------- -----------
$ 2,134,318 $ 2,354,577
----------- -----------
----------- -----------
</TABLE>
F-65
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment............................... $ 487,241 $ 462,847
Leasehold improvements.......................................... 522,678 527,179
Less accumulated depreciation and amortization.................. 832,861 846,331
--------- ---------
$ 177,058 $ 143,695
--------- ---------
--------- ---------
</TABLE>
6. LONG TERM DEBT
Long term debt consists of a note payable to a bank bearing interest at the
bank's prime lending rate plus 1.25% (9.75% and 9.5% as of December 31, 1995 and
1996, respectively), with monthly payments of $8,333 plus interest, maturing
June 30, 1998. Maturities of the note are $100,000 for 1997 and $50,000 for
1998. The note is secured by substantially all of the assets of LOS and is
guaranteed by three of the partners. The note was paid in full in May 1997. LOS
paid approximately $31,000 and $18,000 of interest in 1995 and 1996,
respectively.
7. LEASE COMMITMENTS
LOS leases various equipment, clinic and office space under operating
leases. Future minimum rental commitments under noncancelable operating leases
(with an initial or remaining term in excess of one year) at December 31, 1996
are approximately as follows (including leases with related parties):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------------------------------------------------------
<S> <C>
1997........................................................ $ 335,000
1998........................................................ 296,000
1999........................................................ 218,000
2000........................................................ 218,000
2001........................................................ 145,000
------------
$1,212,000
------------
------------
</TABLE>
8. INCOME TAXES
LOS was formed as a partnership under the Federal Internal Revenue Code. As
a result, in lieu of corporate income tax, LOS' taxable income is passed through
to the partners and taxed at the partner level. Accordingly, no provision or
liability for income tax has been reflected in the financial statements.
9. CONTINGENCIES
LOS procures professional liability coverage on behalf of its physicians on
a claims made basis. The insurance contracts specify that coverage is available
only during the term of each insurance contract and cover only those claims
reported while the policies are in force. An estimate of losses for incurred but
unreported claims is recorded based upon historical experience. Management of
LOS intends to renew the existing claims made policy annually and expects to be
able to obtain such coverage. If coverage is not renewed, LOS intends to
purchase extended reporting period endorsements to provide professional
liability coverage for losses incurred prior to, but reported subsequent to, the
termination of the claims made policies.
F-66
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
LOS leases medical office space from an entity controlled by one of the
partners. The lease expires in 2001 and contains renewal options. Rent expense
incurred under the lease was approximately $206,000 and $213,000 for the years
ended December 31, 1995 and 1996, respectively.
Under the terms of a management agreement, LOS incurs expenses to an entity
controlled by the partners for diagnostic equipment rental and other overhead
charges. Expenses incurred under this contract were approximately $100,000 and
$97,000 for the years ended December 31, 1995 and 1996, respectively.
F-67
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Fishman and Stashak, M.D.'s, P.A.
d/b/a Gold Coast Orthopedics
We have audited the accompanying balance sheets of Fishman and Stashak, M.D.'s,
P.A. d/b/a Gold Coast Orthopedics (Gold Coast) as of December 31, 1995 and 1996,
and the related statements of income, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of Gold
Coast'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 Gold Coast at 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.
ERNST & YOUNG, LLP
West Palm Beach, Florida
July 9, 1997
F-68
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ -- $ -- $ 10,172
Accounts receivable, net.............................................. 1,586,752 1,756,545 1,870,853
Advance to stockholder................................................ 4,606 -- --
Prepaid expenses...................................................... 43,606 74,748 25,055
---------- ---------- -----------
Total current assets.................................................... 1,634,964 1,831,293 1,906,080
Furniture, fixtures and equipment, net.................................. 171,194 141,298 125,594
---------- ---------- -----------
Total assets............................................................ $1,806,158 $1,972,591 $ 2,031,674
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 24,935 $ 33,605 $ 29,595
Accrued consulting fee................................................ -- -- 45,943
Due to BMJ Medical Management, Inc.................................... -- -- 41,666
Due to stockholder.................................................... 18,893 -- --
Accrued compensation.................................................. 130,732 101,209 83,592
Accrued professional liability insurance.............................. 130,271 166,131 167,122
Accrued profit sharing plan contribution.............................. 50,000 -- --
Current portion of long-term debt..................................... 141,118 146,080 140,428
---------- ---------- -----------
Total current liabilities............................................... 495,949 447,025 508,346
Long-term debt.......................................................... 279,232 230,357 172,128
Stockholders' equity:
Common stock, $1 par value--1,000 shares authorized, 600 shares issued
and outstanding in 1995, 1996 and 1997............................. 600 600 600
Retained earnings..................................................... 1,030,377 1,294,609 1,350,600
---------- ---------- -----------
Total stockholders' equity.............................................. 1,030,977 1,295,209 1,351,200
---------- ---------- -----------
Total liabilities and stockholders' equity.............................. $1,806,158 $1,972,591 $ 2,031,674
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes.
F-69
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------ ------------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net patient service revenue.............................. $3,236,573 $3,433,831 $1,780,618 $1,889,635
Costs and expenses:
Physician and other provider services.................. 1,414,343 1,785,478 971,234 631,395
Medical support services............................... 1,290,412 1,204,912 511,132 698,654
Management service fee................................. -- -- -- 41,666
Depreciation........................................... 40,823 33,163 16,582 16,003
Interest............................................... 44,821 30,940 16,872 14,355
Rent................................................... 121,454 115,106 57,553 56,571
---------- ---------- ---------- ----------
Total costs and expenses................................. 2,911,853 3,169,599 1,573,373 1,458,644
---------- ---------- ---------- ----------
Net income............................................... $ 324,720 $ 264,232 $ 207,245 $ 430,991
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-70
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
NUMBER RETAINED STOCKHOLDERS'
OF SHARES AMOUNT EARNINGS EQUITY
--------- ------ ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995...................................... 600 $600 $ 705,657 $ 706,257
Net income.................................................... -- -- 324,720 324,720
--- ------ ---------- -------------
Balance at December 31, 1995.................................... 600 600 1,030,377 1,030,977
Net income.................................................... -- -- 264,232 264,232
--- ------ ---------- -------------
Balance at December 31, 1996.................................... 600 600 1,294,609 1,295,209
Net income (unaudited)........................................ -- -- 430,991 430,991
Stockholder distributions (unaudited)......................... -- -- (375,000) (375,000)
--- ------ ---------- -------------
Balance at June 30, 1997 (unaudited)............................ 600 $600 $1,350,600 $ 1,351,200
--- ------ ---------- -------------
--- ------ ---------- -------------
</TABLE>
See accompanying notes.
F-71
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- -----------------------
1995 1996 1996 1997
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 324,720 $ 264,232 $ 207,245 $ 430,991
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 40,823 33,163 16,582 16,003
Bonus paid with note payable.................................... 200,000 -- -- --
Changes in operating assets and liabilities:
Accounts receivable.......................................... (179,258) (169,793) (152,229) (114,308)
Prepaid expenses............................................. (38,835) (31,142) 11,542 49,693
Accounts payable............................................. (32,127) 8,670 77,444 (4,010)
Accrued consulting fee....................................... -- -- -- 45,943
Due to BMJ Medical Management, Inc. ......................... -- -- -- 41,666
Accrued compensation......................................... 119,270 (29,523) (36,011) (17,617)
Accrued professional liability insurance..................... (157,201) 35,860 17,930 991
Accrued profit sharing plan contribution..................... 50,000 (50,000) (50,000) --
--------- --------- --------- -----------
Net cash provided by operating activities......................... 327,392 61,467 92,503 449,352
INVESTING ACTIVITIES
Advance to stockholder............................................ (8,000) -- -- (85,000)
Payments received on advance to stockholder....................... 3,394 4,606 4,606 85,000
Purchases of furniture, fixtures and equipment.................... (73,269) (3,267) -- (299)
--------- --------- --------- -----------
Net cash (used in) provided by investing activities............... (77,875) 1,339 4,606 (299)
FINANCING ACTIVITIES
Distributions to stockholders..................................... -- -- -- (375,000)
Payments on due to stockholder.................................... (75,000) (100,893) (50,893) --
Proceeds of loan from stockholder................................. 82,000 32,000 --
Proceeds of related party advance................................. 55,000 55,000 --
Payments on related party advance................................. (55,000) (55,000) --
Proceeds from long-term debt...................................... 100,000 157,500 -- 99,000
Payments on long-term debt........................................ (274,517) (201,413) (78,216) (162,881)
--------- --------- --------- -----------
Net cash used in financing activities............................. (249,517) (62,806) (97,109) (438,881)
--------- --------- --------- -----------
Net change in cash and cash equivalents........................... -- -- -- 10,172
Cash and cash equivalents at beginning of period.................. -- -- -- --
--------- --------- --------- -----------
Cash and cash equivalents at end of period........................ $ -- $ -- $ -- $ 10,172
--------- --------- --------- -----------
--------- --------- --------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................ $ 46,932 $ 30,940 $ 16,782 $ 13,273
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
See accompanying notes.
F-72
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics (Gold Coast)
was organized on April 16, 1990 under the laws of the State of Florida. Gold
Coast specializes in providing orthopedic medical and surgical services and
related medical and ancillary services in Palm Beach County. Gold Coast receives
payment for patient services primarily from private insurers, health maintenance
organizations, preferred provider organizations, the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, and directly from patients.
Effective June 1, 1997, Gold Coast and BMJ Medical Management, Inc. (BMJ)
executed a Management Services Agreement (the Agreement). The Agreement provides
that BMJ will be the exclusive provider of all management and administrative
services utilized by Gold Coast through June 1, 2037, in exchange for a
management fee based on 15% of Gold Coast's net collected revenue. In connection
with the Agreement, Gold Coast accrued management fees payable to BMJ of $41,666
at June 30, 1997.
In July 1997, Gold Coast entered into an Asset Purchase Agreement with BMJ
whereby Gold Coast sold all of its accounts receivable, diagnostic and
therapeutic medical equipment, and office equipment to BMJ for approximately
$2.9 million. Furthermore, BMJ will pay Gold Coast for amounts received in
excess of $950,000 on Gold Coast's June 1, 1997 accounts receivable through June
30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Gold Coast considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Gold Coast grants credit without collateral to its patients, most of whom
are local residents that are insured under third-party payor agreements.
Management believes the credit risk associated with accounts receivable is
minimal.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from four to fifteen years.
Financial Instruments
The fair value of Gold Coast's financial instruments (primarily long-term
debt) are estimated using discounted cash flow analyses, based on Gold Coast's
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts of financial instruments as reported in the accompanying
balance sheets approximate their fair value.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered.
Revenues from the Medicare program accounted for approximately 10% of Gold
Coast's net patient service revenues for the years ended December 31, 1995 and
1996. Laws and regulations governing the Medicare program are complex and
subject to interpretation. Gold Coast believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare program.
F-73
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Medical support services costs include all indirect costs associated with
the management and operations of the practice and all direct costs associated
with medical supplies and pharmaceutical expenses.
Income Taxes
Gold Coast is taxed under the provisions of Subchapter S of the Internal
Revenue Code, which generally provides that in lieu of corporate taxes, the
stockholders shall be taxed on Gold Coast's taxable income in accordance with
their ownership interests. As a result, the accompanying financial statements
include no provision for income taxes.
Interim Financial Statements
The interim financial statements as of June 30, 1997 and for the six months
ended June 30, 1996 and 1997 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all normal and recurring adjustments necessary for a fair
presentation of Gold Coast's financial position, results of operations and cash
flows. The interim data disclosed in these notes to the financial statements is
also unaudited. The results of operations for the six months ended June 30, 1997
is not necessarily indicative of the results of operations that may be expected
for the entire year ending December 31, 1997.
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 as of 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.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Gross patient accounts receivable............................. $3,783,563 $3,992,148
Less allowances for contractual adjustments and
uncollectibles.............................................. 2,196,811 2,235,603
---------- ----------
$1,586,752 $1,756,545
---------- ----------
---------- ----------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Furniture and fixtures............................................ $ 91,924 $ 91,924
Equipment......................................................... 138,918 141,940
Automobiles....................................................... 10,441 10,441
Leasehold improvements............................................ 96,489 96,489
-------- --------
337,772 340,794
Less accumulated depreciation and amortization.................... 166,578 199,496
-------- --------
$171,194 $141,298
-------- --------
-------- --------
</TABLE>
F-74
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-Term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
$350,000 promissory note payable to a bank, bearing interest at a fixed rate
of 8.50%, principal and interest payable monthly through December 1998,
secured by substantially all of the assets of Gold Coast.................... $ 286,514 $ 199,373
$142,988 promissory note payable to a bank, bearing interest at a fixed rate
of 9.75%, principal and interest payable monthly through November 1998,
secured by substantially all of the assets of Gold Coast.................... 115,654 79,859
$100,000 revolving line-of-credit arrangement with a bank, bearing interest at
prime plus 1% (9.25% at December 31, 1996), interest payable monthly,
principal due in 24 monthly installments commencing thirty days following
the cancellation of the arrangement, secured by substantially all of the
assets of Gold Coast, the arrangement requires Gold Coast to maintain its
primary operating account at the bank....................................... -- 97,205
$200,000 noninterest bearing promissory note payable to a former stockholder,
principal due in monthly installments through January 1996, secured by the
accounts receivable of Gold Coast, guaranteed by the stockholders of Gold
Coast....................................................................... 18,182 --
----------- -----------
420,350 376,437
Less current portion.......................................................... 141,118 146,080
----------- -----------
$ 279,232 $ 230,357
----------- -----------
----------- -----------
</TABLE>
At December 31, 1996, annual principal payments on long-term debt are as
follows:
<TABLE>
<S> <C>
1997.......................................................... $146,080
1998.......................................................... 133,152
Thereafter.................................................... 97,205
--------
$376,437
--------
--------
</TABLE>
In July 1997, Gold Coast repaid the outstanding balance on the revolving
line-of-credit arrangement.
6. DUE TO STOCKHOLDER
The President of Gold Coast, who is also a 50% stockholder, advanced
approximately $94,000 to Gold Coast prior to January 1, 1994. The amount was
payable to the stockholder on demand, was unsecured and bore interest at 8%.
Gold Coast repaid approximately $75,000 and $19,000 in 1995 and 1996,
respectively.
The Treasurer of Gold Coast, who is also a 50% stockholder, made unsecured
advances totaling approximately $82,000 to Gold Coast during 1996 which bore
interest at 6.25% and were due on demand. Gold Coast repaid these advances
during 1996.
7. LEASE COMMITMENTS
Gold Coast leases office space under a noncancelable operating lease, which
contains an escalation clause. Rent expense charged to operations totalled
approximately $95,000 during both 1995 and 1996.
F-75
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS--(CONTINUED)
Future minimum rental commitments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 94,714
1998.......................................................... 94,714
1999.......................................................... 94,714
2000.......................................................... 94,714
2001.......................................................... 94,714
Thereafter.................................................... 426,213
--------
$899,783
--------
--------
</TABLE>
8. RELATED PARTY TRANSACTIONS
In February 1995, a physician employee and then stockholder of Gold Coast
terminated his employment with Gold Coast. In connection with this termination,
Gold Coast agreed to pay the physician a final bonus of $200,000, pursuant to
the physician's employment agreement. This bonus is included in physician and
other provider services expense in the 1995 statement of income and was paid
over an eleven-month period pursuant to a noninterest bearing promissory note.
At December 31, 1995, approximately $18,000 of this note was outstanding and the
balance was repaid in full during 1996.
9. BENEFIT PLANS
Gold Coast maintains a defined contribution plan under the provisions of
Section 401(k) of the Internal Revenue Code. Employees who meet the minimum
length of service and age requirements are eligible for participation. Gold
Coast is responsible for the administration of the plan as the plan
administrator and trustee. Under the provisions of the plan, contributions by
Gold Coast are discretionary. Gold Coast made contributions of $50,000 and
$45,000 to the plan in 1995 and 1996, respectively.
10. CONTINGENCIES
Gold Coast is involved in various legal proceedings in the ordinary course
of business. Gold Coast does not believe that the disposition of such legal
proceedings and disputes will have a material adverse effect on the financial
position or results of operations of Gold Coast. Gold Coast procures
professional liability coverage on behalf of its physicians on a claims-made
basis. The insurance contracts specify that coverage is available only during
the term of each insurance contract and cover only those claims reported while
the policies are in force. An estimate of losses for incurred but unreported
claims is recorded based upon historical experience. Management of Gold Coast
intends to renew the existing claims-made policy annually and expects to be able
to obtain such coverage.
11. SUBSEQUENT EVENTS
In 1997, Gold Coast declared and distributed stockholders' distributions of
approximately $375,000 through June 30, 1997 and approximately $1.9 million
subsequent to June 30, 1997.
F-76
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners
Sun Valley Orthopaedic Surgeons,
an Arizona General Partnership
We have audited the accompanying balance sheet of Sun Valley Orthopaedic
Surgeons, an Arizona General Partnership (Sun Valley) as of December 31, 1996,
and the related statements of operations and changes in partners' capital and
cash flows for the year then ended. These financial statements are the
responsibility of Sun Valley'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 Sun Valley at December 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Orlando, Florida
July 18, 1997
F-77
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $137,982 $ 142,279
Accounts receivable, net............................................................ 512,267 539,654
Due from related parties............................................................ 183,062 186,663
Inventories......................................................................... 9,500 10,000
Prepaid expenses and other current assets........................................... 24,949 15,973
------------ -----------
Total current assets.................................................................. 867,760 894,569
Furniture, fixtures and equipment, net................................................ 34,935 20,931
Other assets.......................................................................... 7,515 7,464
Due from related parties.............................................................. 48,781 --
------------ -----------
Total assets.......................................................................... $958,991 $ 922,964
------------ -----------
------------ -----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.................................................................... $ 23,665 $ 22,887
Accrued expenses and other current liabilities...................................... 14,273 15,561
Due to bank under line of credit.................................................... 100,000 100,000
------------ -----------
Total current liabilities............................................................. 137,938 138,448
Due to related parties................................................................ 31,174 --
Commitments and contingencies.........................................................
Partners' capital..................................................................... 789,879 784,516
------------ -----------
Total liabilities and partners' capital............................................... $958,991 $ 922,964
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F-78
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net patient service revenue............................................ $2,467,989 $1,289,637 $1,357,617
Other revenue.......................................................... 22,798 11,400 11,600
Other revenue from related party....................................... 12,005 5,500 5,500
------------ ---------- ----------
Total revenue.......................................................... 2,502,792 1,306,537 1,374,717
Costs and expenses:
Physician and other provider services................................ 1,456,127 821,604 786,913
Medical support services............................................. 1,044,879 528,110 569,164
Depreciation......................................................... 26,912 13,456 19,102
Interest............................................................. 10,873 4,470 4,901
Other................................................................ 1,452 -- --
------------ ---------- ----------
Total costs and expenses............................................... 2,540,243 1,367,640 1,380,080
------------ ---------- ----------
Net loss............................................................... (37,451) (61,103) (5,363)
Beginning partners' capital............................................ 827,330 827,330 789,879
------------ ---------- ----------
Ending partners' capital............................................... $ 789,879 $ 766,227 $ 784,516
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
See accompanying notes.
F-79
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................... $ (37,451) $(61,103) $ (5,363)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation............................................................. 26,912 13,456 19,102
Changes in operating assets and liabilities:
Accounts receivable, net.............................................. 14,298 61,152 (27,387)
Due from related parties.............................................. 18,518 19,606 (3,601)
Inventories........................................................... (500) (250) (500)
Prepaid expenses and other current assets............................. (8,658) 5,179 8,976
Accounts payable...................................................... 2,393 (3,651) (778)
Accrued expenses and other current liabilities........................ 819 933 1,288
------------ -------- --------
Net cash provided by (used in) operating activities........................ 16,331 35,322 (8,263)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment............................. (7,404) (7,309) (5,098)
Repayments of amounts due from partners and affiliates..................... 48,492 40,598 48,781
------------ -------- --------
Net cash provided by investing activities.................................. 41,088 33,289 43,683
FINANCING ACTIVITIES
Amounts received on line of credit......................................... 25,000 -- --
Repayments of line of credit............................................... (44,000) (44,000) --
Repayments of amounts due to related parties............................... (39,500) (32,495) (31,174)
Other...................................................................... -- 51 51
------------ -------- --------
Net cash (used in) provided by financing activities........................ (58,500) (76,444) (31,123)
------------ -------- --------
(Decrease) increase in cash................................................ (1,081) (7,833) 4,297
Cash, beginning of period.................................................. 139,063 139,063 137,982
------------ -------- --------
Cash, end of period........................................................ $ 137,982 $131,230 $142,279
------------ -------- --------
------------ -------- --------
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid.............................................................. $ 10,873 $ -- $ --
------------ -------- --------
------------ -------- --------
</TABLE>
See accompanying notes.
F-80
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Sun Valley Orthopaedic Surgeons, an Arizona General Partnership, (Sun
Valley) is a general partnership of individual physicians and an Arizona
professional corporation, and is engaged in the business of providing orthopedic
medical and surgical services and related medical and ancillary services to
patients in Maricopa County, Arizona. Sun Valley is organized as a general
partnership under the laws of the State of Arizona.
On July 1, 1997, Sun Valley agreed in principle to sell substantially all
of its assets to and enter into a management services agreement with BMJ Medical
Management, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts
due from patients, third-party payors and others for medical services rendered.
During 1996, approximately 60% of net patient service revenue was received under
Medicare and Medicare-related programs.
Laws and regulations governing the Medicare program are complex and subject
to interpretation. Sun Valley believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subjecct to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare program.
Inventories
Inventories, which consist of medical and office supplies are stated at
current cost, which approximates market value, utilizing the first-in, first-out
method.
Concentration of Credit Risk
Sun Valley grants credit without collateral to its patients, most of whom
are local residents, who are insured under third-party payor agreements.
Management believes the credit risk associated with accounts receivable is
minimal.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, including leasehold improvements, are
stated at cost, less accumulated depreciation, and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
5 to 10 years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
Interim Financial Statements
The interim financial statements as of and for the six months ended June
30, 1997 and 1996 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all normal and recurring adjustments necessary for a fair presentation
of Sun Valley's financial position, results of operations and cash flows. The
interim data disclosed in these notes to the financial statements is also
unaudited. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results of operations that may be expected for
the entire year ending December 31, 1997.
F-81
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Medical support services costs include all indirect costs associated with
the management and operations of the practice and all direct costs associated
with medical supplies and pharmaceutical expenses.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
Gross patient accounts receivable.......................................................... $ 613,880
Less allowances for contractual adjustments and uncollectibles............................. 101,613
---------
$ 512,267
---------
---------
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following as of December
31, 1996:
<TABLE>
<S> <C>
Furniture, fixtures and equipment.......................................................... $ 176,784
Leasehold improvements..................................................................... 40,025
Less accumulated depreciation.............................................................. 181,874
---------
$ 34,935
---------
---------
</TABLE>
5. LINE OF CREDIT
As of December 31, 1996, Sun Valley has a line of credit with a bank in the
amount of $100,000. The line of credit bears interest at the bank's prime rate
plus 1.5% (the bank's prime rate was 8.5% at December 31, 1996). Sun Valley paid
approximately $11,000 in interest during 1996. There was no unused amount
available under the line-of-credit as of December 31, 1996.
6. LEASE COMMITMENTS
Sun Valley leases various equipment, clinic and office space under
operating leases. Future minimum rental commitments under noncancelable
operating leases (with an initial or remaining term in excess of one year) at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997...................................................................................... $152,961
1998...................................................................................... 153,626
1999...................................................................................... 70,364
2000...................................................................................... 41,296
--------
$418,247
--------
--------
</TABLE>
F-82
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Sun Valley is organized as a partnership pursuant to Subchapter K of the
Internal Revenue Code. As a result, in lieu of corporate income tax, Sun
Valley's taxable income is passed through to the partners and taxed at the
partner level. Accordingly, no provision or liability for income tax has been
reflected in the financial statements.
8. CONTINGENCIES
Sun Valley is a general partnership organized under the laws of the State
of Arizona. Each of the individual physicians in Sun Valley is personally
responsible for and has obtained insurance coverage for professional liability.
Accordingly, no provision or liability for incurred but not reported claims has
been reflected in the financial statements of Sun Valley.
9. RELATED PARTY TRANSACTIONS
As of December 31, 1996, one physician partner had been paid $135,743 in
excess of the amounts due to him for the physician services provided. This
amount is included in due from related parties as of December 31, 1996.
Sun Valley has advanced amounts to a professional corporation that
specializes in osteoporosis and epidurals that is wholly-owned by a physician
partner. Interest on the advance accrues at 8%. As of December 31, 1996, the
amount due Sun Valley, including accrued interest, is $43,485. Sun Valley
recorded interest income for the year ended December 31, 1996 in the amount of
$12,000.
F-83
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Orthopaedic Surgery Associates, P.A.
We have audited the accompanying balance sheet of Orthopaedic Surgery
Associates, P.A. (OSA) as of December 31, 1996, and the related statements of
income, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of OSA'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 Orthopaedic Surgery Associates,
P.A. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
October 10, 1997
F-84
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................................................. $ 26,590
Accounts receivable, net.......................................................................... 1,382,082
Prepaid expenses.................................................................................. 34,216
----------
Total current assets................................................................................ 1,442,888
Furniture, fixtures and equipment, net.............................................................. 1,792,079
Loan receivable--OSA Investments, PA, net of discount of $265,176................................. 64,488
Other............................................................................................... 5,000
----------
Total assets........................................................................................ $3,304,455
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued liabilities............................................................................... $ 150,427
Note payable...................................................................................... 500,000
Current portion of capital lease obligations...................................................... 66,901
----------
Total current liabilities........................................................................... 717,328
Long-term capital lease obligations, less current portion........................................... 1,318,957
Stockholders' equity:
Common stock, $1 par value--500 shares authorized, issued and outstanding......................... 500
Additional paid-in capital........................................................................ 1,090,450
Retained earnings................................................................................. 177,220
----------
Total stockholders' equity.......................................................................... 1,268,170
----------
Total liabilities and stockholders' equity.......................................................... $3,304,455
----------
----------
</TABLE>
See accompanying notes.
F-85
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 21, 1996
<TABLE>
<S> <C>
Net patient service revenue......................................................................... $ 7,520,949
Other income........................................................................................ 12,107
------------
Total revenue....................................................................................... 7,533,056
Costs and expenses:
Physician and other provider services............................................................. 3,175,685
Medical support services.......................................................................... 3,489,020
Depreciation...................................................................................... 90,369
Interest.......................................................................................... 91,458
Rent.............................................................................................. 244,128
Discount on loan receivable....................................................................... 265,176
------------
Total costs and expenses............................................................................ 7,355,836
------------
Net income.......................................................................................... $ 177,220
------------
------------
</TABLE>
See accompanying notes.
F-86
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996....................... 500 $500 $ -- $ -- $ 500
Contribution of capital........................ -- -- 1,090,450 -- 1,090,450
Net income..................................... -- -- -- 177,220 177,220
--- ------ ---------- ---------- --------------
Balance at December 31, 1996..................... 500 $500 $ 177,220 $1,268,170
--- ------ ---------- ---------- --------------
--- ------ ---------- ---------- --------------
</TABLE>
See accompanying notes.
F-87
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income........................................................................................ $ 177,220
Adjustments to reconcile net income to net cash provided by operating activities:
Discount on loan receivable..................................................................... 265,176
Depreciation.................................................................................... 87,552
Changes in operating assets and liabilities:
Accounts receivable.......................................................................... (1,382,082)
Prepaids and deposits........................................................................ (39,216)
Accounts payable............................................................................. 150,427
Accrued expenses............................................................................. 848,437
------------
Net cash provided by operating activities......................................................... 107,514
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment.................................................... (274,832)
Loan receivable................................................................................... (306,592)
------------
Net cash used in investing activities............................................................. (581,424)
FINANCING ACTIVITIES
Contribution of capital........................................................................... 500
Proceeds from borrowing under notes payable....................................................... 500,000
------------
Net cash provided by financing activities......................................................... 500,500
------------
Net increase in cash.............................................................................. 26,590
Cash at beginning of year......................................................................... --
------------
Cash at end of year............................................................................... $ 26,590
------------
------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................................................ $ 91,458
------------
------------
Noncash transactions:
Equipment under capital lease obligations......................................................... $ 1,331,000
------------
------------
Equipment financed by loan payable-related party.................................................. $ 250,650
------------
------------
Conversion of debt to equity...................................................................... $ 1,090,450
------------
------------
</TABLE>
See accompanying notes.
F-88
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
Orthopaedic Surgery Associates, P.A. (OSA) was organized on December 27,
1995 and commenced operations on January 1, 1996, under the laws of the State of
Florida. OSA specializes in providing orthopedic medical and surgical services
and related medical and ancillary services in Palm Beach County, Florida. OSA
receives payment for patient services primarily from private insurers, health
maintenance organizations, preferred provider organizations, the federal
government primarily under the Medicare program, state governments under their
respective Medicaid programs, and directly from patients.
On October 16, 1997, certain assets and liabilities of OSA were acquired
by BMJ Medical Management, Inc. (BMJ) in exchange for 282,254 shares of BMJ
common stock, cash of $4,496,250 and a promissory note for $2,450,465. In
connection therewith, the Company entered into a 40-year service agreement with
BMJ, whereby BMJ will provide substantially all nonmedical services to the
practice.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
OSA's accounting records are maintained on the basis of cash receipts and
cash disbursements for income-tax purposes. The accompanying financial
statements have been prepared on the accrual basis and thus reflect accounts
receivable, prepaid expenses, and liabilities that are not recorded in the
accounting records.
Concentration of Credit Risk
OSA grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Furniture,Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from 5 to 39.5 years. Amortization
expense for assets under capital leases is included in accumulated depreciation.
Financial Instruments
The fair value of OSA's financial instruments (primarily long and
short-term capital lease obligations and debt) are estimated using discount cash
flow analyses, based on OSA's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amounts of financial instruments
as reported in the accompanying balance sheet approximate their fair value.
Revenue Recognition
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
generally less than OSA's customary charges, and the differences are recorded as
contractual adjustments or policy discounts at the time the related service is
rendered.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action, including fines, penalties, and exclusion from
the Medicare and Medicaid programs. OSA believes that it is in compliance with
all applicable laws and regulations. OSA is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing.
F-89
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Income Taxes
OSA is taxed under the provisions of Subchapter S of the Internal Revenue
Code, which generally provides that in lieu of corporate taxes, the stockholders
shall be taxed on OSA's taxable income in accordance with their ownership
interests. As a result, the accompanying financial statements include no
provision for income taxes.
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 as of 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.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Assets under capital leases:
Land...................................................... $ 372,300
Building and leasehold improvements....................... 1,119,350
Furniture, fixtures and office equipment.................. 39,905
Medical equipment......................................... 142,985
----------
1,674,540
Owned assets:
Building and leasehold improvements....................... 96,657
Furniture, fixtures and offfice equipment................. 45,997
Medical equipment......................................... 62,437
----------
1,879,631
Less accumulated depreciation............................... (87,552)
----------
$1,792,079
----------
----------
</TABLE>
4. NOTE PAYABLE
The note payable is a $500,000 line of credit due on August 22, 1997
bearing interest at the prime rate, 8.5% at December 31, 1996. The line of
credit is secured by substantially all of the assets of OSA. Effective August
22, 1997, OSA extended the $500,000 line of credit maturity date to November 22,
1997.
F-90
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
OSA has employment agreements with four physician-stockholders which
provide for, among other things, various insurance coverages and base pay for
one physician-stockholder. Future payments required to be made to physicians
approximate $360,000 in 1997 and $100,000 in 1998, subject to certain
adjustments. Management cannot estimate future adjustments under these
provisions.
OSA leases office space and equipment under noncancelable operating leases,
two of which contain an escalation clause. Rent expense charged to operations
totaled approximately $244,000 during 1996.
Future minimum rental commitments under noncancelable operating leases at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................................ $ 215,839
1998............................................................................ 218,890
1999............................................................................ 229,835
2000............................................................................ 241,327
2001............................................................................ 223,833
----------
$1,129,724
----------
----------
</TABLE>
Future minimum capital lease obligations at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................................ $ 187,918
1998............................................................................ 189,916
1999............................................................................ 186,691
2000............................................................................ 176,073
2001............................................................................ 160,363
Thereafter...................................................................... 1,583,399
----------
2,484,360
Interest........................................................................ (1,098,502)
Less current amount............................................................. (66,901)
----------
$1,318,957
----------
----------
</TABLE>
Effective June 1996, OSA entered into a medical office building capital
lease with OSA Investments, PA, (OSAI), a related party. The lease payment is
equal to OSAI's mortgage payment for the building and the term of the lease is
concurrent with the mortgage term.
OSA procures professional liability coverage on behalf of its physicians on
a claims made basis. The insurance contracts specify that coverage is available
only during the term of each insurance contract and cover only those claims
reported while the policies are in force. An estimate of losses for incurred but
unreported claims is recorded based upon historical experience. Management of
OSA intends to renew the existing claims made policy annually and expects to be
able to obtain such coverage. If coverage is not renewed, OSA intends to
purchase extended reporting period endorsements to provide professional
liability coverage for losses incurred prior to, but reported subsequent to, the
termination of the claims made policies.
6. PROFIT SHARING PLAN
OSA maintains a profit sharing plan under the provisions of Section 401(k)
of the Internal Revenue Code. Employees who meet the minimum length of service
and age requirements are eligible for participation. OSA is responsible for the
administration of the Plan as the plan administrator and OSA's stockholders are
trustees. Under the provisions of the Plan, contributions by OSA are
discretionary. OSA made contributions of approximately $83,000 to the Plan in
1996.
F-91
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LOAN RECEIVABLE - OSA INVESTMENTS, P.A.
During 1996 OSA recorded a loan receivable from OSAI for $329,664. The loan
receivable is non-interest bearing and is expected to be repaid from the
proceeds of the future sale of the medical office building owned by OSAI and
leased to OSA. The loan has been discounted to reflect an imputed interest rate
of 8% per annum over the life of the lease, which is 20 years.
8. SUBSEQUENT EVENTS
Effective July 1, 1997, OSA entered into an employment agreement with a
physician for the payment of a base salary. Future payments required to be made
to the physician approximate $80,000 in 1997, $160,000 in 1998, $160,000 in 1999
and $80,000 in 2000, subject to certain adjustments. Management cannot estimate
future adjustments under these provisions. Effective August 1, 1997, OSA entered
into a 12-month physician employment agreement for the payment of $200 for each
documented hour of service performed on behalf of OSA. Management cannot
estimate future adjustments under these provisions. These contracts are for
various time periods and may be terminated by mutual agreement or upon the
occurrence of other specified events such as death and disability.
Effective August 1, 1997, OSA entered into an equipment lease for $228,000
for a 12-month period.
F-92
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Broward Institute of Orthopaedic
Specialties, P.A.
We have audited the accompanying balance sheet of Broward Institute of
Orthopaedic Specialties, P.A. (BIOS) as of December 31, 1996, and the related
statements of income, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the BIOS'
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 Broward Institute of
Orthopaedic Specialties, P.A. at December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
September 5, 1997
F-93
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................................................. $ 428,530
Accounts receivable, net.......................................................................... 1,875,907
Prepaid expenses.................................................................................. 41,845
----------
Total current assets................................................................................ 2,346,282
Furniture, fixtures and equipment, net.............................................................. 49,301
Other, net.......................................................................................... 13,338
----------
Total assets........................................................................................ $2,408,921
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 187,555
Due to stockholders............................................................................... 80,000
Accrued liabilities............................................................................... 619,197
Current portion of notes payable.................................................................. 267,000
----------
Total current liabilities........................................................................... 1,153,752
Notes payable, less current portion................................................................. 249,871
Stockholders' equity:
Common stock, $.01 par value--1,000 shares authorized,
80 shares issued and outstanding............................................................. 1
Additional paid-in capital........................................................................ 23,999
Retained earnings................................................................................. 981,298
----------
Total stockholders' equity.......................................................................... 1,005,298
----------
Total liabilities and stockholders' equity.......................................................... $2,408,921
----------
----------
</TABLE>
See accompanying notes.
F-94
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Net patient service revenue......................................................................... $8,325,413
Other income........................................................................................ 37,164
----------
Total revenue....................................................................................... 8,362,577
Costs and expenses:
Physician and other provider services............................................................. 3,823,617
Medical support services.......................................................................... 3,892,487
Depreciation and amortization..................................................................... 13,259
Interest.......................................................................................... 68,129
Rent.............................................................................................. 397,094
----------
Total costs and expenses............................................................................ 8,194,586
----------
Net income.......................................................................................... $ 167,991
----------
----------
</TABLE>
See accompanying notes.
F-95
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER PAID IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........................... 80 $1 $ 23,999 $813,307 $ 837,307
Net income............................................. -- -- -- 167,991 167,991
-- --
---------- -------- --------------
Balance at December 31, 1996........................... 80 $1 $ 23,999 $981,298 $1,005,298
-- --
-- --
---------- -------- --------------
---------- -------- --------------
</TABLE>
See accompanying notes
F-96
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income........................................................................................... $ 167,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................................................................... 9,297
Amortization....................................................................................... 3,962
Bad debt........................................................................................... 102,642
Changes in operating assets and liabilities:
Accounts receivable............................................................................. (514,146)
Deposits........................................................................................ (3,435)
Accounts payable................................................................................ 114,599
Accrued expenses................................................................................ 220,303
---------
Net cash provided by operating activities............................................................ 101,213
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment....................................................... (31,210)
---------
Net cash used in investing activities................................................................ (31,210)
FINANCING ACTIVITIES
Payments on notes payable............................................................................ (167,139)
---------
Net cash used in financing activities................................................................ (167,139)
---------
Net decrease in cash................................................................................. (97,136)
Cash at beginning of year............................................................................ 525,666
---------
Cash at end of year.................................................................................. $ 428,530
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................................................... $ 68,127
---------
---------
</TABLE>
See accompanying notes.
F-97
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
Broward Institute of Orthopedic Specialties, P.A. (BIOS) was organized on
November 4, 1993 and commenced operations on August 1, 1995, under the laws of
the State of Florida. BIOS specializes in providing orthopedic medical and
surgical services and related medical and ancillary services in Broward County.
BIOS receives payment services primarily from private insurers, health
maintenance organizations, preferred provider organizations, the federal
government primarily under the Medicare program, state governments under their
respective Medicaid programs, and directly from patients.
On October 31, 1997, certain assets and liabilities of BIOS were acquired
by BMJ Medical Management, Inc. (BMJ) in exchange for 260,237 shares of BMJ
common stock, cash of $119,311 and promissory notes for 3,396,252. In connection
therewith, BIOS entered into a 40-year management services agreement with BMJ,
whereby BMJ will provide substantially all nonmedical services to the practice.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
BIOS' accounting records are maintained on the basis of cash receipts and
cash disbursments for income-tax purposes. The accompanying financial statements
have been prepared on the accrual basis and thus reflect accounts receiveable,
prepaid expenses, and liabilities that are not recorded in the accounting
records.
Concentration of Credit Risk
BIOS grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Financial Instruments
The fair value of BIOS' financial instruments (primarily long and
short-term debt) are estimated using discounted cash flow analyses, based on
BIOS' current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts of financial instruments as reported in the
accompanying balance sheet approximate their fair value.
Revenue Recognition
Net patient service revenues are base on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
less than BIOS' customary charges, and the differences are recorded as
contractual adjustments or policy discounts at the time the related service is
rendered.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs. BIOS believes that it is in compliance with all
applicable laws and regulations. BIOS is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing.
F-98
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to phyisicians and other health care providers.
Income Taxes
BIOS is taxed under the provisions of Subchapter S of the Internal Revenue
Code, which generally provides that in lieu of corporate taxes, the stockholders
shall be taxed on BIOS' taxable income in accordance with their ownership
interests. As a result, the accompanying financial statements include no
provision for income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from the estimates.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures............................................................. $25,203
Equipments......................................................................... 33,934
-------
Less accumulated depreciation...................................................... 59,137
(9,836)
-------
$49,301
-------
-------
</TABLE>
4. NOTES PAYABLE
Notes payable consits of the following:
<TABLE>
<S> <C>
$800,000 promissory note payable, bearing interest at a variable rate of prime
plus .25% (8.75% at December 31, 1996), principal payments of $267,000 during
each of the first two years and interest payable monthly through October 1999,
secured by substantially all of the assets of BIOS.
Less current portion.............................................................. $516,871
(267,000)
--------
$249,871
--------
--------
</TABLE>
5. DUE TO STOCKHOLDERS
The stockholders of BIOS, advanced $80,000 to BIOS prior to January 1,
1996, due on demand, unaccured and bearing interest at 8%. BIOS repaid $80,000
in 1997.
6. LEASE COMMITMENT
BIOS leases office space and equipment under non-cancelable operating
leases, two of which contain an escalation clause. Rent expense charged to
operation totaled approximately $397,000 during 1996.
F-99
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
6. LEASE COMMITMENT--(CONTINUED)
Furniture minimum rental commitments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................................. $ 94,714
1998.............................................................................. 94,714
1999.............................................................................. 94,714
2000.............................................................................. 94,714
2001.............................................................................. 94,714
Thereafter........................................................................ 426,213
--------
$899,783
--------
--------
</TABLE>
7. BENEFIT PLANS
BIOS maintains a defined contribution plan under the provisions of Section
401(k) of the Internal Revenue Code. Employees who meet the minimum length of
service and age requirements are eligible for participation. BIOS is responsible
for the administration of the plan as the plan administrator and BIOS'
stockholders are trustees of the plan. Under the provision of the plan,
contributions by BIOS are discretionary. BIOS made no contributions to the plan
in 1996.
8. COMMITMENTS AND CONTINGENCIES
BIOS procures professional liability coverage on behalf of its physicians
on a claims made basis. The insurance contracts specify that coverage is
availble only during the term of each insurance contract and cover only those
claims reported while the policies are in force. An estimate of losses of
incurred but unreported claims is recorded base upon historical experience.
Management of BIOS to renew the existing claims made policy annually and expects
to be able to obtain such coverage. If coverage is not renewed, BIOS intends to
purchase extended reporting period endorsements to provide professional
liability coverage for losses incurred prior to, but reported subsequent to, the
termination of the claims made policies.
9. SUBSEQUENT EVENT
On July 9, 1997, BIOS borrowed $25,740 under a promissory not with a bank,
at a variable interest rate of prime plus .25%, interest payable monthly,
principal due November 1, 1999, secured by substantially all of the assets of
BIOS.
F-100
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS
OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information........................ 2
Prospectus Summary............................ 3
Risk Factors.................................. 6
The Company................................... 15
Use of Proceeds............................... 16
Dividend Policy............................... 16
Capitalization................................ 17
Dilution...................................... 18
Pro Forma Financial Information............... 19
Selected Financial Information................ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 27
Business...................................... 31
Management.................................... 49
Certain Transactions.......................... 54
Principal Stockholders........................ 61
Description of Capital Stock.................. 63
Shares Eligible for Future Sale............... 66
Underwriting.................................. 67
Legal Matters................................. 69
Experts....................................... 69
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 DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
5,000,000 SHARES
BMJ MEDICAL
MANAGEMENT, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
RAYMOND JAMES &
ASSOCIATES, INC.
VOLPE BROWN WHELAN & COMPANY
, 1997
------------------------------------------------------------
------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the National
Association of Security Dealers, Inc. filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC registration fee................................................................................... $15,682
NASD filing fee........................................................................................ 5,675
Nasdaq National Market listing fee..................................................................... *
Blue sky fees and expenses............................................................................. *
Printing and engraving expenses........................................................................ *
Legal fees and expenses................................................................................ *
Accounting fees and expenses........................................................................... *
Transfer agent and registrar fees...................................................................... *
Miscellaneous.......................................................................................... *
-------
Total............................................................................................. $ *
-------
-------
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
'DGCL'), Article VI of the BMJ Medical Management, Inc. (the 'Company' or the
'Registrant') Restated Certificate of Incorporation (the 'Certificate of
Incorporation') (filed as Exhibit 3.1 to this Registration Statement) eliminates
the liability of the Company's directors to the Company or its stockholders,
except for liabilities related to breach of duty of loyalty, actions not in good
faith and certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Company of its
directors and officers. In addition, Article IX, Section 1 of the Company's
By-laws (filed as Exhibit 3.2 to this Registration Statement) requires the
Company to indemnify any current or former director or officer to the fullest
extent permitted by the DGCL. In addition, the Company has entered into
indemnity agreements with its directors (a form of which is filed as Exhibit
10.1 to this Registration Statement) which obligate the Company to indemnify
such directors to the fullest extent permitted by the DGCL. The Company also
maintains officers' and directors' liability insurance, which insures against
liabilities that officers and directors of the Company may incur in such
capacities.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement, which provides for indemnification of the
directors and officers of the Company signing the Registration Statement and
certain controlling persons of the Company against certain liabilities,
including those arising under the Securities Act, in certain instances by the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1996 the Company has issued unregistered securities to investors
and to physicians and certain other individuals in connection with the
affiliation transactions with the medical practices (the 'Affiliation
Transactions'). Each such issuance was made in reliance upon the exemption from
the registration requirements of the Securities Act of 1933, as amended,
contained in Section 4(2) of the Securities Act or Rule 701 promulgated under
the Securities Act on the basis that such transactions did not involve a public
offering.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
1. On May 6, 1996, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 1,175,000 shares of Common Stock, $.001 par value per
share (the 'Common Stock') and 999,999 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value (the 'Series A Preferred Stock'),
for an aggregate purchase price of $1,011,749 to Naresh Nagpal, M.D. ('Dr.
Nagpal'), Oak VI Affiliates Fund, Limited Partnership ('Oak VI'), Oak Investment
Partners VI, Limited Partnership ('Oak Partners'), Delphi Ventures III, L.P.
('Delphi Ventures'), Delphi BioInvestments III, L.P. ('Delphi BioInvestments')
and Scheer & Company, Inc. ('Scheer').
2. On June 1, 1996, pursuant to the terms of an Incentive Stock Option
Agreement, the Company granted Scott Cielewich an option to purchase 50,000
shares of Common Stock, with an exercise price of $.01 per share.
3. On June 10, 1996, pursuant to an Incentive Stock Option Agreement, the
Company granted Caridad LaPlace an option to purchase 5,000 shares of Common
Stock with an exercise price of $.01 per share.
4. On July 1, 1996, the Company issued 450,000 shares of Common Stock
pursuant to a Management Services Agreement and Restricted Stock Agreements to
Lehigh Valley Bone, Muscle and Joint ('LVBMJ') and the following physicians
affiliated with LVBMJ: Thomas Sauer, M.D., Ranjan Sachdev, M.D., Joseph
Garbarino, M.D., John Williams, M.D. and Peter W. Kozicky, M.D.
5. On September 23, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Ronald Garey an option to purchase 30,000 shares of Common
Stock with an exercise price of $.25 per share.
6. On November 1, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Deborah Flytuta an option to purchase 5,000 shares of Common
Stock with an exercise price of $.25 per share.
7. On November 4, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Sherry Pulliam an option to purchase 25,000 shares of Common
Stock with an exercise price of $.25 per share.
8. On November 12, 1996, pursuant to a Stock Purchase Agreement, the
Company issued 2,000,001 shares of its Series B Convertible Preferred Stock,
$.01 par value (the 'Series B Preferred Stock'), for an aggregate purchase price
of $6,000,003 to Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, and Delphi
BioInvestments.
9. On November 22, 1996, pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued 4,000,000 shares of Common Stock
to the following physicians (or their respective corporations) and employees
affiliated with Southern California Orthopedic Institute Medical Group ('SCOI'):
Pamela Westlin, Glenn Cozen, James M. Fox, M.D., Inc., the Friedman Family
Trust, Wilson Del Pizzo, M.D., Inc., Stephen Snyder, M.D., Richard Ferkel, M.D.,
Todd Moldawer, M.D., Gregory Hanker, M.D., Herbert Dennis Huddleston, M.D.,
Inc., A. Elizabeth Bloze, M.D., Todd Molnar, M.D., Trevor P. Lynch, M.D., a
medical corporation, Saul M. Bernstein, M.D., Inc., Steven Schopler, M.D.,
Ronald Karzel, M.D., Hrair Darakjian, M.D., Jonathan Jaivan, M.D., Donald Wiss,
M.D., Patricia McKeever, M.D., and David Auerbach, M.D.
10. On December 2, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Randal Farwell an option to purchase 40,000 shares of Common
Stock with an exercise price of $.35 per share.
11. On December 23, 1996, the Company issued 1,076,501 shares of Common
Stock to physicians affiliated with South Texas Spinal Clinic ('STSC') in
accordance with the terms of a Management Services Agreement and Restricted
Stock Agreements.
12. On January 1, 1997, pursuant to a Non-qualified Stock Option Agreement,
the Company granted Dr. Nagpal an option to purchase 150,000 shares of Common
Stock with an exercise price of $.01 per share.
13. On January 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted G. Steven Ensinger an option to purchase 25,000 shares of
Common Stock with an exercise price of $.35 per share.
14. On January 2, 1997, the Company issued 10,000 shares of Common Stock to
Scott Cielewich upon exercise of the vested portion of his option (which was
granted on June 1, 1996).
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
15. On January 14, 1997, the Company issued warrants to purchase an
aggregate of 33,333 shares of Common Stock at an exercise price of $3.00 per
share to Dr. Nagpal, Delphi BioInvestments, Delphi Ventures, Oak VI and Oak
Partners in connection with a bridge loan from such persons to the Company.
16. On January 29, 1997, pursuant to a Stock Purchase Agreement, the
Company issued 183,332 shares of Series C Convertible Preferred Stock, $.01 par
value (the 'Series C Preferred Stock'), for an aggregate purchase price of
$549,996 to certain of the SCOI physicians, Glenn Cozen and the Saphier and
Heller Retirement Trust.
17. On January 30, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Pamela Westlin an option to purchase 22,000 shares of Common
Stock with an exercise price of $.35 per share.
18. On January 30, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Cindy Lesonsky an option to purchase 8,000 shares of Common
Stock with an exercise price of $.35 per share.
19. On February 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted David Fater an option to purchase 140,000 shares of Common
Stock with an exercise price of $.35 per share.
20. On February 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Andrea Seratte an option to purchase 40,000 shares of Common
Stock with an exercise price of $.35 per share.
21. On March 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Glenn Cozen an option to purchase 75,000 shares of Common Stock
with an exercise price of $.35 per share.
22. On March 7, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Caridad LaPlace an option to purchase 2,000 shares of Common
Stock with an exercise price of $.50 per share.
23. On March 12, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Robert Cox an option to purchase 40,000 shares of Common Stock
with an exercise price of $.50 per share.
24. On March 12, 1997, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 71,667 shares of Series C Preferred Stock for an
aggregate purchase price of $215,001 to the following persons and entities:
Andrea Seratte, CGJR Health Care Services Private Equities, L.P. ('CGJR Health
Care'), CGJR II, L.P. ('CGJR II'), and CGJR MF/III, L.P. ('CGJR/MF').
25. On April 1, 1997, the Company issued 550,000 shares of Common Stock to
the SCOI physicians who collectively own Center for Orthopedic Surgery, Inc.
('COSI').
26. On April 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Brent Mellecker an option to purchase 40,000 shares of Common
Stock with an exercise price of $.50 per share.
27. On April 1, 1997, the Company issued 402,723 shares of Common Stock to
the following physicians affiliated with Tri-City Orthopaedic Surgery Medical
Group, Inc. ('Tri-City'): Neville Alleyne, M.D., James Esch, M.D., James
Helgager, M.D., Norman Kane, M.D., Richard Muir, M.D., Leonard Ozerkis, M.D.,
and Jacob Sharp, M.D.
28. On April 14, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Keith Bolton an option to purchase 50,000 shares of Common Stock
with an exercise price of $.50 per share.
29. On April 14, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Lee Bodendorfer an option to purchase 30,000 shares of Common
Stock with an exercise price of $.50 per share.
30. On April 15, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Pamela Montgomery an option to purchase 20,000 shares of Common
Stock with an exercise price of $.50 per share.
31. On April 30, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted M. Anthony Anderson an option to purchase 25,000 shares of
Common Stock with an exercise price of $.50 per share.
32. On May 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Meg Finnegan an option to purchase 20,000 shares of Common Stock
with an exercise price of $.50 per share.
II-3
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
33. On May 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Norman Lapin an option to purchase 40,000 shares of Common Stock
with an exercise price of $.50 per share.
34. On May 6, 1997 pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued an aggregate of 478,348 shares
of Common Stock. Such stock was issued in accordance with the following: (a) an
aggregate of 445,962 shares to the following physicians affiliated with
Lauderdale Orthopaedic Surgeons ('LOS'): Martin Silverstein, M.D., Michael
Weiss, M.D., Michael Ruddy, M.D., Raul Aparicio, M.D., Verano Hermida, M.D. and
Paul Greenman, D.P.M., Practice Solutions, (b) an aggregate of 27,613 shares to
LOS' broker and attorney and (c) 4,773 shares to LOS' accountant, Kenneth A.
Ortner, P.A.
35. On May 6, 1997, pursuant to Restricted Stock Agreements, the Company
issued 5,000 shares of Common Stock to each of the following physicians
affiliated with LOS: Martin Silverstein, M.D., Michael Weiss, M.D., Michael
Ruddy, M.D., and Raul Aparicio, M.D.
36. On June 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Sandra Britton an option to purchase 6,000 shares of Common
Stock with an exercise price of $.50 per share.
37. On June 1, 1997, the Company issued 59,693 shares of Common Stock to
Clive Segil, M.D., under the terms of a Management Services Agreement and
Restricted Stock Agreement.
38. On June 1, 1997, pursuant to a Management Services Agreement and
Restricted Stock Agreement, the Company issued 84,197 shares of Common Stock to
H. Leon Brooks, M.D, a sole practitioner.
39. On June 1, 1997, pursuant to a Non-qualified Stock Option Agreement,
the Company granted James Hofmann, M.D. an option to purchase 20,000 shares of
Common Stock with an exercise price of $.25 per share.
40. On June 1, 1997, pursuant to a Non-qualified Stock Option Agreement,
the Company granted Christopher Dankmeyer, M.D. an option to purchase 10,000
shares of Common Stock with an exercise price of $.25 per share.
41. On June 2, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Dana Reynolds an option to purchase 30,000 shares of Common
Stock with an exercise price of $.50 per share.
42. On June 19, 1997, pursuant to a Stock Purchase Agreement, the Company
issued 188,072 shares of Series D Convertible Preferred Stock, $.01 par value
(the 'Series D Preferred Stock') to Oak VI, Oak Partners, Delphi Ventures,
Delphi BioInvestments and Dr. Nagpal in exchange for promissory notes in the
principal amount of $999,999 plus accrued interest previously delivered by the
Company to the foregoing.
43. On June 19, 1997, the Company issued an aggregate of 533,335 shares of
its Series E Convertible Preferred Stock, $.01 par value (the 'Series E
Preferred Stock'), for an aggregate purchase price of $3,200,010 to Dr. Nagpal,
Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care,
CGJR II and CGJR/MF.
44. On June 23, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Joanna Robben an option to purchase 75,000 shares of Common
Stock with an exercise price of $.50 per share.
45. On June 30, 1997, the Company issued warrants to purchase 40,000 shares
of Common Stock to HCFP Funding, Inc. ('HCFP Funding') in connection with a
senior secured loan in the aggregate principal amount of $3,250,000 from HCFP
Funding to the Company and issued warrants to purchase an aggregate of 13,332
shares of Common Stock to the following persons in connection with the guarantee
of the loan by such persons: Dr. Nagpal, Delphi Ventures, Delphi BioInvestments,
Oak Partners and Oak VI.
46. On July 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Denise Truese an option to purchase 5,000 shares of Common Stock
with an exercise price of $.50 per share.
47. On July 1, 1997, the Company issued 45,108 shares of Common Stock to
John Zimmerman, D.P.M. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
II-4
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
48. On July 1, 1997, the Company issued 97,500 shares of Common Stock to
Dr. Nagpal upon conversion of his 1996 accrued compensation and cash bonus for
the fiscal year ended December 31, 1996, payable by the Company to him.
49. On July 1, 1997, the Company issued a total of 150,708 shares of Common
Stock to Randy C. Watson, M.D., Keith R. Swanson, M.D. and Stephen P. Abelow,
M.D., who are affiliated with Surgical Associates of Lake Tahoe, L.P. under the
terms of three Management Services Agreements and three Restricted Stock
Agreements.
50. On July 1, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
124,385 shares of Common Stock to the following physicians affiliated with
Stockdale Podiatry Group, Inc.: Michelle Kraft, D.P.M., Lee Marek, D.P.M., Mark
L. Hamilton, D.P.M. and Mark F. Miller, D.P.M.
51. On July 3, 1997, pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued 265,725 shares of Common Stock
to the following physicians, one broker and one attorney affiliated with Fishman
& Stashak, M.D.'s, P.A. (dba Gold Coast Orthopedics), Eric S. Fishman, M.D.,
Gerald T. Stashak, M.D., Mark A. Rubenstein, M.D., Chaim Arlosoroff, M.D., David
J. Menkhaus and Les S. Alt.
52. On July 8, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Nancy Strayer an option to purchase 10,000 shares of Common
Stock with an exercise price of $.50 per share.
53. On July 14, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted David Ellwanger an option to purchase 125,000 shares of Common
Stock with an exercise price of $.50 per share.
54. On July 21, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Beth Landel an option to purchase 35,000 shares of Common Stock
with an exercise price of $.50 per share.
55. On July 24, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted David Coffler an option to purchase 8,000 shares of Common Stock
with an exercise price of $.50 per share.
56. On July 31, 1997, the Company issued 166,667 shares of Series E
Preferred Stock to HIS Ventures, LLC, an affiliate of Galtney Corporate
Services, Inc. ('Galtney'), for an aggregate purchase price of $1,000,000.
57. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Randy Farber an option to purchase 30,000 shares of Common Stock
with an exercise price of $.50 per share.
58. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Steven Ensinger an option to purchase 15,000 shares of Common
Stock with an exercise price of $.60 per share.
59. On August 1, 1997, the Company issued 40,058 shares of Common Stock to
Robert Wilson, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
60. On August 1, 1997, the Company issued warrants to purchase an aggregate
of 130,000 shares of Series E Preferred Stock, to Comdisco, Inc. ('Comdisco') in
connection with the execution of a (i) Master Lease Agreement and (ii)
Subordinated Loan and Security Agreement pursuant to which Comdisco made a
subordinated loan to the Company in the aggregate principal amount of
$5,000,000.
61. On August 1, 1997, the Company issued 157,807 shares of Common Stock to
the following physicians affiliated with Sun Valley Orthopaedic Surgeons under
the terms of a Management Services Agreement and Restricted Stock Agreements:
Jon Gelsey, M.D., Martin Sterusky, M.D. and Robert Waldrip, M.D.
62. On August 1, 1997, the Company issued 95,384 shares of Common Stock to
Michael Abrahams, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
63. On August 4, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Helen Arnzen an option to purchase 5,000 shares of Common Stock
with an exercise price of $.50 per share.
II-5
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
64. On August 9, 1997, pursuant to an Amended and Restated Management
Services Agreement and Restricted Stock Agreements, the Company issued 68,031
shares of Common Stock to the following physicians affiliated with LVBMJ: Thomas
Sauer, M.D., Ranjan Sachdev, M.D., Joseph Garbarino, M.D., John Williams, M.D.
and Peter W. Kozicky, M.D.
65. On August 18, 1997, pursuant to a Stock Purchase Agreement, the Company
issued 41,667 shares of Series E Preferred Stock to Comdisco for an aggregate
purchase price of $250,000.
66. On August 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Lisa Arnold an option to purchase 5,000 shares of Common
Stock with an exercise price of $.60 per share.
67. On August 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Marc Guthart an option to purchase 7,000 shares of Common
Stock with an exercise price of $.60 per share.
68. On August 22, 1997, the Company issued warrants to purchase an
aggregate of 37,500 shares of Series E Preferred Stock to Galtney in connection
with a Subordinated Loan from Galtney to the Company.
69. On August 26, 1997, pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued 656,902 shares of Common Stock
to the following physicians, one attorney and one broker affiliated with Broward
Orthopedic Specialties, Inc.: Kalman Blomberg, M.D., Michael Reilly, M.D., Alan
Rootman, M.D., Jeffrey Cantor, M.D., John Fernandez, M.D., Terence Matthews,
M.D., Steven Naide, M.D., Mitchell Seavey, M.D., David Menkhaus and Les Alt.
70. On August 26, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Andrew Heeman an option to purchase 5,000 shares of Common
Stock with an exercise price of $2.00 per share.
71. On September 4, 1997, the Company issued 38,229 shares of Common Stock
to Eradio Arredondo, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
72. On September 5, 1997, the Company issued 72,600 shares of Common Stock
to Kramer & Maehrer, LLC under the terms of a Management Services Agreement and
Restricted Stock Agreement.
73. On September 9, 1997, the Company issued 36,492 shares of Common Stock
to Jeffrey Beitler, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
74. On September 9, 1997, the Company issued and sold $4,000,000 in
aggregate principal amount of its subordinated convertible debentures due 2000
to the following: Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak
Partners, Oak VI, and Health Care Services-BMJ, LLC and HGQ Serv*is Ventures,
L.P. affiliates of Hambrecht & Quist, LLC. which are convertible into shares of
Common Stock at an initial conversion price equal to $7.20 per share.
75. On September 12, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
126,923 shares of Common Stock to the following physicians affiliated with
Physical Medicine and Rehabilitation Associates, Inc.: Marc Levinson, M.D.,
Joseph Alshon, M.D., Daniel Picard, M.D., Jonathan Tarrash, M.D. and Max
Gilbert, M.D.
76. On October 15, 1997, pursuant to the terms of a Note Agreement, the
Company issued warrants to purchase an aggregate of 67,500 shares of the
Company's Common Stock to the following: Dr. Nagpal, Delphi Ventures, Delphi Bio
Investments, Oak Partners, Oak VI and Dr. Fox.
77. On October 16, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
282,254 shares of Common Stock to the following physicians affiliated with OSA:
Dr. Eidelson, John VanHouten, M.D., Robert Zann, M.D., Eric Shapiro, M.D., Edgar
Handal, M.D. and Brandon Luskin, M.D.
78. On October 26, 1997, pursuant to the terms of Restricted Stock
Agreements, the Company issued an aggregate of 57,036 shares of Common Stock to
the following physicians affiliated with Orthopaedic Management Network, Inc.:
Gustavo Armendariz, M.D., Philip Bowman, M.D., Roberto Carreon, M.D., Thomas
Carter, M.D., Richard Collins, M.D., Dennis Crandall, M.D., Jody Daggett, M.D.,
Richard Daley, J.D., Jack
II-6
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
Davis, M.D., Sherwood Duhon, M.D., Thomas Erickson, M.D., Norman Fee, M.D.,
Jonathan Fox, M.D., Charles Gauntt, M.D., Lawrence Green, M.D., Mark Greenfield,
M.D., Dan Heller, M.D., Peter Herwick, M.D., Robert Johnson, M.D., Robert Kasa,
M.D., Douglas Kelly, M.D., Stuart Kozinn, M.D., Richard Lane, M.D., John Mahon,
M.D., Bruce Mallin, M.D., Bert McKinnon, M.D., Stephen Milliner, M.D., Gerald
Moczynski, M.D., Neil Motzkin, M.D., Paul Palmer, M.D., William Quinlan, M.D.,
Vincent Russo, M.D., Ronald Sandler, M.D., Saul Schreiber, M.D., Irwin Shapiro,
M.D., Victor Tseng, M.D., Larry Verhulst, M.D., John Whisler, M.D., Robert
White, M.D., Ralph Wilson, M.D., Mark Zachary, M.D. and Jon Zoltan, M.D.
79. On October 28, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
52,972 shares of Common Stock to the following physician affiliated with LOAS:
Bruce Young, M.D., Dominic Kleinhenz, M.D., William McKay, M.D., George
Kolettis, M.D. and Thomas Goberville, M.D.
80. On October 31, 1997, pursuant to the terms of a Management Services
Agreement and Restricted stock Agreements, the Company issued an aggregate of
260,237 shares of Common Stock to the following physicians affiliated with BIOS:
David A. Krant, M.D., Jeffrey B. Worth, M.D., Jeffrey A. Crastnopol, M.D., Marc
Z. Hammerman, M.D., Gary B. Schwartz, M.D., Marshall E. Stauber, M.D., Thomas A.
Hoffeld, M.D. and Phillip E. Greenbarg, M.D.
II-7
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Restated Certificate of Incorporation of the Registrant.
***3.2 -- By-laws of the Registrant.
***4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan.
*5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) regarding
legality of securities being offered.
**10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures and Delphi BioInvestments.
***10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures, and Delphi BioInvestments.
***10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians affiliated
with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement Trust.
***10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR Health
Care, CGJR II and CGJR/MF.
*10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF.
*10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures, LLC.
*10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco.
*10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding.
***10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP Funding.
*10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended, between the
Company and Comdisco.
*10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company.
*10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the Company and
Galtney.
*10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the Company, Dr.
Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners, Health Care Services--BMJ,
LLC and HGQ Serv*is Ventures, L.P.
***10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company and
payable to the order of Dr. Nagpal, dated January 10, 1997.
***10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company and
payable to the order of Dr. Nagpal, dated January 10, 1997.
***10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996, among the
Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Scheer and the
stockholders named therein.
**10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996.
***10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among the
Company, LVBMJ amd certain physicians affiliated with LVBMJ.
***10.19 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and OAB.
10.20 -- Amended and Restated Restricted Stock Agreement, dated as of September 9, 1997, among the
Company, LVBMJ and certain physicians affiliated with LVBMJ.
***10.21 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company
and STSC.
***10.22 -- Asset Purchase Agreement, dated as of November 1, 1996, between the Company and STSC.
</TABLE>
II-8
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
***10.23 -- Restricted Stock Agreement, dated as of December 23, 1996, between the Company, STSC and certain
physicians affiliated with STSC.
***10.24 -- Stockholder Non-Competition Agreement, dated as of December 23, 1996, among the Company, STSC and
the STSC physicians.
**10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the Company,
Tri-City and the indemnifying persons identified therein.
***10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City.
**10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company, Tri-City
and certain physicians affiliated with Tri-City.
***10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company, Tri-City and
certain physicians affiliated with Tri-City.
**10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company
and SCOI.
***10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and SCOI.
**10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, among the Company, SCOI, certain
physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI and Oak Partners.
***10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company, SCOI and
certain physicians affiliated with SCOI.
**10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company, LOS and
certain physicians affiliated with LOS.
***10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS.
**10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS and
certain physicians affiliated with LOS.
***10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company, LOS and
certain physicians affiliated with LOS.
**10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the Company, Sun
Valley and the indemnifying persons thereto.
**10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun Valley.
**10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain
physicians affiliated with Sun Valley.
**10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun Valley
and certain physicians affiliated with Sun Valley.
**10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the Company, Gold
Coast and the physicians affiliated with Gold Coast.
**10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company and Gold
Coast.
**10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and certain
physicians affiliated with Gold Coast.
***10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and certain
physicians affiliated with Gold Coast.
**10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast.
***10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal, Dr. Fox,
Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI.
*10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company and OSA.
*10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and OSA.
</TABLE>
II-9
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and certain
physicians affiliated with OSA.
*10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company and certain
physicians affiliated with OSA.
*10.51 -- Management Services Agreement, effective as of September 1, 1997, between the Company and BIOS.
*10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and BIOS.
*10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and certain
physicians affiliated with BIOS.
*10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company and certain
physicians affiliated with BIOS.
*10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company and LOAS.
*10.56 -- Asset Purchase Agreement effective as of September 1, 1997, between the Company and certain
affiliates of LOAS.
*10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and certain
physicians affiliated with LOAS.
*10.58 -- Amended and Restated Practice Management Services Agreement dated as of September 26, 1997, among
the Company and certain physicians affiliated with Orthopaedic Management Network, Inc.
*10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and certain
physicians affiliated with Orthopaedic Management Network, Inc.
*10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the Company,
OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the shareholders'
representative named therein.
**10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI.
***11.1 -- Schedule of Calculation of Earnings Per Share.
***21 -- List of Subsidiaries.
*23.1 -- Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its opinion to be filed as
Exhibit 5 hereto).
**23.2 -- Consent of Ernst & Young LLP, independent certified public accountants.
***24 -- Powers of Attorney (included on page II-10).
***27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements
or related notes.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is
II-10
<PAGE>
ITEM 17. UNDERTAKINGS.--(CONTINUED)
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in 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 the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-11
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOCA
RATON, STATE OF FLORIDA ON THE 6TH DAY OF NOVEMBER, 1997.
BMJ MEDICAL MANAGEMENT, INC.
By: /s/ Naresh Nagpal
----------------------------------
Name: Naresh Nagpal, M.D.
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 6TH DAY OF NOVEMBER,
1997, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------
<S> <C> <C>
/s/ NARESH NAGPAL President, Chief Executive Officer and
- ------------------------------------------ Director (Principal Executive Officer)
Naresh Nagpal, M.D.
/s/ DAVID H. FATER Executive Vice President, Chief Financial
- ------------------------------------------ Officer and Director (Principal Financial
David H. Fater and Accounting Officer)
Director
- ------------------------------------------
Georges Daou
Director
- ------------------------------------------
Stewart G. Eidelson, M.D.
* Director
- ------------------------------------------
Ann H. Lamont
* Director
- ------------------------------------------
Donald J. Lothrop
* Director
- ------------------------------------------
James M. Fox, M.D.
/s/ DAVID H. FATER
*By --------------------------------------
David H. Fater, Attorney-in-Fact
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Restated Certificate of Incorporation of the Registrant.
***3.2 -- By-laws of the Registrant.
***4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan.
*5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm)
regarding legality of securities being offered.
**10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures and Delphi BioInvestments.
***10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures, and Delphi BioInvestments.
***10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians
affiliated with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement
Trust.
***10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR
Health Care, CGJR II and CGJR/MF.
*10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and
CGJR/MF.
*10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures,
LLC.
*10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco.
*10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding.
***10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP
Funding.
*10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended,
between the Company and Comdisco.
*10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company.
*10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the
Company and Galtney.
*10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the
Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners,
Health Care Services--BMJ, LLC and HGQ Serv*is Ventures, L.P.
***10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997.
***10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997.
***10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996,
among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners,
Oak VI, Scheer and the stockholders named therein.
**10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996.
***10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among
the Company, LVBMJ amd certain physicians affiliated with LVBMJ.
***10.19 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and OAB.
10.20 -- Amended and Restated Restricted Stock Agreement, dated as of September 9, 1997, among
the Company, LVBMJ and certain physicians affiliated with LVBMJ.
***10.21 -- Management Services Agreement, effective as of November 1, 1996, as amended, between
the Company and STSC.
***10.22 -- Asset Purchase Agreement, dated as of November 1, 1996, between the Company and STSC.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
***10.23 -- Restricted Stock Agreement, dated as of December 23, 1996, between the Company, STSC
and certain physicians affiliated with STSC.
***10.24 -- Stockholder Non-Competition Agreement, dated as of December 23, 1996, among the
Company, STSC and the STSC physicians.
**10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the
Company, Tri-City and the indemnifying persons identified therein.
***10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City.
**10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company,
Tri-City and certain physicians affiliated with Tri-City.
***10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company,
Tri-City and certain physicians affiliated with Tri-City.
**10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between
the Company and SCOI.
***10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and
SCOI.
**10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, among the Company, SCOI,
certain physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI
and Oak Partners.
***10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company,
SCOI and certain physicians affiliated with SCOI.
**10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company,
LOS and certain physicians affiliated with LOS.
***10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS.
**10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS
and certain physicians affiliated with LOS.
***10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company,
LOS and certain physicians affiliated with LOS.
**10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the
Company, Sun Valley and the indemnifying persons thereto.
**10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun
Valley.
**10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and
certain physicians affiliated with Sun Valley.
**10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun
Valley and certain physicians affiliated with Sun Valley.
**10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the
Company, Gold Coast and the physicians affiliated with Gold Coast.
**10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company
and Gold Coast.
**10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and
certain physicians affiliated with Gold Coast.
***10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and
certain physicians affiliated with Gold Coast.
**10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast.
***10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal,
Dr. Fox, Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI.
*10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company
and OSA.
*10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and
OSA.
*10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and
certain physicians affiliated with OSA.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
*10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company
and certain physicians affiliated with OSA.
*10.51 -- Management Services Agreement, effective as of September 1, 1997, between the Company
and BIOS.
*10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and
BIOS.
*10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and
certain physicians affiliated with BIOS.
*10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company
and certain physicians affiliated with BIOS.
*10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company
and LOAS.
*10.56 -- Asset Purchase Agreement effective as of September 1, 1997, between the Company and
certain affiliates of LOAS.
*10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and
certain physicians affiliated with LOAS.
*10.58 -- Amended and Restated Practice Management Services Agreement dated as of September 26,
1997, among the Company and certain physicians affiliated with Orthopaedic Management
Network, Inc.
*10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and
certain physicians affiliated with Orthopaedic Management Network, Inc.
*10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the
Company, OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the
shareholders' representative named therein.
**10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI.
***11.1 -- Schedule of Calculation of Earnings Per Share.
***21 -- List of Subsidiaries.
*23.1 -- Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its opinion to
be filed as Exhibit 5 hereto).
**23.2 -- Consent of Ernst & Young LLP, independent certified public accountants.
***24 -- Powers of Attorney (included on page II-10).
***27 -- Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
<PAGE>
Exhibit 10.1
<PAGE>
================================================================================
STOCK PURCHASE AGREEMENT
DATED AS OF
MAY 6, 1996
AMONG
BONE, MUSCLE AND JOINT, INC.
AND
THE INVESTORS IDENTIFIED HEREIN
================================================================================
<PAGE>
BONE, MUSCLE AND JOINT, INC.
As of May 6, 1996
To Each of the Parties
Named on Schedule I Attached
Hereto:
Stock Purchase Agreement
Ladies and Gentlemen:
The undersigned, BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the
"Corporation"), hereby agrees with each of the parties listed on Schedule I
hereto (each, an "Investor," and, collectively, the "Investors") as follows:
SECTION 1. Issuance and Sale of Common Stock and Series A Preferred
Stock; Closing.
1.1 Authorization of Shares. On the terms and subject to the conditions
hereof, the Corporation has authorized the issuance and sale at the Closing (as
hereinafter defined) of an aggregate of (a) 1,175,000 shares (the "Common
Shares") of common stock, $.001 par value (the "Common Stock"), of the
Corporation and (b) 999,999 shares (the "Series A Preferred Shares;" and
together with the Common Shares, the "Shares") of Series A Convertible Preferred
Stock, $.01 par value (the "Series A Preferred Stock"), of the Corporation.
1.2 Agreement to Purchase and Sell the Shares. At the Closing, the
Corporation is selling to each Investor, and each Investor is severally
purchasing from the Corporation, upon the terms and subject to the conditions
hereinafter set forth, that number of Common Shares and Series A Preferred
Shares set forth opposite the name of such Investor on Schedule I hereto, at a
purchase price of $.01 per Common Share and $1.00 per Series A Preferred Share.
1.3 The Closing. The closing (the "Closing") hereunder with respect to the
Shares is taking place on the date hereof at the offices of O'Sullivan Graev &
Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112, simultaneously
with the execution and delivery of this Agreement (the date hereof being
sometimes referred to herein as the "Closing Date").
1.4 Delivery of Shares to the Investors. At the Closing, the Corporation
shall deliver to each Investor certificates representing that number of Common
Shares and Series
<PAGE>
A Preferred Shares set forth opposite such Investor's name on
Schedule I, in each case registered in the name of such Investor and dated the
Closing Date. Delivery to each Investor of the Common Shares and Series A
Preferred Shares to be purchased by such Investor hereunder shall be made
against receipt by the Corporation of a check payable to the Corporation, or a
wire transfer to an account designated by the Corporation, in either case in an
amount equal to the full amount of the purchase price for such Common Shares and
Series A Preferred Shares being purchased by such Investor.
SECTION 2. Representations and Warranties of the Corporation. The
Corporation hereby represents and warrants to the Investors as follows:
2.1 Organization. The Corporation is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Corporation has all requisite corporate power and authority to own and lease its
properties, to carry on its business as presently conducted and as proposed to
be conducted and to carry out the transactions contemplated hereby. The
Corporation will be qualified to do business as a foreign corporation in the
State of Florida and is not qualified to do business as a foreign corporation in
any other jurisdiction and the failure to be so qualified in any such other
jurisdiction will not have a material adverse effect on the Corporation's
business or financial condition.
2.2 Capitalization. The authorized capital stock of the Corporation
immediately upon consummation of the transactions contemplated hereby shall
consist of:
(a) 10,000,000 shares of Common Stock, of which (i) 1,175,000 shares will
be validly issued and outstanding, fully paid and nonassessable; (ii) 225,000
shares will be reserved for issuance to Naresh Nagpal, M.D. ("Dr. Nagpal")
pursuant to that certain letter of employment dated as of the date hereof (the
"Employment Letter") between the Corporation and Dr. Nagpal in the form of
Exhibit A attached hereto; and (iii) 1,250,000 shares (including those shares
referred to in Section 2.2(a)(ii) hereof) will be reserved for issuance to
senior management employees pursuant to the Corporation's 1996 Stock Option Plan
(the "Stock Option Plan"); and
(b) 5,000,000 shares of preferred stock, $.01 par value (the "Preferred
Stock"), of the Corporation, of which (i) 999,999 shares will be designated
Series A Preferred Stock and all of such shares will be validly issued and
outstanding, fully paid and nonassessable and (ii) 999,999 shares will be
designated Series A-1 Preferred Stock and all of such shares will be reserved
for issuance upon conversion of the Series A Preferred Stock pursuant to Section
6 of Article IV of the Certificate of Designation.
2
<PAGE>
Except for Common Stock issuable upon conversion of the Series A Preferred
Shares and pursuant to the Stock Option Plan and the Employment Letter and upon
the consummation of the transactions contemplated hereby, there will be no (i)
outstanding warrants, options, agreements, convertible securities or other
commitments or instruments pursuant to which the Corporation is or may become
obligated to issue or sell any shares of capital stock or other securities of
the Corporation or (ii) preemptive or similar rights to purchase or otherwise
acquire shares of capital stock of the Corporation pursuant to any provision of
law, the Certificate of Incorporation or By-laws of the Corporation or any
agreement to which the Corporation is party or otherwise.
2.3 Authorization. The execution, delivery and performance by the
Corporation of this Agreement and the agreements referred to herein or
contemplated hereby to which the Corporation is a party (collectively, the
"Related Agreements") and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all requisite corporate action
on the part of the Corporation, and this Agreement and each of the Related
Agreements has been duly executed and delivered by the Corporation and
constitutes the valid and binding obligation of the Corporation, enforceable in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or similar laws
relating to or affecting the rights and remedies of creditors and debtors, and
equitable principles generally, regardless of whether such principles are
considered in a proceeding at equity or at law. The execution, delivery and
performance of this Agreement and each of the Related Agreements and compliance
with the provisions hereof and thereof by the Corporation will not (a) violate
in any material respect any law or statute or order, judgment or decree of any
court, administrative agency or other governmental body applicable to the
Corporation or its properties or assets or (b) conflict in any material respect
with or result in any material breach of any of the terms or provisions or
constitute (with due notice or lapse of time, or both) a default under the
Certificate of Incorporation or By-laws of the Corporation or any note,
indenture, mortgage, lease agreement or other material agreement, contract or
instrument to which the Corporation is a party or by which it or any of its
properties or assets may be bound or affected.
2.4 No Consent or Approval Required. No authorization, consent, approval or
other order of, or declaration to or filing with, any governmental agency or
body or other person or entity is required for the valid authorization,
execution, delivery and performance by the Corporation of this Agreement or any
of the Related Agreements.
2.5 Authorization of Shares. The issuance, sale and delivery of the Shares
have been duly authorized by all requisite corporate action of the Corporation
and when issued, sold and delivered in accordance with the terms of this
Agreement, the
3
<PAGE>
Shares will be validly issued and outstanding, fully paid and nonassessable and
will not be subject to preemptive or other similar rights of the stockholders of
the Corporation or others.
2.6 Commencement of Business. Since its inception, the Corporation has
operated as a development stage company and the Corporation (i) is not a party
to any written or oral contract, agreement or understanding, other than as
contemplated by this Agreement or any Related Agreement; (ii) does not have any
liabilities of any nature whatsoever (matured or unmatured, fixed or
contingent), except the expenses that it has incurred in connection with its
incorporation and organization, legal expenses and other miscellaneous expenses
incident to its operations prior to the date hereof or in connection with or in
preparation for the transactions contemplated hereby; and (iii) is not a party
to or directly or indirectly bound by any indenture, mortgage, deed of trust or
other agreement or instrument relating to the borrowing of money (written or
oral).
2.7 Litigation. There are no actions, suits, proceedings or investigations
pending against the Corporation before any court or governmental agency, nor to
the best of the Corporation's knowledge, is there any action, suit, proceeding
or investigation pending or threatened affecting the Corporation's properties,
assets or operations or its right to employ or retain any of its employees or
consultants.
2.8 Use of Proceeds. The net proceeds received by the Corporation from the
sale of the Shares shall be used by the Corporation for general working capital
purposes as determined by the Board of Directors from time to time.
SECTION 3. Representations and Warranties of the Investors. Each Investor
hereby severally represents and warrants to the Corporation as follows:
3.1 Authorization. The execution, delivery and performance by such Investor
of this Agreement and the Related Agreements to which such Investor is a party
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all requisite action on the part of such Investor, and
this Agreement and each of the Related Agreements has been duly executed and
delivered by such Investor and constitute the valid and binding obligations of
such Investor, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws relating to or affecting the rights and remedies of
creditors and debtors and equitable principles generally, regardless of whether
such principles are considered in a proceeding at equity or at law. The
execution, delivery and performance of this Agreement and each of the Related
Agreements and compliance with the provisions hereof and thereof by such
Investor will not (a) violate in any material respect any law or statute or
order, judgment or decree of any court, administrative agency or other
governmental body
4
<PAGE>
applicable to such Investor or its properties or assets or (b) conflict in any
material respect with or result in any material breach of any of the terms or
provisions or constitute (with due notice or lapse of time, or both) a default
under the charter or by-laws or agreement of partnership or any similar
organizational document of such Investor or any note, indenture, mortgage, lease
agreement or other material agreement, contract or instrument to which such
Investor is a party or by which it or any of its properties or assets may be
bound or affected.
3.2 Accredited Investor. Such Investor is an "accredited investor" (as such
term is defined in Rule 501 of Regulation D promulgated under the Securities Act
of 1933, as amended (the "Securities Act")).
3.3 Investor Intent. Such Investor is acquiring the Shares for its own
account, for investment and not with a view to, or for resale in connection
with, any distribution thereof, nor with any present intention of distributing
or reselling the same or any part thereof in any transactions that would be in
violation of the Securities Act or any state securities or "blue-sky" laws.
3.4 Restricted Securities. Such Investor understands (i) that the Shares
will not be registered under the Securities Act or any state securities or
"blue-sky" laws by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act or any state securities or
"blue-sky" laws, (ii) that the Shares must be held indefinitely unless a
subsequent disposition thereof is registered under the Securities Act or any
state securities or "blue-sky" laws or is exempt from such registration, (iii)
that the Corporation is under no obligation to so register any shares of Common
Stock, except as provided in the Registration Rights Agreement (as hereinafter
defined) and (iv) that the certificate(s) evidencing the shares of Common Stock
and Series A Preferred Stock will be imprinted with a legend that prohibits the
transfer substantially as set forth in Section 6.2(b) hereof unless they are
registered or such registration is not required.
3.5 Rule 144. Such Investor understands that the exemption from
registration afforded by Rule 144 (the provisions of which are known to such
Investor) promulgated under the Securities Act ("Rule 144") depends on the
satisfaction of various conditions and that, if applicable, Rule 144 may only
afford the basis for sales under certain circumstances only in limited amounts.
3.6 Access to Information; Experience. Such Investor has been furnished
with or has had access during the course of this transaction to all information
necessary to enable such Investor to evaluate the merits and risks of an
investment in the Corporation and such Investor has had an opportunity to
discuss with representatives of the Corporation the business and financial
affairs of the Corporation. Such Investor has conducted its own investigation
and analysis of the business and its investment in the Shares and is not relying
on the Corporation's business plan or any information or opinions contained
therein in making its decision to purchase the Shares. Such Investor has
5
<PAGE>
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Corporation such that the
Investor is capable of evaluating the merits and the risks of its investment in
the Corporation and has the capacity to protect such Investor's own interests in
making this investment in the Corporation. Such Investor can afford to suffer a
complete loss of its investment in the Shares.
SECTION 4. Conditions Precedent to Obligations of Investors. The respective
several obligations of the Investors to purchase and pay for the Shares on the
Closing Date, are subject to the following conditions precedent:
4.1 Corporate Proceedings; Consents; Etc. All corporate and/or other
proceedings to be taken by the Corporation, its officers, directors and
stockholders and all waivers and consents to be obtained by the Corporation in
connection with the transactions contemplated by this Agreement and each of the
Related Agreements shall have been taken or obtained.
4.2 Representations and Warranties. The representations and warranties of
the Corporation contained in Section 2 shall be true and correct in all material
respects.
4.3 Blue Sky Matters. All consents, approvals, qualifications and/or
registrations required to be obtained or effected under any applicable state
securities or "blue-sky" laws in connection with the execution and delivery of
the Shares shall have been obtained or effected.
4.4 Election of Directors. Effective upon the Closing, the authorized
number of directors of the Corporation shall be initially fixed at three and the
following persons shall have been duly elected to serve as the directors of the
Corporation: Ann H. Lamont, Donald I. Lothrop and Naresh Nagpal, M.D.
4.5 Filing of Certificate of Designation. A Certificate of Designation in
the form of Exhibit B attached hereto setting forth the designations and
preferences of the Series A Preferred Stock and the Common Stock shall have been
filed with, and accepted by, the Secretary of State of the State of Delaware,
and evidence of such filing and acceptance, in form satisfactory to the
Investors, shall have been made available to the Investors.
4.6 Stockholders Agreement. The Corporation and each of the other Investors
shall have executed and delivered a
6
<PAGE>
stockholders agreement (the "Stockholders Agreement") substantially in the form
of Exhibit C attached hereto.
4.7 Registration Rights Agreement. The Corporation and each of the other
Investors shall have executed and delivered a registration rights agreement (the
"Registration Rights Agreement") substantially in the form of Exhibit D attached
hereto.
4.8 Stock Option Plan. The Board of Directors and the stockholders of the
Corporation shall have adopted the Stock Option Plan substantially in the form
of Exhibit E attached hereto, including the forms of stock option agreements
annexed thereto as Attachments 1, 2 and 3.
SECTION 5. Conditions Precedent to Obligations of Corporation. The
obligation of the Corporation to issue and sell the Shares on the Closing Date
is subject to the following conditions precedent:
5.1 Representations and Warranties. The representations and warranties of
the Investors contained in Section 3 shall be true and correct in all material
respects.
5.2 Blue Sky Matters. All consents, approvals, qualifications and/or
registrations required to be obtained or effected under any applicable state
securities or "blue-sky" laws in connection with the execution and delivery of
the Shares shall have been obtained or effected.
5.3 Stockholders Agreement. The Stockholders Agreement shall have been
executed and delivered by the Corporation and each of the Investors.
5.4 Registration Rights Agreement. The Registration Rights Agreement shall
have been executed and delivered by the Corporation and each of the Investors.
5.5 Payment of Purchase Price. Each Investor shall have delivered the full
purchase price payable by such Investor hereunder as specified in Section 1.2
hereof.
SECTION 6. Affirmative Covenants.
6.1 Information Rights. The Corporation agrees to provide each of the
Investors with the following:
(a) General. The Corporation will permit such persons on reasonable notice
to visit and inspect during normal business hours any of the properties of the
Corporation, to examine its books and records, to make copies thereof and to
take extracts therefrom and to discuss its affairs, finances and accounts with,
and to be advised as to the same by, its officers, consultants, counsel and
accountants, at such reasonable times as
7
<PAGE>
such persons may desire. In addition, the Corporation will provide to such
persons such other information as from time to time may reasonably be requested.
(b) Monthly Statements. Within 30 days after the end of each monthly
accounting period, an unaudited consolidated financial report of the
Corporation, prepared in accordance with generally accepted accounting
principles consistently applied, except that such financial statements shall not
include footnotes and shall be subject to normal year-end audit adjustments,
including, with respect to such monthly accounting period, the following:
(i) a profit and loss statement for such monthly accounting period,
together with a cumulative profit and loss statement from the first day of
the current year to the last day of such monthly accounting period;
(ii) a balance sheet as at the last day of such monthly accounting
period;
(iii) a statement of cash flow for such monthly accounting period on a
cumulative basis for the fiscal year to date; and
(iv) a comparison between the actual figures for such monthly
accounting period, the comparable figures (with respect to clauses (i) and
(ii) only) for the prior year (if any) and the comparable figures included
in the Budget (as hereinafter defined) for such monthly accounting period.
(c) Quarterly Reports. As soon as available, but not later than 45 days
after the end of each quarterly accounting period, an unaudited consolidated
financial report of the Corporation, prepared in accordance with generally
accepted accounting principles consistently applied, except that such financial
statements shall not include footnotes and shall be subject to normal year-end
audit adjustments, containing the information contemplated by Sections
6.1(b)(i)-(iv) with respect to such quarterly accounting period.
(d) Annual Reports. As soon as available, but not later than 120 days after
the end of each fiscal year of the Corporation, audited financial statements of
the Corporation, which shall include a statement of cash flows and statement of
operations for such fiscal year and a balance sheet as at the last day thereof,
each prepared in accordance with generally accepted accounting principles,
consistently applied, and accompanied by the report of a firm of independent
certified public accountants of recognized standing selected by the Board of
Directors of the Corporation (the "Accountants").
(e) Budget. With respect to each calendar year commencing with the calendar
year ending December 31, 1997, the Corporation shall, not later than March 31 of
each such calendar
8
<PAGE>
year, prepare a budget (the "Budget") of the Corporation (containing monthly and
quarterly breakdowns of income (loss), balance sheet items and cash flow). The
Budget shall be accepted as the Budget for such fiscal year when it has been
approved by the Board of Directors of the Corporation. The Budget shall be
reviewed by the Corporation periodically and all changes therein and all
material deviations therefrom shall be resubmitted to the Board of Directors in
advance and shall be accepted when approved by the Board of Directors (including
at least one director designated pursuant to Sections 2(a)(ii) and (iii) of the
Stockholders Agreement.)
(f) Termination of Information Rights. Notwithstanding the foregoing
provisions of this Section 6.1, the rights of the Investors and the obligations
of the Corporation under said Section 6.1 shall terminate upon the consummation
of the initial underwritten public offering of the Common Stock of the
Corporation.
6.2 Transfer of Securities.
(a) Restrictions on Transfer. Each Investor acknowledges that the Shares
have not been registered under the Securities Act, that such shares are being
issued pursuant to an exemption from registration under the Securities Act and
that such shares constitute "restricted securities" under Rule 144. Accordingly,
the Shares held by the Investors shall not be sold, transferred, assigned,
pledged, encumbered or otherwise disposed of (each, a "Transfer") except upon
the conditions specified in this Section 6.2, which conditions are intended to
ensure compliance with the provisions of the Securities Act and this Agreement.
(b) Restrictive Legend. Each certificate for shares of Common Stock held by
the Investors and each certificate for any such securities issued to subsequent
transferees of any such certificate shall (unless otherwise permitted by the
provisions of Sections 6.2(c) and 6.2(d)) be stamped or otherwise imprinted with
a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR
"BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.
ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS
SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 6.2
OF THE STOCK PURCHASE AGREEMENT DATED AS OF MAY 6,
1996, AMONG BONE, MUSCLE AND JOINT, INC. AND THE
OTHER PARTIES THERETO, AND NO TRANSFER OF THESE
SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN
9
<PAGE>
REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF BONE, MUSCLE AND
JOINT, INC."
(c) Notice of Transfer. Each Investor agrees, prior to any Transfer of the
Shares, to give written notice to the Corporation of such Investor's intention
to effect such Transfer and to comply in all other respects with the provisions
of this Section 6.2. Each such notice shall describe the manner and
circumstances of the proposed Transfer and shall be accompanied by the written
opinion, addressed to the Corporation, of counsel for the holder of such shares,
stating that in the opinion of such counsel (which opinion and counsel shall be
reasonably satisfactory to the Corporation), such proposed Transfer does not
involve any transaction requiring registration or qualification of such shares
under the Securities Act or the securities or "blue-sky" laws of any relevant
state of the United States; provided, however, that no such opinion of counsel
shall be necessary for a Transfer pursuant to Rule 144. Such Investor shall
thereupon be entitled to Transfer such shares in accordance with the terms of
the notice delivered by it to the Corporation. Each certificate or other
instrument evidencing the securities issued upon the Transfer of any such shares
(and each certificate or other instrument evidencing any untransferred balance
of such shares) shall bear the legend set forth in Section 6.2(b) unless (a) in
such opinion of counsel, registration of any future Transfer is not required by
the applicable provisions of the Securities Act and applicable state securities
or "blue-sky" laws or (b) the Corporation shall have waived the requirement of
such legends; provided, however, that such legend shall not be required on any
certificate or other instrument evidencing the securities issued upon such
Transfer in the event such Transfer shall be made in compliance with the
requirements of Rule 144. No Investor shall Transfer any shares of Common Stock
until such opinion of counsel has been given (unless waived by the Corporation
or unless such opinion is not required in accordance with the provisions of this
Section 6.2).
(d) Removal of Legends, Etc. Notwithstanding the foregoing provisions of
this Section 6.2, the restrictions imposed by this Section 6.2 upon the
transferability of any shares of the capital stock of the Corporation held by
the Investors shall cease and terminate when (a) any such shares are sold or
otherwise disposed of pursuant to an effective registration statement under the
Securities Act or as otherwise contemplated by Section 6.2(c) and, pursuant to
Section 6.2(c), the securities so transferred are not required to bear the
legend set forth in Section 6.2(b) or (b) the holder of such shares has met the
requirements for Transfer of such shares pursuant to subparagraph (k) of Rule
144. Whenever the restrictions imposed by this Section 6.2 shall terminate, as
herein provided, each Investor holding shares as to which such restrictions have
terminated shall be entitled to receive from the Corporation, without expense, a
new certificate not bearing the restrictive
10
<PAGE>
legend set forth in Section 6.2(b) and not containing any other reference to the
restrictions imposed by this Section 6.2.
SECTION 7. Expenses. The Corporation shall pay its expenses and the
expenses of each of the Investors in connection with the preparation for and
consummation of the transactions contemplated by this Agreement; provided,
however, that in the event the transactions contemplated hereby are not
consummated, the Corporation and each of the Investors shall bear their
respective expenses.
SECTION 8. Key-Person Insurance. Within 120 days after the date hereof, the
Corporation shall obtain, and thereafter maintain in full force and effect, for
so long as Dr. Nagpal is employed as an executive officer of the Corporation,
key-person term life insurance coverage on Dr. Nagpal in an amount equal to
$1,000,000.
SECTION 9. Notices. All notices, advices and communications to be given or
otherwise made to any party to this Agreement shall be deemed to be sufficient
if contained in a written instrument delivered in person or by telecopier or
duly sent by first class registered or certified mail, return receipt requested,
postage prepaid, or by overnight courier, addressed to such party at the address
set forth below or at such other address as may hereafter be designated in
writing by the addressee to the addresser listing all parties:
(a) if to the Corporation, to:
Bone, Muscle and Joint, Inc.
2378 N.W. 60th Street
Boca Raton, Florida 33496
Attention: Naresh Nagpal, M.D.
President
Telecopier: 407-998-4649
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Lawrence G. Graev, Esq.
Telecopier: (212) 408-2420; and
(b) if to the Investors, to their respective addresses set forth on
Schedule I;
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, on the date of
such delivery, (ii) in the case of nationally-recognized overnight courier, on
the next business day after the date when sent and
11
<PAGE>
(iii) in the case of mailing, on the third business day following that on which
the piece of mail containing such communication is posted. As used in this
Section 9, "business day" shall mean any day other than a day on which banking
institutions in the State of New York are legally closed for business.
SECTION 10. Successors and Assigns. Except as otherwise expressly provided
herein, this Agreement shall bind and inure to the benefit of the parties hereto
and the respective successors and permitted assigns of the parties hereto.
SECTION 11. Amendments. The terms and provisions of this Agreement may only
be amended or waived with the written consent of the Corporation and Investors
holding at least 80% of the Common Shares and the Series A Preferred Shares.
SECTION 12. Entire Agreement. This Agreement and the other writings
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior and contemporaneous arrangements or understandings with
respect thereto.
SECTION 13. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 14. Headings. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
SECTION 15. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed wholly therein (without reference to any
principles of conflicts of laws).
* * * *
12
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Stock Purchase
Agreement to be executed as of the date first written above.
BONE, MUSCLE AND JOINT, INC.
By:__________________________________________
Naresh Nagpal, M.D.
President and Chief
Executive Officer
INVESTORS:
OAK INVESTMENT PARTNERS VI,
LIMITED PARTNERSHIP
By: OAK ASSOCIATES VI,
LIMITED PARTNERSHIP,
its General Partner
By:__________________________________________
Name: Ann H. Lamont
Title: General Partner
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By:__________________________________________
Name: Ann H. Lamont
Title: Managing Member
DELPHI VENTURES III, L.P.
By: DELPHI MANAGEMENT
PARTNERS III, L.L.C.,
its General Partner
By:__________________________________________
Name:
Title:
<PAGE>
DELPHI INVESTMENTS III, L.P.
By: DELPHI MANAGEMENT
PARTNERS III, L.L.C.,
its General Partner
By:___________________________________________
Name:
Title:
SCHEER & COMPANY, INC.
By:___________________________________________
Name:
Title:
-------------------------------------------
Naresh Nagpal, M.D.
<PAGE>
BONE, MUSCLE AND JOINT, INC.
2378 N.W. 60th Street
Boca Raton, Florida 33496
May 6, 1996
Naresh Nagpal, M.D.
2378 N.W. 60th Street
Boca Raton, Florida 33496
Employment Letter
Dear Naresh:
The following terms summarize the agreement between you and Bone, Muscle
and Joint, Inc. (the "Corporation") with respect to your employment with the
Corporation.
1. You shall be employed by the Corporation as Chairman of the Board,
President and Chief Executive Officer commencing on January 2, 1996, and shall
perform duties and services consistent with such positions as may reasonably be
assigned to you by the Board of Directors of the Corporation. During your
employment with the Corporation, you shall devote your best efforts and your
full business time and attention to the business and affairs of the Corporation;
provided, however, that you may serve as director on the boards of directors of
up to three other business entities.
2. The Corporation shall pay you an annual base salary (the "Base Salary")
of not less than $225,000, payable in such installments as is the Corporation's
practice with respect to its executive employees. The Base Salary may be
increased in the sole discretion of the Board of Directors of the Corporation
based upon your performance of your duties and the range of salaries paid to
chief executive officers of companies at a similar stage of development in the
field of physician practice management as the Corporation. The Corporation shall
pay to you, in one lump sum on the date hereof, that portion of the Base Salary
in arrears as of the date hereof.
3. In addition to the Base Salary, the Board of Directors may, in its sole
discretion, award you an annual bonus (the "Bonus") in an amount up to thirty
percent (30%) of your then current Base Salary. The amount of the Bonus, if any,
will be determined by the Board of Directors based upon your obtaining certain
benchmarks (the "Benchmarks") that are specified on Annex 1 attached hereto. The
Bonus, if any, will be payable following the end of each fiscal year during your
employment with the Corporation.
4. You shall be eligible to participate in the
<PAGE>
Naresh Nagpal, M.D.
May 6, 1996
Page 2
Corporation's benefit plans, 401(k) plan, life insurance, hospitalization and
surgical and major medical coverages, sick leave, holidays, long-term disability
and other fringe benefits, if any. In addition, you shall be entitled to four
weeks of vacation per year.
5. During your employment with the Corporation, the Corporation shall
reimburse you for all reasonable and necessary traveling expenses and other
disbursements incurred by you for or on behalf of the Corporation in the
performance of your duties upon presentation of appropriate receipts or other
documentation therefor. In connection therewith, the Corporation shall reimburse
you, in one lump sum on the date hereof or as soon hereafter as reasonably
practicable, for all of the expenses incurred by you on behalf of the
Corporation prior to the date hereof, including, without limitation, expenses
incurred beginning December 1995 related to business travel, consulting services
and administrative support, which expenses are estimated at approximately
$100,000.
6. The Corporation will deduct from any payments to be made to you any
amounts required to be withheld in respect of any Federal, state or local income
or other taxes.
7. The Corporation may, for its own benefit, maintain "keyperson" life and
disability insurance policies covering you. You shall cooperate with the
Corporation and provide such information or other assistance as the Corporation
may reasonably request in connection with the Corporation obtaining and
maintaining such policies.
8. The Corporation shall grant you the option to purchase seventy five
thousand (75,000) shares of common stock, $.001 par value, of the Corporation at
each of the following times: (a) on the earlier to occur of (i) July 1, 1996,
and (ii) the date upon which the Corporation consummates the first acquisition
of a medical practice; (b) on January 1, 1997; and (c) on January 1, 1998. The
grants specified in clauses (b) and (c) are subject to your attaining the
Benchmarks intended to have been satisfied on each such date. The options
granted pursuant to this paragraph 9 shall be granted pursuant to the
Corporation's 1996 Stock Option Plan (the "Plan") and shall vest and become
exercisable in accordance with the provisions of a Nonqualified Stock Option
Agreement between you and the Corporation, the form of which is annexed to the
Plan as Attachment 3.
9. The Corporation may terminate your employment hereunder for any reason;
provided, however, that if the Corporation terminates your employment without
Cause (as hereinafter defined) or as a result of your becoming permanently
disabled (a) prior to January 1, 1997, you shall receive a severance amount
equal to 100% (being one year's severance) of
<PAGE>
Naresh Nagpal, M.D.
May 6, 1996
Page 3
the Base Salary; (b) after December 31, 1996 but prior to January 1, 1998, you
shall receive a severance amount equal to 75% (being nine months' severance) of
the sum of the then current Base Salary plus the Bonus paid with respect to the
previous year (such sum being referred to herein as the "Compensation Amount");
(c) after December 31, 1997 but prior to January 1, 1999, you shall receive a
severance amount equal to 50% (being six months' severance) of the Compensation
Amount; and (d) on or after January 1, 1999, you shall receive a severance
amount equal to 25% (being three months' severance) of the Compensation Amount.
Such severance amount shall be paid in a lump sum within ten business days
following the date of termination of your employment. As used herein "Cause"
means (i) the repeated failure to perform such duties as are reasonably
requested of you by the Board of Directors of the Corporation; (ii) gross
negligence or willful misconduct in the performance of your duties; or (iii) the
commission of any act of fraud or financial dishonesty with respect to the
Corporation, or any felony or act involving moral turpitude.
10. During the period of your employment with the Corporation and for the
Additional Period (as hereinafter defined), you shall not directly or indirectly
engage in any business activity, either as an individual proprietor, partner,
stockholder, officer, employee, director, or consultant (otherwise than as the
holder of not more than five percent (5%) of the total outstanding capital stock
of a publicly-held company), which competes with the Corporation or any of its
subsidiaries in the Restricted Territory (as hereinafter defined) and in the
field of musculoskeletal physician management. As used herein, (a) "Restricted
Territory" means any state of the United States in which the Corporation or any
of its subsidiaries conducted business at any time during the period of your
employment with the Corporation, or specifically planned to conduct business at
the time of the termination of your employment with the Corporation; and (b)
"Additional Period" means (i) in the event that you are terminated without Cause
or as a result of your becoming permanently disabled, the period in which you
receive severance payments from the Corporation in accordance with paragraph 9
hereof (being either 3, 6, 9 or 12 months) and (ii) in the event that you are
terminated with Cause or you voluntarily resign, a period of one year following
the date of termination. You and the Corporation agree that the restrictions set
forth in this paragraph 10 are reasonable for the purposes of protecting the
business of the Corporation. However, if any such restriction is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
11. You recognize that your relationship with the
<PAGE>
Naresh Nagpal, M.D.
May 6, 1996
Page 4
Corporation is and will continue to be one of high trust and confidence by
reason of your access to and contact with the trade secrets and confidential and
proprietary information of the Corporation. Therefore, you agree that you will
not at any time, either during your employment with the Corporation or
thereafter, disclose to others, or use for your own benefit or the benefit of
others, any confidential, proprietary or secret information owned, possessed or
used by the Corporation ("Proprietary Information"). By way of illustration, but
not limitation, Proprietary Information includes trade secrets, processes, data,
know-how, marketing plans, forecasts, unpublished financial statements, budgets,
licenses, prices, costs and employee, customer and supplier lists.
Notwithstanding anything to the contrary contained herein, this paragraph 11
shall not apply to any Proprietary Information which: (a) is or becomes in the
public domain through no action on your part, (b) is generally disclosed to
third parties by the Corporation or a person entitled to disclose such
information to third parties without an obligation of confidentiality to the
Corporation, or (c) is approved for release by written authorization of the
Board of Directors of the Corporation or its designees. Upon termination of your
employment with the Corporation or at any other time upon request, you will
promptly deliver to the Corporation all notes, memoranda, notebooks, drawings,
records, reports, files and other documents (and all copies or reproductions of
such materials) in your possession or under your control, whether prepared by
you or others, which contain Proprietary Information. You hereby acknowledge
that this material is the sole property of the Corporation.
12. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contacts made and performed
wholly therein.
13. This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing signed by you and the Corporation.
<PAGE>
Naresh Nagpal, M.D.
May 6, 1996
Page 5
If the above terms are satisfactory to you, please acknowledge our
agreement by signing the enclosed copy of this letter in the space indicated
below and returning it to the undersigned.
Sincerely,
BONE, MUSCLE AND JOINT, INC.
BY:
------------------------------
Name:
Title:
Accepted and agreed to:
- -----------------------------
Naresh Nagpal, M.D.
<PAGE>
MANAGEMENT SERVICES AGREEMENT
AMONG
TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC.
AND
BONE, MUSCLE AND JOINT, INC.
AND
THE INDEMNIFYING PERSONS
Effective as of April 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. Retention of the Management Company..............................2
1.1 Retention........................................................2
1.2 Exclusivity......................................................2
1.3 Relationship of Parties..........................................2
1.4 No Referral Obligation...........................................2
SECTION 2. Term.............................................................3
SECTION 3. Management Services..............................................3
3.1 Management Services Generally....................................3
3.2 Premises.........................................................4
3.3 Equipment........................................................6
3.4 New Ancillary Services...........................................8
3.5 Administration, Finance and Accounting...........................9
3.6 Billing and Collection..........................................11
3.7 Personnel.......................................................15
3.8 Inventory and Supplies..........................................16
3.9 Taxes...........................................................16
3.10 Information Systems Management..................................16
3.11 Use of New Technologies in the Practice of Medicine.............17
3.12 Public Relations; Marketing and Advertising.....................18
3.13 Medical Personnel Recruiting....................................18
3.14 Insurance.......................................................18
3.15 Files and Records...............................................19
3.16 Managed Care Contracts..........................................19
3.17 Budgets.........................................................20
3.18 Force Majeure...................................................20
SECTION 4. Equity Participation and Other Consideration....................20
SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments..20
5.1 Ownership of Accounts; Security.................................20
5.2 Bank Accounts and Payments......................................21
5.3 Medical Group Compensation......................................22
5.4 Management Fee..................................................25
5.5 Management Company Costs........................................26
5.6 New Medical Office Start-Up Costs...............................28
5.7 New Physician Start-Up Costs....................................29
5.8 Medical Group Costs.............................................31
5.9 New Ancillary Services Costs....................................32
-i-
<PAGE>
5.10 Review and Audit of Books and Records...........................34
5.11 Start-Up Period.................................................35
SECTION 6. Representations and Warranties of the Medical Group.............35
6.1 Organization; Good Standing; Qualification and Power............35
6.2 Equity Investments..............................................36
6.3 Authority.......................................................36
6.4 Financial Information...........................................37
6.5 Absence of Undisclosed Liabilities..............................37
6.6 Absence of Changes..............................................37
6.7 Tax Matters.....................................................39
6.8 Litigation, Etc.................................................41
6.9 Compliance; Governmental Authorizations.........................41
6.10 Accounts Receivable; Accounts Payable...........................42
6.11 Labor Relations; Employees......................................42
6.12 Employee Benefit Plans..........................................43
6.13 Insurance.......................................................44
6.14 Real Property...................................................44
6.15 Burdensome Restrictions.........................................44
6.16 Disclosure......................................................45
SECTION 7. Representations and Warranties of the Management Company........45
7.1 Organization, Good Standing and Power...........................45
7.2 Authority.......................................................45
7.3 Issuance of Common Stock........................................46
7.4 Issued and Outstanding Stock....................................46
7.5 Permits, Authorizations, Consents, Approvals,
Notifications, and Filings......................................47
7.6 Financial Information...........................................47
7.7 Absence of Undisclosed Liabilities..............................47
7.8 Absence of Changes..............................................47
7.9 Tax Matters.....................................................50
7.10 Litigation, Etc.................................................51
7.11 Compliance; Governmental Authorizations.........................51
7.12 Accounts and Notes Payable......................................51
7.13 Employees.......................................................52
7.14 Employee Benefit Plans..........................................52
7.15 Insurance.......................................................52
7.16 Real Property...................................................52
7.17 Burdensome Restrictions.........................................52
7.18 Disclosure......................................................52
SECTION 8. Operations Committee............................................53
8.1 Formation and Operation of the Operations Committee.............53
8.2 Authoritative Functions of the Operations Committee.............53
8.3 Advisory Functions of the Operations Committee..................55
8.4 Committee Policies and Procedures...............................56
-ii-
<PAGE>
SECTION 9. Obligations of the Medical Group................................57
9.1 Compliance with Laws............................................57
9.2 Use of Facility.................................................58
9.3 Choice of Braces, Splints, Appliances, Medical Supplies,
and Allografts..................................................58
9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical
Therapy, MRI, and Other Medical Professionals and Facilities....58
9.5 Insurability....................................................58
9.6 Medicare........................................................59
9.7 Billing.........................................................59
9.8 Medical Personnel Hiring........................................59
9.9 Continuing Education............................................59
9.10 Sales of Stock..................................................59
SECTION 10. Certain Covenants...............................................60
10.1 Change of Control...............................................60
10.2 Legend on Securities............................................60
SECTION 11. Records........................................................61
11.1 Medical Records................................................61
11.2 Management Business Records....................................61
11.3 Access to Records Following Termination........................61
SECTION 12. Insurance and Indemnity........................................61
12.1 Professional Liability Insurance...............................61
12.2 Life Insurance.................................................62
12.3 Indemnification by Medical Group...............................62
12.4 Indemnification by Certain Individuals.........................63
12.5 Indemnification by Management Company..........................63
SECTION 13. Termination....................................................63
13.1 Termination by Medical Group...................................63
13.2 Termination by Management Company..............................64
13.3 Termination by Medical Group or Management Company.............65
13.4 Effect of Termination..........................................65
13.5 Repurchase of Assets...........................................66
13.6 Phase II.......................................................67
SECTION 14. Non-Disclosure of Confidential Information.....................68
14.1 Non-Disclosure.................................................68
14.2 Confidential or Proprietary Information........................69
SECTION 15. Non-Competition................................................69
SECTION 16. Obligations of the Management Company..........................69
16.1 No Practice of Medicine........................................69
16.2 No Interference with Professional Judgment.....................70
-iii-
<PAGE>
16.3 Compensation Committee.........................................70
16.4 Budgets........................................................70
16.5 Contracts with Venture Capital Firms...........................71
16.6 Stock Held by Certain Individuals or Entities..................71
16.7 Convertible Preferred Stock....................................71
16.8 Initial Public Offering........................................71
16.9 Attendance at Board Meetings...................................72
SECTION 17. Assignment.....................................................72
SECTION 18. Notices........................................................72
SECTION 19. Benefits of Agreement..........................................73
SECTION 20. Governing Law; Jurisdiction....................................74
SECTION 21. Headings.......................................................74
SECTION 22. Entire Agreement; Amendments...................................74
SECTION 23. Severability...................................................75
SECTION 24. Counterparts...................................................75
SECTION 25. Waivers........................................................75
SECTION 26. Survival of Termination........................................75
SECTION 27. Contract Modification for Prospective Legal Events.............75
-iv-
<PAGE>
ATTACHMENTS
SCHEDULES
SCHEDULE I -- New Ancillary Services -- Exceptions
SCHEDULE II -- Management Company Operating Cost Budget
SCHEDULE III -- Equity Participation and Other Consideration
SCHEDULE IV -- Draw Date and Draw Percentage
SCHEDULE V -- Management Fee -- Applicable Percentage
SCHEDULE VI -- Professional Practice Cost Savings
SCHEDULE VII -- Computation Example
SCHEDULE VIII -- Non-Competition
SCHEDULE 6.4 -- Financial Information
SCHEDULE 6.5 -- Absence of Undisclosed Liabilities
SCHEDULE 6.6 -- Absence of Changes
SCHEDULE 6.7 -- Tax Matters
SCHEDULE 6.8 -- Litigation, Etc.
SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable
SCHEDULE 6.11 -- Labor Relations; Employees
SCHEDULE 6.12 -- Employee Benefit Plans
SCHEDULE 6.13 -- Insurance
SCHEDULE 6.14 -- Real Property
SCHEDULE 6.15 -- Burdensome Restrictions
SCHEDULE 6.16 -- Disclosure
SCHEDULE 7.4 -- Issued and Outstanding Stock
SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals,
Notifications, and Filings
SCHEDULE 7.6 -- Financial Information
-v-
<PAGE>
SCHEDULE 7.7 -- Absence of Undisclosed Liabilities
SCHEDULE 7.8 -- Absence of Changes
SCHEDULE 7.9 -- Tax Matters
SCHEDULE 7.10 -- Litigation, Etc.
ANNEX
ANNEX A -- Medical Group Key Personnel
ANNEX B -- Management Company Key Employees
-vi-
<PAGE>
INDEX OF DEFINED TERMS
----------------------
Term Page
- ---- ----
Accounts....................................................................20
Additional Terms.............................................................3
Administrative Personnel....................................................15
AGC .....................................................................67
Agreement....................................................................1
Ancillary Service Start-Up Costs............................................33
Ancillary Service Start-Up Period...........................................33
Annual Draw Amount..........................................................23
Annual Medical Group Compensation Amount....................................22
Applicable Percentage.......................................................26
Asset Purchase Agreements....................................................1
Authorized Management Company Operating Costs...............................28
Authorized Officers.........................................................12
Balance Sheet...............................................................37
Balance Sheet Date..........................................................37
Bankruptcy Event............................................................64
Base Term....................................................................3
Billable Items..............................................................32
Billings....................................................................24
Budgets.....................................................................20
Code .....................................................................40
Collateral..................................................................21
Collections.................................................................24
Commencement Date............................................................3
Compensation Committee......................................................70
Competitive Business........................................................89
Confidential or Proprietary Information.....................................69
Corporate Overhead..........................................................27
-vii-
<PAGE>
Cost Savings................................................................85
Documents...................................................................12
Draw Date...................................................................83
Draw Percentage.............................................................22
Eligible Parties............................................................20
Employee Plans..............................................................43
Employees...................................................................42
Equipment....................................................................7
ERISA .....................................................................43
Excess Net Collections......................................................31
Excluded Costs..............................................................27
Facility....................................................................58
FF&E ......................................................................6
Historical Collections Information..........................................37
Incentive Based Costs.......................................................85
Indemnifying Person.........................................................63
Internal Financial Statements...............................................37
Lender .....................................................................20
Loan Agreement..............................................................21
Management Business..........................................................1
Management Company...........................................................1
Management Company Balance Sheet............................................47
Management Company Balance Sheet Date.......................................47
Management Company Bank.....................................................21
Management Company Costs....................................................26
Management Company Key Employee.............................................49
Management Company Operating Costs..........................................27
Management Company Returns..................................................50
Management Company Transaction Documents....................................45
Management Fee..............................................................25
Management Services..........................................................2
-viii-
<PAGE>
Medical Business.............................................................1
Medical Equipment............................................................6
Medical Equipment Master Lease...............................................6
Medical Equipment Master Lease Payments.....................................26
Medical Group................................................................1
Medical Group Bank..........................................................12
Medical Group Collections Account...........................................12
Medical Group Costs.........................................................31
Medical Group Governance Documents..........................................35
Medical Group Key Personnel.................................................39
Medical Group Services......................................................24
Medical Group Transaction Documents.........................................35
Medical Personnel...........................................................18
Monthly Draw................................................................22
MSAs .....................................................................67
Net Collections.............................................................31
New Ancillary Service Medical Equipment.....................................33
New Ancillary Services.......................................................8
New Medical Office..........................................................29
New Medical Office Start-Up Costs...........................................29
New Medical Office Start-Up Period..........................................29
New Physician...............................................................31
New Physician Start-Up Costs................................................30
New Physician Start-Up Period...............................................30
Non-Compete Period..........................................................89
Office Lease.................................................................5
Office Sublease..............................................................5
Operating Account...........................................................21
Phase II....................................................................67
Professional Practice Cost Savings..........................................26
Real Property...............................................................44
-ix-
<PAGE>
Returns.....................................................................40
Review Financial Statements.................................................37
Selling Shareholders........................................................71
Stock.......................................................................79
Stockholder Non-Competition Agreement.......................................69
Tax.........................................................................41
Taxes.......................................................................41
Tenant Improvements.........................................................54
Term.........................................................................3
Transaction Documents.......................................................79
Unaudited Financial Statements..............................................47
-x-
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of
April 1, 1997, by and among TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC., a
California professional corporation (the "Medical Group"), the INDEMNIFYING
PERSONS referred to in Section 12.4 whose signatures appear on the signature
page hereto, those persons who hereafter sign a written agreement agreeing to be
bound by the terms of Section 12.4 hereof, and BONE, MUSCLE AND JOINT, INC., a
Delaware corporation (the "Management Company"), with reference to the following
facts:
A. The Medical Group is engaged in the business (the "Medical Business")
of providing orthopedic medical and surgical services and related medical and
ancillary services to the general public.
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company has entered into Asset
Purchase Agreements with the Medical Group, with Tri-City Orthopaedic Building
Partners, and with Richard K. Muir, M.D., Inc. (collectively, the "Asset
Purchase Agreements"), pursuant to which the Management Company has acquired
substantially all of the assets owned or used by the Medical Group.
D. The Management Company and the Medical Group now desire to enter into
this Management Services Agreement, pursuant to which, among other things, the
Management Company will render certain management and administrative services to
the Medical Group.
NOW, THEREFORE, the Medical Group and the Management Company hereby
agree as follows:
-1-
<PAGE>
SECTION 1. Retention of the Management Company.
1.1 Retention. The Medical Group hereby retains the Management Company to
provide all of the management and related services identified or referenced in
Section 3 hereof and as otherwise required by this Agreement (collectively, the
"Management Services"), and the Management Company hereby accepts such retention
and agrees to provide such services, upon the terms and subject to the
conditions set forth herein.
1.2 Exclusivity. During the term of this Agreement, the Management Company
shall be the exclusive provider of all management and administrative services
utilized by the Medical Group; provided, however, that the Medical Group may
contract directly with or otherwise engage individuals or companies for the
provision of accounting, legal, consulting, or other professional or advisory
services (provided that such services shall be in addition to, and not in
replacement of, the services to be provided by the Management Company
hereunder), all in the sole discretion of the Medical Group and at the sole cost
of the Medical Group.
1.3 Relationship of Parties. Notwithstanding anything contained herein to
the contrary, (a) the Management Company and the Medical Group intend to act and
perform as independent contractors, and the provisions hereof are not intended
to create any partnership, joint venture, or employment relationship between the
parties, and (b) the Management Company is hereby engaged solely to provide
management and administrative services to the Medical Group and shall not
interfere with, control, direct, or supervise the Medical Group or any medical
professional employed by the Medical Group in connection with the provision of
professional medical services.
1.4 No Referral Obligation. The parties agree that the benefits to the
Medical Group hereunder do not require, are not payment for, and are not in any
way contingent upon the admission, referral, purchase, or any other arrangement
for the provision of any item or service to or for any of the Medical Group's
patients in or from any medical facility or laboratory or from any other entity
owned, operated, controlled, or managed by the Management Company. The
Management Company shall provide prior written notice to the Medical Group
before acquiring any ownership, investment interest, or control in, or entering
into any agreement or
-2-
<PAGE>
arrangement pursuant to which the Management Company would become responsible
for all or any part of the operations or management of, any medical facility,
laboratory, or any provider or supplier of ancillary services, diagnostic or
therapeutic equipment, prosthetic or orthotic devices, medical supplies, or
other items or services furnished to or for use by patients, but only if any of
the foregoing is located in California or serves the geographic area served by
the Medical Group.
SECTION 2. Term. Provided that the Closing under the Asset Purchase
Agreement shall have occurred as provided therein, and subject to such start-up
procedures as the parties may agree upon for purposes of facilitating the
transition of responsibilities required by this Agreement, the performance of
services under this Agreement shall commence as of April 1, 1997 (the
"Commencement Date") and shall expire on the fortieth anniversary of the
Commencement Date unless terminated earlier pursuant to the terms hereof (the
"Base Term"). The Base Term of this Agreement shall be automatically extended
for additional terms ("Additional Terms" and together with the Base Term, the
"Term") of five years each, unless either party delivers to the other party, not
less than six (6) months nor more than nine (9) months prior to the expiration
of the then-current Term, written notice of such party's intention not to extend
the Term of this Agreement.
SECTION 3. Management Services.
3.1 Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager
and administrator of all day-to-day business functions for the Medical
Group, subject to the provisions of Section 1.2 hereof. The Management
Company shall provide all of the management and administrative services
reasonably required by the Medical Group in connection with the provision
of any and all of the Medical Group Services and as otherwise provided in
this Agreement, including without limitation the services described in
Sections 3.2 through 3.17 hereof.
(b) Without limiting the generality of the provisions of Section
3.1(a), the Management Services shall include such management and
administrative services as may be
-3-
<PAGE>
reasonably required in connection with (i) all of the offices (including
New Medical Offices) of the Medical Group, and (ii) all professional
services and all ancillary services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described
in this Agreement shall be applicable with respect to the items identified
as Medical Group Costs in Section 5.8 hereof, except that such Medical
Group Costs shall be paid by the Medical Group rather than by the
Management Company. Accordingly, the Management Company shall provide
accounting, bookkeeping, and related services with respect to all such
costs.
(d) The Management Company may enter into such contracts and
agreements with outside services and suppliers as the Management Company
shall reasonably deem necessary in connection with the provision of the
Management Services, and, to the extent permitted by applicable law, such
contracts and agreements shall, except as otherwise expressly provided in
this Agreement, be in the name of the Management Company. The Management
Company shall have no authority, directly or indirectly, to perform, and
shall not perform or enter into any agreement to perform, professional
medical services or any other medical function required by law to be
performed by a licensed physician or by any other licensed health care
professional.
(e) The Management Company shall comply in all material respects
with all applicable material Federal, state and local laws, regulation,
and ordinances in connection with the provision of the Management Services
hereunder.
3.2 Premises.
(a) The Medical Group, as of the Commencement Date of this
Agreement, leases premises and provides professional medical services at
the following location:
3905 Waring Road
Oceanside, California 92056
-4-
<PAGE>
Immediately prior to the Commencement Date of this Agreement, the premises
were leased to the Medical Group, in the Medical Group's name. Effective
from and after the Commencement Date of this Agreement, the lease of such
premises is to be assigned from the Medical Group to the Management
Company pursuant to an Assignment of Lease entered into as of the date
hereof. Additionally, the Management Company shall sublease the premises
to the Medical Group pursuant to a sublease (the "Office Sublease")
entered into as of the date hereof, in consideration of the payments to be
made by the Medical Group under such Office Sublease. Upon the expiration
of the premises lease assigned in accordance with this Section 3.2(a), the
Management Company shall use its best efforts to enter into a new lease,
in the name of the Management Company, with the landlord of such premises,
and the parties shall amend the applicable Office Sublease or enter into a
new sublease relating to such new premises lease; provided, however, that
the approval of the Medical Group, which shall not be unreasonably
withheld, shall be required in the event of any substantial changes in the
terms of the premises lease, and if the Medical Group does not give such
approval, the failure to enter into such new premises lease shall not
constitute a default of the Management Company. Each assigned lease and
each new lease entered into between the Management Company and the
landlord is referred to herein as an "Office Lease."
(b) A New Medical Office (as hereinafter defined) may be opened only
upon the agreement of the Medical Group and the Management Company. The
capital costs and start-up costs reasonably required in connection with
the opening of any New Medical Office shall be borne as set forth in
Section 5 hereof. The premises of any New Medical Office shall be leased
to the Management Company, in the Management Company's name, and the
Medical Group shall not be required to lease any such premises.
Additionally, the Management Company shall sublease such premises to the
Medical Group pursuant to a sublease substantially in the form of the
Office Sublease, in consideration of the payments to be made by the
Medical Group under such sublease.
(c) The closing or relocation of any offices of the Medical Group
shall be subject to agreement by the Medical Group and the Management
Company.
-5-
<PAGE>
(d) The premises services to be provided by the Management Company
shall include, without limitation, the negotiation and renegotiation of
leases, provision of ongoing liaison with the landlords of the respective
office premises of the Medical Group, identification of potential new
locations for Medical Group offices, financial analysis relating to the
opening, closing, and relocation of offices, arranging for necessary
repairs, maintenance and improvements, procurement of property insurance,
arranging for telephone and other utility services, arranging for
hazardous waste disposal, and all other reasonably necessary or
appropriate services related to all of the office premises of the Medical
Group.
(e) The Management Company also shall provide all necessary or
appropriate leasehold improvements to each of the premises, subject to
prior approval as provided in Section 8.2 hereof.
(f) The Medical Group acknowledges that the Management Company makes
no warranties or representations, expressed or implied, regarding the
condition of any of the leased premises.
3.3 Equipment.
(a) The Management Company shall provide to the Medical Group all of
the diagnostic and therapeutic medical equipment reasonably required by
the Medical Group in connection with the provision of Medical Group
Services (the "Medical Equipment"). All Medical Equipment shall be
provided by the Management Company to the Medical Group in consideration
of the rental payments to be made by the Medical Group to the Management
Company pursuant to an equipment lease entered into as of the date hereof
(the "Medical Equipment Master Lease"). As used herein, the term Medical
Equipment shall not include medical equipment used in connection with a
New Ancillary Service (as hereinafter defined).
(b) The Management Company also shall provide to the Medical Group
all furniture, furnishings, trade fixtures, and office equipment
(including computer hardware and software) reasonably required in
connection with the provision of Medical Group Services pursuant to this
Agreement (collectively, "FF&E"). The Management Company shall acquire,
-6-
<PAGE>
at its cost, all FF&E, and the Management Company shall retain ownership
of all FF&E. The Management Fee payable to the Management Company under
this Agreement is intended to compensate the Management Company for the
provision of FF&E for use by the Medical Group. As used herein, the term
FF&E does not include furniture, furnishings, trade fixtures, and office
equipment used in connection with a New Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation,
or other disposition of any Equipment shall require prior approval as
provided in Section 8.2 hereof.
(d) The Management Company's obligations with respect to the
Equipment are subject and subordinate to the provisions and obligations
contained in any financing, security interest, mortgage, lien or other
encumbrance the Management Company may, in its reasonable discretion,
place upon the Equipment through an unaffiliated third party. The Medical
Group shall use the Equipment only in connection with its provision of the
Medical Group Services, and the Medical Group shall not alter, repair,
augment, or remove the Equipment from the premises of the Medical Group
without the prior written consent of the Management Company and any lessor
thereof, which approval may be granted or withheld in the Management
Company's or such lessor's sole discretion. To the extent the Equipment is
utilized by the Medical Group in the provision of Medical Group Services,
the Medical Group shall have the right to exercise reasonable control over
the use of such Equipment.
(e) From time to time, and as reasonably requested by the Medical
Group, the Management Company shall use reasonable efforts to cause the
Equipment manufacturer or its authorized agent to provide service and
maintenance for the Equipment as needed to maintain the Equipment in an
operable condition, so that all such Equipment shall function continuously
(subject to interruptions not reasonably avoidable) in accordance with the
manufacturer's specifications and so that all conditions imposed by the
manufacturer to maintaining the continued effectiveness of any warranty on
such Equipment shall be satisfied. The Management Company shall take all
reasonable steps to provide that all necessary service and maintenance is
-7-
<PAGE>
obtained in a prompt and timely manner, so as to minimize the amount of
time that any of the Equipment is not available for usage by or for
patients of the Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES
NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP
PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN
CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND
SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF
THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING
DISCLAIMER, THE MANAGEMENT COMPANY DOES WARRANT TO THE MEDICAL GROUP THAT
THE X-RAY EQUIPMENT AND THE COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT
THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL GROUP SHALL BE
SUITABLE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES. Nothing in
this Agreement shall be construed to affect or limit in any way the
professional discretion of the Medical Group to select and use any
Equipment acquired by the Management Company in accordance with the terms
of this Agreement insofar as such selection or use constitutes or might
constitute the practice of medicine.
3.4 New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means
the technical component (but not the professional component) of the
following, except as set forth in Schedule I:
(i) Physical therapy;
(ii) Magnetic resonance imaging and/or other imaging services
(except diagnostic radiology);
(iii) Outpatient surgery;
(iv) Densitometry; and
-8-
<PAGE>
(v) Other revenue-producing services generally recognized as
ancillary services, but excluding the following:
(A) Plain film radiography;
(B) Any other services provided on a regular basis by
the Medical Group immediately prior to the
Commencement Date of this Agreement; and
(C) Any service performed in connection with new
Medical Equipment acquired to replace existing
Medical Equipment so long as the new Medical
Equipment performs substantially the same
functions as the replaced Medical Equipment.
New Ancillary Services do not include the sale or provision of (or
services rendered in connection with) prosthetics, prosthetic devices,
orthotics, braces, splints, appliances, crutches, casts, or any other
supplies or similar items which are billable to patients or payors.
(b) New Ancillary Services may be established only upon agreement of
the Medical Group and the Management Company. Such agreement shall be
memorialized in a written agreement executed by the parties (or in a
written amendment to this Agreement) under which the Management Company
agrees to provide all of the Management Services described in this Section
3 in connection with such New Ancillary Service, and for which the
Management Company shall be compensated as described in Section 5.9 of
this Agreement, except as otherwise agreed by the parties.
3.5 Administration, Finance and Accounting. The Management Company shall
provide or arrange for the provision of all administrative, financial, and
accounting functions necessary for the operation of the Medical Group, including
without limitation --
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
-9-
<PAGE>
(c) Preparing accounts receivable summary reports, including
various analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical
Group Governance Documents prior to distribution of payments
to outside parties; provided, however, that the Management
Company shall not be responsible for or liable with respect to
interpretations of the Medical Group Governance Documents.
(e) Disbursement of payables, including payables of the Medical
Group; provided, however, that payables of the Medical Group
shall be paid from an account of the Medical Group and not
from the Management Company's Operating Account, and all
checks drawn on any Medical Group account shall be signed by
an officer or other authorized representative of the Medical
Group.
(f) Negotiation of vendor contracts.
(g) Performing monthly accounting functions, including bank
reconciliations, maintenance of books and records, and
preparation of financial statements.
(h) Analyzing financial data as reasonably requested by
physicians.
(i) Analyzing potential new office locations, and coordinating all
functions associated with opening new office locations.
(j) Preparing monthly financial and medical practice statistics
reports (i) By satellite office (ii) By physician
(k) Providing from the Medical Group's bank account(s) monthly
compensation payments to physicians; provided, however, that
the Management Company shall not be responsible for or liable
with respect to interpretations of the Medical Group
Governance Documents; provided, further, that all checks drawn
on any Medical Group account shall be signed by an authorized
representative of the Medical Group.
(l) Calculating physicians' annual compensation based on the
Medical Group's physician compensation formulas.
-10-
<PAGE>
(m) Ongoing day-to-day communication with the Chairman of the
Board and assisting him in fulfilling his responsibilities.
(n) Preparing agendas and information packages for Medical Group
meetings.
(o) Developing budgets and long-term strategies for the Medical
Group.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Providing administrative services (excluding the services of a
plan administrator) in connection with any pension or
profit-sharing plan of the Medical Group; provided, however,
that the Management Company shall not be responsible for
investment decisions.
(s) Coordinating recruitment, interviewing, and hiring of new
physicians.
(t) Implementing fee schedule increases and/or decreases
established by the Medical Group.
(u) Coordinating depositions and court appearances.
(v) Assisting in the coordination of call schedules.
(w) Assisting in the coordination of coverage of athletic team
events.
(x) Acting as liaison to hospital administration, physical
therapy, surgery center, MRI, and other ancillary services
entities.
(y) Cooperating with outside accountants in preparing various
schedules and providing other information.
(z) Interacting with legal counsel as necessary.
3.6 Billing and Collection.
(a) The Medical Group acknowledges that ownership of all Accounts
(as hereinafter defined) is transferred by the Medical Group to the
Management Company as provided in greater detail in Section 5.1 of this
Agreement. In order to facilitate the collection of the Accounts, the
Medical Group hereby authorizes the Management Company (i) to bill
patients and third party payors in the Medical Group's name; (ii) to
collect accounts receivable resulting from such billing; (iii) to receive
payments and prepayments from the Medical Group's patients, Blue Cross and
Blue Shield organizations, insurance companies, health care plans,
Medicare, Medicaid, HMOs, and any and all other third party payors; (iv)
to take possession
-11-
<PAGE>
of and deposit into such bank (the "Medical Group Bank") as the Medical
Group designates, in an account established by the Medical Group in the
name of the Medical Group (the "Medical Group Collections Account"), any
and all checks, insurance payments, cash, cash equivalents and other
instruments received for Medical Group Services; and (v) to initiate with
the consent of the Medical Group, which consent may be withheld by the
Medical Group in its sole and absolute discretion, legal proceedings in
the name of the Medical Group to collect any accounts and monies owed to
the Medical Group, to enforce the rights of the Medical Group as a
creditor under any contract or in connection with the rendering of any
service, and to contest adjustments and denials by governmental agencies
(or its fiscal intermediaries) as third-party payors. Following
termination of this Agreement, the Management Company shall continue to
use reasonable efforts to collect the Accounts for a period of ninety (90)
days thereafter.
(b) From time to time at the Management Company's request, the
Medical Group shall make available to the Management Company one or more
authorized officers (the "Authorized Officers") of the Medical Group to
sign any letters, checks, instruments or other documents (the "Documents")
on behalf of the Medical Group that are necessary for the Management
Company to perform its duties under this Section 3.6 and its other duties
under this Agreement. If the Management Company notifies the Medical Group
that an Authorized Officer is not signing the Documents in a timely
manner, the Management Company shall not be liable for any failure to
perform its duties hereunder or for any failure to perform the Management
Services to the extent caused by the failure of an Authorized Officer to
sign the Documents in a timely manner.
(c) The Management Company represents and warrants to the Medical
Group that it has sufficient knowledge and expertise in the area of
billing for orthopedic and other medical services and ancillary services
to be able to adequately perform the billing services required hereunder.
The Management Company shall submit all bills and manage the billing
process on a timely basis in accordance with the terms of this Agreement
and applicable law.
(d) Without limiting the generality of the foregoing, the Management
Company shall bill patients, bill and submit claims to third party payors,
perform appropriate coding for
-12-
<PAGE>
each bill, and collect all fees for professional and other services
rendered and for items supplied to patients by the Medical Group, all in a
timely manner and in accordance with parameters and criteria established
by the Operations Committee (as hereinafter defined). Additionally, the
Management Company shall provide the following services which are
currently being provided by or on behalf of the Medical Group:
(i) Receive and collect from patients at the time of visit all
appropriate payments and pre-payments, including co-pays,
deductibles, payments for non-covered medical services, and
deposits for surgeries (if applicable), and additionally shall
obtain all appropriate insurance and other information
required.
(ii) Submit claims utilizing electronic billing submission,
whenever appropriate.
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanisms for delinquent accounts of
all insurance classifications, all in a timely fashion as
determined by the Operations Committee.
(iv) Turn over to outside collection agencies all delinquent
accounts satisfying the criteria established by the Operations
Committee. The Management Company shall also follow-up on the
performance of the outside collection agencies and make
changes if necessary, and additionally shall reconcile each
account turned over to the summary data provided by the
collection agency.
(v) Write-off account balances according to criteria approved by
the Operations Committee.
-13-
<PAGE>
(vi) Prepare claim reviews in accordance with criteria approved by
the Operations Committee.
(vii) Bill workers' compensation medical services at rates equal to
the most recently approved California workers' compensation
fee schedule.
(viii) Apply "insurance only" and other courtesy write-offs in
compliance with Operations Committee policy.
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), the Management Company shall determine
that payments from the PPOs and HMOs are in compliance with
the contract with the Medical Group.
(x) With respect to capitation fee contracts with HMOs, the
Management Company shall --
(A) Follow-up to ensure that payments by the HMOs are made
on a timely basis;
(B) Review and audit enrollment data provided by the HMO to
ensure that the capitation payments are based on the
proper number of lives enrolled.
(xi) With respect to lien accounts, the Management Company shall --
(A) Ensure that appropriate documents are signed and agreed
to initially as between Medical Group, attorney and
patient;
(B) Follow-up on a regular basis as to the status of the
account; and
(C) Apply the policies of the Operations Committee in
resolving open account balances.
-14-
<PAGE>
(xii) With respect to student athlete accounts, the Management
Company shall coordinate insurances and other information in
compliance with the policy of the Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, the
Management Company shall follow-up on a timely basis to ensure
that withheld amounts are paid, if warranted, and to ensure
that any withheld amounts that are not paid are verified and
audited for appropriateness.
(xiv) Coordinate the timely payment of refunds to patients and third
party payors when appropriate.
3.7 Personnel.
(a) The Management Company shall retain and provide or arrange for
the retention and provision of all of the following non-medical personnel
necessary for the conduct of the Medical Group's business operations
(collectively, "Administrative Personnel"):
(i) Administration
(ii) Accounting
(iii) Billing and Collection
(iv) Secretarial
(v) Transcription
(vi) Appointments
(vii) Switchboard
(viii) Medical Records
(ix) Chart Preparation
(x) Historians
(xi) Clinic Support
(xii) Marketing
-15-
<PAGE>
(b) The Management Company shall determine and pay the salaries and
fringe benefits of the Administrative Personnel, and shall provide other
personnel services related to the Administrative Personnel, including but
not limited to scheduling, personnel policies, administering continuing
education benefits, and payroll administration.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify
educational and employment experience, licensure, and insurability.
(d) All of the personnel services shall be performed in compliance
with all applicable California and Federal labor laws.
3.8 Inventory and Supplies. The Management Company shall order and
purchase inventory and supplies on behalf of the Medical Group, and such other
ordinary or appropriate materials as the Medical Group reasonably deems to be
necessary for it to carry out its professional medical activities. Inventory and
supplies shall include, but not be limited to:
(a) Medical supplies
(b) Office supplies
(c) Postage
(d) Computer forms and supplies
(e) Printing and stationery supplies
(f) Printer supplies
(g) Linen and laundry supplies
3.9 Taxes. The Management Company shall provide the Medical Group with
access to all information necessary for the Medical Group to prepare its tax
returns. The Management Company shall have no responsibility for the payment of
the Medical Group's taxes.
3.10 Information Systems Management.
(a) The Management Company shall provide or arrange for the
provision of all management information systems services to be utilized by
the Medical Group. These
-16-
<PAGE>
services shall include, but not be limited to, ongoing maintenance and
development of the following information systems:
(i) Accounts receivable - Billing/Insurance/Collections
(ii) On-line appointment scheduling
(iii) Internal e-mail
(iv) On-line transcription
(v) Faxing subsystem
(vi) Electronic claims submission
(vii) Patient flow monitoring system
(viii) Authorization module
(ix) Prescription module
(x) X-ray tracking system
(xi) Voice mail
(xii) Paperless medical records
(xiii) Bar code chart tracking system
(b) The acquisition, replacement, relocation, or other disposition
of any equipment described above shall be governed by Section 3.3 hereof.
(c) The services provided by the Management Company shall protect
the confidentiality of patient medical records to the extent required by
applicable law or the Medical Group's payor agreements; provided, however,
that in no event shall a breach of such confidentiality be deemed a
default under this Agreement if the Management Company acted reasonably
and in good faith to protect such confidentiality.
3.11 Use of New Technologies in the Practice of Medicine. The Management
Company shall promote the integration of new technologies into the professional
practice of the Medical Group, including without limitation the use of satellite
and other telecommunications services that permit the provision of remote
consultations, virtual operations, and other professional services; provided,
however, that the foregoing shall be subject to the terms of Section 8.2(e)
hereof.
-17-
<PAGE>
3.12 Public Relations; Marketing and Advertising. The Management Company
shall develop and implement community outreach programs and public relations
programs designed to educate the patient population regarding the Medical Group,
the availability of its medical services, and the availability in terms of any
managed care programs in which the Medical Group participates. The Management
Company also shall develop and implement marketing and advertising programs as
reasonably required to promote and expand the Medical Business, subject to any
approved budgets. The programs shall be conducted in compliance with applicable
laws and regulations governing advertising by the medical profession.
3.13 Medical Personnel Recruiting.
(a) The Management Company shall, upon request by the Medical Group,
assist the Medical Group in recruiting Medical Personnel. "Medical
Personnel" means:
(i) Physicians (including fellows and residents, if any)
providing professional medical services who are
employees or independent contractors of the Medical
Group;
(ii) Physician assistants, nurse practitioners, and other
health care professionals who provide services that are
billable to patients or third party payors (separate and
apart from the billable services provided by
physicians); and
(iii) Technicians who perform diagnostic tests or procedures.
(b) With respect to each of the Medical Personnel, the Management
Company shall verify educational and employment experience, licensure and
insurability, and shall review and provide the Medical Group with copies
of any complaints contained in public files with applicable state and
federal commissions.
3.14 Insurance. The Management Company shall provide the insurance
coverage described in Sections 12.1 and 12.2 of this Agreement.
-18-
<PAGE>
3.15 Files and Records.
(a) To the extent permitted by applicable law, the Management
Company shall supervise and maintain custody of all files and records
relating to the operation of the business of the Medical Group, including,
without limitation, accounting, billing, collection, and patient medical
records. The management of all files and records shall be in compliance
with applicable state and federal statutes. Business records of the
Medical Group created and/or maintained by the Management Company shall be
the joint property of the Management Company and the Medical Group and
shall at all times be located at a location that is readily accessible to
the parties. Patient medical records shall at all times be and remain the
property of the Medical Group and shall be located at a location that is
readily accessible for patient care. The Management Company shall preserve
the confidentiality of patient medical records and use information
contained in such records only for the limited purposes necessary to
perform the management services set forth herein; provided, however, that
in no event shall a breach of such confidentiality be deemed a default
under this Agreement if the Management Company acted reasonably and in
good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of
files and records as required and in conjunction with policies established
by the Operations Committee. The Management Company shall provide the
Medical Group with all requested off-site files and records on a timely
basis, consistent with the policies of the Medical Group in effect
immediately prior to the Commencement Date. Any change in such policies
shall be subject to the approval of the Operations Committee.
3.16 Managed Care Contracts. The Management Company shall solicit,
negotiate and administer all managed care contracts on behalf of the Medical
Group based on parameters and criteria established by the Operations Committee.
Such services shall be performed by the Management Company as agent of the
Medical Group, and all managed care contracts shall be subject to the Medical
Group's prior approval of any such contract. The Management Company shall
prepare cost forecasts and other analyses as reasonably requested by the Medical
Group in order to allow the Medical Group to make an informed decision with
respect to each proposed contract.
-19-
<PAGE>
3.17 Budgets. The Management Company shall prepare, for the review and
approval of the Operations Committee, annual operating budgets (the "Budgets")
reflecting in reasonable detail projected Billings, Collections, Medical Group
Costs, and Management Company Operating Costs; provided, however, that the
Medical Group shall provide the Management Company with a proposed Budget
covering the initial period under this Agreement commencing on the Commencement
Date and ending on December 31 of the year in which the Commencement Date
occurs. The initial Budget is attached hereto as Schedule II. All other budgets
shall be on a calendar year basis. The Management Company shall prepare and
submit to the Operations Committee all subsequent Budgets on or before December
15 of the year immediately preceding the calendar year to which such Budgets are
applicable.
3.18 Force Majeure. The Management Company shall not be liable to the
Medical Group for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies,
changes in applicable law or regulations or other events over which the
Management Company has no control for so long as such events continue and for a
reasonable time thereafter.
SECTION 4. Equity Participation and Other Consideration. In consideration
of the Medical Group's entering into this Agreement, the Management Company
shall provide to the persons identified in Schedule III attached hereto (the
"Eligible Parties") and to the Medical Group the consideration set forth on
Schedule III.
SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments.
5.1 Ownership of Accounts; Security. The Medical Group hereby transfers to
the Management Company ownership of all accounts receivable and the other rights
to payment arising from the provision by the Medical Group of Medical Group
Services during the term hereof (the "Accounts"); provided, however, that the
right to payment of Medicare and Medicaid receivables shall remain with the
Medical Group in accordance with applicable Federal and state law. The
Management Company shall have the right to grant to any lender (the "Lender") a
first priority lien and security interest in and with respect to the Accounts,
together with all books, records, computer information, and other general
intangibles relating thereto
-20-
<PAGE>
(collectively, the "Collateral"), as security for the obligations of the
Management Company to the Lender. The Medical Group hereby irrevocably
constitutes and appoints the Management Company as the true and lawful
attorney-in-fact for the Medical Group to execute in the name of the Medical
Group such financing statements and other documentation as may be necessary or
appropriate to evidence or to perfect the Lender's lien and security interest in
and with respect to all Accounts and other Collateral. The Medical Group shall
cooperate with the Lender as reasonably requested by the Lender in the event
that the Lender seeks to enforce its rights and remedies under its agreement
with the Management Company, including granting the Lender access, to the extent
permitted by law, to all books and records associated with the Collateral.
Neither the Management Company nor the Lender shall be required to give the
Medical Group any notice in connection with any loan or related financing
arrangements affecting the Accounts and other Collateral.
5.2 Bank Accounts and Payments.
(a) Bank Accounts. The Medical Group shall instruct the Medical
Group Bank to transfer, on a daily basis, all funds in the Medical Group
Collections Account (less the amount necessary to avoid the payment of
bank charges or fees relating to the failure to maintain a minimum balance
in the Medical Group Collections Account) to a bank (the "Management
Company Bank") designated by the Management Company, for credit to an
account in the Management Company's name (the "Operating Account"). All
interest earned on the funds on deposit in the Operating Account shall be
for the account of the Management Company.
(b) Payments. The Management Company shall pay all of the Medical
Group Compensation and all of the Management Company Costs, as hereinafter
defined, and the Management Company shall be entitled to retain for itself
the Management Fee, as hereinafter defined. The Management Company shall
satisfy its obligations hereunder from funds of the Management Company,
which funds may be maintained in any bank account of the Management
Company.
-21-
<PAGE>
5.3 Medical Group Compensation.
(a) Monthly Draw.
(i) On each Draw Date during the Term hereof, the Management
Company shall distribute to the Medical Group an amount equal to a
percentage (the "Draw Percentage") of the Medical Group's total
Billings for Medical Group Services provided during the previous
month (the "Monthly Draw"). The Draw Date and the initial Draw
Percentage are as set forth in Schedule IV, and the Draw Percentage
shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each
year thereafter, the Draw Percentage shall be adjusted to equal a
fraction, the numerator of which is the Annual Medical Group
Compensation Amount for the previous year, and the denominator of
which is the total amount of Billings for the previous year.
(b) Annual Settlement.
(i) On or before April 30, 1998, and on or before April 30 of
each year thereafter, the Management Company shall calculate the
following (the "Annual Medical Group Compensation Amount"):
(A) The total Collections for all Medical Group
Services rendered during the previous calendar
year, less --
(B) the sum of the following:
(1) the Management Fee earned by the Management
Company for the previous calendar year;
(2) the Authorized Management Company Operating
Costs incurred by the Management Company
during the previous calendar year;
(3) an amount equal to sixty percent (60%) of
any Collections pertaining to any New
Medical Office
-22-
<PAGE>
during any applicable New Medical Office
Start-Up Period.
(ii) If the Annual Medical Group Compensation Amount thus
determined exceeds the total of the twelve (12) Monthly Draws paid
by the Management Company to the Medical Group during the previous
calendar year (the "Annual Draw Amount"), the Management Company
shall pay to the Medical Group on or before May 15, an amount equal
to such excess. If the Annual Draw Amount for the previous calendar
year exceeds the Annual Medical Group Compensation Amount for the
previous calendar year, the Management Company shall withhold from
the Medical Group Compensation otherwise payable to the Medical
Group, during each of the following six (6) months, an amount equal
to one-sixth (1/6) of such excess.
(iii) For purposes of determining the total Collections for
all Medical Group Services provided during any calendar year, all
Collections during January, February, and March of each year shall
be deemed to be for Medical Group Services rendered during the
previous calendar year, and all Collections during April through
December shall be deemed to be for Medical Group Services rendered
during the calendar year in which such Collections were received;
provided, however, that for purposes of determining the total
Collections during the period commencing on the Commencement Date
and ending December 31, 1997, all Collections from and after the
Commencement Date through March 31, 1998, shall be deemed to be for
Medical Group Services rendered during the period commencing on the
Commencement Date and ending December 31, 1997. Notwithstanding the
foregoing, the Management Fee applicable to any calendar year shall
be based on the Collections actually received during such calendar
year.
(iv) Notwithstanding anything to the contrary set forth
herein, the first period for which the annual settlement described
in this Section 5.3(b) shall be applicable is the period commencing
on the Commencement Date and ending on December 31, 1997.
-23-
<PAGE>
(c) Notwithstanding the provisions of Section 5.2(a), but subject to
the rights of any Lender as provided in Section 5.1, in the event that the
Medical Group has not received from the Management Company all or any
portion of the Monthly Draw on or before the third business day following
the Draw Date, or in the event that the Medical Group has not received
from the Management Company all or any portion of any amount payable to
the Medical Group pursuant to Section 5.3(b)(ii) on or before the third
business day following the date on which such payment is required to be
made under the terms of Section 5.3(b)(ii), without limiting any other
right or remedy that the Medical Group may have under this Agreement or
under applicable law, the Medical Group shall have the right to
immediately withdraw such amount directly from the Medical Group
Collections Account.
(d) For purposes of this Agreement --
(i) "Billings" means, for any applicable period, the gross
charges of the Medical Group for all Medical Group
Services furnished during such period.
(ii) "Collections" means, for any applicable period, all cash
or cash equivalents received during such period for
Medical Group Services, including any capitation
payments received during such period, less --
(A) any refunds paid during such period, and (B) any
amounts paid to orthopedists who are not employed by
(and who do not otherwise provide professional services
through) the Medical Group for the care of patients
with respect to whom the Medical Group has received
capitation payments.
(iii) "Medical Group Services" means the following services
rendered by, through, or on behalf of the Medical Group:
all professional services rendered by or under the
supervision of any of the
-24-
<PAGE>
Medical Personnel (including professional services
rendered in connection with New Ancillary Services); all
diagnostic radiology services rendered by or under the
supervision of any of the Medical Personnel; all other
ancillary services (other than New Ancillary Services);
all prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, and other items and supplies that
are billable to patients or to third party payors; and
depositions, record review services, court appearances,
independent medical exams, and athletic team services.
(iv) It is the intent of the parties that Billings,
Collections, and Medical Group Services not include any
of the following: New Ancillary Services (excluding
professional services rendered by Medical Personnel in
connection therewith, which professional services are
included under Section 5.3(d)(iii) above), interest
income, sublease income from HealthSouth Rehabilitation
Corporation; royalties payable to any Medical Group
physician for medical inventions; income from
presentations, writings, and endorsements; proceeds from
the sale of any capital assets of the Medical Group;
income from investments; Dr. Kane's collections for
services rendered in connection with his professional
practice in La Jolla, California; Dr. Helgager's
collections for services rendered at the IMC
occupational medicine clinic; or Dr. Alleyne's
collections of interpretation fees relating to data
generated in connection with the use of Medex equipment
in the space subleased by the Medical Group to
HealthSouth Rehabilitation Corporation.
5.4 Management Fee.
(a) The compensation payable to the Management Company for the
provision of Management Services under this Agreement (the "Management
Fee"), which the Management
-25-
<PAGE>
Company may retain from Collections received from time to time at its
discretion, shall be equal to the aggregate of the following:
(i) An amount equal to the Applicable Percentage of
Collections, provided that the amount thus determined
shall be reduced by the Medical Equipment Master Lease
Payments; and
(ii) An amount equal to sixty-six and two-thirds percent
(66-2/3%) of the Professional Practice Cost Savings.
(b) For purposes of this Agreement --
(i) "Applicable Percentage" has the meaning set forth in
Schedule V.
(ii) "Medical Equipment Master Lease Payments" means the
monthly lease amounts payable for all Medical Equipment
determined in accordance with the Medical Equipment
Master Lease referenced in Section 3.3(a) hereof.
(iii) "Professional Practice Cost Savings" means the cost
savings determined in the manner described in Schedule
VI.
(c) An example of the computation of Medical Group Compensation and
the Management Fee is attached hereto as Schedule VII.
5.5 Management Company Costs.
(a) The Management Company shall pay all Management Company
Operating Costs and all Excluded Costs (collectively, the "Management
Company Costs"). All Management Company Costs shall be incurred in the
name of the Management Company, and not in the name of the Medical Group,
except as specifically approved by the Medical Group.
-26-
<PAGE>
Management Company Costs shall not include any costs or expenses incurred
prior to the Commencement Date of this Agreement.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the
Management Company Costs.
(c) For purposes of this Agreement, "Management Company Operating
Costs" means all costs and expenses incurred in connection with the
provision of the Management Services, except for any costs and expenses
defined as Medical Group Costs in Section 5.8 hereof, and except for
Excluded Costs. "Excluded Costs" means all of the following costs and
expenses incurred in connection with the provision of the Management
Services hereunder:
(i) New Medical Office Start-Up Costs;
(ii) New Physician Start-Up Costs;
(iii) The rent and any other payments due under any of the
Office Leases;
(iv) The cost of any Medical Equipment leased by the
Management Company to the Medical Group;
(v) The cost of any FF&E provided by the Management Company
to the Medical Group;
(vi) Depreciation, amortization, and interest; and
(vii) Corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the
following conditions are satisfied:
(A) The Corporate Overhead is incurred in lieu of a
pre-existing Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not
exceed the amount of the Management Company
Operating Costs being eliminated; and
-27-
<PAGE>
(C) The Corporate Overhead is allocated to the Medical
Group and to all other medical groups utilizing
such Corporate Overhead on a pro rata basis.
Any Corporate Overhead with respect to which all
of the above conditions are satisfied shall be
considered Management Company Operating Costs.
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in
any year reduced by any or all of the following, as applicable:
(i) any costs that exceed the applicable Management Company
Operating Costs Budget which are not approved by the
Operations Committee;
(ii) any costs with respect to which the Medical Group has
reasonably requested supporting documentation or other
backup detail which has not been furnished by the
Management Company or which does not reasonably
establish the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an audit
under Section 5.10 not to have been reasonably incurred
in connection with the Management Services required to
be provided under of this Agreement.
5.6 New Medical Office Start-Up Costs.
(a) The Management Company shall pay all New Medical Office Start-Up
Costs incurred in connection with the establishment of any New Medical
Office.
(b) All Medical Equipment utilized at any New Medical Office shall
be acquired by the Management Company and leased to the Medical Group in
accordance with Section 3.3 hereof.
-28-
<PAGE>
(c) For purposes of this Agreement, "New Medical Office" means any
office of the Medical Group other than those offices located in the
premises identified in Section 3.2(a) hereof.
(d) For purposes of this Agreement, "New Medical Office Start-Up
Costs" means the following costs incurred in connection with the
establishment of a New Medical Office during the New Medical Office
Start-Up Period: all Management Company Costs and all costs other than
physician Medical Personnel costs that, but for this provision, would have
been considered Medical Group Costs.
(e) For purposes of this Agreement, "New Medical Office Start-Up
Period" means the period commencing on the date that any costs are
incurred in connection with the establishment of a New Medical Office and
ending on the earlier of (i) the last day of the calendar month in which a
period of eighteen (18) months has elapsed from and after the date on
which the New Medical Office first opened for the treatment of patients,
or (ii) the last day of the first period of two (2) consecutive calendar
months for which the costs borne by the Management Company in connection
with the New Medical Office are less than sixty percent (60%) of the
Collections for Medical Group Services provided at the New Medical Office
during such two-month period. In no event shall the Management Company
have any obligation under this Section 5.6 to pay any New Medical Office
Start-Up Costs incurred later than eighteen (18) months after the New
Medical Office first opened for the treatment of patients.
5.7 New Physician Start-Up Costs.
(a) Upon the request of the Medical Group and approval by the
Management Company, which approval shall not be unreasonably withheld, the
Management Company shall pay all New Physician Start-Up Costs (as defined
below) to the extent authorized hereunder, subject to recoupment by the
Management Company as provided herein.
(b) The Management Company shall be entitled to retain all Net
Collections (as defined below) during the New Physician Start-Up Period
(as defined below), which shall be offset against the New Physician
Start-Up Costs that the Medical Group has previously paid and is entitled
to recoup as provided in Section 5.7(c) below.
-29-
<PAGE>
(c) Beginning with the month immediately following the expiration of
the New Physician Start-Up Period, the Management Company shall be
entitled to recoup all of the New Physician Start-Up Costs previously paid
by the Management Company by retaining any and all Excess Net Collections
(as defined below) until the Management Company has recouped the full
amount of New Physician Start-Up Costs previously paid by the Management
Company, without interest.
(d) "New Physician Start-Up Costs" means the following costs
(whether otherwise considered Management Company Costs or Medical Group
Costs hereunder) payable to or incurred in connection with a New Physician
during the New Physician Start-Up Period, but only to the extent approved
by the Operations Committee: all salary and other compensation payable to
the New Physician; the cost of health insurance and any other employee
benefits provided for the benefit of the New Physician; the cost of
professional liability insurance coverage for the New Physician; the cost
of continuing professional education incurred for the benefit of the New
Physician (including the cost of travel, meals, and lodging incurred in
connection with attendance at seminars and similar professional events);
and all other direct out-of-pocket costs (but not indirect costs),
determined on an incremental basis.
(e) "New Physician Start-Up Period" means the period commencing on
the date that the New Physician commences performing professional medical
services as an employee or independent contractor of the Medical Group and
ending on the earlier of (i) the last day of the calendar month in which a
period of eighteen (18) months has elapsed from and after the date on
which the New Physician commenced performing such services, or (ii) the
last day of the first period of two (2) consecutive calendar months for
which the amount of Net Collections (as defined below) attributable to the
services performed by the New Physician equals or exceeds the amount of
New Physician Start-Up Costs paid or payable during such period. In no
event shall the Management Company have any obligation under this Section
5.7 to pay any New Physician Start-Up Costs incurred later than eighteen
(18) months after the New Physician commenced performing professional
medical services as an employee or independent contractor of the Medical
Group.
-30-
<PAGE>
(f) "Net Collections" in any period means total Collections in such
period less that portion of the Management Fee which is based on the
Applicable Percentage of Collections. At all times during and after the
New Physician Start-Up Period, the Management Company shall be entitled to
receive, as part of its compensation under this Agreement, that portion of
the Management Fee which is based on the Applicable Percentage of
Collections attributable to the services provided by the New Physician.
(g) "Excess Net Collections" means the amount (if any) by which Net
Collections in any month attributable to services performed by the New
Physician exceed the amount of costs paid or payable during such month
which would have been considered New Physician Start-Up Costs had they
been paid or payable during the New Physician Start-Up Period.
(h) "New Physician" means any physician who becomes an employee or
independent contractor of the Medical Group after the date hereof and who
practices with the Medical Group on a substantially full-time basis.
5.8 Medical Group Costs. Except as otherwise provided in this Agreement,
the Medical Group shall pay all of the costs specified in this Section 5.8 (the
"Medical Group Costs"). All Medical Group Costs shall be incurred in the name of
the Medical Group, and not in the name of the Management Company, and shall be
paid from an account of the Medical Group and not from the Operating Account of
the Management Company. The Medical Group Costs are as follows:
(a) Compensation of all Medical Personnel;
(b) Any applicable fringe benefits for all Medical Personnel,
including, but not limited to, payroll taxes, workers'
compensation, health insurance (including drug coverage),
dental insurance, individual disability insurance, life
insurance, business buy-out disability insurance, continuing
education, and medical dues and licenses;
-31-
<PAGE>
(c) The cost of prosthetics, prosthetic devices, orthotics,
braces, splints, appliances, allografts, x-ray films, and
other items and supplies that are billable to patients or to
third party payors (the "Billable Items");
(d) The Medical Equipment Master Lease Payments;
(e) Any lease payments for New Ancillary Service Medical
Equipment;
(f) The monthly rent payable under any Office Sublease described
in Section 3.2 hereof; and
(g) The cost of any items which are not required to be provided by
the Management Company under this Agreement and/or which were
ordered, purchased, or incurred by the Medical Group directly,
including but not limited to the cost of accounting, legal,
consulting, or other professional or advisory services,
business meetings, and business taxes.
5.9 New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary
Service as described in Section 3.4 of this Agreement shall (unless
otherwise agreed by the parties) incorporate the following:
(i) The Management Company shall create a separate division
for purposes of accounting for the income, costs, profits, and
losses of any New Ancillary Service. The Management Company shall
utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of
each New Ancillary Service.
(ii) Profits and/or losses of any New Ancillary Service shall
be divided equally between the Medical Group and the Management
Company, and all distributions to the Medical Group and to the
Management Company shall be made in equal amounts to each from
available cash (after payment of all currently due obligations
incurred in connection with such New Ancillary Service, including
without limitation any principal and interest amounts then due and
payable under Section 5.9(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such Ancillary
Division.
-32-
<PAGE>
(iii) All diagnostic and therapeutic equipment utilized in
connection with any New Ancillary Service ("New Ancillary Service
Medical Equipment") shall be acquired by the Management Company and
leased to the Medical Group pursuant to an equipment lease
substantially in the form of the Medical Equipment Master Lease.
(iv) The Management Company shall pay all of the Ancillary
Service Start-Up Costs. Beginning with the month immediately
following the expiration of the Ancillary Service Start-Up Period,
the Management Company shall be entitled to recoup all of the
Ancillary Service Start-Up Costs previously paid by the Management
Company in sixty (60) equal monthly installments of principal, plus
interest on the unrecouped portion of such costs at the prevailing
prime rate as set forth in the Wall Street Journal and/or at the
actual rate paid by the Management Company with respect to any part
of such costs that have been financed by the Management Company.
(v) The Management Company shall provide, in connection with
any New Ancillary Service, the full range of management services
described in this agreement.
(vi) The billings, collections, costs and expenses relating to
any New Ancillary Service shall not be included in the computations
of Medical Group Compensation, the Management Fee, Management
Company Costs, New Medical Office Start-Up Costs, New Physician
Start-Up Costs, or Medical Group Costs as described in Sections 5.3,
5.4, 5.5, 5.6, 5.7, or 5.8, respectively.
(b) For purposes of this Section 5.9, "Ancillary Service Start-Up
Period" means the period commencing on the date that any costs are
incurred in connection with the establishment of the New Ancillary Service
and ending on the last day of the first period of two (2) consecutive
calendar months for which the New Ancillary Service shows a profit.
(c) For purposes of this Section 5.9, "Ancillary Service Start-Up
Costs" means the total of all of the following costs incurred in
connection with the establishment of a New
-33-
<PAGE>
Ancillary Service during the Ancillary Service Start-Up Period (whether
such costs would otherwise be considered Management Company Costs or
Medical Group Costs) --
(i) Any lease payments for New Ancillary Service Medical
Equipment;
(ii) All costs of acquiring furniture, fixtures, and office
equipment;
(iii) All initial occupancy costs, if any, including but not
limited to rent deposits, prepaid rent, and tenant
improvements;
(iv) All other start-up costs, including but not limited to
legal, accounting and consulting fees, and the cost of
initial inventories of supplies and other items; and
(v) All ongoing costs of the New Ancillary Service,
including but not limited to personnel (other than
physician Medical Personnel) and related benefits, the
cost of operating any equipment utilized in providing
the service, supplies, insurance, rent, repairs and
maintenance, outside services, telephone, taxes,
utilities, storage and other ordinary ongoing expenses
of providing the New Ancillary Service.
5.10 Review and Audit of Books and Records. Each of the parties shall have
the right, during ordinary business hours and upon reasonable notice, to review
and make copies of, or to audit through a qualified certified public accountant
approved by the other party (which approval shall not be unreasonably withheld),
the books and records of the other party relating to the billing, collection,
and disbursement of fees, and the determination of costs, under this Agreement.
Any such review or audit shall be performed at the cost of the requesting party;
provided, however, that in the event that such review or audit requested by the
Medical Group discloses a discrepancy indicating that the Medical Group has
actually been underpaid by an amount in excess of two percent (2%) of the total
amount of Medical Group Compensation
-34-
<PAGE>
payable to the Medical Group for the period covered by the audit, the cost of
the audit shall be borne by the Management Company. All documents and other
information obtained in the course of such review or audit shall be held in
strict confidence.
5.11 Start-Up Period. Consistent with the provisions of Section 2 of this
Agreement, the parties acknowledge and agree that, in order to facilitate the
transition of responsibilities hereunder, certain requirements and procedures
agreed to under this Agreement may be implemented over the course of a period of
time commencing on the Commencement Date and ending two (2) months thereafter
(subject to extension by agreement of the Medical Group and the Management
Company), rather than being fully implemented immediately on the Commencement
Date. Accordingly, the parties further agree that the Management Fee and Medical
Group Compensation payable in respect of the Management Services and the Medical
Group Services applicable to such period of time shall be computed, and any
appropriate adjustments shall be made, such that no material financial advantage
or disadvantage shall accrue to either party as a result of implementing such
requirements and procedures over the course of such start-up period rather than
immediately on the Commencement Date.
SECTION 6. Representations and Warranties of the Medical Group. The
Medical Group hereby represents and warrants to the Management Company, as of
the date hereof, as follows:
6.1 Organization; Good Standing; Qualification and Power. The Medical
Group is a professional corporation duly organized, validly existing, and in
good standing under the laws of the State of California and has all requisite
power and authority to own, lease, and operate its properties, to carry on its
business as now being conducted and as proposed to be conducted, to enter into
this Agreement, the Asset Purchase Agreement to which the Medical Group is a
party, the Medical Equipment Master Lease, the Assignment of Lease, the Office
Sublease, and the Stockholder Non-Competition Agreement (collectively, the
"Medical Group Transaction Documents"), to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
The Medical Group has delivered to the Management Company a true and correct
copy of its Articles of Incorporation and Bylaws (collectively, the "Medical
Group Governance Documents"), in effect on the date hereof.
-35-
<PAGE>
6.2 Equity Investments. The Medical Group currently has no subsidiaries,
nor does the Medical Group currently own any capital stock or other proprietary
interest, directly or indirectly, in any corporation, association, trust,
partnership, joint venture, or other entity.
6.3 Authority. The execution, delivery and performance of the Medical
Group Transaction Documents and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
action on the part of the Medical Group. The Medical Group Transaction Documents
have been duly and validly executed and delivered by the Medical Group and
constitute the legal, valid and binding obligations of the Medical Group
enforceable in accordance with their respective terms, except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally or by applicable laws
pertaining to the enforceability of non-competition agreements. Neither the
execution, delivery or performance of the Medical Group Transaction Documents by
the Medical Group nor the consummation by the Medical Group of the transactions
contemplated hereby or thereby, nor compliance by the Medical Group with any
provision hereof or thereof will (a) conflict with or result in a breach of any
provision of the formation documents of the Medical Group, (b) cause a default
(with due notice, lapse of time or both), or give rise to any right of
termination, cancellation or acceleration, under any of the terms, conditions or
provisions of any note, bond, lease, mortgage, indenture, license or other
instrument, obligation or agreement to which the Medical Group or the Medical
Business is a party or by which they or any of its respective properties or
assets may be bound (with respect to which defaults or other rights all
requisite waivers or consents shall have been obtained at or prior to the date
hereof) or (c) to the best knowledge of the Medical Group, but without
expressing any opinion regarding the enforceability of non-competition
agreements, violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Medical Group, the Medical Business or any
of their respective properties or assets. To the best knowledge of the Medical
Group, no permit, authorization, consent or approval of or by, or any
notification of or filing with, any person (governmental or private) is required
in connection with the execution, delivery or performance by the Medical Group
of the Medical Group Transaction Documents or the consummation of the
transactions contemplated thereby.
-36-
<PAGE>
6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's
balance sheet as of December 31, 1996 (the "Balance Sheet"; and the date thereof
being referred to as the "Balance Sheet Date"), and the related internal
statements of revenue and expenses for the period then ended (including the
notes thereto and other financial information included therein) (collectively,
the "Internal Financial Statements"), (b) the review financial statements of the
Medical Business for the periods ended December 31, 1996 and December 31, 1995
(the "Review Financial Statements"), and (c) the historical collection
information of the Medical Group and its shareholder employees for the year
ended December 31, 1995 and for the ten-month period ended October 31, 1996 (the
"Historical Collections Information"). The Internal Financial Statements, the
Review Financial Statements, and the Historical Collections Information (i) were
prepared in accordance with the books and records of the Medical Business, (ii)
fairly present the financial position of the Medical Business as of the dates
thereof, and (iii) are true, correct and complete in all material respects as of
the dates thereof.
6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule
6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any
material liability of any nature (matured or unmatured, fixed or contingent,
known or unknown) which was not provided for or disclosed on the Balance Sheet,
(b) all liability reserves established by the Medical Business on the Balance
Sheet were adequate and (c) there were no loss contingencies (as such term is
used in Statement of Financial Accounting Standards No. 5 issued by the
Financial Accounting Standards Board in March 1975) which were not adequately
provided for or disclosed on the Balance Sheet.
6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the
Balance Sheet Date, the Medical Business has been operated in the ordinary
course and consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working
capital and the components thereof), liabilities, operations, results of
operations, earnings, business or prospects of the Medical Business;
-37-
<PAGE>
(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Medical Business;
(c) any obligation or liability (whether absolute, accrued,
contingent or otherwise and whether due or to become due) created or
incurred, or any transaction, contract or commitment entered into, by the
Medical Business other than such items created or incurred in the ordinary
course of the Medical Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Medical Business outside the
ordinary course of the Medical Business (whether absolute, accrued,
contingent or otherwise and whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other
disposition of any tangible or intangible asset of the Medical Business
except in the ordinary course of the Medical Business and consistent with
past practice;
(f) any write-off as uncollectible of any accounts receivable in
connection with the Medical Business or any portion thereof in excess of
$5,000 in the aggregate exclusive of all normal contractual adjustments
from third party payors;
(g) except for all normal contractual adjustments from third party
payors, any account receivable in connection with the Medical Business in
an amount greater than $10,000 which (i) has become delinquent in its
payment by more than 90 days, (ii) has had asserted against it any claim,
refusal to pay or right of set-off, (iii) an account debtor has refused to
pay for any reason or with respect to which such account debtor has become
insolvent or bankrupt or (iv) has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Medical
Business;
-38-
<PAGE>
(i) any general uniform increase in the compensation of employees of
the Medical Group or the Medical Business (including, without limitation,
any increase pursuant to any bonus, pension, profit-sharing, deferred
compensation arrangement or other plan or commitment) or any increase in
compensation payable to any officer, employee, consultant or agent
thereof, or the entering into of any employment contract with any officer
or employee, or the making of any loan to, or the engagement in any
transaction with, any officer of the Medical Group or the Medical
Business;
(j) any change in the accounting methods or practices followed in
connection with the Medical Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) the termination of employment of any key employee of the Medical
Group or the Medical Business listed on Annex A ("Medical Group Key
Personnel"), or any expression of intention by any of the Medical Group
Key Personnel to terminate such employment with the Medical Group or the
Medical Business;
(l) any agreement or commitment relating to the sale of any material
fixed assets of the Medical Business;
(m) any other transaction relating to the Medical Business other
than in the ordinary course of the Medical Business and consistent with
past practice; or
(n) any agreement or understanding, whether in writing or otherwise,
for the Medical Business to take any of the actions specified in items (a)
through (m) above.
6.7 Tax Matters.
(a) Except as set forth on Schedule 6.7, (i) all Taxes relating to
the Medical Business required to be paid by the Medical Group through the
date hereof have been paid and all returns, declarations of estimated Tax,
Tax reports, information returns and statements required to be filed by
the Medical Group in connection with the Medical Business prior to the
-39-
<PAGE>
date hereof (other than those for which extensions shall have been granted
prior to the date hereof) relating to any Taxes with respect to any
income, properties or operations of the Medical Group prior to the date
hereof (collectively, "Returns") have been duly filed; (ii) as of the time
of filing, the Returns correctly reflected in all material respects (and,
as to any Returns not filed as of the date hereof, will correctly reflect
in all material respects) the facts regarding the income, business,
assets, operations, activities and status of the Medical Business and any
other information required to be shown therein; (iii) all Taxes relating
to the operations of the Medical Business that have been shown as due and
payable by the Medical Group on the Returns have been timely paid and
filed or adequate provisions made to the books and records of the Medical
Business; (iv) in connection with the Medical Business (A) the Medical
Group has made provision on the Balance Sheet for all Taxes payable by the
Medical Group for any periods that end on or before the Balance Sheet Date
for which no Returns have yet been filed and for any periods that begin on
or before the Balance Sheet Date and end after the Balance Sheet Date to
the extent such Taxes are attributable to the portion of any such period
ending on the Balance Sheet Date and (B) provision has been made for all
Taxes payable by the Medical Group for any periods that end on or before
the date hereof for which no Returns have then been filed and for any
periods that begin on or before the date hereof and end after such date to
the extent such Taxes are attributable to the portion of any such period
ending on such date; (v) no tax liens have been filed with respect to any
of the assets of the Medical Business, and there are no pending tax audits
of any Returns relating to the Medical Business; and (vi) no deficiency or
addition to Taxes, interest or penalties applicable to the Medical Group
for any Taxes relating to the operation of the Medical Business has been
proposed, asserted or assessed in writing (or any member of any affiliated
or combined group of which the Medical Group or any previous operator of
the Medical Business was a member for which the Medical Group could be
liable).
(b) The Medical Group is not a foreign person within the meaning of
ss.1.1445- 2(b) of the Regulations under Section 1445 of the Internal
Revenue Code of 1986, as amended (the "Code").
-40-
<PAGE>
(c) The Medical Group has provided the Management Company with true
and complete copies of all Federal, state and foreign Returns of the
Medical Group for the calendar years ending December 31, 1995 and 1996.
(d) For purposes of this Agreement, "Tax" means any of the Taxes and
"Taxes" means, with respect to any person or entity, (i) all federal,
state, local and foreign income taxes (including any tax on or based upon
net income, or gross income, or income as specially defined, or earnings,
or profits, or selected items of income, earnings or profits) and all
Federal, state, local and foreign gross receipts, sales, use, ad valorem,
transfer, franchise, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property or windfall profits taxes,
alternative or add-on minimum taxes, customs duties or other Federal,
state, local and foreign taxes, fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority (domestic or
foreign) on such person or entity and (ii) any liability for the payment
of any amount of the type described in the immediately preceding clause
(i) as a result of being a `transferee' (within the meaning of Section
6901 of the Code or any other applicable law) of another person or entity
or a member of an affiliated or combined group.
6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a)
actions, suits, claims, investigations or legal or administrative or arbitration
proceedings pending or, to the best knowledge of the Medical Group, threatened
against the Medical Group or any shareholder of the Medical Group, or in
connection with the Medical Business, whether at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions
or orders of any court, governmental department, commission, agency,
instrumentality or arbitrator against the Medical Group, its assets or affecting
the Medical Business. The Medical Group has delivered to the Management Company
all documents and correspondence relating to matters referred to in said
Schedule 6.8.
6.9 Compliance; Governmental Authorizations. The Medical Group and the
Medical Business shall have complied in all material respects with all
applicable material Federal, state,
-41-
<PAGE>
local or foreign laws, ordinances, regulations and orders. The Medical Group has
all Federal, state, local and foreign governmental licenses and permits
necessary in the conduct of the Medical Business, the lack of which would have a
material adverse effect on the Medical Group's ability to operate the Medical
Business after the date hereof on substantially the same basis as presently
operated, such licenses and permits are in full force and effect, the Medical
Group has not received any notice indicating that any violations are or have
been recorded in respect of any thereof, and no proceeding is pending or, to the
best knowledge of the Medical Group, threatened to revoke or limit any thereof.
To the best knowledge of the Medical Group, none of such licenses and permits
shall be affected in any material respect by the transactions contemplated
hereby.
6.10 Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts
receivable owing to the Medical Group in connection with the Medical
Business as of the date hereof constitute valid and enforceable claims
arising from bona fide transactions in the ordinary course of the Medical
Business, the amounts of which are actually due and owing, and as of the
date hereof, to the best knowledge of the Medical Group, there are no
claims, refusals to pay or other rights of set-off against any thereof.
Except as set forth on Schedule 6.10, as of the date hereof, there is (i)
no account debtor or note debtor of the Medical Business delinquent in its
payment by more than 60 days, (ii) no account debtor or note debtor of the
Medical Business who or which has refused to pay its obligations for any
reason or is the subject of a bankruptcy proceeding and (iii) no account
receivable or note receivable of the Medical Business pledged to any third
party.
(b) All accounts payable and notes payable by the Medical Business
to third parties arose in the ordinary course of business and, except as
set forth in Schedule 6.10, there is no account payable or note payable
past due or delinquent in its payment.
6.11 Labor Relations; Employees. Schedule 6.11 contains a true and
complete list of the persons employed by the Medical Group as of the date hereof
(the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group
and the Medical Business are not delinquent in payments to any of the Employees
for any wages, salaries, commissions, bonuses
-42-
<PAGE>
or other compensation for any services performed by them to the date hereof or
amounts required to be reimbursed to the Employees; (b) upon termination of the
employment of any of the Employees, neither the Medical Group, the Medical
Business nor the Management Company will by reason of anything done prior to the
date hereof, or by reason of the consummation of the transactions contemplated
hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or
to any of the Employees for severance pay or any other payments; (c) there is no
unfair labor practice complaint against the Medical Group or in connection with
the Medical Business pending before the National Labor Relations Board or any
comparable state, local or foreign agency; (d) there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the best knowledge of the
Medical Group, threatened against or involving the Medical Group or Medical
Business; (e) there is no collective bargaining agreement covering any of the
Employees; and (f) to the best knowledge of the Medical Group, no Employee or
consultant is in violation of any (i) employment agreement, arrangement or
policy between such person and any previous employer (private or governmental)
or (ii) agreement restricting or prohibiting the use of any information or
materials used or being used by such person in connection with such person's
employment by or association with the Medical Group or the Medical Business.
6.12 Employee Benefit Plans.
(a) Schedule 6.12 identifies each `employee benefit plan', as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and all other written or oral plans, programs,
policies or agreements involving direct or indirect compensation
(including any employment agreements entered into between the Medical
Group or the Medical Business and any Employee or former employee of the
Medical Group or in connection with the Medical Business, but excluding
workers' compensation, unemployment compensation and other
government-mandated programs) currently or previously maintained or
entered into by the Medical Group or in connection with the Medical
Business for the benefit of any Employee or former employee of the Medical
Group or in connection with the Medical Business under which the Medical
Group, any affiliate thereof or the Medical Business has any present or
future obligation or liability (the "Employee Plans"). The Medical Group
has provided the Management Company with true and complete age, salary,
service and related data for Employees of the Medical Group and in
connection with the Medical Business.
-43-
<PAGE>
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or
oral) providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, deferred
compensation, profit-sharing, bonuses, stock options, stock appreciation
or other forms of incentive compensation or post-retirement insurance,
compensation or benefits currently maintained by the Medical Group or in
connection with the Medical Business.
6.13 Insurance. Schedule 6.13 contains a list of all policies of
professional liability (medical malpractice), general liability, theft,
fidelity, fire, product liability, errors and omissions, health and other
property and casualty forms of insurance held by the Medical Group covering the
assets, properties or operations of the Medical Group and the Medical Business
(specifying the insurer, amount of coverage, type of insurance, policy number
and any pending claims thereunder). All such policies of insurance are valid and
enforceable policies and are outstanding and duly in force and all premiums with
respect thereto are currently paid. Neither the Medical Group nor its
predecessor in interest has, during the last five fiscal years, been denied or
had revoked or rescinded any policy of insurance relating to the assets,
properties or operations of the Medical Group or the Medical Business.
6.14 Real Property. Schedule 6.14 sets forth an accurate and complete
legal description of the entire right, title and interest of the Medical Group
in and to all real property, together with all buildings, facilities, fixtures
and improvements located on such real property, owned or leased by the Medical
Group (the "Real Property"), together with an accurate description of the title
insurance policy or other evidence of title issued with respect thereto, the
most current survey of such real property and a description of the use thereof.
Other than the Real Property, the Medical Group has no other interest (leasehold
or otherwise) in real property used, held for use or intended to be used in the
Medical Business. The Medical Group has a valid leasehold interest in all Real
Property leased by the Medical Group.
6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15,
neither the Medical Group nor the Medical Business is bound by any oral or
written agreement or contract
-44-
<PAGE>
which by its terms prohibits it from conducting the Medical Group or the Medical
Business (or any material part thereof).
6.16 Disclosure. Neither the Medical Group Transaction Documents
(including the Exhibits and Schedules attached thereto) nor any other document,
certificate or written statement furnished to the Management Company by or on
behalf of the Medical Group in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein not misleading. Except as set forth on Schedule 6.16, there have been no
events or transactions, or information which has come to the attention of the
Medical Group, which, as they relate directly to the Medical Group or the
Medical Business, could reasonably be expected to have a material adverse effect
on the business, operations, affairs, prospects or condition of the Medical
Group and the Medical Business.
SECTION 7. Representations and Warranties of the Management Company. The
Management Company represents and warrants to the Medical Group, as of the date
hereof, as follows:
7.1 Organization, Good Standing and Power. The Management Company (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and (b) has all requisite corporate power and authority
to own, lease and operate its properties, to carry on its business as now being
conducted and as proposed to be conducted, to execute and deliver this
Agreement, the Asset Purchase Agreements, the Restricted Stock Agreement, the
Medical Equipment Master Lease, the Assignment of Lease, the Office Sublease,
and the Stockholder Non-Competition Agreement (collectively, the "Management
Company Transaction Documents"), to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
7.2 Authority. The execution, delivery and performance of the Management
Company Transaction Documents, and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action on the part of
-45-
<PAGE>
the Management Company. The Management Company Transaction Documents to which it
is a party have been duly and validly executed and delivered by the Management
Company, and such Management Company Transaction Documents are valid and binding
obligations of the Management Company, enforceable in accordance with their
respective terms except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of the
Management Company Transaction Documents, nor the consummation by the Management
Company of the transactions contemplated thereby, nor compliance by the
Management Company with any provision thereof, will (a) conflict with or result
in a breach of any provisions of the Certificate of Incorporation or By-laws of
the Management Company, (b) cause a default (with due notice, lapse of time or
both), or give rise to any right of termination, cancellation or acceleration,
under any of the terms, conditions or provisions of any material note, bond,
lease, mortgage, indenture, license or other instrument, obligation or agreement
to which the Management Company is a party or by which it or any of its
properties or assets is or may be bound or (c) violate any law, statute, rule or
regulation or order, writ, judgment, injunction or decree of any court,
administrative agency or governmental body applicable to the Management Company
or any of its properties or assets.
7.3 Issuance of Common Stock. The Management Company has taken all action
necessary or appropriate to duly authorize the creation, issuance and sale of
the common stock to be issued hereunder. Such shares of common stock, when
issued, sold and delivered, as provided for herein and in the Restricted Stock
Agreement, will be validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership of the shares. The issuance of
such shares of common stock will not violate any preemptive or similar right of
any person.
7.4 Issued and Outstanding Stock. Set forth in Schedule 7.4 is an accurate
and complete list of the number and class of issued and outstanding shares of
stock of the Management Company. Each of the outstanding shares of capital stock
has been duly and validly authorized and issued, is fully paid and
non-assessable.
-46-
<PAGE>
7.5 Permits, Authorizations, Consents, Approvals, Notifications, and
Filings. Except as provided in Schedule 7.5, to the best of the Management
Company's knowledge, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery or performance by the
Management Company of this Agreement or the consummation by the Management
Company of the transactions contemplated hereby.
7.6 Financial Information. Schedule 7.6 contains (a) the unaudited
statements of assets, liabilities and stockholders' equity of the Management
Business as at the date set forth therein (the "Management Company Balance
Sheet"; and the date thereof being referred to as the "Management Company
Balance Sheet Date"), and the related unaudited statements of revenue and
expenses for the periods then ended (including the notes thereto and other
financial information included therein) (collectively, the "Unaudited Financial
Statements"). The Unaudited Financial Statements (i) were prepared in accordance
with the books and records of the Management Business, (ii) fairly present the
financial position of the Management Business as of the dates thereof, and (iii)
are true, correct and complete in all material respects as of the date thereof.
7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule
7.7, as of the Management Company Balance Sheet Date, (a) the Management
Business did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Management Company Balance Sheet, (b) all liability reserves
established by the Management Business on the Management Company Balance Sheet
were adequate and (c) there were no loss contingencies (as such term is used in
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which were not adequately provided for
or disclosed on the Management Company Balance Sheet.
7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the
Management Company Balance Sheet Date, the Management Business has been operated
in the ordinary course and consistent with past practice and there has not been:
-47-
<PAGE>
(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working
capital and the components thereof), liabilities, operations, results of
operations, earnings, business or prospects of the Management Business;
(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Management Business;
(c) any obligation or liability (whether absolute, accrued,
contingent or otherwise and whether due or to become due) created or
incurred, or any transaction, contract or commitment entered into, by the
Management Business other than such items created or incurred in the
ordinary course of the Management Business and consistent with past
practice;
(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Management Business outside
the ordinary course of the Management Business (whether absolute, accrued,
contingent or otherwise and whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other
disposition of any tangible or intangible asset of the Management Business
except in the ordinary course of the Management Business and consistent
with past practice;
(f) any write-off as uncollectible of any accounts receivable in
connection with the Management Business or any portion thereof in excess
of $5,000 in the aggregate exclusive of all normal contractual adjustments
from third party payors;
(g) except for all normal contractual adjustments from third party
payors, any account receivable in connection with the Management Business
in an amount greater than $10,000 which (i) has become delinquent in its
payment by more than 90 days, (ii) has had asserted against it any claim,
refusal to pay or right of set-off, (iii) an account debtor has refused
-48-
<PAGE>
to pay for any reason or with respect to which the Management Business,
such account debtor has become insolvent or bankrupt or (iv) has been
pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(i) any general uniform increase in the compensation of employees of
the Management Company or the Management Business (including, without
limitation, any increase pursuant to any bonus, pension, profit-sharing,
deferred compensation arrangement or other plan or commitment) or any
increase in compensation payable to any officer, employee, consultant or
agent thereof, or the entering into of any employment contract with any
officer or employee, or the making of any loan to, or the engagement in
any transaction with, any officer of the Management Company or the
Management Business;
(j) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) any termination of employment of any key employee of the
Management Company or the Management Business listed on Annex B (each, a
"Management Company Key Employee"), or any expression of intention by any
Key Employee of the Management Company or the Management Business to
terminate such employment with the Management Company or the Management
Business;
(l) any agreement or commitment relating to the sale of any material
fixed assets of the Management Business;
(m) any other transaction relating to the Management Business other
than in the ordinary course of the Management Business and consistent with
past practice; or
-49-
<PAGE>
(n) any agreement or understanding, whether in writing or otherwise,
for the Management Business to take any of the actions specified in items
(a) through (m) above.
7.9 Tax Matters.
(a) Except as set forth on Schedule 7.9, (i) all Taxes relating to
the Management Business required to be paid through the date hereof have
been paid and all returns, declarations of estimated Tax, Tax reports,
information returns and statements required to be filed in connection with
the Management Business prior to the date hereof (other than those for
which extensions shall have been granted prior to the date hereof)
relating to any Taxes with respect to any income, properties or operations
of the Management Company prior to the date hereof (collectively,
"Management Company Returns") have been duly filed; (ii) as of the time of
filing, the Management Company Returns correctly reflected in all material
respects (and, as to any Management Company Returns not filed as of the
date hereof, will correctly reflect in all material respects) the facts
regarding the income, business, assets, operations, activities and status
of the Management Business and any other information required to be shown
therein; (iii) all Taxes relating to the operations of the Management
Business that have been shown as due and payable on the Management Company
Returns have been timely paid and filed or adequate provisions made to the
books and records of the Management Business; (iv) in connection with the
Management Business (A) the Management Company has made provision on the
Management Company Balance Sheet for all Taxes payable for any periods
that end on or before the Management Company Balance Sheet Date for which
no Management Company Returns have yet been filed and for any periods that
begin on or before the Management Company Balance Sheet Date and end after
the Management Company Balance Sheet Date to the extent such Taxes are
attributable to the portion of any such period ending on the Management
Company Balance Sheet Date and (B) provision has been made for all Taxes
payable for any periods that end on or before the date hereof for which no
Management Company Returns have then been filed and for any periods that
begin on or before the date hereof and end after such date to the extent
such Taxes are attributable to the portion of any such period ending on
such date; (v) no tax liens have been filed with respect to any of the
assets of the Management Business, and there are no pending tax audits of
any Management Company Returns relating to the Management Business; and
(vi) no deficiency or addition to Taxes, interest or penalties for
-50-
<PAGE>
any Taxes relating to the operation of the Management Business has been
proposed, asserted or assessed in writing (or any member of any affiliated
or combined group of which the Management Company or any previous operator
of the Management Business was a member for which the Management Company
could be liable).
(b) The Management Company is not a foreign person within the
meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the
Code.
7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no
(a) actions, suits, claims, investigations or legal or administrative or
arbitration proceedings pending or, to the best knowledge of the Management
Company, threatened against the Management Company or in connection with the
Management Business, whether at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or (b) judgments, decrees, injunctions or orders of
any court, governmental department, commission, agency, instrumentality or
arbitrator against the Management Company its assets or affecting the Management
Business.
7.11 Compliance; Governmental Authorizations. The Management Company and
the Management Business have complied in all material respects with all
applicable material Federal, state, local or foreign laws, ordinances,
regulations and orders. The Management Company has all Federal, state, local and
foreign governmental licenses and permits necessary in the conduct of the
Management Business, the lack of which would have a material adverse effect on
the Management Company's ability to operate the Management Business after the
date hereof on substantially the same basis as presently operated, and such
licenses and permits are in full force and effect. To the best knowledge of the
Management Company, none of such licenses and permits shall be affected in any
material respect by the transactions contemplated hereby.
7.12 Accounts and Notes Payable. All accounts payable and notes payable by
the Management Company to third parties arose in the ordinary course of
business, and there is no account payable or note payable which is delinquent.
-51-
<PAGE>
7.13 Employees. The Management Company is not delinquent in payments to
any of the Management Company employees for any wages, salaries, commissions,
bonuses or other compensation for any services performed by them to the date
hereof.
7.14 Employee Benefit Plans. The Management Company is not delinquent in
its payments or otherwise in default under any `employee benefit plan', as
defined in Section 3(3) of ERISA, or under any other written or oral plans,
programs, policies or agreements involving direct or indirect compensation,
including any employment agreements entered into between the Management Company
and any Management Company employee or former employee in connection with the
Management Business.
7.15 Insurance. The Management Company has obtained such policies of
insurance as are usual and customary for businesses of the type conducted by the
Management Company. All such policies of insurance are valid and enforceable
policies, and all premiums with respect thereto are currently paid. The
Management Company has not been denied or had revoked or rescinded any policy of
insurance relating to the assets, properties or operations of the Management
Company or the Management Business.
7.16 Real Property. The Management Company has a valid leasehold interest
in all Management Company real property leased by the Management Company.
7.17 Burdensome Restrictions. Neither the Management Company nor the
Management Business is bound by any oral or written agreement or contract which
by its terms prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
7.18 Disclosure. Neither the Management Company Transaction Documents
(including the Exhibits and Schedules attached thereto) nor any other document,
certificate or written statement furnished to the Medical Group by or on behalf
of the Management Company in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein
-52-
<PAGE>
and therein not misleading. Except as set forth on Schedule 7.18, there have
been no events or transactions, or information which has come to the attention
of the Management Company, which, as they relate directly to the Management
Company or the Management Business, could reasonably be expected to have a
material adverse effect on the business, operations, affairs, prospects or
condition of the Management Company and the Management Business.
SECTION 8. Operations Committee.
8.1 Formation and Operation of the Operations Committee. The Management
Company and the Medical Group shall establish an Operations Committee
responsible for directing the Management Company in connection with the
development of certain specific management and administrative policies for the
overall operation of the Medical Group. The Operations Committee shall consist
of four (4) members. The Medical Group shall designate two (2) members of the
Operations Committee, each of whom shall be a physician in the Medical Group,
and the Management Company shall designate two (2) members of the Operations
Committee. The Medical Group hereby designates James C. Esch, M.D. and James A.
Helgager, M.D. to serve on the Operations Committee commencing as of the date of
this Agreement. The business of the Operations Committee shall be conducted in
accordance with the policies and procedures described in Section 8.4 hereof.
8.2 Authoritative Functions of the Operations Committee. The Operations
Committee shall perform the following functions, and the decisions of the
Operations Committee with respect to such functions shall be binding on the
Management Company and the Medical Group:
(a) Approve the annual budgets for:
(i) Billings and Collections
(ii) Medical Group Costs
(iii) Management Company Operating Costs (which, in the
absence of approval by the Operations Committee, shall
be increased by one percent (1.0%) over the total amount
approved for the preceding period)
-53-
<PAGE>
(b) Approve costs and expenses that exceed the Management Company
Operating Costs Budget.
(c) Establish parameters and criteria with respect to the
establishment and maintenance of relationships with
institutional providers and payors and managed care contracts
(except with respect to the establishment of professional
fees).
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection
agencies
(vi) Write-offs of account balances
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off policies
(ix) Lien account collection policies
(x) Student Athlete account policies
(e) Approve the acquisition, replacement, relocation, or other
disposition of Medical Equipment and FF&E, approve the
integration of new technologies into the professional practice
of the Medical Group as contemplated by Section 3.11 hereof,
and approve the renovation and expansion of any offices of the
Medical Group ("Tenant Improvements"); provided, however, that
the approval of the Management Company also shall be required
prior to (i) the acquisition of any Medical Equipment or FF&E
(including any Medical Equipment or FF&E relating to the
integration of new technologies into the professional practice
of the Medical Group) if and to the extent that the aggregate
cost of such items in any calendar year exceeds five percent
(5%) of the Management Fee
-54-
<PAGE>
for such year, (ii) the undertaking of any Tenant Improvements
relating to patient care facilities that cost more than
$10,000 in the aggregate at any one of the Medical Group's
office locations in any calendar year, or (iii) the
undertaking of any other Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of
files and records of the Medical Group.
(g) Approve any change in the insurance carrier that provides
professional liability coverage to the Medical Group.
(h) Approve all New Physician Start-Up Costs in accordance with
Section 5.7 hereof.
8.3 Advisory Functions of the Operations Committee. The Operations
Committee shall review, evaluate and make recommendations to the Medical Group
and the Management Company with respect to the following matters:
(a) Identification of physician subspecialties required for the
efficient operation of the Medical Group; advice regarding all
Medical Personnel employment and recruitment contracts to be
utilized by the Medical Group.
(b) Development of long-term strategic planning objectives for the
Medical Group.
(c) Public relations, advertising, and other marketing of Medical
Group services, including design of exterior signs.
(d) The establishment of fees for professional services and
ancillary services rendered by the Medical Group.
-55-
<PAGE>
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group
and the Management Company, as such coverage may relate to
Medical Group operations and activities.
(g) Any matters arising in connection with the operations of the
Medical Group that are not specifically addressed in this
Agreement and as to which the Management Company or the
Medical Group requests consideration by the Operations
Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Management Company and the Medical Group, and except as provided herein, the
Operations Committee does not have the power to bind the Management Company or
the Medical Group. Where discretion with respect to any matters is vested in the
Management Company or the Medical Group under the terms of this Agreement, the
Management Company or the Medical Group, as the case may be, shall have ultimate
responsibility for the exercise of such discretion, notwithstanding any
recommendation of the Operations Committee. The Management Company and the
Medical Group shall, however, take such recommendations of the Operations
Committee into account in good faith in the exercise of such discretion.
8.4 Committee Policies and Procedures.
(a) The Medical Group shall designate one of its members to act as
Chairman of the Committee, and the Management Company shall designate one
of its members to act as Vice Chairman. Each party may substitute or
change its designated Operations Committee members at any time upon notice
to the other party, and any Operations Committee member may designate his
or her own substitute at any meeting without notice. Each member shall
have one vote and shall have the right to grant his or her proxy to
another member of the Operations Committee. The Chairman, if present,
shall preside at all meetings of the Operations Committee. In the absence
of the designated Chairman, the Vice Chairman shall preside. The
-56-
<PAGE>
only powers of the Chairman and the Vice Chairman that differ from those
of the other members of the Operations Committee shall be to call and
preside over meetings in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or
formal notice at such times and places as a quorum of its members may from
time to time determine. A meeting of the Operations Committee also may be
called by at least two (2) members of the Operations Committee or by the
Chairman or Vice Chairman thereof upon at least three (3) days' written
notice to the other members of the Operations Committee. Such notice
requirement shall be deemed waived with respect to any member of the
Operations Committee who attends such meeting. Meetings may be held in
person or by telephone. The Operations Committee also may act by written
consent as provided in Section 8.4(c). Minutes shall be kept of all formal
actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of the four (4) members of the Operations Committee
present or represented by proxy at the applicable meeting. A quorum of the
Operations Committee shall be the four (4) members, in person, by
telephone, or by proxy, and a quorum must remain for the duration of the
meeting. The Operations Committee may establish such procedures to act by
written consent, without a meeting, as the Operations Committee determines
are advisable, provided that all four (4) members (in person or by proxy)
must sign any written consent.
SECTION 9. Obligations of the Medical Group. The Medical Group shall
perform the following obligations during the Term:
9.1 Compliance with Laws. The Medical Group shall provide professional
services to patients in compliance at all times with ethical standards, laws and
regulations to which they are subject. The Medical Group shall verify, with the
assistance of the Management Company, that each physician and other Medical
Personnel associated with the Medical Group for the purpose of providing medical
care to patients of the Medical Group is licensed by the State of California.
The Medical Group shall monitor the quality of medical care practiced by
physicians
-57-
<PAGE>
and other health care personnel associated with the Medical Group. In the event
that any disciplinary actions or medical malpractice actions are initiated
against any such physician by any payor, patient, state or federal regulatory
agency or any other person or entity, the Medical Group shall immediately inform
the Management Company of such action and its underlying facts and
circumstances.
9.2 Use of Facility. The Medical Group shall use and occupy any Facility
(as defined below) exclusively for the practice of medicine, and shall comply
with all applicable federal, state and local rules, ordinances and standards of
medical care. The medical practice or practices conducted at any Facility
described in clause (i) of the definition of the term "Facility" shall be
conducted solely by Medical Personnel associated with the Medical Group, and no
other physician or medical practitioner shall be permitted to use or occupy any
Facility described in clause (i) below without the prior written consent of the
Management Company, which consent shall not be unreasonably withheld or delayed.
The term "Facility" shall mean (i) any medical facility or laboratory
controlled, managed or operated by the Management Company or (ii) any hospital
at which any Medical Personnel practices medicine or maintains admitting
privileges.
9.3 Choice of Braces, Splints, Appliances, Medical Supplies, and
Allografts. The Medical Group shall have the exclusive control over the choice
of vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts.
9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical
Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group
shall have exclusive control over the choice of specific physicians and
facilities to be utilized by the Medical Group with respect to radiology,
anesthesiology, hospitals, physical therapy, MRI, and other medical
professionals and facilities; provided, however, that the foregoing shall not
limit the provisions of Section 3.4(b) hereof.
9.5 Insurability. The Medical Group shall cooperate with the Management
Company in (i) ensuring that its Medical Personnel are insurable or (ii)
instituting proceedings to terminate
-58-
<PAGE>
within two business days any Medical Personnel who is not insurable or who loses
his or her insurance eligibility. The Medical Group shall notify the Management
Company in writing of any change in the insurance status of any Medical
Personnel within two days after the Medical Group receives notice of any such
change. The Medical Group shall require all Medical Personnel to participate in
an on-going risk management program.
9.6 Medicare. The Medical Group shall cause all physicians to be
participating providers and accept assignment under Medicare.
9.7 Billing. The Medical Group's Medical Personnel shall be responsible
for providing the appropriate current CPT4 coding with respect to the fee
tickets prepared by such Medical Personnel.
9.8 Medical Personnel Hiring. The Medical Group shall have the ultimate
control over and responsibility for the hiring, compensation, supervision,
evaluation and termination of its Medical Personnel; provided, however, that at
the request of the Medical Group, the Management Company shall consult with the
Medical Group regarding such matters.
9.9 Continuing Education. The Medical Group and its Medical Personnel
shall be solely responsible for ongoing membership in professional associations
and continuing professional education. The Medical Group shall ensure that its
Medical Personnel participate in such continuing professional education as is
necessary for such physician or professional to remain current in his or her
field of medical practice.
9.10 Sales of Stock. The Eligible Parties shall give to Naresh Nagpal,
M.D. and any venture capital firm providing funds to the Management Company the
right to participate on a pro rata basis (based on the number of shares, whether
preferred or common, calculated on an as-converted basis, held by Naresh Nagpal,
M.D. and any such venture capital firm and by any other shareholders who hold
the same rights that are conferred by this Section 9.10, including members of
other physician groups) in any proposed sale of more than fifty percent (50%) of
the stock in the Management Company held by the Eligible Parties to any
unaffiliated third party
-59-
<PAGE>
or parties, and the Medical Group shall require the Eligible Parties to comply
with the obligations set forth in this Section 9.10; provided, however, that the
obligations under this Section 9.10 shall become null and void upon the
consummation of an initial public offering of the Management Company's common
stock.
SECTION 10. Certain Covenants.
10.1 Change of Control. During the Term of this Agreement, the Medical
Group shall not enter into any single transaction (or group of related
transactions undertaken pursuant to a common plan) involving the admission of
new shareholders, transfer of stock in the Medical Group, or reorganization or
restructuring of the Medical Group if in any such case the effect would be to
transfer a majority of the ownership interest in the Medical Group, without the
prior written consent of the Management Company, which consent shall not be
unreasonably withheld or delayed.
10.2 Legend on Securities. During the Term of this Agreement, any
certificate or similar evidence representing an equity interest in the Medical
Group issued by the Medical Group shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT
EFFECTIVE AS OF APRIL 1, 1997, BETWEEN TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION, BONE, MUSCLE
AND JOINT, INC., A DELAWARE CORPORATION, AND THE INDEMNIFYING PERSONS (AS
DEFINED THEREIN)."
The Management Company acknowledges that there is no certificate or other
similar evidence representing equity interests in the Medical Group as of the
date hereof. Nothing herein shall be construed as requiring the Medical Group to
issue any certificate or other evidence representing an equity interest in the
Medical Group (other than the Medical Group Governance Documents, or any
replacement thereof, as amended from time to time).
-60-
<PAGE>
SECTION 11. Records.
11.1 Medical Records. Upon termination of this Agreement, the Medical
Group shall retain all patient medical records maintained by the Medical Group
or the Management Company in the name of the Medical Group.
11.2 Management Business Records. All books and records relating in any
way to the operation of the Management Business which are not patient medical
records shall at all times be the property of the Management Company. The
Medical Group shall, upon its written request, be entitled to copies of any such
records relating to the Management Services performed by the Management Company.
11.3 Access to Records Following Termination.
(a) Following the termination of this Agreement, the Medical Group
shall grant (to the extent permitted by law) to the Management Company,
for the purpose of preparing for any actual or anticipated legal
proceeding or for any other reasonable purpose, reasonable access (which
shall include making photocopies) to the patient medical records described
in Section 11.1 hereof and any other pertinent information regarding the
Medical Group during the Term. Prior to accessing such patient medical
records, the Management Company shall obtain any required patient
authorization.
(b) Following the termination of this Agreement, the Management
Company shall provide to the Medical Group, promptly upon the Medical
Group's written request, photocopies of the Management Business records
described in Section 11.2 hereof, and shall grant to the Medical Group,
for the purpose of preparing for any actual or anticipated legal
proceeding or for any other reasonable purpose, any other pertinent
information regarding the Management Company during the Term.
SECTION 12. Insurance and Indemnity.
12.1 Professional Liability Insurance. During the Term, the Management
Company shall, to the extent permitted by applicable law, and subject to
approval by the Operations Committee if required by Section 8.2(g) hereof,
procure and maintain for the benefit of itself
-61-
<PAGE>
and the Medical Group comprehensive professional liability insurance providing
for (a) general liability coverage and (b) medical malpractice coverage with
limits of not less than $1,000,000 per claim and with aggregate policy limits of
not less than $3,000,000 covering the Medical Group and each of the Medical
Personnel of the Medical Group (or such higher amounts as may be necessary to
comply with any regulatory requirement and/or contractual requirement to which
such Medical Personnel or the Medical Group may be subject), including coverage
for claims made after the Commencement Date relating to events or occurrences at
any time prior thereto. The parties hereto acknowledge that the Management
Company is procuring the malpractice insurance referenced herein to ensure that
the Management Company has protection in the event it is sued as a result of an
act or omission of an employee of the Medical Group. The Management Company
shall pay the premiums for such general and medical malpractice liability
coverage, and the Management Company shall be designated as a co-beneficiary
under such insurance policies.
12.2 Life Insurance. The Management Company shall obtain a $500,000 life
insurance policy for each duly licensed physician shareholder in the Medical
Group. The Management Company shall be designated as the beneficiary under such
policies. The premiums for such policies shall be paid by the Management Company
and shall not be included as Management Company Operating Costs or otherwise
charged to the Medical Group.
12.3 Indemnification by Medical Group. The Medical Group shall indemnify,
hold harmless and defend the Management Company, its officers, directors,
employees, agents and independent contractors from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees and expenses), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of (i) the performance of Medical Group Services, including without
limitation the performance of such services prior to the Commencement Date, (ii)
any other acts or omissions of the Medical Group and its Medical Personnel,
including without limitation any such acts or omissions that occurred prior to
the Commencement Date, or (iii) any breach of or failure to perform any
obligation under this Agreement or the Transaction Documents by the Medical
-62-
<PAGE>
Group and/or the Medical Personnel and/or their respective agents and/or
subcontractors (other than the Management Company) during the Term.
12.4 Indemnification by Certain Individuals. Each of the Medical Personnel
who are currently or hereinafter become shareholders in the Medical Group (each,
an "Indemnifying Person") shall, on a several basis, indemnify, hold harmless
and defend the Management Company, its officers, directors, employees, agents
and independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of medical services by the Indemnifying Person, (ii) any other acts
or omissions by the Indemnifying Person, or (iii) any breach or failure to
perform any obligation under this Agreement or the Transaction Documents by the
Indemnifying Person and/or his or her agents during the Term. Each new
shareholder in the Medical Group shall execute a written statement agreeing to
be bound by this Section 12.4.
12.5 Indemnification by Management Company. The Management Company shall
indemnify, hold harmless and defend the Medical Group, its officers, directors,
employees, agents and independent contractors from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees and expenses), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of (i) the performance of Management Services, (ii) any other acts or
omissions of the Management Company and its employees or (iii) any breach of or
failure to perform any obligation under this Agreement or the Transaction
Documents by the Management Company and/or its employees and/or their respective
agents and/or subcontractors (other than the Medical Group) during the Term.
SECTION 13. Termination.
13.1 Termination by Medical Group. The Medical Group may terminate this
Agreement effective immediately by giving written notice of termination to the
Management Company (a) in the event of the filing of a petition in voluntary
bankruptcy or an assignment for
-63-
<PAGE>
the benefit of creditors by the Management Company or upon other action taken or
suffered, voluntarily or involuntarily, under any federal or state law for the
benefit of debtors by the Management Company, except for the filing of a
petition in involuntary bankruptcy against the Management Company which is
dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the
event the Management Company shall default in any material respect in the
performance of any duty or obligation imposed upon it by this Agreement and the
Management Company shall not have taken reasonable action commencing curing of
such default within thirty (30) days after written notice thereof has been given
to the Management Company by the Medical Group or the Management Company does
not thereafter diligently prosecute such action to completion, (c) in the event
that any of the representations and warranties made by the Management Company in
Section 7 is untrue or misleading in any material respect, provided that the
Medical Group shall have previously given written notice to the Management
Company describing in reasonable detail the nature of the item in question and
the Management Company shall not have cured such matter within thirty (30) days
of such notice, (d) in the event that the sale of shares of the Management
Company pursuant to its IPO is not consummated within forty-eight (48) months
after the Commencement Date, (e) at any time during the month of April 1998, if
by April 1, 1998, the commencement date of Phase II (as hereinafter defined) has
not occurred, or at any time after April 30, 1998, so long as the commencement
date of Phase II has not yet occurred; (f) if Naresh Nagpal, M.D. ceases to be
and act on a full-time basis as the President and CEO of the Management Company
prior to the commencement date of Phase II, provided that the Medical Group
gives notice of termination within ninety (90) days after the Medical Group's
receipt of written notice from the Management Company that Dr. Nagpal has ceased
to be or act on a full-time basis as the President and CEO of the Management
Company; or (g) in the event of the Management Company's breach of Section 16.8
hereof pertaining to the initial public offering of the Management Company's
common stock.
13.2 Termination by Management Company. The Management Company may
terminate this Agreement effective immediately by giving written notice of
termination to the Medical Group (a) in the event of a Bankruptcy Event relating
to the Medical Group, (b) in the event the Medical Group shall default in any
material respect in the performance of any duty or obligation imposed upon it by
this Agreement and the Medical Group shall not have taken
-64-
<PAGE>
reasonable action commencing curing of such default within thirty (30) days
after written notice thereof has been given to the Medical Group by the
Management Company or the Medical Group does not thereafter diligently prosecute
such action to completion, (c) in the event that any of the representations and
warranties made by the Medical Group in Section 6 is untrue or misleading in any
material respect, provided that the Management Company shall have previously
given written notice to the Medical Group describing in reasonable detail the
nature of the item in question and the Medical Group shall not have cured such
matter within thirty (30) days of such notice, or (d) in the event the Medical
Group is excluded from the Medicaid or Medicare program for any reason.
13.3 Termination by Medical Group or Management Company. The Medical Group
and the Management Company shall each have the right to terminate this Agreement
effective immediately by giving written notice of termination to the other party
pursuant to Section 27 of this Agreement.
13.4 Effect of Termination. Upon the termination of this Agreement in
accordance with the terms hereof, neither party hereto shall have any further
obligation or liability to the other party hereunder, except as provided in
Section 5.3(b), Section 13.5, and Section 26 hereof, and except to pay in full
and satisfy any and all outstanding obligations of the parties accruing through
the effective date of termination. In order to accomplish the foregoing, the
Annual Medical Group Compensation Amount described in Section 5.3(b) shall be
calculated on or before the end of the fourth month following the termination
date, rather than on or before April 30 as specified in Section 5.3(b), and the
computation made under such section shall be made with respect to the portion of
the year ending on the termination date (if the termination date is other than
December 31). In making such computation, all Collections during January,
February, and March of such year shall be excluded, and all Collections during
the three-month period following termination shall be included. Additionally,
any payment required under the terms of Section 5.3(b)(ii) shall be made within
fifteen (15) days after the date by which the foregoing calculation is to be
made, rather than on May 15. Any Collections received by the Management Company
at any time after the three-month period following termination shall be
-65-
<PAGE>
delivered by the Management Company to the Medical Group and shall belong solely
to the Medical Group.
13.5 Repurchase of Assets. Promptly following termination of this
Agreement for any reason, the Management Company shall sell, transfer, convey,
and assign to the Medical Group, and the Medical Group shall purchase, assume,
and accept from the Management Company, at such price and upon such terms as may
be agreed upon by the parties -- or, if the parties are unable to agree, at fair
market value, determined in the manner set forth below -- all of the following
items which are used in connection with the professional practice and related
activities of the Medical Group and which, in the case of items (a), (b), (c)
and (d), are physically located in any of the offices of the Medical Group,
subject to any required consent from any third party having an interest therein:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office
equipment owned by the Management Company;
(c) the Management Company's rights and interests in any equipment
leased by the Management Company, subject to the Medical
Group's assumption of the obligations accruing thereunder
after the date of termination of this Agreement;
(d) the supplies owned by the Management Company;
(e) the Management Company's rights and interests under all of the
Office Leases, subject to the Medical Group's assumption of
the obligations accruing thereunder after the date of
termination of this Agreement; and
(f) the deposits of the Management Company relating to the Medical
Group.
Fair market value of the above described assets shall be determined by an
independent appraiser mutually agreed upon by the Medical Group and the
Management Company; provided, however, that if the Medical Group and the
Management Company are unable to agree upon such an appraiser, each of the
parties shall select an appraiser and the two appraisers thus selected shall
select a third appraiser. All of the appraisers shall appraise the assets, and
for purposes of
-66-
<PAGE>
determining the purchase price, the highest and lowest appraisals shall be
disregarded, and the remaining appraisal shall be used.
13.6 Phase II. For purposes of this Agreement, the commencement date of
"Phase II" means the earlier of the following:
(a) the date on which the Management Company files a Preliminary
Prospectus for the initial public offering of its stock with
the Securities and Exchange Commission; or
(b) the first day of the month next following the first period of
twelve (12) consecutive calendar months for which Aggregate
Group Collections ("AGC") equals or exceeds Sixty-Five Million
Dollars ($65,000,000), where AGC means the sum of the
following:
(i) the Collections of the Medical Group; provided, however,
that with respect to any physician who joins the Medical
Group after the Commencement Date and before the end of
the third month of the above-described twelve-month
period, the collections attributable to such physician
for purposes of this computation shall be computed by
determining the amount of such collections commencing on
the first day of the fourth month after the physician
begins performing professional services for or with the
Medical Group and ending on the last day of the
above-described twelve (12) month period, and then
annualizing the amount thus determined; plus
(ii) the aggregate amount of the total actual collections of
all other medical groups which have entered into
management services agreements ("MSAs") with the
Management Company (including any such agreement that is
to become operational upon the consummation of the
Management Company's IPO); provided, however, that with
respect to any physician who joins any such
-67-
<PAGE>
medical group during the first three months of the
above-described twelve-month period, the collections
attributable to such physician for purposes of this
computation shall be computed by determining the amount
of such collections commencing on the first day of the
fourth month after the physician begins performing
professional services for or with such medical group and
ending on the last day of the above-described
twelve-month period, and then annualizing the amount
thus determined; provided, further, that in the event
any MSA between the Management Company and a medical
group provides for a management fee that is other than
ten percent (10.0%) of gross collections, then the
amount of collections attributable to such medical group
for purposes of this computation shall be adjusted by
multiplying the actual amount of collections by a
fraction, the numerator of which is equal to such
management fee percentage figure and the denominator of
which is ten (10). For example, if the MSA for another
medical group provides for a management fee of five
percent (5.0%) of the medical group's collections, then
the actual amount of such collections shall be adjusted
by multiplying such actual amount by 5/10, or 1/2. For
purposes of this computation, any portion of the
management fee payable in respect of Professional
Practice Cost Savings (as described in Schedule VI) or
similar formulations applicable to any other medical
group shall be ignored.
SECTION 14. Non-Disclosure of Confidential Information.
14.1 Non-Disclosure. Neither the Management Company nor the Medical Group,
nor their respective employees, stockholders, consultants or agents shall, at
any time after the execution and delivery hereof, directly or indirectly
disclose any Confidential or Proprietary Information relating to the other party
hereto to any person, firm, corporation, association or other entity, nor shall
either party, or their respective employees, stockholders, consultants or agents
make use of any of such Confidential or Proprietary Information for its or their
own
-68-
<PAGE>
purposes or for the benefit of any person, firm, corporation or other entity
except the parties hereto or any subsidiary or affiliate thereof. The foregoing
obligation shall not apply to any information which a party hereto can establish
to have (a) become publicly known without breach of this Agreement by it or
them, (b) to have been given to such party by a third party who is not obligated
to maintain the confidentiality of such information, or (c) is disclosed to a
third party with the prior written consent of the other party hereto.
14.2 Confidential or Proprietary Information. The term "Confidential or
Proprietary Information" means all information known to a party hereto, or to
any of its employees, stockholders, officers, directors or consultants, which
relates to the Transaction Documents, patient medical and billing records, trade
secrets, books and records, supplies, pricing and cost information, marketing
plans, strategies and forecasts. Nothing contained herein shall prevent a party
hereto from furnishing Confidential or Proprietary Information pursuant to a
direct order of a court of competent jurisdiction.
SECTION 15. Non-Competition. In consideration of the premises contained
herein and the consideration to be received hereunder, and in consideration of
and as an inducement to the Management Company to consummate the transactions
contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition
provisions attached hereto as Schedule VIII, (b) agrees to require each of the
Eligible Parties to execute the Stockholder Non-Competition Agreement executed
by the Medical Group and the Management Company concurrently herewith (the
"Stockholder Non-Competition Agreement"), and (c) agrees to require each person
who after the date hereof becomes entitled to receive shares (or options to
receive shares) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute an agreement
substantially identical to the Stockholder Non-Competition Agreement.
SECTION 16. Obligations of the Management Company.
16.1 No Practice of Medicine. The Medical Group and the Management Company
acknowledge that certain federal and state statutes severely restrict or
prohibit the Management Company from providing medical services. Accordingly,
during the Term, the Management
-69-
<PAGE>
Company shall not provide or otherwise engage in services or activities which
constitute the practice of medicine, as defined in applicable state or federal
law, except in compliance therewith.
16.2 No Interference with Professional Judgment. Without in any way
limiting Section 16.1 hereof, during the Term, the Management Company shall not
interfere with the exercise of professional judgment by any physician or other
licensed health care professional who is a shareholder, employee, or contractor
of the Medical Group, nor shall the Management Company interfere with, control,
direct, or supervise any physician or other licensed health care professional in
connection with the provision of professional medical services. The foregoing
shall not preclude the Management Company from assisting in the development of
professional protocols and monitoring compliance with policies and procedures
that have been instituted in accordance with this Agreement.
16.3 Compensation Committee. The Management Company shall establish a
compensation committee (the "Compensation Committee") which is comprised of
members of the Board of Directors of the Management Company who are not
employees of the Management Company, and the compensation payable to the five
(5) most highly compensated management employees of the Management Company shall
be subject to the approval of the Compensation Committee; provided, however,
that the obligations under this Section 16.3 shall become null and void upon the
consummation of an initial public offering of the Management Company's common
stock.
16.4 Budgets. The Board of Directors of the Management Company shall
establish budgets for the expenses of the Management Company, and the approval
of the Board of Directors shall be required in connection with any expenses in
excess of any such approved budget; provided, however, that the obligations
under this Section 16.4 shall become null and void upon the consummation of an
initial public offering of the Management Company's common stock.
-70-
<PAGE>
16.5 Contracts with Venture Capital Firms. The Management Company shall
not enter into any consulting agreement or other contract or arrangement with
any venture capital firm (or affiliate thereof) providing financing to the
Management Company under which compensation will be payable to any such venture
capital firm (or affiliate thereof); provided, however, that the obligations
under this Section 16.5 shall become null and void upon the consummation of an
initial public offering of the Management Company's common stock.
16.6 Stock Held by Certain Individuals or Entities. Naresh Nagpal, M.D.
and any venture capital firm providing funds to the Management Company ("Selling
Shareholders") shall give to the Eligible Parties the right to participate on a
pro rata basis (based on the number of shares, whether preferred or common,
calculated on an as-converted basis, held by the Eligible Parties and by any
other shareholders who hold the same rights that are conferred by this Section
16.6, including members of other physician groups) in any proposed sale of stock
(whether preferred or common) in the Management Company from any of the Selling
Shareholders to any unaffiliated third party or parties, and the Management
Company shall require the Selling Shareholders to comply with the obligations
set forth in this Section 16.6; provided, however, that the obligations under
this Section 16.6 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
16.7 Convertible Preferred Stock. The Management Company shall not sell
any common stock or take any other action the effect of which sale or other
action would be to give a holder of convertible preferred stock the right to
convert any number of shares of convertible preferred stock into a greater
number of shares of common stock; provided, however, that the obligations under
this Section 16.7 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
16.8 Initial Public Offering. The Management Company shall not authorize
an initial public offering of its common stock for less than Four Dollars
($4.00) per share (appropriately adjusted to reflect any stock dividends, stock
splits, or similar transaction). Without waiving or limiting any other right or
remedy available to the Medical Group for breach of this covenant by the
Management Company, in the event of an initial public offering of the Management
-71-
<PAGE>
Company's common stock at less than Four Dollars ($4.00) per share, if the
Medical Group so elects by written notice to the Management Company, such
initial public offering shall not be considered as the initial public offering
of the Management Company's common stock for any purpose under this Agreement or
any of the other Transaction Documents. The Management Company shall disclose
this provision to any potential underwriter in connection with the initial
public offering of the Management Company's common stock.
16.9 Attendance at Board Meetings. The Medical Group shall have the right
to appoint one of its shareholders to attend meetings of the Management
Company's Board of Directors; provided, however, that such person shall not be a
member of the Board of Directors; provided, further, that the obligations under
this Section 16.9 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
SECTION 17. Assignment. The Management Company shall have the right to
assign its rights and delegate its obligations hereunder to any affiliate and to
assign its rights hereunder to any lending institution from which the Management
Company or any affiliate obtains financing for security purposes or as
collateral. Except as set forth in the preceding sentence, neither the
Management Company nor the Medical Group shall have the right to assign its
respective rights or delegate its respective obligations hereunder without the
prior written consent of the other; provided, however, that after the
consummation of an initial public offering of the Management Company's common
stock, the Medical Group's consent shall not be required in connection with a
sale of all or substantially all of the stock or assets of the Management
Company or the merger, consolidation, or reorganization of the Management
Company.
SECTION 18. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed sufficient if
personally delivered, sent by nationally-recognized overnight courier, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
-72-
<PAGE>
If to the Management Company:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
If to the Medical Group:
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
Attention: President
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, and (c) in the case of mailing, on the third business day following
the day on which the piece of mail containing such communication is posted.
SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to
the benefit of any successors to or permitted assigns of the Management Company
and of the Medical Group.
-73-
<PAGE>
SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
California without giving effect to the laws and principles thereof, or of any
other jurisdiction, which would direct the application of the laws of another
jurisdiction. The parties to this Agreement agree that jurisdiction and venue in
any action brought by any party hereto pursuant to this Agreement shall lie in
any Federal or state court located in the State of California. By execution and
delivery of this Agreement, the parties hereto irrevocably submit to the
nonexclusive jurisdiction of such courts for themselves and in respect of their
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in such court, and hereby waive any objection that such
court is an improper or inconvenient forum for the resolution of such action.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any other jurisdiction. The parties hereto shall act in good faith and shall
refrain from taking any actions to circumvent or frustrate the provisions of
this Agreement.
SECTION 21. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 22. Entire Agreement; Amendments. This Agreement and the various
exhibits hereto and thereto, contain the entire understanding of the parties
with respect to its subject matter, and neither this Agreement nor any part of
it may in any way be altered, amended, extended, waived, discharged or
terminated except by a written agreement signed by the Medical Group and the
Management Company; provided, however, that in the case of any amendment
affecting Section 9.10, Section 12.4, or Section 16.6 hereof, the signatures of
all of those persons or entities that have agreed to such provisions as
indicated on the signature pages hereof (and, in the case of an amendment to
Section 12.4, all of those persons who hereafter sign a written agreement
agreeing to be bound by the terms of Section 12.4 hereof) shall also be required
in order for such amendment to be effective.
-74-
<PAGE>
SECTION 23. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
SECTION 24. Counterparts. This Agreement may be executed in counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 25. Waivers. Any party to this Agreement may, by written notice to
the other party, waive any provision of this Agreement. The waiver by any party
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach.
SECTION 26. Survival of Termination. Notwithstanding anything contained
herein to the contrary, Sections 3.3(f), 3.6, 11, 12, 13.4, 13.5, 14, 15(a), 18,
19, 20, 23, 25, 27 and this Section 26 shall survive any expiration or
termination of this Agreement.
SECTION 27. Contract Modification for Prospective Legal Events. In the
event any state or Federal laws or regulations, now existing or enacted or
promulgated after the date hereof, are interpreted by judicial decision, a
regulatory agency or legal counsel of both parties in such a manner as to
indicate that the structure of this Agreement may be in violation of such laws
or regulations, the Medical Group and the Management Company shall amend this
Agreement as necessary to avoid such violation. To the maximum extent possible,
any such amendment shall preserve the underlying economic and financial
arrangements between the Medical Group and the Management Company. If an
amendment is not possible, either party shall have the right to terminate this
Agreement. Any dispute between the parties hereto arising under this Section 27
with respect to whether this Agreement violates any state or Federal laws or
regulations shall be jointly submitted by the parties and finally settled by
binding arbitration in Los Angeles, California, pursuant to the arbitration
rules of the National Health Lawyers Association Alternative Dispute Resolution
Service. Arbitration shall take place before one arbitrator appointed in
accordance with such rules. The governing law of the arbitration shall
-75-
<PAGE>
be the law set forth in Section 20. Any decision rendered by the arbitrator
shall clearly set forth the factual and legal basis for such decision. The
decision rendered by the arbitrator shall be non-appealable and enforceable in
any court having jurisdiction thereof. The administrative costs of the
arbitration and the arbitrator fees shall be equally borne by the parties. Each
party shall pay its own legal costs and fees in connection with such
arbitration.
* * *
-76-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management
Services Agreement as of the date first above written.
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By: /s/James C. Esch
---------------------------------------
James C. Esch, M.D., President
BONE, MUSCLE AND JOINT, INC.
By: /s/Naresh Nagpal
---------------------------------------
Naresh Nagpal, M.D., President
and Chief Executive Officer
ACCEPTED AND AGREED AS TO
SECTION 12.4
INDEMNIFYING PERSONS
/s/NEVILLE ALLEYNE
- --------------------------------
NEVILLE ALLEYNE, M.D.
/s/JAMES C. ESCH
- --------------------------------
JAMES C. ESCH, M.D.
/s/JAMES A. HELGAGER
- --------------------------------
JAMES A. HELGAGER, M.D.
/s/NORMAN KANE
- --------------------------------
NORMAN KANE, M.D.
/s/RICHARD K. MUIR
- --------------------------------
RICHARD K. MUIR, M.D.
/s/LEONARD R. OZERKIS
- --------------------------------
LEONARD R. OZERKIS, M.D.
/s/JACOB SHARP
- --------------------------------
JACOB SHARP, M.D.
[Signatures Continued]
-77-
<PAGE>
ACCEPTED AND AGREED
AS TO SECTION 16.6
/s/NARESH NAGPAL
- ----------------------------------------
NARESH NAGPAL, M.D.
DELPHI VENTURES III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/Donald J. Lothrop
------------------------------------
Donald J. Lothrop, Managing Member
DELPHI BIOINVESTMENTS III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/Donald J. Lothrop
------------------------------------
Donald J. Lothrop, Managing Member
OAK INVESTMENT PARTNERS VI, LIMITED
PARTNERSHIP
By: OAK ASSOCIATES VI, LIMITED
PARTNERSHIP, its General Partner
By: /s/Ann H. Lamont
------------------------------------
Ann H. Lamont, Managing Partner
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By: /s/Ann H. Lamont
------------------------------------
Ann H. Lamont, Managing Member
[Signatures Continued]
-78-
<PAGE>
AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT
THIS AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT (the "Amendment") is
entered into as of April 1, 1997, by and between TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC., a California professional corporation (the "Medical
Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the
"Management Company"), with respect to the following facts:
A. The parties entered into that certain Management Services
Agreement, effective as of April 1, 1997 (the "Agreement").
B. The parties desire to amend the Agreement as set forth below.
NOW, THEREFORE, the Medical Group and the Management Company hereby agree
as follows:
1. Section 3.7 of the Agreement is amended by changing the heading to
read "Administrative Personnel" in lieu of "Personnel".
2. Section 3.13 (Medical Personnel Recruiting) is deleted from the
Agreement, and the following new Section 3.13 is inserted in lieu thereof:
"3.13 Medical Personnel.
(a) The Management Company shall, upon request by the Medical
Group, assist the Medical Group in recruiting Medical Personnel.
"Medical Personnel" means:
(i) Physicians (including fellows and residents, if any)
providing professional medical services who are
employees or independent contractors of the Medical
Group; and
(ii) Physician assistants, nurse practitioners, and other
health care professionals who provide services that are
billable to patients or third party payors under the
name of such health care professional (as distinguished
from services that are billable under the name of the
supervising physician).
1
<PAGE>
(b) With respect to each of the Medical Personnel, the Management
Company shall verify educational and employment experience, licensure
and insurability, and shall review and provide the Medical Group with
copies of any complaints contained in public files with applicable
state and federal commissions."
3. Sections 3.14, 3.15, 3.16, 3.17, and 3.18 of the Agreement are
renumbered as Sections 3.15, 3.16, 3.17, 3.18, and 3.19, respectively.
4. A new Section 3.14 is added to the Agreement to read as follows:
"3.14 Technical Personnel: Leased Employees.
(a) Subject to the conditions set forth in this Section 3.14, the
Management Company shall employ or contract with, or shall arrange
for, and shall provide to the Medical Group as leased employees, such
Technical Personnel (as defined below) as may be reasonably necessary
for the conduct of the Medical Group's professional practice.
(b) For purposes of this Agreement, "Technical Personnel" means
nurses, medical assistants, x-ray technicians, other technicians, and
other personnel who perform diagnostic tests or other services that
are covered by Medicare or by other third party payors when performed
by an employee of a physician under the physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall
exercise, such supervision and control over the activities of the
Technical Personnel as may be necessary for the Technical Personnel to
be considered leased employees under the Medicare program and under
applicable law. Without limiting the generality of the foregoing, the
Medical Group --
(i) shall have the right to have any Technical Personnel
terminated from employment;
(ii) shall furnish the Technical Personnel with the
equipment and supplies needed by the Technical
Personnel for their work;
(iii) shall provide the Technical Personnel with any
necessary training;
(iv) shall instruct the Technical Personnel regarding their
activities performed for the Medical Group;
2
<PAGE>
(v) shall establish the hours of work for the Technical
Personnel;
(vi) shall approve vacation time and other time off from
work; and
(vii) shall provide that degree of supervision as is
required by Medicare and by other third party payors to
satisfy applicable conditions for coverage thereunder.
(d) With respect to each of the Technical Personnel, the
Management Company shall verify or arrange for the verification of
educational and employment experience, licensure and insurability, and
shall review and provide the Medical Group with copies of any
complaints contained in public files with applicable state and federal
commissions."
5. Section 13.1 is deleted from the Agreement, and the following new
Section 13.1 is inserted in lieu thereof:
"13.1 Termination by Medical Group. The Medical Group may terminate
this Agreement effective immediately by giving written notice of
termination to the Management Company (a) in the event of the filing
of a petition in voluntary bankruptcy or an assignment for the benefit
of creditors by the Management Company or upon other action taken or
suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by the Management Company, except for the
filing of a petition in involuntary bankruptcy against the Management
Company which is dismissed within ninety (90) days thereafter (a
"Bankruptcy Event"), (b) in the event the Management Company shall
default in any material respect in the performance of any duty or
obligation imposed upon it by this Agreement and the Management
Company shall not have taken reasonable action commencing curing of
such default within thirty (30) days after written notice thereof has
been given to the Management Company by the Medical Group or the
Management Company does not thereafter diligently prosecute such
action to completion, or (c) in the event that any of the
representations and warranties made by the Management Company in
Section 7 is untrue or misleading in any material respect, provided
that the Medical Group shall have previously given written notice to
the Management Company describing in reasonable detail the nature of
the item in question and the Management Company shall not have cured
such matter within thirty (30) days of such notice.
3
<PAGE>
6. Schedule V of the Agreement is amended by adding the following new
sentence at the end thereof:
"Notwithstanding the foregoing, in the event that the common stock of
the Management Company has not commenced trading on NASDAQ, the New
York Stock Exchange, or other established securities markets within
forty-eight (48) months after the date hereof, pursuant to an initial
public offering that satisfies the requirements of Section 16.8 of
this Agreement, the Applicable Percentage shall be two and one-half
percent (2.5%) in lieu of ten percent (10.0%), effective commencing on
the fourth anniversary of the date hereof and continuing thereafter
during the Term of this Agreement until the common stock of the
Management Company commences public trading as specified above
pursuant to an initial public offering that satisfies the requirements
of Section 16.8."
7. All other terms and conditions of the Agreement remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first above written.
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By: /s/ James C. Esch, MD
-----------------------------------
James C. Esch, M.D., President
BONE, MUSCLE AND JOINT, INC.
By:
-----------------------------------
Naresh Nagpal, M.D., President
and Chief Executive Officer
4
<PAGE>
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of
April 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware
corporation (the "Company"), and each of the individuals identified on the
signature page hereof (each, a "Stockholder," and collectively, the
"Stockholders"), with reference to the following facts.
A. This Agreement is entered into in connection with that certain
Management Services Agreement effective as of the date hereof (the "Management
Services Agreement") by and among the Company, Tri-City Orthopaedic Surgery
Medical Group, Inc. (the "Medical Group"), and the Indemnifying Persons thereto.
B. Certain capitalized terms used herein are defined in paragraph 5 below.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the Company
and each Stockholder agree as follows:
1. Purchase and Sale of Restricted Stock. (a) The Company shall issue to
each Stockholder the number of shares specified opposite the Stockholder's name
in Schedule A attached hereto (the "Restricted Stock") of the common stock of
the Company, par value $0.001 per share (the "Common Stock"), pursuant to
Section 4 and Schedule III of the Management Services Agreement.
(b) In connection with the issuance of the Restricted Stock hereunder, each
Stockholder severally represents and warrants to the Company that:
(i) the Restricted Stock to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in violation of the 1933 Act, or any applicable state securities
laws, and the Restricted Stock will not be disposed of in contravention of
the 1933 Act or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Stock;
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Stock and is able to bear the economic risk of
his or her investment in the Restricted Stock for an indefinite period of
time and understands that the Restricted
1
<PAGE>
Stock has not been registered or qualified under the 1933 Act or any
applicable state securities laws, by reason of the issuance of the
Restricted Stock in a transaction exempt from the registration and
qualification requirements of the 1933 Act or such state securities laws
and, therefore, cannot be sold unless subsequently registered or qualified
under the 1933 Act or such state securities laws or an exemption from such
registration or qualification is available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Stock and has had full access to or been provided with such
other information concerning the Company as he or she has requested.
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Stock to the
Stockholder and as a condition thereto, each Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Stock to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement; and
(ii) the Company shall provide the Stockholder with substantially the
same information regarding the Company that the Company regularly discloses
to its other stockholders.
-2-
<PAGE>
2. Vesting of the Restricted Stock. (a) Except as otherwise provided in
paragraphs 2(b) and 2(c) hereof, the Restricted Stock shall become vested in
accordance with the following schedule, if, as of each such date, (i) the
Management Services Agreement has not been terminated, (ii) there has not been a
Cessation of Active Practice (as defined in paragraph 2(d) below) by the
Stockholder, or (iii) the Stockholder has not died or become permanently
disabled:
Anniversary of the Date Cumulative Percentage of
of this Agreement Restricted Stock Vested
----------------------- ------------------------
First 25%
Second 50%
Third 75%
Fourth 100%
Shares of the Restricted Stock which have become vested are referred to herein
as "Vested Shares" and all other shares of the Restricted Stock are referred to
herein as "Unvested Shares."
(b) (i) The provisions of paragraph (ii) below shall be applicable only in
the event that the Company has not amended that certain Restricted Stock
Agreement entered into by and between the Company and Lehigh Valley Bone, Muscle
and Joint Group, L.L.C., a Pennsylvania limited liability company ("Lehigh
Valley"), in or about July, 1996, to delete that provision in such agreement
which is substantially similar to paragraph (ii) below. If such agreement is so
amended, paragraph (ii) below shall become null and void upon the Company's
provision of notice thereof to the Medical Group, and the Restricted Stock shall
become vested only in annual increments as provided in paragraph 2(a) above.
(ii) If the Management Services Agreement is terminated or there is a
Cessation of Active Practice by the Stockholder, or if the Stockholder dies or
becomes permanently disabled, on any date other than an anniversary date of the
issuance of the Restricted Stock, the cumulative percentage of the Restricted
Stock to become vested shall be determined on a pro rata basis according to the
number of days elapsed since the prior anniversary date or the date of this
Agreement (should such termination occur prior to the first anniversary date).
(c) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
paragraphs 2(a) and 2(b) above, the number of Unvested Shares scheduled to
become Vested Shares pursuant to paragraph 2(a) above during the eighteen-month
period immediately following the date of death shall immediately become Vested
Shares.
(d) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death or permanent
disability), throughout any twelve-month period ending on the day before any of
the vesting dates described
-3-
<PAGE>
in paragraph 2(a) hereof, to engage in the practice of medicine with the Medical
Group on a regular basis, including the performance of orthopedic surgical
procedures on a regular basis (except in the case of any Stockholder who did not
practice surgery on a regular basis immediately prior to the date hereof), such
that (i) the Stockholder was engaged in patient care activities with the Medical
Group for less than seventy-five percent (75%) of the time that the Stockholder
had been engaged in such activities during the twelve-month period immediately
preceding the date hereof, and (ii) the Stockholder generated billings with the
Medical Group that were less than seventy-five percent (75%) of the amount of
such billings generated by the Stockholder during the twelve-month period
immediately preceding the date hereof; provided, however, that if a Stockholder
satisfies all of the foregoing criteria except that the Stockholder has ceased
to conduct his medical practice with the Medical Group, there shall not have
been a Cessation of Active Practice within the meaning of this provision if (A)
the Stockholder enters into a Management Services Agreement with the Company
substantially in the form of the Management Services Agreement entered into by
and between the Medical Group and the Company and (B) the Stockholder enters
into a new Stockholder Non-Competition Agreement with the Company substantially
in the form of the Stockholder Non-Competition Agreement executed by the
Stockholder in connection with the Management Services Agreement entered into by
and between the Medical Group and the Company.
(e) Notwithstanding paragraph 2(d) above, in the case of Jacob Sharp, M.D.,
the Stockholder shall be deemed to have failed to engage in the practice of
medicine with the Medical Group on a regular basis, as stated in paragraph 2(d)
above, only if the Stockholder ceases entirely to practice medicine with the
Medical Group; provided, further, that in the event of a Cessation of Active
Practice by Dr. Sharp, and provided that Dr. Sharp does not breach the
Stockholder Non-Competition Agreement entered into concurrently herewith, all
Unvested Shares held by Dr. Sharp shall be allocated among and transferred to
the other Stockholders identified in Exhibit A attached hereto (other than
Richard K. Muir, M.D.) in proportion to the number of shares allocated to each
such Stockholder as specified in Exhibit A, and such reallocated shares shall
become Vested Shares of each such Stockholder in accordance with the remaining
portion of the vesting schedule specified in paragraph 2(a) and subject to all
other terms and conditions set forth in this Agreement.
(f) If the Stockholder is insured under a disability insurance policy, the
determination under such policy as to whether the Stockholder's condition
constitutes a permanent disability shall be binding on the parties hereto for
purposes of this Agreement. If the Stockholder is not insured under a policy of
disability insurance, such determination shall be made by an independent
qualified physician proposed by the Medical Group, subject to the approval of
the Company, which approval shall not be unreasonably withheld.
(g) Notwithstanding anything to the contrary set forth in this Agreement,
including without limitation the provisions of paragraph 2(a) hereof relating to
vesting, if as of the date or dates on which any of the Restricted Stock is
scheduled to vest, Phase II under the Management Services Agreement has not yet
commenced and the Medical Group has not waived the Medical Group's right to
terminate the Management Services Agreement pursuant to Section 13.1(e) of the
Management Services Agreement (providing the Medical Group the right under
-4-
<PAGE>
certain circumstances to terminate the Management Services Agreement prior to
the commencement of Phase II), such vesting shall be deferred until (i) the date
on which Phase II under the Management Services Agreement commences or (ii) the
date on which the Medical Group gives written notice to the Management Company
waiving its right to terminate the Management Services Agreement under Section
13.1(e), whichever first occurs. If the Management Services Agreement is
terminated by the Medical Group pursuant to Section 13.1(e) thereof, none of the
Restricted Stock shall be deemed to Vested Shares hereunder.
3. Repurchase of Restricted Stock. (a) Except as provided in paragraph
3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below,
the Company may elect to repurchase the Restricted Stock (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
permitted transferees) pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option").
(b) Each of the following shall constitute a "Repurchase Event":
(i) Termination of the Management Services Agreement for any reason
whatsoever on or before the fourth anniversary of the date of this
Agreement;
(ii) Termination of the Management Services Agreement by the Medical
Group pursuant to Section 13.1(d) thereof (based on failure of the Company
to consummate an initial public offering of its Common Stock within
forty-eight (48) months after the Commencement Date under the Management
Services Agreement); or
(iii) The Stockholder's Cessation of Active Practice.
(c) The repurchase price for each Unvested Share shall be equal to the
Original Value of such share.
(d) The repurchase price for each Vested Share shall be the Fair Market
Value for such share.
(e) The Company may elect to repurchase all or a portion of the Restricted
Stock by delivering written notice (the "Repurchase Notice") to the Stockholder
within ninety (90) days after the Repurchase Event; provided, however, that if
the Company elects to repurchase less than all of the Restricted Stock, the
Company shall repurchase all of the Unvested Shares and may purchase that number
of Vested Shares as the Company may, in its discretion, determine. The
Repurchase Notice shall set forth the number of Unvested Shares and Vested
Shares to be acquired, the aggregate consideration to be paid for such shares,
and the time and place for the closing of the transaction. If the Repurchase
Event giving rise to the Company's election to repurchase consists of the
termination of the Management Services Agreement, and if the number of shares of
Restricted Stock that the Company has elected to repurchase is less than the
total number of shares of Restricted Stock held by all of the Stockholders, the
Company shall purchase the shares of Restricted Stock pro rata according to
-5-
<PAGE>
the number of shares of Restricted Stock held by all of the Stockholders at the
time of delivery of such Repurchase Notice (determined as nearly as practicable
to the nearest share).
(f) The closing of the repurchase of Restricted Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the delivery of the Repurchase Notice. The Company
shall pay for Restricted Stock to be purchased pursuant to the Repurchase Option
by delivery of (i) the Company's check or wire transfer of funds, (ii) a
subordinated note or notes payable in up to five equal annual installments
beginning on the first anniversary of the closing of such purchase and bearing
interest (payable quarterly) at a rate per annum equal to the greater of either
the prime rate announced from time to time by The Chase Manhattan Bank (National
Association) plus 1/2% or the "applicable Federal rate" (as defined in Section
1274(d) of the Internal Revenue Code) in effect from time to time, or (iii) both
(i) and (ii), in the aggregate amount of the repurchase price for such shares;
provided, however, that in the event that the Medical Group is obligated to pay
to the Company any sums in connection with the repurchase of assets by the
Medical Group pursuant to the Management Services Agreement, the total of such
sums may be offset by the Company against any amounts owed by the Company to the
Stockholder pursuant to the Restricted Stock Agreement, such offset amount to be
allocated pro rata among all of the Stockholders. Any notes issued by the
Company pursuant to this paragraph 3(f) shall be subject to the restrictive
covenants, if any, to which the Company is subject at the time of such
repurchase. The Company shall be entitled to require the signature of the
Stockholder to be guaranteed and to receive representations and warranties from
the Stockholder regarding (A) the Stockholder's power, authority and legal
capacity to enter into such sale and transfer valid right, title and interest in
such Restricted Stock, (B) the Stockholder's ownership of such Restricted Stock
and the absence of any liens, pledges, and other encumbrances on such Restricted
Stock and (C) the absence of any violation, default, or acceleration of any
agreement or instrument pursuant to which the Stockholder or the Stockholder's
assets are bound resulting from such sale.
(g) Notwithstanding anything to the contrary set forth in this paragraph 3,
in the event of a Repurchase Event consisting of the termination of the
Management Services Agreement by the Medical Group pursuant to Section 13.1 of
the Management Services Agreement, or in the event of termination of the
Management Services Agreement by either party in accordance with Section 27
thereof (pursuant to Section 13.3), the Company shall have the obligation
(rather than the option) to purchase all of the Restricted Stock acquired by the
Stockholder pursuant to this Agreement, and the repurchase price shall be paid
in full in cash not later than sixty (60) days after the date of termination of
the Management Services Agreement; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in connection with the
repurchase of assets by the Medical Group pursuant to the Management Services
Agreement, the total of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to the Restricted Stock
Agreement, such offset amount to be allocated pro rata among all of the
Stockholders.
-6-
<PAGE>
(h) In the event of the death or permanent disability of the Stockholder,
the Company shall repurchase all of the Unvested Shares (but not the Vested
Shares) of the Stockholder. The repurchase price for each Unvested Share shall
be equal to the Original Value of such share, and such repurchase price shall be
paid in full in cash not later than sixty (60) days after the date of death or
the date on which such disability is determined to be permanent.
(i) In the event that the Stockholder is required, prior to the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act or prior to the second anniversary of the date hereof,
whichever is later, to pay any state or federal taxes in connection with the
receipt of the Restricted Stock hereunder, the Stockholder shall have the right
to sell to the Company, and the Company shall be obligated to purchase from the
Stockholder, for the purchase price determined in accordance with this paragraph
3, such number of shares of Vested Stock as the Stockholder may tender to the
Company, provided that the purchase price therefor shall not exceed the total
amount of the Stockholder's tax liability incurred in connection with the
receipt of such stock. In the event that the Stockholder desires to exercise the
right conferred under this paragraph 3(i), the Stockholder shall give notice to
the Company not earlier than forty-five (45) days prior to, nor later than
forty-five (45) days after, the date on which such taxes are due and payable,
and the Stockholder shall furnish to the Company reasonable documentation
prepared by the Stockholder's certified public accountant establishing the
amount of such tax liability.
(j) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Stock by the Company shall be subject to
applicable restrictions, if any, contained in Federal law or in the Delaware
General Corporation Law. Notwithstanding anything to the contrary contained in
this Agreement, if any such restrictions prohibit or otherwise delay the
repurchase of Restricted Stock hereunder which the Company is otherwise entitled
or required to make, the Company may make such repurchases as soon as it is
permitted to do so under such restrictions.
(k) In the event that Restricted Stock is repurchased pursuant to this
paragraph 3, the Stockholder and his or her successors and assigns shall take
all reasonable steps to obtain all required third-party, governmental and
regulatory consents and approvals and take all other reasonable actions
necessary to facilitate consummation of such repurchase in a timely manner.
4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided
in paragraph 3, the Stockholder shall sell or transfer or agree to sell or
transfer ("Sale" or "Sell") Restricted Stock only in accordance with the
following procedures; provided, however, that with respect to this paragraph
4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares
and at no time shall the Stockholder have the right to sell Unvested Shares;
provided, further, that the restrictions on transfers of Vested Shares set forth
in this paragraph 4 shall expire, and shall be of no further force or effect,
upon the consummation of initial public offering of the Company's Common Stock
pursuant to the 1933 Act:
(b) In the event that the Stockholder receives a bona fide offer from
a third party (the "Prospective Stockholder") to purchase all or any
portion of the Restricted Stock
-7-
<PAGE>
owned by the Stockholder, the Stockholder shall deliver to the Company a
written notice (the "Offer Notice"), which shall be irrevocable for a
period of fifteen (15) business days after delivery thereof (the "Offer
Period"), offering (the "Offer") all of the Restricted Stock proposed to be
Sold by the Stockholder to the Prospective Stockholder at the purchase
price and on the terms of the proposed Sale to the Prospective Stockholder
(such Offer Notice shall include the foregoing information, a copy of the
Prospective Stockholder's bona fide offer and all other relevant terms of
the proposed Sale, including the identification of the Prospective
Stockholder). The Company shall have the right and option, for a period of
fifteen (15) business days after delivery of the Offer Notice, to
repurchase all of the Restricted Stock so offered at the purchase price and
on the terms stated in the Offer Notice. Such acceptance shall be made by
delivering a written notice to the Stockholder within said fifteen (15)
business-day period.
(c) Sales of Restricted Stock under the terms of paragraph 4(b) above
shall be made on a mutually satisfactory business day within fifteen (15)
business days after the expiration of the Offer Period. Delivery of
certificates or other instruments evidencing such Restricted Stock duly
endorsed for transfer shall be made on such date against payment of the
purchase price therefor.
(d) If the Company fails to purchase the Restricted Stock offered for
Sale pursuant to the Offer Notice, then at any time within sixty (60)
business days after the expiration of the Offer Period the Stockholder may
Sell all or any part of the Restricted Stock so offered for Sale on terms
no more favorable than the terms stated in the Offer Notice; provided,
however, that the Stockholder shall not, under any circumstances, Sell any
Restricted Stock to the Prospective Stockholder if the Board of Directors
of the Company, in its sole discretion, determines in good faith that the
Prospective Stockholder is a competitor, or an Affiliate of a competitor,
of the Company or that such Prospective Stockholder's ownership of
Restricted Stock would be contrary to the best interests of the Company. In
the event that the Restricted Stock is not Sold by the Stockholder to the
Prospective Stockholder during such period, the right of the Stockholder to
Sell such remaining Restricted Stock to the Prospective Stockholder shall
expire and the obligations of the Stockholder pursuant to this paragraph 4
shall be reinstated.
(e) Any transferee of Restricted Stock (other than the Company) shall,
as a condition to such transfer, agree to be bound by all of the provisions
of this Agreement applicable to the Stockholder.
(f) The certificates representing the Restricted Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED
STOCK AGREEMENT EFFECTIVE AS OF APRIL 1, 1997, BETWEEN THE STOCKHOLDER AND
BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY
THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE."
-8-
<PAGE>
(g) Naresh Nagpal, M.D. and any venture capital firm providing funds
to the Company ("Selling Shareholders") shall give to the Stockholder the
right to participate on a pro rata basis (based on the number of shares
owned, whether preferred or common, held by the Stockholders and by any
other shareholders who hold the same rights that are conferred by this
paragraph 4(g), including members of other physician groups), in any
proposed sale of stock (whether preferred or common) in the Company from
any of the Selling Shareholders to any unaffiliated third party, and the
Company shall require the Selling Shareholders to comply with the
obligations set forth in this paragraph 4(g); provided, however, that the
obligation under this paragraph 4(g) shall become null and void upon the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act.
(h) The Stockholder hereby agrees to the provisions of Section 9.12 of
the Management Services Agreement (relating to the right of Naresh Nagpal,
M.D. and any venture capital firm providing funds to the Company to
participate in certain sales of stock by the Stockholder).
5. Definitions. (a) "Affiliate" means, with respect to any Person, any of
(a) a director, officer or partner of such Person and (b) any other Person that,
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, another Person. The term
"control" includes, without limitation, the possession, directly or indirectly,
of the power to direct the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value jointly determined by the Stockholder and the
Company, provided that if they cannot so agree, such value shall be determined
by a mutually acceptable investment banking or other qualified firm of national
or regional reputation, retained jointly by the Company and the Medical Group,
and all fees, expenses and other charges of such firm incurred in connection
with such determination of Fair Market Value shall be borne and shared equally
by the Company and the Medical Group. In the event that the parties are unable
to agree upon such an investment banking or other qualified firm within ten (10)
days after the date on which either party may initially propose such a firm, a
qualified firm shall be selected in the following manner:
-9-
<PAGE>
First, the Stockholder shall send a list of names of four such firms,
arranged in order of the Stockholder's preference, by written notice to the
Company within seven (7) days after the expiration of the above referenced
10-day period. If the Stockholder does not furnish such a list to the
Company within such time period, the Company may, within the next seven (7)
days following expiration of such earlier seven-day period, submit a list
of names of four such firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed agreed to by the parties.
(c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as
the same may be amended or supplemented from time to time, or any successor
statute, and the rules and regulations thereunder, as the same are from time to
time in effect.
(d) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to Ten Cents $0.10 (as proportionately adjusted for all subsequent
stock splits, stock dividends and other recapitalizations).
(e) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
(f) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The
Restricted Stock will continue to be Restricted Stock in the hands of any holder
other than the Stockholder (except for the Company and except for transferees in
a Public Sale), and except as otherwise provided herein, each such other holder
of the Restricted Stock will succeed to all rights and obligations attributable
to the Stockholder as the holder of the Restricted Stock hereunder. The
Restricted Stock will also include shares of the Company's capital stock issued
with respect to the Restricted Stock by way of a stock split, stock dividend or
other recapitalization.
(h) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
-10-
<PAGE>
6. Indemnification. (a) The Company shall indemnify, defend and hold
harmless each Stockholder against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of the representations, warranties or agreements of the Company
contained in this Agreement.
(b) Each Stockholder, severally, shall indemnify and hold harmless the
Company against all liability, loss or damage, together with all reasonable
costs and expenses related thereto (including reasonable legal fees and
expenses), relating to or arising from the untruth, inaccuracy or breach of any
of the representations, warranties or agreements of such Stockholder contained
in this Agreement.
7. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of
any Restricted Stock in violation of any provision of this Agreement shall be
void, and the Company shall not record such Transfer on its books or treat any
purported transferee of such Restricted Stock as the owner of such stock for any
purpose.
(b) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(c) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(d) Relationship Among Stockholders. No Stockholder shall have any
responsibility for any breach of this Agreement by any other Stockholder or for
any representations, warranties, acts or omissions of any other Stockholder.
Each Stockholder is entering into this Agreement for and on behalf of such
Stockholder only, and no partnership, joint venture, unincorporated association,
or any other legal entity is intended to be formed by
-11-
<PAGE>
or among the Stockholders as a result of or in connection with this Agreement.
The parties have chosen to execute a single instrument for convenience only, and
this Agreement shall be construed as separate and several agreements between the
Company and each of the respective Stockholders for all purposes. This Agreement
may be executed in separate counterparts.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, assigns, heirs,
representatives and estate, as the case may be (including subsequent holders of
Restricted Stock); provided that the rights and obligations of the Stockholder
under this Agreement shall not be assignable except in connection with a
permitted transfer of Restricted Stock hereunder.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
California, or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of California to be applied. In furtherance of
the foregoing, the internal law of the State of California will control the
interpretation and construction of this agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America sitting in the State of California, and any appellate court thereof,
in any action or proceeding arising out of or relating to this Agreement or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such California
state court or, to the extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that any party may otherwise have to bring any action or
proceeding relating to this Agreement in the courts of any other jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any California state
or Federal court. Each of the parties hereto irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
(h) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and
-12-
<PAGE>
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction for specific performance and/or other injunctive relief
(without posting any bond or deposit) in order to enforce or prevent any
violations of the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof.
(j) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
reputable overnight courier service (charges prepaid) to the recipient at the
address below indicated or at such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. Notices will be deemed to have been given hereunder and received
when delivered personally, when received if transmitted via telecopier, five
days after deposit in the U.S. mail and one business day after deposit with a
reputable overnight courier service.
If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Facsimile: (561) 391-1389
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
Facsimile: (818) 783-1693
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
Facsimile: (310) 286-7821
-13-
<PAGE>
If to the Stockholder, to:
[Name of Stockholder]
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
Facsimile: (619) 724-3686
with a copy to:
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
Attention: President
Facsimile: (619) 724-3686
(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of California, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(l) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the losing party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(m) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(n) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(o) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of nouns and pronouns shall include the plural and vice-versa.
* * *
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Agreement effective as of the date first written above.
COMPANY
BONE, MUSCLE AND JOINT, INC.
By: /s/ N. Nagpal
---------------------------------
Naresh Nagpal, M.D., President
and Chief Executive Officer
STOCKHOLDERS
/s/ Neville Alleyne, M.D. /s/ Richard K. Muir
- ----------------------------- -----------------------------
Neville Alleyne, M.D. Richard K. Muir, M.D.
/s/ James C. Esch /s/ Leonard R. Ozerkis
- ----------------------------- -----------------------------
James C. Esch, M.D. Leonard R. Ozerkis, M.D.
/s/ James A. Helgager, M.D. /s/ Jacob Sharp
- ----------------------------- -----------------------------
James A. Helgager, M.D. Jacob Sharp, M.D.
/s/ Norman Kane
- -----------------------------
Norman Kane, M.D.
MEDICAL GROUP
ACCEPTED AND AGREED
AS TO PARAGRAPH 5(b)
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By: /s/ James C. Esch
-----------------------------------
James C. Esch, M.D., President
[Signatures Continued]
-15-
<PAGE>
ACCEPTED AND AGREED
AS TO SECTION 4(g)
/s/ N. Nagpal
- ----------------------------------------
NARESH NAGPAL, M.D.
DELPHI VENTURES III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/ Donald J. Lothrop
-------------------------------------
Donald J. Lothrop, Managing Member
DELPHI BIOINVESTMENTS III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/ Donald J. Lothrop
-------------------------------------
Donald J. Lothrop, Managing Member
OAK INVESTMENT PARTNERS VI, LIMITED
PARTNERSHIP
By: OAK ASSOCIATES VI, LIMITED
PARTNERSHIP, its General Partner
By:
-------------------------------------
Ann H. Lamont, Managing Partner
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By:
-------------------------------------
Ann H. Lamont, Managing Member
-16-
<PAGE>
AMENDMENT NO. 1 TO RESTRICTED STOCK AGREEMENT
THIS AMENDMENT NO. 1 TO RESTRICTED STOCK AGREEMENT (the "Amendment") is
entered into as of April 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a
Delaware corporation (the "Company"), and each of the individuals identified on
the signature page hereof (each, a "Stockholder," and collectively, the
"Stockholders"), with reference to the following facts.
A. The parties entered into that certain Restricted Stock Agreement
effective as of April 1, 1997 (the "Agreement").
B. The parties desire to amend the Agreement as set forth below.
NOW, THEREFORE, the Company and each Stockholder hereby agree as follows:
1. Paragraph 2(d) of the Agreement is deleted, and the following new
Paragraph 2(d) in inserted in lieu thereof:
"(d) For purposes of this Agreement, "Cessation of Active Practice"
means a physician Stockholder's failure (other than by reason of death
or permanent disability) to engage in the practice of medicine with
the Medical Group on a regular basis, including the performance of
orthopedic surgical procedures on a regular basis (except in the case
of any Stockholder who did not practice surgery on a regular basis
immediately prior to the date hereof); provided, however, that if a
Stockholder has ceased to conduct his medical practice with the
Medical Group, there shall not have been a Cessation of Active
Practice within the meaning of this provision if (A) the Stockholder
enters into a Management Services Agreement with the Company
substantially in the form of the Management Services Agreement entered
into by and between the Medical Group and the Company and (B) the
Stockholder enters into a new Stockholder Non-Competition Agreement
with the Company substantially in the form of the Stockholder
Non-Competition Agreement executed by the Stockholder in connection
with the Management Services Agreement entered into by and between the
Medical Group and the Company."
1
<PAGE>
2. Paragraph 2(e) of the Agreement is deleted, and the following new
Paragraph 2(e) is inserted in lieu thereof:
"(e) Notwithstanding paragraph 2(d) above, in the case of Jacob Sharp,
M.D., the Stockholder shall be deemed to have failed to engage in the
practice of medicine with the Medical Group on a regular basis, as
stated in paragraph 2(d) above, only if the Stockholder ceases
entirely to practice medicine with the Medical Group."
3. A new Paragraph 2(h) is added to the Agreement to read as follows:
"(h) Transfer of Restricted Stock to the Medical Group.
(i) For purposes of this paragraph 2(h), each of the following shall
constitute a "Stockholder Termination Event":
(A) Cessation of Active Practice by the Stockholder;
(B) Death of the Stockholder; or
(C) Permanent disability of the Stockholder.
(ii) In the event of a Stockholder Termination Event, the Stockholder
shall transfer (or cause to be transferred) to the Medical Group all of the
Unvested Shares of Restricted Stock held by the Stockholder (or by the
Stockholder's permitted transferee(s)), pursuant to the terms and
conditions set forth in this paragraph 2(h).
(iii) The Medical Group shall accept such Unvested Shares and shall
pay to the Stockholder (or to the Stockholder's permitted transferee(s)) an
amount determined by multiplying the number of such Unvested Shares by the
Original Value (as defined in this Agreement). Such shares shall be
delivered and such sum shall be paid in full in cash not later than sixty
(60) days after the date of the Stockholder Termination Event.
(iv) A portion of the shares received by the Medical Group pursuant to
this paragraph 2(h) shall be held by the Medical Group as Vested Shares,
and a portion shall be held as Unvested Shares. The number of such shares
to be held as Vested Shares shall be determined by dividing the amount paid
by the Medical Group pursuant to paragraph 2(h)(iii) by the Fair Market
Value (as hereinafter defined) per share. The remainder of such shares
shall be Unvested Shares. Any such Vested Shares may be held, transferred,
or sold at the discretion of the Medical
2
<PAGE>
Group. Any Unvested Shares may be transferred only in accordance with
paragraph 2(h)(v), and such shares may become Vested Shares only as
provided in paragraph 2(h)(v).
(v) The Medical Group shall not sell or otherwise transfer any
Unvested Shares to any person or entity, except to one or more physician
employees, independent contractors, or partners in the Medical Group who
prior to the receipt of such shares from the Medical Group had not acquired
any shares of the Company. As a condition to any such sale or transfer,
such physician(s) shall enter into a Restricted Stock Agreement with the
Company substantially in the form of this Agreement, effective as of the
date of transfer of such shares. Any such sale or transfer to any such
physician(s) shall be subject to such additional terms and conditions as
may be agreed upon by the Medical Group and such physician(s).
(vi) Notwithstanding paragraph 2(h)(iv) above, in the case of transfer
of Unvested Shares from Jacob Sharp, M.D. to the Medical Group pursuant to
this paragraph 2(h), such shares shall become Vested Shares on the date or
dates determined in accordance with paragraph 2(a), except as provided in
this Agreement in the event of termination of the Management Services
Agreement. Any Vested Shares may be held, transferred, or sold at the
discretion of the Medical Group. Any Unvested Shares may be transferred
only in accordance with paragraph 2(h)(v)."
4. Paragraph 3(b) of the Agreement is deleted, and the following new
Paragraph 3(b) is inserted in lieu thereof:
"(b) Each of the following shall constitute a "Repurchase Event":
(i) Termination of the Management Services Agreement for any
reason whatsoever on or before the fourth anniversary of the date of
this Agreement; or
(ii) Termination of the Management Services Agreement by the
Medical Group pursuant to Section 13.1(d) thereof (based on failure of
the Company to consummate an initial public offering of its Common
Stock within forty-eight (48) months after the Commencement Date under
the Management Services Agreement)."
5. Paragraph 3(h) of the Agreement is deleted in its entirety.
6. All other terms and conditions set forth in the Agreement remain in full
force and effect.
3
<PAGE>
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the date first written above.
COMPANY
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Naresh Nagpal, M.D., President
STOCKHOLDERS
/s/ Neville Alleyne, M.D. /s/ Richard K. Muir
- ----------------------------- -----------------------------
Neville Alleyne, M.D. Richard K. Muir, M.D.
/s/ James C. Esch /s/ Leonard R. Ozerkis
- ----------------------------- -----------------------------
James C. Esch, M.D. Leonard R. Ozerkis, M.D.
/s/ James A. Helgager, M.D. /s/ Jacob Sharp
- ----------------------------- -----------------------------
James A. Helgager, M.D. Jacob Sharp, M.D.
/s/ Norman Kane
- -----------------------------
Norman Kane, M.D.
MEDICAL GROUP
ACCEPTED AND AGREED
AS TO PARAGRAPHS 2(h) and 5(b)
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By: /s/ James C. Esch
-----------------------------------
James C. Esch, M.D., President
4
<PAGE>
MANAGEMENT SERVICES AGREEMENT
BETWEEN
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP
AND
BONE, MUSCLE AND JOINT, INC.
Effective as of November 1, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. Retention of the Management Company.......................... 2
SECTION 2. Term......................................................... 3
SECTION 3. Management Services.......................................... 3
SECTION 4. Equity Participation......................................... 21
SECTION 5. Costs, Compensation, and Other Payments...................... 21
SECTION 6. Representations and Warranties of the Medical Group.......... 34
SECTION 7. Representations and Warranties of the Management Company..... 43
SECTION 8. Operations Committee......................................... 54
SECTION 9. Obligations of the Medical Group............................. 59
SECTION 10. Certain Covenants........................................... 62
SECTION 11. Records..................................................... 62
SECTION 12. Insurance and Indemnity..................................... 63
SECTION 13. Termination................................................. 65
SECTION 14. Non-Disclosure of Confidential Information.................. 69
SECTION 15. Non-Competition............................................. 69
SECTION 16. Obligations of the Management Company....................... 70
SECTION 17. Assignment.................................................. 72
SECTION 18. Notices..................................................... 72
SECTION 19. Benefits of Agreement....................................... 73
SECTION 20. Governing Law; Jurisdiction................................. 74
-i-
<PAGE>
SECTION 21. Headings.................................................... 74
SECTION 22. Entire Agreement; Amendments................................ 74
SECTION 23. Attorneys' Fees............................................. 74
SECTION 24. Counterparts................................................ 75
SECTION 25. Waivers..................................................... 75
SECTION 26. Survival of Termination..................................... 75
SECTION 27. Contract Modification for Prospective Legal Events.......... 75
-ii-
<PAGE>
ATTACHMENTS
-----------
SCHEDULES
- ---------
SCHEDULE I -- New Ancillary Services -- Exceptions
SCHEDULE II -- Management Company Operating Cost Budget
SCHEDULE III -- Equity Participation
SCHEDULE IV -- Draw Date and Draw Percentage
SCHEDULE V -- Management Fee -- Applicable Percentage
SCHEDULE VI -- Professional Practice Cost Savings
SCHEDULE VII -- Computation Example
SCHEDULE VIII -- Non-Competition
SCHEDULE IX -- Royalties
SCHEDULE 6.4 -- Financial Information
SCHEDULE 6.5 -- Absence of Undisclosed Liabilities
SCHEDULE 6.6 -- Absence of Changes
SCHEDULE 6.7 -- Tax Matters
SCHEDULE 6.8 -- Litigation, Etc.
SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable
SCHEDULE 6.11 -- Labor Relations; Employees
SCHEDULE 6.12 -- Employee Benefit Plans
SCHEDULE 6.13 -- Insurance
SCHEDULE 6.14 -- Real Property
SCHEDULE 6.15 -- Burdensome Restrictions
SCHEDULE 6.16 -- Disclosure
SCHEDULE 7.2 -- Equity Investments
SCHEDULE 7.3(a) -- Issued and Outstanding Stock
SCHEDULE 7.3(c) -- Options; Conversion Rights
-iii-
<PAGE>
SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals,
Notifications, and Filings
SCHEDULE 7.6 -- Financial Information
SCHEDULE 7.7 -- Absence of Undisclosed Liabilities
SCHEDULE 7.8 -- Absence of Changes
SCHEDULE 7.9 -- Tax Matters
SCHEDULE 7.10 -- Litigation, Etc.
SCHEDULE 7.11 -- Compliance; Governmental Authorizations
SCHEDULE 7.12 -- Accounts Receivable; Accounts Payable
SCHEDULE 7.13 -- Labor Relations; Employees
SCHEDULE 7.14 -- Employee Benefit Plans
SCHEDULE 7.15 -- Insurance
SCHEDULE 7.16 -- Real Property
SCHEDULE 7.17 -- Burdensome Restrictions
SCHEDULE 7.18 -- Disclosure
ANNEX
ANNEX A -- Medical Group Key Personnel
ANNEX B -- Management Company Key Employees
EXHIBITS
EXHIBIT A -- Asset Purchase Agreement
EXHIBIT B -- Stockholder Non-Competition Agreement
EXHIBIT C -- Restricted Stock Agreement
EXHIBIT D -- Assignment of Lease
EXHIBIT E -- Office Sublease
EXHIBIT F -- Medical Equipment Master Lease
-iv-
<PAGE>
INDEX OF DEFINED TERMS
----------------------
Term Page
- ---- ----
Additional Terms........................................................... 3
Administrative Personnel................................................... 16
Agreement.................................................................. 1
Ancillary Division......................................................... 31
Ancillary Service Start-Up Costs........................................... 32
Ancillary Service Start-Up Period.......................................... 32
Annual Draw Amount......................................................... 23
Annual Medical Group Compensation Amount................................... 23
Applicable Percentage...................................................... 26
Asset Purchase Agreement................................................... 1
Authorized Management Company Operating Costs.............................. 28
Authorized Partners........................................................ 13
Balance Sheet.............................................................. 35
Balance Sheet Date......................................................... 35
Bankruptcy Event........................................................... 65
Base Term.................................................................. 3
Billable Items............................................................. 30
Billings................................................................... 24
BMJ Formation Documents.................................................... 44
Budgets.................................................................... 21
Collections................................................................ 24
Commencement Date.......................................................... 3
Compensation Committee..................................................... 70
Competitive Business....................................................... 104
Confidential or Proprietary Information.................................... 69
Corporate Overhead......................................................... 27
COSI....................................................................... 66
Cost Savings............................................................... 99
-v-
<PAGE>
Documents.................................................................. 13
Draw Date.................................................................. 96
Draw Percentage............................................................ 22
Eligible Parties........................................................... 21
Employee Plans............................................................. 42
Employees.................................................................. 41
Equipment.................................................................. 7
ERISA...................................................................... 41
Excluded Costs............................................................. 27
Facility................................................................... 59
FF&E....................................................................... 7
Incentive Based Costs...................................................... 99
Internal Financial Statements.............................................. 35
IPO........................................................................ 97
Management Business........................................................ 1
Management Company......................................................... 1
Management Company Balance Sheet........................................... 46
Management Company Balance Sheet Date...................................... 46
Management Company Bank.................................................... 22
Management Company Costs................................................... 27
Management Company Employees............................................... 52
Management Company Key Employee............................................ 49
Management Company Operating Costs......................................... 27
Management Company Real Property........................................... 54
Management Company Returns................................................. 49
Management Company Transaction Documents................................... 44
Management Fee............................................................. 26
Management Services........................................................ 2
Medical Business........................................................... 1
Medical Equipment.......................................................... 7
Medical Equipment Master Lease Payments.................................... 26
-vi-
<PAGE>
Medical Group.............................................................. 1
Medical Group Bank......................................................... 12
Medical Group Collections Account.......................................... 12
Medical Group Costs........................................................ 30
Medical Group Key Personnel................................................ 37
Medical Group Services..................................................... 24
Medical Group Transaction Documents........................................ 34
Medical Personnel.......................................................... 19
MGC........................................................................ 97
Monthly Draw............................................................... 22
MSAs....................................................................... 87
New Ancillary Service Medical Equipment.................................... 31
New Ancillary Services..................................................... 9
New Medical Office......................................................... 29
New Medical Office Start-Up Costs.......................................... 29
New Medical Office Start-Up Period......................................... 29
Office Lease............................................................... 6
Office Sublease............................................................ 5
Office Sublease Payments................................................... 26
OGC........................................................................ 97
Operating Account.......................................................... 22
Phase I.................................................................... 97
Phase II................................................................... 97
Phase III.................................................................. 97
Professional Practice Cost Savings......................................... 26
Real Property.............................................................. 43
Recalculation Date......................................................... 84
Restricted Stock Agreement................................................. 84
Returns.................................................................... 38
Review Financial Statements................................................ 35
SEC........................................................................ 97
-vii-
<PAGE>
Selling Shareholders....................................................... 71
Shares..................................................................... 88
Signature Date............................................................. 1
Stock...................................................................... 81
Stockholders Agreement..................................................... 45
Tax........................................................................ 39
Taxes...................................................................... 39
Tenant Improvements........................................................ 56
Term....................................................................... 3
Transaction Documents...................................................... 81
Unaudited Financial Statements............................................. 46
Van Nuys Office............................................................ 4
-viii-
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of
November 22, 1996 (the "Signature Date"), effective as of November 1, 1996, by
and between SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, a California
general partnership (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a
Delaware corporation (the "Management Company"), with reference to the following
facts:
A. The Medical Group is engaged in the business (the "Medical Business") of
providing orthopedic medical and surgical services and related medical and
ancillary services to the general public.
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company and the Medical Group have
entered into an Asset Purchase Agreement (the "Asset Purchase Agreement"),
pursuant to which the Management Company has acquired substantially all of the
assets of the Medical Group.
D. The Management Company and the Medical Group now desire to enter into
this Management Services Agreement, pursuant to which, among other things, the
Management Company will render certain management and administrative services to
the Medical Group.
NOW, THEREFORE, the Medical Group and the Management Company hereby agree
as follows:
-1-
<PAGE>
SECTION 1. Retention of the Management Company.
1.1 Retention. The Medical Group hereby retains the Management Company to
provide all of the management and related services identified or referenced in
Section 3 hereof and as otherwise required by this Agreement (collectively, the
"Management Services"), and the Management Company hereby accepts such retention
and agrees to provide such services, upon the terms and subject to the
conditions set forth herein.
1.2 Exclusivity. During the term of this Agreement, the Management Company
shall be the exclusive provider of all management and administrative services
utilized by the Medical Group; provided, however, that the Medical Group may
contract directly with or otherwise engage individuals or companies for the
provision of accounting, legal, consulting, or other professional or advisory
services (provided that such services shall be in addition to, and not in
replacement of, the services to be provided by the Management Company
hereunder), all in the sole discretion of the Medical Group and at the sole cost
of the Medical Group.
1.3 Relationship of Parties. Notwithstanding anything contained herein to
the contrary, (a) the Management Company and the Medical Group intend to act and
perform as independent contractors, and the provisions hereof are not intended
to create any partnership, joint venture, or employment relationship between the
parties, and (b) the Management Company is hereby engaged solely to provide
management and administrative services to the Medical Group and shall not
interfere with, control, direct, or supervise the Medical Group or any medical
professional employed by the Medical Group in connection with the provision of
professional medical services.
1.4 No Referral Obligation. The parties agree that the benefits to the
Medical Group hereunder do not require, are not payment for, and are not in any
way contingent upon the admission, referral, purchase, or any other arrangement
for the provision of any item or service to or for any of the Medical Group's
patients in or from any medical facility or laboratory or from any other entity
owned, operated, controlled, or managed by the Management Company. The
Management Company shall provide prior written notice to the Medical Group
before acquiring any ownership, investment interest, or control in, or entering
into any agreement or
-2-
<PAGE>
arrangement pursuant to which the Management Company would become responsible
for all or any part of the operations or management of, any medical facility,
laboratory, or any provider or supplier of ancillary services, diagnostic or
therapeutic equipment, prosthetic or orthotic devices, medical supplies, or
other items or services furnished to or for use by patients, but only if any of
the foregoing is located in California or serves the geographic area served by
the Medical Group.
SECTION 2. Term. Provided that the Closing under the Asset Purchase
Agreement shall have occurred as provided therein, and subject to such start-up
procedures as the parties may agree upon for purposes of facilitating the
transition of responsibilities required by this Agreement, the performance of
services under this Agreement shall commence as of November 1, 1996 (the
"Commencement Date") and shall expire on the fortieth anniversary of the
Commencement Date unless terminated earlier pursuant to the terms hereof (the
"Base Term"). The Base Term of this Agreement shall be automatically extended
for additional terms ("Additional Terms" and together with the Base Term, the
"Term") of five years each, unless either party delivers to the other party, not
less than six (6) months nor more than nine (9) months prior to the expiration
of the then-current Term, written notice of such party's intention not to extend
the Term of this Agreement.
SECTION 3. Management Services.
3.1 Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager and
administrator of all day-to-day business functions for the Medical Group,
subject to the provisions of Section 1.2 hereof. The Management Company shall
provide all of the management and administrative services reasonably required by
the Medical Group in connection with the provision of any and all of the Medical
Group Services and as otherwise provided in this Agreement, including without
limitation the services described in Sections 3.2 through 3.17 hereof.
(b) Without limiting the generality of the provisions of Section 3.1(a),
the Management Services shall include such management and administrative
services as may be
-3-
<PAGE>
reasonably required in connection with (i) all of the offices (including New
Medical Offices) of the Medical Group, and (ii) all professional services and
all ancillary services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described in
this Agreement shall be applicable with respect to the items identified as
Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs
shall be paid by the Medical Group rather than by the Management Company.
Accordingly, the Management Company shall provide accounting, bookkeeping, and
related services with respect to all such costs.
(d) The Management Company may enter into such contracts and agreements
with outside services and suppliers as the Management Company shall reasonably
deem necessary in connection with the provision of the Management Services, and,
to the extent permitted by applicable law, such contracts and agreements shall,
except as otherwise expressly provided in this Agreement, be in the name of the
Management Company. The Management Company shall have no authority, directly or
indirectly, to perform, and shall not perform or enter into any agreement to
perform, Medical Services or any other medical function required by law to be
performed by a licensed physician or by any other licensed health care
professional.
(e) The Management Company shall comply in all material respects with all
applicable material Federal, state and local laws, regulation, and ordinances in
connection with the provision of the Management Services hereunder.
3.2 Premises.
(a) The Medical Group, as of the Commencement Date of this Agreement,
leases premises and provides Medical Services at the following location (the
"Van Nuys Office"):
6815 Noble Avenue
Van Nuys, California 91405
-4-
<PAGE>
The above-identified premises are leased to the Medical Group, in the Medical
Group's name, and such premises shall continue to be leased to the Medical
Group, in the Medical Group's name, from and after the Commencement Date of this
Agreement. The Management Company shall not be required to lease such premises.
(b) The Medical Group, as of the Commencement Date of this Agreement, also
provides Medical Services at the following locations:
23861 McBean Parkway, Suites A-2 and A-4
Valencia, California 91355
7230 Medical Center Drive, Suite 400
West Hills, California 91307
800 South Fairmont, Suite 325
Pasadena, California 91105
2026 21st Street, Suite B
Bakersfield, California 93301
Immediately prior to the Commencement Date of this Agreement, all of the
above-identified premises were leased to the Medical Group, in the Medical
Group's name. Effective from and after the Commencement Date of this Agreement,
each of the leases of such premises are to be assigned from the Medical Group to
the Management Company pursuant to an assignment substantially in the form of
the Assignment of Lease attached hereto as Exhibit D. Additionally, the
Management Company shall sublease each of such premises to the Medical Group
pursuant to a sublease (each, an "Office Sublease") substantially in the form of
the Office Sublease attached hereto as Exhibit E, in consideration of the
payments to be made by the Medical Group under such Office Sublease. Upon the
expiration of each of the premises leases assigned in accordance with this
Section 3.2(b), the Management Company shall use its best efforts to enter into
a new lease, in the name of the Management Company, with the landlord of such
premises, and the parties shall amend the applicable Office Sublease or enter
into a new sublease relating to such new premises lease; provided, however, that
the approval of the Medical Group, which shall not be unreasonably withheld,
shall be required in the event of any substantial changes in
-5-
<PAGE>
the terms of the premises lease, and if the Medical Group does not give such
approval, the failure to enter into such new premises lease shall not constitute
a default of the Management Company. Each assigned lease and each new lease
entered into between the Management Company and the landlord is referred to
herein as an "Office Lease."
(c) A New Medical Office (as hereinafter defined) may be opened only upon
the agreement of the Medical Group and the Management Company. The capital costs
and start-up costs reasonably required in connection with the opening of any New
Medical Office shall be borne as set forth in Section 5 hereof. The premises of
any New Medical Office shall be leased to the Management Company, in the
Management Company's name, and the Medical Group shall not be required to lease
any such premises. Additionally, the Management Company shall sublease such
premises to the Medical Group pursuant to a sublease substantially in the form
of the Sublease attached hereto as Exhibit E, in consideration of the payments
to be made by the Medical Group under such sublease.
(d) The closing or relocation of any offices of the Medical Group shall be
subject to agreement by the Medical Group and the Management Company.
(e) The premises services to be provided by the Management Company shall
include, without limitation, the negotiation and renegotiation of leases,
provision of ongoing liaison with the landlords of the respective office
premises of the Medical Group, identification of potential new locations for
Medical Group offices, financial analysis relating to the opening, closing, and
relocation of offices, arranging for necessary repairs, maintenance and
improvements, procurement of property insurance, arranging for telephone and
other utility services, arranging for hazardous waste disposal, and all other
reasonably necessary or appropriate services related to all of the office
premises of the Medical Group.
(f) The Management Company also shall provide all necessary or appropriate
leasehold improvements to each of the premises, subject to prior approval as
provided in Section 8.2 hereof.
-6-
<PAGE>
(g) The Medical Group acknowledges that the Management Company makes no
warranties or representations, expressed or implied, regarding the condition of
any of the leased premises.
3.3 Equipment.
(a) The Management Company shall provide to the Medical Group all of the
diagnostic and therapeutic medical equipment reasonably required by the Medical
Group in connection with the provision of Medical Group Services (the "Medical
Equipment"). All Medical Equipment shall be provided by the Management Company
to the Medical Group in consideration of the rental payments to be made by the
Medical Group to the Management Company pursuant to an equipment lease
substantially in the form of the Medical Equipment Master Lease Agreement
attached hereto as Exhibit F. As used herein, the term Medical Equipment shall
not include medical equipment used in connection with a New Ancillary Service
(as hereinafter defined).
(b) The Management Company also shall provide to the Medical Group all
furniture, furnishings, trade fixtures, and office equipment reasonably required
in connection with the provision of Medical Group Services pursuant to this
Agreement (collectively, "FF&E"). The Management Company shall acquire, at its
cost, all FF&E, and the Management Company shall retain ownership of all FF&E.
The Management Fee payable to the Management Company under this Agreement is
intended to compensate the Management Company for the provision of FF&E for use
by the Medical Group. As used herein, the term FF&E does not include furniture,
furnishings, trade fixtures, and office equipment used in connection with a New
Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation, or
other disposition of any Equipment shall require prior approval as provided in
Section 8.2 hereof.
(d) The Management Company's obligations with respect to the Equipment are
subject and subordinate to the provisions and obligations contained in any
financing, security
-7-
<PAGE>
interest, mortgage, lien or other encumbrance the Management Company may, in its
reasonable discretion, place upon the Equipment through an unaffiliated third
party. The Medical Group shall use the Equipment only in connection with its
provision of the Medical Group Services, and the Medical Group shall not alter,
repair, augment, or remove the Equipment from the premises of the Medical Group
without the prior written consent of the Management Company and any lessor
thereof, which approval may be granted or withheld in the Management Company's
or such lessor's sole discretion. To the extent the Equipment is utilized by the
Medical Group in the provision of Medical Group Services, the Medical Group
shall have the right to exercise reasonable control over the use of such
Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so that
all such Equipment shall function continuously (subject to interruptions not
reasonably avoidable) in accordance with the manufacturer's specifications and
so that all conditions imposed by the manufacturer to maintaining the continued
effectiveness of any warranty on such Equipment shall be satisfied. The
Management Company shall take all reasonable steps to provide that all necessary
service and maintenance is obtained in a prompt and timely manner, so as to
minimize the amount of time that any of the Equipment is not available for usage
by or for patients of the Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER
RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT,
THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR
PURPOSE. NOTWITHSTANDING THE FOREGOING DISCLAIMER, THE MANAGEMENT COMPANY DOES
WARRANT TO THE MEDICAL GROUP THAT THE X-RAY
-8-
<PAGE>
EQUIPMENT AND THE COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT THE MANAGEMENT
COMPANY SELECTS FOR USE BY THE MEDICAL GROUP SHALL BE SUITABLE FOR USE BY THE
MEDICAL GROUP FOR SUCH INTENDED USES. Nothing in this Agreement shall be
construed to affect or limit in any way the professional discretion of the
Medical Group to select and use any Equipment acquired by the Management Company
in accordance with the terms of this Agreement insofar as such selection or use
constitutes or might constitute the practice of medicine.
3.4 New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means the
technical component (but not the professional component) of the following,
except as set forth in Schedule I:
(i) Physical therapy;
(ii) Magnetic resonance imaging and/or other imaging services (except
diagnostic radiology);
(iii) Outpatient surgery;
(iv) Densitometry; and
(v) Other revenue-producing services generally recognized as
ancillary services, but excluding the following:
(A) Plain film radiography;
(B) Any other services provided on a regular basis by the
Medical Group immediately prior to the Commencement Date of
this Agreement, including without limitation (1) other
diagnostic radiology (if any) and (2) ultrasound for
pediatric patients; and
(C) Any service performed in connection with new Medical
Equipment acquired to replace existing Medical Equipment so
long as the new Medical Equipment performs substantially the
same functions as the replaced Medical Equipment.
-9-
<PAGE>
New Ancillary Services do not include the sale or provision of (or services
rendered in connection with) prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, crutches, casts, or any other supplies or similar items
which are billable to patients or payors.
(b) New Ancillary Services may be established only upon agreement of the
Medical Group and the Management Company. Such agreement shall be memorialized
in a written agreement executed by the parties (or in a written amendment to
this Agreement) under which the Management Company agrees to provide all of the
Management Services described in this Section 3 in connection with such New
Ancillary Service, and for which the Management Company shall be compensated as
described in Section 5.8 of this Agreement, except as otherwise agreed by the
parties.
3.5 Administration, Finance and Accounting. The Management Company shall
provide or arrange for the provision of all administrative, financial, and
accounting functions necessary for the operation of the Medical Group, including
without limitation --
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
(c) Preparing accounts receivable summary reports, including various
analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical
Group's General Partnership Agreement prior to distribution of
payments to outside parties; provided, however, that the
Management Company shall not be responsible for or liable with
respect to interpretations of the General Partnership Agreement.
(e) Disbursement of payables, including payables of the Medical
Group; provided, however, that payables of the Medical Group
shall be paid from an account of the Medical Group and not from
the Management Company's Operating Account, and all checks drawn
on any Medical Group account shall be signed by a partner in the
Medical Group or other authorized representative of the Medical
Group.
-10-
<PAGE>
(f) Negotiation of vendor contracts.
(g) Performing monthly accounting functions, including bank
reconciliations, maintenance of books and records, and
preparation of financial statements.
(h) Analyzing financial data as reasonably requested by physicians.
(i) Analyzing potential new office locations, and coordinating all
functions associated with opening new office locations.
(j) Preparing monthly financial and medical practice statistics
reports
(i) By satellite office
(ii) By physician
(k) Providing from the Medical Group's bank account(s) monthly draws
to physicians and professional corporations pursuant to service
agreements, monthly profit and loss distributions, and quarterly
bonus calculations; provided, however, that the Management
Company shall not be responsible for or liable with respect to
interpretations of the General Partnership Agreement; provided,
further, that all checks drawn on any Medical Group account shall
be signed by a partner in the Medical Group or other authorized
representative of the Medical Group.
(l) Calculating physicians' and professional corporations' annual
earnings based on the Medical Group's profit and loss
distribution formulas.
(m) Ongoing day-to-day communication with the managing partner and
assisting the managing partner in fulfilling his
responsibilities.
(n) Preparing agendas and information packages for Medical Group
meetings.
(o) Developing budgets and long-term strategies for the Medical
Group.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Providing administrative services (excluding the services of a
plan administrator) of the Medical Group's 401(k) and flexible
spending plans; provided, however, that the Management Company
shall not be responsible for investment decisions.
(s) Coordinating recruitment, interviewing, and hiring of new
physicians.
(t) Implementing Medical Group fee schedule increases and/or
decreases.
-11-
<PAGE>
(u) Coordinating depositions and court appearances.
(v) Assisting in the coordination of call schedules.
(w) Assisting in the coordination of coverage of athletic team
events.
(x) Assisting in the day-to-day administration of the Medical Group's
fellowship program, including the sports clinic.
(y) Acting as liaison to hospital administration, physical therapy,
surgery center, MRI, and other ancillary services entities.
(z) Cooperating with outside accountants in preparing various
schedules and providing other information.
(aa) Interacting with legal counsel as necessary.
3.6 Billing and Collection.
(a) The Medical Group hereby irrevocably designates and appoints the
Management Company to be the agent of the Medical Group during the Term, to
perform the following duties and for those purposes incidental thereto: (i) to
bill patients and third party payors in the Medical Group's name and on its
behalf; (ii) to collect accounts receivable resulting from such billing; (iii)
to receive payments and prepayments from the Medical Group's patients, Blue
Cross and Blue Shield organizations, insurance companies, health care plans,
Medicare, Medicaid, HMO's and any and all other third party payors; (iv) to take
possession of and deposit into such bank (the "Medical Group Bank") as the
Medical Group designates, in an account established by the Medical Group in the
name of the Medical Group (the "Medical Group Collections Account"), any and all
checks, insurance payments, cash, cash equivalents and other instruments
received for Medical Group Services; and (v) to initiate with the consent of the
Medical Group, which consent may be withheld by the Medical Group in its sole
and absolute discretion, legal proceedings in the name of the Medical Group to
collect any accounts and monies owed to the Medical Group, to enforce the rights
of the Medical Group as a creditor under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by governmental
agencies (or its fiscal intermediaries) as third-party payors. The Management
Company, in its capacity as agent pursuant to this paragraph, shall not have any
duties or responsibilities except those expressly set forth in clauses (i)
through (v) above. Following termination of this Agreement, the Management
Company shall continue to use
-12-
<PAGE>
reasonable efforts to collect the accounts receivable of the Medical Group as of
such termination date for a period of ninety (90) days thereafter.
(b) From time to time at the Management Company's request, the Medical
Group shall make available to the Management Company one or more authorized
partners (the "Authorized Partners") of the Medical Group to sign any letters,
checks, instruments or other documents (the "Documents") on behalf of the
Medical Group that are necessary for the Management Group to perform its duties
as agent under this Section 3.6 and its other duties under this Agreement. If
the Management Company notifies the Medical Group that an Authorized Partner is
not signing the Documents in a timely manner, the Management Company shall not
be liable for any failure to perform its duties as agent hereunder or for any
failure to perform the Management Services to the extent caused by the failure
of an Authorized Partner to sign the Documents in a timely manner.
(c) The Management Company represents and warrants to the Medical Group
that it has sufficient knowledge and expertise in the area of billing for
orthopedic and other medical services and ancillary services to be able to
adequately perform the billing services required by the Medical Group hereunder.
The Management Company shall submit all bills and manage the billing process on
a timely basis in accordance with the terms of this Agreement and applicable
law.
(d) Without limiting the generality of the foregoing, the Management
Company shall bill patients, bill and submit claims to third party payors,
perform appropriate coding for each bill, and collect all fees for professional
and other services rendered and for items supplied to patients by the Medical
Group, all in a timely manner and in accordance with parameters and criteria
established by the Operations Committee (as hereinafter defined). Additionally,
the Management Company shall provide the following services which are currently
being provided by or on behalf of the Medical Group:
(i) Receive and collect from patients at the time of visit all
appropriate payments and pre-payments, including co-pays,
-13-
<PAGE>
deductibles, payments for non-covered medical services, and
deposits for surgeries (if applicable), and additionally shall
obtain all appropriate insurance and other information required.
(ii) Submit claims utilizing electronic billing submission, whenever
appropriate.
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanisms for delinquent accounts of all
insurance classifications, all in a timely fashion as determined
by the Operations Committee.
(iv) Turn over to outside collection agencies all delinquent accounts
satisfying the criteria established by the Operations Committee.
The Management Company shall also follow-up on the performance of
the outside collection agencies and make changes if necessary,
and additionally shall reconcile each account turned over to the
summary data provided by the collection agency.
(v) Write-off account balances according to criteria approved by the
Operations Committee.
(vi) Prepare claim reviews in accordance with criteria approved by the
Operations Committee.
(vii) Bill workers' compensation medical services at rates equal to
the most recently approved California workers' compensation fee
schedule.
(viii) Apply "insurance only" and other courtesy write-offs in
compliance with Operations Committee policy.
-14-
<PAGE>
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), the Management Company shall determine that
payments from the PPOs and HMOs are in compliance with the
contract with the Medical Group.
(x) With respect to capitation fee contracts with HMOs, the
Management Company shall --
(A) Follow-up to ensure that payments to the Medical Group are
made on a timely basis;
(B) Review and audit enrollment data provided by the HMO to
ensure that Medical Group is being compensated for the
proper number of lives enrolled.
(xi) With respect to lien accounts, the Management Company shall --
(A) Ensure that appropriate documents are signed and agreed to
initially as between Medical Group, attorney and patient;
(B) Follow-up on a regular basis as to the status of the
account; and
(C) Apply the policies of the Operations Committee in resolving
open account balances.
(xii) With respect to student athlete accounts, the Management Company
shall coordinate insurances and other information in compliance
with the policy of the Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, the Management
Company shall follow-up on a timely basis to ensure that withheld
amounts are returned to the Medical Group, if
-15-
<PAGE>
warranted, and to ensure that amounts not returned are verified
and audited for appropriateness.
(xiv) Coordinate the timely payment of refunds to patients and third
party payors when appropriate.
(xv) Ensure that revenue related to depositions, record review, court
appearances, athletic teams services, and royalties payable to
Stephen J. Snyder, M.D., are accounted for, monitored, followed-
up, and ultimately collected.
3.7 Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of all of the following non-medical personnel necessary
for the conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration
(ii) Accounting
(iii) Billing and Collection
(iv) Secretarial
(v) Transcription
(vi) Appointments
(vii) Switchboard
(viii) Medical Records
(ix) Chart Preparation
(x) Historians
(xi) Clinic Support
(xii) Marketing
(b) The Management Company shall determine and pay the salaries and fringe
benefits of the Administrative Personnel, and shall provide other personnel
services related to
-16-
<PAGE>
the Administrative Personnel, including but not limited to scheduling, personnel
policies, administering continuing education benefits, and payroll
administration.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify
educational and employment experience, licensure, and insurability.
(d) All of the personnel services shall be performed in compliance with all
applicable California and Federal labor laws.
3.8 Inventory and Supplies. The Management Company shall order and purchase
inventory and supplies on behalf of the Medical Group, and such other ordinary
or appropriate materials as the Medical Group reasonably deems to be necessary
for it to carry out its professional medical activities. Inventory and supplies
shall include, but not be limited to:
(a) Medical supplies
(b) Office supplies
(c) Postage
(d) Computer forms and supplies
(e) Printing and stationary supplies
(f) Printer supplies
(g) Linen and laundry supplies
3.9 Taxes. The Management Company shall provide the Medical Group with
access to all information necessary for the Medical Group to prepare its tax
returns. The Management Company shall have no responsibility for --
(a) The payment of the Medical Group's taxes; or
(b) The preparation of any partnership income tax returns or related
Schedule K-1 forms for the Medical Group.
-17-
<PAGE>
3.10 Information Systems Management.
(a) The Management Company shall provide or arrange for the provision of
all management information systems services to be utilized by the Medical Group.
These services shall include, but not be limited to --
(i) Ongoing maintenance and improvement of the Medical Group's existing
information systems:
(A) Accounts receivable - Billing/Insurance/Collections
(B) On-line appointment scheduling
(C) Internal e-mail
(D) On-line transcription
(E) Faxing subsystem
(F) Electronic claims submission
(G) Patient flow monitoring system
(H) Authorization module
(I) Prescription module
(J) X-ray tracking system
(K) Voice mail
(ii) Development of the following new information systems --
(A) Paperless medical records
(B) Bar code chart tracking system
(b) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical Group's payor agreements; provided, however, that in no event
shall a breach of such confidentiality be deemed a default under this Agreement
if the Management Company acted reasonably and in good faith to protect such
confidentiality.
3.11 Use of New Technologies in the Practice of Medicine. The Management
Company shall promote the integration of new technologies into the professional
practice of the Medical Group, including without limitation the use of satellite
and other telecommunications
-18-
<PAGE>
services that permit the provision of remote consultations, virtual operations,
and other professional services; provided, however, that the foregoing shall be
subject to the terms of Section 8.2(e) hereof.
3.12 Public Relations; Marketing and Advertising. The Management Company
shall develop and implement community outreach programs and public relations
programs designed to educate the patient population regarding the Medical Group,
the availability of its medical services, and the availability in terms of any
managed care programs in which the Medical Group participates. The Management
Company also shall develop and implement marketing and advertising programs as
reasonably required to promote and expand the Medical Business, subject to any
approved budgets. The programs shall be conducted in compliance with applicable
laws and regulations governing advertising by the medical profession.
3.13 Medical Personnel Recruiting.
(a) The Management Company shall, upon request by the Medical Group, assist
the Medical Group in recruiting Medical Personnel. "Medical Personnel" means:
(i) Physicians (including fellows and residents, if any) providing
professional medical services who are employees, independent
contractors, partners, or physician-employees of corporate
partners in the Medical Group;
(ii) Physician assistants, nurse practitioners, and other health care
professionals who provide services that are billable to patients
or third party payors (separate and apart from the billable
services provided by physicians); and
(iii) Technicians who perform diagnostic tests or procedures.
(b) With respect to each of the Medical Personnel, the Management Company
shall verify educational and employment experience, licensure and insurability,
and shall review
-19-
<PAGE>
and provide the Medical Group with copies of any complaints contained in public
files with applicable state and federal sanctioned commissions.
3.14 Insurance. The Management Company shall provide the insurance coverage
described in Sections 12.1 and 12.2 of this Agreement.
3.15 Files and Records.
(a) To the extent permitted by applicable law, the Management Company shall
supervise and maintain custody of all files and records relating to the
operation of the business of the Medical Group, including, without limitation,
accounting, billing, collection, or patient medical records. The management of
all files and records shall be in compliance with applicable state and federal
statutes. Business records of the Medical Group created and/or maintained by the
Management Company shall be the joint property of the Management Company and the
Medical Group and shall at all times be located at a location that is readily
accessible to the parties. Patient medical records shall at all times be and
remain the property of the Medical Group and shall be located at a location that
is readily accessible for patient care. The Management Company shall preserve
the confidentiality of patient medical records and use information contained in
such records only for the limited purposes necessary to perform the management
services set forth herein; provided, however, that in no event shall a breach of
such confidentiality be deemed a default under this Agreement if the Management
Company acted reasonably and in good faith to protect such confidentiality.
(b) The Management Company shall provide all off site storage of files and
records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the
Commencement Date. Any change in such policies shall be subject to the approval
of the Operations Committee.
3.16 Managed Care Contracts. The Management Company shall solicit,
negotiate and administer all managed care contracts on behalf of the Medical
Group based on parameters and
-20-
<PAGE>
criteria established by the Operations Committee. Such services shall be
performed by the Management Company as agent of the Medical Group, and all
managed care contracts shall be subject to the Medical Group's prior approval of
any such contract. The Management Company shall prepare cost forecasts and other
analyses as reasonably requested by the Medical Group in order to allow the
Medical Group to make an informed decision with respect to each proposed
contract.
3.17 Budgets. The Management Company shall prepare, for the review and
approval of the Operations Committee, annual operating budgets (the "Budgets")
reflecting in reasonable detail projected Billings, Collections, Medical Group
Costs, and Management Company Operating Costs; provided, however, that the
Medical Group shall provide the Management Company with a proposed Budget
covering the initial three-month period under this Agreement. The initial
Budget, which shall be applicable to the period commencing on the Commencement
Date and ending three (3) months thereafter, is attached hereto as Schedule II.
All other budgets shall be on a calendar year basis. The Management Company
shall prepare and submit to the Operations Committee all subsequent Budgets on
or before December 15 of the year immediately preceding the calendar year to
which such Budgets are applicable.
3.18 Force Majeure. The Management Company shall not be liable to the
Medical Group for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies,
changes in applicable law or regulations or other events over which the
Management Company has no control for so long as such events continue and for a
reasonable time thereafter.
SECTION 4. Equity Participation. In consideration of the Medical Group's
entering into this Agreement, the Management Company shall provide to the
persons identified in Schedule III attached hereto (the "Eligible Parties") the
consideration set forth on Schedule III.
SECTION 5. Costs, Compensation, and Other Payments.
5.1 Bank Accounts. The Medical Group shall instruct the Medical Group Bank
to transfer, on a weekly basis, all funds in the Medical Group Collections
Account (less the amount
-21-
<PAGE>
necessary to avoid the payment of bank charges or fees relating to the failure
to maintain a minimum balance in the Medical Group Collections Account) to a
bank (the "Management Company Bank") designated by the Management Company, for
credit to an account in the Management Company's name (the "Operating Account").
All interest earned on the funds on deposit in the Operating Account shall be
for the account of the Management Company.
5.2 Payments. The Management Company shall pay all of the Medical Group
Compensation and all of the Management Company Costs, as hereinafter defined,
and the Management Company shall be entitled to retain for itself the Management
Fee, as hereinafter defined. The Management Company may disburse funds from the
Operating Account only for the purposes specified in this Section 5, including
without limitation for the payment of Medical Group Compensation, Authorized
Management Company Operating Costs, and the Management Fee. If at any time there
are insufficient funds in the Operating Account to satisfy any of the payment
obligations of the Management Company under this Agreement, the Management
Company shall satisfy such obligations from other funds of the Management
Company, and the Management Company may thereafter reimburse itself such amounts
from the Operating Account.
5.3 Medical Group Compensation.
(a) Monthly Draw.
(i) On each Draw Date during the Term hereof, the Management Company shall
distribute to the Medical Group an amount equal to a percentage (the "Draw
Percentage") of the Medical Group's total Billings for Medical Group Services
provided during the previous month (the "Monthly Draw"). The Draw Date and the
initial Draw Percentage are as set forth in Schedule IV, and the Draw Percentage
shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each year thereafter,
the Draw Percentage shall be adjusted to equal a fraction, the numerator of
which is the Annual Medical Group Compensation Amount for the previous year, and
the denominator of which is the total amount of Billings for the previous year.
-22-
<PAGE>
(b) Annual Settlement.
(i) On or before April 30, 1998, and on or before April 30 of each year
thereafter, the Management Company shall calculate the following (the "Annual
Medical Group Compensation Amount"):
(A) The total Collections for all Medical Group Services rendered during
the previous calendar year, less --
(B) the sum of the following:
(1) the Management Fee earned by the Management Company for the
previous calendar year; and
(2) the Authorized Management Company Operating Costs incurred by the
Management Company during the previous calendar year.
(ii) If the Annual Medical Group Compensation Amount thus determined
exceeds the total of the twelve (12) Monthly Draws paid by the Management
Company to the Medical Group during the previous calendar year (the "Annual Draw
Amount"), the Management Company shall pay to the Medical Group on or before May
15, an amount equal to such excess. If the Annual Draw Amount for the previous
calendar year exceeds the Annual Medical Group Compensation Amount for the
previous calendar year, the Management Company shall withhold from the Medical
Group Compensation otherwise payable to the Medical Group, during each of the
following six (6) months, an amount equal to one-sixth (1/6) of such excess.
(iii) For purposes of determining the total Collections for all Medical
Group Services provided during any calendar year, all Collections during
January, February, and March of each year shall be deemed to be for Medical
Group Services rendered during the previous calendar year, and all Collections
during April through December shall be deemed to be for Medical Group Services
rendered during the calendar year in which such Collections were received;
provided, however, that for purposes of determining the total Collections during
the period commencing on the Commencement Date and ending December 31, 1997, all
Collections from and after the Commencement Date through March 31, 1998, shall
be deemed to be for
-23-
<PAGE>
Medical Group Services rendered during the period commencing on the Commencement
Date and ending December 31, 1997. Notwithstanding the foregoing, the Management
Fee applicable to any calendar year shall be based on the Collections actually
received during such calendar year.
(iv) Notwithstanding anything to the contrary set forth herein, the first
period for which the annual settlement described in this Section 5.3(b) shall be
applicable is the period commencing on the Commencement Date and ending on
December 31, 1997.
(c) Notwithstanding the provisions of Section 5.1, in the event that the
Medical Group has not received from the Management Company all or any portion of
the Monthly Draw on or before the third business day following the Draw Date, or
in the event that the Medical Group has not received from the Management Company
all or any portion of any amount payable to the Medical Group pursuant to
Section 5.3(b)(ii) on or before the third business day following the date on
which such payment is required to be made under the terms of Section 5.3(b)(ii),
without limiting any other right or remedy that the Medical Group may have under
this Agreement or under applicable law, the Medical Group shall have the right
to immediately withdraw such amount directly from the Medical Group Collections
Account.
(d) For purposes of this Agreement --
(i) "Billings" means, for any applicable period, the gross charges of
the Medical Group for all Medical Group Services furnished during
such period.
(ii) "Collections" means, for any applicable period, all cash or cash
equivalents received during such period, net of refunds paid
during such period, for Medical Group Services.
(iii) "Medical Group Services" means the following services rendered
by, through, or on behalf of the Medical Group: all professional
-24-
<PAGE>
services rendered by or under the supervision of any of the
Medical Personnel (including professional services rendered in
connection with New Ancillary Services); all diagnostic radiology
services rendered by or under the supervision of any of the
Medical Personnel; all other ancillary services (other than New
Ancillary Services); all prosthetics, prosthetic devices,
orthotics, braces, splints, appliances, and other items and
supplies that are billable to patients or to third party payors;
depositions, record review services, court appearances,
independent medical exams, athletic team services; bookkeeping
fees received from SCORE and from FDP Development, Inc.; and
those services of Stephen J. Snyder, M.D. which are compensated
through the payment of royalties (other than book royalties), a
current list of which is attached hereto as Schedule IX.
(iv) It is the intent of the parties that Billings, Collections, and
Medical Group Services not include any of the following: New
Ancillary Services (excluding professional services rendered by
Medical Personnel in connection therewith, which professional
services are included under Section 5.3(d)(iii) above), interest
income, income from the HealthSouth Rehabilitation Corporation
with respect to a Services Agreement under which computer, linen,
and telephone support services are provided; royalties payable to
any Medical Group physician (except Stephen J. Snyder, M.D.) for
medical inventions; fees payable under consulting agreements
entered into by Medical Group physicians (including Stephen J.
Snyder, M.D.); income from presentations, writings, and
endorsements; proceeds from the sale of any capital assets of the
Medical Group; and any income from investments.
-25-
<PAGE>
5.4 Management Fee.
(a) The compensation payable to the Management Company for the provision of
Management Services under this Agreement (the "Management Fee"), which the
Management Company may disburse from the Operating Account from time to time at
its discretion, shall be equal to the aggregate of the following:
(i) An amount equal to the Applicable Percentage of Collections,
provided that the amount thus determined shall be reduced by the
Medical Equipment Master Lease Payments; and
(ii) An amount equal to sixty-six and two-thirds percent (66-2/3%) of
the Professional Practice Cost Savings.
(b) For purposes of this Section 5.4, "Applicable Percentage" has the
meaning set forth in Schedule V.
(c) For purposes of this Agreement, "Office Sublease Payments" means the
aggregate of the monthly lease amounts payable under all of the Office Subleases
described in Section 3.2 hereof.
(d) For purposes of this Agreement, "Medical Equipment Master Lease
Payments" means the monthly lease amounts payable for all Medical Equipment
determined in accordance with the Medical Equipment Master Lease Agreement
referenced in Section 3.3(a) hereof.
(e) For purposes of this Section 5.4, "Professional Practice Cost Savings"
means the cost savings determined in the manner described in Schedule VI.
(f) An example of the computation of Medical Group Compensation and the
Management Fee is attached hereto as Schedule VII.
-26-
<PAGE>
5.5 Management Company Costs.
(a) The Management Company shall pay all Management Company Operating Costs
and all Excluded Costs (collectively, the "Management Company Costs").
(Authorized Management Company Operating Costs may be paid from the Operating
Account, but Excluded Costs shall be paid from a separate account of the
Management Company.) All Management Company Costs shall be incurred in the name
of the Management Company, and not in the name of the Medical Group, except as
specifically approved by the Medical Group. Management Company Costs shall not
include any costs or expenses incurred prior to the Commencement Date of this
Agreement.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the Management
Company Costs.
(c) For purposes of this Agreement, "Management Company Operating Costs"
means all costs and expenses incurred in connection with the provision of the
Management Services, except for any costs and expenses defined as Medical Group
Costs in Section 5.7 hereof, and except for Excluded Costs. "Excluded Costs"
means all of the following costs and expenses incurred in connection with the
provision of the Management Services hereunder:
(i) New Medical Office Start-Up Costs;
(ii) The rent and any other payments due under any of the Office
Leases;
(iii) The cost of any Medical Equipment leased by the Management
Company to the Medical Group;
(iv) The cost of any FF&E provided by the Management Company to the
Medical Group;
(v) Depreciation, amortization, and interest; and
(vi) Corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the following
conditions are satisfied:
-27-
<PAGE>
(A) The Corporate Overhead is incurred in lieu of a pre-existing
Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not exceed the amount
of the Management Company Operating Costs being eliminated; and
(C) The Corporate Overhead is allocated to the Medical Group and to
all other medical groups utilizing such Corporate Overhead on a
pro rata basis.
Any Corporate Overhead with respect to which all of the above
conditions are satisfied shall be considered Management Company
Operating Costs.
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in any
year reduced by any or all of the following, as applicable:
(i) any costs that exceed the applicable Management Company Operating
Costs Budget which are not approved by the Operations Committee;
(ii) any costs with respect to which the Medical Group has reasonably
requested supporting documentation or other backup detail which
has not been furnished by the Management Company or which does
not reasonably establish the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an audit under
Section 5.9 not to have been reasonably incurred in connection
with the Management Services required to be provided under of
this Agreement.
-28-
<PAGE>
5.6 New Medical Office Start-Up Costs.
(a) The Management Company shall pay all New Medical Office Start-Up Costs
incurred in connection with the establishment of any New Medical Office.
(b) All Medical Equipment utilized at any New Medical Office shall be
acquired by the Management Company and leased to the Medical Group in accordance
with Section 3.3 hereof.
(c) For purposes of this Agreement, "New Medical Office" means any office
of the Medical Group other than those offices located in the premises identified
in Sections 3.2(a) and 3.2(b) hereof.
(d) For purposes of this Agreement, "New Medical Office Start-Up Costs"
means the following costs incurred in connection with the establishment of a New
Medical Office during the New Medical Office Start-Up Period: all Management
Company Costs and all costs other than physician Medical Personnel costs that,
but for this provision, would have been considered Medical Group Costs.
(e) For purposes of this Agreement, "New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of a New Medical Office and ending on the
earlier of (i) the last day of the calendar month in which a period of eighteen
(18) months has elapsed from and after the date on which the New Medical Office
first opened for the treatment of patients, or (ii) the last day of the first
period of two (2) consecutive calendar months for which the costs borne by the
Management Company in connection with the New Medical Office are less than sixty
percent (60%) of the Collections for Medical Group Services provided at the New
Medical Office during such two-month period. In no event shall the Management
Company have any obligation under this Section 5.6 to pay any New Medical Office
Start-Up Costs incurred later than eighteen (18) months after the New Medical
Office first opened for the treatment of patients.
-29-
<PAGE>
5.7 Medical Group Costs. Except as otherwise provided in this Agreement,
the Medical Group shall pay all of the costs specified in this Section 5.7 (the
"Medical Group Costs"). All Medical Group Costs shall be incurred in the name of
the Medical Group, and not in the name of the Management Company, and shall be
paid from an account of the Medical Group and not from the Operating Account of
the Management Company. The Medical Group Costs are as follows:
(a) Compensation of all Medical Personnel;
(b) Any applicable fringe benefits for all Medical Personnel, including,
but not limited to, payroll taxes, workers' compensation, health
insurance (including drug coverage), dental insurance, individual
disability insurance, life insurance, business buy-out disability
insurance, continuing education, and medical dues and licenses;
(c) The cost of prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, allografts, x-ray films, and other items and
supplies that are billable to patients or to third party payors (the
"Billable Items");
(d) The Medical Equipment Master Lease Payments;
(e) Any lease payments for New Ancillary Service Medical Equipment;
(f) Rent for the Van Nuys Office and any other offices leased by the
Medical Group;
(g) The Office Sublease Payments; and
(h) The cost of any items which are not required to be provided by the
Management Company under this Agreement and/or which were ordered,
purchased, or incurred by the Medical Group directly, including but
not limited to the cost of accounting, legal, consulting, or other
professional or advisory services, business meetings, and business
taxes.
5.8 New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
-30-
<PAGE>
(i) The Management Company shall create a separate division
("Ancillary Division") for purposes of accounting for the income, costs,
profits, and losses of any New Ancillary Service. The Management Company
shall utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of each New
Ancillary Service.
(ii) Profits and/or losses of any Ancillary Division shall be divided
equally between the Medical Group and the Management Company, and all
distributions to the Medical Group and to the Management Company shall be
made in equal amounts to each from available cash (after payment of all
currently due obligations incurred in connection with such New Ancillary
Division, including without limitation any principal and interest amounts
then due and payable under Section 5.8(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such Ancillary Division.
(iii) All diagnostic and therapeutic equipment utilized in connection
with any New Ancillary Service ("New Ancillary Service Medical Equipment")
shall be acquired by the Management Company and leased to the Medical Group
pursuant to an equipment lease substantially in the form of the Medical
Equipment Master Lease Agreement attached hereto as Exhibit F.
(iv) The Management Company shall pay all of the Ancillary Service
Start-Up Costs. Beginning with the month following the expiration of the
Ancillary Service Start-Up Period, the Management Company shall be entitled
to recoup all of the Ancillary Service Start-Up Costs previously paid by
the Management Company in sixty (60) equal monthly installments of
principal, plus interest on the unrecouped portion of such costs at the
prevailing prime rate as set forth in the Wall Street Journal and/or at the
actual rate paid by the Management Company with respect to any part of such
costs that have been financed by the Management Company.
(v) The Management Company shall provide, in connection with any New
Ancillary Service, the full range of management services described in this
agreement.
-31-
<PAGE>
(vi) The billings, collections, costs and expenses relating to any New
Ancillary Service shall not be included in the computations of Medical
Group Compensation, the Management Fee, Management Company Costs, New
Medical Office Start-Up Costs, or Medical Group Costs as described in
Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively.
(b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of the New Ancillary Service and ending on the
last day of the first period of two (2) consecutive calendar months for which
the New Ancillary Service shows a profit.
(c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs"
means the total of all of the following costs incurred in connection with the
establishment of a New Ancillary Service during the Ancillary Service Start-Up
Period (whether such costs would otherwise be considered Management Company
Costs or Medical Group Costs) --
(i) Any lease payments for New Ancillary Service Medical Equipment;
(ii) All costs of acquiring furniture, fixtures, and office equipment;
(iii) All initial occupancy costs, if any, including but not limited
to rent deposits, prepaid rent, and tenant improvements;
(iv) All other start-up costs, including but not limited to legal,
accounting and consulting fees, and the cost of initial
inventories of supplies and other items; and
(v) All ongoing costs of the New Ancillary Service, including but not
limited to personnel (other than physician Medical Personnel) and
related benefits, the cost of operating any equipment utilized in
providing the service, supplies, insurance, rent, repairs and
-32-
<PAGE>
maintenance, outside services, telephone, taxes, utilities,
storage and other ordinary ongoing expenses of providing the New
Ancillary Service.
5.9 Review and Audit of Books and Records. Each of the parties shall have
the right, during ordinary business hours and upon reasonable notice, to review
and make copies of, or to audit through a qualified certified public accountant
approved by the other party (which approval shall not be unreasonably withheld),
the books and records of the other party relating to the billing, collection,
and disbursement of fees, and the determination of costs, under this Agreement.
Any such review or audit shall be performed at the cost of the requesting party;
provided, however, that in the event that such review or audit requested by the
Medical Group discloses a discrepancy indicating that the Medical Group has
actually been underpaid by an amount in excess of two percent (2%) of the total
amount of Medical Group Compensation payable to the Medical Group for the period
covered by the audit, the cost of the audit shall be borne by the Management
Company. All documents and other information obtained in the course of such
review or audit shall be held in strict confidence.
5.10 Start-Up Period. Consistent with the provisions of Section 2 of this
Agreement, the parties acknowledge and agree that, in order to facilitate the
transition of responsibilities hereunder, certain requirements and procedures
agreed to under this Agreement may be implemented over the course of a period of
time commencing on the Commencement Date and ending December 31, 1996 (subject
to extension by agreement of the Medical Group and the Management Company),
rather than being fully implemented immediately on the Commencement Date.
Accordingly, the parties further agree that the Management Fee and Medical Group
Compensation payable in respect of the Management Services and the Medical Group
Services applicable to such period of time shall be computed, and any
appropriate adjustments shall be made, such that no material financial advantage
or disadvantage shall accrue to either party as a result of implementing such
requirements and procedures over the course of such start-up period rather than
immediately on the Commencement Date.
-33-
<PAGE>
SECTION 6. Representations and Warranties of the Medical Group. The Medical
Group hereby represents and warrants to the Management Company, as of the
Signature Date hereof, as follows:
6.1 Organization; Good Standing; Qualification and Power. The Medical Group
is a general partnership duly organized, validly existing, and in good standing
under the laws of the State of California and has all requisite power and
authority to own, lease, and operate its properties, to carry on its business as
now being conducted and as proposed to be conducted, to enter into this
Agreement, the Asset Purchase Agreement, the Medical Equipment Master Lease,
each Assignment of Lease, each Office Sublease, and each Stockholder
Non-Competition Agreement (collectively, the "Medical Group Transaction
Documents"), to perform its obligations thereunder, and to consummate the
transactions contemplated hereby and thereby. The Medical Group has delivered to
the Management Company a true and correct copy of its General Partnership
Agreement, in effect on the date hereof.
6.2 Equity Investments. The Medical Group currently has no subsidiaries,
nor does the Medical Group currently own any capital stock or other proprietary
interest, directly or indirectly, in any corporation, association, trust,
partnership, joint venture, or other entity.
6.3 Authority. The execution, delivery and performance of the Medical Group
Transaction Documents and the consummation of the transactions contemplated
thereby have been duly and validly authorized by all necessary action on the
part of the Medical Group. The Medical Group Transaction Documents have been
duly and validly executed and delivered by the Medical Group and constitute the
legal, valid and binding obligations of the Medical Group enforceable in
accordance with their respective terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally or by applicable laws pertaining to
the enforceability of non-competition agreements. Neither the execution,
delivery or performance of the Medical Group Transaction Documents by the
Medical Group nor the consummation by the Medical Group of the transactions
contemplated hereby or thereby, nor compliance by the Medical Group with any
provision hereof or thereof will (a) conflict with or result in a breach of any
provision of the
-34-
<PAGE>
formation documents of the Medical Group, (b) cause a default (with due notice,
lapse of time or both), or give rise to any right of termination, cancellation
or acceleration, under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument, obligation or
agreement to which the Medical Group or the Medical Business is a party or by
which they or any of its respective properties or assets may be bound (with
respect to which defaults or other rights all requisite waivers or consents
shall have been obtained at or prior to the date hereof) or (c) to the best
knowledge of the Medical Group, but without expressing any opinion regarding the
enforceability of non-competition agreements, violate any law, statute, rule or
regulation or order, writ, judgment, injunction or decree of any court,
administrative agency or governmental body applicable to the Medical Group, the
Medical Business or any of their respective properties or assets. To the best
knowledge of the Medical Group, no permit, authorization, consent or approval of
or by, or any notification of or filing with, any person (governmental or
private) is required in connection with the execution, delivery or performance
by the Medical Group of the Medical Group Transaction Documents or the
consummation of the transactions contemplated thereby.
6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's
internal statements of assets, liabilities and partners' equity of the Medical
Business at September 30, 1996 (the "Balance Sheet"; and the date thereof being
referred to as the "Balance Sheet Date"), and the related internal statements of
revenue and expenses for the period then ended (including the notes thereto and
other financial information included therein) (collectively, the "Internal
Financial Statements"), and (b) the review financial statements of the Medical
Business for the periods ended December 31, 1995 and December 31, 1994 (the
"Review Financial Statements"). The Internal Financial Statements and the Review
Financial Statements (i) were prepared in accordance with the books and records
of the Medical Business, (ii) fairly present the financial position of the
Medical Business as of the dates thereof, and (iii) are true, correct and
complete in all material respects as of the dates thereof.
6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule
6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any
material liability of any nature (matured or unmatured, fixed or contingent,
known or unknown) which was not provided
-35-
<PAGE>
for or disclosed on the Balance Sheet, (b) all liability reserves established by
the Medical Business on the Balance Sheet were adequate and (c) there were no
loss contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March
1975) which were not adequately provided for or disclosed on the Balance Sheet.
6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the
Balance Sheet Date, the Medical Business has been operated in the ordinary
course and consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working
capital and the components thereof), liabilities, operations, results of
operations, earnings, business or prospects of the Medical Business;
(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Medical Business;
(c) any obligation or liability (whether absolute, accrued, contingent
or otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Medical Business
other than such items created or incurred in the ordinary course of the
Medical Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Medical Business outside the
ordinary course of the Medical Business (whether absolute, accrued,
contingent or otherwise and whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition
of any tangible or intangible asset of the Medical Business except in the
ordinary course of the Medical Business and consistent with past practice;
-36-
<PAGE>
(f) any write-off as uncollectible of any accounts receivable in
connection with the Medical Business or any portion thereof in excess of
$5,000 in the aggregate exclusive of all normal contractual adjustments
from third party payors;
(g) except for all normal contractual adjustments from third party
payors, any account receivable in connection with the Medical Business in
an amount greater than $10,000 which (i) has become delinquent in its
payment by more than 90 days, (ii) has had asserted against it any claim,
refusal to pay or right of set-off, (iii) an account debtor has refused to
pay for any reason or with respect to which such account debtor has become
insolvent or bankrupt or (iv) has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Medical
Business;
(i) any general uniform increase in the compensation of employees of
the Medical Group or the Medical Business (including, without limitation,
any increase pursuant to any bonus, pension, profit-sharing, deferred
compensation arrangement or other plan or commitment) or any increase in
compensation payable to any officer, employee, consultant or agent thereof,
or the entering into of any employment contract with any officer or
employee, or the making of any loan to, or the engagement in any
transaction with, any officer of the Medical Group or the Medical Business;
(j) any change in the accounting methods or practices followed in
connection with the Medical Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) the termination of any partner and/or key employee of the Medical
Group or the Medical Business listed on Annex A ("Medical Group Key
Personnel"), or any expression of intention by any of the Medical Group Key
Personnel to terminate such partnership status or employment with the
Medical Group or the Medical Business;
-37-
<PAGE>
(l) any agreement or commitment relating to the sale of any material
fixed assets of the Medical Business;
(m) any other transaction relating to the Medical Business other than
in the ordinary course of the Medical Business and consistent with past
practice; or
(n) any agreement or understanding, whether in writing or otherwise,
for the Medical Business to take any of the actions specified in items (a)
through (m) above.
6.7 Tax Matters.
(a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the
Medical Business required to be paid by the Medical Group through the date
hereof have been paid and all returns, declarations of estimated Tax, Tax
reports, information returns and statements required to be filed by the Medical
Group in connection with the Medical Business prior to the date hereof (other
than those for which extensions shall have been granted prior to the date
hereof) relating to any Taxes with respect to any income, properties or
operations of the Medical Group prior to the date hereof (collectively,
"Returns") have been duly filed; (ii) as of the time of filing, the Returns
correctly reflected in all material respects (and, as to any Returns not filed
as of the date hereof, will correctly reflect in all material respects) the
facts regarding the income, business, assets, operations, activities and status
of the Medical Business and any other information required to be shown therein;
(iii) all Taxes relating to the operations of the Medical Business that have
been shown as due and payable by the Medical Group on the Returns have been
timely paid and filed or adequate provisions made to the books and records of
the Medical Business; (iv) in connection with the Medical Business (x) the
Medical Group has made provision on the Balance Sheet for all Taxes payable by
the Medical Group for any periods that end on or before the Balance Sheet Date
for which no Returns have yet been filed and for any periods that begin on or
before the Balance Sheet Date and end after the Balance Sheet Date to the extent
such Taxes are attributable to the portion of any such period ending on the
Balance Sheet Date and (y) provision has been made for all Taxes payable by the
Medical Group for any periods that end on or before the date hereof for which no
Returns have then been filed and for any periods that begin on or before the
date hereof and end after such date to the extent such
-38-
<PAGE>
Taxes are attributable to the portion of any such period ending on such date;
(v) no tax liens have been filed with respect to any of the assets of the
Medical Business, and there are no pending tax audits of any Returns relating to
the Medical Business; and (vi) no deficiency or addition to Taxes, interest or
penalties applicable to the Medical Group for any Taxes relating to the
operation of the Medical Business has been proposed, asserted or assessed in
writing (or any member of any affiliated or combined group of which the Medical
Group or any previous operator of the Medical Business was a member for which
the Medical Group could be liable).
(b) The Medical Group is not a foreign person within the meaning of
Sections 1.1445-2(b) of the Regulations under Section 1445 of the Code.
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal, state and foreign Returns of the Medical Group
for the calendar years ending December 31, 1994 and 1995.
(d) For purposes of this Agreement, "Tax" means any of the Taxes and
"Taxes" means, with respect to any person or entity, (i) all federal, state,
local and foreign income taxes (including any tax on or based upon net income,
or gross income, or income as specially defined, or earnings, or profits, or
selected items of income, earnings or profits) and all Federal, state, local and
foreign gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties or other Federal, state, local and foreign taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) on such person or entity and (ii) any liability for the payment of
any amount of the type described in the immediately preceding clause (i) as a
result of being a `transferee' (within the meaning of Section 6901 of the Code
or any other applicable law) of another person or entity or a member of an
affiliated or combined group.
6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a)
actions, suits, claims, investigations or legal or administrative or arbitration
proceedings pending or, to
-39-
<PAGE>
the best knowledge of the Medical Group, threatened against the Medical Group or
in connection with the Medical Business, whether at law or in equity, or before
or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality or (b) judgments, decrees,
injunctions or orders of any court, governmental department, commission, agency,
instrumentality or arbitrator against the Medical Group, its assets or affecting
the Medical Business. The Medical Group has delivered to the Management Company
all documents and correspondence relating to matters referred to in said
Schedule 6.8.
6.9 Compliance; Governmental Authorizations. The Medical Group and the
Medical Business shall have complied in all material respects with all
applicable material Federal, state, local or foreign laws, ordinances,
regulations and orders. The Medical Group has all Federal, state, local and
foreign governmental licenses and permits necessary in the conduct of the
Medical Business, the lack of which would have a material adverse effect on the
Medical Group's ability to operate the Medical Business after the date hereof on
substantially the same basis as presently operated, such licenses and permits
are in full force and effect, the Medical Group has not received any notice
indicating that any violations are or have been recorded in respect of any
thereof, and no proceeding is pending or, to the best knowledge of the Medical
Group, threatened to revoke or limit any thereof. To the best knowledge of the
Medical Group, none of such licenses and permits shall be affected in any
material respect by the transactions contemplated hereby.
6.10 Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts receivable
owing to the Medical Group in connection with the Medical Business as of the
date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Medical Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Medical Group, there are no claims, refusals to pay or other
rights of set-off against any thereof. Except as set forth on Schedule 6.10, as
of the date hereof, there is (i) no account debtor or note debtor of the Medical
Business delinquent in its payment by more than 60 days, (ii) no account debtor
or note debtor of the Medical Business who or which
-40-
<PAGE>
has refused to pay its obligations for any reason or is the subject of a
bankruptcy proceeding and (iii) no account receivable or note receivable of the
Medical Business pledged to any third party.
(b) All accounts payable and notes payable by the Medical Business to third
parties arose in the ordinary course of business and, except as set forth in
Schedule 6.10, there is no account payable or note payable past due or
delinquent in its payment.
6.11 Labor Relations; Employees. Schedule 6.11 contains a true and complete
list of the persons employed by the Medical Group as of the date hereof (the
"Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and
the Medical Business are not delinquent in payments to any of the Employees for
any wages, salaries, commissions, bonuses or other compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to the
Employees; (b) upon termination of the employment of any of the Employees,
neither the Medical Group, the Medical Business nor the Management Company will
by reason of anything done prior to the date hereof, or by reason of the
consummation of the transactions contemplated hereby, be liable for any excise
taxes pursuant to Section 4980B of the Code or to any of the Employees for
severance pay or any other payments; (c) there is no unfair labor practice
complaint against the Medical Group or in connection with the Medical Business
pending before the National Labor Relations Board or any comparable state, local
or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage
actually pending or, to the best knowledge of the Medical Group, threatened
against or involving the Medical Group or Medical Business; (e) there is no
collective bargaining agreement covering any of the Employees; and (f) to the
best knowledge of the Medical Group, no Employee or consultant is in violation
of any (i) employment agreement, arrangement or policy between such person and
any previous employer (private or governmental) or (ii) agreement restricting or
prohibiting the use of any information or materials used or being used by such
person in connection with such person's employment by or association with the
Medical Group or the Medical Business.
6.12 Employee Benefit Plans.
(a) Schedule 6.12 identifies each `employee benefit plan', as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and all
-41-
<PAGE>
other written or oral plans, programs, policies or agreements involving direct
or indirect compensation (including any employment agreements entered into
between the Medical Group or the Medical Business and any Employee or former
employee of the Medical Group or in connection with the Medical Business, but
excluding workers' compensation, unemployment compensation and other
government-mandated programs) currently or previously maintained or entered into
by the Medical Group or in connection with the Medical Business for the benefit
of any Employee or former employee of the Medical Group or in connection with
the Medical Business under which the Medical Group, any affiliate thereof or the
Medical Business has any present or future obligation or liability (the
"Employee Plans"). The Medical Group has provided the Management Company with
true and complete age, salary, service and related data for Employees of the
Medical Group and in connection with the Medical Business.
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Medical Group or in connection with the Medical Business.
6.13 Insurance. Schedule 6.13 contains a list of all policies of
professional liability (medical malpractice), general liability, theft,
fidelity, fire, product liability, errors and omissions, health and other
property and casualty forms of insurance held by the Medical Group covering the
assets, properties or operations of the Medical Group and the Medical Business
(specifying the insurer, amount of coverage, type of insurance, policy number
and any pending claims thereunder). All such policies of insurance are valid and
enforceable policies and are outstanding and duly in force and all premiums with
respect thereto are currently paid. Neither the Medical Group nor its
predecessor in interest has, during the last five fiscal years, been denied or
had revoked or rescinded any policy of insurance relating to the assets,
properties or operations of the Medical Group or the Medical Business.
-42-
<PAGE>
6.14 Real Property. Schedule 6.14 sets forth an accurate and complete legal
description of the entire right, title and interest of the Medical Group in and
to all real property, together with all buildings, facilities, fixtures and
improvements located on such real property, owned or leased by the Medical Group
(the "Real Property"), together with an accurate description of the title
insurance policy or other evidence of title issued with respect thereto, the
most current survey of such real property and a description of the use thereof.
Other than the Real Property, the Medical Group has no other interest (leasehold
or otherwise) in real property used, held for use or intended to be used in the
Medical Business. The Medical Group has a valid leasehold interest in all Real
Property leased by the Medical Group.
6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15, neither
the Medical Group nor the Medical Business is bound by any oral or written
agreement or contract which by its terms prohibits it from conducting the
Medical Group or the Medical Business (or any material part thereof).
6.16 Disclosure. Neither the Medical Group Transaction Documents (including
the Exhibits and Schedules attached thereto) nor any other document, certificate
or written statement furnished to the Management Company by or on behalf of the
Medical Group in connection with the transactions contemplated hereby contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. Except as set forth on Schedule 6.16, there have been no events or
transactions, or information which has come to the attention of the Medical
Group, which, as they relate directly to the Medical Group or the Medical
Business, could reasonably be expected to have a material adverse effect on the
business, operations, affairs, prospects or condition of the Medical Group and
the Medical Business.
SECTION 7. Representations and Warranties of the Management Company. The
Management Company represents and warrants to the Medical Group, as of the
Signature Date hereof, as follows:
-43-
<PAGE>
7.1 Organization, Good Standing and Power. The Management Company (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and (b) has all requisite corporate power and authority
to own, lease and operate its properties, to carry on its business as now being
conducted and as proposed to be conducted, to execute and deliver this
Agreement, the Asset Purchase Agreement, each Restricted Stock Agreement, the
Medical Equipment Master Lease, each Assignment of Lease, each Office Sublease,
and each Stockholder Non-Competition Agreement (collectively, the "Management
Company Transaction Documents"), to perform its obligations thereunder, and to
consummate the transactions contemplated hereby and thereby. The Management
Company has delivered to the Medical Group a true and correct copy of its
formation documents, consisting of the following: Amended and Restated
Certificate of Incorporation filed November 12, 1996 (the "BMJ Formation
Documents"). The BMJ Formation Documents have not been amended, and the BMJ
Formation Documents are in effect as of the date hereof.
7.2 Equity Investments. Except as identified in Schedule 7.2, the
Management Company currently has no subsidiaries, nor does the Management
Company currently own any capital stock or other proprietary interest, directly
or indirectly, in any corporation, association, trust, partnership, joint
venture, or other entity.
7.3 Capitalization.
(a) The total authorized capital of the Management Company consists of
10,000,000 shares of common stock and 5,000,000 shares of preferred stock. Set
forth in Schedule 7.3(a) is an accurate and complete listing of all of the
stockholders of the Management Company and the number and class of shares held
by each. Except as set forth in Schedule 7.3(a), the Management Company has no
other outstanding stock or securities of any kind or nature, and no shares of
capital stock are held by the Management Company in its treasury. Each of the
outstanding shares of capital stock has been duly and validly authorized and
issued, is fully paid and non-assessable, and was issued in compliance with all
applicable federal and state securities laws. Except as set forth in the
Stockholders Agreement (as hereinafter defined), no person is entitled to any
preemptive or similar right with respect to the issuance of any shares of
capital stock of the Management Company.
-44-
<PAGE>
(b) No sale of common stock has been effected or any other action taken the
effect of which sale or other action would require or permit an adjustment of
the Conversion Price of any issued and outstanding convertible preferred stock.
The exercise of the right of any holder of convertible preferred stock to
convert such stock to common stock on or as of the Commencement Date hereunder
would entitle such holder of preferred stock to receive one share of common
stock for each share of preferred stock.
(c) There are no outstanding warrants, options, calls, conversion rights or
commitments or other rights to subscribe for or purchase from the Management
Company any shares of capital stock of the Management Company or securities
convertible into or exchangeable for capital stock, except as set forth in
Schedule 7.3(c).
(d) The Management Company has taken all action necessary or appropriate to
duly authorize the creation, issuance and sale of the common stock to be issued
hereunder. Such shares of common stock, when issued, sold and delivered, as
provided for herein and in the Restricted Stock Agreements, will be validly
issued, fully paid and nonassessable, with no personal liability attaching to
the ownership of the shares. The issuance of such shares of common stock will
not violate any preemptive or similar right of any person.
7.4 Stockholders Agreement. The Management Company has delivered to the
Medical Group a true and correct copy of that certain Amended and Restated
Stockholders Agreement dated as of November 12, 1996 (the "Stockholders
Agreement"), entered into by and among the Management Company and the
stockholders identified therein. The Stockholders Agreement has not been
terminated or amended and remains in full force and effect.
7.5 Authority. The execution, delivery and performance of the Management
Company Transaction Documents, and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action on the part of the Management Company. The Management Company
Transaction Documents to which it is a party have been duly and validly executed
and delivered by the Management Company, and such Management Company Transaction
Documents are valid and binding obligations of the
-45-
<PAGE>
Management Company, enforceable in accordance with their respective terms except
as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally. Neither the execution, delivery or performance of the Management
Company Transaction Documents, nor the consummation by the Management Company of
the transactions contemplated thereby, nor compliance by the Management Company
with any provision thereof, will (a) conflict with or result in a breach of any
provisions of the BMJ Formation Documents or By-laws of the Management Company,
(b) cause a default (with due notice, lapse of time or both), or give rise to
any right of termination, cancellation or acceleration, under any of the terms,
conditions or provisions of any material note, bond, lease, mortgage, indenture,
license or other instrument, obligation or agreement to which the Management
Company is a party or by which it or any of its properties or assets is or may
be bound or (c) violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Management Company or any of its properties
or assets. Except as provided in Schedule 7.5, to the best of the Management
Company's knowledge, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery or performance by the
Management Company of this Agreement or the consummation by the Management
Company of the transactions contemplated hereby.
7.6 Financial Information. Schedule 7.6 contains (a) the unaudited
statements of assets, liabilities and stockholders' equity of the Management
Business at September 30, 1996 (the "Management Company Balance Sheet"; and the
date thereof being referred to as the "Management Company Balance Sheet Date"),
and the related unaudited statements of revenue and expenses for the periods
then ended (including the notes thereto and other financial information included
therein) (collectively, the "Unaudited Financial Statements"). The Unaudited
Financial Statements (i) were prepared in accordance with the books and records
of the Management Business, (ii) fairly present the financial position of the
Management Business as of the dates thereof, and (iii) are true, correct and
complete in all material respects as of the date thereof.
-46-
<PAGE>
7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule
7.7, as of the Management Company Balance Sheet Date, (a) the Management
Business did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Management Company Balance Sheet, (b) all liability reserves
established by the Management Business on the Management Company Balance Sheet
were adequate and (c) there were no loss contingencies (as such term is used in
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which were not adequately provided for
or disclosed on the Management Company Balance Sheet.
7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the
Management Company Balance Sheet Date, the Management Business has been operated
in the ordinary course and consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or otherwise),
assets (including, without limitation, levels of working capital and the
components thereof), liabilities, operations, results of operations, earnings,
business or prospects of the Management Business;
(b) any damage, destruction or loss (whether or not covered by insurance)
in an aggregate amount exceeding $25,000 affecting any asset or property of the
Management Business;
(c) any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Management Business
other than such items created or incurred in the ordinary course of the
Management Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien, encumbrance,
liability or obligation by the Management Business outside the ordinary course
of the Management Business (whether absolute, accrued, contingent or otherwise
and whether due or to become due);
-47-
<PAGE>
(e) any license, sale, transfer, pledge, mortgage or other disposition of
any tangible or intangible asset of the Management Business except in the
ordinary course of the Management Business and consistent with past practice;
(f) any write-off as uncollectible of any accounts receivable in connection
with the Management Business or any portion thereof in excess of $5,000 in the
aggregate exclusive of all normal contractual adjustments from third party
payors;
(g) except for all normal contractual adjustments from third party payors,
any account receivable in connection with the Management Business in an amount
greater than $10,000 which (i) has become delinquent in its payment by more than
90 days, (ii) has had asserted against it any claim, refusal to pay or right of
set-off, (iii) an account debtor has refused to pay for any reason or with
respect to which the Management Business, such account debtor has become
insolvent or bankrupt or (iv) has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(i) any general uniform increase in the compensation of employees of the
Management Company or the Management Business (including, without limitation,
any increase pursuant to any bonus, pension, profit-sharing, deferred
compensation arrangement or other plan or commitment) or any increase in
compensation payable to any officer, employee, consultant or agent thereof, or
the entering into of any employment contract with any officer or employee, or
the making of any loan to, or the engagement in any transaction with, any
officer of the Management Company or the Management Business;
(j) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
-48-
<PAGE>
(k) any termination of employment of any key employee of the Management
Company or the Management Business listed on Annex B (each, a "Management
Company Key Employee"), or any expression of intention by any Key Employee of
the Management Company or the Management Business to terminate such employment
with the Management Company or the Management Business;
(l) any agreement or commitment relating to the sale of any material fixed
assets of the Management Business;
(m) any other transaction relating to the Management Business other than in
the ordinary course of the Management Business and consistent with past
practice; or
(n) any agreement or understanding, whether in writing or otherwise, for
the Management Business to take any of the actions specified in items (a)
through (m) above.
7.9 Tax Matters.
(a) Except as set forth on Schedule 7.9, (i) all Taxes relating to the
Management Business required to be paid through the date hereof have been paid
and all returns, declarations of estimated Tax, Tax reports, information returns
and statements required to be filed in connection with the Management Business
prior to the date hereof (other than those for which extensions shall have been
granted prior to the date hereof) relating to any Taxes with respect to any
income, properties or operations of the Management Company prior to the date
hereof (collectively, "Management Company Returns") have been duly filed; (ii)
as of the time of filing, the Management Company Returns correctly reflected in
all material respects (and, as to any Management Company Returns not filed as of
the date hereof, will correctly reflect in all material respects) the facts
regarding the income, business, assets, operations, activities and status of the
Management Business and any other information required to be shown therein;
(iii) all Taxes relating to the operations of the Management Business that have
been shown as due and payable on the Management Company Returns have been timely
paid and filed or adequate provisions made to the books and records of the
Management Business; (iv) in connection with the Management Business (x) the
Management Company has made provision on the Management
-49-
<PAGE>
Company Balance Sheet for all Taxes payable for any periods that end on or
before the Management Company Balance Sheet Date for which no Management Company
Returns have yet been filed and for any periods that begin on or before the
Management Company Balance Sheet Date and end after the Management Company
Balance Sheet Date to the extent such Taxes are attributable to the portion of
any such period ending on the Management Company Balance Sheet Date and (y)
provision has been made for all Taxes payable for any periods that end on or
before the date hereof for which no Management Company Returns have then been
filed and for any periods that begin on or before the date hereof and end after
such date to the extent such Taxes are attributable to the portion of any such
period ending on such date; (v) no tax liens have been filed with respect to any
of the assets of the Management Business, and there are no pending tax audits of
any Management Company Returns relating to the Management Business; and (vi) no
deficiency or addition to Taxes, interest or penalties for any Taxes relating to
the operation of the Management Business has been proposed, asserted or assessed
in writing (or any member of any affiliated or combined group of which the
Management Company or any previous operator of the Management Business was a
member for which the Management Company could be liable).
(b) The Management Company is not a foreign person within the meaning of
Sections 1.1445-2(b) of the Regulations under Section 1445 of the Code.
7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no
(a) actions, suits, claims, investigations or legal or administrative or
arbitration proceedings pending or, to the best knowledge of the Management
Company, threatened against the Management Company or in connection with the
Management Business, whether at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or (b) judgments, decrees, injunctions or orders of
any court, governmental department, commission, agency, instrumentality or
arbitrator against the Management Company its assets or affecting the Management
Business. The Management Company has delivered to the Medical Group all
documents and correspondence relating to matters referred to in said Schedule
7.10.
-50-
<PAGE>
7.11 Compliance; Governmental Authorizations. The Management Company and
the Management Business shall have complied in all material respects with all
applicable material Federal, state, local or foreign laws, ordinances,
regulations and orders. The Management Company has all Federal, state, local and
foreign governmental licenses and permits necessary in the conduct of the
Management Business, the lack of which would have a material adverse effect on
the Management Company's ability to operate the Management Business after the
date hereof on substantially the same basis as presently operated, such licenses
and permits are in full force and effect, the Management Company has not
received any notice indicating that any violations are or have been recorded in
respect of any thereof, and no proceeding is pending or, to the best knowledge
of the Management Company, threatened to revoke or limit any thereof. To the
best knowledge of the Management Company, none of such licenses and permits
shall be affected in any material respect by the transactions contemplated
hereby.
7.12 Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 7.12, all of the accounts receivable
owing to the Management Company in connection with the Management Business as of
the date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Management Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Management Company, there are no claims, refusals to pay or
other rights of set-off against any thereof. Except as set forth on Schedule
7.12, as of the date hereof, there is (i) no account debtor or note debtor of
the Management Business delinquent in its payment by more than 60 days, (ii) no
account debtor or note debtor of the Management Business who or which has
refused to pay its obligations for any reason or is the subject of a bankruptcy
proceeding and (iii) no account receivable or note receivable of the Management
Business pledged to any third party.
(b) All accounts payable and notes payable by the Management Business to
third parties arose in the ordinary course of business and, except as set forth
in Schedule 7.12, there is no account payable or note payable past due or
delinquent in its payment.
-51-
<PAGE>
7.13 Labor Relations; Employees. Schedule 7.13 contains a true and complete
list of the persons employed by the Management Company as of the date hereof
(the "Management Company Employees"). Except as set forth on Schedule 7.13, (a)
the Management Company and the Management Business are not delinquent in
payments to any of the Management Company Employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them to
the date hereof or amounts required to be reimbursed to the Management Company
Employees; (b) upon termination of the employment of any of the Management
Company Employees, neither the Management Company, the Management Business nor
the Medical Group will by reason of anything done prior to the date hereof, or
by reason of the consummation of the transactions contemplated hereby, be liable
for any excise taxes pursuant to Section 4980B of the Code or to any of the
Management Company Employees for severance pay or any other payments; (c) there
is no unfair labor practice complaint against the Management Company or in
connection with the Management Business pending before the National Labor
Relations Board or any comparable state, local or foreign agency; (d) there is
no labor strike, dispute, slowdown or stoppage actually pending or, to the best
knowledge of the Management Company, threatened against or involving the
Management Company or Management Business; (e) there is no collective bargaining
agreement covering any of the Management Company Employees; and (f) to the best
knowledge of the Management Company, no Management Company Employee or
consultant is in violation of any (i) employment agreement, arrangement or
policy between such person and any previous employer (private or governmental)
or (ii) agreement restricting or prohibiting the use of any information or
materials used or being used by such person in connection with such person's
employment by or association with the Management Company or the Management
Business.
7.14 Employee Benefit Plans.
(a) Schedule 7.14 identifies each `employee benefit plan', as defined in
Section 3(3) of ERISA, and all other written or oral plans, programs, policies
or agreements involving direct or indirect compensation (including any
employment agreements entered into between the Management Company or the
Management Business and any Management Company Employee or former employee of
the Management Company or in connection with the Management Business, but
excluding workers' compensation, unemployment compensation and other
-52-
<PAGE>
government-mandated programs) currently or previously maintained or entered into
by the Management Company or in connection with the Management Business for the
benefit of any Management Company Employee or former employee of the Management
Company or in connection with the Management Business under which the Management
Company, any affiliate thereof or the Management Business has any present or
future obligation or liability. The Management Company has provided the Medical
Group with true and complete age, salary, service and related data for
Management Company Employees and in connection with the Management Business.
(b) Schedule 7.14 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Management Company or in connection with the Management
Business.
7.15 Insurance. Schedule 7.15 contains a list of all policies of liability,
theft, fidelity, fire, product liability, errors and omissions, health and other
property and casualty forms of insurance held by the Management Company covering
the assets, properties or operations of the Management Company and the
Management Business (specifying the insurer, amount of coverage, type of
insurance, policy number and any pending claims thereunder). All such policies
of insurance are valid and enforceable policies and are outstanding and duly in
force and all premiums with respect thereto are currently paid. Neither the
Management Company nor its predecessor in interest has, during the last five
fiscal years, been denied or had revoked or rescinded any policy of insurance
relating to the assets, properties or operations of the Management Company or
the Management Business.
7.16 Real Property. Schedule 7.16 sets forth an accurate and complete legal
description of the entire right, title and interest of the Management Company in
and to all real property, together with all buildings, facilities, fixtures and
improvements located on such real
-53-
<PAGE>
property, owned or leased by the Management Company (the "Management Company
Real Property"), together with an accurate description of the title insurance
policy or other evidence of title issued with respect thereto, the most current
survey of such real property and a description of the use thereof. Other than
the Management Company Real Property, the Management Company has no other
interest (leasehold or otherwise) in real property used, held for use or
intended to be used in the Management Business. The Management Company has a
valid leasehold interest in all Management Company Real Property leased by the
Management Company.
7.17 Burdensome Restrictions. Except as set forth on Schedule 7.17, neither
the Management Company nor the Management Business is bound by any oral or
written agreement or contract which by its terms prohibits it from conducting
the Management Company or the Management Business (or any material part
thereof).
7.18 Disclosure. Neither the Management Company Transaction Documents
(including the Exhibits and Schedules attached thereto) nor any other document,
certificate or written statement furnished to the Medical Group by or on behalf
of the Management Company in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein not misleading. Except as set forth on Schedule 7.18, there have been no
events or transactions, or information which has come to the attention of the
Management Company, which, as they relate directly to the Management Company or
the Management Business, could reasonably be expected to have a material adverse
effect on the business, operations, affairs, prospects or condition of the
Management Company and the Management Business.
SECTION 8. Operations Committee.
8.1 Formation and Operation of the Operations Committee. The Management
Company and the Medical Group shall establish an Operations Committee
responsible for directing the Management Company in connection with the
development of certain specific management and administrative policies for the
overall operation of the Medical Group. The Operations Committee shall consist
of six (6) members. The Medical Group shall designate
-54-
<PAGE>
three (3) members of the Operations Committee, each of whom shall be a physician
in the Medical Group, and the Management Company shall designate three (3)
members of the Operations Committee. The business of the Operations Committee
shall be conducted in accordance with the policies and procedures described in
Section 8.4 hereof.
8.2 Authoritative Functions of the Operations Committee. The Operations
Committee shall perform the following functions, and the decisions of the
Operations Committee with respect to such functions shall be binding on the
Management Company and the Medical Group:
(a) Approve the annual budgets for:
(i) Billings and Collections
(ii) Medical Group Costs
(iii) Management Company Operating Costs (which, in the absence of
approval by the Operations Committee, shall be increased by one
percent (1.0%) over the total amount approved for the preceding
period)
(b) Approve costs and expenses that exceed the Management Company
Operating Costs Budget.
(c) Establish parameters and criteria with respect to the establishment
and maintenance of relationships with institutional providers and
payors and managed care contracts (except with respect to the
establishment of professional fees).
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection agencies
(vi) Write-offs of account balances
-55-
<PAGE>
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off policies
(ix) Lien account collection policies
(x) Student Athlete account policies
(e) Approve the acquisition, replacement, relocation, or other disposition
of Medical Equipment and FF&E, approve the integration of new
technologies into the professional practice of the Medical Group as
contemplated by Section 3.11 hereof, and approve the renovation and
expansion of any offices of the Medical Group ("Tenant Improvements");
provided, however, that the approval of the Management Company also
shall be required prior to (i) the acquisition of any Medical
Equipment or FF&E (including any Medical Equipment or FF&E relating to
the integration of new technologies into the professional practice of
the Medical Group) if and to the extent that the aggregate cost of
such items in any calendar year exceeds five percent (5%) of the
Management Fee for such year, (ii) the undertaking of any Tenant
Improvements relating to patient care facilities that cost more than
$25,000 in the aggregate at any one of the Medical Group's office
locations in any calendar year, or (iii) the undertaking of any other
Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of files and
records of the Medical Group.
8.3 Advisory Functions of the Operations Committee. The Operations
Committee shall review, evaluate and make recommendations to the Medical Group
and the Management Company with respect to the following matters:
(a) Identification of physician subspecialties required for the efficient
operation of the Medical Group; advice regarding all Medical Personnel
-56-
<PAGE>
employment and recruitment contracts to be utilized by the Medical
Group.
(b) Development of long-term strategic planning objectives for the Medical
Group.
(c) Public relations, advertising, and other marketing of Medical Group
services, including design of exterior signs.
(d) The establishment of fees for professional services and ancillary
services rendered by the Medical Group.
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group and the
Management Company, as such coverage may relate to Medical Group
operations and activities.
(g) Any matters arising in connection with the operations of the Medical
Group that are not specifically addressed in this Agreement and as to
which the Management Company or the Medical Group requests
consideration by the Operations Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Management Company and the Medical Group, and except as provided herein, the
Operations Committee does not have the power to bind the Management Company or
the Medical Group. Where discretion with respect to any matters is vested in the
Management Company or the Medical Group under the terms of this Agreement, the
Management Company or the Medical Group, as the case may be, shall have ultimate
responsibility for the exercise of such discretion, notwithstanding any
recommendation of the Operations Committee. The Management Company and the
Medical
-57-
<PAGE>
Group shall, however, take such recommendations of the Operations Committee into
account in good faith in the exercise of such discretion.
8.4 Committee Policies and Procedures.
(a) The Medical Group shall designate one of its members to act as Chairman
of the Committee, and the Management Company shall designate one of its members
to act as Vice Chairman. Each party may substitute or change its designated
Operations Committee members at any time upon notice to the other party, and any
Operations Committee member may designate his or her own substitute at any
meeting without notice. Each member shall have one vote and shall have the right
to grant his or her proxy to another member of the Operations Committee. The
Chairman, if present, shall preside at all meetings of the Operations Committee.
In the absence of the designated Chairman, the Vice Chairman shall preside. The
only powers of the Chairman and the Vice Chairman that differ from those of the
other members of the Operations Committee shall be to call and preside over
meetings in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or formal
notice at such times and places as a quorum of its members may from time to time
determine. A meeting of the Operations Committee also may be called by at least
two (2) members of the Operations Committee or by the Chairman or Vice Chairman
thereof upon at least three (3) days' written notice to the other members of the
Operations Committee. Such notice requirement shall be deemed waived with
respect to any member of the Operations Committee who attends such meeting.
Meetings may be held in person or by telephone. The Operations Committee also
may act by written consent as provided in Section 8.4(c). Minutes shall be kept
of all formal actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of four (4) or more members of the Operations Committee
present or represented by proxy at the applicable meeting. A quorum of the
Operations Committee shall be four (4) members, in person, by telephone, or by
proxy, and a quorum must remain for the duration of the meeting. The Operations
Committee may establish such procedures to act by written
-58-
<PAGE>
consent, without a meeting, as the Operations Committee determines are
advisable, provided that all six (6) members (in person or by proxy) must sign
any written consent.
SECTION 9. Obligations of the Medical Group. The Medical Group shall
perform the following obligations during the Term:
9.1 Compliance with Laws. The Medical Group shall provide professional
services to patients in compliance at all times with ethical standards, laws and
regulations to which they are subject. The Medical Group shall verify, with the
assistance of the Management Company, that each physician and other Medical
Personnel associated with the Medical Group for the purpose of providing medical
care to patients of the Medical Group is licensed by the State of California.
The Medical Group shall monitor the quality of medical care practiced by
physicians and other health care personnel associated with the Medical Group. In
the event that any disciplinary actions or medical malpractice actions are
initiated against any such physician by any payor, patient, state or federal
regulatory agency or any other person or entity, the Medical Group shall
immediately inform the Management Company of such action and its underlying
facts and circumstances.
9.2 Use of Facility. The Medical Group shall use and occupy any Facility
(as defined below) exclusively for the practice of medicine, and shall comply
with all applicable federal, state and local rules, ordinances and standards of
medical care. The medical practice or practices conducted at any Facility
described in clause (i) of the definition of the term "Facility" shall be
conducted solely by Medical Personnel associated with the Medical Group, and no
other physician or medical practitioner shall be permitted to use or occupy any
Facility described in clause (i) below without the prior written consent of the
Management Company, which consent shall not be unreasonably withheld or delayed.
The term "Facility" shall mean (i) any medical facility or laboratory
controlled, managed or operated by the Management Company or (ii) any hospital
at which any Medical Personnel practices medicine or maintains admitting
privileges.
-59-
<PAGE>
9.3 Choice of Braces, Splints, Appliances, Medical Supplies, and
Allografts. The Medical Group shall have the exclusive control over the choice
of vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts.
9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy,
MRI, and Other Medical Professionals and Facilities. The Medical Group shall
have exclusive control over the choice of specific physicians and facilities to
be utilized by the Medical Group with respect to radiology, anesthesiology,
hospitals, physical therapy, MRI, and other medical professionals and
facilities; provided, however, that the foregoing shall not limit the provisions
of Section 3.4(b) hereof.
9.5 Insurability. The Medical Group shall cooperate with the Management
Company in (i) ensuring that its Medical Personnel are insurable or (ii)
instituting proceedings to terminate within two business days any Medical
Personnel who is not insurable or who loses his or her insurance eligibility.
The Medical Group shall notify the Management Company in writing of any change
in the insurance status of any Medical Personnel within two days after the
Medical Group receives notice of any such change. The Medical Group shall
require all Medical Personnel to participate in an on-going risk management
program.
9.6 Medicare. The Medical Group shall cause all physicians to be
participating providers and accept assignment under Medicare.
9.7 Billing. The Medical Group's Medical Personnel shall be responsible for
providing the appropriate current CPT4 coding with respect to the fee tickets
prepared by such Medical Personnel.
9.8 Medical Personnel Hiring. The Medical Group shall have the ultimate
control over and responsibility for the hiring, compensation, supervision,
evaluation and termination of its Medical Personnel; provided, however, that at
the request of the Medical Group, the Management Company shall consult with the
Medical Group regarding such matters.
-60-
<PAGE>
9.9 Continuing Education. The Medical Group and its Medical Personnel shall
be solely responsible for ongoing membership in professional associations and
continuing professional education. The Medical Group shall ensure that its
Medical Personnel participate in such continuing professional education as is
necessary for such physician or professional to remain current in his or her
field of medical practice.
9.10 Physician Fellowship Program. The Medical Group shall have the
ultimate control over and responsibility for the Physician Fellowship Program of
the Medical Group, including but not be limited to fellow interviewing, hiring,
termination, compensation, day-to-day supervision, and assignment of
responsibilities and projects.
9.11 Clinical Research. The Medical Group shall have the ultimate control
over and responsibility for the clinical research program pertaining to patients
of the Medical Group. This shall include but not be limited to research
personnel interviewing, hiring, termination, compensation, day-to-day
supervision, and assignment of responsibilities and projects. However, the
Medical Group will cooperate with and take direction from the Management Company
in its nationwide efforts to provide an effective disease management information
system and outcome studies programs.
9.12 Sales of Stock. The Eligible Parties shall give to Naresh Nagpal, M.D.
and any venture capital firm providing funds to the Management Company the right
to participate on a pro rata basis (based on the number of shares, whether
preferred or common, calculated on an as-converted basis, held by Naresh Nagpal,
M.D. and any such venture capital firm and by any other shareholders who hold
the same rights that are conferred by this Section 9.12, including members of
other physician groups) in any proposed sale of more than fifty percent (50%) of
the stock in the Management Company held by the Eligible Parties to any
unaffiliated third party or parties, and the Medical Group shall require the
Eligible Parties to comply with the obligations set forth in this Section 9.12;
provided, however, that the obligations under this Section 9.12 shall become
null and void upon the consummation of an initial public offering of the
Management Company's common stock.
-61-
<PAGE>
SECTION 10. Certain Covenants.
10.1 Change of Control. During the Term of this Agreement, the Medical
Group shall not enter into any single transaction (or group of related
transactions undertaken pursuant to a common plan) involving the admission of
new partners, transfer of partnership interests, or reorganization or
restructuring of the Medical Group if in any such case the effect would be to
transfer a majority of the ownership interest in the Medical Group, without the
prior written consent of the Management Company, which consent shall not be
unreasonably withheld or delayed.
10.2 Legend on Securities. During the Term of this Agreement, any
certificate or similar evidence representing an equity interest in the Medical
Group issued by the Medical Group shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT
EFFECTIVE AS OF NOVEMBER 1, 1996, BETWEEN SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP, AND BONE, MUSCLE
AND JOINT, INC., A DELAWARE CORPORATION."
The Management Company acknowledges that there is no certificate or other
similar evidence representing equity interests in the Medical Group as of the
Effective Date hereof. Nothing herein shall be construed as requiring the
Medical Group to issue any certificate or other evidence representing an equity
interest in the Medical Group (other than the Medical Group's General
Partnership Agreement, or any replacement thereof, as amended from time to
time).
SECTION 11. Records.
11.1 Medical Records. Upon termination of this Agreement, the Medical Group
shall retain all patient medical records maintained by the Medical Group or the
Management Company in the name of the Medical Group.
-62-
<PAGE>
11.2 Management Business Records. All books and records relating in any way
to the operation of the Management Business which are not patient medical
records shall at all times be the joint property of the Management Company and
the Medical Group. The Management Company shall maintain custody of such
records, and the Medical Group shall, upon its written request, be entitled to
copies of any such records relating to the Management Services performed by the
Management Company.
11.3 Access to Records Following Termination.
(a) Following the termination of this Agreement, the Medical Group shall
grant (to the extent permitted by law) to the Management Company, for the
purpose of preparing for any actual or anticipated legal proceeding or for any
other reasonable purpose, reasonable access (which shall include making
photocopies) to the patient medical records described in Section 11.1 hereof and
any other pertinent information regarding the Medical Group during the Term.
Prior to accessing such patient medical records, the Management Company shall
obtain any required patient authorization.
(b) Following the termination of this Agreement, the Management Company
shall provide to the Medical Group, promptly upon the Medical Group's written
request, photocopies of the Management Business records described in Section
11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing
for any actual or anticipated legal proceeding or for any other reasonable
purpose, any other pertinent information regarding the Management Company during
the Term.
SECTION 12. Insurance and Indemnity.
12.1 Professional Liability Insurance. During the Term, the Management
Company shall, to the extent permitted by applicable law, procure and maintain
for the benefit of itself and the Medical Group comprehensive professional
liability insurance providing for (a) general liability coverage and (b) medical
malpractice coverage with limits of not less than $1,000,000 per claim and with
aggregate policy limits of not less than $3,000,000 covering the Medical Group
and each of the Medical Personnel of the Medical Group (or such higher amounts
as may be necessary to comply with any regulatory requirement and/or contractual
requirement to which
-63-
<PAGE>
such Medical Personnel or the Medical Group may be subject), including coverage
for claims made after the Commencement Date relating to events or occurrences at
any time prior thereto. The parties hereto acknowledge that the Management
Company is procuring the malpractice insurance referenced herein to ensure that
the Management Company has protection in the event it is sued as a result of an
act or omission of an employee of the Medical Group. The Management Company
shall pay the premiums for such general and medical malpractice liability
coverage, and the Management Company shall be designated as a co-beneficiary
under such insurance policies.
12.2 Life Insurance. The Management Company shall obtain a $500,000 life
insurance policy for each duly licensed physician partner in the Medical Group.
The Management Company shall be designated as the beneficiary under such
policies. The premiums for such policies shall be paid by the Management Company
and shall not be included as Management Company Operating Costs or otherwise
charged to the Medical Group.
12.3 Indemnification by Medical Group. The Medical Group shall indemnify,
hold harmless and defend the Management Company, its officers, directors,
shareholders, employees, agents and independent contractors from and against any
and all liabilities, losses, damages, claims, causes of action and expenses
(including reasonable attorneys' fees and expenses), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly, by or
as a result of (i) the performance of Medical Group Services, including without
limitation the performance of such services prior to the Commencement Date, (ii)
any other acts or omissions of the Medical Group and its Medical Personnel,
including without limitation any such acts or omissions that occurred prior to
the Commencement Date, or (iii) any breach of or failure to perform any
obligation under this Agreement or the Transaction Documents by the Medical
Group and/or the Medical Personnel and/or their respective agents and/or
subcontractors (other than the Management Company) during the Term.
12.4 Indemnification by Management Company. The Management Company shall
indemnify, hold harmless and defend the Medical Group, its officers, directors,
partners, members, employees, agents and independent contractors from and
against any and all liabilities,
-64-
<PAGE>
losses, damages, claims, causes of action and expenses (including reasonable
attorneys' fees and expenses), whether or not covered by insurance, caused or
asserted to have been caused, directly or indirectly, by or as a result of (i)
the performance of Management Services, (ii) any other acts or omissions of the
Management Company and its employees or (iii) any breach of or failure to
perform any obligation under this Agreement or the Transaction Documents by the
Management Company and/or its partners, agents, employees and/or subcontractors
(other than the Medical Group) during the Term.
SECTION 13. Termination.
13.1 Termination by Medical Group. The Medical Group may terminate this
Agreement effective immediately by giving written notice of termination to the
Management Company (a) in the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by the Management
Company or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by the Management
Company, except for the filing of a petition in involuntary bankruptcy against
the Management Company which is dismissed within ninety (90) days thereafter (a
"Bankruptcy Event"), (b) in the event the Management Company shall default in
any material respect in the performance of any duty or obligation imposed upon
it by this Agreement and the Management Company shall not have taken reasonable
action commencing curing of such default within thirty (30) days after written
notice thereof has been given to the Management Company by the Medical Group or
the Management Company does not thereafter diligently prosecute such action to
completion, (c) in the event that any of the representations and warranties made
by the Management Company in Section 7 is untrue or misleading in any material
respect, provided that the Medical Group shall have previously given written
notice to the Management Company describing in reasonable detail the nature of
the item in question and the Management Company shall not have cured such matter
within thirty (30) days of such notice, (d) in the event that the sale of shares
of the Management Company pursuant to its IPO is not consummated within
forty-eight (48) months after the Commencement Date, (e) at any time during the
month of January 1998, if by December 31, 1997, the commencement date of Phase
II (as described in Schedule V) has not occurred, or at any time after January
31, 1998, so long as the commencement date of Phase II has not yet occurred; (f)
if Naresh Nagpal, M.D. ceases to be and act on a full-time
-65-
<PAGE>
basis as the President and CEO of the Management Company prior to the
commencement date of Phase II, provided that the Medical Group gives notice of
termination within ninety (90) days after the Medical Group's receipt of written
notice from the Management Company that Dr. Nagpal has ceased to be or act on a
full-time basis as the President and CEO of the Management Company; (g) in the
event of the Management Company's breach of Section 16.8 hereof pertaining to
the initial public offering of the Management Company's common stock; (h) in the
event of the failure of the Management Company and the Center for Orthopedic
Surgery, Inc. ("COSI") (an affiliate of the Medical Group) to enter into, on or
before December 31, 1996, the definitive agreements described in that certain
Letter of Intent Regarding Surgical Clinic Transaction entered into as of the
date hereof by the Management Company and COSI, pursuant to which (A) the
Management Company is to assume management responsibilities for the ambulatory
surgery center to be constructed on the fourth floor of the building in which
the Medical Group's Van Nuys Office is located, and (B) the Management Company
is to issue common stock of the Management Company to the shareholders of COSI;
(i) in the event of the failure of the Management Company to issue, on or before
December 31, 1996, one hundred eighty-three thousand three hundred thirty-three
(183,333) shares of convertible preferred stock of the Management Company at a
purchase price of $3.00 per share to the members of the Medical Group and/or
other persons designated by the Medical Group, and approved by the Management
Company, except to the extent that the Management Company's failure to issue
such shares is the result of any delay or inaction by any of such members of the
Medical Group or such other persons; or (j) in the event that the Management
Company fails to take such steps as may be necessary to implement the provisions
of Section 16.9 (relating to the appointment of a member of the Medical Group to
the Board of Directors of the Management Company) of this Agreement.
13.2 Termination by Management Company. The Management Company may
terminate this Agreement effective immediately by giving written notice of
termination to the Medical Group (a) in the event of a Bankruptcy Event relating
to the Medical Group, (b) in the event the Medical Group shall default in any
material respect in the performance of any duty or obligation imposed upon it by
this Agreement and the Medical Group shall not have taken reasonable action
commencing curing of such default within thirty (30) days after written notice
-66-
<PAGE>
thereof has been given to the Medical Group by the Management Company or the
Medical Group does not thereafter diligently prosecute such action to
completion, (c) in the event that any of the representations and warranties made
by the Medical Group in Section 6 is untrue or misleading in any material
respect, provided that the Management Company shall have previously given
written notice to the Medical Group describing in reasonable detail the nature
of the item in question and the Medical Group shall not have cured such matter
within thirty (30) days of such notice, or (d) in the event the Medical Group is
excluded from the Medicaid or Medicare program for any reason.
13.3 Termination by Medical Group or Management Company. The Medical Group
and the Management Company shall each have the right to terminate this Agreement
effective immediately by giving written notice of termination to the other party
pursuant to Section 27 of this Agreement.
13.4 Effect of Termination. Upon the termination of this Agreement in
accordance with the terms hereof, neither party hereto shall have any further
obligation or liability to the other party hereunder, except as provided in
Section 13.5 and in Section 26 hereof, and except to pay in full and satisfy any
and all outstanding obligations of the parties accruing through the effective
date of termination. In order to accomplish the foregoing, the Annual Medical
Group Compensation Amount described in Section 5.3(b) shall be calculated on or
before the end of the fourth month following the termination date, rather than
on or before April 30 as specified in Section 5.3(b), and the computation made
under such section shall be made with respect to the portion of the year ending
on the termination date (if the termination date is other than December 31). In
making such computation, all Collections during January, February, and March of
such year shall be excluded, and all Collections during the three-month period
following termination shall be included. Additionally, any payment required
under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days
after the date by which the foregoing calculation is to be made, rather than on
May 15.
13.5 Repurchase of Assets. Promptly following termination of this Agreement
for any reason, the Management Company shall sell, transfer, convey, and assign
to the Medical Group,
-67-
<PAGE>
and the Medical Group shall purchase, assume, and accept from the Management
Company, at such price and upon such terms as may be agreed upon by the parties
- -- or, if the parties are unable to agree, at fair market value, determined in
the manner set forth below -- all of the following items which are used in
connection with the professional practice and related activities of the Medical
Group and which, in the case of items (a), (b), (c) and (d), are physically
located in any of the offices of the Medical Group, subject to any required
consent from any third party having an interest therein:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office equipment owned
by the Management Company;
(c) the Management Company's rights and interests in any equipment leased
by the Management Company, subject to the Medical Group's assumption
of the obligations accruing thereunder after the date of termination
of this Agreement;
(d) the supplies owned by the Management Company;
(e) the Management Company's rights and interests under all of the Office
Leases, subject to the Medical Group's assumption of the obligations
accruing thereunder after the date of termination of this Agreement;
and
(f) the deposits of the Management Company relating to the Medical Group.
Fair market value of the above described assets shall be determined by an
independent appraiser mutually agreed upon by the Medical Group and the
Management Company; provided, however, that if the Medical Group and the
Management Company are unable to agree upon such an appraiser, each of the
parties shall select an appraiser and the two appraisers thus selected shall
select a third appraiser. All of the appraisers shall appraise the assets, and
for purposes of determining the purchase price, the highest and lowest
appraisals shall be disregarded, and the remaining appraisal shall be used.
-68-
<PAGE>
SECTION 14. Non-Disclosure of Confidential Information.
14.1 Non-Disclosure. Neither the Management Company nor the Medical Group,
nor their respective employees, stockholders, consultants or agents shall, at
any time after the execution and delivery hereof, directly or indirectly
disclose any Confidential or Proprietary Information relating to the other party
hereto to any person, firm, corporation, association or other entity, nor shall
either party, or their respective employees, stockholders, consultants or agents
make use of any of such Confidential or Proprietary Information for its or their
own purposes or for the benefit of any person, firm, corporation or other entity
except the parties hereto or any subsidiary or affiliate thereof. The foregoing
obligation shall not apply to any information which a party hereto can establish
to have (a) become publicly known without breach of this Agreement by it or
them, (b) to have been given to such party by a third party who is not obligated
to maintain the confidentiality of such information, or (c) is disclosed to a
third party with the prior written consent of the other party hereto.
14.2 Confidential or Proprietary Information. The term "Confidential or
Proprietary Information" means all information known to a party hereto, or to
any of its employees, stockholders, officers, directors or consultants, which
relates to the Transaction Documents, patient medical and billing records, trade
secrets, books and records, supplies, pricing and cost information, marketing
plans, strategies and forecasts. Nothing contained herein shall prevent a party
hereto from furnishing Confidential or Proprietary Information pursuant to a
direct order of a court of competent jurisdiction.
SECTION 15. Non-Competition. In consideration of the premises contained
herein and the consideration to be received hereunder, and in consideration of
and as an inducement to the Management Company to consummate the transactions
contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition
provisions attached hereto as Schedule VIII and (b) agrees to require each of
the Eligible Parties, and each person who after the date hereof becomes entitled
to receive shares (or options to receive shares) in the Management Company in
connection with his or her performance of services for the Medical Group, to
execute a Stockholder Non-Competition Agreement substantially in the form
attached hereto as Exhibit B.
-69-
<PAGE>
SECTION 16. Obligations of the Management Company.
16.1 No Practice of Medicine. The Medical Group and the Management Company
acknowledge that certain federal and state statutes severely restrict or
prohibit the Management Company from providing medical services. Accordingly,
during the Term, the Management Company shall not provide or otherwise engage in
services or activities which constitute the practice of medicine, as defined in
applicable state or federal law, except in compliance therewith.
16.2 No Interference with Professional Judgment. Without in any way
limiting Section 16.1 hereof, during the Term, the Management Company shall not
interfere with the exercise of professional judgment by any physician or other
licensed health care professional who is a partner, employee, or contractor of
the Medical Group, nor shall the Management Company interfere with, control,
direct, or supervise any physician or other licensed health care professional in
connection with the provision of Medical Services. The foregoing shall not
preclude the Management Company from assisting in the development of
professional protocols and monitoring compliance with policies and procedures
that have been instituted in accordance with this Agreement.
16.3 Compensation Committee. The Management Company shall establish a
compensation committee (the "Compensation Committee") which is comprised of
members of the Board of Directors of the Management Company who are not
employees of the Management Company. The compensation payable to the five (5)
most highly compensated management employees of the Management Company shall be
subject to the approval of the Compensation Committee.
16.4 Budgets. The Board of Directors of the Management Company shall
establish budgets for the expenses of the Management Company, and the approval
of the Board of Directors shall be required in connection with any expenses in
excess of any such approved budget; provided, however, that following
consummation of an initial public offering of the Company's Common Stock, the
responsibility of the Board of Directors with respect to such
-70-
<PAGE>
budgets shall be exercised in accordance with the standards applicable to the
conduct of business of public companies.
16.5 Contracts with Venture Capital Firms. The Management Company shall not
enter into any consulting agreement or other contract or arrangement with any
venture capital firm (or affiliate thereof) providing financing to the
Management Company under which compensation will be payable to any such venture
capital firm (or affiliate thereof).
16.6 Stock Held by Certain Individuals or Entities. Naresh Nagpal, M.D. and
any venture capital firm providing funds to the Management Company ("Selling
Shareholders") shall give to the Eligible Parties the right to participate on a
pro rata basis (based on the number of shares, whether preferred or common,
calculated on an as-converted basis, held by the Eligible Parties and by any
other shareholders who hold the same rights that are conferred by this Section
16.6, including members of other physician groups) in any proposed sale of stock
(whether preferred or common) in the Management Company from any of the Selling
Shareholders to any unaffiliated third party or parties, and the Management
Company shall require the Selling Shareholders to comply with the obligations
set forth in this Section 16.6; provided, however, that the obligations under
this Section 16.6 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
16.7 Convertible Preferred Stock. The Management Company shall not sell any
common stock or take any other action the effect of which sale or other action
would be to give a holder of convertible preferred stock the right to convert
any number of shares of convertible preferred stock into a greater number of
shares of common stock; provided, however, that the obligations under this
Section 16.7 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
16.8 Initial Public Offering. The Management Company shall not authorize an
initial public offering of its common stock for less than Four Dollars ($4.00)
per share (appropriately adjusted to reflect any stock dividends, stock splits,
or similar transaction). Without waiving or limiting any other right or remedy
available to the Medical Group for breach of this covenant
-71-
<PAGE>
by the Management Company, in the event of an initial public offering of the
Management Company's common stock at less than Four Dollars ($4.00) per share,
if the Medical Group so elects by written notice to the Management Company, such
initial public offering shall not be considered as the initial public offering
of the Management Company's common stock for any purpose under this Agreement or
any of the other Transaction Documents. The Management Company shall disclose
this provision to any potential underwriter in connection with the initial
public offering of the Management Company's common stock.
16.9 Representation on Board of Directors. The Management Company shall
take such actions as may be necessary to provide that a physician member of the
Medical Group be appointed as a member of the Management Company's Board of
Directors; provided, however, that the obligations under this Section 16.9 shall
become null and void upon the consummation of an initial public offering of the
Management Company's common stock.
SECTION 17. Assignment. The Management Company shall have the right to
assign its rights and delegate its obligations hereunder to any affiliate and to
assign its rights hereunder to any lending institution from which the Management
Company or any affiliate obtains financing for security purposes or as
collateral. Except as set forth in the preceding sentence, neither the
Management Company nor the Medical Group shall have the right to assign their
respective rights and delegate their respective obligations hereunder without
the prior written consent of the other party; provided, however, that after the
consummation of an initial public offering of the Management Company's common
stock, the Medical Group's consent shall not be required in connection with a
sale of all or substantially all of the stock or assets of the Management
Company or the merger, consolidation, or reorganization of the Management
Company.
SECTION 18. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed sufficient if
personally delivered, sent by nationally-recognized overnight courier, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
-72-
<PAGE>
If to the Management Company:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
If to the Medical Group:
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 94105
Attention: Managing Partner
with a copy to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, and (c) in the case of mailing, on the third business day following
the day on which the piece of mail containing such communication is posted.
SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to
the benefit of any successors to or permitted assigns of the Management Company
and the Medical Group.
-73-
<PAGE>
SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
California without giving effect to the laws and principles thereof, or of any
other jurisdiction, which would direct the application of the laws of another
jurisdiction. The parties to this Agreement agree that jurisdiction and venue in
any action brought by any party hereto pursuant to this Agreement shall lie in
any Federal or state court located in the State of California. By execution and
delivery of this Agreement, the parties hereto irrevocably submit to the
nonexclusive jurisdiction of such courts for themselves and in respect of their
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in such court, and hereby waive any objection that such
court is an improper or inconvenient forum for the resolution of such action.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any other jurisdiction. The parties hereto shall act in good faith and shall
refrain from taking any actions to circumvent or frustrate the provisions of
this Agreement.
SECTION 21. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 22. Entire Agreement; Amendments. This Agreement and the various
exhibits hereto and thereto, contain the entire understanding of the parties
with respect to its subject matter, and neither this Agreement nor any part of
it may in any way be altered, amended, extended, waived, discharged or
terminated except by a written agreement signed by each of the parties hereto.
SECTION 23. Attorneys' Fees. In the event of any dispute or controversy
arising out of or relating to this Agreement, the prevailing party shall be
entitled to recover from the other party all reasonable costs and expenses,
including attorneys' fees and accountants' fees, incurred in connection with
such dispute or controversy.
-74-
<PAGE>
SECTION 24. Counterparts. This Agreement may be executed in counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 25. Waivers. Any party to this Agreement may, by written notice to
the other party, waive any provision of this Agreement. The waiver by any party
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach.
SECTION 26. Survival of Termination. Notwithstanding anything contained
herein to the contrary, Sections 3.3(f), 3.6, 11, 12, 13.4, 13.5, 14, 15(a), 18,
19, 20, 23, 25, 27 and this Section 26 shall survive any expiration or
termination of this Agreement.
SECTION 27. Contract Modification for Prospective Legal Events.
In the event any state or Federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Medical Group and the Management Company shall amend
this Agreement as necessary to avoid such violation. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between the Medical Group and the Management Company. If
an amendment is not possible, either party shall have the right to terminate
this Agreement. Any dispute between the parties hereto arising under this
Section 27 with respect to whether this Agreement violates any state or Federal
laws or regulations shall be jointly submitted by the parties and finally
settled by binding arbitration in Los Angeles, California, pursuant to the
arbitration rules of the National Health Lawyers Association Alternative Dispute
Resolution Service. Arbitration shall take place before one arbitrator appointed
in accordance with such rules. The governing law of the arbitration shall be the
law set forth in Section 21. Any decision rendered by the arbitrator shall
clearly set forth the factual and legal basis for such decision. The decision
rendered by the arbitrator shall be non-appealable and enforceable in any court
having jurisdiction thereof. The administrative costs of the arbitration and the
arbitrator fees shall be
-75-
<PAGE>
equally borne by the parties. Each party shall pay its own legal costs and fees
in connection with such arbitration.
* * *
-76-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
JAMES M. FOX, M.D., INC.
By: /s/ James M. Fox
-------------------------------------
James M. Fox, M.D., President
WILSON DEL PIZZO, M.D., INC.
By: /s/ Wilson Del Pizzo
-------------------------------------
Wilson Del Pizzo, M.D., President
MARC J. FRIEDMAN, M.D., INC.
By: /s/ Marc J. Friedman
-------------------------------------
Marc J. Friedman, M.D., President
/s/ Stephen J. Snyder
------------------------------------------
STEPHEN J. SNYDER, M.D.
/s/ Richard D. Ferkel
------------------------------------------
RICHARD D. FERKEL, M.D.
/s/ Todd D. Moldawer, M.D.
------------------------------------------
TODD D. MOLDAWER, M.D.
/s/ Gregory J. Hanker, M.D.
------------------------------------------
GREGORY J. HANKER, M.D.
[Signatures Continued]
-77-
<PAGE>
HERBERT DENNIS HUDDLESTON, M.D., INC.
By:/s/ Herbert Dennis Huddleston
---------------------------------------
Herbert Dennis Huddleston, M.D., President
/s/ A. Elizabeth Bloze
------------------------------------------
A. ELIZABETH BLOZE, M.D.
/s/ Todd D. Molnar
------------------------------------------
TODD D. MOLNAR, M.D.
TREVOR P. LYNCH, M.D., A Medical Corporation
By:/s/ Trevor P. Lynch
---------------------------------------
Trevor P. Lynch, M.D., President
SAUL M. BERNSTEIN, M.D., INC.
By:/s/ Saul M. Bernstein
---------------------------------------
Saul M. Bernstein, M.D., President
/s/ Steven A. Schopler
------------------------------------------
STEVEN A. SCHOPLER, M.D.
/s/ Ronald P. Karzel
------------------------------------------
RONALD P. KARZEL, M.D.
/s/ Hrair E. Darakjian
------------------------------------------
HRAIR E. DARAKJIAN, M.D.
/s/ Jonathan S. Jaivin
------------------------------------------
JONATHAN S. JAIVIN, M.D.
[Signatures Continued]
-78-
<PAGE>
/s/ Donald A. Wiss
------------------------------------------
DONALD A. WISS, M.D.
/s/ Patricia C. McKeever
------------------------------------------
PATRICIA C. McKEEVER, M.D.
/s/ David M. Auerbach
------------------------------------------
DAVID M. AUERBACH, M.D.
BONE, MUSCLE AND JOINT, INC.
By: /s/ Naresh Nagpal, M.D.
-------------------------------------
Naresh Nagpal, M.D., President
and Chief Executive Officer
ACCEPTED AND AGREED AS TO
THOSE PORTIONS OF SECTIONS
3.6(d)(xv), 5.3(c)(iii), and 5.3(c)(iv)
THAT PERTAIN SPECIFICALLY
TO THE UNDERSIGNED
/s/ Stephen J. Snyder
- ------------------------------
STEPHEN J. SNYDER, M.D.
[Signatures Continued]
-79-
<PAGE>
ACCEPTED AND AGREED
AS TO SECTION 16.6
/s/ Naresh Nagpal, M.D.
- ----------------------------------------
NARESH NAGPAL, M.D.
DELPHI VENTURES III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/ Donald J. Lothrop
------------------------------------
Donald J. Lothrop, Managing Member
DELPHI BIOINVESTMENTS III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/ Donald J. Lothrop
------------------------------------
Donald J. Lothrop, Managing Member
OAK INVESTMENT PARTNERS VI, LIMITED
PARTNERSHIP
By: OAK ASSOCIATES VI, LIMITED
PARTNERSHIP, its General Partner
By: /s/ Ann H. Lamont
------------------------------------
Ann H. Lamont, Managing Member
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By: /s/ Ann H. Lamont
------------------------------------
Ann H. Lamont, Managing Member
[Signatures Continued]
-80-
<PAGE>
EXECUTION COPY
AMENDMENT NO. 3 TO
THE MANAGEMENT SERVICES AGREEMENT
dated as of September 11, 1997,
between SOUTHERN CALIFORNIA
ORTHOPEDIC INSTITUTE MEDICAL GROUP,
a California general partnership
(the "Medical Group"), and BONE,
MUSCLE AND JOINT, INC., a Delaware
corporation (the "Management
Company").
Reference is made to the Management Services Agreement effective as of
November 1, 1996 (as amended by Amendment No. 1 to the Management Services
Agreement dated as of March 31, 1997, the "Management Services Agreement"),
between the Medical Group and the Management Company, pursuant to which the
Management Company has agreed to provide the Medical Group with certain
management, administrative and other related services in connection with the
Medical Business (as defined in the Management Services Agreement). The parties
hereto desire to amend the Management Services Agreement to provide that the
Management Company arrange for the provision of Technical Personnel (as
hereinafter defined) to the Medical Group on the terms hereinafter set forth.
NOW, THEREFORE, in consideration for the mutual agreements contained in
this Amendment and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Medical Group and the
Management Company hereby agree as follows:
Section 1. All capitalized terms used but not defined herein have the
meanings ascribed thereto in the Management Services Agreement.
Section 2. Section 3.13(a) of the Management Services Agreement is hereby
amended by (a) inserting "and" at the end of clause (i) and (b) deleting ", and
(iii) Technicians who perform diagnostic tests or procedures" and inserting "."
in lieu thereof.
Section 3. Section 3 of the Management Services Agreement is hereby amended
by adding a new Section 3.19 thereto, to read in its entirety as follows:
"3.19 Technical Personnel; Leased Employees.
(a) Subject to the conditions set forth in this Section 3.19, the
Management Company shall employ or contract with, or shall arrange for, and
shall provide
<PAGE>
to the Medical Group as leased employees, such Technical Personnel (as
defined below) as may reasonably be necessary for the conduct of the
Medical Business.
(b) For purposes of this Agreement, "Technical Personnel" means
nurses, medical assistants, x-ray technicians, other technicians, and other
personnel who perform diagnostic tests or other services that are covered
by Medicare or by other third party payors when performed by an employee of
a physician under the physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall
exercise, such supervision and control over the activities of the Technical
Personnel as may be necessary for the Technical Personnel to be considered
leased employees under the Medicare program and under applicable law.
Without limiting the generality of the foregoing, the Medical Group shall:
(i) have the right to have any Technical Personnel terminated
from employment;
(ii) furnish the Technical Personnel with the equipment and
supplies needed by the Technical Personnel for their work;
(iii) provide the Technical Personnel with any necessary
training;
(iv) instruct the Technical Personnel regarding their activities
performed for the Medical Group;
(v) establish the hours of work for the Technical Personnel;
(vi) approve vacation time and other time off from work; and
(vii) provide that degree of supervision as is required by
Medicare and by other third party payors to satisfy applicable
conditions for coverage thereunder.
(d) With respect to each of the Technical Personnel, the Management
Company shall verify or arrange for the verification of educational and
employment experience, licensure and insurability, and shall review and
provide the Medical Group with copies of any complaints contained in public
files with applicable state and Federal commissions."
-2-
<PAGE>
Section 4. Section 12.3 of the Management Services Agreement is hereby
amended by (a) inserting "or Technical Personnel" after "Medical Personnel" on
the eighth line thereof, and (b) inserting "and/or the Technical Personnel"
after "Medical Personnel" on the eleventh line thereof.
Section 5. Section 13.1 of the Management Services Agreement is hereby
amended by (i) inserting at the end of clause (b) thereof "; provided, however,
that if the Medical Group intends to terminate this Agreement due to the
Management Company's default under Section 16.9, the Medical Group must so
notify the Management Company within 60 days after the occurrence of such
default in order for such termination to be effective; or" and (ii) deleting
clauses (d), (e), (f), (g), (h), (i) and (j) therefrom.
Section 6. Section 16.8 of the Management Services Agreement is hereby
amended and restated in its entirety to read as follows:
"16.8 In the event of an initial public offering of the Management
Company's common stock at less than Four Dollars ($4.00) per share, if the
Medical Group so elects by written notice to the Management Company, such
public offering shall not be considered as the initial public offering of
the Management Company's common stock for any purpose under this Agreement
or any of the other Transaction Documents."
Section 7. Schedule V to the Management Services Agreement is hereby
amended by inserting the following after paragraph (iii) and renumbering the
last paragraph thereof to be paragraph (vi).
"(iv) Anything contained in this Agreement to the contrary
notwithstanding, if the commencement date of Phase II (as described in
Schedule V) has not occurred by January 1, 1998, the Applicable Percentage
shall, effective January 1, 1998, be two and one-half percent (2.5%), which
percentage shall remain in effect throughout the Term; provided, however,
that (A) such percentage shall increase to ten percent (10%) (pursuant to
paragraph (iii) above) once the Management Company files a Preliminary
Prospectus for the initial public offering of its stock with the Securities
and Exchange Commission and (B) if the Management Company does not
consummate the sale of shares pursuant to such public offering within
ninety (90) days of the filing of such Preliminary Prospectus, the
Applicable Percentage shall revert back to two and one-half percent (2.5%)
retroactively to the date of filing of such Preliminary Prospectus. In the
event the Management Company does not consummate an initial public offering
as described above, the provisions of
-3-
<PAGE>
the preceding proviso shall again become applicable upon any subsequent
filing of a Preliminary Prospectus in connection with an initial public
offering of the Management Company Common Stock or upon the consummation of
the sale of shares pursuant to the Management Company's previous filing of
such a Preliminary Prospectus.
(v) Notwithstanding the provisions of paragraphs (i), (ii), (iii) and
(iv) above, in the event that the common stock of the Management Company
has not, within forty-eight (48) months after the date hereof, commenced
trading at a price not less than $4.00 per share on NASDAQ, the New York
Stock Exchange, or any other established securities market pursuant to an
initial public offering of such common stock, the Applicable Percentage
shall be two and one-half percent (2.5%), which decreased percentage shall
become effective on the fourth anniversary of the date hereof and remain
effective throughout the Term or until the common stock of the Management
Company commences public trading as described above."
Section 8. Except as expressly provided in this Amendment No. 3, the
Management Services Agreement remains in full force and effect in accordance
with its terms.
Section 9. This Amendment No. 3 may be executed in more than one
counterparts, and by the parties hereto in separate counterparts, and each such
counterpart shall constitute an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
Section 10. This Amendment No. 3 shall by governed by, construed and
interpreted in accordance with the laws of the State of California.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
No. 3 to the Management Services Agreement as of the date first above written.
BONE, MUSCLE AND JOINT, INC.
By:
--------------------------------
Name:
Title:
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
By Its Partners:
JAMES M. FOX, M.D., INC.
By:
--------------------------------
James M. Fox, M.D., President
WILSON DEL PIZZO, M.D., INC.
By:
--------------------------------
Wilson Del Pizzo, M.D., President
MARC J. FRIEDMAN, M.D., INC.
By:
--------------------------------
Marc J. Friedman, M.D., President
------------------------------------
Stephen J. Snyder, M.D.
------------------------------------
Richard D. Ferkel, M.D.
<PAGE>
------------------------------------
Todd D. Moldawer, M.D.
------------------------------------
Gregory J. Hanker, M.D.
HERBERT DENNIS HUDDLESTON, M.D.,INC.
By:
--------------------------------
Herbert Dennis Huddleston, M.D.,
President
------------------------------------
A. Elizabeth Bloze, M.D.
------------------------------------
Todd J. Molnar, M.D.
TREVOR P. LYNCH, M.D., A MEDICAL
CORPORATION
By:
--------------------------------
Trevor P. Lynch, M.D., President
SAUL M. BERNSTEIN, M.D., INC.
By:
----------------------------------
Saul M. Bernstein, M.D., President
------------------------------------
Steven A. Schopler, M.D.
<PAGE>
------------------------------------
Ronald P. Karzel, M.D.
------------------------------------
Jonathan S. Jaivan, M.D.
------------------------------------
Donald A. Wiss, M.D.
------------------------------------
Patricia C. McKeever, M.D.
------------------------------------
David M. Auerbach, M.D.
<PAGE>
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of
November 22, 1996, effective as of November 1, 1996, by and between BONE, MUSCLE
AND JOINT, INC., a Delaware corporation (the "Company"), and the individual
identified on the signature page hereof (the "Stockholder"), with reference to
the following facts. Certain capitalized terms used herein are defined in
paragraph 5 below.
A. This Agreement is entered into in connection with and concurrently with
that certain Management Services Agreement dated as of the date hereof (the
"Management Services Agreement") by and between the Company and Southern
California Orthopedic Institute Medical Group (the "Medical Group").
B. This Agreement also is entered into concurrently with substantially
identical Restricted Stock Agreements between the Company and the other partners
in or employees of the Medical Group identified in Schedule A attached hereto
(collectively, the "Stockholders").
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Purchase and Sale of Restricted Stock. (a) (i) Upon execution of this
Agreement, the Company shall issue to the Stockholder the number of shares
specified opposite the Stockholder's name in Schedule A attached hereto (the
"Restricted Stock") of the common stock of the Company, par value $0.001 per
share (the "Common Stock"), pursuant to Section 4 and Schedule III of the
Management Services Agreement.
(ii) The Company shall deliver, at the time of execution of this Agreement,
two (2) stock certificates, each dated the date hereof and issued in the name of
the Stockholder. One of the certificates shall represent seventy-five percent
(75%) of the Restricted Stock issued to the Stockholder on the date hereof, and
such certificate shall be delivered to the Stockholder. The other certificate
shall represent twenty-five percent (25%) of the Restricted Stock issued to the
Stockholder on the date hereof, and such certificate shall be delivered to the
Medical Group. Additionally, the Stockholder shall deliver to the Medical Group
an executed stock power relating to such certificate. The Medical Group shall
hold such share certificate and stock power until the recalculation required
under Schedule III of the Management Services Agreement has been completed, and
the Medical Group shall promptly thereafter deliver such certificate to the
Stockholder or to the Management Company, as applicable, in accordance with the
terms of such Schedule III. In the event of delivery of such certificate to the
Management Company, such certificate shall be accompanied by the stock power
previously executed by the Stockholder.
-1-
<PAGE>
(b) In connection with the issuance of the Restricted Stock hereunder, the
Stockholder represents and warrants to the Company that:
(i) the Restricted Stock to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in violation of the 1933 Act, or any applicable state securities
laws, and the Restricted Stock will not be disposed of in contravention of
the 1933 Act or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Stock;
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Stock and is able to bear the economic risk of
his or her investment in the Restricted Stock for an indefinite period of
time and understands that the Restricted Stock has not been registered or
qualified under the 1933 Act or any applicable state securities laws, by
reason of the issuance of the Restricted Stock in a transaction exempt from
the registration and qualification requirements of the 1933 Act or such
state securities laws and, therefore, cannot be sold unless subsequently
registered or qualified under the 1933 Act or such state securities laws or
an exemption from such registration or qualification is available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Stock and has had full access to or been provided with such
other information concerning the Company as he or she has requested.
-2-
<PAGE>
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Stock to the
Stockholder and as a condition thereto, the Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Stock to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement; and
(ii) the Company shall provide the Stockholder with substantially the
same information regarding the Company that the Company regularly discloses
to its other stockholders.
(e) Notwithstanding anything to the contrary set forth in this Agreement,
the total number of shares to be issued to the Stockholder hereunder is subject
to adjustment in connection with any adjustment made to the total number of
shares issued to all Stockholders pursuant to Schedule III of the Management
Services Agreement; provided, however, that the amount of such adjustment
allocated to the Stockholder shall be as provided in a written schedule
furnished to the Company by the Medical Group specifying the adjusted number of
shares for each of the Stockholders. In the event that the Stockholder is
entitled to receive additional shares pursuant to such adjustment, the Company
shall promptly deliver to the Stockholder without further consideration a stock
certificate representing such additional shares. If pursuant to such adjustment
the Stockholder is required to return any shares to the Company, the Medical
Group shall promptly return to the Company the share certificate representing
twenty-five percent (25%) of the Restricted Stock previously issued to the
Stockholder, accompanied by the stock power previously executed by the
Stockholder. If the Stockholder is required to return more shares than is
represented by such certificate, the Stockholder shall return to the Company the
share certificate representing seventy-five percent (75%) of the Restricted
Stock previously issued to the Stockholder, together with an executed stock
power, in lieu of or in addition to the above-referenced stock certificate
representing twenty-five percent (25%) of such stock, as necessary to comply
with the Stockholder's obligation to return to the Company the total number of
shares required to be returned to the Company in accordance with this paragraph
1(e). Thereafter the Company shall promptly deliver to the Stockholder a new
stock certificate or certificates representing the adjusted number of shares,
all without any further consideration.
2. Vesting of the Restricted Stock. (a) Except as otherwise provided in
paragraphs 2(b) and 2(c) hereof, the Restricted Stock shall become vested in
accordance with the following schedule, if, as of each such date, (i) the
Management Services Agreement has not been terminated, (ii) there has not been a
Cessation of Active Practice (as defined in paragraph 2(d) below) by the
Stockholder, or (iii) the Stockholder has not died or become permanently
disabled:
-3-
<PAGE>
Anniversary Date Cumulative Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 50%
Third 75%
Fourth 100%
For purposes of this Agreement, "Anniversary Date of this Agreement" means
November 1 of each year after 1996. Shares of the Restricted Stock which have
become vested are referred to herein as "Vested Shares" and all other shares of
the Restricted Stock are referred to herein as "Unvested Shares." The parties
acknowledge and agree that the number of shares issued to the Stockholder
hereunder may be increased or decreased in connection with the recalculation
described in Schedule III to the Management Services Agreement. Accordingly,
following such recalculation, the vesting schedule set forth above shall be
applicable retroactively and prospectively to the adjusted number of shares
issued to the Stockholder in connection with such recalculation.
(b) (i) The provisions of paragraph (ii) below shall be applicable only in
the event that the Company has not amended that certain Restricted Stock
Agreement entered into by and between the Company and Lehigh Valley Bone, Muscle
and Joint Group, L.L.C., a Pennsylvania limited liability company ("Lehigh
Valley"), in or about July, 1996, to delete that provision in such agreement
which is substantially similar to paragraph (ii) below. If such agreement is so
amended, paragraph (ii) below shall become null and void upon the Company's
provision of notice thereof to the Medical Group, and the Restricted Stock shall
become vested only in annual increments as provided in paragraph 2(a) above.
(ii) If the Management Services Agreement is terminated or there is a
Cessation of Active Practice by the Stockholder, or if the Stockholder dies or
becomes permanently disabled, on any date other than an anniversary date of the
issuance of the Restricted Stock, the cumulative percentage of the Restricted
Stock to become vested shall be determined on a pro rata basis according to the
number of days elapsed since the prior anniversary date or the date of this
Agreement (should such termination occur prior to the first anniversary date).
(c) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
paragraphs 2(a) and 2(b) above, the number of Unvested Shares scheduled to
become Vested Shares pursuant to paragraph 2(a) above during the eighteen-month
period immediately following the date of death shall immediately become Vested
Shares.
(d) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death or permanent
disability),
-4-
<PAGE>
throughout any twelve-month period ending on the day before any of the vesting
dates described in paragraph 2(a) hereof, to engage in the practice of medicine
with the Medical Group on a regular basis, including the performance of
orthopedic surgical procedures on a regular basis (except in the case of any
Stockholder who did not practice surgery on a regular basis immediately prior to
the date hereof), such that (i) the Stockholder was engaged in patient care
activities for less than seventy-five percent (75%) of the time that the
Stockholder had been engaged in such activities during the twelve-month period
immediately preceding the date hereof, and (ii) the Stockholder generated
billings that were less than seventy-five percent (75%) of the amount of
billings generated by the Stockholder during the twelve-month period immediately
preceding the date hereof.
(e) If the Stockholder is insured under a disability insurance policy, the
determination under such policy as to whether the Stockholder's condition
constitutes a permanent disability shall be binding on the parties hereto for
purposes of this Agreement. If the Stockholder is not insured under a policy of
disability insurance, such determination shall be made by an independent
qualified physician proposed by the Medical Group, subject to the approval of
the Company, which approval shall not be unreasonably withheld.
(f) Notwithstanding anything to the contrary set forth in this Agreement,
including without limitation the provisions of paragraph 2(a) hereof relating to
vesting, if as of the date or dates on which any of the Restricted Stock is
scheduled to vest, Phase II under the Management Services Agreement has not yet
commenced and the Medical Group has not waived the Medical Group's right to
terminate the Management Services Agreement pursuant to Section 13.1(e) of the
Management Services Agreement (providing the Medical Group the right under
certain circumstances to terminate the Management Services Agreement prior to
the commencement of Phase II), such vesting shall be deferred until (i) the date
on which Phase II under the Management Services Agreement commences or (ii) the
date on which the Medical Group gives written notice to the Management Company
waiving its right to terminate the Management Services Agreement under Section
13.1(e), whichever first occurs. If the Management Services Agreement is
terminated by the Medical Group pursuant to Section 13.1(e) thereof, none of the
Restricted Stock shall be deemed to Vested Shares hereunder.
3. Repurchase of Restricted Stock. (a) Except as provided in paragraph
3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below,
the Company may elect to repurchase the Restricted Stock (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
permitted transferees) pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option").
(b) Each of the following shall constitute a "Repurchase Event":
(i) Termination of the Management Services Agreement for any reason
whatsoever on or before the fourth anniversary of the date of this
Agreement;
(ii) Termination of the Management Services Agreement by the Medical
Group pursuant to Section 13.1(d) thereof (based on failure of the Company
to
-5-
<PAGE>
consummate an initial public offering of its Common Stock within
forty-eight (48) months after the Commencement Date under the Management
Services Agreement); or
(iii) The Stockholder's Cessation of Active Practice.
(c) The repurchase price for each Unvested Share shall be equal to the
Original Value of such share.
(d) The repurchase price for each Vested Share shall be the Fair Market
Value for such share.
(e) The Company may elect to repurchase all or a portion of the Restricted
Stock by delivering written notice (the "Repurchase Notice") to the Stockholder
within ninety (90) days after the Repurchase Event; provided, however, that if
the Company elects to repurchase less than all of the Restricted Stock, the
Company shall repurchase all of the Unvested Shares and may purchase that number
of Vested Shares as the Company may, in its discretion, determine. The
Repurchase Notice shall set forth the number of Unvested Shares and Vested
Shares to be acquired, the aggregate consideration to be paid for such shares,
and the time and place for the closing of the transaction. If the Repurchase
Event giving rise to the Company's election to repurchase consists of the
termination of the Management Services Agreement, and if the number of shares of
Restricted Stock that the Company has elected to repurchase is less than the
total number of shares of Restricted Stock held by all of the Stockholders, the
Company shall purchase the shares of Restricted Stock pro rata according to the
number of shares of Restricted Stock held by all of the Stockholders at the time
of delivery of such Repurchase Notice (determined as nearly as practicable to
the nearest share).
(f) The closing of the repurchase of Restricted Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the delivery of the Repurchase Notice. The Company
shall pay for Restricted Stock to be purchased pursuant to the Repurchase Option
by delivery of (i) the Company's check or wire transfer of funds, (ii) a
subordinated note or notes payable in up to five equal annual installments
beginning on the first anniversary of the closing of such purchase and bearing
interest (payable quarterly) at a rate per annum equal to the greater of either
the prime rate announced from time to time by The Chase Manhattan Bank (National
Association) plus 1/2% or the "applicable Federal rate" (as defined in Section
1274(d) of the Internal Revenue Code) in effect from time to time, or (iii) both
(i) and (ii), in the aggregate amount of the repurchase price for such shares;
provided, however, that in the event that the Medical Group is obligated to pay
to the Company any sums in connection with the repurchase of assets by the
Medical Group pursuant to the Management Services Agreement, the total of such
sums may be offset by the Company against any amounts owed by the Company to the
Stockholders pursuant to each of the Restricted Stock Agreements, such offset
amount to be allocated pro rata among all of the Stockholders. Any notes issued
by the Company pursuant to this paragraph 3(f) shall be subject to the
restrictive covenants, if any, to which the Company is subject at the time of
such repurchase. The Company shall be entitled to require the signature of the
Stockholder to be guaranteed and to receive representations and
-6-
<PAGE>
warranties from the Stockholder regarding (A) the Stockholder's power, authority
and legal capacity to enter into such sale and transfer valid right, title and
interest in such Restricted Stock, (B) the Stockholder's ownership of such
Restricted Stock and the absence of any liens, pledges, and other encumbrances
on such Restricted Stock and (C) the absence of any violation, default, or
acceleration of any agreement or instrument pursuant to which the Stockholder or
the Stockholder's assets are bound resulting from such sale.
(g) Notwithstanding anything to the contrary set forth in this paragraph 3,
in the event of a Repurchase Event consisting of the termination of the
Management Services Agreement by the Medical Group pursuant to Section 13.1 of
the Management Services Agreement, or in the event of termination of the
Management Services Agreement by either party in accordance with Section 27
thereof (pursuant to Section 13.3), the Company shall have the obligation
(rather than the option) to purchase all of the Restricted Stock acquired by the
Stockholder pursuant to this Agreement, and the repurchase price shall be paid
in full in cash not later than sixty (60) days after the date of termination of
the Management Services Agreement; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in connection with the
repurchase of assets by the Medical Group pursuant to the Management Services
Agreement, the total of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to each of the
Restricted Stock Agreements, such offset amount to be allocated pro rata among
all of the Stockholders.
(h) In the event of the death or permanent disability of the Stockholder,
the Company shall repurchase all of the Unvested Shares (but not the Vested
Shares) of the Stockholder. The repurchase price for each Unvested Share shall
be equal to the Original Value of such share, and such repurchase price shall be
paid in full in cash not later than sixty (60) days after the date of death or
the date on which such disability is determined to be permanent.
(i) In the event that the Stockholder is required, prior to the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act or prior to the second anniversary of the date hereof,
whichever is later, to pay any state or federal taxes in connection with the
receipt of the Restricted Stock hereunder, the Stockholder shall have the right
to sell to the Company, and the Company shall be obligated to purchase from the
Stockholder, for the purchase price determined in accordance with this paragraph
3, such number of shares of Vested Stock as the Stockholder may tender to the
Company, provided that the purchase price therefor shall not exceed the total
amount of the Stockholder's tax liability incurred in connection with the
receipt of such stock. In the event that the Stockholder desires to exercise the
right conferred under this paragraph 3(i), the Stockholder shall give notice to
the Company not earlier than forty-five (45) days prior to, nor later than
forty-five (45) days after, the date on which such taxes are due and payable,
and the Stockholder shall furnish to the Company reasonable documentation
prepared by the Stockholder's certified public accountant establishing the
amount of such tax liability.
(j) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Stock by the Company shall be subject to
applicable restrictions, if
-7-
<PAGE>
any, contained in Federal law or in the Delaware General Corporation Law.
Notwithstanding anything to the contrary contained in this Agreement, if any
such restrictions prohibit or otherwise delay the repurchase of Restricted Stock
hereunder which the Company is otherwise entitled or required to make, the
Company may make such repurchases as soon as it is permitted to do so under such
restrictions.
(k) In the event that Restricted Stock is repurchased pursuant to this
paragraph 3, the Stockholder and his or her successors and assigns shall take
all reasonable steps to obtain all required third-party, governmental and
regulatory consents and approvals and take all other reasonable actions
necessary to facilitate consummation of such repurchase in a timely manner.
4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided
in paragraph 3, the Stockholder shall sell or transfer or agree to sell or
transfer ("Sale" or "Sell") Restricted Stock only in accordance with the
following procedures; provided, however, that with respect to this paragraph
4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares
and at no time shall the Stockholder have the right to sell Unvested Shares;
provided, further, that the restrictions on transfers of Vested Shares set forth
in this paragraph 4 shall expire, and shall be of no further force or effect,
upon the consummation of initial public offering of the Company's Common Stock
pursuant to the 1933 Act:
(b) In the event that the Stockholder receives a bona fide offer from
a third party (the "Prospective Stockholder") to purchase all or any
portion of the Restricted Stock owned by the Stockholder, the Stockholder
shall deliver to the Company a written notice (the "Offer Notice"), which
shall be irrevocable for a period of fifteen (15) business days after
delivery thereof (the "Offer Period"), offering (the "Offer") all of the
Restricted Stock proposed to be Sold by the Stockholder to the Prospective
Stockholder at the purchase price and on the terms of the proposed Sale to
the Prospective Stockholder (such Offer Notice shall include the foregoing
information, a copy of the Prospective Stockholder's bona fide offer and
all other relevant terms of the proposed Sale, including the identification
of the Prospective Stockholder). The Company shall have the right and
option, for a period of fifteen (15) business days after delivery of the
Offer Notice, to repurchase all of the Restricted Stock so offered at the
purchase price and on the terms stated in the Offer Notice. Such acceptance
shall be made by delivering a written notice to the Stockholder within said
fifteen (15) business-day period.
(c) Sales of Restricted Stock under the terms of paragraph 4(b) above
shall be made on a mutually satisfactory business day within fifteen (15)
business days after the expiration of the Offer Period. Delivery of
certificates or other instruments evidencing such Restricted Stock duly
endorsed for transfer shall be made on such date against payment of the
purchase price therefor.
(d) If the Company fails to purchase the Restricted Stock offered for
Sale pursuant to the Offer Notice, then at any time within sixty (60)
business days after the expiration of the Offer Period the Stockholder may
Sell all or any part of the Restricted Stock so offered for Sale on terms
no more favorable than the terms stated in the Offer Notice; provided,
however, that the Stockholder shall not, under any circumstances, Sell any
Restricted Stock to
-8-
<PAGE>
the Prospective Stockholder if the Board of Directors of the Company, in
its sole discretion, determines in good faith that the Prospective
Stockholder is a competitor, or an Affiliate of a competitor, of the
Company or that such Prospective Stockholder's ownership of Restricted
Stock would be contrary to the best interests of the Company. In the event
that the Restricted Stock is not Sold by the Stockholder to the Prospective
Stockholder during such period, the right of the Stockholder to Sell such
remaining Restricted Stock to the Prospective Stockholder shall expire and
the obligations of the Stockholder pursuant to this paragraph 4 shall be
reinstated.
(e) Any transferee of Restricted Stock (other than the Company) shall,
as a condition to such transfer, agree to be bound by all of the provisions
of this Agreement applicable to the Stockholder.
(f) The certificates representing the Restricted Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A
RESTRICTED STOCK AGREEMENT DATED AS OF NOVEMBER 1, 1996, BETWEEN THE
STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT
MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE
OF BUSINESS WITHOUT CHARGE."
(g) Naresh Nagpal, M.D. and any venture capital firm providing funds
to the Company ("Selling Shareholders") shall give to the Stockholder the
right to participate on a pro rata basis (based on the number of shares
owned, whether preferred or common, held by the Stockholders and by any
other shareholders who hold the same rights that are conferred by this
paragraph 4(g), including members of other physician groups), in any
proposed sale of stock (whether preferred or common) in the Company from
any of the Selling Shareholders to any unaffiliated third party, and the
Company shall require the Selling Shareholders to comply with the
obligations set forth in this paragraph 4(g); provided, however, that the
obligation under this paragraph 4(g) shall become null and void upon the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act.
(h) The Stockholder hereby agrees to the provisions of Section 9.12 of
the Management Services Agreement (relating to the right of Naresh Nagpal,
M.D. and any venture capital firm providing funds to the Company to
participate in certain sales of stock by the Stockholder).
5. Definitions.
(a) "Affiliate" means, with respect to any Person, any of (a) a director,
officer or partner of such Person and (b) any other Person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, another Person. The term "control" includes,
without limitation, the possession, directly or indirectly,
-9-
<PAGE>
of the power to direct the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value jointly determined by the Stockholder and the
Company, provided that if they cannot so agree, such value shall be determined
by a mutually acceptable investment banking or other qualified firm of national
or regional reputation, retained jointly by the Company and the Medical Group,
and all fees, expenses and other charges of such firm incurred in connection
with such determination of Fair Market Value shall be borne and shared equally
by the Company and the Medical Group. In the event that the parties are unable
to agree upon such an investment banking or other qualified firm within ten (10)
days after the date on which either party may initially propose such a firm, a
qualified firm shall be selected in the following manner:
First, the Stockholder shall send a list of names of four such firms,
arranged in order of the Stockholder's preference, by written notice to the
Company within seven (7) days after the expiration of the above referenced
10-day period. If the Stockholder does not furnish such a list to the
Company within such time period, the Company may, within the next seven (7)
days following expiration of such earlier seven-day period, submit a list
of names of four such firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed agreed to by the parties.
(c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as
the same may be amended or supplemented from time to time, or any successor
statute, and the rules and regulations thereunder, as the same are from time to
time in effect.
-10-
<PAGE>
(d) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to Ten Cents $0.10 (as proportionately adjusted for all subsequent
stock splits, stock dividends and other recapitalizations).
(e) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
(f) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The
Restricted Stock will continue to be Restricted Stock in the hands of any holder
other than the Stockholder (except for the Company and except for transferees in
a Public Sale), and except as otherwise provided herein, each such other holder
of the Restricted Stock will succeed to all rights and obligations attributable
to the Stockholder as the holder of the Restricted Stock hereunder. The
Restricted Stock will also include shares of the Company's capital stock issued
with respect to the Restricted Stock by way of a stock split, stock dividend or
other recapitalization.
(h) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
6. Indemnification. (a) The Company shall indemnify, defend and hold
harmless the Stockholder against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of the representations, warranties or agreements of the Company
contained in this Agreement.
(b) The Stockholder shall indemnify and hold harmless the Company against
all liability, loss or damage, together with all reasonable costs and expenses
related thereto (including reasonable legal fees and expenses), relating to or
arising from the untruth, inaccuracy or breach of any of the representations,
warranties or agreements of the Stockholder contained in this Agreement.
7. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of
any Restricted Stock in violation of any provision of this Agreement shall be
void, and the Company shall not record such
-11-
<PAGE>
Transfer on its books or treat any purported transferee of such Restricted Stock
as the owner of such stock for any purpose.
(b) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(c) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, assigns, heirs,
representatives and estate, as the case may be (including subsequent holders of
Restricted Stock); provided that the rights and obligations of the Stockholder
under this Agreement shall not be assignable except in connection with a
permitted transfer of Restricted Stock hereunder.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
California, or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of California to be applied. In furtherance of
the foregoing, the internal law of the State of California will control the
interpretation and construction of this agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America sitting in the State of California, and any appellate court thereof,
in any action or proceeding arising out of or relating
-12-
<PAGE>
to this Agreement or for recognition or enforcement of any judgment, and each of
the parties hereto hereby irrevocably and unconditionally agrees that all claims
in respect of any such action or proceeding may be heard and determined in any
such California state court or, to the extent permitted by law, in such Federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any other jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any California state
or Federal court. Each of the parties hereto irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
(h) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that any party may
in its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or other injunctive relief (without
posting any bond or deposit) in order to enforce or prevent any violations of
the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof.
(j) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
reputable overnight courier service (charges prepaid) to the recipient at the
address below indicated or at such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. Notices will be deemed to have been given hereunder and received
when delivered personally, when received if transmitted via telecopier, five
days after deposit in the U.S. mail and one business day after deposit with a
reputable overnight courier service.
-13-
<PAGE>
If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telephone: (561) 989-0909
Telecopy: (561) 391-1389
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telephone: (212) 408-2416
Telecopy: (212) 408-2420
If to the Stockholder, to:
[Name of Stockholder]
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telephone: (818) 901-6600
Telecopy: (818) 901-6680
with copies to:
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Attention: Managing Partner
Telephone: (818) 901-6600
Telecopy: (818) 901-6680
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
Telephone: (310) 201-7555
Telecopy: (310) 286-7821
-14-
<PAGE>
(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of California, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(l) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the other party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(m) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(n) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(o) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of nouns and pronouns shall include the plural and vice-versa.
* * *
-15-
EXECUTION COPY
================================================================================
MANAGEMENT SERVICES AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
LAUDERDALE ORTHOPAEDIC SURGEONS
Effective as of April 1, 1997
================================================================================
<PAGE>
ATTACHMENTS
SCHEDULES
- ---------
SCHEDULE I -- New Ancillary Services -- Exceptions
SCHEDULE II -- Management Company Operating Cost Budget
SCHEDULE III -- Equity Participation
SCHEDULE IV -- Draw Date and Draw Percentage
SCHEDULE V -- Management Fee -- Applicable Percentage
SCHEDULE VI -- Professional Practice Cost Savings
SCHEDULE VII -- Computation Example
SCHEDULE VIII -- Non-Competition
SCHEDULE 6.2 -- Equity Investments
SCHEDULE 6.3 -- Consents
SCHEDULE 6.4 -- Financial Information
SCHEDULE 6.5 -- Absence of Undisclosed Liabilities
SCHEDULE 6.6 -- Absence of Changes
SCHEDULE 6.7 -- Tax Matters
SCHEDULE 6.8 -- Litigation, Etc.
SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable
SCHEDULE 6.11 -- Labor Relations; Employees
SCHEDULE 6.12 -- Employee Benefit Plans
SCHEDULE 6.13 -- Insurance
SCHEDULE 6.14 -- Real Property
SCHEDULE 6.15 -- Burdensome Restrictions
SCHEDULE 6.16 -- Disclosure
SCHEDULE 7.2 -- Equity Investments
SCHEDULE 7.3(a) -- Issued and Outstanding Stock
SCHEDULE 7.3(c) -- Options; Conversion Rights
SCHEDULE 7.4 -- Consents
SCHEDULE 7.5 -- Financial Information
SCHEDULE 7.6 -- Absence of Undisclosed Liabilities
SCHEDULE 7.7 -- Absence of Changes
SCHEDULE 7.8 -- Tax Matters
SCHEDULE 7.9 -- Litigation, Etc.
SCHEDULE 7.11 -- Accounts Receivable; Accounts Payable
SCHEDULE 7.12 -- Labor Relations; Employees
<PAGE>
SCHEDULE 7.13 -- Employee Benefit Plans
SCHEDULE 7.14 -- Insurance
SCHEDULE 7.15 -- Real Property
SCHEDULE 7.16 -- Burdensome Restrictions
SCHEDULE 7.17 -- Disclosure
EXHIBITS
EXHIBIT A -- Asset Purchase Agreement
EXHIBIT B -- Assignment of Lease
EXHIBIT C -- Restricted Stock Agreement
EXHIBIT D -- Stockholder Non-Competition Agreement
<PAGE>
THIS MANAGEMENT SERVICES AGREEMENT
(the "Agreement") is entered into
as of May 6, 1997 (the "Signature
Date"), effective as of April 1,
1997, by and between LAUDERDALE
ORTHOPAEDIC SURGEONS, a Florida
partnership (the "Medical Group"),
and BONE, MUSCLE AND JOINT, INC., a
Delaware corporation (the
"Management Company"), with
reference to the following facts:
A. The Medical Group is engaged in the business (the "Medical Business") of
providing orthopedic medical and surgical services and related medical and
ancillary services to the general public.
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company and the Medical Group are
entering into an Asset Purchase Agreement (the "Asset Purchase Agreement"), in
the form of Exhibit A attached hereto, pursuant to which the Management Company
is acquiring substantially all of the assets of the Medical Group.
D. The Management Company and the Medical Group desire to enter into this
Management Services Agreement, pursuant to which, among other things, the
Management Company will render certain management and administrative services to
the Medical Group.
NOW, THEREFORE, the Medical Group and the Management Company hereby agree
as follows:
<PAGE>
SECTION 1. Retention of the Management Company.
1.1. Retention.
The Medical Group hereby retains the Management Company to provide all of
the management and related services identified or referenced in Section 3 hereof
and as otherwise required by this Agreement (collectively, the "Management
Services"), and the Management Company hereby accepts such retention and agrees
to provide such services, upon the terms and subject to the conditions set forth
herein.
1.2. Exclusivity.
During the term of this Agreement, the Management Company shall be the
exclusive provider of all management and administrative services utilized by the
Medical Group; provided, however, that the Medical Group may contract directly
with or otherwise engage individuals or companies for the provision of
accounting, legal, consulting, or other professional or advisory services
(provided that such services shall be in addition to, and not in replacement of,
the services to be provided by the Management Company hereunder), all in the
sole discretion of the Medical Group and at the sole cost of the Medical Group.
1.3. Relationship of Parties.
Notwithstanding anything contained herein to the contrary, (a) the
Management Company and the Medical Group intend to act and perform as
independent contractors, and the provisions hereof are not intended to create
any partnership, joint venture, or employment relationship between the parties,
and (b) the Management Company is hereby engaged solely to provide management
and administrative services to the Medical Group and shall not interfere with,
control, direct, or supervise the Medical Group or any medical professional
employed by the Medical Group in connection with the provision of professional
medical services.
-2-
<PAGE>
1.4. No Referral Obligation.
The parties agree that the benefits to the Medical Group hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral, purchase, or any other arrangement for the provision of any
item or service to or for any of the Medical Group's patients in or from any
medical facility or laboratory or from any other entity owned, operated,
controlled, or managed by the Management Company. The Management Company shall
provide prior written notice to the Medical Group before acquiring any
ownership, investment interest, or control in, or entering into any agreement or
arrangement pursuant to which the Management Company would become responsible
for all or any part of the operations or management of, any medical facility,
laboratory, or any provider or supplier of ancillary services, diagnostic or
therapeutic equipment, prosthetic or orthotic devices, medical supplies, or
other items or services furnished to or for use by patients, but only if any of
the foregoing is located in Dade, Palm Beach or Broward County, Florida or
serves the geographic area served by the Medical Group.
SECTION 2. Term.
Provided that the Closing under the Asset Purchase Agreement shall have
occurred as provided therein, and subject to such start-up procedures as the
parties may agree upon for purposes of facilitating the transition of
responsibilities required by this Agreement, the performance of services under
this Agreement shall commence as of April 1, 1997 (the "Commencement Date") and
shall expire on the fortieth anniversary of the Commencement Date unless
terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term
of this Agreement shall be automatically extended for successive terms (each, an
"Additional Term," and together with the Base Term, the "Term") of five years
each, unless either party delivers to the other party, not less than six (6)
months nor more than nine (9)
-3-
<PAGE>
months prior to the expiration of the then-current Term, written notice of such
party's intention not to so extend the Term of this Agreement.
SECTION 3. Management Services.
3.1 Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager and
administrator of all day-to-day business functions for the Medical Group,
subject to the provisions of Section 1.2 hereof. The Management Company shall
provide all of the management and administrative services reasonably required by
the Medical Group in connection with the provision of any and all of the Medical
Group Services (as hereinafter defined) and as otherwise provided in this
Agreement, including without limitation the services described in Sections 3.2
through 3.17 hereof.
(b) Without limiting the generality of the provisions of Section 3.1(a),
and subject to the further provisions of this Agreement, the Management Services
shall include such management and administrative services as may be reasonably
required in connection with (i) all of the offices (including New Medical
Offices, as hereinafter defined) of the Medical Group, and (ii) all professional
services and all ancillary services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described in
this Agreement shall be applicable with respect to the items identified as
Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs
shall be paid by the Medical Group rather than by the Management Company.
Accordingly, the Management Company shall provide accounting, bookkeeping, and
related services with respect to all such costs.
(d) The Management Company may enter into such contracts and agreements
with outside services and suppliers as
-4-
<PAGE>
the Management Company shall reasonably deem necessary in connection with the
provision of the Management Services, and, to the extent permitted by applicable
law, such contracts and agreements shall, except as otherwise expressly provided
in this Agreement, be in the name of the Management Company; provided, however,
that without the prior approval of the Operations Committee (as hereinafter
defined), the Management Company shall not enter into any agreement pursuant to
which an unaffiliated (as hereinafter defined) third party will perform
substantially all of the duties of the Management Company set forth in Section
3.6(a) hereof. The Management Company shall have no authority, directly or
indirectly, to perform, and shall not perform or enter into any agreement to
perform, Medical Group Services or any other medical function required by law to
be performed by a licensed physician or by any other licensed health care
professional. As used herein, "unaffiliated third party" means, with respect to
the Management Company, a person or entity that is not controlled by or under
common control with the Management Company.
(e) The Management Company shall comply in all material respects with all
applicable material Federal, state and local laws, regulation, and ordinances in
connection with the provision of the Management Services hereunder.
3.2 Premises.
(a) The Medical Group, as of the Commencement Date, leases premises
and provides Medical Services at the following locations:
(i) 1212 E. Broward Boulevard Fort Lauderdale, Florida 33301
(ii) 4850 W. Oakland Park Boulevard Lauderdale Lakes, Florida
33313
Immediately prior to the Commencement Date, all of the above-identified premises
were leased to the Medical Group, in
-5-
<PAGE>
the Medical Group's name. Effective from and after the Commencement Date, each
of the leases for such premises are to be assigned from the Medical Group to the
Management Company pursuant to an assignment (each, an "Assignment of Lease")
substantially in the form attached hereto as Exhibit B. During the Term, the
Medical Group shall, subject in all instances to the terms of such leases, have
the right to use such premises solely for the provision of Medical Services in
accordance with the terms of this Agreement. In connection therewith, the
Medical Group agrees in all instances to abide by all of the terms and
provisions of all such leases. Upon the expiration of each of the leases
assigned in accordance with this Section 3.2(a), the Management Company shall
use its best efforts to enter into a new lease, in the name of the Management
Company, with the landlord of such premises; provided, however, that the
approval of the Medical Group, which shall not be unreasonably withheld, shall
be required in the event of any substantial changes in the terms of such lease,
and if the Medical Group does not give such approval, the failure to enter into
such new lease shall not constitute a default of the Management Company. Each
assigned lease and each new lease entered into between the Management Company
and the landlord is referred to herein as an "Office Lease."
(b) A New Medical Office (as hereinafter defined) may be opened only upon
the agreement of the Medical Group and the Management Company. The capital costs
and start-up costs reasonably required in connection with the opening of any New
Medical Office shall be borne as set forth in Section 5 hereof. The premises of
any New Medical Office shall be leased by the Management Company, in the
Management Company's name, and the Medical Group shall, subject in each instance
to the terms of any such lease, have the right to use the premises of any such
New Medical Office solely for the provision of Medical Services in accordance
with the terms of this Agreement. In connection therewith, the Medical Group
agrees in all instances to abide by
-6-
<PAGE>
all of the terms and provisions of all such leases. Notwithstanding anything to
the contrary contained in this Agreement, the Management Company may, in its
sole discretion, determine to permanently close any New Medical Office if such
office is not, after 12 months of operation, profitable (as hereinafter defined
and as determined in the sole discretion of the Management Company); provided,
however, that if the Medical Group elects to pay 80% of any deficit generated by
the operations of such New Medical Office at all times after the initial 12
months and until such New Medical Office becomes profitable, then the Management
Company shall not close such New Medical Office; provided further, however, that
notwithstanding the foregoing, if such New Medical Office incurred a loss during
the initial 12 months of operation in excess of $100,000, then such New Medical
Office shall be closed in the sole discretion of the Management Company unless
the Medical Group agrees to incur all future costs and expenses (including
Management Company Operating Costs) associated with such office until it becomes
profitable. As used herein, "profitable" means, as to any New Medical Office,
that the aggregate revenues generated by such New Medical Office during any
calendar year exceed the aggregate costs and expenses relating to the operation
of such New Medical Office during such calendar year.
(c) Except as set forth in Sections 3.2(a) or (b) above, the closing or
relocation of any offices of the Medical Group shall be subject to agreement by
the Medical Group and the Management Company.
(d) The services to be provided by the Management Company with respect to
the premises leased in accordance with this Section 3.2 shall include, without
limitation, the negotiation and renegotiation of leases, communication with the
landlords of the respective premises, identification of potential new locations
for Medical Group offices, financial analysis relating to the opening, closing,
and relocation of any offices,
-7-
<PAGE>
arrangement of necessary repairs, maintenance and improvements, procurement of
property insurance, arrangement of telephone and other utility services, and
hazardous waste disposal, and all other reasonably necessary or appropriate
services related to all of the offices of the Medical Group.
(e) The Management Company also shall provide all necessary or appropriate
leasehold improvements to each of the premises, subject to prior approval as
provided in Section 8.2 hereof.
(f) The Medical Group acknowledges that the Management Company makes no
warranties or representations, expressed or implied, regarding the condition of
any of the leased premises.
3.3. Equipment.
(a) During the Term, the Management Company shall provide to the Medical
Group the diagnostic and therapeutic medical equipment reasonably required by
the Medical Group in connection with the provision of Medical Group Services
(collectively, the "Medical Equipment"). The Management Company shall acquire
(or lease), at its cost, all Medical Equipment, and the Management Company shall
retain ownership of (or the leasehold interest with respect to) all Medical
Equipment. As used herein, the term Medical Equipment shall not include medical
equipment used in connection with a New Ancillary Service (as hereinafter
defined).
(b) The Management Company also shall provide to the Medical Group all
furniture, furnishings, trade fixtures, and office equipment reasonably required
in connection with the provision of Medical Group Services pursuant to this
Agreement (collectively, "FF&E"). The Management Company shall acquire, at its
cost, all FF&E, and the Management Company shall retain ownership of all FF&E.
As used herein, the term FF&E does not
-8-
<PAGE>
include furniture, furnishings, trade fixtures, and office equipment used in
connection with a New Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation, or
other disposition of any Equipment shall require prior approval as provided in
Section 8.2 hereof. All of the Equipment acquired by the Management Company
under the Asset Purchase Agreement and maintained after the date hereof in any
facility operated by the Medical Group shall be provided to the Medical Group
for its exclusive use and benefit.
(d) The Medical Group's right to use the Equipment shall be subordinate to
the rights of any unaffiliated third party to which the Management Company
elects, in its sole discretion, to grant any security interest, mortgage, lien
or other encumbrance in or on the Equipment. The Medical Group shall use the
Equipment only in connection with its provision of the Medical Group Services,
and the Medical Group shall not alter, repair, augment, or remove the Equipment
from the premises of the Medical Group without the prior written consent of the
Management Company and any lessor thereof, which approval may be granted or
withheld in the Management Company's or such lessor's sole discretion. To the
extent the Equipment is utilized by the Medical Group in the provision of
Medical Group Services, the Medical Group shall have the right to exercise
reasonable control over the use of such Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so that
all such Equipment shall function continuously (subject to interruptions not
reasonably avoidable) in accordance with the manufacturer's specifications and
so that all conditions imposed
-9-
<PAGE>
by the manufacturer to maintaining the continued effectiveness of any warranty
on such Equipment shall be satisfied. The Management Company shall take all
reasonable steps to provide that all necessary service and maintenance is
obtained in a prompt and timely manner, so as to minimize the amount of time
that any of the Equipment is not available for usage by or for patients of the
Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER
RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT,
THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR
PURPOSE. Nothing in this Agreement shall be construed to affect or limit in any
way the professional discretion of the Medical Group to select and use any
Equipment acquired by the Management Company in accordance with the terms of
this Agreement insofar as such selection or use constitutes or might constitute
the practice of medicine.
3.4. New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means the
technical component (but not the professional component) of the following,
except as set forth in Schedule I:
(i) Physical therapy (excluding those services provided in the Medical
Group's offices as of the Signature Date);
(ii) Magnetic resonance imaging and/or other imaging services (except
diagnostic radiology);
(iii) Outpatient surgery;
-10-
<PAGE>
(iv) Densitometry; and
(v) Other revenue-producing services generally recognized as
ancillary services, but excluding the following:
(A) Any services provided on a regular basis by the Medical Group
immediately prior to the Commencement Date, including without
limitation (1) plain film and other diagnostic radiology (if any)
and (2) ultrasound for pediatric patients; and
(B) Any service performed in connection with new Medical Equipment
acquired to replace existing Medical Equipment so long as the new
Medical Equipment performs substantially the same functions as
the replaced Medical Equipment.
New Ancillary Services do not include the sale or provision of (or services
rendered in connection with) prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, crutches, casts, or any other supplies or similar items
which are billable to patients or payors, all of which are to be included in the
scope of Medical Group Services.
(b) New Ancillary Services may be established only upon agreement of the
Medical Group and the Management Company. Such agreement shall be memorialized
in a written agreement executed by the parties (or in a written amendment to
this Agreement) under which the Management Company agrees to provide all of the
Management Services described in this Section 3 in connection with such New
Ancillary Service, and for which the Management Company shall be compensated as
described in Section
-11-
<PAGE>
5.8 of this Agreement, except as may otherwise be agreed upon by the parties.
3.5. Administration, Finance and Accounting.
The Management Company shall provide or arrange for the provision of all
administrative, financial, and accounting functions necessary for the operation
of the Medical Group, including, without limitation, the following (if
applicable):
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
(c) Preparing accounts receivable summary reports, including various
analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical Group's
General Partnership Agreement (the "Partnership Agreement") prior to
distribution of payments to outside parties; provided, however, that
the Management Company shall not be responsible for or liable with
respect to interpretations of the Partnership Agreement.
(e) Disbursement of payables, including payables of the Medical Group;
provided, however, that payables of the Medical Group shall be paid
from an account of the Medical Group and not from any of the
Management Company's bank accounts, and all checks drawn on any
Medical Group account shall be signed by a partner in the Medical
Group or another authorized representative of the Medical Group.
(f) Negotiation of vendor contracts.
-12-
<PAGE>
(g) Performing monthly accounting functions, including bank
reconciliations, maintenance of books and records, and preparation of
financial statements.
(h) Analyzing financial data as reasonably requested by physicians.
(i) Analyzing potential New Medical Office locations, and coordinating all
functions associated with opening New Medical Office locations.
(j) Preparing monthly financial and medical practice statistics reports by
satellite office and by physician, and the Management Company shall
use its reasonable efforts to have such reports available, with
respect to any given month, 20 days after the end of such month.
(k) Providing from the Medical Group's bank account(s) monthly draws
to physicians and professional corporations pursuant to service
agreements, monthly profit and loss distributions, and quarterly bonus
calculations; provided, however, that the Management Company shall not
be responsible for or liable with respect to interpretations of the
Partnership Agreement; provided, further, that all checks drawn on any
Medical Group bank account shall be signed by a partner in the Medical
Group or other authorized representative of the Medical Group.
-13-
<PAGE>
(l) Calculating physicians' and partnership's annual earnings based on the
Medical Group's profit and loss distribution formulas.
(m) Ongoing day-to-day communication with the managing partner (or other
manager of the Medical Group) and assisting such person in fulfilling
his responsibilities.
(n) Preparing agendas and information packages for Medical Group meetings.
(o) Developing budgets and long-term strategies for the Medical Group,
including an initial long-term plan and capital expenditures budget
and the Management Company shall use its reasonable efforts to have
such plan and budget delivered to the Medical Group within 180 days
and 90 days, respectively, after the Commencement Date.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Sponsoring employee benefit plans and providing administrative
services relating thereto for the Medical Personnel (as hereinafter
defined).
(s) Coordinating recruitment, interviewing, and hiring of new physicians.
(t) Implementing Medical Group fee schedule increases and/or decreases.
(u) Coordinating depositions and court appearances.
-14-
<PAGE>
(v) Assisting in the coordination of call schedules.
(w) Assisting in the coordination of coverage of athletic team events.
(x) Acting as liaison to hospital administration, physical therapy,
surgery center, MRI, and other ancillary services entities.
(y) Cooperating with outside accountants in preparing various schedules
and providing other information.
(z) Interacting with legal counsel as necessary.
(aa) Preparing and filing all state and Federal reports regarding health
care ownership and referrals, including, without limitation, group
practice compliance certification, and HCCCB tax reports, provided
that the Management Company shall not be obligated to perform the
duties under this clause (aa) prior to March 1, 1998.
3.6. Billing and Collection.
(a) The Medical Group acknowledges that ownership of all Accounts (as
hereinafter defined) is transferred by the Medical Group to the Management
Company as provided in greater detail in Section 5.1 of this Agreement. In order
to facilitate the collection of the Accounts, the Management Company shall (i)
bill patients and third party payors in the Medical Group's name; (ii) collect
accounts receivable resulting from such billing; (iii) receive payments and
prepayments from the Medical Group's patients, Blue Cross and Blue Shield
organizations, insurance companies, health care plans, Medicare, Medicaid, HMOs,
and any and all other third party payors; (iv) take possession of and deposit
into such bank (the "Medical Group Bank") as the Medical
-15-
<PAGE>
Group designates, in an account established by the Medical Group in the name of
the Medical Group (the "Medical Group Collections Account"), any and all checks,
insurance payments, cash, cash equivalents and other instruments received for
Medical Group Services; and (v) initiate with the consent of the Medical Group,
which consent may be withheld by the Medical Group in its sole and absolute
discretion, legal proceedings in the name of the Medical Group to collect any
Accounts and monies owed to the Medical Group, to enforce the rights of the
Medical Group as a creditor under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by governmental
agencies (or their fiscal intermediaries) as third-party payors.
(b) From time to time at the Management Company's request, the Medical
Group shall make available to the Management Company one or more authorized
partners or other authorized signatories (the "Authorized Partners") of the
Medical Group to sign any letters, checks, instruments or other documents (the
"Documents") on behalf of the Medical Group that are necessary for the
Management Company to take the actions specified in this Section 3.6 and to
perform its duties under this Agreement. If the Management Company notifies the
Medical Group that an Authorized Partner is not signing the Documents in a
timely manner, the Management Company shall not be liable for any failure to
perform its duties hereunder or for any failure to take the actions specified
herein or to perform the Management Services to the extent caused by the failure
of an Authorized Partner to sign the Documents in a timely manner.
(c) The Management Company represents and warrants to the Medical Group
that it has sufficient knowledge and expertise in the area of billing for
orthopedic and other medical services and ancillary services to be able to
adequately perform the billing services required by the Medical Group hereunder.
The Management Company shall submit all bills and manage the
-16-
<PAGE>
billing process on a timely basis in accordance with the terms of this Agreement
and applicable law.
(d) Without limiting the generality of the foregoing, the Management
Company shall bill patients, bill and submit claims to third party payors,
perform appropriate coding for each bill, and collect all fees for professional
and other services rendered and for items supplied to patients by the Medical
Group, all in a timely manner and in accordance with parameters and criteria
established by the Operations Committee (as hereinafter defined). Additionally,
the Management Company shall provide the following services which are currently
being provided by or on behalf of the Medical Group:
(i) Receive and collect from patients at the time of visit all
appropriate payments and pre-payments, including co-pays, deductibles,
payments for non-covered medical services, and deposits for surgeries (if
applicable), and shall obtain all appropriate insurance and other
information required.
(ii) Submit claims utilizing electronic billing submission, whenever
appropriate.
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanics for delinquent accounts of all insurance
classifications, all in a timely fashion as determined by the Operations
Committee.
(iv) Turn over to outside collection agencies all delinquent accounts
satisfying the criteria established by the Operations Committee. The
Management Company shall also follow-up on the performance of the outside
collection agencies and make changes, if necessary, and shall reconcile
each account turned over to the summary data provided by the collection
agency.
-17-
<PAGE>
(v) Write-off account balances according to criteria approved by the
Operations Committee.
(vi) Prepare claim reviews in accordance with criteria approved by the
Operations Committee.
(vii) Bill workers' compensation medical services at rates equal to
the most recently approved Florida workers' compensation fee schedule.
(viii) Apply "insurance only" and other courtesy write-offs in
compliance with Operations Committee policy.
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), the Management Company shall determine that payments
received from PPOs and HMOs are in compliance with their respective
contracts with the Medical Group.
(x) With respect to capitation fee contracts with HMOs, the Management
Company shall:
(a) Follow-up to ensure that payments to the Medical Group are made on a
timely basis;
(b) Review and audit enrollment data provided by the HMO to ensure that
the Medical Group is being compensated for the proper number of lives
enrolled; and
(c) Review and audit appropriateness of withholds and reserves with
respect to specialty risk pools.
(xi) With respect to lien accounts, the Management Company shall:
(a) Ensure that appropriate documents are signed and agreed to initially
as between the Medical Group, attorney and patient;
-18-
<PAGE>
(b) Follow-up on a regular basis as to the status of the account; and
(c) Apply the policies of the Operations Committee in resolving open
account balances.
(xii) With respect to student athlete accounts, the Management Company
shall coordinate insurance and other information in compliance with the
policy of the Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, the Management Company
shall follow-up on a timely basis to ensure that withheld amounts are
returned to the Medical Group, if warranted, and to ensure that amounts not
returned are verified and audited for appropriateness.
(xiv) Coordinate the timely payment of refunds to patients and third
party payors when appropriate.
(xv) Ensure that revenues related to depositions, record review and
court appearances are accounted for, monitored, followed-up, and ultimately
collected.
3.7. Administrative Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of all of the following non-medical personnel necessary
for the conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration;
(ii) Accounting;
(iii) Billing and Collection;
(iv) Secretarial;
-19-
<PAGE>
(v) Transcription;
(vi) Appointments;
(vii) Switchboard;
(viii) Medical Records;
(ix) Chart Preparation;
(x) Historians;
(xi) Clinic Support; and
(xii) Marketing.
(b) The Management Company shall determine and pay the salaries and fringe
benefits of the Administrative Personnel, and shall provide other personnel
services related to the Administrative Personnel, including, but not limited to,
scheduling, personnel policies, administering continuing education benefits, and
payroll administration.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify
educational and employment experience, licensure, and insurability.
(d) The Management Company shall attempt, consistent with sound business
practices, to honor Medical Group requests with regard to the retention or
assignment of specific Administrative Personnel to the Medical Group. In the
event that the Management Company receives a complaint from the Medical Group
that any of the Administrative Personnel is interfering with or disrupting the
provision of Medical Services by the Medical Group, the Management Company will
use reasonable efforts to attempt to promptly remedy any such complaint. If any
such complaint is not remedied to the reasonable satisfaction of the Medical
Group, then the Management Company shall remove such Administrative Personnel,
if requested by the Medical Group, from
-20-
<PAGE>
the Medical Group's facilities, if and to the extent such action by the
Management Company will not violate any applicable law.
(e) All of the services provided by the Management Company under this
Section 3.7, including the obligations set forth in Section 3.7(d), shall be
performed in compliance with all applicable state and Federal laws.
3.8 Technical Personnel; Leased Employees.
(a) Subject to the conditions set forth in this Section 3.8, the Management
Company shall employ or contract with, or shall arrange for, and shall provided
to the Medical Group as leased employees, such Technical Personnel (as
hereinafter defined) as may be reasonably necessary for the conduct of the
Medical Group's professional practice.
(b) For purposes of this Agreement, "Technical Personnel" means nurses,
medical assistants, x-ray technicians, other technicians, and other personnel
who perform diagnostic tests or other services that are covered by Medicare or
by other third party payors when performed by an employee of a physician under
the physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall exercise,
such supervision and control over the activities of the Technical Personnel as
may be necessary for the Technical Personnel to be considered leased employees
under the Medicare program and under applicable law. Without limiting the
generality of the foregoing, the Medical Group shall:
(i) have the right to have any Technical Personnel terminated from
employment;
(ii) furnish the Technical Personnel with the equipment and
supplies needed by the Technical Personnel for their work;
-21-
<PAGE>
(iii) provide the Technical Personnel with any necessary training;
(iv) instruct the Technical Personnel regarding their activities
performed for the Medical Group;
(v) establish the hours of work for the Technical Personnel;
(vi) approve vacation time and other time off from work; and
(vii) provide that degree of supervision as is required by
Medicare and by other third party payors to satisfy applicable conditions
for coverage thereunder.
(d) With respect to each of the Technical Personnel, the
Management Company shall verify or arrange for the verification of
educational and employment experience, licensure and insurability, and
shall review and provide the Medical Group with copies of any complaints
contained in public files with applicable state and Federal commissions.
3.9. Medical Personnel.
(a) The Management Company shall, upon request by the Medical Group, assist
the Medical Group in recruiting Medical Personnel. The employment or retention
of any Medical Personnel shall be in the sole discretion of the Medical Group.
The employment or retention of any Medical Personnel shall be in the sole
discretion of the Medical Group. "Medical Personnel" means:
(i) Physicians (including fellows and residents, if any) providing
professional medical services who are employees or independent
contractors of the Medical Group; and
(ii) Physician assistants, nurse practitioners, and other health
care professionals who provide services
-22-
<PAGE>
that are billable to patients or third party payors under the name of
such health care professional (as distinguished from services that are
billable under the name of the supervising physician).
(b) With respect to each of the Medical Personnel, the Management Company
shall verify educational and employment experience, licensure and insurability,
and shall review and provide the Medical Group with copies of any complaints
contained in public files with applicable state and Federal sanctioned
commissions.
3.10. Inventory and Supplies.
The Management Company shall order and purchase inventory and supplies on
behalf of the Medical Group, and such other ordinary or appropriate materials as
the Management Company and the Medical Group may mutually agree is necessary for
the Medical Group to carry out its Medical Group Services. Inventory and
supplies shall include, but not be limited, to:
(a) Medical supplies;
(b) Office supplies;
(c) Postage;
(d) Computer forms and supplies;
(e) Printing and stationary supplies;
(f) Printer supplies;
(h) Uniforms;
(i) Duplication services; and
(j) Linen and laundry supplies.
-23-
<PAGE>
3.11. Taxes.
The Management Company shall provide the Medical Group with timely access
to all information necessary for the Medical Group to prepare its tax returns.
The Management Company shall have no responsibility for:
(a) The payment of the Medical Group's taxes; or
(b) The preparation of any partnership income tax returns or related
Schedule K-1 forms for the Medical Group.
3.12. Information Systems Management.
(a) The Management Company shall provide or arrange for the provision of
all management information systems services to be utilized by the Medical Group.
These services shall include, but not be limited to, ongoing maintenance and
improvement of the information systems used by the Medical Group in connection
with the provision of the following services:
(i) Accounts receivable - Billing/Insurance/ Collections;
(ii) On-line appointment scheduling;
(iii) Internal e-mail;
(vi) On-line transcription;
(v) Faxing subsystem;
(vi) Electronic claims submission;
(vii) Patient flow monitoring system;
(viii) Authorization module;
(ix) Prescription module;
(x) X-ray tracking system;
(xi) Voice mail;
-24-
<PAGE>
(xii) Paperless medical records; and
(xiii) Bar code chart tracking system.
(b) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical Group's payor agreements; provided, however, that in no event
shall a breach of such confidentiality be deemed a default under this Agreement
if the Management Company acted reasonably and in good faith to protect such
confidentiality.
3.13. Use of New Technologies in the Practice of Medicine.
The Management Company shall promote the integration of new technologies
into the professional practice of the Medical Group, including, without
limitation, the use of satellite and other telecommunications services that
permit the provision of remote consultations, virtual operations, and other
professional services; provided, however, that the foregoing shall be subject to
the terms of Section 8.2(e) hereof.
3.14. Public Relations; Marketing and Advertising.
The Management Company shall develop and implement community outreach
programs and public relations programs designed to educate the patient
population regarding the Medical Group, the availability of its medical
services, and the availability in terms of any managed care programs in which
the Medical Group participates. The Management Company also shall develop and
implement marketing and advertising programs as reasonably required to promote
and expand the Medical Business, subject to any approved budgets. The programs
shall be conducted in compliance with applicable laws and regulations governing
advertising by the medical profession. Any promotional materials created solely
for the purpose of marketing the services provided by the Medical Group and the
use of any individual physician's
-25-
<PAGE>
name in any promotional materials shall require the consent of the Medical Group
or such physician, as the case may be.
3.15. Insurance.
The Management Company shall provide the insurance coverage described in
Sections 12.1 and 12.2 of this Agreement.
3.16. Files and Records.
(a) To the extent permitted by applicable law, the Management Company shall
supervise and maintain custody of all files and records relating to the
operation of the business of the Medical Group, including, without limitation,
accounting, billing, collection, or patient medical records. The management of
all files and records shall be in compliance with applicable state and Federal
statutes. Patient medical records shall at all times be and remain the property
of the Medical Group and shall be located at a location that is readily
accessible for patient care. The Management Company shall preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purposes necessary to perform the management
services set forth herein; provided, however, that in no event shall a breach of
such confidentiality be deemed a default under this Agreement if the Management
Company acted reasonably and in good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of files and
records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the
Commencement Date. Any change in such policies shall be subject to the approval
of the Operations Committee.
-26-
<PAGE>
(c) In the event of termination of this Agreement, the Management Company
shall deliver to the Medical Group at no charge a copy of the books and records
of the Medical Group in the Management Company's possession. In the event any
physician of the Medical Group terminates his affiliation with the Medical Group
during the Term, the Management Company shall, within 30 days of receipt of
written instructions from the Medical Group, deliver to such physician a copy of
the books and records pertaining to the services provided by such physician
during the five years prior to such physician's departure from the Medical
Group; provided that the Management Company shall not be obligated to return any
books and records pertaining to services provided prior to the Commencement
Date.
3.17. Managed Care Contracts.
The Management Company shall solicit, negotiate and administer all managed
care contracts on behalf of the Medical Group based on parameters and criteria
established by the Operations Committee. Such services shall be performed by the
Management Company as agent of the Medical Group, and all managed care contracts
shall be subject to the Medical Group's prior approval of any such contract. The
Management Company shall prepare cost forecasts and other analyses as reasonably
requested by the Medical Group in order to allow the Medical Group to make an
informed decision with respect to each proposed contract.
3.18. Budgets.
The Management Company shall prepare, for the review and approval of the
Operations Committee, annual operating budgets (the "Budgets") reflecting in
reasonable detail projected Billings, Collections, Medical Group Costs, and
Management Company Operating Costs (all as hereinafter defined); provided,
however, that the Medical Group shall provide the Management Company with a
proposed Budget covering the initial three-month
-27-
<PAGE>
period under this Agreement. The initial Budget, which shall be applicable to
the period commencing on the Commencement Date and ending three (3) months
thereafter, is attached hereto as Schedule II. All other budgets shall be on a
calendar year basis. The Management Company shall prepare and submit to the
Operations Committee all subsequent Budgets on or before December 15 of the year
immediately preceding the calendar year for which any Budget is applicable.
3.19. Force Majeure.
The Management Company shall not be liable to the Medical Group for failure
to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, unavailability of supplies, changes in
applicable law or regulations or other events over which the Management Company
has no control for so long as such events continue and for a reasonable time
thereafter.
SECTION 4. Equity Participation.
In consideration of the Medical Group's entering into this Agreement, the
Management Company shall provide to each person identified on Schedule III
attached hereto (the "Eligible Parties") the consideration set forth opposite
such person's name on Schedule III, which consideration consists of cash and
equity.
SECTION 5. Costs, Compensation, and Other Payments.
5.1. Ownership of Accounts; Security.
The Medical Group hereby transfers to the Management Company ownership of
all accounts receivable and other rights to payment arising from the provision
by the Medical Group of orthopedic medical and surgical services and related
medical services to the general public during the Term (the "Accounts");
provided, however, that the right to payment of Medicaid and Medicare
receivables shall remain with the Medical Group in
-28-
<PAGE>
accordance with applicable Federal and state law. The Management Company shall
have the right to grant to any lender (the "Lender") a first priority lien and
security interest in and with respect to the Accounts, together with all books,
records, computer information and other general intangibles relating thereto
(collectively, the "Collateral"), as security for the obligations of the
Management Company to the Lender. The Medical Group shall cooperate with the
Lender as reasonably requested in the event the Lender seeks to enforce its
rights and remedies under its agreement with the Management Company, including
granting the Lender access, to the extent permitted by law, to all books and
records associated with the Collateral. Neither the Management Company nor the
Lender shall be required to give the Medical Group any notice in connection with
any loan or related financing arrangements affecting the Accounts or other
Collateral.
5.2. Bank Accounts.
The Medical Group shall instruct the Medical Group Bank to transfer, on a
daily basis, all funds in the Medical Group Collections Account (less the amount
necessary to avoid the payment of bank charges or fees relating to the failure
to maintain a minimum balance in the Medical Group Collections Account) to a
bank (the "Management Company Bank") designated by the Management Company, for
credit to an account in the Management Company's name (the "Operating Account").
5.3. Medical Group Compensation.
(a) Monthly Draw.
(i) On each Draw Date (as hereinafter defined) during the Term hereof,
the Management Company shall distribute to the Medical Group an amount
equal to a percentage (the "Draw Percentage") of the Medical Group's total
Billings (as hereinafter defined) for Medical Group
-29-
<PAGE>
Services provided during the previous month (the "Monthly Draw"). The Draw
Date and the initial Draw Percentage are as set forth on Schedule IV, and
the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each year
thereafter, the Draw Percentage shall be adjusted to equal a fraction, the
numerator of which is the Annual Medical Group Compensation Amount (as
hereinafter defined) for the previous year, and the denominator of which is
the total amount of Billings for the previous year.
(b) Annual Settlement.
(i) On or before April 30 of each year beginning 1998, the Management
Company shall determine the compensation (the "Annual Medical Group
Compensation Amount") earned by the Medical Group with respect to the prior
calendar year in accordance with the following calculation:
(A) The total Collections for all Medical Group Services
rendered during such year, minus
(B) the sum of the following:
(1) the Management Fee earned by the Management Company fo
the previous calendar year; and
(2) the Authorized Management Company Operating Costs (as
hereinafter defined) incurred by the Management Company
during such year.
-30-
<PAGE>
(ii) If the Annual Medical Group Compensation Amount thus determined
exceeds (the "Annual Shortfall") the total of the twelve (12) Monthly Draws
paid by the Management Company to the Medical Group during the previous
calendar year (the "Annual Draw Amount"), the Management Company shall pay
to the Medical Group on or before May 15, an amount equal to the Annual
Shortfall. If the Annual Medical Group Compensation is less (the "Annual
Overpayment") than the Annual Draw Amount, the Management Company shall
withhold from the Monthly Draw otherwise payable to the Medical Group,
during each of the following six (6) months, an amount equal to one-sixth
(1/6) of such Annual Overpayment.
(iii) With respect to this Section 5.3(b), for purposes of determining
the total Collections for all Medical Group Services provided during any
calendar year (or portion thereof) during the Term, all Collections during
January, February, and March of each year (or portion thereof) shall be
deemed to be for Medical Group Services rendered during the previous
calendar year, and all Collections during April through December shall be
deemed to be for Medical Group Services rendered during the calendar year
(or portion thereof) during the Term in which such Collections were
received. The foregoing shall also apply with respect to determining the
Management Fee earned by the Management Company for the previous calendar
year, for purposes of this Section 5.3(b).
(iv) Notwithstanding anything to the contrary set forth herein, the
first period for which the annual settlement described in this Section
5.3(b) shall be applicable is the period commencing on the Commencement
Date and ending on December 31, 1997.
(c) For purposes of this Agreement:
-31-
<PAGE>
(i) "Billings" means, for any applicable period, the gross charges of
the Medical Group for all Medical Group Services furnished during such
period.
(ii) "Collections" means, for any applicable period, all cash or cash
equivalents received during such period, net of refunds paid during such
period, for Medical Group Services.
(iii) "Medical Group Services" means the following services rendered
by, through, or on behalf of the Medical Group: all professional services
rendered by or under the supervision of any of the Medical Personnel
(including professional services rendered in connection with New Ancillary
Services); all plain film and other diagnostic radiology services rendered
by or under the supervision of any of the Medical Personnel; all other
ancillary services (other than New Ancillary Services); all ultrasound for
pediatric patients; all prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, and other items and supplies that are billable to
patients or to third party payors; depositions, record review services,
court appearances, and independent medical exams; and all other services
provided on a regular basis by the Medical Group immediately prior to the
Commencement Date (except as set forth below).
(iv) It is the intent of the parties that Billings, Collections, and
Medical Group Services not include any of the following:
(A) New Ancillary Services (excluding professional services
rendered by Medical Personnel in connection therewith, which
professional services are included under Section 5.3(c)(iii)
above);
-32-
<PAGE>
(B) interest income;
(C) royalties payable to any Medical Group physician for medical
inventions;
(D) fees payable under consulting agreements entered into by
Medical Group physicians;
(E) revenues from presentations, publications, medical
directorships, serving as head of a hospital department,
home health, hospice or nursing facility, and endorsements;
(F) proceeds from the sale of any capital assets of the Medical
Group; and
(G) any income from investments.
Notwithstanding anything to the contrary contained herein, any revenues received
by any Billable Medical Personnel (as hereinafter defined) from any source set
forth in clause (E) above, shall be included in Billings, Collections and
Medical Group Services if the revenues from Medical Group Services generated by
such Billable Medical Personnel during any year are materially reduced by the
Billable Medical Personnel's participation in such activity.
(v) For illustrative purposes only, an example of the computation of
the Annual Settlement is set forth on Schedule VII attached hereto.
5.4. Management Fee.
(a) The compensation payable to the Management Company for the provision of
Management Services under this
-33-
<PAGE>
Agreement (the "Management Fee"), which the Management Company may disburse from
time to time at its discretion, shall be equal to (i) the sum of (A) the
Applicable Percentage (as hereinafter defined) of Net Operating Income (as
hereinafter defined), (B) an amount equal to sixty-six and two-thirds percent
(66-2/3%) of the Professional Management Cost Savings (as hereinafter defined)
and (C) any amounts owed to the Management Company pursuant to Section 5.11
hereof, if any, less (ii) an amount equal to the Medical Group's pro rata
portion of the Specialty Care Network Profit (as hereinafter defined) for such
period , if any, based on the number of claims generated by the Medical Group
through the specialty care network owned or operated by the Management Company
during the applicable period; provided, however, that in the event the
Applicable Percentage of Net Operating Income shall equal an amount that is less
than $400,000 for any calendar year ending on or before December 31, 2004, the
Management Fee for such period shall, notwithstanding anything to the contrary
contained herein, equal $400,000 plus the amounts described in clauses (B) and
(C) above (the "Guaranteed Minimum Fee"); provided further, however, that at
such time as the sum of the amounts determined by taking the Applicable
Percentage of Net Operating Income for each calendar year ending on or prior to
the date of determination shall equal or exceed $3,000,000, the preceding
provisions relating to the payment of a Guaranteed Minimum Fee shall be null and
void as to any future periods. Notwithstanding anything contained herein to the
contrary, the portion of the Management Fee calculated for the month of April
1997 by the Medical Group, and payable to the Management Company for such month,
shall equal $45,000. For illustrative purposes only, an example of the
computation of the Management Fee is set forth on Schedule VII attached hereto.
(b) For purposes of this Section 5.4, the following terms have the meanings
set forth below:
-34-
<PAGE>
(i) "Addbacks" means, for any applicable period, the aggregate amount
of expense incurred during such period for the benefit of the Medical Group
for each of the following line items in excess of the respective amounts
budgeted therefor in the Budget for such period: (A) entertainment and (B)
automobiles.
(ii) "Adjusted Operating Expenses" means, for any period, an amount
equal to (A) Professional Practice Cost Savings (as hereinafter defined),
plus (B) Authorized Management Company Operating Costs, minus (C) Addbacks;
(iii) "Applicable Percentage" has the meaning set forth on Schedule V;
(iv) "Net Operating Income" means, for any period, an amount equal to
Collections minus Adjusted Operating Expenses;
(v) "Professional Management Cost Savings" means the Professional
Practice Cost Savings described in Section A.1 of Schedule VI;
(vi) "Professional Practice Cost Savings" means the cost savings
determined in the manner described in Schedule VI; and
(vii) "Specialty Care Network Profit" means the excess of the fee(s)
received by the Management Company over the costs incurred by the
Management Company, each in connection with its ownership and/or operation
of a specialty care network.
5.5. Management Company Costs.
(a) The Management Company shall pay all Management Company Operating Costs
and all Excluded Costs (collectively, the "Management Company Costs"). All
Management Company Costs shall be incurred in the name of the Management
-35-
<PAGE>
Company, and not in the name of the Medical Group, except as specifically
approved by the Medical Group. Management Company Costs shall not include any
costs or expenses incurred prior to the Commencement Date.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the Management
Company Costs.
(c) For purposes of this Agreement, "Management Company Operating Costs"
means all costs and expenses incurred in connection with the provision of the
Management Services, including, without limitation, those costs and expenses set
forth in the Budget, except that any costs and expenses defined as Medical Group
Costs in Section 5.7 hereof, and any Excluded Costs (as hereinafter defined)
shall not be deemed Management Company Operating Costs. To the extent that the
Medical Group and the Management Company mutually determine that an expenditure
not included in the Budget needs to be incurred in connection with the provision
of Management Services hereunder, such expenditure shall be included in
Management Company Operating Costs for purposes of this Agreement. "Excluded
Costs" means all of the following costs and expenses incurred in connection with
the provision of the Management Services hereunder:
(i) New Medical Office Start-Up Costs;
(ii) The cost of any FF&E provided by the Management Company to the
Medical Group, including the capital costs associated with any information
systems technology implemented by the Management Company (subject to the
provisions of Section 8.2(e) hereof); provided that the costs associated
with the maintenance of such technology shall be an expense included in the
Budget and shall be deemed an Authorized Management Company Operating Cost
for purposes of this Agreement;
-36-
<PAGE>
(iii) Depreciation, amortization, and interest; and
(iv) Corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the following conditions are
satisfied:
(A) The Corporate Overhead is incurred in lieu of a pre-existing
Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not exceed the
amount of the Management Company Operating Costs being
eliminated; and
(C) The Corporate Overhead is allocated to the Medical Group and
to all other medical groups utilizing such Corporate
Overhead on a pro rata basis.
Any Corporate Overhead with respect to which all of the above conditions are
satisfied shall be considered Management Company Operating Costs.
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in any
year reduced by any or all of the following, as applicable:
(i) any costs that exceed the applicable Management Company Operating
Costs Budget which are not approved by the Operations Committee;
(ii) any costs with respect to which the Medical Group has reasonably
requested supporting documentation or other backup detail which has not
been
-37-
<PAGE>
furnished by the Management Company or which does not reasonably establish
the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an audit under
Section 5.9 not to have been reasonably incurred in connection with the
Management Services required to be provided under this Agreement.
5.6. New Medical Office Start-Up Costs.
(a) The Management Company shall pay, to the extent provided herein, all
New Medical Office Start-Up Costs incurred in connection with the establishment
of any New Medical Office. The Management Company shall create a separate
division (the "New Office Division") for purposes of accounting for the income,
costs, profits, and losses of any New Medical Office. The Management Company
shall utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of each New
Medical Office. Notwithstanding anything to the contrary contained herein,
Corporate Overhead shall not be included in determining the costs and expenses
associated with any New Medical Office. At the end of the New Medical Office
Start-Up Period (as hereinafter defined), (i) the Management Company shall be
entitled to receive the aggregate Management Fee as described in Section 5.4 and
(ii) the Medical Group shall be entitled to receive the Annual Medical Group
Compensation Amount for such New Medical Office, in each case, as if such New
Medical Office had been any other office of the Medical Group during the New
Medical Office Start-Up Period; provided, however, that notwithstanding the
foregoing, if the Net Operating Income of such New Medical Office for the New
Medical Office Start-Up Period is equal to or less than zero, then (A) all of
the New Medical Office Start-Up Costs shall be borne solely by the Management
Company and such costs shall be considered Excluded Costs for purposes of this
Agreement and (B) the Management Company and the Medical Group
-38-
<PAGE>
shall not be entitled to receive the Management Fee or the Annual Medical Group
Compensation Amount, as applicable.
(b) Except to the extent provided in Section 5.6(a) above, the billings,
collections, costs and expenses relating to any New Medical Office shall not,
during the New Medical Office Start-Up Period, be included in the computations
of Medical Group Compensation, the Management Fee, Management Company Costs,
Ancillary Services, or Medical Group Costs as described in Sections 5.3, 5.4,
5.5, 5.8, or 5.7, respectively.
(c) All Medical Equipment utilized at any New Medical Office shall be
acquired by the Management Company and provided to the Medical Group in
accordance with the terms of Section 3.3 hereof.
(d) For purposes of this Agreement, "New Medical Office" means any office
of the Medical Group other than those offices located in the premises identified
in Section 3.2(a) hereof.
(e) For purposes of this Agreement, "New Medical Office Start-Up Costs"
means the following costs incurred in connection with the establishment of a New
Medical Office during the New Medical Office Start-Up Period: all Management
Company Costs and all costs associated with the development of such New Medical
Office other than Medical Group Costs, provided that, the costs incurred in
connection with any New Physician (as hereinafter defined) shall be borne in
accordance with the provisions of Section 5.11 hereof.
(f) For purposes of this Agreement, "New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of a New Medical Office and ending on the last
day of the calendar month in which a period of twelve (12) months has elapsed
from and after the date on which the New Medical Office
-39-
<PAGE>
first opened for the treatment of patients. In the event that the New Medical
Office is profitable (as defined in Section 3.2(b) and as determined by the
Management Company) as of the end of the New Medical Office Start-Up Period, at
all times thereafter such New Medical Office shall, for all purposes of this
Agreement, be treated as any other office of the Medical Group.
5.7 Medical Group Costs.
Except as otherwise provided in this Agreement, the Medical Group shall pay
all of the costs specified in this Section 5.7 (the "Medical Group Costs"). All
Medical Group Costs shall be incurred in the name of the Medical Group, and not
in the name of the Management Company, and shall be paid from an account of the
Medical Group and not from any bank account of the Management Company. The
Medical Group Costs are as follows:
(a) Compensation of all Medical Personnel that (i) are authorized to
directly bill patients, Medicare, Medicaid and third party payors
and (ii) are employed directly by the Medical Group (such persons
being referred to herein as the "Billable Medical Personnel");
(b) Any applicable fringe benefits for all Medical Personnel,
including, but not limited to, payroll taxes, workers'
compensation, disability insurance, life insurance, 401(k)
retirement plan, business buy-out disability insurance and
continuing education; and
(c) The cost of any items (excluding automobile and entertainment
expenses which shall be included in Authorized Management Company
Operating Costs) which are not required to be provided by the
Management Company under this
-40-
<PAGE>
Agreement and/or which were ordered, purchased, or incurred by the
Medical Group directly, including but not limited to the cost of
accounting, legal, consulting, or other professional or advisory
services, business meetings, and business taxes.
5.8. New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
(i) The Management Company shall create a separate division
("Ancillary Division") for purposes of accounting for the income, costs,
profits, and losses of any New Ancillary Service. The Management Company
shall utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of each New
Ancillary Service. Notwithstanding anything to the contrary contained
herein, Corporate Overhead shall not be included in determining the costs
and expenses associated with any New Ancillary Service.
(ii) Profits and/or losses of any Ancillary Division shall be divided
equally between the Medical Group and the Management Company, and all
distributions to the Medical Group and to the Management Company shall be
made in equal amounts to each from available cash (after payment of all
currently due obligations incurred in connection with such New Ancillary
Division, including, without limitation, any principal and interest amounts
then due and payable under Section 5.8(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such Ancillary Division.
-41-
<PAGE>
(iii) All diagnostic and therapeutic equipment utilized in connection
with any New Ancillary Service ("New Ancillary Service Medical Equipment")
shall be acquired by the Management Company and shall be provided to the
Medical Group on terms substantially similar to those set forth in Section
3.3 hereof.
(iv) The Management Company shall pay all of the Ancillary Service
Start-Up Costs (as hereinafter defined). Beginning with the month following
the expiration of the Ancillary Service Start-Up Period (as hereinafter
defined), the Management Company shall be entitled to recoup all of the
Ancillary Service Start-Up Costs (as hereinafter defined) previously paid
by the Management Company in sixty (60) equal monthly installments of
principal, plus interest on the unrecouped portion of such costs at the
prevailing prime rate as set forth in the Wall Street Journal or at the
actual rate paid by the Management Company with respect to any part of such
costs that have been financed by the Management Company, if applicable.
(v) The Management Company shall provide, in connection with any New
Ancillary Service, the full range of management services described in this
Agreement.
(vi) The billings, collections, costs and expenses relating to any New
Ancillary Service shall not be included in the computations of Medical
Group Compensation, the Management Fee, Management Company Costs, New
Medical Office Start-Up Costs, or Medical Group Costs as described in
Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively.
(b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of the New Ancillary Service, which date shall
not be prior to the date of the agreement establishing such New Ancillary
Service, and ending on the earlier to occur of (i) the last day
-42-
<PAGE>
of the first period of two (2) consecutive calendar months for which the New
Ancillary Service shows a profit or (ii) the last day of the twelfth month after
the establishment of such New Ancillary Service.
(c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs"
means the total of all of the following costs incurred in connection with the
establishment of a New Ancillary Service during the Ancillary Service Start-Up
Period (whether such costs would otherwise be considered Management Company
Costs or Medical Group Costs):
(i) Any lease payments for New Ancillary Service Medical Equipment;
(ii) All costs of acquiring furniture, fixtures, and office equipment;
(iii) All initial occupancy costs, if any, including but not limited
to prepaid rent, and tenant improvements;
(iv) All costs related to the acquisition of materials and supplies
related to the provision of such New Ancillary Service; and
(v) All ongoing costs of the New Ancillary Service, including but not
limited to personnel (other than the Billable Medical Personnel) and
related benefits, the cost of operating any equipment utilized in providing
the service, supplies, insurance, rent, repairs and maintenance, outside
services, telephone, taxes, utilities, storage and other ordinary ongoing
expenses of providing the New Ancillary Service.
5.9 Review and Audit of Books and Records.
Each of the parties shall have the right, during ordinary business hours
and upon reasonable notice, to review and
-43-
<PAGE>
make copies of, or to audit through a qualified certified public accountant
approved by the other party (which approval shall not be unreasonably withheld),
the books and records of the other party relating to the billing, collection,
and disbursement of fees, and the determination of costs, under this Agreement.
Any such review or audit shall be performed at the cost of the requesting party;
provided, however, that in the event that such review or audit requested by the
Medical Group discloses a discrepancy indicating that the Medical Group has
actually been underpaid by an amount in excess of four percent (4%) of the total
amount of Medical Group Compensation otherwise payable to the Medical Group for
the period covered by the audit, the cost of the audit shall be borne by the
Management Company. All documents and other information obtained in the course
of such review or audit shall be held in strict confidence.
5.10. Start-Up Period.
Consistent with the provisions of Section 2 of this Agreement, the parties
acknowledge and agree that, in order to facilitate the transition of
responsibilities hereunder, certain requirements and procedures agreed to under
this Agreement may be implemented, in whole or in part and at any time during
the period commencing on the Commencement Date and ending on July 1, 1997
(subject to extension by agreement of the Medical Group and the Management
Company), rather than being fully implemented immediately on the Commencement
Date. Accordingly, the parties further agree that the Management Fee and Monthly
Draw payable in respect of the Management Services and the Medical Group
Services applicable to such period of time shall be computed, and any
appropriate adjustments shall be made, such that no material financial advantage
or disadvantage shall accrue to either party as a result of implementing such
requirements and procedures over the course of such start-up period rather than
immediately on the Commencement Date.
-44-
<PAGE>
5.11. New Physician Compensation Costs.
(a) Notwithstanding anything contained herein to the contrary, during the
period beginning on the New Physician Start Date (as hereinafter defined) and
ending on the Physician Breakeven Date (as hereinafter defined), the Management
Company shall be responsible for the payment of all New Physician Compensation
(as hereinafter defined) and, notwithstanding anything to the contrary contained
in this Agreement, shall receive, in consideration therefor, sixty six and
two-thirds percent (66 2/3%) of all Collections generated by such New Physician
for those Medical Group Services performed by such New Physician, and such
amounts shall not be included in determining Net Operating Income for purposes
of this Agreement. The remaining thirty three and one-third percent (33 1/3%) of
such Collections shall belong to the Medical Group and shall not be included in
determining Net Operating Income for purposes of this Agreement. As of the
Physician Breakeven Date, the New Physician Compensation shall be payable by,
and become the responsibility of, the Medical Group in accordance with Section
5.7 hereof, and all of the Billings and Collections generated by such New
Physician thereafter shall be considered Billings and Collections for purposes
of this Agreement.
(b) "New Physician" means, any physician who, at any time after the
Commencement Date, becomes affiliated with or employed by the Medical Group;
provided that if such physician becomes affiliated with or employed by the
Medical Group pursuant to a transaction between the Management Company and such
physician or a medical group with which such physician is affiliated in which
the Management Company acquires any assets or accounts receivable from such
physician or such medical group or pays any other consideration to such
physician or such medical group in connection with such physician's affiliation
or employment with the Medical Group and/or the Management Company,
-45-
<PAGE>
then such physician shall not be deemed to be a New Physician for purposes of
this Agreement.
(c) "Physician Breakeven Date" means, with respect to any New Physician,
the date on which the Collections generated by such New Physician during the
period beginning on the New Physician Start Date and ending on the date of
determination first equal or exceed (i) the aggregate amount of New Physician
Compensation paid to such New Physician for the foregoing period plus (ii) that
portion of the Medical Group Costs and Management Company Costs associated with
such New Physician and/or the Medical Group Services provided by such New
Physician.
(d) "New Physician Compensation" means, with respect to any New Physician
and for any period in question, the amount of compensation (wages and otherwise)
payable to such New Physician by the Medical Group.
(e) "Physician Start Date" means, with respect to any New Physician, the
date such New Physician becomes affiliated with or employed by the Medical
Group.
SECTION 6. Representations and Warranties of the Medical Group
The Medical Group hereby represents and warrants to the Management Company,
as of the Signature Date hereof, as follows:
6.1 Organization; Good Standing; Qualification and Power.
The Medical Group is a partnership duly organized, validly existing, and in
good standing under the laws of the State of Florida and has all requisite power
and authority to own, lease, and operate its properties, to carry on its
business as now being conducted and as proposed to be conducted, to enter into
this Agreement, the Asset Purchase Agreement, each Assignment of Lease, and each
Stockholder Non-Competition
-46-
<PAGE>
Agreement (collectively, the "Medical Group Transaction Documents"), to perform
its obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. The Medical Group has delivered to the
Management Company a true and correct copy of its partnership agreement, in
effect on the date hereof.
6.2. Equity Investments.
Except as set forth on Schedule 6.2, the Medical Group currently has no
subsidiaries, nor does the Medical Group currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.
6.3. Authority.
The execution, delivery and performance of this Agreement and the other
Medical Group Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of the Medical Group. This Agreement and the other
Medical Group Transaction Documents have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement or any other Medical Group Transaction Document by the Medical Group
nor the consummation by the Medical Group of the transactions contemplated
hereby or thereby, nor compliance by the Medical Group with any provision hereof
or thereof will conflict with or result in a breach of any provision of the
formation documents of the Medical Group, cause a default (with due notice,
lapse of
-47-
<PAGE>
time or both), or give rise to any right of termination, cancellation or
acceleration, under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument, obligation or
agreement to which the Medical Group is a party or by which the Medical Group or
any of its properties or assets may be bound (with respect to which defaults or
other rights all requisite waivers or consents shall have been obtained at or
prior to the date hereof) or violate any law, statute, rule or regulation or
order, writ, judgment, injunction or decree of any court, administrative agency
or governmental body applicable to the Medical Group or any of its properties or
assets or the Medical Business. Except as provided on Schedule 6.3, to the best
of the Medical Group's knowledge, no permit, authorization, consent or approval
of or by, or any notification of or filing with, any person (governmental or
private) is required in connection with the execution, delivery or performance
by the Medical Group of this Agreement or any other Medical Group Transaction
Document or the consummation of the transactions contemplated hereby and
thereby.
6.4. Financial Information.
Schedule 6.4 contains the Medical Group's internal statements of assets,
liabilities and partners' equity of the Medical Business at January 31, 1997
(the "Balance Sheet"; and the date thereof being referred to as the "Balance
Sheet Date"), and the related internal statements of revenue and expenses for
the one-month period then ended (including the notes thereto and other financial
information included therein) (collectively, the "Internal Financial
Statements"), and (b) the compiled financial statements of the Medical Business
for the periods ended December 31, 1996, December 31, 1995 and December 31, 1994
(the "Review Financial Statements"). The Internal Financial Statements and the
Review Financial Statements (i) are in accordance with the books and records of
the Medical Business, (ii) fairly present the financial position of the Medical
Business as of the dates
-48-
<PAGE>
thereof, (iii) have been prepared in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants consistently applied throughout the periods covered thereby,
and (iv) are true, correct and complete in all material respects as of the dates
thereof.
6.5. Absence of Undisclosed Liabilities.
Except as set forth on Schedule 6.5, as of the Balance Sheet Date, the
Medical Business did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Balance Sheet, all liability reserves established by the
Medical Business on the Balance Sheet were adequate and there were no loss
contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March
1975) which were not adequately provided for or disclosed on the Balance Sheet.
6.6. Absence of Changes.
Except as set forth on Schedule 6.6, since the Balance Sheet Date, the
Medical Business has been operated in the ordinary course and consistent with
past practice and there has not been:
(a) any material adverse change in the condition (financial or otherwise),
assets (including, without limitation, levels of working capital and the
components thereof), liabilities, operations, results of operations, earnings,
business or prospects of the Medical Business;
(b) any damage, destruction or loss (whether or not covered by insurance)
in an aggregate amount exceeding $25,000 affecting any asset or property of the
Medical Business;
-49-
<PAGE>
(c) any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Medical Business other
than such items created or incurred in the ordinary course of the Medical
Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien, encumbrance,
liability or obligation by the Medical Business outside the ordinary course of
the Medical Business (whether absolute, accrued, contingent or otherwise and
whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition of
any tangible or intangible asset of the Medical Business except in the ordinary
course of the Medical Business and consistent with past practice;
(f) any write-off as uncollectible of any accounts receivable in connection
with the Medical Business or any portion thereof in excess of $5,000 in the
aggregate exclusive of all normal contractual adjustments from third party
payors;
(g) except for all normal contractual adjustments from third party payors,
any account receivable in connection with the Medical Business in an amount
greater than $10,000 which (i) has become delinquent in its payment by more than
90 days, (ii) has had asserted against it any claim, refusal to pay or right of
set-off, (iii) an account debtor has refused to pay for any reason or with
respect to which such account debtor has become insolvent or bankrupt or (iv)
has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Medical Business;
-50-
<PAGE>
(i) any general uniform increase in the compensation of employees of the
Medical Group or the Medical Business (including, without limitation, any
increase pursuant to any bonus, pension, profit-sharing, deferred compensation
arrangement or other plan or commitment) or any increase in compensation payable
to any officer, employee, consultant or agent thereof, or the entering into of
any employment contract with any officer or employee, or the making of any loan
to, or the engagement in any transaction with, any officer of the Medical Group
or the Medical Business;
(j) any change in the accounting methods or practices followed in
connection with the Medical Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) any agreement or commitment relating to the sale of any material fixed
assets of the Medical Business;
(l) any other transaction relating to the Medical Business other than in
the ordinary course of the Medical Business and consistent with past practice;
or
(m) any agreement or understanding, whether in writing or otherwise, for
the Medical Business to take any of the actions specified in items (a) through
(l) above.
6.7. Tax Matters.
(a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the
Medical Business required to be paid by the Medical Group through the date
hereof have been paid and all returns, declarations of estimated Tax, Tax
reports, information returns and statements required to be filed by the Medical
Group in connection with the Medical Business prior to the date hereof (other
than those for which extensions shall have been granted prior to the date
hereof) relating to any Taxes with respect to
-51-
<PAGE>
any income, properties or operations of the Medical Group prior to the date
hereof (collectively, "Returns") have been duly filed; (ii) as of the time of
filing, the Returns correctly reflected in all material respects (and, as to any
Returns not filed as of the date hereof, will correctly reflect in all material
respects) the facts regarding the income, business, assets, operations,
activities and status of the Medical Business and any other information required
to be shown therein; (iii) all Taxes relating to the operations of the Medical
Business that have been shown as due and payable by the Medical Group on the
Returns have been timely paid and filed or adequate provisions made to the books
and records of the Medical Business; (iv) in connection with the Medical
Business (x) the Medical Group has made provision on the Balance Sheet for all
Taxes payable by the Medical Group for any periods that end on or before the
Balance Sheet Date for which no Returns have yet been filed and for any periods
that begin on or before the Balance Sheet Date and end after the Balance Sheet
Date to the extent such Taxes are attributable to the portion of any such period
ending on the Balance Sheet Date and (y) provision has been made for all Taxes
payable by the Medical Group for any periods that end on or before the date
hereof for which no Returns have then been filed and for any periods that begin
on or before the date hereof and end after such date to the extent such Taxes
are attributable to the portion of any such period ending on such date; (v) no
tax liens have been filed with respect to any of the assets of the Medical
Business, and there are no pending tax audits of any Returns relating to the
Medical Business; and (vi) no deficiency or addition to Taxes, interest or
penalties applicable to the Medical Group for any Taxes relating to the
operation of the Medical Business has been proposed, asserted or assessed in
writing (or any member of any affiliated or combined group of which the Medical
Group or any previous operator of the Medical Business was a member for which
the Medical Group could be liable).
-52-
<PAGE>
(b) The Medical Group is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Code.
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal, state and foreign Returns of the Medical Group
for the calendar years ending December 31, 1994 and 1995.
(d) For purposes of this Agreement, "Tax" means any of the Taxes and
"Taxes" means, with respect to any person or entity, (i) all Federal, state,
local and foreign income taxes (including any tax on or based upon net income,
or gross income, or income as specially defined, or earnings, or profits, or
selected items of income, earnings or profits) and all Federal, state, local and
foreign gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties or other Federal, state, local and foreign taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) on such person or entity and (ii) any liability for the payment of
any amount of the type described in the immediately preceding clause (i) as a
result of being a `transferee' (within the meaning of Section 6901 of the Code
or any other applicable law) of another person or entity or a member of an
affiliated or combined group.
6.8. Litigation, Etc.
Except as set forth on Schedule 6.8, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Medical Group, threatened against the
Medical Group or in connection with the Medical Business, whether at law or in
-53-
<PAGE>
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality or (b)
judgments, decrees, injunctions or orders of any court, governmental department,
commission, agency, instrumentality or arbitrator against the Medical Group, its
assets or affecting the Medical Business. The Medical Group has delivered to the
Management Company all documents and correspondence relating to matters referred
to in said Schedule 6.8.
6.9 Compliance; Governmental Authorizations.
The Medical Group and the Medical Business have complied in all material
respects with all applicable material Federal, state, local or foreign laws,
ordinances, regulations and orders. The Medical Group has all Federal, state,
local and foreign governmental licenses and permits necessary in the conduct of
the Medical Business, the lack of which would have a material adverse effect on
the Medical Group's ability to operate the Medical Business after the date
hereof on substantially the same basis as presently operated, such licenses and
permits are in full force and effect, the Medical Group has not received any
notice indicating that any violations are or have been recorded in respect of
any thereof, and no proceeding is pending or, to the best knowledge of the
Medical Group, threatened to revoke or limit any thereof. To the best knowledge
of the Medical Group, none of such licenses and permits shall be affected in any
material respect by the transactions contemplated hereby. To the best knowledge
of the Medical Group, neither the Medical Group nor any of the Medical Personnel
employed by the Medical Group is now or in the last four years has been the
subject of or involved in any investigation by any Federal, state or local
regulatory agency related to its or his Medicare, Medicaid or other third party
payor billing practices.
-54-
<PAGE>
6.10. Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts receivable
owing to the Medical Group in connection with the Medical Business as of the
date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Medical Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Medical Group, there are no claims, refusals to pay or other
rights of set-off against any thereof. Except as set forth on Schedule 6.10, as
of the date hereof, there is no account receivable or note receivable of the
Medical Business pledged to any third party. The Medical Group has, within 15
days prior to the Commencement Date, provided the Management Company with an
accounts receivable aging report that is true and complete as of the date given
to the Management Company.
(b) All accounts payable and notes payable by the Medical Business to third
parties arose in the ordinary course of business and, except as set forth in
Schedule 6.10, there is no account payable or note payable past due or
delinquent in its payment.
6.11. Labor Relations; Employees.
Schedule 6.11 contains a true and complete list of the persons employed by
the Medical Group as of the date hereof (the "Employees"). Except as set forth
on Schedule 6.11, (a) the Medical Group and the Medical Business are not
delinquent in payments to any of the Employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them to
the date hereof or amounts required to be reimbursed to the Employees; (b) upon
termination of the employment of any of the Employees, neither the Medical
Group, the Medical Business nor the Management Company will by reason of
anything done prior to the date hereof, or by reason of the consummation of the
transactions contemplated hereby, be liable
-55-
<PAGE>
for any excise taxes pursuant to Section 4980B of the Code or to any of the
Employees for severance pay or any other payments; (c) there is no unfair labor
practice complaint against the Medical Group or in connection with the Medical
Business pending before the National Labor Relations Board or any comparable
state, local or foreign agency; (d) there is no labor strike, dispute, slowdown
or stoppage actually pending or, to the best knowledge of the Medical Group,
threatened against or involving the Medical Group or Medical Business; (e) there
is no collective bargaining agreement covering any of the Employees; and (f) to
the best knowledge of the Medical Group, no Employee or consultant is in
violation of any (i) employment agreement, arrangement or policy between such
person and any previous employer (private or governmental) or (ii) agreement
restricting or prohibiting the use of any information or materials used or being
used by such person in connection with such person's employment by or
association with the Medical Group or the Medical Business.
6.12 Employee Benefit Plans.
(a) Schedule 6.12 identifies each 'employee benefit plan', as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and all other written or oral plans, programs, policies or agreements
involving direct or indirect compensation (including any employment agreements
entered into between the Medical Group or the Medical Business and any Employee
or former employee of the Medical Group or in connection with the Medical
Business, but excluding workers' compensation, unemployment compensation and
other government-mandated programs) currently or previously maintained or
entered into by the Medical Group or in connection with the Medical Business for
the benefit of any Employee or former employee of the Medical Group or in
connection with the Medical Business under which the Medical Group, any
affiliate thereof or the Medical Business has any present or future obligation
or liability (the "Employee Plans"). The Medical
-56-
<PAGE>
Group has provided the Management Company with true and complete age, salary,
service and related data for Employees of the Medical Group and in connection
with the Medical Business.
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Medical Group or in connection with the Medical Business.
(c) Except as set forth on the Schedule 6.12; (i) each Employee Plan has
been operated and administered in compliance with ERISA, the Code and in
accordance with the provisions of all other applicable Federal and state laws;
(ii) all reporting and disclosure obligations imposed under ERISA and the Code
have been satisfied with respect to each Employee Plan; (iii) no breaches of
fiduciary duty or prohibited transactions have occurred with respect to any
Employee Plan; and (iv) all reporting, disclosure and bonding obligations have
been satisfied with respect to each Employee Plan.
(d) The Medical Group has made available to the Management Company a true
and complete copy of each Employee Plan and a true and complete copy of each of
the following documents, prepared in connection with such Employee Plan; (i)
each trust or other funding arrangement, (ii) the two most recently filed Annual
Reports (Form 5500), including attachments, for each Employee Plan, and (iii)
the most recently received IRS determination letter.
-57-
<PAGE>
6.13. Insurance.
Schedule 6.13 contains a list of all policies of professional liability
(medical malpractice), general liability, theft, fidelity, fire, product
liability, errors and omissions, health and other property and casualty forms of
insurance held by the Medical Group covering the assets, properties or
operations of the Medical Group and the Medical Business (specifying the
insurer, amount of coverage, type of insurance, policy number and any pending
claims thereunder). All such policies of insurance are valid and enforceable
policies and are outstanding and duly in force and all premiums with respect
thereto are currently paid. Neither the Medical Group nor its predecessor in
interest has, during the last five fiscal years, been denied or had revoked or
rescinded any policy of insurance relating to the assets, properties or
operations of the Medical Group or the Medical Business.
6.14. Real Property.
Schedule 6.14 sets forth an accurate and complete legal description of the
entire right, title and interest of the Medical Group in and to all real
property, together with all buildings, facilities, fixtures and improvements
located on such real property, owned or leased by the Medical Group (the "Real
Property"), together with an accurate description of the title insurance policy
or other evidence of title issued with respect thereto, the most current survey
of such real property and a description of the use thereof. Other than the Real
Property, the Medical Group has no other interest (leasehold or otherwise) in
real property used, held for use or intended to be used in the Medical Business.
The Medical Group has a valid leasehold interest in all Real Property leased by
the Medical Group.
-58-
<PAGE>
6.15. Burdensome Restrictions.
Except as set forth on Schedule 6.15, neither the Medical Group nor the
Medical Business is bound by any oral or written agreement or contract which by
its terms prohibits or restricts it from conducting the Medical Group or the
Medical Business (or any material part thereof).
6.16. Disclosure.
Neither the Medical Group Transaction Documents (including the Exhibits and
Schedules attached thereto) nor any other document, certificate or written
statement furnished to the Management Company by or on behalf of the Medical
Group in connection with the transactions contemplated hereby contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
Except as set forth on Schedule 6.16, there have been no events or transactions,
or information which has come to the attention of the Medical Group, which, as
they relate directly to the Medical Group or the Medical Business, could
reasonably be expected to have a material adverse effect on the business,
operations, affairs, prospects or condition of the Medical Group and the Medical
Business.
SECTION 7. Representations and Warranties of the Management Company
The Management Company represents and warrants to the Medical Group, as of
the Signature Date hereof, as follows:
7.1. Organization, Good Standing and Power.
The Management Company (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
has all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now being conducted and as proposed to
-59-
<PAGE>
be conducted, to execute and deliver this Agreement and each of the Asset
Purchase Agreement, the Restricted Stock Agreements (as hereinafter defined),
the Assignments of Lease, and the Stockholder Non-Competition Agreements (as
hereinafter defined) (collectively, the "Management Company Transaction
Documents"), to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. The Management
Company has delivered to the Medical Group a true and correct copy of its
formation documents, consisting of (i) the Amended and Restated Certificate of
Incorporation filed January 22, 1997, as amended by that certain Certificate of
Amendment dated as of March 12, 1997, and (ii) the By-Laws (the "BMJ Formation
Documents"). The BMJ Formation Documents have not been amended, and the BMJ
Formation Documents are in effect as of the date hereof.
7.2. Equity Investments.
Except as identified in Schedule 7.2, the Management Company currently has
no subsidiaries, nor does the Management Company currently own any capital stock
or other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.
7.3. Capitalization.
(a) The total authorized capital of the Management Company consists of
15,000,000 shares of common stock and 6,685,000 shares of preferred stock. Set
forth in Schedule 7.3(a) is an accurate and complete listing of all of the
stockholders of the Management Company and the number and class of shares held
by each. Except as set forth in Schedule 7.3(a), the Management Company has no
other outstanding stock or securities of any kind or nature, and no shares of
capital stock are held by the Management Company in its treasury. Each of the
outstanding shares of capital stock has been duly and validly
-60-
<PAGE>
authorized and issued, is fully paid and non-assessable, and was issued in
compliance with all applicable Federal and state securities laws. Except as set
forth in the Second Amended and Restated Stockholders Agreement dated as of
November 22, 1996, no person is entitled to any preemptive or similar right with
respect to the issuance of any shares of capital stock of the Management
Company.
(b) No sale of common stock has been effected or any other action taken the
effect of which sale or other action would require or permit an adjustment of
the conversion price of any issued and outstanding convertible preferred stock.
The exercise of the right of any holder of convertible preferred stock to
convert such stock to common stock on or as of the Commencement Date hereunder
would entitle such holder of preferred stock to receive one share of common
stock for each share of preferred stock.
(c) There are no outstanding warrants, options, calls, conversion rights or
commitments or other rights to subscribe for or purchase from the Management
Company any shares of capital stock of the Management Company or securities
convertible into or exchangeable for capital stock, except as set forth in
Schedule 7.3(c).
(d) The Management Company has taken all action necessary or appropriate to
duly authorize the creation, issuance and sale of the common stock to be issued
hereunder. Such shares of common stock, when issued, sold and delivered, as
provided for herein and in the Restricted Stock Agreements, will be validly
issued, fully paid and nonassessable, with no personal liability attaching to
the ownership of the shares. The issuance of such shares of common stock will
not violate any preemptive or similar right of any person.
-61-
<PAGE>
7.4. Authority.
The execution, delivery and performance of this Agreement and the other
Management Company Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Management
Company. This Agreement and each Management Company Transaction Document to
which it is a party has been duly and validly executed and delivered by the
Management Company, and this Agreement and each such Management Company
Transaction Document is the valid and binding obligation of the Management
Company, enforceable in accordance with its respective terms, except as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally. Neither
the execution, delivery or performance of this Agreement or any other Management
Company Transaction Document, nor the consummation by the Management Company of
the transactions contemplated hereby or thereby, nor compliance by the
Management Company with any provision hereof or thereof, will (a) conflict with
or result in a breach of any provisions of the BMJ Formation Documents, (b)
cause a default (with due notice, lapse of time or both), or give rise to any
right of termination, cancellation or acceleration, under any of the terms,
conditions or provisions of any material note, bond, lease, mortgage, indenture,
license or other instrument, obligation or agreement to which the Management
Company is a party or by which it or any of its properties or assets is or may
be bound or (c) violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Management Company or any of its properties
or assets. Except as provided in Schedule 7.4, to the best of the Management
Company's knowledge, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery or
-62-
<PAGE>
performance by the Management Company of this Agreement or the consummation by
the Management Company of the transactions contemplated hereby.
7.5. Financial Information.
Schedule 7.5 contains (a) the unaudited statements of assets, liabilities
and stockholders' equity of the Management Business at March 31, 1997 (the
"Management Company Balance Sheet"; and the date thereof being referred to as
the "Management Company Balance Sheet Date"), and the related unaudited
statements of revenue and expenses for the periods then ended (including the
notes thereto and other financial information included therein) (collectively,
the "Unaudited Financial Statements"). The Unaudited Financial Statements (i)
were prepared in accordance with the books and records of the Management
Business, (ii) fairly present the financial position of the Management Business
as of the dates thereof, and (iii) are true, correct and complete in all
material respects as of the date thereof.
7.6 Absence of Undisclosed Liabilities.
Except as set forth on Schedule 7.6, as of the Management Company Balance
Sheet Date, (a) the Management Business did not have any material liability of
any nature (matured or unmatured, fixed or contingent, known or unknown) which
was not provided for or disclosed on the Management Company Balance Sheet, (b)
all liability reserves established by the Management Business on the Management
Company Balance Sheet were adequate and (c) there were no loss contingencies (as
such term is used in Statement of Financial Accounting Standards No. 5 issued by
the Financial Accounting Standards Board in March 1975) which were not
adequately provided for or disclosed on the Management Company Balance Sheet.
-63-
<PAGE>
7.7. Absence of Changes.
Except as set forth on Schedule 7.7, since the Management Company Balance
Sheet Date, the Management Business has been operated in the ordinary course and
consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or otherwise),
assets (including, without limitation, levels of working capital and the
components thereof), liabilities, operations, results of operations, earnings,
business or prospects of the Management Business;
(b) any damage, destruction or loss (whether or not covered by insurance)
in an aggregate amount exceeding $25,000 affecting any asset or property of the
Management Business;
(c) any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Management Business
other than such items created or incurred in the ordinary course of the
Management Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien, encumbrance,
liability or obligation by the Management Business outside the ordinary course
of the Management Business (whether absolute, accrued, contingent or otherwise
and whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition of
any tangible or intangible asset of the Management Business except in the
ordinary course of the Management Business and consistent with past practice;
(f) any write-off as uncollectible of any accounts receivable in connection
with the Management Business or any
-64-
<PAGE>
portion thereof in excess of $5,000 in the aggregate exclusive of all normal
contractual adjustments from third party payors;
(g) except for all normal contractual adjustments from third party payors,
any account receivable in connection with the Management Business in an amount
greater than $10,000 which (i) has become delinquent in its payment by more than
90 days, (ii) has had asserted against it any claim, refusal to pay or right of
set-off, (iii) an account debtor has refused to pay for any reason or with
respect to which the Management Business, such account debtor has become
insolvent or bankrupt or (iv) has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(i) any general uniform increase in the compensation of employees of the
Management Company or the Management Business (including, without limitation,
any increase pursuant to any bonus, pension, profit-sharing, deferred
compensation arrangement or other plan or commitment) or any increase in
compensation payable to any officer, employee, consultant or agent thereof, or
the entering into of any employment contract with any officer or employee, or
the making of any loan to, or the engagement in any transaction with, any
officer of the Management Company or the Management Business;
(j) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) any agreement or commitment relating to the sale of any material fixed
assets of the Management Business;
-65-
<PAGE>
(l) any other transaction relating to the Management Business other than in
the ordinary course of the Management Business and consistent with past
practice; or
(m) any agreement or understanding, whether in writing or otherwise, for
the Management Business to take any of the actions specified in items (a)
through (l) above.
7.8. Tax Matters.
(a) Except as set forth on Schedule 7.8, (i) all Taxes relating to the
Management Business required to be paid through the date hereof have been paid
and all returns, declarations of estimated Tax, Tax reports, information returns
and statements required to be filed in connection with the Management Business
prior to the date hereof (other than those for which extensions shall have been
granted prior to the date hereof) relating to any Taxes with respect to any
income, properties or operations of the Management Company prior to the date
hereof (collectively, "Management Company Returns") have been duly filed; (ii)
as of the time of filing, the Management Company Returns correctly reflected in
all material respects (and, as to any Management Company Returns not filed as of
the date hereof, will correctly reflect in all material respects) the facts
regarding the income, business, assets, operations, activities and status of the
Management Business and any other information required to be shown therein;
(iii) all Taxes relating to the operations of the Management Business that have
been shown as due and payable on the Management Company Returns have been timely
paid and filed or adequate provisions made to the books and records of the
Management Business; (iv) in connection with the Management Business (x) the
Management Company has made provision on the Management Company Balance Sheet
for all Taxes payable for any periods that end on or before the Management
Company Balance Sheet Date for which no Management Company Returns have yet been
filed and for any periods that begin on or before the Management Company Balance
Sheet Date and end after the Management Company Balance Sheet Date to the extent
such Taxes are attributable to the portion of any such period ending on the
Management Company Balance Sheet Date and (y) provision has been made for all
Taxes payable for any periods that end on or before the date hereof for which no
Management Company Returns have then been filed and for any periods that
-66-
<PAGE>
begin on or before the date hereof and end after such date to the extent such
Taxes are attributable to the portion of any such period ending on such date;
(v) no tax liens have been filed with respect to any of the assets of the
Management Business, and there are no pending tax audits of any Management
Company Returns relating to the Management Business; and (vi) no deficiency or
addition to Taxes, interest or penalties for any Taxes relating to the operation
of the Management Business has been proposed, asserted or assessed in writing
(or any member of any affiliated or combined group of which the Management
Company or any previous operator of the Management Business was a member for
which the Management Company could be liable).
(b) The Management Company is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Code.
7.9 Litigation, Etc.
Except as set forth on Schedule 7.9, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Management Company, threatened against
the Management Company or in connection with the Management Business, whether at
law or in equity, or before or by any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality or
(b) judgments, decrees, injunctions or orders of any court, governmental
department, commission, agency, instrumentality or arbitrator against the
Management Company its
-67-
<PAGE>
assets or affecting the Management Business. The Management Company has
delivered to the Medical Group all documents and correspondence relating to
matters referred to in said Schedule 7.9.
7.10. Compliance; Governmental Authorizations.
The Management Company and the Management Business shall have complied in
all material respects with all applicable material Federal, state, local or
foreign laws, ordinances, regulations and orders. The Management Company has all
Federal, state, local and foreign governmental licenses and permits necessary in
the conduct of the Management Business, the lack of which would have a material
adverse effect on the Management Company's ability to operate the Management
Business after the date hereof on substantially the same basis as presently
operated, such licenses and permits are in full force and effect, the Management
Company has not received any notice indicating that any violations are or have
been recorded in respect of any thereof, and no proceeding is pending or, to the
best knowledge of the Management Company, threatened to revoke or limit any
thereof. To the best knowledge of the Management Company, none of such licenses
and permits shall be affected in any material respect by the transactions
contemplated hereby.
7.11. Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 7.11, all of the accounts receivable
owing to the Management Company in connection with the Management Business as of
the date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Management Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Management Company, there are no claims, refusals to pay or
other rights of set-off against any thereof. Except as set forth on Schedule
7.11, as of
-68-
<PAGE>
the date hereof, there is no account receivable or note receivable of the
Management Business pledged to any third party.
(b) All accounts payable and notes payable by the Management Business to
third parties arose in the ordinary course of business and, except as set forth
in Schedule 7.11, there is no account payable or note payable past due or
delinquent in its payment.
7.12. Labor Relations; Employees.
Except as set forth on Schedule 7.12, (a) the Management Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them to
the date hereof or amounts required to be reimbursed to the Management Company
Employees; (b) upon termination of the employment of any of the Management
Company's employees, neither the Management Company nor the Medical Group will,
by reason of anything done prior to the date hereof, or by reason of the
consummation of the transactions contemplated hereby, be liable for any excise
taxes pursuant to Section 4980B of the Code or to any of the employees of the
Management Company for severance pay or any other payments; (c) there is no
unfair labor practice complaint against the Management Company or in connection
with the Management Business pending before the National Labor Relations Board
or any comparable state, local or foreign agency; (d) there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the best knowledge of the
Management Company, threatened against or involving the Management Company or
Management Business; (e) there is no collective bargaining agreement covering
any of the Management Company Employees; and (f) to the best knowledge of the
Management Company, none of its employees or consultants is in violation of any
(i) employment agreement, arrangement or policy between such person and any
previous employer (private or governmental) or (ii) agreement restricting or
prohibiting the
-69-
<PAGE>
use of any information or materials used or being used by such person in
connection with such person's employment by or association with the Management
Company or the Management Business.
7.13. Employee Benefit Plans.
(a) Schedule 7.13 identifies each `employee benefit plan', as defined in
Section 3(3) of ERISA, and all other written or oral plans, programs, policies
or agreements involving direct or indirect compensation (including any
employment agreements entered into between the Management Company and any
employee or former employee of the Management Company or in connection with the
Management Business, but excluding workers' compensation, unemployment
compensation and other government-mandated programs) currently or previously
maintained or entered into by the Management Company or in connection with the
Management Business for the benefit of any employee or former employee of the
Management Company or in connection with the Management Business under which the
Management Company, any affiliate thereof or the Management Business has any
present or future obligation or liability.
(b) Schedule 7.13 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Management Company or in connection with the Management
Business.
-70-
<PAGE>
7.14 Insurance.
Schedule 7.14 contains a list of all policies of liability, theft,
fidelity, fire, product liability, errors and omissions, health and other
property and casualty forms of insurance held by the Management Company covering
the assets, properties or operations of the Management Company and the
Management Business (specifying the insurer, amount of coverage, type of
insurance, policy number and any pending claims thereunder). All such policies
of insurance are valid and enforceable policies and are outstanding and duly in
force and all premiums with respect thereto are currently paid. The Management
Company has not since its incorporation, been denied or had revoked or rescinded
any policy of insurance relating to the assets, properties or operations of the
Management Company or the Management Business.
7.15. Real Property.
Schedule 7.15 sets forth an accurate and complete legal description of the
entire right, title and interest of the Management Company in and to all real
property, together with all buildings, facilities, fixtures and improvements
located on such real property, owned or leased by the Management Company (the
"Management Company Real Property"), together with an accurate description of
the title insurance policy or other evidence of title issued with respect
thereto, the most current survey of such real property and a description of the
use thereof. Other than the Management Company Real Property, the Management
Company has no other interest (leasehold or otherwise) in real property used,
held for use or intended to be used in the Management Business. The Management
Company has a valid leasehold interest in all Management Company Real Property
leased by the Management Company.
-71-
<PAGE>
7.16 Burdensome Restrictions.
Except as set forth on Schedule 7.16, neither the Management Company nor
the Management Business is bound by any oral or written agreement or contract
which by its terms prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
7.17. Disclosure.
Neither the Management Company Transaction Documents (including the
Exhibits and Schedules attached thereto) nor any other document, certificate or
written statement furnished to the Medical Group by or on behalf of the
Management Company in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading. Except as set forth on Schedule 7.17, there have been no events or
transactions, or information which has come to the attention of the Management
Company, which, as they relate directly to the Management Company or the
Management Business, could reasonably be expected to have a material adverse
effect on the business, operations, affairs, prospects or condition of the
Management Company and the Management Business.
SECTION 8. Operations Committee.
8.1. Formation and Operation of the Operations Committee.
The Management Company and the Medical Group shall establish a committee
(the "Operations Committee") responsible for directing the Management Company in
connection with the development of certain specific management and
administrative policies for the overall operation of the Medical Group. The
Operations Committee shall consist of six (6) members. The Medical Group shall
designate three (3) members of the Operations
-72-
<PAGE>
Committee, each of whom shall be a physician in the Medical Group, and the
Management Company shall designate three (3) members of the Operations
Committee. The business of the Operations Committee shall be conducted in
accordance with the policies and procedures described in Section 8.4 hereof.
8.2. Authoritative Functions of the Operations Committee.
The Operations Committee shall perform the following functions, and the
decisions of the Operations Committee with respect to such functions shall be
binding on the Management Company and the Medical Group:
(a) Approve the annual budgets for:
(i) Billings and Collections;
(ii) Medical Group Costs;
(iii) Capital expenditures to be made by the Management Company in
fulfillment of its obligations hereunder;
(iv) Management Company Operating Costs (which, in the absence of
approval by the Operations Committee, shall be increased by one
percent (1.0%) over the total amount approved for the preceding
period)
(b) Approve costs and expenses that exceed the Management Company Operating
Costs Budget.
(c) Establish parameters and criteria with respect to the establishment and
maintenance of relationships with institutional providers and payors and managed
care contracts (except with respect to the establishment of professional fees).
-73-
<PAGE>
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection agencies
(vi) Write-offs of account balances
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off policies
(ix) Lien account collection policies
(x) Student Athlete account policies
(e) Approve the acquisition, replacement, relocation, or other disposition
of Medical Equipment and FF&E, approve the integration of new
technologies into the professional practice of the Medical Group as
contemplated by Section 3.11 hereof, and approve the renovation and
expansion of any offices of the Medical Group ("Tenant Improvements");
provided, however, that the approval of the Management Company also
shall be required prior to (i) the acquisition of any Medical
Equipment or FF&E (including any Medical Equipment or FF&E relating to
the integration of new technologies into the professional practice of
the Medical Group) if and to the extent that the aggregate cost of
such items in any calendar year exceeds five percent (5%)
-74-
<PAGE>
of the Management Fee for such year, (ii) the undertaking of any
Tenant Improvements relating to patient care facilities that cost more
than $10,000 in the aggregate at any one of the Medical Group's office
locations in any calendar year, or (iii) the undertaking of any other
Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of files and
records of the Medical Group.
8.3. Advisory Functions of the Operations Committee.
The Operations Committee shall review, evaluate and make recommendations to
the Medical Group and the Management Company with respect to the following
matters:
(a) Identification of physician subspecialties required for the efficient
operation of the Medical Group; advice regarding all Medical Personnel
employment and recruitment contracts to be utilized by the Medical
Group.
(b) Development of long-term strategic planning objectives for the Medical
Group.
(c) Public relations, advertising, and other marketing of Medical Group
services, including design of exterior signs.
(d) The establishment of fees for professional services and ancillary
services rendered by the Medical Group.
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group and the
Management Company, as
-75-
<PAGE>
such coverage may relate to Medical Group operations and activities.
(g) Any matters arising in connection with the operations of the Medical
Group that are not specifically addressed in this Agreement and as to
which the Management Company or the Medical Group requests
consideration by the Operations Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Management Company and the Medical Group, and except as provided herein, the
Operations Committee does not have the power to bind the Management Company or
the Medical Group. Where discretion with respect to any matters is vested in the
Management Company or the Medical Group under the terms of this Agreement, the
Management Company or the Medical Group, as the case may be, shall have ultimate
responsibility for the exercise of such discretion, notwithstanding any
recommendation of the Operations Committee. The Management Company and the
Medical Group shall, however, take such recommendations of the Operations
Committee into account in good faith in the exercise of such discretion.
8.4. Committee Policies and Procedures.
(a) The Medical Group shall designate one of its members to act as Chairman
of the Committee, and the Management Company shall designate one of its members
to act as Vice Chairman. Each party may substitute or change its designated
Operations Committee members at any time upon notice to the other party, and any
Operations Committee member may designate his or her own substitute at any
meeting without notice. Each member shall have one vote and shall have the right
to grant his or her proxy to another member of the Operations Committee. The
Chairman, if present, shall preside at all meetings of the Operations Committee.
In the absence of the designated Chairman,
-76-
<PAGE>
the Vice Chairman shall preside. The only powers of the Chairman and the Vice
Chairman that differ from those of the other members of the Operations Committee
shall be to call and preside over meetings in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or formal
notice at such times and places as a quorum of its members may from time to time
determine. A meeting of the Operations Committee also may be called by at least
two (2) members of the Operations Committee or by the Chairman or Vice Chairman
thereof upon at least three (3) days' written notice to the other members of the
Operations Committee. Such notice requirement shall be deemed waived with
respect to any member of the Operations Committee who attends such meeting.
Meetings may be held in person or by telephone. The Operations Committee also
may act by written consent as provided in Section 8.4(c). Minutes shall be kept
of all formal actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of four (4) or more members of the Operations Committee
present or represented by proxy at the applicable meeting. A quorum of the
Operations Committee shall be four (4) members, in person, by telephone, or by
proxy, and a quorum must remain for the duration of the meeting. The Operations
Committee may establish such procedures to act by written consent, without a
meeting, as the Operations Committee determines are advisable, provided that all
six (6) members (in person or by proxy) must sign any written consent.
SECTION 9. Obligations of the Medical Group.
The Medical Group shall have the following obligations during the Term:
-77-
<PAGE>
9.1. Compliance with Laws.
The Medical Group shall provide professional services to patients in
compliance at all times with those ethical standards, laws and regulations to
which they are subject. The Medical Group shall verify, with the assistance of
the Management Company, that each physician and other Medical Personnel
associated with the Medical Group for the purpose of providing medical care to
patients of the Medical Group is licensed by the State of Florida. The Medical
Group shall monitor the quality of medical care practiced by physicians and
other health care personnel associated with the Medical Group. In the event that
any disciplinary actions or medical malpractice actions are initiated against
any such physician by any payor, patient, state or Federal regulatory agency or
any other person or entity, the Medical Group shall immediately inform the
Management Company of such action and its underlying facts and circumstances.
9.2. Use of Facility.
The Medical Group shall use and occupy any Facility (as defined below)
exclusively for the practice of medicine, and shall comply with all applicable
Federal, state and local rules, ordinances and standards of medical care. The
medical practice or practices conducted at any Facility described in clause (i)
of the definition of the term "Facility" shall be conducted solely by Medical
Personnel associated with the Medical Group, and no other physician or medical
practitioner shall be permitted to use or occupy any Facility described in
clause (i) below without the prior written consent of the Management Company,
which consent shall not be unreasonably withheld or delayed. The term "Facility"
shall mean (i) any medical facility or laboratory controlled, managed or
operated by the Management Company or (ii) any hospital at which any Medical
Personnel practices medicine or maintains admitting privileges.
-78-
<PAGE>
9.3. Choice of Braces, Splints, Appliances, Medical Supplies, and
Allografts.
The Medical Group shall have the exclusive control over the choice of
vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts.
9.4. Choice of Radiologists, Anesthesiologists, Hospitals, Physical
Therapy, MRI, and Other Medical Professionals and Facilities.
The Medical Group shall have exclusive control over the choice of specific
physicians and facilities to be utilized by the Medical Group with respect to
radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical
professionals and facilities; provided, however, that the foregoing shall not be
considered New Ancillary Services or New Medical Offices, as the case may be,
unless the parties have agreed thereto in accordance with Section 3.4(b) or
3.2(b), as the case may be.
9.5. Insurability.
The Medical Group shall cooperate with the Management Company in (i)
ensuring that its Medical Personnel are insurable under commercially available
malpractice insurance policies or (ii) instituting proceedings to terminate
within thirty business days any Medical Personnel who is not so insurable or who
loses his or her malpractice insurance eligibility unless the Medical Group
makes (within such 30-day period) other arrangements reasonably appropriate
under the circumstances and reasonably acceptable to the Management Company. The
Medical Group shall notify the Management Company in writing of any change in
the insurance status of any Medical Personnel within two days after the Medical
Group receives notice of any such change. The Medical Group shall require all
Medical Personnel to participate in an on-going risk management program.
-79-
<PAGE>
9.6. Medicare.
The Medical Group shall cause all physicians to be participating providers
and accept assignment under Medicare.
9.7. Accounts Receivable; Billing.
From the Commencement Date, the Medical Group acknowledges and agrees that
all accounts receivable of the Medical Group or its Medical Personnel shall be
the property of the Management Company hereunder and the Medical Group and the
Medical Personnel hereby transfer and assign all of their right, title and
interest to such accounts receivable to the Management Company; provided,
however, that the right to payment of Medicaid and Medicare receivables shall
remain with the Medical Group in accordance with applicable Federal law. The
Medical Group's Medical Personnel shall be responsible for providing the
appropriate current CPT4 coding with respect to the fee tickets prepared by such
Medical Personnel.
9.8. Medical Personnel Hiring.
The Medical Group shall have the ultimate control over and responsibility
for the hiring, compensation, supervision, evaluation and termination of its
Medical Personnel; provided, however, that at the request of the Medical Group,
the Management Company shall consult with the Medical Group regarding such
matters.
9.9. Continuing Education.
The Medical Group and its Medical Personnel shall be solely responsible for
ongoing membership in professional associations and continuing professional
education. The Medical Group shall ensure that its Medical Personnel participate
in such continuing professional education as is necessary for such
-80-
<PAGE>
physician or professional to remain current in his or her field of medical
practice.
9.10. Clinical Research.
The Medical Group shall have the ultimate control over and responsibility
for any clinical research program pertaining to patients of the Medical Group.
This shall include but not be limited to research personnel interviewing,
hiring, termination, compensation, day-to-day supervision, and assignment of
responsibilities and projects. However, the Medical Group will cooperate with
and take direction from the Management Company in its nationwide efforts to
provide an effective disease management information system and outcome studies
programs.
9.11. Sales of Stock.
The Eligible Parties shall give to Naresh Nagpal, M.D. and each venture
capital firm providing funds to the Management Company and executing this
Agreement the right to participate on a pro rata basis (based on the number of
shares, whether preferred or common, calculated on an as-converted basis, held
by Naresh Nagpal, M.D. and any such venture capital firm and by any other
stockholders who hold the same rights that are conferred by this Section 9.11,
including members of other physician groups) in any proposed sale of more than
fifty percent (50%) of the stock in the Management Company held by the Eligible
Parties to any unaffiliated third party or parties, and the Medical Group shall
require the Eligible Parties to comply with the obligations set forth in this
Section 9.11; provided, however, that the obligations under this Section 9.11
shall become null and void upon the consummation of an initial public offering
of the Management Company's common stock.
-81-
<PAGE>
SECTION 10. Certain Covenants.
10.1. Change of Control.
During the Term of this Agreement, the Medical Group shall not enter into
any single transaction (or group of related transactions undertaken pursuant to
a common plan) involving the admission of new partners, transfer of partnership
interests, or reorganization or restructuring of the Medical Group, if in any
such case the effect would be to transfer a majority of the ownership interest
in the Medical Group, without the prior written consent of the Management
Company, which consent shall not be unreasonably withheld or delayed.
10.2. Legend on Securities.
During the Term of this Agreement, any certificate or similar evidence
representing an equity interest in the Medical Group issued by the Medical Group
shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.
ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT
EFFECTIVE AS OF APRIL 1, 1997, BETWEEN LAUDERDALE ORTHOPAEDIC SURGEONS, A
FLORIDA PARTNERSHIP, AND BONE, MUSCLE AND JOINT, INC., A DELAWARE
CORPORATION."
The Management Company acknowledges that there is no certificate or other
similar evidence representing equity interests in the Medical Group as of the
Signature Date hereof. Nothing herein shall be construed as requiring the
Medical Group to issue any
-82-
<PAGE>
certificate or other evidence representing an equity interest in the Medical
Group.
SECTION 11. Records.
11.1. Medical Records.
Upon termination of this Agreement, the Medical Group shall retain all
patient medical records maintained by the Medical Group or the Management
Company in the name of the Medical Group.
11.2 Management Business Records.
All books and records relating in any way to the operation of the
Management Business which are not patient medical records shall at all times be
the property of the Management Company. The Management Company shall maintain
custody of such records, and the Medical Group shall, upon its written request,
be entitled to copies of any such records relating to the Management Services
performed by the Management Company.
11.3. Access to Records Following Termination.
Following the termination of this Agreement, the Medical Group shall grant
(to the extent permitted by law) to the Management Company, for the purpose of
preparing for any actual or anticipated legal proceeding or for any other
reasonable purpose, reasonable access (which shall include making photocopies)
to the patient medical records described in Section 11.1 hereof and any other
pertinent information regarding the Medical Group during the Term. Prior to
accessing such patient medical records, the Management Company shall obtain any
required patient authorization.
-83-
<PAGE>
Following the termination of this Agreement, the Management Company shall
provide to the Medical Group, promptly upon the Medical Group's written request,
photocopies of the Management Business records described in Section 11.2 hereof,
and shall grant to the Medical Group, for the purpose of preparing for any
actual or anticipated legal proceeding or for any other reasonable purpose, any
other pertinent information regarding the Management Company during the Term.
SECTION 12. Insurance and Indemnity.
12.1 Professional Liability Insurance.
During the Term, the Management Company shall, to the extent permitted by
applicable law, procure and maintain for the benefit of itself and the Medical
Group comprehensive professional liability insurance providing for (a) general
liability coverage and (b) medical malpractice coverage with limits of not less
than $250,000 per claim and with aggregate policy limits of not less than
$750,000 covering the Medical Group and each of the Medical Personnel of the
Medical Group (or such higher amounts as may be necessary to comply with any
regulatory requirement and/or contractual requirement to which such Medical
Personnel or the Medical Group may be subject), including coverage for claims
made after the Commencement Date relating to events or occurrences at any time
prior thereto. The parties hereto acknowledge that the Management Company is
procuring the malpractice insurance referenced herein to ensure that the
Management Company has protection in the event it is sued as a result of an act
or omission of an employee of the Medical Group. The Management Company shall
pay the premiums for such general and medical malpractice liability coverage,
and the Management Company shall be designated as a co-beneficiary under such
insurance policies.
-84-
<PAGE>
12.2 Life Insurance; Business Interruption.
The Management Company shall obtain a $500,000 life insurance policy for
each duly licensed physician partner in the Medical Group. The Management
Company shall also obtain business interruption insurance for each Medical
Office in amounts to be mutually agreed upon by the parties. The Management
Company and the Medical Group shall be designated as the beneficiaries under
each of the aforementioned policies and shall each receive fifty percent of any
proceeds resulting from an insurable event thereunder; provided that until such
time as the Management Company is no longer entitled to receive the Guaranteed
Minimum Fee, the Management Company shall forward to the Medical Group the total
amount of any such proceeds received by the Management Company. The premiums for
such policies shall be paid equally by the Management Company and the Medical
Group, provided that the Medical Group's share of the aggregate amount of such
premiums shall not exceed $5,000 in the first year of the Term and in any year
thereafter shall not be in excess of the amount determined by taking the sum of
(a) the then current amount of the Medical Group's share, plus (b) the product
determined by multiplying the then current amount of the Medical Group's share
by the percentage by which the CPI in effect in the last month of such year
exceeds the CPI in the same month for the immediately prior year. As used
herein, "CPI" means the Consumer Price Index for Urban Wage Earners and Clerical
Workers, All Items, for Miami-Fort Lauderdale, Florida, published by the Bureau
of Labor Statistics of the U.S. Department of Labor with a 1982-84 = 100 base;
provided, however, that if such index (or an index substituted therefor as
hereinafter provided) shall cease to be published, then for purposes of this
Agreement there shall be substituted for such index another index of a similar
kind published by a governmental or other nonpartisan organization, as may be
mutually agreed upon by the Management Company and the Medical Group.
-85-
<PAGE>
12.3 Indemnification by Medical Group.
The Medical Group shall indemnify, hold harmless and defend the Management
Company, its officers, directors, shareholders, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of Medical Group Services, including without limitation the
performance of such services prior to the Commencement Date, (ii) any other acts
or omissions of the Medical Group and its Medical Personnel, including without
limitation any such acts or omissions that occurred prior to the Commencement
Date, or (iii) any breach of or failure to perform any obligation under this
Agreement or the Transaction Documents by the Medical Group and/or the Medical
Personnel and/or their respective agents and/or subcontractors (other than the
Management Company) during the Term.
12.4 Indemnification by Management Company.
The Management Company shall indemnify, hold harmless and defend the
Medical Group, its partners, members, employees, agents and independent
contractors from and against any and all liabilities, losses, damages, claims,
causes of action and expenses (including reasonable attorneys' fees and
expenses), whether or not covered by insurance, caused or asserted to have been
caused, directly or indirectly, by or as a result of (i) the performance of
Management Services, (ii) any other acts or omissions of the Management Company
and its employees or (iii) any breach of or failure to perform any obligation
under this Agreement or the Transaction Documents by the Management Company
and/or its agents, employees and/or subcontractors (other than the Medical
Group) during the Term.
-86-
<PAGE>
SECTION 13. Termination.
13.1. Termination by Medical Group.
The Medical Group may terminate this Agreement effective immediately by
giving written notice of termination to the Management Company (a) in the event
of the filing of a petition in voluntary bankruptcy or an assignment for the
benefit of creditors by the Management Company or upon other action taken or
suffered, voluntarily or involuntarily, under any Federal or state law for the
benefit of debtors by the Management Company, except for the filing of a
petition in involuntary bankruptcy against the Management Company which is
dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the
event the Management Company shall default in any material respect in the
performance of any duty or obligation imposed upon it by this Agreement and the
Management Company shall not have taken reasonable action commencing curing of
such default within thirty (30) days after written notice thereof has been given
to the Management Company by the Medical Group or the Management Company does
not thereafter diligently prosecute such action to completion; provided,
however, that the Management Company shall have only 10 days after written
notice to cure a default arising as a result of its failure to pay the Monthly
Draw pursuant to Section 5.3(a) or any other monetary obligation owed to the
Medical Group hereunder, (c) in the event that any of the representations and
warranties made by the Management Company in Section 7 is untrue or misleading
in any material respect, provided that the Medical Group shall have previously
given written notice to the Management Company describing in reasonable detail
the nature of the item in question and the Management Company shall not have
cured such matter within thirty (30) days of such notice, (d) the Management
Company shall have been sanctioned in writing by the Health Care Finance
Administration for any violation of the Social Security Act, the Health Care
Quality Improvement Act or any similar Federal law in a final,
-87-
<PAGE>
nonappealable proceeding and such sanction prevents the Management Company from
fulfilling its obligations hereunder in accordance with all applicable law, or
(e) in the event Naresh Nagpal, M.D., ceases to be and act on a full-time basis
as the Chief Executive Officer of the Management Company at all times prior to
the initial public offering of the common stock of the Management Company,
provided that the Medical Group shall give the Management Company at least
ninety (90) days prior written notice of its intention to terminate this
Agreement pursuant to this Section 13.1(e).
13.2 Termination by Management Company.
The Management Company may terminate this Agreement effective immediately
by giving written notice of termination to the Medical Group (a) in the event of
a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical
Group shall default in any material respect in the performance of any duty or
obligation imposed upon it by this Agreement and the Medical Group shall not
have taken reasonable action commencing curing of such default within thirty
(30) days after written notice thereof has been given to the Medical Group by
the Management Company or the Medical Group does not thereafter diligently
prosecute such action to completion; provided, however, that the Medical Group
shall have only 10 days after written notice to cure a default arising as a
result of its failure to pay any monetary obligation owed to the Management
Company hereunder, (c) in the event that any of the representations and
warranties made by the Medical Group in Section 6 is untrue or misleading in any
material respect, provided that the Management Company shall have previously
given written notice to the Medical Group describing in reasonable detail the
nature of the item in question and the Medical Group shall not have cured such
matter within thirty (30) days of such notice, or (d) in the event the Medical
Group is excluded from the Medicaid or Medicare program for any reason.
-88-
<PAGE>
13.3 Termination by Medical Group or Management Company.
The Medical Group and the Management Company shall each have the right to
terminate this Agreement effective immediately by giving written notice of
termination to the other party pursuant to Section 29 of this Agreement.
13.4 Effect of Termination.
(a) Upon the termination of this Agreement in accordance with the terms
hereof, neither party hereto shall have any further obligation or liability to
the other party hereunder, except as provided in Sections 3.15(c), 5.3(b) (as
modified by Section 13.4(b) below), 13.5 and 28 hereof, and except to pay in
full and satisfy any and all outstanding obligations of the parties accruing
through the effective date of termination.
(b) Upon the termination of this Agreement, the Annual Medical Group
Compensation Amount described in Section 5.3(b) shall be calculated on or before
the end of the fourth month following the termination date, rather than on or
before April 30 as specified in Section 5.3(b), and the computation made under
such Section shall be made with respect to the portion of the year ending on the
termination date (if the termination date is other than December 31). In making
such computation, all Collections during January, February, and March of such
year shall be excluded, and all Collections during the three-month period
following termination shall be included. All Collections during the three-month
period following termination shall be credited to the Management Company in
accordance with Section 3.19 and all Collections thereafter shall belong to the
Medical Group. Any payment required under the terms of Section 5.3(b)(ii) shall
be made within fifteen (15) days after the date by which the foregoing
calculation is to be made, rather than on May 15.
-89-
<PAGE>
13.5. Repurchase of Assets.
Promptly following termination of this Agreement for any reason, the
Management Company shall sell, transfer, convey, and assign to the Medical
Group, and the Medical Group shall purchase, assume, and accept from the
Management Company, at such price and upon such terms as may be agreed upon by
the parties -- or, if the parties are unable to agree, at fair market value,
determined in the manner set forth below -- all of the following items which are
used in connection with the professional practice and related activities of the
Medical Group and which, in the case of items (a), (b), (c) and (d) below, are
physically located in any of the offices of the Medical Group, subject to any
required consent from any third party having an interest therein, but otherwise
free and clear of any liens, claims or encumbrances; provided that any leased
equipment or property shall be assigned to the Medical Group subject to the
applicable lease agreement and any liens granted thereunder:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office equipment owned
by the Management Company;
(c) the Management Company's rights and interests in any equipment leased
by the Management Company, subject to the Medical Group's assumption
of the obligations accruing thereunder after the date of termination
of this Agreement;
(d) the supplies owned by the Management Company;
(e) the Management Company's rights and interests under all of the Office
Leases, subject to the Medical Group's assumption of the obligations
-90-
<PAGE>
accruing thereunder after the date of termination of this Agreement;
and
(f) the deposits of the Management Company relating to the Medical Group.
Fair market value of the above described assets shall be determined by an
independent appraiser mutually agreed upon by the Medical Group and the
Management Company; provided, however, that if the Medical Group and the
Management Company are unable to agree upon such an appraiser, each of the
parties shall select an appraiser and the two appraisers thus selected shall
select a third appraiser. All of the appraisers shall appraise the assets, and
for purposes of determining the purchase price, the highest and lowest
appraisals shall be disregarded, and the remaining appraisal shall be used.
Notwithstanding anything contained herein to the contrary, the consideration
payable by the Medical Group to the Management Company under this Section 13.5
shall be reduced by the aggregate amount, if any, payable by the Management
Company to the Stockholders (as such term is defined in the Restricted Stock
Agreements).
SECTION 14. Rescission.
14.1 Rescission By Medical Group.
(a) In the event that the Management Company has not consummated an initial
public offering of its Common Stock under the Securities Act of 1933, as
amended, by December 29, 1997, the Medical Group may, in its sole discretion at
any time during the period beginning December 31, 1997 and ending February 28,
1998 (such period being referred to herein as the "Rescission Period"), rescind
(the "Rescission Option") this Agreement and disengage itself from its
obligations under this Agreement. The Medical Group may exercise its Rescission
Option during the Rescission Period by giving 30 days' prior written notice (the
"Rescission Notice") to the Management Company and by complying with the other
provisions contained in this Section 14.1. The
-91-
<PAGE>
effective date (the "Rescission Effective Date") of the rescission shall be the
date of such Rescission Notice.
(b) Effect of Rescission. In the event that the Medical Group exercises its
Rescission Option pursuant to this Section 14.1, the procedures set forth in
Section 13.4 of this Agreement shall apply.
(c) Repurchase of Assets. Within 30 days following the Rescission Effective
Date the Management Company shall, subject to the prior receipt of any required
landlord and third party consents, transfer, convey and assign to the Medical
Group, and the Medical Group shall assume and accept from the Management Company
the property described in Section 13.5 hereof.
(d) Repayment of Consideration. On or before the Rescission Effective Date,
the Medical Group shall deliver to the Management Company the cash consideration
received by the Medical Group from the Management Company pursuant to this
Agreement and the Asset Purchase Agreement less the aggregate amount of the
Management Fees paid to the Management Company hereunder; provided, however,
that the portion of such consideration attributed to the A/R Amount (as defined
in the Asset Purchase Agreement), as adjusted pursuant to Section 2.3 thereof,
shall not be returned to the Management Company.
(e) Stock of Management Company. The Medical Group shall cause each
physician receiving capital stock of the Management Company as of the date
hereof to, and each such physician shall, return and deliver to the Management
Company the stock certificates representing shares of common stock of the
Management Company issued to each such physician pursuant to a restricted stock
agreement (each, a "Restricted Stock Agreement"), substantially in the form
attached hereto as Exhibit C. In the event any portion of such shares shall have
been previously transferred by any such physician, any transferee of such
physician shall, and the physician shall cause such
-92-
<PAGE>
transferee to, deliver the certificate(s) representing such shares to the
Management Company. Certificates delivered pursuant to this Section 14.1(e)
shall be duly endorsed for transfer to the Management Company.
14.2 Waiver of Rescission Option.
Notwithstanding anything contained herein to the contrary, the parties
hereto expressly agree and acknowledge that if the Medical Group shall fail to
deliver the notice of rescission referenced in Section 14.1(a) hereof prior to
the end of the Rescission Period, then the Medical Group shall be deemed to have
expressly and irrevocably waived its right to rescind this Agreement and to
disengage itself from its obligations hereunder.
14.3. Discontinuation of Management Fees
The parties hereto acknowledge that in the event this Agreement is
rescinded pursuant to the provisions of Article 14 hereof, the Management
Company shall not be entitled to any Management Fees otherwise payable hereunder
for Medical Services provided by the Medical Group from the date on which the
Rescission Notice is delivered through and including the Rescission Effective
Date.
14.4 Disengagement of Individual Member.
(a) In the event that, during the Rescission Period, any Eligible Party
terminates his affiliation with the Medical Group (such person being referred to
herein as a "Disengaging Member"), such Disengaging Member shall return to the
Management Group the stock certificate(s) issued to such Disengaging Member
pursuant to a Restricted Stock Agreement, and the Management Company shall, upon
notice from such Disengaging Member, return to the Disengaging Member the
consideration paid by such Disengaging Member for the shares of common stock
underlying such stock certificate(s). In the event that any
-93-
<PAGE>
portion of such shares shall have been previously transferred by such
Disengaging Member, any transferee of such Disengaging Member shall, and the
Disengaging Member shall cause such transferee to, deliver the certificate(s)
representing such shares to the Management Company. Certificates delivered
pursuant to this Section 14.4(a) shall be duly endorsed for transfer to the
Management Company.
(b) Upon the rescission of this Agreement by a Disengaging Member pursuant
to the provisions of this Section 14.4 such Disengaging Member and the
Management Company shall have no further obligations or liabilities to the other
except as set forth in Section 14.4(a) above. However, the disengagement by the
Disengaging Member shall have no effect upon the continuing rights and
obligations of the Medical Group vis-a-vis the Management Company under the
terms of this Agreement.
SECTION 15. Non-Disclosure of Confidential Information.
15.1. Non-Disclosure.
(a) Neither the Management Company nor the Medical Group, nor their
respective employees, stockholders, consultants or agents shall, at any time
after the execution and delivery hereof, directly or indirectly disclose any
Confidential or Proprietary Information relating to the other party hereto to
any person, firm, corporation, association or other entity, nor shall either
party, or their respective employees, stockholders, consultants or agents make
use of any of such Confidential or Proprietary Information for its or their own
purposes or for the benefit of any person, firm, corporation or other entity
except the parties hereto or any subsidiary or affiliate thereof. The foregoing
obligation shall not apply to any information which a party hereto can establish
to have (a) become publicly known without breach of this Agreement by it or
them, (b) to have been given to such party by a third party who is not obligated
to maintain the confidentiality of such information, or (c) is
-94-
<PAGE>
disclosed to a third party with the prior written consent of the other party
hereto. Nothing contained herein shall be construed to prevent any party hereto
from disclosing any Confidential or Proprietary Information of any other party
to its professional advisers for purposes of evaluating, negotiating or
otherwise assisting such party in connection with the transactions contemplated
by this Agreement; provided that such party shall be liable to such other party
for the disclosure by any of its professional advisers of such other party's
Confidential or Proprietary Information, unless such information falls within
one of the categories set forth in clauses (a), (b) or (c) of the preceding
sentence.
(b) For purposes of this Section 15, the term "Confidential or Proprietary
Information" means all information known to a party hereto, or to any of its
employees, stockholders, officers, directors or consultants, which relates to
the Transaction Documents, patient medical and billing records, trade secrets,
books and records, supplies, pricing and cost information, marketing plans,
strategies and forecasts. Nothing contained herein shall prevent a party hereto
from furnishing Confidential or Proprietary Information pursuant to a direct
order of a court of competent jurisdiction.
(c) In the event any physician, representative, agent, employee or employed
professional of the Medical Group discloses to any person or entity the
structure or terms of this transaction, such disclosure shall be deemed a
default under this Agreement and the Management Company shall have the right, to
be exercised in its sole discretion, to terminate this transaction immediately
upon notice thereof to the Medical Group. In the event the Management Company
terminates this Agreement pursuant to the preceding sentence, the terms and
provisions of Sections 14.1(b) through (e) shall apply.
-95-
<PAGE>
SECTION 16. Non-Competition.
In consideration of the premises contained herein and the consideration to
be received hereunder, and in consideration of and as an inducement to the
Management Company to consummate the transactions contemplated hereby, the
Medical Group hereby (a) agrees to the Non-Competition covenants attached hereto
as Schedule VIII and (b) agrees to require each of the physicians receiving
capital stock of the Management Company as of the date hereof, and each person
who after the date hereof becomes entitled to receive stock (or options to
receive stock) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute a Stockholder
Non-Competition Agreement substantially in the form attached hereto as Exhibit
D.
SECTION 17. Obligations of the Management Company.
17.1. No Practice of Medicine.
During the Term, the Management Company shall not provide or otherwise
engage in services or activities which constitute the practice of medicine, as
defined in applicable state or Federal law, except in compliance therewith.
17.2. No Interference with Professional Judgment.
Without in any way limiting Section 17.1 hereof, during the Term, the
Management Company shall not interfere with the exercise of professional
judgment by any physician or other licensed health care professional who is a
partner, employee, or contractor of the Medical Group, nor shall the Management
Company interfere with, control, direct, or supervise any physician or other
licensed health care professional in connection with the provision of Medical
Services. The foregoing shall not preclude the Management Company from assisting
in the development of professional protocols and monitoring compliance with
policies
-96-
<PAGE>
and procedures that have been instituted in accordance with this Agreement.
17.3 Physician Advisory Board.
The Management Company is developing an advisory group (the "Physician
Advisory Board") to be comprised of physicians practicing in the State of
Florida. Upon the establishment of the Physician Advisory Board, which is
anticipated to occur on or about October 1, 1997, and in accordance with the
governing documents thereof, the Management Company shall, or shall cause the
Physician Advisory Board to, appoint Martin Silverstein, M.D. to serve on the
Physician Advisory Board. The terms of Dr. Silverstein's service on such board
shall be set forth in an agreement between Dr. Silverstein and the Management
Company, which shall provide, among other things, that Dr. Silverstein's
appointment shall not be terminated other than by mutual agreement of the
parties or upon termination of this Agreement.
17.4 Budgets.
The Board of Directors of the Management Company shall establish budgets
for the expenses of the Management Company, and the approval of the Board of
Directors shall be required in connection with any expenses in excess of any
such approved budget; provided, however, that following consummation of an
initial public offering of the Company's Common Stock, the responsibility of the
Board of Directors with respect to such budgets shall be exercised in accordance
with the standards applicable to the conduct of business of public companies.
17.5 Stock Held by Certain Individuals or Entities.
Naresh Nagpal, M.D. and each venture capital firm providing funds to the
Management Company and executing this Agreement ("Selling Shareholders") shall
give to the Eligible Parties the right to participate on a pro rata basis (based
on
-97-
<PAGE>
the number of shares, whether preferred or common, calculated on an as-converted
basis, held by the Eligible Parties and by any other shareholders who hold the
same rights that are conferred by this Section 17.5, including members of other
physician groups) in any proposed sale of stock (whether preferred or common) in
the Management Company from any of the Selling Shareholders to any unaffiliated
third party or parties, and the Management Company shall require the Selling
Shareholders to comply with the obligations set forth in this Section 17.5;
provided, however, that the obligations under this Section 17.5 shall become
null and void upon the consummation of an initial public offering of the
Management Company's Common Stock.
17.6. Convertible Preferred Stock.
The Management Company shall not sell any Common Stock or take any other
action the effect of which sale or other action would be to give a holder of
convertible preferred stock the right to convert any number of shares of
convertible preferred stock into a greater number of shares of Common Stock;
provided, however, that the obligations under this Section 17.6 shall become
null and void upon the consummation of an initial public offering of the
Management Company's common stock.
SECTION 18. Bahamas Option.
The Medical Group and the Management Company hereby agree that the medical
practice (the "Bahamas Practice") being operated by the Medical Group as of the
date hereof in the Bahamas is not subject to the terms and conditions set forth
in this Agreement. Without limiting the generality of the foregoing, the Medical
Group hereby grants the Management Company an option (the "Bahamas Option") to
manage the Bahamas Practice, which Bahamas Option the Management Company may
exercise by giving notice of its intention to so exercise to the Medical Group
at any time during the period beginning on the first anniversary of the
Commencement Date and ending on May 31, 1998.
-98-
<PAGE>
In the event the Management Company exercises the Bahamas Option, it shall be
deemed a part of the Medical Group for all purposes of this Agreement, and the
Medical Group and the Management Company shall use their best efforts to agree,
in a timely manner, on the additional consideration payable to the Medical Group
and the additional fee payable to the Management Company in connection
therewith. The Medical Group and the Management Company shall within 30 days
following the giving of the notice required hereunder, execute and deliver an
amendment to this Agreement, which amendment shall set forth the terms and
conditions agreed upon pursuant to this Section 18. Failure of the parties to
reach agreement as to the terms described above shall not constitute a default
hereunder by either party. The Medical Group may, in its sole discretion at
anytime prior to the Management Company's exercise of the Bahamas Option, cease
the operation of its Bahamas Practice; provided that if the Medical Group or any
of the physician owners of the Medical Group reinitiate the operations of an
orthopedic practice in the Bahamas within 180 days after the Bahamas Practice is
closed, the Medical Group or such physician owners shall grant the Management
Company an option to enter into a management services agreement substantially
similar to this agreement for the provision of management services to such
practice.
SECTION 19 Assignment.
The Management Company shall have the right to assign its rights and
delegate its obligations hereunder to any affiliate and to assign its rights
hereunder to any lending institution from which the Management Company or any
affiliate obtains financing for security purposes or as collateral. Except as
set forth in the preceding sentence, neither the Management Company nor the
Medical Group shall have the right to assign their respective rights and
delegate their respective obligations hereunder without the prior written
consent of the other party; provided, however, that after the consummation of an
initial
-99-
<PAGE>
public offering of the Management Company's common stock, the Medical Group's
consent shall not be required in connection with any assignment by the
Management Company arising out of or in connection with a sale of all or
substantially all of the stock or assets of the Management Company or the
merger, consolidation, or reorganization of the Management Company.
SECTION 20. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed sufficient if personally delivered, telecopied
(with original sent by mail), sent by nationally-recognized overnight courier,
or by registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:
If to the Management Company:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telecopier: (212) 408-2420; and
If to the Medical Group:
Lauderdale Orthopaedic Surgeons
1212 East Broward Boulevard
Fort Lauderdale, Florida 33301
Attention: Martin Silverstein, M.D.
Telecopier: (954) 761-9625;
-100-
<PAGE>
with a copy to:
Ritter & Chusid
7000 West Palmetto Park Road
Suite 400
Boca Raton, Florida 33433
Attention: Gregory J. Ritter, Esq.
Telecopier: (561) 394-2582;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery and telecopier, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after the
date when sent, and (c) in the case of mailing, on the third business day
following the day on which the piece of mail containing such communication is
posted.
SECTION 21. Benefits of Agreement.
This Agreement shall bind and inure to the benefit of any successors to or
permitted assigns of the Management Company and the Medical Group.
SECTION Governing Law; Jurisdiction.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida without giving effect to the
laws and principles thereof, or of any other jurisdiction, which would direct
the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought by any party
hereto pursuant to this Agreement may lie in any Federal or state court located
in Broward County, Florida or the Southern District of Florida. By execution and
delivery of this Agreement, the parties hereto irrevocably submit to the
nonexclusive jurisdiction of such courts for themselves and in respect of their
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in
-101-
<PAGE>
such court, and hereby waive any objection that such court is an improper or
inconvenient forum for the resolution of such action. Nothing in this Agreement
shall affect any right that any party may otherwise have to bring any action or
proceeding relating to this Agreement in the courts of any other jurisdiction.
The parties hereto shall act in good faith and shall refrain from taking any
actions to circumvent or frustrate the provisions of this Agreement.
SECTION 23. Headings.
Section headings are used for convenience only and shall in no way affect
the construction of this Agreement.
SECTION 24. Entire Agreement; Amendments.
This Agreement and the exhibits and schedules hereto contain the entire
understanding of the parties with respect to its subject matter, and neither
this Agreement nor any part of it may in any way be altered, amended, extended,
waived, discharged or terminated except by a written agreement signed by all of
the parties against whom enforcement is sought.
SECTION 25. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover from the other
party all reasonable costs and expenses, including attorneys' fees and
accountants' fees, incurred in connection with such dispute or controversy.
SECTION 26. Counterparts.
This Agreement may be executed in counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such counterparts together
shall constitute but one agreement.
-102-
<PAGE>
SECTION 27. Waivers.
Any party to this Agreement may, by written notice to the other party,
waive any provision of this Agreement. The waiver by any party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
SECTION 28. Survival of Termination.
Notwithstanding anything contained herein to the contrary, Sections 3.3(f),
3.6, 3.19, 11, 12, 13.4, 13.5, 14, 15, 16, 20, 21, 22, 24, 25 and this Section
28 shall survive any expiration or termination of this Agreement.
SECTION 29. Contract Modification for Prospective Legal Events.
In the event any state or Federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Medical Group and the Management Company shall amend
this Agreement as necessary to avoid such violation. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between the Medical Group and the Management Company. If
an amendment is not possible, either party shall have the right to terminate
this Agreement. Any dispute between the parties hereto arising under this
Section 29 with respect to whether this Agreement violates any state or Federal
laws or regulations shall be jointly submitted by the parties and finally
settled by binding arbitration in Florida, pursuant to the arbitration rules of
the National Health Lawyers Association Alternative Dispute Resolution Service.
Arbitration shall take place before one arbitrator appointed in accordance with
such rules. The governing law of the arbitration shall be the law set forth in
-103-
<PAGE>
Section 22. Any decision rendered by the arbitrator shall clearly set forth the
factual and legal basis for such decision. The decision rendered by the
arbitrator shall be non-appealable and enforceable in any court having
jurisdiction thereof. The administrative costs of the arbitration and the
arbitrator fees shall be equally borne by the parties. Each party shall pay its
own legal costs and fees in connection with such arbitration.
* * * * *
-104-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
LAUDERDALE ORTHOPAEDIC SURGEONS
By:
------------------------------
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
By:
------------------------------
Naresh Nagpal, M.D.
President and Chief Executive
Officer
Acknowledged and Agreed to
(as to Sections 4, 9.7, 9.11,
14.1, 14.2, 14.3, 14.4, 15 and 16):
- ------------------------------
Martin Silverstein, M.D.
- ------------------------------
Raul Aparicio, M.D.
- ------------------------------
Michael Ruddy, M.D.
- ------------------------------
Michael Weiss, D.O.
Acknowledged and Agreed to
(as to Sections 14.1(e), 15 and 16):
- ------------------------------
Verano M. Hermida
- ------------------------------
Paul M. Greenman
<PAGE>
Acknowledged and Agreed to
(as to Sections 9.7, 14.1, 14.2,
and 14.3)
- ------------------------------
Verona M. Hermida, M.D.
- ------------------------------
Paul M. Greenman, D.P.M.
Acknowledged and Agreed to
(as to Section 17.5):
- ------------------------------
Naresh Nagpal, M.D.
OAK INVESTMENT PARTNERS VI, L.P.
By: Oak Associates VI, L.P.
its General Partner
By:
---------------------------
Ann H. Lamont
General Partner
OAK VI AFFILIATES FUND, L.P.
By: Oak VI Affiliates, LLC
its General Partner
By:
---------------------------
Ann H. Lamont
Managing Member
DELPHI VENTURES III, L.P.
By: Delphi Management Partners, LLC
its General Partner
By:
---------------------------
Donald J. Lothrop
Managing Member
<PAGE>
DELPHI BIOINVESTMENTS III, L.P.
By: Delphi Management Partners, LLC
its General Partner
By:
---------------------------
Donald J. Lothrop
Managing Member
<PAGE>
EXECUTION COPY
AMENDMENT NO. 1 TO THE MANAGEMENT
SERVICES AGREEMENT dated as of
September 4, 1997, between
LAUDERDALE ORTHOPAEDIC SURGEONS, a
Florida partnership (the "Medical
Group"), and BONE, MUSCLE AND
JOINT, INC., a Delaware corporation
(the "Management Company").
Reference is made to the Management Services Agreement effective as of
April 1, 1997 (the "Management Services Agreement"), between the Medical Group
and the Management Company, pursuant to which the Management Company has agreed
to provide the Medical Group with certain management, administrative and other
related services in connection with the Medical Business (as defined in the
Management Services Agreement). The parties hereto desire to amend the
Management Services Agreement in accordance with the terms hereinafter set
forth.
NOW, THEREFORE, in consideration for the mutual agreements contained in
this Amendment and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Medical Group and the
Management Company hereby agree as follows:
SECTION 1. All capitalized terms used but not defined herein have the
meanings ascribed thereto in the Management Services Agreement.
SECTION 2. Section 13.1 of the Management Services Agreement is hereby
amended by (i) inserting at the end of clause (b) thereof "; provided further,
however, that if the Medical Group intends to terminate this Agreement due to
the Management Company's default under Section 17.7, the Medical Group must so
notify the Management Company by February 28, 1998 in order for such termination
to be effective", (ii) inserting "or" immediately before clause (d) thereof,
(iii) deleting ", or" at the end of clause (d) and (iv) deleting clause (e)
therefrom.
SECTION 3. Section 13.4(a) of the Management Services Agreement is hereby
amended by adding at the end thereof "; provided that in the event this
Agreement is terminated by the Medical Group as a result of the Management
Company's breach of its covenant in Section 17.7 hereof, those provisions set
forth in Section 13.6 shall also apply."
SECTION 4. Section 13 of the Management Services Agreement is hereby
amended by adding at the end thereof a new Section 13.6 to read in its entirety
as follows:
<PAGE>
"13.6. Effect of Termination Resulting from Failure to Publicly Report.
In the event that the Medical Group terminates this Agreement due to
the Management Company's breach of its covenant set forth in Section 17.7
hereof, the Medical Group shall deliver to the Management Company an amount
equal to $394,500. The Medical Group shall also cause each physician
affiliated with the Medical Group who received shares of capital stock of
the Management Company in connection with the execution and delivery of
this Agreement to, and each such physician shall, return and deliver to the
Management Company the certificates representing all of such shares of
capital stock. Certificates delivered pursuant to this Section 13.6 shall
be duly endorsed for transfer to the Management Company."
SECTION 5. Section 14 of the Management Services Agreement is hereby
amended and restated in its entirety to read as follows:
"Section 14. [Intentionally Omitted]"
SECTION 6. Section 17 of the Management Services Agreement is hereby
amended by adding a new Section 17.7 thereto, to read in its entirety as
follows:
"17.7 Covenant to Develop a Public Company.
The Management Company shall use its best efforts to cause the
Management Company to become a public reporting company under the
Securities Exchange Act of 1934, as amended, by December 29, 1997. To the
best knowledge of the Management Company, there are no facts or
circumstances which (a) would prevent the Management Company from becoming
a public reporting company within such time period or (b) are inconsistent
with the Management Company's fulfillment of the foregoing covenant."
SECTION 7. Section 28 is hereby amended by inserting ", 30" on the third
line thereof after "25".
SECTION 8. The Management Services Agreement is hereby amended by adding a
new Section 30, to read in its entirety as follows:
"Section 30. Severability.
It is the desire and intent of the parties hereto that the provisions
of this Agreement be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which
-107-
<PAGE>
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to
such jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited
or unenforceable in such jurisdiction, it shall, as to such jurisdiction,
be so narrowly drawn, without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of such provision in
any other jurisdiction."
SECTION 9. Except as expressly provided in this Amendment No. 1, the
Management Services Agreement remains in full force and effect in accordance
with its terms.
SECTION 10. This Amendment No. 1 may be executed in more than one
counterparts, and by the parties hereto in separate counterparts, and each such
counterpart shall constitute an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
SECTION 11. This Amendment No. 1 shall by governed by, construed and
interpreted in accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
No. 1 to the Management Services Agreement as of the date first above written.
LAUDERDALE ORTHOPAEDIC SURGEONS
By:
------------------------------
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
By:
------------------------------
Name:
Title:
EXECUTION COPY
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of May
6, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the
"Company"), and the individual identified on the signature page hereto (the
"Stockholder"), with reference to the following facts. Certain capitalized terms
used herein are defined in Section 6 below.
A. This Agreement is entered into in connection with and concurrently with
that certain Management Services Agreement dated as of the date hereof (the
"Management Services Agreement") between the Company and Lauderdale Orthopaedic
Surgeons (the "Medical Group").
B. This Agreement is being entered into concurrently with substantially
identical Restricted Stock Agreements between the Company and the other partners
in or employees of the Medical Group identified on Schedule A attached hereto
(such individuals and their Permitted Transferees are referred to herein
collectively as the "Stockholders").
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Purchase and Sale of Restricted Shares; Representations and Warranties
of Stockholder.
(a) Upon execution of this Agreement, the Company shall, pursuant to
Section 4 and Schedule III of the Management Services Agreement, issue to the
Stockholder that number of shares (such shares together with those shares
hereafter acquired pursuant to the terms hereof, are referred to herein as the
"Restricted Shares") of common stock, $.001 par value (the "Common Stock"), of
the Company set forth opposite the Stockholder's name on Schedule A attached
hereto. The aggregate shares of Common Stock issued to the Stockholders are
referred to collectively herein as "Restricted Stock." Simultaneously with the
execution and delivery hereof, the Company is delivering to the Stockholder the
certificate(s) representing the Restricted Shares against receipt by the Company
of the consideration therefor as set forth opposite the Stockholder's name on
Schedule A attached hereto.
(b) In connection with the issuance of the Restricted Shares hereunder, the
Stockholder represents and warrants to the Company that:
(i) the Restricted Shares to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in
<PAGE>
violation of the 1933 Act, or any applicable state securities laws, and the
Restricted Shares will not be disposed of in contravention of the 1933 Act
or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Shares;
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Shares and is able to bear the economic risk
of his or her investment in the Restricted Shares for an indefinite period
of time and understands that the Restricted Shares have not been registered
or qualified under the 1933 Act or any applicable state securities laws, by
reason of the issuance of the Restricted Shares in a transaction exempt
from the registration and qualification requirements of the 1933 Act or
such state securities laws and, therefore, cannot be sold unless
subsequently registered or qualified under the 1933 Act or such state
securities laws or an exemption from such registration or qualification is
available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Shares and has had full access to or been provided with such
other
-2-
<PAGE>
information concerning the Company as he or she has requested.
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Shares to the
Stockholder and as a condition thereto, the Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Shares to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement in accordance with its terms;
and
(ii) the Company shall provide the Stockholder with substantially the
same information regarding the Company that the Company regularly discloses
to its other shareholders.
2. Vesting of the Restricted Shares.
(a) Except as otherwise provided in Section 2(b) below, the Restricted
Shares shall become vested in accordance with the following schedule, if, as of
each such date, (i) the Management Services Agreement has not been terminated,
(ii) there has not been a Cessation of Active Practice (as defined in Section
2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently
disabled, and (iv) the Stockholder has not died:
Anniversary Date Cumulative Percentage of
of this Agreement Restricted Shares Vested
----------------- ------------------------
First 25%
Second 50%
Third 75%
Fourth 100%
For purposes of this Agreement, "Anniversary Date of this Agreement" means April
1 of each year after 1997. Restricted Shares which have become vested are
referred to herein as "Vested Shares" and all other Restricted Shares are
referred to herein as "Unvested Shares."
-3-
<PAGE>
(b) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
Section 2(a) above, the number of Unvested Shares, if any, that would have
become Vested Shares during the 18-month period immediately following the date
of death had such death not occurred shall be deemed Vested Shares as of the
date of death.
(c) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death), throughout any
twelve-month period ending on the day before any of the vesting dates described
in Section 2(a) hereof, to engage in the practice of medicine with the Medical
Group on a regular basis, including the performance of orthopedic surgical
procedures on a regular basis (except in the case of any Stockholder who did not
practice surgery on a regular basis immediately prior to the date hereof), such
that (i) the Stockholder was engaged in patient care activities for less than
seventy-five percent (75%) of the time that the Stockholder had been engaged in
such activities during the twelve-month period immediately preceding the date
hereof, and (ii) the Stockholder generated billings that were less than
seventy-five percent (75%) of the amount of billings generated by the
Stockholder during the twelve-month period immediately preceding the date
hereof.
3. Repurchase of Restricted Shares.
(a) In the event of the termination of the Management Services Agreement
pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth
anniversary of the date hereof, the Company shall have the right (but not the
obligation) (the "Repurchase Option"), to be exercised in its sole discretion,
to repurchase all or any portion of the Restricted Shares (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
Permitted Transferees) pursuant to the terms and conditions set forth in this
Section 3.
(b) The Company may elect to repurchase all or any portion of the
Restricted Shares by delivering written notice (the "Repurchase Notice") to the
Stockholder within ninety (90) days after the Repurchase Event; provided,
however, that if the Company elects to repurchase less than all of the
Restricted Shares, the Company shall first repurchase Unvested Shares and then
repurchase that number of Vested Shares, if any, as the Company may, in its sole
discretion, elect. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be repurchased, the aggregate consideration to be
paid for such shares, and the time and place for the closing of the transaction.
The purchase price payable for each Unvested Share shall equal the Original
Value of such share and the purchase price payable for each Vested Share shall
equal the Fair Market
-4-
<PAGE>
Value of such share. If the Company decides to repurchase Restricted Shares from
any Stockholder pursuant to this Section 3(b), then the Company must purchase
that number of Restricted Shares which it has elected to repurchase from all of
the Stockholders pro rata according to the number of shares of Restricted Stock
held by all of the Stockholders at the time of delivery of such Repurchase
Notice (determined as nearly as practicable to the nearest whole share).
(c) The closing of the repurchase of Restricted Shares pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the delivery of the Repurchase Notice. The Company
shall pay for the Restricted Shares to be purchased pursuant to the Repurchase
Option by delivery of a check or wire transfer of funds in the aggregate amount
of the repurchase price for such shares; provided, however, that in the event
the Medical Group is obligated to pay to the Company any sums in connection with
the repurchase of assets by the Medical Group pursuant to Section 13.5 or 14.1
of the Management Services Agreement, the total amount of such sums may be
offset by the Company against any amounts owed by the Company to the Stockholder
pursuant to this Agreement (if such Stockholder is, at such time, an equity
owner of or partner in the Medical Group), such offset amount to be allocated
pro rata among all of the Stockholders who at such time hold equity of or are
partners in the Medical Group. The Company's payment under this Section 3(c)
shall be subject to the terms and provisions of any financing agreement, if any,
to which the Company is a party, its certificate of incorporation and the
operation of law. The Company shall be entitled to require the signature of the
Stockholder to be guaranteed and to receive representations and warranties from
the Stockholder regarding (i) the Stockholder's power, authority and legal
capacity to enter into such sale and to transfer valid right, title and interest
in such Restricted Shares, (i i) the Stockholder's ownership of such Restricted
Shares and the absence of any liens, pledges, and other encumbrances on such
Restricted Shares and (iii) the absence of any violation, default, or
acceleration of any agreement or instrument pursuant to which the Stockholder or
the Stockholder's assets are bound resulting from such sale.
(d) In the event of the Cessation of Active Practice, the death or
permanent disability of the Stockholder, the Company shall repurchase all of the
Unvested Shares of the Stockholder pursuant to the following terms. The
repurchase price for each Unvested Share shall be equal to the Original Value of
such share, and such repurchase price shall be paid in full in cash not later
than sixty (60) days after the date of Cessation of Active Practice, death or
permanent disability of the Stockholder. For purposes of this Section 3(d), if
the Stockholder is insured under a disability insurance policy, the
-5-
<PAGE>
determination under such policy as to whether the Stockholder's condition
constitutes a permanent disability shall be binding on the parties hereto for
purposes of this Section 3(d). If the Stockholder is not insured under a policy
of disability insurance, such determination shall be made by an independent
qualified physician proposed by the Medical Group, subject to the approval of
the Company, which approval shall not be unreasonably withheld.
(e) In the event that the Stockholder is required, prior to the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act or prior to the second anniversary of the date hereof,
whichever is later, to pay any state or Federal taxes in connection with the
receipt of the Restricted Shares hereunder, the Stockholder shall have the right
to sell to the Company, and the Company shall be obligated to purchase from the
Stockholder, for the purchase price determined in accordance with this Section
3, such number of shares of Vested Stock as the Stockholder may tender to the
Company, provided that the purchase price therefor shall not exceed the total
amount of the Stockholder's tax liability incurred in connection with the
receipt of such stock. In the event that the Stockholder desires to exercise the
right conferred under this Section 3(e), the Stockholder shall give notice to
the Company not earlier than forty-five (45) days prior to, nor later than
forty-five (45) days after, the date on which such taxes are due and payable,
and the Stockholder shall furnish to the Company reasonable documentation
prepared by the Stockholder's certified public accountant establishing the amo
unt of such tax liability.
(f) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Shares by the Company shall be subject to
applicable restrictions, if any, contained in Federal law or in the Delaware
General Corporation Law and, if any such restrictions prohibit or otherwise
delay the repurchase of Restricted Shares hereunder which the Company is
otherwise entitled or required to make, the Company may make such repurchases as
soon as it is permitted to do so under the applicable Federal law or the
Delaware General Corporation Law.
(g) In the event that any Restricted Shares are repurchased pursuant to
this Section 3 (other than pursuant to Section 3(e)), the Stockholder and his or
her successors and assigns shall, at the Company's expense, take all reasonable
steps to obtain all required third-party, governmental and regulatory consents
and approvals and take all other reasonable actions necessary to facilitate
consummation of such repurchase in a timely manner.
-6-
<PAGE>
4. Transfer Restriction; Legend.
Except as otherwise expressly provided in Section 3 and except for
Permitted Transfers, the Stockholder may not sell or transfer or agree to sell
or transfer ("Sale" or "Sell") any Restricted Shares unless such Sale shall be
in accordance with the procedures set forth in this Section 4; provided,
however, that with respect to this Section 4, Restricted Shares, at any point in
time, shall be limited to Vested Shares and at no time shall the Stockholder
have the right to Sell Unvested Shares (except as provided in Sections 3(b) and
3(d) hereof):
(a) In the event that the Stockholder receives a bona fide offer from a
third party (the "Prospective Stockholder") to purchase all or any part of the
Restricted Shares owned by the Stockholder, the Stockholder shall deliver to the
Company a written notice (the "Offer Notice"), which shall be irrevocable for a
period of fifteen (15) business days after delivery thereof (the "Offer
Period"), offering (the "Offer") all of the Restricted Shares proposed to be
Sold by the Stockholder to the Prospective Stockholder at the purchase price and
on the terms of the proposed Sale to the Prospective Stockholder (such Offer
Notice shall include the foregoing information, a copy of the Prospective
Stockholder's bona fide offer and all other relevant terms of the proposed Sale,
including the identification of the Prospective Stockholder). The Company shall
have the right and option, for a period of fifteen (15) business days after
delivery of the Offer Notice, to repurchase all of the Restricted Shares so
offered at the purchase price and on the terms stated in the Offer Notice. Such
acceptance shall be made by delivering a written notice to the Stockholder
within said fifteen (15) business-day period.
(b) Sales of Restricted Shares under the terms of Section 4(a) above shall
be made on a mutually satisfactory business day within fifteen (15) business
days after the expiration of the Offer Period. Delivery of certificates or other
instruments evidencing such Restricted Shares duly endorsed for transfer shall
be made on such date against payment of the purchase price therefor.
(c) If the Company fails to purchase all of the Restricted Shares offered
for Sale pursuant to the Offer Notice, then at any time within sixty (60)
business days after the expiration of the Offer Period the Stockholder may Sell
all or any part of the remaining Restricted Shares so offered for Sale on terms
no more favorable to the Prospective Stockholder than the terms stated in the
Offer Notice; provided, however, that the Stockholder shall not, under any
circumstances, Sell any Restricted Shares to the Prospective Stockholder if the
Board of Directors of the Company, in its sole discretion, determines in good
faith that the Prospective Stockholder is a competitor, or an Affiliate of a
competitor, of the Company or that such
-7-
<PAGE>
Prospective Stockholder's ownership of such Restricted Shares would be contrary
to the best interests of the Company. In the event that all of such Restricted
Shares are not Sold by the Stockholder to the Prospective Stockholder during
such period, the right of the Stockholder to Sell such Restricted Shares to the
Prospective Stockholder shall expire and the obligations of the Stockholder
pursuant to this Section 4 shall be reinstated.
(d) Any Permitted Transferee (other than the Company and any transferee
pursuant to Section 17.5 of the Management Services Agreement), shall, as a
condition to such transfer, (i) agree to be bound by all of the provisions of
this Agreement applicable to the Stockholder and shall evidence such agreement
by executing and delivering to the Company a joinder to this Agreement in form
and substance satisfactory to the Company, and (ii) if such transferee is a
partner in or an equity owner of the Medical Group, execute a noncompetition
agreement in form and substance satisfactory to the Company (if such transferee
is not, as of the date of such transfer, a party to such an agreement with the
Company).
(e) The certificate(s) representing the Restricted Shares will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UN DER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.
ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN REPURCHASE OPTIONS, TRANSFER RESTRICTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT DATED AS OF MAY 6,
1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF
SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(f) The restrictions on transfers of Vested Shares set forth in this
Section 4 shall expire, and shall be of no further force or effect, upon the
consummation of initial public offering of the Company's Common Stock pursuant
to the 1933 Act.
5. Registration Rights.
(a) Piggyback Registration. If the Company, at any time after that date
which is six months after the consummation of the initial public offering of the
Common Stock, proposes for any reason to register Primary Shares or Other Shares
under the Securities Act (other than on Form S-4 or Form S-8 promulgated under
the Securities Act or any successor forms thereto), it
-8-
<PAGE>
shall promptly give written notice to the Stockholders of its intention so to
register the Primary Shares or Other Shares and, upon the written request, given
within 15 days after delivery of any such notice by the Company, of any
Stockholder to include in such registration Registrable Shares held by such
Stockholder (which request shall specify the number of Registrable Shares
proposed to be included in such registration), the Company shall use its best
efforts to cause all such Registrable Shares to be included in such registration
on the same terms and conditions as the securities otherwise being sold in such
registration; provided, however, that if the managing underwriter advises the
Company that the inclusion of all Registrable Shares requested by the
Stockholders to be included in such registration, together with the inclusion of
all Other Shares, would interfere with the successful marketing (including
pricing) of Primary Shares proposed to be registered by the Company, then the
number of Primary Shares, Registrable Shares and Other Shares proposed to be
included in such registration shall be included in the following order:
(i)first, the Primary Shares;
(ii) second, the Venture Capital Shares requested to be included in
such registration by the Venture Capitalists (pro rata based on the number
of Venture Capital Shares held by all Venture Capitalists requesting
inclusion of Venture Capital Shares in such registration) ;
(iii) third, the Other Shares in such proportion as shall be
determined by the Company; and
(iv) fourth, the Registrable Shares requested to be included in such
registration by the Stockholders (pro rata based on the number of
Registrable Shares held by all Stockholders requesting inclusion of
Registrable Shares in such registration).
(b) Condition to Registration Obligations. The Corporation shall not be
obligated to effect the registration of the Registrable Shares pursuant to
Section 5(a) above unless the Stockholder executes a power of attorney, custody
arrangement and other documents customary in such transactions and reasonably
required by the managing underwriter thereof prior to the filing of the
registration statement.
(c) Holdback Agreement. If the Company at any time shall register shares of
Common Stock under the Securities Act (including any registration pursuant to
Section 5(a) above) for sale to the public, the Stockholder shall not sell
publicly, make any short sale of, grant any option for the purchase of, or
otherwise dispose publicly of, any Restricted Shares (other than those shares of
Common Stock included in such registration pursuant to Section 5(a) above)
without the prior written
-9-
<PAGE>
consent of the Company for a period designated by the Company in writing to the
holders of Registrable Shares, which period shall not begin more than 10 days
prior to the effectiveness of the registration statement pursuant to which such
public offering shall be made and shall not last more than 180 days after the
effective date of such registration statement.
(d) Indemnification. In connection with any registration of Registrable
Shares under the Securities Act pursuant to this Agreement, the Stockholder
shall indemnify and hold harmless the Company, each director of the Company,
each officer of the Company who shall sign such registration statement, each
underwriter, broker or other person acting on behalf of the holders of
Registrable Shares and each person who controls any of the foregoing persons
within the meaning of the Securities Act with respect to any statement or
omission from such registration statement, any preliminary prospectus or final
prospectus contained therein or otherwise filed with the Commission, any
amendment or supplement thereto or any document incident to registration or
qualification of any Registrable Shares, if such statement or omission was made
in reliance upon and in conformity with written information furnished to the
Company or such underwriter through an instrument duly executed by such ho lder
of Registrable Shares specifically for use in connection with the preparation of
such registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document.
(e) Information by Stockholder. In the event the Stockholder elects to sell
Registrable Shares pursuant to Section 5(a) above, the Stockholder shall furnish
to the Company such written information regarding the Stockholder and the
distribution proposed by the Stockholder as the Company may reasonably request
in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Section 5.
6. Definitions.
(a) "Affiliate" means, with respect to any Person, (a) any director,
officer or partner of such Person and (b) any other Person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person. The term "control" includes,
without limitation, the possession, directly or indirectly, of the power to
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales
-10-
<PAGE>
on any such exchange on any given day, the average of the last bid and asked
prices on all such exchanges at the end of such day, or, if on any given day the
Common Stock is not so listed, the average of the representative bid and asked
prices quoted in the Nasdaq Stock Market National Market System ("Nasdaq") as of
4:00 P.M., New York time, or, if on any given day the Common Stock is not quoted
in Nasdaq, the average of the bid and asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which the Fair Market Value
is being determined and the 20 consecutive trading days prior to such day. If at
any time the Common Stock is not listed on any securities exchange or quoted in
Nasdaq or the over-the-counter market, the Fair Market Value shall be that value
jointly determined by the Stockholder and the Company, provided that if they
cannot so agree, such value shall be determined by a mutually acceptable
investment banking or other qua lified firm of national or regional reputation,
retained jointly by the Company and the Medical Group, and all fees, expenses
and other charges of such firm incurred in connection with such determination of
Fair Market Value shall be borne and shared equally by the Company and the
Medical Group. In the event that the parties are unable to agree upon such an
investment banking or other qualified firm within ten (10) days after the date
on which either party may initially propose such a firm, a qualified firm shall
be selected in the following manner:
First, the Stockholder shall send a list of four such firms, arranged
in order of the Stockholder's preference, by written notice to the Company
within seven (7) days after the expiration of the above referenced 10-day
period. If the Stockholder does not furnish such list to the Company within
the required time period, the Company may, within seven (7) days following
expiration of the initial seven-day period, submit a list of four such
firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed acceptable and agreeable to each of the parties.
(c) "Internal Revenue Code" means the Internal Revenue Code of 1986, as the
same may be amended or supplemented from time to time, or any successor statute,
and the rules and regulations thereunder, as the same are from time to time in
effect.
(d) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to $0.001 (as
-11-
<PAGE>
proportionately adjusted for all subsequent stock splits, stock dividends and
other recapitalizations).
(e) "Other Shares" means at any time those shares of Common Stock that do
not constitute Primary Shares or Registrable Shares.
(f) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
(g) "Permitted Transferee" means, as to the Stockholder, any transferee who
acquires the Restricted Shares pursuant to a Permitted Transfer or any other
transfer made in accordance with the provisions of this Agreement.
(h) "Permitted Transfer" means, as to the Stockholder, (i) any sale or
transfer of Vested Shares to (A) the spouse or lineal descendants of such
Stockholder or (B) a trust for the benefit of any of the foregoing and (ii) any
sale or transfer of Vested Shares or Unvested Shares to any other Stockholder,
or any physician who, as of the date of such transfer, is a partner of or equity
owner in the Medical Group.
(i) "Primary Shares" means at any time the authorized but unissued shares
of Common Stock or shares of Common Stock held by the Company in its treasury.
(j) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(k) "Registrable Shares" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by the Stockholders and which have not theretofore been sold to
the public pursuant to a registration statement under the Securities Act or
pursuant to Rule 144; provided that, unvested shares shall not under any
circumstance be Registrable Shares.
(l) "Restricted Shares" has the meaning set forth in Section 1(a). The
Restricted Shares will continue to be Restricted Shares in the hands of any
holder other than the Stockholder (except for the Company and except for
transferees in a Public Sale), and except as otherwise provided herein, each
such other holder of the Restricted Shares will succeed to all
-12-
<PAGE>
rights and obligations attributable to the Stockholder as the holder of the
Restricted Shares hereunder. The Restricted Shares will also include shares of
the Company's capital stock issued with respect to the Restricted Stock by way
of a stock split, stock dividend or other recapitalization.
(m) "Venture Capitalists" means Naresh Nagpal and those venture capital
firms that have acquired, prior to the date hereof, and may acquire, at any time
hereafter, securities of the Company and in connection with such acquisition
have obtained or may obtain registration rights.
(n) "Venture Capital Shares" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by a Venture Capitalist and which have not theretofore been sold
to the public pursuant to a registration statement under the Securities Act or
pursuant to Rule 144.
(o) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
7. Indemnification.
(a) The Company shall indemnify, defend and hold harmless the Stockholder
against all liability, loss or damage, together with all reasonable costs and
expenses related thereto (including reasonable legal fees and expenses),
relating to or arising from the untruth, inaccuracy or breach of any of the
representations, warranties or agreements of the Company contained in this
Agreement.
(b) The Stockholder shall indemnify and hold harmless the Company against
all liability, loss or damage, together with all reasonable costs and expenses
related thereto (including reasonable legal fees and expenses), relating to or
arising from the untruth, inaccuracy or breach of any of the representations,
warranties or agreements of the Stockholder contained in this Agreement.
8. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (each, a "Transfer") or attempted
Transfer of any Restricted Shares in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported
-13-
<PAGE>
transferee of such Restricted Shares as the owner of such stock for any purpose.
(b) Binding Effect of Management Services Agreement. The Stockholder hereby
agrees to be bound by the provisions of Sections 9.11 and 14 of the Management
Services Agreement, which provisions such Stockholder has reviewed.
(c) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(d) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(e) Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
(f) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, permitted assigns,
heirs, representatives and estate, as the case may be (including subsequent
holders of Restricted Stock); provided, however, that the rights and obligations
of the Stockholder under this Agreement shall not be assignable except in
connection with a Permitted Transfer of Restricted Shares hereunder and;
provided further, however, that the rights of the Stockholder set forth in
Section 5 hereof may not be assigned to any transferee.
-14-
<PAGE>
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida, without giving effect to any
choice of law or conflicting provision or rule (whether of the State of Florida,
or any other jurisdiction), that would cause the laws of any jurisdiction other
than the State of Florida to be applied. In furtherance of the foregoing, the
internal law of the State of Florida will control the interpretation and
construction of this agreement, even if under such jurisdiction's choice of law
or conflict of law analysis, the substantive law of some other jurisdiction
would ordinarily apply.
(h) Jurisdiction.
(i) Each of the parties hereto hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of
any Florida state court or Federal court of the United States of America
sitting in the State of Florida, and any appellate court thereof, in any
action or proceeding arising out of or relating to this Agreement or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of
any such action or proceeding may be heard and determined in any such
Florida state court or, to the extent permitted by law, in such Federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement shall affect any right that any party may
otherwise have to bring any action or proceeding relating to this Agreement
in the courts of any other jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement in
any Florida state or Federal court. Each of the parties hereto irrevocably
waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any
such court.
(i) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for the Company in the event of a breach of the provisions of this
Agreement by the Stockholder and that the Company may, in its sole discretion,
-15-
<PAGE>
apply to any court of law or equity of competent jurisdiction for specific
performance and/or other injunctive relief (without posting any bond or deposit)
in order to enforce or prevent any violations of the provisions of this
Agreement.
(j) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof; provided, however, that the Company may amend, without the
Stockholder's consent, Schedule A hereto upon consummation of a Permitted
Transfer of shares hereunder to reflect the then current ownership of the
Restricted Stock.
(k) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
nationally-recognized overnight courier service (charges prepaid) to the
recipient at the address below indicated or at such other address or to the
attention of such other person as the recipient party has specified by prior
written notice to the sending party. Notices will be deemed to have been given
hereunder and received when delivered personally, when received if transmitted
via telecopier, five days a fter deposit in the U.S. mail and one business day
after deposit with a nationally-recognized overnight courier service.
(i) If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telephone: (561) 391-1311
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telephone: (212) 408-2417
Telecopier: (212) 408-2420; and
-16-
<PAGE>
(ii) If to the Stockholder, to:
Martin B. Silverstein, M.D.
1621 SE 8th Street
Fort Lauderdale, Florida 33316;
with copies to:
Lauderdale Orthopaedic Surgeons
1212 East Broward Boulevard
Fort Lauderdale, Florida 33301
Attention: Martin Silverstein, M.D.
Telephone: (954) 462-1526
Telecopier: (954) 761-9625; and
Moore & Menkhaus, P.A.
4800 N. Federal Highway, Suite 210A
Boca Raton, Florida 33431
Attention: David Menkhaus, Esq.
Telephone: (561) 394-7910
Telecopier: (561) 393-6541.
(l) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of Florida, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(m) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the other party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(n) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(o) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which i t relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(p) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the
-17-
<PAGE>
singular form of nouns and pronouns shall include the plural and vice-versa.
* * * *
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Agreement effective as of the date first written above.
COMPANY
-------
BONE, MUSCLE AND JOINT, INC.
By:__________________________
Name:
Title:
STOCKHOLDER
-----------
-----------------------------
Martin B. Silverstein, M.D.
MEDICAL GROUP
- -------------
ACCEPTED AND AGREED
AS TO PARAGRAPHS 3(d)(iv), and 6(b)
LAUDERDALE ORTHOPAEDIC SURGEONS
By:_________________________
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Agreement effective as of the date first written above.
COMPANY
-------
BONE, MUSCLE AND JOINT, INC.
By:__________________________
Name:
Title:
STOCKHOLDER
-----------
-----------------------------
MEDICAL GROUP
- -------------
ACCEPTED AND AGREED
AS TO PARAGRAPHS 3(d)(iv), and 6(b)
LAUDERDALE ORTHOPAEDIC SURGEONS
By:_________________________
Name:
Title:
<PAGE>
EXECUTION COPY
--------------
AMENDMENT NO. 1 TO THE RESTRICTED
STOCK AGREEMENT dated as of
September 4, 1997, between BONE,
MUSCLE AND JOINT, INC., a Delaware
corporation (the "Company"), and
the individual identified on the
signature page hereof (the
"Stockholder").
Reference is made to the Restricted Stock Agreement entered into as of May
6, 1997 (the "Restricted Stock Agreement"), pursuant to which the Stockholder
acquired shares (the "Restricted Shares") of the common stock of the Company,
par value $0.001 per share (the "Common Stock"). The parties hereto desire to
amend certain of the provisions of the Restricted Stock Agreement relating to
the vesting of the Restricted Shares and the transferability thereof.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
Section 1. All capitalized terms used but not defined herein have the
meanings ascribed in the Restricted Stock Agreement.
Section 2. to the Restricted Stock Agreement is hereby amended in its
entirety, to read as follows:
"2. Vesting of the Restricted Shares.
(a) Except as otherwise provided in Section 2(b) below, the Restricted
Shares shall become vested in accordance with the following schedule, if,
as of each such date, (i) the Management Services Agreement has not been
terminated, (ii) there has not been a Cessation of Active Practice (as
defined in paragraph 2(c) below) by the Stockholder, (iii) the Stockholder
has not become permanently disabled (as described in Section 3(a)(iii)
below), and (iv) the Stockholder has not died:
Anniversary Date Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 25%
Third 25%
Fourth 25%
<PAGE>
For purposes of this Agreement, "Anniversary Date of this Agreement" means
April 1 of each year after 1997. Restricted Shares which have become vested
are referred to herein as "Vested Shares" and all other Restricted Shares
are referred to herein as "Unvested Shares."
(b) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
paragraph 2(a) above, the number of Unvested Shares, if any, that would
have become Vested Shares during the 18-month period immediately following
the date of death had such death not occurred shall be deemed Vested Shares
as of the date of death.
(c) For purposes of this Agreement, "Cessation of Active Practice"
means the Stockholder's resignation from or termination of employment with
the Medical Group (other than by reason of death or permanent disability)."
Section 3. to the Restricted Stock Agreement is hereby amended in its
entirety, to read as follows:
"3. Forfeiture and Repurchase of Restricted Shares.
(a) In the event of the Cessation of Active Practice by or the death
or permanent disability of the Stockholder (the "Forfeiture Event"), the
following provisions shall apply.
(i) The Stockholder or the estate (in the case of death) of the
Stockholder shall transfer to the Medical Group, all of the Unvested
Shares held by the Stockholder. Such Unvested Shares shall be
transferred for no consideration from the Company and the stock
certificate(s) representing those shares shall be delivered to the
Company, no later than thirty (30) days after the Forfeiture Event,
duly endorsed for transfer in accordance with this Section 3(a). The
Company shall, within thirty (30) days after its receipt of a joinder
to this Agreement executed by the Medical Group, issue and deliver to
the Medical Group a certificate representing the Unvested Shares. Such
Unvested Shares shall continue to vest according to the vesting
schedule set forth in Section 2(a) above.
(ii) The Medical Group shall not Sell (as hereinafter defined)
any Unvested Shares to any Person, other than to one or more physician
-2-
<PAGE>
employees or equity owners of the Medical Group, who prior to the
receipt of such shares from the Medical Group had not acquired any
shares of the Company's Common Stock pursuant to the Management
Services Agreement between the Company and the Medical Group. As a
condition to any such Sale, the transferee shall execute and deliver
to the Company a Restricted Stock Agreement in substantially the form
of this Agreement, effective as of the date of transfer of such
shares. Any Unvested Shares distributed according to this Section 3(a)
shall be subject to a vesting schedule identical to the schedule set
forth in Section 2(a) hereof.
(iii) For purposes of this Agreement, if the Stockholder is
insured under a disability insurance policy, the determination under
such policy as to whether such Stockholder's condition constitutes a
permanent disability shall be binding on the parties hereto. If the
Stockholder is not insured under a policy of disability insurance,
such determination shall be made by an independent qualified physician
proposed by the Medical Group, subject to the approval of the Company,
which approval shall not be unreasonably withheld.
(b) In the event of the termination of the Management Services
Agreement pursuant to Section 13 thereof (the "Repurchase Event") on or
before the fourth anniversary of the Commencement Date (as defined
therein), the Company shall have the right (but not the obligation) (the
"Repurchase Option"), to be exercised in its sole discretion, to repurchase
all or any portion of the Restricted Stock (whether vested or unvested and
whether held by the Stockholder or one or more of the Stockholder's
Permitted Transferees) pursuant to the terms and conditions set forth in
this Section 3.
(i) The Company may elect to repurchase all or any portion of the
Restricted Shares by delivering written notice (the "Repurchase
Notice") to the Stockholder within ninety (90) days after the
Repurchase Event; provided, however, that, if the Company elects to
repurchase less than all of the Restricted Shares, the Company shall
first repurchase Unvested Shares and then repurchase that number of
Vested Shares, if any, as the Company may, in its sole discretion,
elect. The Repurchase Notice shall set forth the number of Unvested
Shares and Vested Shares to be repurchased, the aggregate
consideration to be
-3-
<PAGE>
paid for such shares, and the time and place for the closing of the
transaction. The purchase price payable for each Unvested Share shall
equal the Original Value for such share and the purchase price payable
for each Vested Share shall equal the Fair Market Value for such
share. If the Company decides to repurchase Restricted Shares from any
Stockholder pursuant to this Section 3(b), then the Company must
purchase that number of Restricted Stock which it has elected to
repurchase from all of the Stockholders pro rata according to the
number of shares of Restricted Stock held by all of the Stockholders
at the time of delivery of such Repurchase Notice (determined as
nearly as practicable to the nearest whole share).
(ii) The closing of the repurchase of Restricted Shares pursuant
to the Repurchase Option shall take place on the date designated by
the Company in the Repurchase Notice, which date shall not be more
than sixty (60) days nor less than five (5) days after the delivery of
the Repurchase Notice. The Company shall pay for Restricted Shares to
be purchased pursuant to the Repurchase Option by delivery of a check
or wire transfer of funds in the aggregate amount of the repurchase
price for the shares; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in
connection with the repurchase of assets by the Medical Group pursuant
to Section 13.5 or 14.1 of the Management Services Agreement, the
total amount of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to this
Agreement (if such Stockholder is, at such time, an equity owner of or
partner in the Medical Group), such offset amount to be allocated pro
rata among all of the Stockholders who at such time hold equity of or
are partners in the Medical Group. The Company's payment under this
Section 3(b) shall be subject to the terms and provisions of any
financing agreement, if any, to which the Company is a party, its
certificate of incorporation and the operation of law. The Company
shall be entitled to require the signature of the Stockholder to be
guaranteed and to receive representations and warranties from the
Stockholder regarding (x) the Stockholder's power, authority and legal
capacity to enter into such sale and to transfer valid right, title
and interest in such Restricted Shares, (y) the Stockholder's
ownership of such Restricted Shares and the absence of any liens,
-4-
<PAGE>
pledges, and other encumbrances on such Restricted Shares and (z) the
absence of any violation, default, or acceleration of any agreement or
instrument pursuant to which the Stockholder or the Stockholder's
assets are bound resulting from such sale.
(iii) In the event that the Stockholder is required, prior to the
consummation of an initial public offering of the Company's Common
Stock pursuant to the 1933 Act or prior to the second anniversary of
the date hereof, whichever is later, to pay any state or Federal taxes
in connection with the receipt of the Restricted Shares hereunder, the
Stockholder shall have the right to Sell to the Company, and the
Company shall be obligated to purchase from the Stockholder, for the
purchase price determined in accordance with this Section 3, such
number of shares of Vested Stock, which shares shall have been held by
the Stockholder for at least six (6) months, as the Stockholder may
tender to the Company, provided that the purchase price therefor shall
not exceed the total amount of the Stockholder's tax liability
incurred in connection with the receipt of such stock. In the event
that the Stockholder desires to exercise the right conferred under
this Section 3(c), the Stockholder shall give notice to the Company
not earlier than forty-five (45) days prior to, nor later than
forty-five (45) days after, the date on which such taxes are due and
payable, and the Stockholder shall furnish to the Company reasonable
documentation prepared by the Stockholder's certified public
accountant establishing the amount of such tax liability.
(c) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Restricted Shares by the Company under this
Section 3 shall be subject to applicable restrictions, if any, contained in
Federal law or in the Delaware General Corporation Law and, if any such
restrictions prohibit or otherwise delay the repurchase of Restricted
Shares hereunder which the Company is otherwise entitled or required to
make, the Company may make such repurchases as soon as it is permitted to
do so under applicable Federal law or the Delaware General Corporation Law.
(d) In the event that any Restricted Shares are repurchased pursuant
to this Section 3 (other than pursuant to Section 3(c)), the Stockholder
and his or her successors and assigns shall, at the Company's
-5-
<PAGE>
expense, take all reasonable steps to obtain all required third-party,
governmental and regulatory consents and approvals and take all other
reasonable actions necessary to facilitate consummation of such repurchase
in a timely manner."
SECTION 4. Section 8(b) of the Restricted Stock Agreement is hereby amended
by deleting "Section 14" on the third line and inserting "Section 13.6" in lieu
thereof.
SECTION 5. This Amendment No. 1 shall be deemed effective as of May 6,
1997. Except as expressly provided in this Amendment No. 1, the Restricted Stock
Agreement remains in full force and effect in accordance with its terms.
SECTION 6. This Amendment No. 1 may be executed in more than one
counterpart, and by the parties hereto in separate counterparts, and each such
counterpart shall constitute an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
SECTION 74. This Amendment No. 1 shall by governed by, construed and
interpreted in accordance with the laws of the State of Florida.
* * * *
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Restricted Stock Agreement effective as of the date first written above.
COMPANY
-------
BONE, MUSCLE AND JOINT, INC.
By:__________________________
STOCKHOLDER
-----------
__________________________
Signature
__________________________
Printed Name
<PAGE>
MANAGEMENT SERVICES AGREEMENT
AMONG
SUN VALLEY ORTHOPAEDIC SURGEONS
AND
BONE, MUSCLE AND JOINT, INC.
AND
THE INDEMNIFYING PARTIES
Effective as of July 1, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Retention of the Management Company..............................2
1.1 Retention........................................................2
1.2 Exclusivity......................................................2
1.3 Relationship of Parties..........................................2
1.4 No Referral Obligation...........................................3
SECTION 2. Term.............................................................3
SECTION 3. Management Services..............................................4
3.1 Management Services Generally....................................4
3.2 Premises.........................................................5
3.3 Equipment........................................................7
3.4 New Ancillary Services...........................................9
3.5 Administration, Finance and Accounting..........................10
3.6 Billing and Collection..........................................12
3.7 Administrative Personnel........................................16
3.8 Technical Personnel: Leased Employees...........................17
3.9 Medical Personnel...............................................18
3.10 Inventory and Supplies..........................................19
3.11 Taxes...........................................................19
3.12 Information Systems Management..................................19
3.13 Use of New Technologies in the Practice of Medicine.............20
3.14 Public Relations; Marketing and Advertising.....................20
3.15 Insurance.......................................................21
3.16 Files and Records...............................................21
3.17 Managed Care Contracts..........................................21
3.18 Budgets.........................................................22
3.19 Force Majeure...................................................22
SECTION 4. Equity Participation and Other Consideration....................22
SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments..22
5.1 Ownership of Accounts; Security.................................22
5.2 Bank Accounts and Payments......................................23
5.3 Medical Group Compensation......................................24
5.4 Management Fee..................................................27
5.5 Management Company Costs........................................28
5.6 New Medical Office Start-Up Costs...............................30
5.7 New Physician Start-Up Costs....................................31
5.8 Medical Group Costs.............................................33
5.9 New Ancillary Services Costs....................................34
-i-
<PAGE>
5.10 Review and Audit of Books and Records...........................36
5.11 Start-Up Period.................................................37
SECTION 6. Representations and Warranties of the Medical Group.............38
6.1 Organization; Good Standing; Qualification and Power............38
6.2 Equity Investments..............................................38
6.3 Authority.......................................................38
6.4 Financial Information...........................................39
6.5 Absence of Undisclosed Liabilities..............................40
6.6 Absence of Changes..............................................40
6.7 Tax Matters.....................................................42
6.8 Litigation, Etc.................................................44
6.9 Compliance; Governmental Authorizations.........................44
6.10 Accounts Receivable; Accounts Payable...........................44
6.11 Labor Relations; Employees......................................45
6.12 Employee Benefit Plans..........................................46
6.13 Insurance.......................................................46
6.14 Real Property...................................................47
6.15 Burdensome Restrictions.........................................47
6.16 Disclosure......................................................47
SECTION 7. Representations and Warranties of the Management Company........48
7.1 Organization, Good Standing and Power...........................48
7.2 Authority.......................................................48
7.3 Issuance of Common Stock........................................49
7.4 Issued and Outstanding Stock....................................49
7.5 Permits, Authorizations, Consents, Approvals,
Notifications, and Filings......................................49
7.6 Financial Information...........................................49
7.7 Absence of Undisclosed Liabilities..............................50
7.8 Absence of Changes..............................................50
7.9 Tax Matters.....................................................52
7.10 Litigation, Etc.................................................53
7.11 Compliance; Governmental Authorizations.........................53
7.12 Accounts and Notes Payable......................................54
7.13 Employees.......................................................54
7.14 Employee Benefit Plans..........................................54
7.15 Insurance.......................................................54
7.16 Real Property...................................................54
7.17 Burdensome Restrictions.........................................54
7.18 Disclosure......................................................55
SECTION 8. Operations Committee............................................55
8.1 Formation and Operation of the Operations Committee.............55
8.2 Authoritative Functions of the Operations Committee.............55
8.3 Advisory Functions of the Operations Committee..................57
8.4 Committee Policies and Procedures...............................58
-ii-
<PAGE>
SECTION 9. Obligations of the Medical Group................................59
9.1 Compliance with Laws............................................60
9.2 Choice of Braces, Splints, Appliances, Medical Supplies,
and Allografts..................................................60
9.3 Choice of Radiologists, Anesthesiologists, Hospitals, Physical
Therapy, MRI, and Other Medical Professionals and Facilities....60
9.4 Insurability....................................................60
9.5 Medicare........................................................61
9.6 Billing.........................................................61
9.7 Medical Personnel Hiring........................................61
9.8 Continuing Education............................................61
SECTION 10. Certain Covenants...............................................61
10.1 Change of Control...............................................61
10.2 Legend on Securities............................................61
10.3 Non-Disclosure of Confidential Information......................62
10.4 Confidential or Proprietary Information.........................62
SECTION 11. Records.........................................................63
11.1 Medical Records.................................................63
11.2 Management Business Records.....................................63
11.3 Access to Records Following Termination.........................63
SECTION 12. Insurance and Indemnity.........................................63
12.1 Professional Liability Insurance................................63
12.2 Life Insurance..................................................64
12.3 Indemnification by Medical Group................................64
12.4 Indemnification by Certain Individuals..........................65
12.5 Indemnification by Management Company...........................65
12.6 Notice and Control of Litigation................................66
SECTION 13. Termination.....................................................66
13.1 Termination by Medical Group....................................66
13.2 Termination by Management Company...............................67
13.3 Termination by Medical Group or Management Company..............67
13.4 Effect of Termination...........................................68
13.5 Repurchase of Assets............................................68
13.6 Phase II........................................................69
SECTION 14. Rescission/Disengagement........................................71
14.1 Seventh Anniversary of Agreement................................71
14.2 Rescission/Disengagement by Medical Group.......................71
14.3 Waiver of Rescission/Disengagement Right........................73
14.4 Continuation of Management Fees.................................73
SECTION 15. Non-Competition.................................................73
-iii-
<PAGE>
SECTION 16. Obligations of the Management Company...........................74
16.1 No Practice of Medicine.........................................74
16.2 No Interference with Professional Judgment......................74
16.3 Compensation Committee..........................................74
16.4 Budgets.........................................................74
16.5 Contracts with Venture Capital Firms............................75
16.6 Convertible Preferred Stock.....................................75
16.7 Initial Public Offering.........................................75
SECTION 17. Assignment......................................................76
17.1 Generally.......................................................76
17.2 Assignment to Partners..........................................76
SECTION 18. Notices.........................................................76
SECTION 19. Benefits of Agreement...........................................77
SECTION 20. Governing Law; Jurisdiction.....................................78
SECTION 21. Headings........................................................78
SECTION 22. Entire Agreement; Amendments....................................78
SECTION 23. Severability....................................................78
SECTION 24. Counterparts....................................................79
SECTION 25. Waivers.........................................................79
SECTION 26. Survival of Termination.........................................79
SECTION 27. Contract Modification for Prospective Legal Events..............79
-iv-
<PAGE>
ATTACHMENTS
SCHEDULES
SCHEDULE I -- New Ancillary Services -- Exceptions
SCHEDULE II -- Management Company Operating Cost Budget
SCHEDULE III -- Equity Participation and Other Consideration
SCHEDULE IV -- Draw Date and Draw Percentage
SCHEDULE V -- Management Fee -- Applicable Percentage
SCHEDULE VI -- Professional Practice Cost Savings
SCHEDULE VII -- Computation Example
SCHEDULE VIII -- Non-Competition
SCHEDULE 6.4 -- Financial Information
SCHEDULE 6.5 -- Absence of Undisclosed Liabilities
SCHEDULE 6.6 -- Absence of Changes
SCHEDULE 6.7 -- Tax Matters
SCHEDULE 6.8 -- Litigation, Etc.
SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable
SCHEDULE 6.11 -- Labor Relations; Employees
SCHEDULE 6.12 -- Employee Benefit Plans
SCHEDULE 6.13 -- Insurance
SCHEDULE 6.14 -- Real Property
SCHEDULE 6.15 -- Burdensome Restrictions
SCHEDULE 6.16 -- Disclosure
SCHEDULE 7.4 -- Issued and Outstanding Stock
SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals,
Notifications, and Filings
SCHEDULE 7.6 -- Financial Information
-v-
<PAGE>
SCHEDULE 7.7 -- Absence of Undisclosed Liabilities
SCHEDULE 7.8 -- Absence of Changes
SCHEDULE 7.9 -- Tax Matters
SCHEDULE 7.10 -- Litigation, Etc.
SCHEDULE 7.13 -- Employees
SCHEDULE 7.18 -- Disclosure
-vi-
<PAGE>
INDEX OF DEFINED TERMS
Term Page
- ---- ----
Accounts....................................................................23
Additional Terms.............................................................3
Administrative Personnel....................................................16
AGC ......................................................................70
Agreement....................................................................1
Ancillary Service Start-Up Costs............................................35
Ancillary Service Start-Up Period...........................................35
Annual Draw Amount..........................................................25
Annual Medical Group Compensation Amount....................................24
Applicable Percentage.......................................................27
Asset Purchase Agreement.....................................................1
Assignment of Office Lease...................................................5
Authorized Management Company Operating Costs...............................29
Authorized Signatory........................................................13
Balance Sheet...............................................................39
Balance Sheet Date..........................................................39
Bankruptcy Event............................................................66
Base Term....................................................................3
Billable Items..............................................................33
Billings....................................................................26
Budgets.....................................................................22
Code ......................................................................43
Collateral..................................................................23
Collections.................................................................26
Compensation Committee......................................................74
Competitive Business........................................................93
Confidential or Proprietary Information.....................................62
Corporate Overhead..........................................................29
-vii-
<PAGE>
Cost Savings................................................................89
Documents...................................................................13
Draw Date...................................................................87
Draw Percentage.............................................................24
Effective Date..............................................................71
Eligible Parties............................................................22
Employee Plans..............................................................46
Employees...................................................................45
Equipment....................................................................7
ERISA ......................................................................46
Excess Net Collections......................................................32
Excluded Costs..............................................................28
FF&E .......................................................................7
Financing Statement.........................................................23
Historical Collections Information..........................................39
Incentive Based Costs.......................................................89
Indemnifying Party..........................................................65
Indemnitee..................................................................66
Indemnitor..................................................................66
Internal Financial Statements...............................................39
Lender......................................................................23
Management Business..........................................................1
Management Company...........................................................1
Management Company Balance Sheet............................................49
Management Company Balance Sheet Date.......................................49
Management Company Bank.....................................................23
Management Company Costs....................................................28
Management Company Operating Costs..........................................28
Management Company Returns..................................................52
Management Fee..............................................................27
Management Services..........................................................2
-viii-
<PAGE>
Medical Business.............................................................1
Medical Equipment............................................................7
Medical Equipment Master Lease...............................................7
Medical Equipment Master Lease Payments.....................................27
Medical Group................................................................1
Medical Group Bank..........................................................13
Medical Group Collections Account...........................................13
Medical Group Costs.........................................................33
Medical Group Governance Documents..........................................38
Medical Group Services......................................................26
Medical Personnel...........................................................18
Monthly Draw................................................................24
MSAs ......................................................................70
Net Collections.............................................................32
New Ancillary Service Medical Equipment.....................................34
New Ancillary Services.......................................................9
New Medical Office..........................................................30
New Medical Office Start-Up Costs...........................................30
New Medical Office Start-Up Period..........................................30
New Physician...............................................................33
New Physician Start-Up Costs................................................31
New Physician Start-Up Period...............................................32
Non-Compete Period..........................................................93
Office Lease.................................................................5
Office Sublease..............................................................5
Partner......................................................................1
Phase II....................................................................69
Principal....................................................................1
Professional Practice Cost Savings..........................................28
Provider Account Agreement..................................................24
Real Property...............................................................47
-ix-
<PAGE>
Restricted Stock Agreement..................................................22
Returns.....................................................................42
Review Financial Statements.................................................39
Stock ......................................................................83
Stockholder Non-Competition Agreement.......................................73
Tax ......................................................................43
Taxes ......................................................................43
Technical Personnel.........................................................17
Tenant Improvements.........................................................56
Term .......................................................................3
Transaction Documents.......................................................38
Unaudited Financial Statements..............................................49
Wilson MSA...................................................................2
-x-
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of
July 1, 1997, by and among SUN VALLEY ORTHOPAEDIC SURGEONS, an Arizona general
partnership (the "Medical Group"), the INDEMNIFYING PARTIES referred to in
Section 12.4 whose signatures appear on the signature page hereto, those persons
who hereafter sign a written agreement agreeing to be bound by the terms of
Section 12.4 hereof, and BONE, MUSCLE AND JOINT, INC., a Delaware corporation
(the "Management Company"), with reference to the following facts:
A. The Medical Group is an Arizona general partnership comprised of
individual physicians and Arizona professional corporations, and is engaged in
the business (the "Medical Business") of providing orthopedic medical and
surgical services and related medical and ancillary services to the general
public. (Each partner in the Medical Group is referred to herein as a "Partner,"
and each shareholder of a professional corporation that is a Partner is referred
to herein as a "Principal.")
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company has entered into an Asset
Purchase Agreement with the Medical Group (the "Asset Purchase Agreement"),
pursuant to which the Management Company has acquired substantially all of the
assets owned by the Medical Group.
D. The Management Company and the Medical Group now desire to enter into
this Management Services Agreement, pursuant to which, among other things, the
Management Company will render certain management and administrative services to
the Medical Group.
-1-
<PAGE>
E. Concurrently herewith, the Management Company is entering into a
Management Services Agreement with Robert O. Wilson, M.D., P.C. (the "Wilson
MSA").
NOW, THEREFORE, the Medical Group and the Management Company hereby agree
as follows:
SECTION 1. Retention of the Management Company.
1.1 Retention. The Medical Group hereby retains the Management Company to
provide all of the management and related services identified or referenced in
Section 3 hereof and as otherwise required by this Agreement (collectively, the
"Management Services"), and the Management Company hereby accepts such retention
and agrees to provide such services, upon the terms and subject to the
conditions set forth herein. Notwithstanding the foregoing, the parties hereby
agree that to the extent that any of the services provided (or required to be
provided) by the Management Company to the Medical Group pursuant to this
Agreement relate to Robert O. Wilson, M.D., P.C. or Robert O. Wilson, M.D., the
Wilson MSA and the other agreements, documents, and instruments referred to
therein (rather than this Agreement and the other agreements, documents, and
instruments referred to herein) shall govern.
1.2 Exclusivity. During the term of this Agreement, the Management Company
shall be the exclusive provider of all management and administrative services
utilized by the Medical Group; provided, however, that the Medical Group may
contract directly with or otherwise engage individuals or companies for the
provision of accounting, legal, consulting, or other professional or advisory
services (provided that such services shall be in addition to, and not in
replacement of, the services to be provided by the Management Company
hereunder), all in the sole discretion of the Medical Group and at the sole cost
of the Medical Group.
1.3 Relationship of Parties. Notwithstanding anything contained herein to
the contrary, (a) the Management Company and the Medical Group intend to act and
perform as independent contractors, and the provisions hereof are not intended
to create any partnership, joint venture, or employment relationship between the
parties, and (b) the Management Company is hereby engaged solely to provide
management and administrative services to the Medical
-2-
<PAGE>
Group and shall not interfere with, control, direct, or supervise the Medical
Group or any medical professional employed by the Medical Group in connection
with the provision of professional medical services.
1.4 No Referral Obligation. The parties agree that the benefits to the
Medical Group hereunder do not require, are not payment for, and are not in any
way contingent upon the admission, referral, purchase, or any other arrangement
for the provision of any item or service to or for any of the Medical Group's
patients in or from any medical facility or laboratory or from any other entity
owned, operated, controlled, or managed by the Management Company. The
Management Company shall provide prior written notice to the Medical Group
before acquiring any ownership, investment interest, or control in, or entering
into any agreement or arrangement pursuant to which the Management Company would
become responsible for all or any part of the operations or management of, any
medical facility, laboratory, or any provider or supplier of ancillary services,
diagnostic or therapeutic equipment, prosthetic or orthotic devices, medical
supplies, or other items or services furnished to or for use by patients, but
only if any of the foregoing serves the geographic area served by the Medical
Group.
SECTION 2. Term. Provided that the Closing under the Asset Purchase
Agreement shall have occurred as provided therein, and subject to such start-up
procedures as the parties may agree upon for purposes of facilitating the
transition of responsibilities required by this Agreement, the performance of
services under this Agreement shall commence as of the date hereof and shall
expire on the fortieth anniversary of the date hereof unless terminated earlier
pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement
shall be automatically extended for additional terms ("Additional Terms" and
together with the Base Term, the "Term") of five years each, unless either party
delivers to the other party, not less than six (6) months nor more than nine (9)
months prior to the expiration of the then-current Term, written notice of such
party's intention not to extend the Term of this Agreement.
-3-
<PAGE>
SECTION 3. Management Services.
3.1 Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager and
administrator of all day-to-day business functions for the Medical Group,
subject to the provisions of Section 1.2 hereof. The Management Company shall
provide all of the management and administrative services reasonably required by
the Medical Group in connection with the provision of any and all of the Medical
Group Services and as otherwise provided in this Agreement, including without
limitation the services described in Sections 3.2 through 3.18 hereof.
(b) Without limiting the generality of the provisions of Section 3.1(a),
the Management Services shall include such management and administrative
services as may be reasonably required in connection with (i) all of the offices
(including New Medical Offices) of the Medical Group, and (ii) all professional
services and all ancillary services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described in
this Agreement shall be applicable with respect to the items identified as
Medical Group Costs in Section 5.8 hereof, except that such Medical Group Costs
shall be paid by the Medical Group rather than by the Management Company.
Accordingly, the Management Company shall provide accounting, bookkeeping, and
related services with respect to all such costs.
(d) The Management Company may enter into such contracts and agreements
with outside services and suppliers as the Management Company shall reasonably
deem necessary in connection with the provision of the Management Services, and,
to the extent permitted by applicable law, such contracts and agreements shall,
except as otherwise expressly provided in this Agreement, be in the name of the
Management Company. The Management Company shall have no authority, directly or
indirectly, to perform, and shall not perform or enter into any agreement to
perform, professional medical services or any other medical function required by
law to be performed by a licensed physician or by any other licensed health care
professional.
-4-
<PAGE>
(e) The Management Company shall comply in all material respects with all
applicable material Federal, state and local laws, regulation, and ordinances in
connection with the provision of the Management Services hereunder.
3.2 Premises.
(a) The Medical Group, as of the date of this Agreement, leases premises
and provides professional medical services at the following locations:
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
9403 West Thunderbird Road
Peoria, Arizona 85381
Immediately prior to the date of this Agreement, the premises were leased to the
Medical Group, in the Medical Group's name. Effective from and after the date of
this Agreement, the leases of such premises are to be assigned from the Medical
Group to the Management Company pursuant to two Assignment of Lease agreements
(each, an "Assignment of Office Lease") entered into as of the date hereof.
Additionally, the Management Company shall sublease the premises of both offices
to the Medical Group pursuant to subleases (each, an "Office Sublease") entered
into as of the date hereof, in consideration of the payments to be made by the
Medical Group under such Office Subleases. Upon the expiration of each premises
lease assigned in accordance with this Section 3.2(a), the Management Company
shall use its best efforts to enter into a new lease, in the name of the
Management Company, with the landlord of such premises, and the parties shall
amend the applicable Office Sublease or enter into a new sublease relating to
such new premises lease; provided, however, that the approval of the Medical
Group, which shall not be unreasonably withheld, shall be required in the event
of any substantial changes in the terms of the premises lease, and if the
Medical Group does not give such approval, the failure to enter into such new
premises lease shall not constitute a default of the Management Company. Each
assigned lease and each new lease entered into between the Management Company
and the landlord is referred to herein as an "Office Lease."
-5-
<PAGE>
(b) A New Medical Office (as hereinafter defined) may be opened only upon
the agreement of the Medical Group and the Management Company. The capital costs
and start-up costs reasonably required in connection with the opening of any New
Medical Office shall be borne as set forth in Section 5 hereof. The premises of
any New Medical Office shall be leased to the Management Company, in the
Management Company's name, and the Medical Group shall not be required to lease
any such premises. Additionally, the Management Company shall sublease such
premises to the Medical Group pursuant to a sublease substantially in the form
of the Office Sublease, in consideration of the payments to be made by the
Medical Group under such sublease.
(c) The closing or relocation of any offices of the Medical Group shall be
subject to agreement by the Medical Group and the Management Company.
(d) The premises services to be provided by the Management Company shall
include, without limitation, the negotiation and renegotiation of leases,
provision of ongoing liaison with the landlords of the respective office
premises of the Medical Group, identification of potential new locations for
Medical Group offices, including a review of current satellite offices of the
Medical Group and potential satellite offices to be considered by the Medical
Group, financial analysis relating to the opening, closing, and relocation of
offices, arranging for necessary repairs, maintenance and improvements,
procurement of property insurance, arranging for telephone and other utility
services, arranging for hazardous waste disposal, and all other reasonably
necessary or appropriate services related to all of the office premises of the
Medical Group.
(e) The Management Company also shall provide all necessary or appropriate
leasehold improvements to each of the premises, subject to prior approval as
provided in Section 8.2(e) hereof.
(f) The Medical Group acknowledges that the Management Company makes no
warranties or representations, expressed or implied, regarding the condition of
any of the leased premises.
-6-
<PAGE>
3.3 Equipment.
(a) The Management Company shall provide or arrange for the provision of
all of the diagnostic and therapeutic medical equipment reasonably required by
the Medical Group in connection with the provision of Medical Group Services
(the "Medical Equipment"). All Medical Equipment shall be provided by the
Management Company to the Medical Group in consideration of the rental payments
to be made by the Medical Group to the Management Company pursuant to an
equipment lease entered into as of the date hereof (the "Medical Equipment
Master Lease"). As used herein, the term Medical Equipment shall not include
medical equipment used in connection with a New Ancillary Service (as
hereinafter defined).
(b) The Management Company also shall provide or arrange for the provision
of all furniture, furnishings, trade fixtures, and office equipment (including
computer hardware and software) reasonably required in connection with the
provision of Medical Group Services pursuant to this Agreement (collectively,
"FF&E"). The Management Company shall acquire, at its cost, all FF&E, and the
Management Company shall retain ownership of all FF&E. The Management Fee
payable to the Management Company under this Agreement is intended to compensate
the Management Company for the provision of FF&E for use by the Medical Group.
As used herein, the term FF&E does not include furniture, furnishings, trade
fixtures, and office equipment used in connection with a New Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation, or
other disposition of any Equipment shall require prior approval as provided in
Section 8.2 hereof.
(d) The Management Company's obligations with respect to the Equipment are
subject and subordinate to the provisions and obligations contained in any
financing, security interest, mortgage, lien or other encumbrance the Management
Company may, in its reasonable discretion, place upon the Equipment through an
unaffiliated third party. The Medical Group shall use the Equipment only in
connection with its provision of the Medical Group Services, and the Medical
Group shall not alter, repair, augment, or remove the Equipment from the
premises of the Medical Group without the prior written consent of the
Management Company
-7-
<PAGE>
and any lessor thereof, which approval may be granted or withheld in the
Management Company's or such lessor's sole discretion. Notwithstanding the
foregoing, in the event of an emergency relating to the provision of patient
care, the Medical Group may order repairs and replacements of Equipment not
exceeding $5,000, and the Medical Group shall notify the Management Company
immediately in any such event. To the extent the Equipment is utilized by the
Medical Group in the provision of Medical Group Services, the Medical Group
shall have the right to exercise reasonable control over the use of such
Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so that
all such Equipment shall function continuously (subject to interruptions not
reasonably avoidable) in accordance with the manufacturer's specifications and
so that all conditions imposed by the manufacturer to maintaining the continued
effectiveness of any warranty on such Equipment shall be satisfied. The
Management Company shall take all reasonable steps to provide that all necessary
service and maintenance is obtained in a prompt and timely manner, so as to
minimize the amount of time that any of the Equipment is not available for usage
by or for patients of the Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER
RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT,
THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR
PURPOSE. NOTWITHSTANDING THE FOREGOING DISCLAIMER, THE MANAGEMENT COMPANY DOES
WARRANT TO THE MEDICAL GROUP THAT THE X-RAY EQUIPMENT AND THE COMPUTER HARDWARE
AND COMPUTER SOFTWARE THAT THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL
-8-
<PAGE>
GROUP SHALL BE SUITABLE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES.
Nothing in this Agreement shall be construed to affect or limit in any way the
professional discretion of the Medical Group to select and use any Equipment
acquired by the Management Company in accordance with the terms of this
Agreement insofar as such selection or use constitutes or might constitute the
practice of medicine.
3.4 New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means the
technical component (but not the professional component) of the following,
except as set forth in Schedule I:
(i) Physical therapy;
(ii) Magnetic resonance imaging and/or other imaging services (except
diagnostic radiology);
(iii) Outpatient surgery;
(iv) Densitometry; and
(v) Other revenue-producing services generally recognized as ancillary
services, but excluding the following:
(A) Plain film radiography;
(B) Any other services provided on a regular basis by the Medical
Group immediately prior to the date of this Agreement; and
(C) Any service performed in connection with new Medical
Equipment acquired to replace existing Medical Equipment so long as
the new Medical Equipment performs substantially the same functions as
the replaced Medical Equipment.
New Ancillary Services do not include the sale or provision of (or services
rendered in connection with) prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, crutches, casts, or any other supplies or similar items
which are billable to patients or payors.
-9-
<PAGE>
(b) The Management Company shall review the ancillary services currently
provided by the Medical Group and potential New Ancillary Services opportunities
to be considered by the Medical Group. New Ancillary Services may be established
only upon agreement of the Medical Group and the Management Company. Such
agreement shall be memorialized in a written agreement executed by the parties
(or in a written amendment to this Agreement) under which the Management Company
agrees to provide all of the Management Services described in this Section 3 in
connection with such New Ancillary Service, and for which the Management Company
shall be compensated as described in Section 5.9 of this Agreement, except as
otherwise agreed by the parties.
3.5 Administration, Finance and Accounting. The Management Company shall
provide or arrange for the provision of all administrative, financial, and
accounting functions necessary for the operation of the Medical Group, including
without limitation --
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
(c) Preparing accounts receivable summary reports, including various
analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical Group
Governance Documents prior to distribution of payments to outside parties;
provided, however, that the Management Company shall not be responsible for or
liable with respect to interpretations of the Medical Group Governance
Documents.
(e) Disbursement of payables, including payables of the Medical Group;
provided, however, that payables of the Medical Group shall be paid from an
account of the Medical Group and not from the Management Company's Operating
Account, and all checks drawn on any Medical Group account shall be signed by an
officer or other authorized representative of the Medical Group.
(f) Negotiation of vendor contracts.
(g) Performing monthly accounting functions, including bank
reconciliations, maintenance of books and records, and preparation of financial
statements.
-10-
<PAGE>
(h) Analyzing financial data as reasonably requested by physicians.
(i) Analyzing potential new office locations, and coordinating all
functions associated with opening new office locations.
(j) Preparing monthly financial and medical practice statistics reports (i)
By satellite office (ii) By physician
(k) Providing from the Medical Group's bank account(s) monthly compensation
payments to physicians; provided, however, that the Management Company shall not
be responsible for or liable with respect to interpretations of the Medical
Group Governance Documents; provided, further, that all checks drawn on any
Medical Group account shall be signed by an authorized representative of the
Medical Group.
(l) Calculating physicians' annual compensation based on the Medical
Group's physician compensation formulas.
(m) Ongoing day-to-day communication with the designated representative(s)
of the Medical Group and assisting such representative(s) in fulfilling his, her
or their responsibilities.
(n) Preparing agendas and information packages for Medical Group meetings.
(o) Developing budgets and long-term strategies for the Medical Group.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Providing administrative services (excluding the services of a plan
administrator) in connection with any pension or profit-sharing plan of the
Medical Group; provided, however, that the Management Company shall not be
responsible for investment decisions.
(s) Reviewing current physician makeup of the Medical Group, particularly
with respect to subspecialty coverage, and potential physician additions to be
considered by the Medical Group.
(t) Coordinating recruitment, interviewing, and hiring of new physicians.
(u) Implementing fee schedule increases and/or decreases established by the
Medical Group.
-11-
<PAGE>
(v) Coordinating depositions and court appearances.
(w) Assisting in the coordination of call schedules.
(x) Assisting in the coordination of coverage of athletic team events.
(y) Acting as liaison to hospital administration, physical therapy, surgery
center, MRI, and other ancillary services entities.
(z) Cooperating with outside accountants in preparing various schedules and
providing other information.
(aa) Interacting with legal counsel as necessary.
(bb) Providing a complete operational review of the practice, involving a
breakdown of each practice component and relevant statistics on each component.
(cc) Reviewing current managed care contracts the Medical Group has
executed, and potential managed care relationships to be considered by the
Medical Group.
(dd) Reviewing current workers' compensation relationships the Medical
Group has developed, and potential workers' compensation relationships to be
considered by the Medical Group.
The Management Company shall provide to the Medical Group, upon written request
by the Medical Group (but not more frequently than annually), within sixty (60)
days after receipt of any such request, written reports addressing the points
identified in items (s), (aa), (bb), and (cc) above.
3.6 Billing and Collection.
(a) The Medical Group acknowledges that ownership of all Accounts (as
hereinafter defined) is transferred by the Medical Group to the Management
Company as provided in greater detail in Section 5.1 of this Agreement. In order
to facilitate the collection of the Accounts, the Medical Group hereby
authorizes the Management Company (i) to bill patients and third party payors in
the Medical Group's name; (ii) to collect accounts receivable resulting from
such billing; (iii) to receive payments and prepayments from the Medical Group's
patients, Blue Cross and Blue Shield organizations, insurance companies, health
care plans,
-12-
<PAGE>
Medicare, Medicaid, HMOs, and any and all other third party payors; (iv) to take
possession of and deposit into such bank (the "Medical Group Bank") as the
Medical Group designates, in an account established by the Medical Group in the
name of the Medical Group (the "Medical Group Collections Account"), any and all
checks, insurance payments, cash, cash equivalents and other instruments
received for Medical Group Services; and (v) to initiate with the consent of the
Medical Group, which consent may be withheld by the Medical Group in its sole
and absolute discretion, legal proceedings in the name of the Medical Group to
collect any accounts and monies owed to the Medical Group, to enforce the rights
of the Medical Group as a creditor under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by governmental
agencies (or its fiscal intermediaries) as third party payors. The Medical Group
shall promptly turn over to the Management Company for deposit into the Medical
Group Collections Account in accordance with this Agreement all checks and other
payments received by the Medical Group or by any of its shareholders from any
patient or third party payor for Medical Group Services rendered hereunder.
Following termination of this Agreement, the Management Company shall continue
to use reasonable efforts to collect the Accounts for a period of ninety (90)
days thereafter (and any amounts collected during such period shall be
considered as Collections under this Agreement).
(b) From time to time at the Management Company's request, the Medical
Group shall make available to the Management Company one or more authorized
representatives (each, an "Authorized Signatory") of the Medical Group to sign
any letters, checks, instruments or other documents (the "Documents") on behalf
of the Medical Group that are necessary for the Management Company to perform
its duties under this Section 3.6 and its other duties under this Agreement. If
the Management Company notifies the Medical Group that an Authorized Signatory
is not signing the Documents in a timely manner, the Management Company shall
not be liable for any failure to perform its duties hereunder or for any failure
to perform the Management Services to the extent caused by the failure of an
Authorized Signatory to sign the Documents in a timely manner.
(c) The Management Company shall submit all bills and manage the billing
process on a timely basis in accordance with the terms of this Agreement and
applicable law.
-13-
<PAGE>
(d) Without limiting the generality of the foregoing, the Management
Company shall bill patients, bill and submit claims to third party payors,
perform appropriate coding for each bill, and collect all fees for professional
and other services rendered and for items supplied to patients by the Medical
Group, all in a timely manner and in accordance with parameters and criteria
established by the Operations Committee (as hereinafter defined). The Management
Company may discharge its billing and collection responsibilities hereunder by
arranging for such duties to be carried out by the billing service that
furnished such services to the Medical Corporation immediately prior to the date
hereof, or by such other billing service as the Management Company may in its
discretion select. Additionally, the Management Company shall provide or arrange
for the provision of the following services:
(i) Receive and collect from patients at the time of visit all
appropriate payments and pre-payments, including co-pays,
deductibles, payments for non-covered medical services, and
deposits for surgeries (if applicable), and additionally shall
obtain all appropriate insurance and other information required.
(ii) Submit claims utilizing electronic billing submission, whenever
appropriate.
(iii) Perform delinquent account collection calls and other appropriate
follow-up mechanisms for delinquent accounts of all insurance
classifications, all in a timely fashion as determined by the
Operations Committee.
(iv) Turn over to outside collection agencies all delinquent accounts
satisfying the criteria established by the Operations Committee,
follow-up on the performance of the outside collection agencies
and make changes if necessary, and reconcile each account turned
over to the summary data provided by the collection agency.
-14-
<PAGE>
(v) Write-off account balances according to criteria approved by the
Operations Committee.
(vi) Prepare claim reviews in accordance with criteria approved by the
Operations Committee.
(vii) Bill workers' compensation medical services at rates equal to the
most recently approved state workers' compensation fee schedule.
(viii) Apply "insurance only" and other courtesy write-offs in compliance
with Operations Committee policy.
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), determine that payments from the PPOs and
HMOs are in compliance with the contract with the Medical Group.
(x) With respect to capitation fee contracts with HMOs --
(A) Follow-up to ensure that payments by the HMOs are made on a
timely basis;
(B) Review and audit enrollment data provided by the HMO to
ensure that the capitation payments are based on the proper
number of lives enrolled.
(xi) With respect to lien accounts --
(A) Ensure that appropriate documents are signed and agreed to
initially as between Medical Group, attorney and patient;
(B) Follow-up on a regular basis as to the status of the
account; and
-15-
<PAGE>
(C) Apply the policies of the Operations Committee in resolving
open account balances.
(xii) With respect to student athlete accounts, coordinate insurances
and other information in compliance with the policy of the
Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, follow-up on a
timely basis to ensure that withheld amounts are paid, if
warranted, and to ensure that any withheld amounts that are not
paid are verified and audited for appropriateness.
(xiv) Coordinate the timely payment of refunds to patients and third
party payors when appropriate.
3.7 Administrative Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of all of the following non-medical personnel necessary
for the conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration
(ii) Accounting
(iii) Billing and Collection
(iv) Secretarial
(v) Transcription
(vi) Appointments
(vii) Switchboard
(viii) Medical Records
(ix) Chart Preparation
(x) Historians
-16-
<PAGE>
(xi) Clinic Support
(xii) Marketing
(b) The Management Company shall determine and pay or arrange for the
payment of the salaries and fringe benefits of the Administrative Personnel, and
shall provide or arrange for other personnel services related to the
Administrative Personnel, including but not limited to scheduling, personnel
policies, administering continuing education benefits, and payroll
administration.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify or
arrange for the verification of educational and employment experience,
licensure, and insurability.
(d) All of the personnel services shall be performed in compliance with all
applicable state and Federal labor laws.
3.8 Technical Personnel: Leased Employees.
(a) Subject to the conditions set forth in this Section 3.8, the Management
Company shall employ or contract with, or shall arrange for, and shall provide
to the Medical Group as leased employees, such Technical Personnel (as defined
below) as may be reasonably necessary for the conduct of the Medical Group's
professional practice.
(b) For purposes of this Agreement, "Technical Personnel" means nurses,
medical assistants, x-ray technicians, other technicians, and other personnel
who perform diagnostic tests or other services that are covered by Medicare or
by other third party payors when performed by an employee of a physician under
the physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall exercise,
such supervision and control over the activities of the Technical Personnel as
may be necessary for the Technical Personnel to be considered leased employees
under the Medicare program and under applicable law. Without limiting the
generality of the foregoing, the Medical Group --
-17-
<PAGE>
(i) shall have the right to have any Technical Personnel terminated
from employment;
(ii) shall furnish the Technical Personnel with the equipment and
supplies needed by the Technical Personnel for their work;
(iii) shall provide the Technical Personnel with any necessary training;
(iv) shall instruct the Technical Personnel regarding their activities
performed for the Medical Group;
(v) shall establish the hours of work for the Technical Personnel;
(vi) shall approve vacation time and other time off from work; and
(vii) shall provide that degree of supervision as is required by
Medicare and by other third party payors to satisfy applicable
conditions for coverage thereunder.
(d) With respect to each of the Technical Personnel, the Management Company
shall verify or arrange for the verification of educational and employment
experience, licensure and insurability, and shall review and provide the Medical
Group with copies of any complaints contained in public files with applicable
state and federal commissions.
3.9 Medical Personnel.
(a) The Management Company shall, upon request by the Medical Group, assist
the Medical Group in recruiting Medical Personnel. "Medical Personnel" means:
(i) Physicians (including fellows and residents, if any) providing
professional medical services for or in connection with the
Medical Group; and
(ii) Physician assistants, nurse practitioners, and other health care
professionals who provide services that are billable to patients
or third party payors under the name of such health care
professional (as distinguished from services that are billable
under the name of the supervising physician).
-18-
<PAGE>
(b) With respect to each of the Medical Personnel, the Management Company
shall verify or arrange for the verification of educational and employment
experience, licensure and insurability, and shall review and provide the Medical
Group with copies of any complaints contained in public files with applicable
state and federal commissions.
3.10 Inventory and Supplies. The Management Company shall order and
purchase, or arrange for the order and purchase of, inventory and supplies on
behalf of the Medical Group, and such other ordinary or appropriate materials as
the Medical Group reasonably deems to be necessary for it to carry out its
professional medical activities. Inventory and supplies shall include, but not
be limited to:
(a) Medical supplies
(b) Office supplies
(c) Postage
(d) Computer forms and supplies
(e) Printing and stationery supplies
(f) Printer supplies
(g) Linen and laundry supplies
3.11 Taxes. The Management Company shall provide the Medical Group with
access to all information necessary for the Medical Group to prepare its tax
returns. The Management Company shall have no responsibility for the payment of
the Medical Group's taxes.
3.12 Information Systems Management.
(a) The Management Company shall provide or arrange for the provision of
all management information systems services to be utilized by the Medical Group.
These services shall include, but not be limited to, ongoing maintenance and
development of the following information systems:
(i) Accounts receivable - Billing/Insurance/Collections
(ii) On-line appointment scheduling
(iii) Internal e-mail
(iv) On-line transcription
-19-
<PAGE>
(v) Faxing subsystem
(vi) Electronic claims submission
(vii) Patient flow monitoring system
(viii) Authorization module
(ix) Prescription module
(x) X-ray tracking system
(xi) Voice mail
(xii) Paperless medical records
(xiii) Bar code chart tracking system
(b) The acquisition, replacement, relocation, or other disposition of any
equipment described above shall be governed by Section 3.3 hereof.
(c) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical Group's payor agreements; provided, however, that in no event
shall a breach of such confidentiality be deemed a default under this Agreement
if the Management Company acted reasonably and in good faith to protect such
confidentiality.
3.13 Use of New Technologies in the Practice of Medicine. The Management
Company shall promote the integration of new technologies into the professional
practice of the Medical Group, including without limitation the use of satellite
and other telecommunications services that permit the provision of remote
consultations, virtual operations, and other professional services; provided,
however, that the foregoing shall be subject to the terms of Section 8.2(e)
hereof.
3.14 Public Relations; Marketing and Advertising. The Management Company
shall develop and implement community outreach programs and public relations
programs designed to educate the patient population regarding the Medical Group,
the availability of its medical services, and the availability in terms of any
managed care programs in which the Medical Group participates. The Management
Company also shall develop and implement marketing and
-20-
<PAGE>
advertising programs as reasonably required to promote and expand the Medical
Business, subject to any approved budgets. The programs shall be conducted in
compliance with applicable laws and regulations governing advertising by the
medical profession.
3.15 Insurance. The Management Company shall provide the insurance coverage
described in Sections 12.1 and 12.2 of this Agreement.
3.16 Files and Records.
(a) To the extent permitted by applicable law, the Management Company shall
supervise and maintain custody of all files and records relating to the
operation of the business of the Medical Group, including, without limitation,
accounting, billing, collection, and patient medical records. The management of
all files and records shall be in compliance with applicable state and federal
statutes. Patient medical records shall be kept at a location that is readily
accessible for patient care. The Management Company shall preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purposes necessary to perform the management
services set forth herein; provided, however, that in no event shall a breach of
such confidentiality be deemed a default under this Agreement if the Management
Company acted reasonably and in good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of files and
records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the date
hereof. Any change in such policies shall be subject to the approval of the
Operations Committee.
3.17 Managed Care Contracts. The Management Company shall solicit,
negotiate and administer all managed care contracts on behalf of the Medical
Group based on parameters and criteria established by the Operations Committee.
Such services shall be performed by the Management Company as agent of the
Medical Group, and all managed care contracts shall be subject to the Medical
Group's prior approval of any such contract. The Management Company
-21-
<PAGE>
shall prepare cost forecasts and other analyses as reasonably requested by the
Medical Group in order to allow the Medical Group to make an informed decision
with respect to each proposed contract.
3.18 Budgets. The Management Company shall prepare, for the review and
approval of the Operations Committee, annual operating budgets (the "Budgets")
reflecting in reasonable detail projected Billings, Collections, Medical Group
Costs, and Management Company Operating Costs; provided, however, that the
Medical Group and the Management Company hereby agree that the Budget covering
the initial period under this Agreement shall be the Budget attached hereto as
Schedule II. All other budgets shall be on a calendar year basis. The Management
Company shall prepare and submit to the Operations Committee all subsequent
Budgets on or before December 15 of the year immediately preceding the calendar
year to which such Budgets are applicable.
3.19 Force Majeure. The Management Company shall not be liable to the
Medical Group for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies,
changes in applicable law or regulations or other events over which the
Management Company has no control for so long as such events continue and for a
reasonable time thereafter.
SECTION 4. Equity Participation and Other Consideration. In consideration
of the Medical Group's entering into this Agreement, the Management Company
shall provide to the persons identified in Schedule III attached hereto (the
"Eligible Parties") and to the Medical Group the consideration set forth on
Schedule III, provided that the Eligible Parties execute the Restricted Stock
Agreement presented for signature herewith (the "Restricted Stock Agreement").
SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments.
5.1 Ownership of Accounts; Security. The Medical Group hereby transfers to
the Management Company ownership of all accounts receivable and the other rights
to payment arising from the provision by the Medical Group of Medical Group
Services during the term
-22-
<PAGE>
hereof (the "Accounts"); provided, however, that the right to payment of
Medicare and Medicaid receivables shall remain with the Medical Group in
accordance with applicable Federal and state law. The Medical Corporation agrees
to execute the Financing Statement presented for signature herewith (the
"Financing Statement") and such additional financing statements and continuation
statements as the Management Company may reasonably request to evidence,
protect, or perfect the Management Company's ownership interest in the Accounts.
The Management Company shall have the right to grant to any lender (the
"Lender") a first priority lien and security interest in and with respect to the
Accounts, together with all books, records, computer information, and other
general intangibles relating thereto (collectively, the "Collateral"), as
security for the obligations of the Management Company to the Lender. The
Medical Group hereby irrevocably constitutes and appoints the Management Company
as the true and lawful attorney-in-fact for the Medical Group to execute in the
name of the Medical Group such financing statements, continuation statements,
and other documentation as may be necessary or appropriate to evidence, protect,
or perfect the Management Company's interest in and/or the Lender's lien and
security interest in and with respect to all Accounts and other Collateral. The
Medical Group shall cooperate with the Lender as reasonably requested by the
Lender in the event that the Lender seeks to enforce its rights and remedies
under its agreement with the Management Company, including granting the Lender
access, to the extent permitted by law, to all books and records associated with
the Collateral. Neither the Management Company nor the Lender shall be required
to give the Medical Group any notice in connection with any loan or related
financing arrangements affecting the Accounts and other Collateral.
5.2 Bank Accounts and Payments.
(a) The Medical Group shall instruct the Medical Group Bank to transfer, on
a daily basis, all funds in the Medical Group Collections Account (less the
amount necessary to avoid the payment of bank charges or fees relating to the
failure to maintain a minimum balance in the Medical Group Collections Account)
to a bank (the "Management Company Bank") designated by the Management Company,
for credit to an account of the Management Company in the Management Company's
name. Concurrently herewith, the Medical Corporation is entering into a Provider
Account Agreement with the Medical Corporation Bank, the
-23-
<PAGE>
Management Company, and the Management Company's lender (the "Provider Account
Agreement"), in order to implement the foregoing obligation.
(b) The Management Company shall pay all of the Medical Group Compensation
and all of the Management Company Costs, as hereinafter defined, and the
Management Company shall be entitled to retain for itself the Management Fee, as
hereinafter defined.
5.3 Medical Group Compensation.
(a) Monthly Draw.
(i) On each Draw Date during the Term hereof, the Management Company
shall distribute to the Medical Group an amount equal to a percentage (the
"Draw Percentage") of the Medical Group's total Billings for Medical Group
Services provided during the previous month (the "Monthly Draw"). The Draw
Date and the initial Draw Percentage are as set forth in Schedule IV, and
the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each year
thereafter, the Draw Percentage shall be adjusted to equal a fraction, the
numerator of which is the Annual Medical Group Compensation Amount for the
previous year, and the denominator of which is the total amount of Billings
for the previous year. Additionally, the Management Company may adjust the
Draw Percentage from time to time based on the actual amount of Collections
year-to-date in order to minimize the amount of any annual settlement
payment reasonably anticipated to be required under Section 5.3(b).
(b) Annual Settlement.
(i) On or before April 30, 1998, and on or before April 30 of each
year thereafter, the Management Company shall calculate the following (the
"Annual Medical Group Compensation Amount"):
(A) The total Collections for all Medical Group Services rendered
during the previous calendar year, less --
-24-
<PAGE>
(B) the sum of the following:
(1) the Management Fee earned by the Management Company for the
previous calendar year; and
(2) the Authorized Management Company Operating Costs incurred
by the Management Company during the previous calendar year.
(ii) If the Annual Medical Group Compensation Amount thus determined
exceeds the total of the twelve (12) Monthly Draws paid by the Management
Company to the Medical Group during the previous calendar year (the "Annual
Draw Amount"), the Management Company shall pay to the Medical Group,
together with the compensation amount otherwise payable to the Medical
Group, during each of the following twelve (12) months, an amount equal to
one-twelfth (1/12) of such excess. If the Annual Draw Amount for the
previous calendar year exceeds the Annual Medical Group Compensation Amount
for the previous calendar year, the Management Company shall withhold from
the Medical Group compensation otherwise payable to the Medical Group,
during each of the following twelve (12) months, an amount equal to
one-twelfth (1/12) of such excess. Notwithstanding the foregoing, the party
which is required to pay to the other any such excess may elect to pay such
excess in equal installments over a period that is shorter than twelve (12)
months.
(iii) For purposes of determining the total Collections for all
Medical Group Services provided during any calendar year, all Collections
during January, February, and March of each year shall be deemed to be for
Medical Group Services rendered during the previous calendar year, and all
Collections during April through December shall be deemed to be for Medical
Group Services rendered during the calendar year in which such Collections
were received; provided, however, that for purposes of determining the
total Collections during the period commencing on the date hereof and
ending December 31, 1997, all Collections from and after the date hereof
through March 31, 1998, shall be deemed to be for Medical Group Services
rendered during the period commencing on the date hereof and ending
December 31, 1997. Notwithstanding the foregoing, the Management Fee
applicable to any calendar year shall be based on the Collections actually
received during such calendar year.
-25-
<PAGE>
(iv) Notwithstanding anything to the contrary set forth herein, the
first period for which the annual settlement described in this Section
5.3(b) shall be applicable is the period commencing on the date hereof and
ending on December 31, 1997.
(c) For purposes of this Agreement --
(i) "Billings" means, for any applicable period, the gross charges of
the Medical Group for all Medical Group Services furnished during
such period.
(ii) "Collections" means, for any applicable period, all cash or cash
equivalents received during such period for Medical Group
Services, including any capitation payments received during such
period, less any refunds paid during such period.
(iii) "Medical Group Services" means the following services rendered by,
through, or on behalf of the Medical Group during the Term at the
offices identified in Section 3.2 hereof or at any other location:
all professional services rendered by or under the supervision of
any of the Medical Personnel (including professional services
rendered in connection with New Ancillary Services), except for
services rendered by or under the supervision of Robert O. Wilson,
M.D., P.C. and Robert O. Wilson, M.D.; all diagnostic radiology
services rendered by or under the supervision of any of the
Medical Personnel; all diagnostic tests and other services
rendered by Technical Personnel; all other ancillary services
(other than New Ancillary Services); all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, and other items
and supplies that are billable to patients or to third party
payors; and depositions, record review services, court
appearances, independent medical exams, and athletic team
services.
-26-
<PAGE>
(iv) It is the intent of the parties that Billings, Collections, and
Medical Group Services not include any of the following: services
rendered by or under the supervision of Robert O. Wilson, M.D.,
P.C. and Robert O. Wilson, M.D. (which are included under the
Wilson MSA); New Ancillary Services (excluding professional
services rendered by Medical Personnel in connection therewith,
which professional services are included under Section 5.3(c)(iii)
above); interest income; sublease income, if any; royalties
payable to any Medical Group physician for medical inventions;
income from presentations, writings, and endorsements; proceeds
from the sale of any capital assets of the Medical Group; or
income from investments.
5.4 Management Fee.
(a) The compensation payable to the Management Company for the provision of
Management Services under this Agreement (the "Management Fee"), which the
Management Company may retain from funds received by the Management Company from
time to time at its discretion, shall be equal to the aggregate of the
following: (i) An amount equal to the Applicable Percentage of Collections,
provided that the amount thus determined shall be reduced by the Medical
Equipment Master Lease Payments; and (ii) An amount equal to sixty-six and
two-thirds percent (66-2/3%) of the Professional Practice Cost Savings.
(b) For purposes of this Agreement --
(i) "Applicable Percentage" has the meaning set forth in Schedule V.
(ii) "Medical Equipment Master Lease Payments" means the monthly lease
amounts payable for all Medical Equipment (except for any amounts
payable by or on behalf of Robert O. Wilson, M.D., P.C. or Robert
O. Wilson, M.D.) determined in accordance with the
-27-
<PAGE>
Medical Equipment Master Lease referenced in Section 3.3(a)
hereof.
(iii) "Professional Practice Cost Savings" means the cost savings
determined in the manner described in Schedule VI.
(c) An example of the computation of Medical Group Compensation and the
Management Fee is attached hereto as Schedule VII.
5.5 Management Company Costs.
(a) The Management Company shall pay all Management Company Operating Costs
and all Excluded Costs (collectively, the "Management Company Costs"). All
Management Company Costs shall be incurred in the name of the Management
Company, and not in the name of the Medical Group, except as specifically
approved by the Medical Group. Management Company Costs shall not include any
costs or expenses incurred prior to the date of this Agreement.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the Management
Company Costs.
(c) For purposes of this Agreement, "Management Company Operating Costs"
means all costs and expenses incurred in connection with the provision of the
Management Services, except for any costs and expenses defined as Medical Group
Costs in Section 5.8 hereof, and except for Excluded Costs. Management Company
Operating Costs also include the cost of billing and collecting any accounts
receivable generated prior to the date hereof and purchased by the Management
Company pursuant to the Asset Purchase Agreement. "Excluded Costs" means all of
the following costs and expenses incurred in connection with the provision of
the Management Services hereunder:
(i) New Medical Office Start-Up Costs;
(ii) New Physician Start-Up Costs;
-28-
<PAGE>
(iii) The rent and any other payments due under any of the Office
Leases;
(iv) The cost of any Medical Equipment leased by the Management Company
to the Medical Group;
(v) The cost of any FF&E provided by the Management Company to the
Medical Group;
(vi) Depreciation, amortization, and interest; and
(vii) Corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the following
conditions are satisfied:
(A) The Corporate Overhead is incurred in lieu of a
pre-existing Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not exceed the
amount of the Management Company Operating Costs being
eliminated; and
(C) The Corporate Overhead is allocated to the Medical Group
and to all other medical groups utilizing such Corporate
Overhead on a pro rata basis.
Any Corporate Overhead with respect to which all of the
above conditions are satisfied shall be considered
Management Company Operating Costs. Under no circumstances
shall any Corporate Overhead cost allocation include
compensation payable to corporate staff, nor shall there be
any other Corporate Overhead cost allocation of any kind
except to the extent that the conditions set forth in this
item (vii) above are satisfied.
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in any
year, reduced by any or all of the following costs if and to the extent that
such costs were under the sole control of the Management Company and were not
approved by the Operations Committee or by the Medical Group:
-29-
<PAGE>
(i) any costs that exceed the applicable Management Company Operating
Costs Budget;
(ii) any costs with respect to which the Medical Group has reasonably
requested supporting documentation or other backup detail which
has not been furnished by the Management Company or which does not
reasonably establish the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an audit under
Section 5.10 not to have been reasonably incurred in connection
with the Management Services required to be provided under of this
Agreement.
5.6 New Medical Office Start-Up Costs.
(a) The Management Company shall pay all New Medical Office Start-Up Costs
incurred in connection with the establishment of any New Medical Office.
(b) All Medical Equipment utilized at any New Medical Office shall be
acquired by the Management Company and leased to the Medical Group in accordance
with Section 3.3 hereof.
(c) For purposes of this Agreement, "New Medical Office" means any office
of the Medical Group other that the office(s) identified in Section 3.2(a)
hereof.
(d) For purposes of this Agreement, "New Medical Office Start-Up Costs"
means the following costs incurred in connection with the establishment of a New
Medical Office during the New Medical Office Start-Up Period: all Management
Company Costs and all costs other than physician Medical Personnel costs that,
but for this provision, would have been considered Medical Group Costs.
(e) For purposes of this Agreement, "New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the
-30-
<PAGE>
establishment of a New Medical Office and ending on the earlier of (i) the last
day of the calendar month in which a period of eighteen (18) months has elapsed
from and after the date on which the New Medical Office first opened for the
treatment of patients, or (ii) the last day of the first period of two (2)
consecutive calendar months for which Collections reach a level such that the
costs borne by the Management Company in connection with the New Medical Office
are less than sixty percent (60%) of the Collections for Medical Group Services
provided at the New Medical Office during such two-month period. In no event
shall the Management Company have any obligation under this Section 5.6 to pay
any New Medical Office Start-Up Costs incurred later than eighteen (18) months
after the New Medical Office first opened for the treatment of patients.
5.7 New Physician Start-Up Costs.
(a) Upon the request of the Medical Group and approval by the Management
Company, which approval shall not be unreasonably withheld, the Management
Company shall pay all New Physician Start-Up Costs (as defined below) to the
extent authorized hereunder, subject to recoupment by the Management Company as
provided herein.
(b) The Management Company shall be entitled to retain all Net Collections
(as defined below) during the New Physician Start-Up Period (as defined below),
which shall be offset against the New Physician Start-Up Costs that the Medical
Group has previously paid and is entitled to recoup as provided in Section
5.7(c) below.
(c) Beginning with the month immediately following the expiration of the
New Physician Start-Up Period, the Management Company shall be entitled to
recoup all of the New Physician Start-Up Costs previously paid by the Management
Company by retaining any and all Excess Net Collections (as defined below) until
the Management Company has recouped the full amount of New Physician Start-Up
Costs previously paid by the Management Company, without interest.
(d) "New Physician Start-Up Costs" means the following costs (whether
otherwise considered Management Company Costs or Medical Group Costs hereunder)
payable
-31-
<PAGE>
to or incurred in connection with a New Physician during the New Physician
Start-Up Period, but only to the extent approved by the Operations Committee:
all salary and other compensation payable to the New Physician; the cost of
health insurance and any other employee benefits provided for the benefit of the
New Physician; the cost of professional liability insurance coverage for the New
Physician; the cost of continuing professional education incurred for the
benefit of the New Physician (including the cost of travel, meals, and lodging
incurred in connection with attendance at seminars and similar professional
events); and all other direct out-of-pocket costs (but not indirect costs),
determined on an incremental basis.
(e) "New Physician Start-Up Period" means the period commencing on the date
that the New Physician commences performing professional medical services as an
employee or independent contractor of the Medical Group and ending on the
earlier of (i) the last day of the calendar month in which a period of eighteen
(18) months has elapsed from and after the date on which the New Physician
commenced performing such services, or (ii) the last day of the first period of
two (2) consecutive calendar months for which the amount of Net Collections (as
defined below) attributable to the services performed by the New Physician
equals or exceeds the amount of New Physician Start-Up Costs paid or payable
during such period. In no event shall the Management Company have any obligation
under this Section 5.7 to pay any New Physician Start-Up Costs incurred later
than eighteen (18) months after the New Physician commenced performing
professional medical services as an employee or independent contractor of the
Medical Group.
(f) "Net Collections" in any period means total Collections in such period
less that portion of the Management Fee which is based on the Applicable
Percentage of Collections. At all times during and after the New Physician
Start-Up Period, the Management Company shall be entitled to receive, as part of
its compensation under this Agreement, that portion of the Management Fee which
is based on the Applicable Percentage of Collections attributable to the
services provided by the New Physician.
(g) "Excess Net Collections" means the amount (if any) by which Net
Collections in any month attributable to services performed by the New Physician
exceed the
-32-
<PAGE>
amount of costs paid or payable during such month which would have been
considered New Physician Start-Up Costs had they been paid or payable during the
New Physician Start-Up Period.
(h) "New Physician" means any physician who becomes an employee or
independent contractor of the Medical Group after the date hereof and who
practices with the Medical Group on a substantially full-time basis.
5.8 Medical Group Costs. Except as otherwise provided in this Agreement,
the Medical Group shall pay all of the costs specified in this Section 5.8 (the
"Medical Group Costs"). All Medical Group Costs shall be incurred in the name of
the Medical Group, and not in the name of the Management Company, and shall be
paid from an account of the Medical Group. The Medical Group Costs are as
follows:
(a) Compensation of all Medical Personnel;
(b) Any applicable fringe benefits for all Medical Personnel, including,
but not limited to, payroll taxes, workers' compensation, health
insurance (including drug coverage), dental insurance, individual
disability insurance, life insurance, business buy-out disability
insurance, continuing education, and medical dues and licenses;
(c) The cost of prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, allografts, x-ray films, and other items and
supplies that are billable to patients or to third party payors (the
"Billable Items");
(d) The Medical Equipment Master Lease Payments;
(e) Any lease payments for New Ancillary Service Medical Equipment;
(f) The rent payable under any Office Sublease described in Section 3.2
hereof or under any other office sublease entered into with the
Management Company; and
(g) The cost of any items which are not required to be provided by the
Management Company under this Agreement and/or which were ordered,
purchased, or incurred by the Medical Group directly, including but
not
-33-
<PAGE>
limited to the cost of accounting, legal, consulting, or other
professional or advisory services, business meetings, and business
taxes.
5.9 New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
(i) The Management Company shall create a separate division for
purposes of accounting for the income, costs, profits, and losses of any
New Ancillary Service. The Management Company shall utilize generally
accepted accounting principles in determining and accounting for the
profits and losses related to the operations of each New Ancillary Service.
(ii) Profits and/or losses of any New Ancillary Service shall be
divided equally between the Medical Group and the Management Company, and
all distributions to the Medical Group and to the Management Company shall
be made in equal amounts to each from available cash (after payment of all
currently due obligations incurred in connection with such New Ancillary
Service, including without limitation any principal and interest amounts
then due and payable under Section 5.9(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such New Ancillary
Service.
(iii) All diagnostic and therapeutic equipment utilized in connection
with any New Ancillary Service ("New Ancillary Service Medical Equipment")
shall be acquired by the Management Company and leased to the Medical Group
pursuant to an equipment lease substantially in the form of the Medical
Equipment Master Lease.
(iv) The Management Company shall pay all of the Ancillary Service
Start-Up Costs. Beginning with the month immediately following the
expiration of the Ancillary Service Start-Up Period, the Management Company
shall be entitled to recoup all of the Ancillary Service Start-Up Costs
previously paid by the Management Company in sixty (60) equal monthly
installments of principal, plus interest on the unrecouped portion of such
costs
-34-
<PAGE>
at the prevailing prime rate as set forth in the Wall Street Journal and/or
at the actual rate paid by the Management Company (but in no event greater
than prime plus two percent (2%)) with respect to any part of such costs
that have been financed by the Management Company.
(v) The Management Company shall provide, in connection with any New
Ancillary Service, the full range of management services described in this
agreement.
(vi) The billings, collections, costs and expenses relating to any New
Ancillary Service shall not be included in the computations of Medical
Group Compensation, the Management Fee, Management Company Costs, New
Medical Office Start-Up Costs, New Physician Start-Up Costs, or Medical
Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, 5.7, or 5.8,
respectively.
(b) For purposes of this Section 5.9, "Ancillary Service Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of the New Ancillary Service and ending on the
last day of the first period of two (2) consecutive calendar months for which
the New Ancillary Service shows a profit.
(c) For purposes of this Section 5.9, "Ancillary Service Start-Up Costs"
means the total of all of the following costs incurred in connection with the
establishment of a New Ancillary Service during the Ancillary Service Start-Up
Period (whether such costs would otherwise be considered Management Company
Costs or Medical Group Costs) --
(i) Any lease payments for New Ancillary Service Medical Equipment;
(ii) All costs of acquiring furniture, fixtures, and office equipment;
(iii) All initial occupancy costs, if any, including but not limited to
rent deposits, prepaid rent, and tenant improvements;
-35-
<PAGE>
(iv) All other start-up costs, including but not limited to legal,
accounting and consulting fees, and the cost of initial
inventories of supplies and other items; and
(v) All ongoing costs of the New Ancillary Service, including but not
limited to personnel (other than physician Medical Personnel) and
related benefits, the cost of operating any equipment utilized in
providing the service, supplies, insurance, rent, repairs and
maintenance, outside services, telephone, taxes, utilities,
storage and other ordinary ongoing expenses of providing the New
Ancillary Service.
(d) New Ancillary Services shall be provided through legal structures as
agreed to by the parties, including but not limited to limited partnerships.
Additionally, upon agreement of the parties, New Ancillary Services may be
structured to permit the participation of physicians who are not members of the
Medical Group and/or who do not have contracts with the Management Company.
5.10 Review and Audit of Books and Records. Each of the parties shall have
the right, during ordinary business hours and upon reasonable notice, to review
and make copies of, or to audit through a qualified certified public accountant
approved by the other party (which approval shall not be unreasonably withheld),
the books and records of the other party relating to the billing, collection,
and disbursement of fees, and the determination of costs, under this Agreement.
Any such review or audit shall be performed at the cost of the requesting party;
provided, however, that in the event that such review or audit requested by the
Medical Group discloses a discrepancy indicating that the Medical Group has
actually been underpaid by an amount in excess of two percent (2%) of the total
amount of Medical Group Compensation payable to the Medical Group for the period
covered by the audit, the cost of the audit shall be borne by the Management
Company. All documents and other information obtained in the course of such
review or audit shall be held in strict confidence.
-36-
<PAGE>
5.11 Start-Up Period.
(a) Consistent with the provisions of Section 2 of this Agreement, the
parties acknowledge and agree that, in order to facilitate the transition of
responsibilities hereunder, certain requirements and procedures agreed to under
this Agreement may be implemented over the course of a period of time commencing
on the date hereof and ending two (2) months thereafter (subject to extension by
agreement of the Medical Group and the Management Company), rather than being
fully implemented immediately on the date hereof. Accordingly, the parties may
implement interim procedures during such start-up period, including the
procedures set forth in Section 5.11(b) hereof. The parties further agree that
the Management Fee and Medical Group Compensation payable in respect of the
Management Services and the Medical Group Services applicable to such period of
time shall be computed, and any appropriate adjustments shall be made, such that
no material financial advantage or disadvantage shall accrue to either party as
a result of implementing such requirements and procedures over the course of
such start-up period rather than immediately on the date hereof.
(b) Until such time as the Management Company is able to pay directly, from
an account of the Management Company, all Authorized Management Company
Operating Costs, the Management Company shall advance to the Medical Group, on
or before the first business day of each calendar month, such amount as may be
reasonably necessary to pay, on a timely basis, the estimated amount of such
costs for such month that the Management Company is not able to pay directly.
The Medical Group shall pay such costs on a timely basis, on behalf of the
Management Company, from such funds. If additional funds are needed to pay such
costs during such month, the Management Company shall provide additional funds
to the Medical Group as reasonably required. Any such funds received by the
Medical Group from the Management Company which have not been applied by the
Medical Group in payment of Authorized Management Company Operating Costs during
such month shall be applied to such costs during the subsequent month or
refunded to the Management Company. This arrangement shall terminate at such
time as procedures have been developed that enable the Management Company to pay
all Authorized Management Company Operating Costs directly from an account of
the Management Company. Any direct costs incurred in order to implement this
interim arrangement shall be borne by the Management Company, and not by the
Medical Group.
-37-
<PAGE>
SECTION 6. Representations and Warranties of the Medical Group. The Medical
Group hereby represents and warrants to the Management Company, as of the date
hereof, as follows:
6.1 Organization; Good Standing; Qualification and Power. The Medical Group
is a general partnership duly organized, validly existing, and in good standing
under the laws of the State of Arizona and has all requisite power and authority
to own, lease, and operate its properties, to carry on its business as now being
conducted and as proposed to be conducted, to execute and deliver this
Agreement, the Asset Purchase Agreement, the Stockholder Non-Competition
Agreement, the Restricted Stock Agreement, the Provider Account Agreement, the
Financing Statement, the Medical Equipment Master Lease, each Assignment of
Lease, and each Office Sublease (collectively, the "Transaction Documents"), to
perform its obligations thereunder, and to consummate the transactions
contemplated thereby. The Medical Group has delivered to the Management Company
a true and correct copy of its partnership agreement and all amendments thereto
(the "Medical Group Governance Documents"), in effect on the date hereof.
6.2 Equity Investments. The Medical Group currently has no subsidiaries,
nor does the Medical Group currently own any capital stock or other proprietary
interest, directly or indirectly, in any corporation, association, trust,
partnership, joint venture, or other entity. The foregoing shall not be
interpreted to be applicable to any of the Partners, individually.
6.3 Authority. The execution, delivery and performance of the Transaction
Documents and the consummation of the transactions contemplated thereby have
been duly and validly authorized by all necessary action on the part of the
Medical Group. The Transaction Documents have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally or by applicable laws pertaining to the enforceability of
non-competition agreements. Neither the execution, delivery or performance of
the Transaction Documents by
-38-
<PAGE>
the Medical Group nor the consummation by the Medical Group of the transactions
contemplated thereby, nor compliance by the Medical Group with any provision
thereof will (a) conflict with or result in a breach of any provision of the
Medical Group Governance Documents, (b) cause a default (with due notice, lapse
of time or both), or give rise to any right of termination, cancellation or
acceleration, under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument, obligation or
agreement to which the Medical Group or the Medical Business is a party or by
which they or any of its respective properties or assets may be bound (with
respect to which defaults or other rights all requisite waivers or consents
shall have been obtained at or prior to the date hereof) or (c) to the best
knowledge of the Medical Group, but without expressing any opinion regarding the
enforceability of non-competition agreements, violate any law, statute, rule or
regulation or order, writ, judgment, injunction or decree of any court,
administrative agency or governmental body applicable to the Medical Group, the
Medical Business or any of their respective properties or assets. To the best
knowledge of the Medical Group, no permit, authorization, consent or approval of
or by, or any notification of or filing with, any person (governmental or
private) is required in connection with the execution, delivery or performance
by the Medical Group of the Transaction Documents or the consummation of the
transactions contemplated thereby.
6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's
internal statement of assets, liabilities, and partners' equity of the Medical
Business as of March 31, 1997 (the "Balance Sheet"; and the date thereof being
referred to as the "Balance Sheet Date"), and the related internal statements of
revenue and expenses for the period then ended (including the notes thereto and
other financial information included therein) (collectively, the "Internal
Financial Statements"), (b) the review financial statements of the Medical
Business for the periods ended December 31, 1996 and December 31, 1995 (the
"Review Financial Statements"), and (c) the historical collections information
of the Medical Group for the periods ended April 30, 1997, December 31, 1996,
December 31, 1995, and December 31, 1994 (the "Historical Collections
Information"). The Internal Financial Statements, the Review Financial
Statements, and the Historical Collections Information (i) were prepared in
accordance with the books and records of the Medical Business, (ii) fairly
present the financial position of the
-39-
<PAGE>
Medical Business as of the dates thereof, and (iii) are true, correct and
complete in all material respects as of the dates thereof.
6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule
6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any
material liability of any nature (matured or unmatured, fixed or contingent,
known or unknown) which was not provided for or disclosed on the Balance Sheet,
(b) all liability reserves established by the Medical Business on the Balance
Sheet were adequate and (c) there were no loss contingencies (as such term is
used in Statement of Financial Accounting Standards No. 5 issued by the
Financial Accounting Standards Board in March 1975) which were not adequately
provided for or disclosed on the Balance Sheet.
6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the
Balance Sheet Date, the Medical Business has been operated in the ordinary
course and consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working
capital and the components thereof), liabilities, operations, results of
operations, earnings, business or prospects of the Medical Business;
(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Medical Business;
(c) any obligation or liability (whether absolute, accrued, contingent
or otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Medical Business
other than such items created or incurred in the ordinary course of the
Medical Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Medical Business outside the
ordinary course of the Medical
-40-
<PAGE>
Business (whether absolute, accrued, contingent or otherwise and whether
due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition
of any tangible or intangible asset of the Medical Business except in the
ordinary course of the Medical Business and consistent with past practice;
(f) any write-off as uncollectible of any accounts receivable in
connection with the Medical Business or any portion thereof in excess of
$5,000 in the aggregate exclusive of all normal contractual adjustments
from third party payors;
(g) except for all normal contractual adjustments from third party
payors, any account receivable in connection with the Medical Business in
an amount greater than $10,000 which (i) has become delinquent in its
payment by more than 90 days, (ii) has had asserted against it any claim,
refusal to pay or right of set-off, (iii) an account debtor has refused to
pay for any reason or with respect to which such account debtor has become
insolvent or bankrupt or (iv) has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Medical
Business;
(i) any general uniform increase in the compensation of employees of
the Medical Group or the Medical Business (including, without limitation,
any increase pursuant to any bonus, pension, profit-sharing, deferred
compensation arrangement or other plan or commitment) or any increase in
compensation payable to any Partner or Principal, or the entering into of
any contract with any Partner or Principal, or the making of any loan to,
or the engagement in any transaction with, any Partner or Principal;
(j) any change in the accounting methods or practices followed in
connection with the Medical Business or any change in depreciation or
amortization policies or rates theretofore adopted;
-41-
<PAGE>
(k) any agreement or commitment relating to the sale of any material
fixed assets of the Medical Business;
(l) any other transaction relating to the Medical Business other than
in the ordinary course of the Medical Business and consistent with past
practice; or
(m) any agreement or understanding, whether in writing or otherwise,
for the Medical Business to take any of the actions specified in items (a)
through (l) above.
6.7 Tax Matters.
(a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the
Medical Business required to be paid by the Medical Group through the date
hereof have been paid and all returns, declarations of estimated Tax, Tax
reports, information returns and statements required to be filed by the Medical
Group in connection with the Medical Business prior to the date hereof (other
than those for which extensions shall have been granted prior to the date
hereof) relating to any Taxes with respect to any income, properties or
operations of the Medical Group prior to the date hereof (collectively,
"Returns") have been duly filed; (ii) as of the time of filing, the Returns
correctly reflected in all material respects (and, as to any Returns not filed
as of the date hereof, will correctly reflect in all material respects) the
facts regarding the income, business, assets, operations, activities and status
of the Medical Business and any other information required to be shown therein;
(iii) all Taxes relating to the operations of the Medical Business that have
been shown as due and payable by the Medical Group on the Returns have been
timely paid and filed or adequate provisions made to the books and records of
the Medical Business; (iv) in connection with the Medical Business (A) the
Medical Group has made provision on the Balance Sheet for all Taxes payable by
the Medical Group for any periods that end on or before the Balance Sheet Date
for which no Returns have yet been filed and for any periods that begin on or
before the Balance Sheet Date and end after the Balance Sheet Date to the extent
such Taxes are attributable to the portion of any such period ending on the
Balance Sheet Date and (B) provision has been made for all Taxes payable by the
Medical Group for any periods that end on or before the date hereof for which no
Returns have then been filed and for any periods that begin on or before the
date hereof and end after such date to the extent such
-42-
<PAGE>
Taxes are attributable to the portion of any such period ending on such
date; (v) no tax liens have been filed with respect to any of the assets of
the Medical Business, and there are no pending tax audits of any Returns
relating to the Medical Business; and (vi) no deficiency or addition to
Taxes, interest or penalties applicable to the Medical Group for any Taxes
relating to the operation of the Medical Business has been proposed,
asserted or assessed in writing (or any member of any affiliated or
combined group of which the Medical Group or any previous operator of the
Medical Business was a member for which the Medical Group could be liable).
(b) The Medical Group is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Internal Revenue
Code of 1986, as amended (the "Code").
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal, state and foreign Returns of the Medical Group
for the calendar years ending December 31, 1995 and 1996.
(d) For purposes of this Agreement, "Tax" means any of the Taxes and
"Taxes" means, with respect to any person or entity, (i) all federal, state,
local and foreign income taxes (including any tax on or based upon net income,
or gross income, or income as specially defined, or earnings, or profits, or
selected items of income, earnings or profits) and all Federal, state, local and
foreign gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties or other Federal, state, local and foreign taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) on such person or entity and (ii) any liability for the payment of
any amount of the type described in the immediately preceding clause (i) as a
result of being a `transferee' (within the meaning of Section 6901 of the Code
or any other applicable law) of another person or entity or a member of an
affiliated or combined group.
-43-
<PAGE>
6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a)
actions, suits, claims, investigations or legal or administrative or arbitration
proceedings pending or, to the best knowledge of the Medical Group, threatened
against the Medical Group or any Partner or Principal in connection with the
Medical Business, whether at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or (b) judgments, decrees, injunctions or orders of
any court, governmental department, commission, agency, instrumentality or
arbitrator against the Medical Group, its assets or affecting the Medical
Business. The Medical Group has delivered to the Management Company all
documents and correspondence relating to matters referred to in said Schedule
6.8.
6.9 Compliance; Governmental Authorizations. The Medical Group, all
Partners and Principals, and the Medical Business shall have complied in all
material respects with all applicable material Federal, state, local or foreign
laws, ordinances, regulations and orders. The Medical Group and all Partners and
Principals have all Federal, state, local and foreign governmental licenses and
permits necessary in the conduct of the Medical Business, the lack of which
would have a material adverse effect on the Medical Group's ability to operate
the Medical Business after the date hereof on substantially the same basis as
presently operated, such licenses and permits are in full force and effect, the
Medical Group has not received any notice indicating that any violations are or
have been recorded in respect of any thereof, and no proceeding is pending or,
to the best knowledge of the Medical Group, threatened to revoke or limit any
thereof. To the best knowledge of the Medical Group, none of such licenses and
permits shall be affected in any material respect by the transactions
contemplated hereby.
6.10 Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts receivable
owing to the Medical Group in connection with the Medical Business as of the
date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Medical Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Medical Group, there are no claims, refusals to pay or other
rights of set-off against any thereof. Except as set forth on Schedule 6.10, as
of the date hereof, there
-44-
<PAGE>
is (i) no account debtor or note debtor of the Medical Business delinquent in
its payment by more than 60 days, (ii) no account debtor or note debtor of the
Medical Business who or which has refused to pay its obligations for any reason
or is the subject of a bankruptcy proceeding and (iii) no account receivable or
note receivable of the Medical Business pledged to any third party.
(b) All accounts payable and notes payable by the Medical Business to third
parties arose in the ordinary course of business and, except as set forth in
Schedule 6.10, there is no account payable or note payable past due or
delinquent in its payment.
6.11 Labor Relations; Employees. Schedule 6.11 contains a true and complete
list of the persons employed by the Medical Group as of the date hereof (the
"Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and
the Medical Business are not delinquent in payments to any of the Employees for
any wages, salaries, commissions, bonuses or other compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to the
Employees; (b) upon termination of the employment of any of the Employees,
neither the Medical Group, the Medical Business nor the Management Company will
by reason of anything done prior to the date hereof, or by reason of the
consummation of the transactions contemplated hereby, be liable for any excise
taxes pursuant to Section 4980B of the Code or to any of the Employees for
severance pay or any other payments; (c) there is no unfair labor practice
complaint against the Medical Group or in connection with the Medical Business
pending before the National Labor Relations Board or any comparable state, local
or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage
actually pending or, to the best knowledge of the Medical Group, threatened
against or involving the Medical Group or Medical Business; (e) there is no
collective bargaining agreement covering any of the Employees; and (f) to the
best knowledge of the Medical Group, no Employee or consultant is in violation
of any (i) employment agreement, arrangement or policy between such person and
any previous employer (private or governmental) or (ii) agreement restricting or
prohibiting the use of any information or materials used or being used by such
person in connection with such person's employment by or association with the
Medical Group or the Medical Business.
-45-
<PAGE>
6.12 Employee Benefit Plans.
(a) Schedule 6.12 identifies each `employee benefit plan', as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and all other written or oral plans, programs, policies or agreements
involving direct or indirect compensation (including any employment agreements
entered into between the Medical Group, any Partner, or the Medical Business, on
one hand, and any Employee or former employee of the Medical Group or of a
Partner in connection with the Medical Business, but excluding workers'
compensation, unemployment compensation and other government-mandated programs)
currently or previously maintained or entered into by the Medical Group or any
Partner, or in connection with the Medical Business for the benefit of any
Employee or former employee of the Medical Group or any Partner, or in
connection with the Medical Business under which the Medical Group, any Partner,
any affiliate of the Medical Group, or the Medical Business has any present or
future obligation or liability (the "Employee Plans"). The Medical Group has
provided the Management Company with true and complete age, salary, service and
related data for Employees of the Medical Group and in connection with the
Medical Business.
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Medical Group or in connection with the Medical Business.
6.13 Insurance. Schedule 6.13 contains a list of all policies of
professional liability (medical malpractice), general liability, theft,
fidelity, fire, product liability, errors and omissions, health and other
property and casualty forms of insurance held by the Medical Group covering the
assets, properties or operations of the Medical Group and the Medical Business
(specifying the insurer, amount of coverage, type of insurance, policy number
and any pending claims thereunder). All such policies of insurance are valid and
enforceable policies and are outstanding and duly in force and all premiums with
respect thereto are currently paid. Neither
-46-
<PAGE>
the Medical Group nor its predecessor in interest has, during the last five
fiscal years, been denied or had revoked or rescinded any policy of insurance
relating to the assets, properties or operations of the Medical Group or the
Medical Business.
6.14 Real Property. Schedule 6.14 sets forth an accurate and complete legal
description of the entire right, title and interest of the Medical Group in and
to all real property, together with all buildings, facilities, fixtures and
improvements located on such real property, owned or leased by the Medical Group
(the "Real Property"), together with an accurate description of the title
insurance policy or other evidence of title issued with respect thereto, the
most current survey of such real property and a description of the use thereof.
Other than the Real Property, the Medical Group has no other interest (leasehold
or otherwise) in real property used, held for use or intended to be used in the
Medical Business. The Medical Group has a valid leasehold interest in all Real
Property leased by the Medical Group.
6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15, neither
the Medical Group nor the Medical Business is bound by any oral or written
agreement or contract which by its terms prohibits it from conducting the
Medical Group or the Medical Business (or any material part thereof).
6.16 Disclosure. Neither the Transaction Documents (including the Exhibits
and Schedules attached thereto) nor any other document, certificate or written
statement furnished to the Management Company by or on behalf of the Medical
Group in connection with the transactions contemplated hereby contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
Except as set forth on Schedule 6.16, there have been no events or transactions,
or information which has come to the attention of the Medical Group, which, as
they relate directly to the Medical Group or the Medical Business, could
reasonably be expected to have a material adverse effect on the business,
operations, affairs, prospects or condition of the Medical Group and the Medical
Business.
-47-
<PAGE>
SECTION 7. Representations and Warranties of the Management Company. The
Management Company represents and warrants to the Medical Group, as of the date
hereof, as follows:
7.1 Organization, Good Standing and Power. The Management Company (a) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and (b) has all requisite corporate power and authority
to own, lease and operate its properties, to carry on its business as now being
conducted and as proposed to be conducted, to execute and deliver this Agreement
and each of the other Transaction Documents, to perform its obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby.
7.2 Authority. The execution, delivery and performance of the Transaction
Documents, and the consummation of the transactions contemplated thereby have
been duly and validly authorized by all necessary corporate action on the part
of the Management Company. The Transaction Documents to which it is a party have
been duly and validly executed and delivered by the Management Company, and such
Transaction Documents are valid and binding obligations of the Management
Company, enforceable in accordance with their respective terms except as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally. Neither
the execution, delivery or performance of the Transaction Documents, nor the
consummation by the Management Company of the transactions contemplated thereby,
nor compliance by the Management Company with any provision thereof, will (a)
conflict with or result in a breach of any provisions of the Certificate of
Incorporation or By-laws of the Management Company, (b) cause a default (with
due notice, lapse of time or both), or give rise to any right of termination,
cancellation or acceleration, under any of the terms, conditions or provisions
of any material note, bond, lease, mortgage, indenture, license or other
instrument, obligation or agreement to which the Management Company is a party
or by which it or any of its properties or assets is or may be bound or (c)
violate any law, statute, rule or regulation or order, writ, judgment,
injunction or decree of any court, administrative agency or governmental body
applicable to the Management Company or any of its properties or assets.
-48-
<PAGE>
7.3 Issuance of Common Stock. The Management Company has taken all action
necessary or appropriate to duly authorize the creation, issuance and sale of
the common stock to be issued hereunder. Such shares of common stock, when
issued, sold and delivered, as provided for herein and in the Restricted Stock
Agreement, will be validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership of the shares. The issuance of
such shares of common stock will not violate any preemptive or similar right of
any person.
7.4 Issued and Outstanding Stock. Set forth in Schedule 7.4 is an accurate
and complete list of the number and class of issued and outstanding shares of
stock of the Management Company as of the date specified therein. Each of the
outstanding shares of capital stock has been duly and validly authorized and
issued, is fully paid and non-assessable.
7.5 Permits, Authorizations, Consents, Approvals, Notifications, and
Filings. Except as provided in Schedule 7.5, to the best of the Management
Company's knowledge, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery or performance by the
Management Company of this Agreement or the consummation by the Management
Company of the transactions contemplated hereby.
7.6 Financial Information. Schedule 7.6 contains (a) the unaudited
statements of assets, liabilities and stockholders' equity of the Management
Business as at the date set forth therein (the "Management Company Balance
Sheet"; and the date thereof being referred to as the "Management Company
Balance Sheet Date"), and the related unaudited statements of revenue and
expenses for the periods then ended (including the notes thereto and other
financial information included therein) (collectively, the "Unaudited Financial
Statements"). The Unaudited Financial Statements (i) were prepared in accordance
with the books and records of the Management Business, (ii) fairly present the
financial position of the Management Business as of the dates thereof, and (iii)
are true, correct and complete in all material respects as of the date thereof.
-49-
<PAGE>
7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule
7.7, as of the Management Company Balance Sheet Date, (a) the Management
Business did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Management Company Balance Sheet, (b) all liability reserves
established by the Management Business on the Management Company Balance Sheet
were adequate and (c) there were no loss contingencies (as such term is used in
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which were not adequately provided for
or disclosed on the Management Company Balance Sheet.
7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the
Management Company Balance Sheet Date, the Management Business has been operated
in the ordinary course and consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working
capital and the components thereof), liabilities, operations, results of
operations, earnings, business or prospects of the Management Business;
(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Management Business;
(c) any obligation or liability (whether absolute, accrued, contingent
or otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Management
Business other than such items created or incurred in the ordinary course
of the Management Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Management Business outside the
ordinary course of the Management Business (whether absolute, accrued,
contingent or otherwise and whether due or to become due);
-50-
<PAGE>
(e) any license, sale, transfer, pledge, mortgage or other disposition
of any tangible or intangible asset of the Management Business except in
the ordinary course of the Management Business and consistent with past
practice;
(f) any write-off as uncollectible of any accounts receivable in
connection with the Management Business or any portion thereof in excess of
$5,000 in the aggregate exclusive of all normal contractual adjustments
from third party payors;
(g) except for all normal contractual adjustments from third party
payors, any account receivable in connection with the Management Business
in an amount greater than $10,000 which (i) has become delinquent in its
payment by more than 90 days, (ii) has had asserted against it any claim,
refusal to pay or right of set-off, (iii) an account debtor has refused to
pay for any reason or with respect to which the Management Business, such
account debtor has become insolvent or bankrupt or (iv) has been pledged to
any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(i) any general uniform increase in the compensation of employees of
the Management Company or the Management Business (including, without
limitation, any increase pursuant to any bonus, pension, profit-sharing,
deferred compensation arrangement or other plan or commitment) or any
increase in compensation payable to any officer, employee, consultant or
agent thereof, or the entering into of any employment contract with any
officer or employee, or the making of any loan to, or the engagement in any
transaction with, any officer of the Management Company or the Management
Business;
(j) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
-51-
<PAGE>
(k) any agreement or commitment relating to the sale of any material
fixed assets of the Management Business;
(l) any other transaction relating to the Management Business other
than in the ordinary course of the Management Business and consistent with
past practice; or
(m) any agreement or understanding, whether in writing or otherwise,
for the Management Business to take any of the actions specified in items
(a) through (l) above.
7.9 Tax Matters.
(a) Except as set forth on Schedule 7.9, (i) all Taxes relating to the
Management Business required to be paid through the date hereof have been paid
and all returns, declarations of estimated Tax, Tax reports, information returns
and statements required to be filed in connection with the Management Business
prior to the date hereof (other than those for which extensions shall have been
granted prior to the date hereof) relating to any Taxes with respect to any
income, properties or operations of the Management Company prior to the date
hereof (collectively, "Management Company Returns") have been duly filed; (ii)
as of the time of filing, the Management Company Returns correctly reflected in
all material respects (and, as to any Management Company Returns not filed as of
the date hereof, will correctly reflect in all material respects) the facts
regarding the income, business, assets, operations, activities and status of the
Management Business and any other information required to be shown therein;
(iii) all Taxes relating to the operations of the Management Business that have
been shown as due and payable on the Management Company Returns have been timely
paid and filed or adequate provisions made to the books and records of the
Management Business; (iv) in connection with the Management Business (A) the
Management Company has made provision on the Management Company Balance Sheet
for all Taxes payable for any periods that end on or before the Management
Company Balance Sheet Date for which no Management Company Returns have yet been
filed and for any periods that begin on or before the Management Company Balance
Sheet Date and end after the Management Company Balance Sheet Date to the extent
such Taxes are attributable to the portion of any such period ending on the
Management Company Balance Sheet Date and (B) provision has been made for all
Taxes payable for any
-52-
<PAGE>
periods that end on or before the date hereof for which no Management Company
Returns have then been filed and for any periods that begin on or before the
date hereof and end after such date to the extent such Taxes are attributable to
the portion of any such period ending on such date; (v) no tax liens have been
filed with respect to any of the assets of the Management Business, and there
are no pending tax audits of any Management Company Returns relating to the
Management Business; and (vi) no deficiency or addition to Taxes, interest or
penalties for any Taxes relating to the operation of the Management Business has
been proposed, asserted or assessed in writing (or any member of any affiliated
or combined group of which the Management Company or any previous operator of
the Management Business was a member for which the Management Company could be
liable).
(b) The Management Company is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Code.
7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no
(a) actions, suits, claims, investigations or legal or administrative or
arbitration proceedings pending or, to the best knowledge of the Management
Company, threatened against the Management Company or in connection with the
Management Business, whether at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or (b) judgments, decrees, injunctions or orders of
any court, governmental department, commission, agency, instrumentality or
arbitrator against the Management Company its assets or affecting the Management
Business.
7.11 Compliance; Governmental Authorizations. The Management Company and
the Management Business have complied in all material respects with all
applicable material Federal, state, local or foreign laws, ordinances,
regulations and orders. The Management Company has all Federal, state, local and
foreign governmental licenses and permits necessary in the conduct of the
Management Business, the lack of which would have a material adverse effect on
the Management Company's ability to operate the Management Business after the
date hereof on substantially the same basis as presently operated, and such
licenses and permits are in full force
-53-
<PAGE>
and effect. To the best knowledge of the Management Company, none of such
licenses and permits shall be affected in any material respect by the
transactions contemplated hereby.
7.12 Accounts and Notes Payable. All accounts payable and notes payable by
the Management Company to third parties arose in the ordinary course of
business, and there is no account payable or note payable which is delinquent.
7.13 Employees. Except as set forth on Schedule 7.13, the Management
Company is not delinquent in payments to any of the Management Company employees
for any wages, salaries, commissions, bonuses or other compensation for any
services performed by them to the date hereof.
7.14 Employee Benefit Plans. The Management Company is not delinquent in
its payments or otherwise in default under any `employee benefit plan', as
defined in Section 3(3) of ERISA.
7.15 Insurance. The Management Company has obtained such policies of
insurance as are usual and customary for businesses of the type conducted by the
Management Company. All such policies of insurance are valid and enforceable
policies, and all premiums with respect thereto are currently paid. The
Management Company has not been denied or had revoked or rescinded any policy of
insurance relating to the assets, properties or operations of the Management
Company or the Management Business.
7.16 Real Property. The Management Company has a valid leasehold interest
in all real property leased by the Management Company.
7.17 Burdensome Restrictions. Neither the Management Company nor the
Management Business is bound by any oral or written agreement or contract which
by its terms prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
-54-
<PAGE>
7.18 Disclosure. Neither the Transaction Documents (including the Exhibits
and Schedules attached thereto) nor any other document, certificate or written
statement furnished to the Medical Group by or on behalf of the Management
Company in connection with the transactions contemplated hereby contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
Except as set forth on Schedule 7.18, there have been no events or transactions,
or information which has come to the attention of the Management Company, which,
as they relate directly to the Management Company or the Management Business,
could reasonably be expected to have a material adverse effect on the business,
operations, affairs, prospects or condition of the Management Company and the
Management Business.
SECTION 8. Operations Committee.
8.1 Formation and Operation of the Operations Committee.
(a) The Management Company and the Medical Group shall establish an
Operations Committee responsible for directing the Management Company in
connection with the development of certain specific management and
administrative policies for the overall operation of the Medical Group. The
business of the Operations Committee shall be conducted in accordance with the
policies and procedures described in Section 8.4 hereof.
(b) The Operations Committee shall consist of four (4) members. The Medical
Group shall designate two (2) members of the Operations Committee, each of whom
shall be a physician in the Medical Group, and the Management Company shall
designate two (2) members of the Operations Committee.
8.2 Authoritative Functions of the Operations Committee. The Operations
Committee shall perform the following functions, and the decisions of the
Operations Committee with respect to such functions shall be binding on the
Management Company and the Medical Group:
(a) Approve the annual budgets for:
(i) Billings and Collections
(ii) Medical Group Costs
-55-
<PAGE>
(iii) Management Company Operating Costs (which, in the absence of
approval by the Operations Committee, shall be increased by one
percent (1.0%) over the total amount approved for the preceding
period)
(b) Approve costs and expenses that exceed the Management Company
Operating Costs Budget.
(c) Establish parameters and criteria with respect to the establishment
and maintenance of relationships with institutional providers and
payors and managed care contracts (except with respect to the
establishment of professional fees).
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection
agencies
(vi) Write-offs of account balances
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off policies
(ix) Lien account collection policies
(x) Student Athlete account policies
(e) Approve the acquisition, replacement, relocation, or other disposition
of Medical Equipment and FF&E, approve the integration of new
technologies into the professional practice of the Medical Group as
contemplated by Section 3.13 hereof, and approve the renovation and
expansion of any offices of the Medical Group ("Tenant Improvements");
provided, however, that the approval of the Management Company also
-56-
<PAGE>
shall be required prior to (i) the acquisition of any Medical
Equipment or FF&E (including any Medical Equipment or FF&E relating to
the integration of new technologies into the professional practice of
the Medical Group) if and to the extent that the aggregate cost of
such items in any calendar year exceeds five percent (5%) of the
Management Fee for such year, (ii) the undertaking of any Tenant
Improvements relating to patient care facilities that cost more than
$10,000 in the aggregate at any one of the Medical Group's office
locations in any calendar year, or (iii) the undertaking of any other
Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of files and
records of the Medical Group.
(g) Approve any change in the insurance carrier that provides professional
liability coverage to the Medical Group.
(h) Approve all New Physician Start-Up Costs in accordance with Section
5.7 hereof.
8.3 Advisory Functions of the Operations Committee. The Operations
Committee shall review, evaluate and make recommendations to the Medical Group
and the Management Company with respect to the following matters:
(a) Identification of physician subspecialties required for the efficient
operation of the Medical Group; advice regarding all Medical Personnel
employment and recruitment contracts to be utilized by the Medical
Group.
(b) Development of long-term strategic planning objectives for the Medical
Group.
-57-
<PAGE>
(c) Public relations, advertising, and other marketing of Medical Group
services, including design of exterior signs.
(d) The establishment of fees for professional services and ancillary
services rendered by the Medical Group.
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group and the
Management Company, as such coverage may relate to Medical Group
operations and activities.
(g) Any matters arising in connection with the operations of the Medical
Group that are not specifically addressed in this Agreement and as to
which the Management Company or the Medical Group requests
consideration by the Operations Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Management Company and the Medical Group, and except as provided herein, the
Operations Committee does not have the power to bind the Management Company or
the Medical Group. Where discretion with respect to any matters is vested in the
Management Company or the Medical Group under the terms of this Agreement, the
Management Company or the Medical Group, as the case may be, shall have ultimate
responsibility for the exercise of such discretion, notwithstanding any
recommendation of the Operations Committee. The Management Company and the
Medical Group shall, however, take such recommendations of the Operations
Committee into account in good faith in the exercise of such discretion.
8.4 Committee Policies and Procedures.
(a) The Medical Group shall designate one of its members to act as Chairman
of the Committee, and the Management Company shall designate one of its members
to act as
-58-
<PAGE>
Vice Chairman. Each party may substitute or change its designated Operations
Committee members at any time upon notice to the other party, and any Operations
Committee member may designate his or her own substitute at any meeting without
notice. Each member shall have one vote and shall have the right to grant his or
her proxy to another member of the Operations Committee. The Chairman, if
present, shall preside at all meetings of the Operations Committee. In the
absence of the designated Chairman, the Vice Chairman shall preside. The only
powers of the Chairman and the Vice Chairman that differ from those of the other
members of the Operations Committee shall be to call and preside over meetings
in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or formal
notice at such times and places as a quorum of its members may from time to time
determine. A meeting of the Operations Committee also may be called by at least
two (2) members of the Operations Committee or by the Chairman or Vice Chairman
thereof upon at least three (3) days' written notice to the other members of the
Operations Committee. Such notice requirement shall be deemed waived with
respect to any member of the Operations Committee who attends such meeting.
Meetings may be held in person or by telephone. The Operations Committee also
may act by written consent as provided in Section 8.4(c). Minutes shall be kept
of all formal actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of the four (4) members of the Operations Committee
present or represented by proxy at the applicable meeting. A quorum of the
Operations Committee shall be the four (4) members, in person, by telephone, or
by proxy, and a quorum must remain for the duration of the meeting. The
Operations Committee may establish such procedures to act by written consent,
without a meeting, as the Operations Committee determines are advisable,
provided that all four (4) members (in person or by proxy) must sign any written
consent.
SECTION 9. Obligations of the Medical Group. The Medical Group shall
perform the following obligations during the Term:
-59-
<PAGE>
9.1 Compliance with Laws. The Medical Group shall provide professional
services to patients in compliance at all times with ethical standards, laws and
regulations to which they are subject. The Medical Group shall verify, with the
assistance of the Management Company, that each physician and other Medical
Personnel associated with the Medical Group for the purpose of providing medical
care to patients of the Medical Group is appropriately licensed. The Medical
Group shall monitor the quality of medical care practiced by physicians and
other health care personnel associated with the Medical Group. In the event that
any disciplinary actions or medical malpractice actions are initiated against
any such physician by any payor, patient, state or federal regulatory agency or
any other person or entity, the Medical Group shall immediately inform the
Management Company of such action and its underlying facts and circumstances.
9.2 Choice of Braces, Splints, Appliances, Medical Supplies, and
Allografts. The Medical Group shall have the exclusive control over the choice
of vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts.
9.3 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy,
MRI, and Other Medical Professionals and Facilities. The Medical Group shall
have exclusive control over the choice of specific physicians and facilities to
be utilized by the Medical Group with respect to radiology, anesthesiology,
hospitals, physical therapy, MRI, and other medical professionals and
facilities; provided, however, that the foregoing shall not limit the provisions
of Section 3.4(b) hereof.
9.4 Insurability. The Medical Group shall cooperate with the Management
Company in (i) ensuring that its Medical Personnel are insurable or (ii)
instituting proceedings to terminate within two business days any Medical
Personnel who is not insurable or who loses his or her insurance eligibility.
The Medical Group shall notify the Management Company in writing of any change
in the insurance status of any Medical Personnel within two days after the
Medical Group receives notice of any such change. The Medical Group shall
require all Medical Personnel to participate in an on-going risk management
program.
-60-
<PAGE>
9.5 Medicare. The Medical Group shall cause all physicians to be
participating providers and accept assignment under Medicare.
9.6 Billing. The Medical Group's Medical Personnel shall be responsible for
providing the appropriate current CPT4 coding with respect to the fee tickets
prepared by such Medical Personnel.
9.7 Medical Personnel Hiring. The Medical Group shall have the ultimate
control over and responsibility for the hiring, compensation, supervision,
evaluation and termination of its Medical Personnel; provided, however, that at
the request of the Medical Group, the Management Company shall consult with the
Medical Group regarding such matters.
9.8 Continuing Education. The Medical Group and its Medical Personnel shall
be solely responsible for ongoing membership in professional associations and
continuing professional education. The Medical Group shall ensure that its
Medical Personnel participate in such continuing professional education as is
necessary for such physician or professional to remain current in his or her
field of medical practice.
SECTION 10. Certain Covenants.
10.1 Change of Control. During the Term of this Agreement, the Medical
Group shall not enter into any single transaction (or group of related
transactions undertaken pursuant to a common plan) involving the admission of
new partners, transfer of any partnership interest in the Medical Group, or
reorganization or restructuring of the Medical Group, if in any such case the
effect would be to transfer a majority of the ownership interest in the Medical
Group, without the prior written consent of the Management Company, which
consent shall not be unreasonably withheld or delayed.
10.2 Legend on Securities. During the Term of this Agreement, any
certificate or similar evidence representing an equity interest in the Medical
Group issued by the Medical Group shall bear the following legend:
-61-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT
EFFECTIVE AS OF JULY 1, 1997, BETWEEN SUN VALLEY ORTHOPAEDIC SURGEONS, AN
ARIZONA GENERAL PARTNERSHIP, BONE, MUSCLE AND JOINT, INC., A DELAWARE
CORPORATION, AND THE INDEMNIFYING PARTIES (AS DEFINED THEREIN)."
10.3 Non-Disclosure of Confidential Information. Neither the Management
Company nor the Medical Group, nor their respective employees, consultants or
agents, nor any Partner or Principal, shall, at any time after the execution and
delivery hereof, directly or indirectly disclose any Confidential or Proprietary
Information relating to the other party hereto to any person, firm, corporation,
association or other entity, nor shall either party, or any of their respective
employees, consultants or agents, or any Partner or Principal, make use of any
of such Confidential or Proprietary Information for its, his or her own purposes
or for the benefit of any person, firm, corporation or other entity except the
parties hereto or any subsidiary or affiliate thereof. The foregoing obligation
shall not apply to any information which a party hereto can establish to have
(a) become publicly known without breach of this Agreement by it or them, (b) to
have been given to such party by a third party who is not obligated to maintain
the confidentiality of such information, or (c) is disclosed to a third party
with the prior written consent of the other party hereto.
10.4 Confidential or Proprietary Information. The term "Confidential or
Proprietary Information" means all information known to a party hereto, or to
any of its employees, officers, directors, consultants, or agents, or to any
Partner or Principal, which relates to the Transaction Documents, patient
medical and billing records, trade secrets, books and records, supplies, pricing
and cost information, marketing plans, strategies and forecasts. Nothing
contained herein shall prevent a party hereto from furnishing Confidential or
Proprietary Information pursuant to a direct order of a court of competent
jurisdiction.
-62-
<PAGE>
SECTION 11. Records.
11.1 Medical Records. Upon termination of this Agreement, the Medical Group
shall retain all patient medical records maintained by the Medical Group or the
Management Company in the name of the Medical Group.
11.2 Management Business Records. All books and records relating in any way
to the operation of the Management Business which are not patient medical
records shall at all times be the property of the Management Company. The
Medical Group shall, upon its written request, be entitled to copies of any such
records relating to the Management Services performed by the Management Company.
11.3 Access to Records Following Termination.
(a) Following the termination of this Agreement, the Medical Group shall
grant (to the extent permitted by law) to the Management Company, for the
purpose of preparing for any actual or anticipated legal proceeding or for any
other reasonable purpose, reasonable access (which shall include making
photocopies) to the patient medical records described in Section 11.1 hereof and
any other pertinent information regarding the Medical Group during the Term.
Prior to accessing such patient medical records, the Management Company shall
obtain any required patient authorization.
(b) Following the termination of this Agreement, the Management Company
shall provide to the Medical Group, promptly upon the Medical Group's written
request, photocopies of the Management Business records described in Section
11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing
for any actual or anticipated legal proceeding or for any other reasonable
purpose, any other pertinent information regarding the Management Company during
the Term.
SECTION 12. Insurance and Indemnity.
12.1 Professional Liability Insurance. During the Term, the Management
Company shall, to the extent permitted by applicable law, and subject to
approval by the Operations Committee if required by Section 8.2(g) hereof,
procure and maintain comprehensive
-63-
<PAGE>
professional liability insurance providing for (a) general liability coverage
and (b) medical malpractice coverage, in each case with limits of not less than
$1,000,000 per claim and not less than $3,000,000 in the aggregate (or such
higher amounts as may be necessary to comply with any applicable regulatory or
contractual requirement), covering the Medical Group and each of the Medical
Personnel of the Medical Group, including coverage for claims made after the
date hereof relating to events or occurrences at any time prior thereto. The
Management Company shall be designated as an additional insured under all such
insurance policies. The parties hereto acknowledge that the Management Company
is procuring the malpractice insurance referenced herein to ensure that the
Management Company has protection in the event it is sued as a result of an act
or omission of an employee of the Medical Group. The Management Company shall
pay the premiums for such general and medical malpractice liability coverage,
which payments shall be considered Management Company Operating Costs under this
Agreement, subject to recoupment by the Management Company in accordance with
Section 5 hereof); provided, however, that if any additional premium is charged
for adding the Management Company as an additional insured under any such
policy, the cost thereof shall be considered Management Company corporate
overhead and therefore not subject to recoupment by the Management Company.
12.2 Life Insurance. The Management Company shall obtain a $500,000 life
insurance policy for each duly licensed physician who is a Partner or
Principal.. The Management Company shall be designated as the beneficiary under
such policies. The premiums for such policies shall be paid by the Management
Company and shall not be included as Management Company Operating Costs or
otherwise charged to the Medical Group.
12.3 Indemnification by Medical Group. The Medical Group shall indemnify,
hold harmless and defend the Management Company, its officers, directors,
employees, agents and independent contractors from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees and expenses), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of (i) the performance of Medical Group Services, including without
limitation the performance of such services prior to the date hereof, (ii) any
other acts or omissions of the
-64-
<PAGE>
Medical Group or its Medical Personnel, including without limitation any such
acts or omissions that occurred prior to the date hereof, (iii) the untruth or
inaccuracy of any representation or warranty of the Medical Group contained in
this Agreement (including any Schedule) or in any of the other Transaction
Documents or any certificate delivered by the Medical Group in connection
herewith, or (iv) any breach of or failure to perform any obligation under this
Agreement or the Transaction Documents by the Medical Group and/or the Medical
Personnel and/or their respective agents and/or subcontractors (other than the
Management Company) during the Term.
12.4 Indemnification by Certain Individuals. Each of the Medical Personnel
who currently is or hereinafter becomes a Partner or Principal (each, an
"Indemnifying Party") shall, on a several basis, indemnify, hold harmless and
defend the Management Company, its officers, directors, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of medical services by the Indemnifying Party, (ii) any other acts
or omissions by the Indemnifying Party, (iii) any breach or failure to perform
any obligation under any of the Transaction Documents by the Indemnifying Party
and/or his or her agents during the Term. Each new Partner and Principal shall
execute a written statement agreeing to be bound by this Section 12.4.
12.5 Indemnification by Management Company. The Management Company shall
indemnify, hold harmless and defend the Medical Group, the Partners, Principals,
employees, agents and independent contractors from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees and expenses), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of (i) the performance of Management Services, (ii) any other acts or
omissions of the Management Company or its employees, including without
limitation any such acts or omissions that occurred prior to the date hereof,
(iii) the untruth or inaccuracy of any representation or warranty of the
Management Company contained in this Agreement (including any Schedule) or in
any of the other Transaction Documents or any certificate
-65-
<PAGE>
delivered by the Management Company in connection herewith, or (iv) any breach
of or failure to perform any obligation under this Agreement or the Transaction
Documents by the Management Company and/or its employees and/or their respective
agents and/or subcontractors (other than the Medical Group) during the Term.
12.6 Notice and Control of Litigation. If any claim is asserted in writing
against any person entitled to indemnification (each, an "Indemnitee") under
Section 12.3, 12.4, or 12.5, the Indemnitee shall give notice to the entity or
person required to provide such indemnification (each, an "Indemnitor") within
thirty (30) days of receipt of such written assertion of such claim. The
Indemnitor shall have the right to defend the claim and control the defense,
settlement and prosecution of any litigation. If the Indemnitor exercises its
right to undertake its defense of the claim, the Indemnitee shall have the right
to participate fully in such defense at its own expense. All parties shall
cooperate in the defense of such claims. Should the Indemnitee fail to notify
the Indemnitor within the time period specified above, the right to
indemnification shall terminate and be of no further force and effect with
respect to the subject matter of the required notice.
SECTION 13. Termination.
13.1 Termination by Medical Group. The Medical Group may terminate this
Agreement effective immediately by giving written notice of termination to the
Management Company (a) in the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by the Management
Company or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by the Management
Company, except for the filing of a petition in involuntary bankruptcy against
the Management Company which is dismissed within ninety (90) days thereafter (a
"Bankruptcy Event"), (b) in the event the Management Company shall default in
any material respect in the performance of any duty or obligation imposed upon
it by this Agreement, including without limitation the reporting requirements
specified in the last sentence of Section 3.5 of this Agreement, and the
Management Company shall not have taken reasonable action commencing curing of
such default within thirty (30) days after written notice thereof has been given
to the Management Company by the Medical Group or the Management Company does
not thereafter
-66-
<PAGE>
diligently prosecute such action to completion, or (c) in the event that any of
the representations and warranties made by the Management Company in Section 7
is untrue or misleading in any material respect, provided that the Medical Group
shall have previously given written notice to the Management Company describing
in reasonable detail the nature of the item in question and the Management
Company shall not have cured such matter within thirty (30) days of such notice.
13.2 Termination by Management Company. The Management Company may
terminate this Agreement effective immediately by giving written notice of
termination to the Medical Group (a) in the event of a Bankruptcy Event relating
to the Medical Group, (b) in the event the Medical Group shall default in any
material respect in the performance of any duty or obligation imposed upon it by
this Agreement and the Medical Group shall not have taken reasonable action
commencing curing of such default within thirty (30) days after written notice
thereof has been given to the Medical Group by the Management Company or the
Medical Group does not thereafter diligently prosecute such action to
completion, (c) in the event that any of the representations and warranties made
by the Medical Group in Section 6 is untrue or misleading in any material
respect, provided that the Management Company shall have previously given
written notice to the Medical Group describing in reasonable detail the nature
of the item in question and the Medical Group shall not have cured such matter
within thirty (30) days of such notice, or (d) in the event the Medical Group is
excluded from the Medicaid or Medicare program by action taken by the agency (or
its representative) that operates such program (including any voluntary
termination from such program under threat of action by any such agency or
representative) based on a breach or violation (or alleged breach or violation)
of the rules, regulations, or other requirements governing such program.
13.3 Termination by Medical Group or Management Company. The Medical Group
and the Management Company shall each have the right to terminate this Agreement
effective immediately by giving written notice of termination to the other party
pursuant to Section 27 of this Agreement.
-67-
<PAGE>
13.4 Effect of Termination.
(a) Upon the termination of this Agreement in accordance with the terms
hereof, neither party hereto shall have any further obligation or liability to
the other party hereunder, except as provided in Section 5.3(b), Section 13.5,
and Section 26 hereof, and except to pay in full and satisfy any and all
outstanding obligations of the parties accruing through the effective date of
termination. In order to accomplish the foregoing, the Annual Medical Group
Compensation Amount described in Section 5.3(b) shall be calculated on or before
the end of the fourth month following the termination date, rather than on or
before April 30 as specified in Section 5.3(b), and the computation made under
such section shall be made with respect to the portion of the year ending on the
termination date (if the termination date is other than December 31). In making
such computation, all Collections during January, February, and March of such
year shall be excluded, and all Collections during the three-month period
following termination shall be included. Additionally, any payment required
under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days
after the date by which the foregoing calculation is to be made, rather than on
May 15.
(b) Upon termination of this Agreement, the Management Company agrees to
deliver to the Medical Group upon request by the Medical Group, a Financing
Statement amending the terms of any Financing Statement filed with the Secretary
of State of the state in which the principal place of business of the Medical
Group is located, excluding from the collateral thereunder any accounts
receivable generated after the date of termination of this Agreement.
13.5 Repurchase of Assets. Promptly following termination of this Agreement
for any reason, the Medical Group shall have the option, exercisable at any time
prior to such termination or within thirty (30) days after such termination, to
purchase, assume, and accept from the Management Company, at such price and upon
such terms as may be agreed upon by the parties -- or, if the parties are unable
to agree, at fair market value, determined in the manner set forth below -- all
of the following items which are used in connection with the professional
practice and related activities of the Medical Group and which, in the case of
items
-68-
<PAGE>
(a), (b), (c) and (d), are physically located in any of the offices of the
Medical Group, subject to any required consent from any third party having an
interest therein:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office equipment owned
by the Management Company;
(c) the Management Company's rights and interests in any equipment leased
by the Management Company, subject to the Medical Group's assumption
of the obligations accruing thereunder after the date of termination
of this Agreement;
(d) the supplies owned by the Management Company;
(e) the Management Company's rights and interests under all of the Office
Leases, subject to the Medical Group's assumption of the obligations
accruing thereunder after the date of termination of this Agreement;
and
(f) the deposits of the Management Company relating to the Medical Group.
Fair market value of the above described assets shall be determined by an
independent appraiser mutually agreed upon by the Medical Group and the
Management Company; provided, however, that if the Medical Group and the
Management Company are unable to agree upon such an appraiser, each of the
parties shall select an appraiser and the two appraisers thus selected shall
select a third appraiser. All of the appraisers shall appraise the assets, and
for purposes of determining the purchase price, the highest and lowest
appraisals shall be disregarded, and the remaining appraisal shall be used.
13.6 Phase II. For purposes of this Agreement, the commencement date of
"Phase II" means the earlier of the following:
-69-
<PAGE>
(a) the date on which the Management Company files a Preliminary
Prospectus for the initial public offering of its stock with the
Securities and Exchange Commission; or
(b) the first day of the month next following the first period of twelve
(12) consecutive calendar months for which Aggregate Group Collections
("AGC") equals or exceeds Sixty-Five Million Dollars ($65,000,000),
where AGC means the sum of the following:
(i) the Collections of the Medical Group; provided, however, that
with respect to any physician who joins the Medical Group after
the date hereof and before the end of the third month of the
above- described twelve-month period, the collections
attributable to such physician for purposes of this computation
shall be computed by determining the amount of such collections
commencing on the first day of the fourth month after the
physician begins performing professional services for or with the
Medical Group and ending on the last day of the above-described
twelve (12) month period, and then annualizing the amount thus
determined; plus
(ii) the aggregate amount of the total actual collections of all other
medical groups which have entered into management services
agreements ("MSAs") with the Management Company (including any
such agreement that is to become operational upon the
consummation of the Management Company's IPO); provided, however,
that with respect to any physician who joins any such medical
group during the first three months of the above-described
twelve-month period, the collections attributable to such
physician for purposes of this computation shall be computed by
determining the amount of such collections commencing on the
first day of the fourth month after the physician begins
performing professional
-70-
<PAGE>
services for or with such medical group and ending on the last
day of the above-described twelve-month period, and then
annualizing the amount thus determined; provided, further, that
in the event any MSA between the Management Company and a medical
group provides for a management fee that is other than ten
percent (10.0%) of gross collections, then the amount of
collections attributable to such medical group for purposes of
this computation shall be adjusted by multiplying the actual
amount of collections by a fraction, the numerator of which is
equal to such management fee percentage figure and the
denominator of which is ten (10). For example, if the MSA for
another medical group provides for a management fee of five
percent (5.0%) of the medical group's collections, then the
actual amount of such collections shall be adjusted by
multiplying such actual amount by 5/10, or 1/2. For purposes of
this computation, any portion of the management fee payable in
respect of Professional Practice Cost Savings (as described in
Schedule VI) or similar formulations applicable to any other
medical group shall be ignored.
SECTION 14. Rescission/Disengagement.
14.1 Seventh Anniversary of Agreement. Effective as of the seventh
anniversary (the "Effective Date") of the date hereof, the Medical Group, at its
option, may rescind this Agreement and disengage itself from further
participation in, and from all of its obligations under, this Agreement,
pursuant to the terms and conditions set forth in Section 14.2 hereof.
14.2 Rescission/Disengagement by Medical Group.
(a) Notice and Effective Date. The option conferred under Section 14.1
hereof may be exercised by the Medical Group by giving written notice of
rescission/disengagement to the Management Company not less than thirty (30)
days prior to the Effective Date, subject to the Medical Group's compliance with
the provisions of Sections 14.2(c) and 14.2(d) below.
-71-
<PAGE>
(b) Effect of Rescission/Disengagement. The effect of the rescission/
disengagement by the Medical Group pursuant to the provisions of this Section
14.2 shall be identical to the effect of termination as described in Section
13.4 of this Agreement.
(c) Repurchase of Assets. Within thirty (30) days following the Effective
Date of the rescission/disengagement by the Medical Group, the Management
Company shall, subject to the prior receipt of any required landlord and third
party consents, sell, transfer, convey, and assign to the Medical Group, and the
Medical Group shall purchase, assume, and accept from the Management Company,
the property described in Section 13.5 of this Agreement, in accordance with the
terms set forth in Section 13.5.
(d) Repayment of Consideration. On or before the Effective Date of the
rescission/disengagement, the Medical Group shall deliver to the Management
Company the following:
(i) Cash Consideration: The Medical Group shall not be obligated to
return any of the cash consideration received by the Medical Group or by
the Eligible Parties from the Management Company upon execution of this
Agreement.
(ii) Stock of the Management Company: All shares of stock of the
Management Company received by the Eligible Parties shall be returned and
redelivered to the Management Company. In the event any portion of the
shares to be returned and redelivered shall have been previously disposed
of by any of the Eligible Parties, the Fair Market Value (as defined in the
Restricted Stock Agreement) of such portion, determined as of the Effective
Date, shall be payable to the Management Company by cashier's check or by
wire transfer of good funds delivered to a depository institution
designated by the Management Company.
(e) Management Fee. The Management Company shall have no obligation to
return to the Medical Group any portion of the Management Fees paid by the
Medical Group under the terms of this Agreement.
-72-
<PAGE>
14.3 Waiver of Rescission/Disengagement Right. Notwithstanding anything
contained herein to the contrary, the parties hereto expressly agree and
acknowledge that if the Medical Group shall fail to deliver the notice of
rescission/disengagement referenced in Section 14.2 hereof within the time
period specified in Section 14.2, then the Medical Group shall be deemed to have
expressly and irrevocably waived its right to rescind and/or disengage from the
Management Services Agreement pursuant to the applicable provisions of Sections
14.1 and 14.2 hereof.
14.4 Continuation of Management Fees. The parties hereto acknowledge that
in the event this Agreement is terminated or rescinded (or the parties
disengage) pursuant to the provisions of Section 13 or Section 14 hereof, the
Management Company shall be entitled to all Management Fees otherwise payable
hereunder for all services provided to the Medical Group through and including
the date of such termination, rescission, or disengagement. This provision shall
survive any such termination, rescission, or disengagement, and for purposes
thereof, the parties agree that the transfer of funds provided for in Section
5.1 hereof shall continue until such time as the Management Company has
collected all Management Fees to which it is entitled.
SECTION 15. Non-Competition. In consideration of the premises contained
herein and the consideration to be received hereunder, and in consideration of
and as an inducement to the Management Company to consummate the transactions
contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition
provisions attached hereto as Schedule VIII, (b) agrees to require each of the
Eligible Parties to execute the Stockholder Non-Competition Agreement executed
by the Medical Group and the Management Company concurrently herewith (the
"Stockholder Non-Competition Agreement"), and (c) agrees to require each person
who after the date hereof becomes entitled to receive shares (or options to
receive shares) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute an agreement
substantially identical to the Stockholder Non-Competition Agreement.
-73-
<PAGE>
SECTION 16. Obligations of the Management Company.
16.1 No Practice of Medicine. The Medical Group and the Management Company
acknowledge that certain federal and state statutes severely restrict or
prohibit the Management Company from providing medical services. Accordingly,
during the Term, the Management Company shall not provide or otherwise engage in
services or activities which constitute the practice of medicine, as defined in
applicable state or federal law, except in compliance therewith.
16.2 No Interference with Professional Judgment. Without in any way
limiting Section 16.1 hereof, during the Term, the Management Company shall not
interfere with the exercise of professional judgment by any physician or other
licensed health care professional who is a Partner or Principal, or who is an
employee or contractor of the Medical Group, nor shall the Management Company
interfere with, control, direct, or supervise any physician or other licensed
health care professional in connection with the provision of professional
medical services. The foregoing shall not preclude the Management Company from
assisting in the development of professional protocols and monitoring compliance
with policies and procedures that have been instituted in accordance with this
Agreement.
16.3 Compensation Committee. The Management Company shall establish a
compensation committee (the "Compensation Committee") which is comprised of
members of the Board of Directors of the Management Company who are not
employees of the Management Company, and the compensation payable to the five
(5) most highly compensated management employees of the Management Company shall
be subject to the approval of the Compensation Committee; provided, however,
that the obligations under this Section 16.3 shall become null and void upon the
consummation of an initial public offering of the Management Company's common
stock.
16.4 Budgets. The Board of Directors of the Management Company shall
establish budgets for the expenses of the Management Company, and the approval
of the Board of Directors shall be required in connection with any expenses in
excess of any such approved budget; provided, however, that the obligations
under this Section 16.4 shall become null and
-74-
<PAGE>
void upon the consummation of an initial public offering of the Management
Company's common stock.
16.5 Contracts with Venture Capital Firms. The Management Company shall not
enter into any consulting agreement or other contract or arrangement with any
venture capital firm (or affiliate thereof) providing financing to the
Management Company under which compensation will be payable to any such venture
capital firm (or affiliate thereof); provided, however, that the obligations
under this Section 16.5 shall become null and void upon the consummation of an
initial public offering of the Management Company's common stock.
16.6 Convertible Preferred Stock. The Management Company shall not sell any
common stock or take any other action the effect of which sale or other action
would be to give a holder of convertible preferred stock the right to convert
any number of shares of convertible preferred stock into a greater number of
shares of common stock; provided, however, that the obligations under this
Section 16.6 shall become null and void upon the consummation of an initial
public offering of the Management Company's common stock.
16.7 Initial Public Offering. The Management Company shall not authorize an
initial public offering of its common stock for less than Four Dollars ($4.00)
per share (appropriately adjusted to reflect any stock dividends, stock splits,
or similar transaction). Without waiving or limiting any other right or remedy
available to the Medical Group for breach of this covenant by the Management
Company, in the event of an initial public offering of the Management Company's
common stock at less than Four Dollars ($4.00) per share, if the Medical Group
so elects by written notice to the Management Company, such initial public
offering shall not be considered as the initial public offering of the
Management Company's common stock for any purpose under this Agreement or any of
the other Transaction Documents. The Management Company shall disclose this
provision to any potential underwriter in connection with the initial public
offering of the Management Company's common stock.
-75-
<PAGE>
SECTION 17. Assignment.
17.1 Generally. The Management Company shall have the right to assign its
rights and delegate its obligations hereunder to any affiliate and to assign its
rights hereunder to any lending institution from which the Management Company or
any affiliate obtains financing for security purposes or as collateral. Except
as set forth in this Section 17, neither the Management Company nor the Medical
Group shall have the right to assign its respective rights or delegate its
respective obligations hereunder without the prior written consent of the other;
provided, however, that after the consummation of an initial public offering of
the Management Company's common stock, the Medical Group's consent shall not be
required in connection with a sale of all or substantially all of the stock or
assets of the Management Company or the merger, consolidation, or reorganization
of the Management Company.
17.2 Assignment to Partners. Notwithstanding the provisions of Section 17.1
hereof, the Medical Group shall have the right to assign all of its rights and
delegate all of its obligations, to the extent that such rights and obligations
relate to any particular Partner, to such Partner (or to a professional medical
corporation of which such Partner is the sole shareholder), provided that such
Partner (or professional corporation) enters into a new Management Services
Agreement with the Management Company substantially in the form of this
Agreement, together with such related agreements, documents, and instruments as
may be necessary or appropriate, pursuant to which such Partner (or professional
corporation) assumes all of the obligations to which such Partner was bound as a
Partner under this Agreement and the other Transaction Documents.
SECTION 18. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed sufficient if
personally delivered, sent by nationally-recognized overnight courier, or by
registered or certified mail, return receipt requested and postage prepaid,
addressed as follows:
-76-
<PAGE>
If to the Management Company:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
If to the Medical Group:
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, and (c) in the case of mailing, on the third business day following
the day on which the piece of mail containing such communication is posted.
SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to
the benefit of any successors to or permitted assigns of the Management Company
and of the Medical Group.
-77-
<PAGE>
SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
California without giving effect to the laws and principles thereof, or of any
other jurisdiction, which would direct the application of the laws of another
jurisdiction. The parties to this Agreement agree that jurisdiction and venue in
any action brought by any party hereto pursuant to this Agreement shall lie in
any Federal or state court located in the State of California. By execution and
delivery of this Agreement, the parties hereto irrevocably submit to the
nonexclusive jurisdiction of such courts for themselves and in respect of their
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in such court, and hereby waive any objection that such
court is an improper or inconvenient forum for the resolution of such action.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any other jurisdiction. The parties hereto shall act in good faith and shall
refrain from taking any actions to circumvent or frustrate the provisions of
this Agreement.
SECTION 21. Headings. Section headings are used for convenience only and
shall in no way affect the construction of this Agreement.
SECTION 22. Entire Agreement; Amendments. This Agreement and the various
exhibits hereto and thereto, contain the entire understanding of the parties
with respect to its subject matter, and neither this Agreement nor any part of
it may in any way be altered, amended, extended, waived, discharged or
terminated except by a written agreement signed by the Medical Group and the
Management Company; provided, however, that in the case of any amendment
affecting Section 12.4, the signatures of all of those persons who have agreed
to such provision as indicated on the signature page hereof, and all of those
persons who hereafter sign a written agreement agreeing to be bound by the terms
of Section 12.4 hereof, shall also be required in order for such amendment to be
effective.
SECTION 23. Severability. The provisions of this Agreement shall be deemed
severable, and if any portion shall be held invalid, illegal or unenforceable
for any reason, the remainder of this Agreement shall be effective and binding
upon the parties.
-78-
<PAGE>
SECTION 24. Counterparts. This Agreement may be executed in counterparts,
and each such counterpart shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement.
SECTION 25. Waivers. Any party to this Agreement may, by written notice to
the other party, waive any provision of this Agreement. The waiver by any party
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach.
SECTION 26. Survival of Termination. Notwithstanding anything contained
herein to the contrary, Sections 3.3(f), 3.6 (to the extent provided in the last
sentence thereof), 11, 12, 13.4, 13.5, 14, 15(a), 18, 19, 20, 23, 25, 27 and
this Section 26 shall survive any expiration or termination of this Agreement.
SECTION 27. Contract Modification for Prospective Legal Events. In the
event any state or Federal laws or regulations, now existing or enacted or
promulgated after the date hereof, are interpreted by judicial decision, a
regulatory agency or legal counsel of both parties in such a manner as to
indicate that the structure of this Agreement may be in violation of such laws
or regulations, the Medical Group and the Management Company shall amend this
Agreement as necessary to avoid such violation. To the maximum extent possible,
any such amendment shall preserve the underlying economic and financial
arrangements between the Medical Group and the Management Company. If an
amendment is not possible, either party shall have the right to terminate this
Agreement. Any dispute between the parties hereto arising under this Section 27
with respect to whether this Agreement violates any state or Federal laws or
regulations shall be jointly submitted by the parties and finally settled by
binding arbitration in Los Angeles, California, pursuant to the arbitration
rules of the National Health Lawyers Association Alternative Dispute Resolution
Service. Arbitration shall take place before one arbitrator appointed in
accordance with such rules. The governing law of the arbitration shall be the
law set forth in Section 21. Any decision rendered by the arbitrator shall
clearly set forth the factual and legal basis for such decision. The decision
rendered by the arbitrator shall be non-appealable and enforceable in any court
having jurisdiction thereof. The administrative costs
-79-
<PAGE>
of the arbitration and the arbitrator fees shall be equally borne by the
parties. Each party shall pay its own legal costs and fees in connection with
such arbitration.
* * *
-80-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
SUN VALLEY ORTHOPAEDIC SURGEONS
By: ROBERT O. WILSON, M.D., P.C.,General Partner
By: /s/Robert O. Wilson, M.D.
--------------------------------------
Robert O. Wilson, M.D., President
By: /s/JON EDWIN GELSEY, M.D.
------------------------------------------
JON EDWIN GELSEY, M.D., General Partner
By: /s/MARTIN G. STERUSKY, M.D.
------------------------------------------
MARTIN G. STERUSKY, M.D., General Partner
By: /s/ROBERT WALDRIP, M.D.
------------------------------------------
ROBERT WALDRIP, M.D., General Partner
BONE, MUSCLE AND JOINT, INC.
By: /s/Naresh Nagpal, M.D.
------------------------------------------
Naresh Nagpal, M.D., President
ACCEPTED AND AGREED
AS TO AND SECTION 12.4
INDEMNIFYING PARTIES
/s/Robert O. Wilson, M.D.
- ---------------------------------
Robert O. Wilson, M.D.
/s/Jon Edwin Gelsey, M.D.
- ---------------------------------
Jon Edwin Gelsey, M.D.
/s/Martin G. Sterusky, M.D.
- ---------------------------------
Martin G. Sterusky, M.D.
/s/Robert Waldrip, M.D.
- ---------------------------------
Robert Waldrip, M.D.
-81-
<PAGE>
APPROVAL BY PRINCIPAL
The undersigned individual (who is the sole shareholder of a professional
corporation which is a Partner in the Medical Group) hereby agrees,
individually, to those provisions contained in this Agreement which by their
terms are expressly applicable to "Principals."
/s/Robert O. Wilson, M.D.
- ---------------------------------
Robert O. Wilson, M.D.
-82-
<PAGE>
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
SUN VALLEY ORTHOPAEDIC SURGEONS
Effective as of July 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Article Page
- ------- ----
1. Transfer of Purchased Assets, Assumption of Liabilities and
Related Matters........................................................ 2
1.1 Transfer of Assets............................................. 2
1.2 Assets Not Being Transferred................................... 2
1.3 Liabilities Being Assumed...................................... 2
1.4 Liabilities Not Being Assumed.................................. 3
1.5 Instruments of Conveyance and Transfer, Etc.................... 3
1.6 Right of Endorsement, Etc...................................... 3
1.7 Further Assurances............................................. 4
1.8 Assignment of Leases........................................... 4
2. Purchase Price; Allocation.............................................. 5
2.1 Purchase Price; Payment........................................ 5
2.2 Allocation of Purchase Price................................... 5
2.3 Accounts Receivable Payment.................................... 5
3. Representations and Warranties.......................................... 6
3.1 Representations and Warranties of the Seller................... 6
3.2 Representations and Warranties of the Buyer.................... 9
4. Conditions of Closing................................................... 10
4.1 Conditions of Each Party's Obligations......................... 10
4.2 Conditions of Obligations of the Buyer......................... 11
4.3 Conditions of Obligations of the Seller........................ 12
4.4 Related Agreements............................................. 13
5. Closing................................................................. 14
5.1 Closing Date................................................... 14
5.2 Closing Transactions........................................... 14
5.3 Post-Closing Obligations....................................... 15
6. Indemnification......................................................... 15
6.1 Definitions.................................................... 15
6.2 Indemnification Generally...................................... 17
6.3 Assertion of Claims............................................ 17
6.4 Notice and Defense of Third Party Claims....................... 17
6.5 Survival of Representations, Warranties and Covenants.......... 19
7. Non-Competition......................................................... 19
8. Repurchase of Assets.................................................... 19
-i-
<PAGE>
9. Amendment, Modification and Waiver..................................... 19
10. Miscellaneous.......................................................... 20
10.1 Transfer Taxes, Etc........................................... 20
10.2 Entire Agreement.............................................. 20
10.3 Descriptive Headings.......................................... 20
10.4 Notices....................................................... 20
10.5 Counterparts.................................................. 21
10.6 Bulk Sales Compliance......................................... 21
10.7 Governing Law; Jurisdiction................................... 21
10.8 Attorneys' Fees............................................... 22
10.9 Benefits of Agreement......................................... 22
10.10 Pronouns...................................................... 22
SCHEDULES
- ---------
1.1(a) - Medical Equipment
1.1(b) - Furniture, Furnishings, Trade Fixtures, and Office Equipment
1.1(c) - Equipment Leases
1.1(d) - Supplies
1.1(e) - Accounts Receivable
1.1(f) - Office Leases
1.1(g) - Deposits
1.1(h) - Additional Items
2.2 - Allocation of Purchase Price
3.1(c) - Claims
3.1(d) - Litigation
EXHIBITS
- --------
Exhibit A - Bill of Sale
Exhibit B - Financing Statement
-ii-
<PAGE>
Definitions
-----------
The following terms which may appear in more than one Section of this
Agreement are defined at the following pages:
Term Page
- ---- ----
A/R Collections ........................................................... 5
A/R Initial Payment Amount ................................................ 5
Accounts Receivable ....................................................... 2
Affiliate ................................................................. 15
Agreement ................................................................. 1
Assignment of Office Lease ................................................ 13
Assumed Obligations ....................................................... 3
Business Day .............................................................. 21
Buyer .................................................................. 1
Buyer Indemnification Event ............................................... 15
Buyer Indemnified Persons ................................................. 16
Claims .................................................................. 7
Closing .................................................................. 14
Closing Date .............................................................. 14
Consent of Landlord ....................................................... 13
Determination Date ........................................................ 5
Excluded Assets ........................................................... 2
Excluded Obligations ...................................................... 3
Indemnified Persons ....................................................... 16
Indemnifying Person ....................................................... 16
Losses .................................................................. 16
Management Services Agreement ............................................. 1
Medical Equipment Master Lease ............................................ 14
Medical Group Governance Documents ........................................ 6
Office Sublease ........................................................... 13
Partner .................................................................. 1
Permitted Liens ........................................................... 8
Principal ................................................................. 1
Provider Account Agreement ................................................ 13
Purchase Price ............................................................ 5
Purchased Assets .......................................................... 2
Related Agreements ........................................................ 11
Restricted Stock Agreement ................................................ 13
Seller .................................................................. 1
Seller Indemnification Event .............................................. 16
Seller Indemnified Persons ................................................ 17
Statement of Allocation ................................................... 5
Stockholder Non-Competition Agreement ..................................... 13
Subject Business .......................................................... 1
-iii-
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is entered into as of July
1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation
(the "Buyer"), and SUN VALLEY ORTHOPAEDIC SURGEONS, an Arizona general
partnership (the "Seller").
A. The Seller is an Arizona general partnership comprised of individual
physicians and Arizona professional corporations, and is engaged in the business
(the "Subject Business") of providing orthopedic medical and surgical services
and related medical and ancillary services to patients. (Each partner in the
Medical Group is referred to herein as a "Partner," and each shareholder of a
professional corporation that is a Partner is referred to herein as a
"Principal.")
B. The Buyer is engaged in the business of providing management,
administrative, financial, marketing, information technology, and related
services to professional medical organizations.
C. Concurrently herewith, the Seller and the Buyer are entering into a
Management Services Agreement (the "Management Services Agreement"), pursuant to
which the Buyer will furnish to the Seller management, administrative, and
related services.
D. The Seller desires to sell, transfer, convey and assign to the Buyer,
and the Buyer desires to purchase from the Seller, certain of the assets,
properties, interests in properties and rights of the Seller used in the Subject
Business upon the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereby agree as follows:
-1-
<PAGE>
1. Transfer of Purchased Assets, Assumption of Liabilities and Related
Matters.
1.1 Transfer of Assets. On the terms and subject to the conditions of this
Agreement, at the Closing (as hereinafter defined), the Seller shall sell,
transfer, convey and assign to the Buyer, and the Buyer shall purchase, assume,
and accept from the Seller, the following assets, properties, interests in
properties and rights of the Seller (the "Purchased Assets"), as the same shall
exist immediately prior to the Closing, free and clear of all Claims (as defined
below) (except Permitted Liens (as defined below)):
(a) the medical equipment owned by the Seller and listed on Schedule
1.1(a);
(b) the furniture, furnishings, trade fixtures, and office equipment
owned by the Seller and listed on Schedule 1.1(b);
(c) the Seller's rights and interests under any equipment leases
identified on Schedule 1.1(c), subject to the Buyer's assumption of the
obligations accruing thereunder as provided in Section 1.3;
(d) the supplies described on Schedule 1.1(d);
(e) the accounts receivable described on Schedule 1.1(e) (the
"Accounts Receivable");
(f) the Seller's rights and interests under the office leases
identified in Schedule 1.1(f), subject to the Buyer's assumption of the
obligations accruing thereunder as provided in Section 1.3;
(g) the deposits identified on Schedule 1.1(g); and
(h) any additional items identified on Schedule 1.1(h).
1.2 Assets Not Being Transferred. All assets, properties, interests in
properties, and rights of the Seller not expressly identified in Section 1.1 or
the schedules referenced therein (the "Excluded Assets") are expressly excluded
from the assets of the Seller being sold, assigned, or otherwise transferred to
the Buyer.
1.3 Liabilities Being Assumed. Except as otherwise provided herein and
subject to the terms and conditions of this Agreement, simultaneously with the
sale, transfer,
-2-
<PAGE>
conveyance and assignment to the Buyer of the Purchased Assets, the Buyer shall
assume, and hereby agrees to pay when due, those liabilities accruing after the
Closing Date under any equipment leases identified in Schedule 1.1(c) and under
any office lease identified in Schedule 1.1(f) (the "Assumed Obligations").
1.4 Liabilities Not Being Assumed. The Buyer is not assuming any
liabilities or obligations of the Seller (fixed or contingent, known or unknown,
matured or unmatured) whatsoever other than the Assumed Obligations. For
convenience of reference, all liabilities and obligations of the Seller not
being assumed by the Buyer are collectively referred to as the "Excluded
Obligations."
1.5 Instruments of Conveyance and Transfer, Etc. At the Closing, the Seller
shall deliver (or cause to be delivered) to the Buyer such deeds, bills of sale,
endorsements, assignments and other good and sufficient instruments of sale,
transfer, conveyance and assignment as shall be necessary to sell, transfer,
convey and assign to the Buyer, in accordance with the terms hereof, title to
the Purchased Assets, free and clear of all Claims (except Permitted Liens),
including, without limitation, the items required to be delivered by Seller
pursuant to Section 5.2 hereof. Simultaneously therewith, the Seller shall take
all steps as may be reasonably required to put the Buyer in possession and
operating control of the Purchased Assets.
1.6 Right of Endorsement, Etc. Effective upon the Closing, the Seller
hereby constitutes and appoints the Buyer, its successors and assigns, the true
and lawful attorney-in-fact of the Seller with full power of substitution, in
the name of the Buyer, or the name of the Seller, on behalf of and for the
benefit of the Buyer, to collect all accounts receivable assigned to the Buyer
as provided herein, to endorse, without recourse, checks, notes and other
instruments received in payment of such accounts receivable in the name of the
Seller, and to execute in the name of the Seller such financing statements,
continuation statements, and other documentation as may be necessary or
appropriate to evidence, protect, or perfect the Buyer's interest in and with
respect to such accounts receivable, and to institute and prosecute, in the name
of the Seller or otherwise, all proceedings which the Buyer may deem proper in
order to assert or enforce
-3-
<PAGE>
any claim, right or title of any kind in or to the Purchased Assets (other than
the Accounts Receivable), to defend and compromise any and all actions, suits or
proceedings in respect of any of the Purchased Assets (other than the Accounts
Receivable) and to do all such acts and things in relation thereto as the Buyer
may deem advisable. The foregoing powers are coupled with an interest and shall
be irrevocable by the Seller, directly or indirectly, whether by the dissolution
of the Seller or in any manner or for any reason.
1.7 Further Assurances. The Seller shall pay or cause to be paid to the
Buyer promptly any amounts which shall be received by the Seller after the
Closing which constitute Purchased Assets, including all amounts paid to the
Seller on account of the Accounts Receivable. The Seller shall, at any time and
from time to time after the Closing, upon the reasonable request of the Buyer,
execute, acknowledge, deliver and file, or cause to be executed, acknowledged,
delivered, and filed, and perform or cause to be performed, all such further
acts, transfers, conveyances, assignments or assurances as may reasonably be
required for better selling, transferring, conveying, assigning and assuring to
the Buyer, or for aiding and assisting in the collection of or reducing to
possession by the Buyer, any of the assets, properties, interests in properties
or rights being purchased by the Buyer hereunder. Any expenses incurred in
connection with the foregoing shall be borne equally by the Buyer and the
Seller.
1.8 Assignment of Leases. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement shall not constitute an agreement or
attempted agreement to assign any office or equipment lease if an attempted
assignment thereof, without the consent of any other party thereto, would
constitute a breach thereof or in any way affect the rights of the Buyer or the
Seller thereunder. The Seller shall use its best efforts, and the Buyer shall
cooperate with the Seller, to obtain the consent of any such third party to the
assignment thereof to the Buyer. If such consent is not obtained, the Seller
shall cooperate with the Buyer in any arrangements reasonably necessary or
desirable to provide for the Buyer the benefits (together with the obligations
to perform) thereunder.
-4-
<PAGE>
2. Purchase Price; Allocation.
2.1 Purchase Price; Payment. The purchase price (the "Purchase Price") to
be paid for the Purchased Assets shall consist of the following:
(a) the sum of One Hundred Six Thousand Five Hundred Sixty-Four
Dollars and Seventy-Five Cents ($106,564.75); and
(b) the sum of Three Hundred Seven Thousand Dollars ($307,000) (the
"A/R Initial Payment Amount"), subject to adjustment in accordance with
Section 2.3.
2.2 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Purchased Assets in a statement (the "Statement of Allocation")
reflecting the allocation set forth in Schedule 2.2 attached hereto. The A/R
Initial Payment Amount represents the parties' best estimate, as of the date of
this Agreement, of the total collectible amount of the accounts receivable
assigned under this Agreement. The parties shall complete their respective tax
returns for the period which includes the Closing Date in a manner that is
consistent with the Statement of Allocation.
2.3 Accounts Receivable Payment. The portion of the Purchase Price
specified in Section 2.1(b) is subject to adjustment as follows:
(a) Within fifteen (15) days after the date which occurs one year
after the date hereof (the "Determination Date"), the Buyer shall furnish
to the Seller a statement setting forth the amount of collections received
by the Buyer in payment of the Accounts Receivable as of the Determination
Date (the "A/R Collections"), including detail of write-offs of any of the
Accounts Receivable, the remaining outstanding balance of the Accounts
Receivable, and any other detail relating thereto as the Seller may
reasonably request. If the amount of A/R Collections exceeds the A/R
Initial Payment Amount, the Buyer shall promptly pay to the Seller an
amount equal to the amount of such excess. If the A/R Initial Payment
Amount exceeds the amount of the A/R Collections, the Seller shall promptly
pay to the Buyer an amount equal to such excess.
-5-
<PAGE>
(b) Commencing with the month next following the month in which the
Determination Date occurred, the Buyer shall pay to the Seller on a monthly
basis, within fifteen (15) days after the end of each month, an amount
equal to the actual amount of collections received by the Buyer during the
prior month in respect of any of the then-outstanding Accounts Receivable,
such payments to continue until the Accounts Receivable have been collected
in full or agreed by the parties to be written off. It is the intention of
the parties that an amount equal to any and all payments received by the
Buyer in respect of the Accounts Receivable be paid by the Buyer to the
Seller.
(c) All payments by patients and third party payors shall be accounted
for on a first-in-first-out basis unless any such payment is identified as
a payment in respect of a particular invoice or otherwise is designated as
payment of a particular invoice or for a particular service.
3. Representations and Warranties.
3.1 Representations and Warranties of the Seller. The Seller hereby
represents and warrants to the Buyer, as of the date hereof, as follows:
(a) Organization; Good Standing; Qualification and Power. The Seller
is a general partnership duly organized, validly existing and in good
standing under the laws of the State of Arizona and has all requisite power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted and as proposed to be conducted, to execute
and deliver this Agreement, a Bill of Sale in the form attached hereto as
Exhibit A (the "Bill of Sale"), and a Financing Statement in the form
attached hereto as Exhibit B (the "Financing Statement") (collectively, the
"Transaction Documents"), to perform its obligations thereunder, and to
consummate the transactions contemplated thereby. The Seller has delivered
to the Buyer a true and correct copy of its partnership agreement,
including all amendments thereto (the "Medical Group Governance Documents")
as in effect on the date hereof.
(b) Authority. The execution, delivery and performance of the
Transaction Documents, and the consummation of the transactions
contemplated hereby and
-6-
<PAGE>
thereby have been duly and validly authorized by all necessary corporate action
on the part of the Seller. The Transaction Documents have been duly and validly
executed and delivered by the Seller and constitute legal, valid and binding
obligations of the Seller enforceable in accordance with their respective terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally. Neither the execution, delivery or performance by the Seller of the
Transaction Documents, nor the consummation by the Seller of the transactions
contemplated thereby, nor compliance by the Seller with any provision thereof
will (i) conflict with or result in a breach of any provision of the Medical
Group Governance Documents, (ii) cause a default (with due notice, lapse of time
or both), or give rise to any right of termination, cancellation or
acceleration, under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument, obligation or
agreement to which the Seller is a party or by which it or any of its respective
properties or assets may be bound or (iii) violate any law, statute, rule or
regulation or order, writ, judgment, injunction or decree of any court,
administrative agency or governmental body applicable to the Seller or any of
its respective properties or assets. No permit, authorization, consent or
approval of or by, or any notification of or filing with, any person
(governmental or private) is required in connection with the execution, delivery
or performance by the Seller of the Transaction Documents or the consummation of
the transactions contemplated thereby.
(c) Title to Assets, Properties, Interests in Properties and Rights and
Related Matters.
(i) The Seller has good and valid title to all of the Purchased
Assets, free and clear of all security interests, judgments, liens,
pledges, claims, charges, escrows, encumbrances, easements, options, rights
of first refusal, rights of first offer, mortgages, indentures, security
agreements or other agreements, arrangements, contracts, commitments,
understandings or obligations, whether written or oral and whether or not
relating in any way to credit or the borrowing of money (collectively,
"Claims"), of any kind or character, except for (i) those Claims set forth
on Schedule 3.1(c) and (ii) Permitted Liens.
-7-
<PAGE>
(ii) There does not exist any condition which materially interferes
with the economic value or use (consistent with the Seller's past practice)
of any tangible personal property included in the Purchased Assets and such
property is in good operating condition and repair, reasonable wear and
tear excepted.
(iii) The Seller has the complete and unrestricted power and the
unqualified right to sell, transfer, convey and assign the Purchased
Assets, and the Transaction Documents are sufficient to sell, transfer,
convey and assign to the Buyer all right, title and interest of the Seller
in and to the Purchased Assets, free and clear of all Claims (other than
Permitted Liens) and to vest in the Buyer good and valid title thereto.
(iv) As used in this Agreement, "Permitted Liens" shall mean (i) any
lien for current taxes not yet due and payable, and (ii) liens of carriers,
warehousemen, mechanics and materialmen created in the ordinary course of
the Subject Business for amounts not yet due and payable which do not
materially detract from the value or impair the use of any property or
assets.
(d) Litigation. Except as set forth on Schedule 3.1(d), there are no (i)
actions, suits, claims, investigations or legal or administrative or arbitration
proceedings pending or, to the best knowledge of the Seller, threatened against
the Seller, against any Partner or Principal in connection with the Subject
Business, or against the Purchased Assets or the Subject Business, whether at
law or in equity, or before or by any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality or
(ii) judgments, decrees, injunctions or orders of any court, governmental
department, commission, agency, instrumentality or arbitrator against the Seller
or affecting the Purchased Assets or the Subject Business. The Seller has
delivered to the Buyer all documents and correspondence relating to matters
referred to in said Schedule 3.1(d).
(e) Compliance; Governmental Authorizations. The Seller has complied in all
material respects with all applicable Federal, state, local or foreign laws,
ordinances, regulations and orders. The Seller has all Federal, state, local and
foreign
-8-
<PAGE>
governmental licenses and permits necessary in the conduct of the Subject
Business the lack of which would have a material adverse effect on the Buyer's
ability to operate the Subject Business after the Closing on substantially the
same basis as presently operated, such licenses and permits are in full force
and effect, no violations are or have been recorded in respect of any thereof
and no proceeding is pending or threatened to revoke or limit any thereof. None
of such licenses and permits shall be affected in any material respect by the
transactions contemplated hereby.
(f) Disclosure. Neither this Agreement (including the Exhibits and
Schedules attached hereto) nor any other document, certificate or written
statement furnished to the Buyer by or on behalf of the Seller in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading.
3.2 Representations and Warranties of the Buyer. The Buyer represents and
warrants to the Seller, as of the date hereof, as follows:
(a) Organization, Good Standing and Power. The Buyer (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, (ii) has all requisite corporate power and
authority to own, lease and operate its properties, to carry on its
business as now being conducted, to execute and deliver this Agreement, to
perform its obligations hereunder, and to consummate the transactions
contemplated hereby, and (iii) is duly qualified and in good standing to do
business in all jurisdictions in which the failure to be so qualified and
in good standing to do business could reasonably be expected to have a
material adverse effect on the business, assets, operations, results of
operations or affairs of the Buyer.
(b) Authority. The execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby,
have been duly and validly authorized by all necessary corporate action on
the part of the Buyer. This Agreement has been duly and validly executed
and delivered by the Buyer, and constitutes the valid and binding
obligation of the Buyer, enforceable in accordance with its terms except as
enforcement
-9-
<PAGE>
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the rights of creditors generally. Neither the
execution, delivery or performance by the Buyer of this Agreement, nor the
consummation by the Buyer of the transactions contemplated hereby, nor
compliance by the Buyer with any provision hereof, will (i) conflict with or
result in a breach of any provisions of the Certificate of Incorporation or
By-laws of the Buyer, (ii) cause a default (with due notice, lapse of time or
both), or give rise to any right of termination, cancellation or acceleration,
under any of the terms, conditions or provisions of any material note, bond,
lease, mortgage, indenture, license or other instrument, obligation or agreement
to which the Buyer is a party or by which it or any of its properties or assets
is or may be bound or (iii) violate any law, statute, rule or regulation or
order, writ, judgment, injunction or decree of any court, administrative agency
or governmental body applicable to the Buyer or any of its properties or assets.
No permit, authorization, consent or approval of or by, or any notification of
or filing with, any person (governmental or private) is required in connection
with the execution, delivery or performance by the Buyer of this Agreement or
the consummation by the Buyer of the transactions contemplated hereby.
(c) Disclosure. Neither this Agreement (including the Exhibits and
Schedules attached hereto) nor any other document, certificate or written
statement furnished to the Seller by or on behalf of the Buyer in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading.
4. Conditions of Closing.
4.1 Conditions of Each Party's Obligations. The obligations of the Seller
to sell the Purchased Assets, and of the Buyer to purchase the Purchased Assets,
are subject to the satisfaction of the following conditions unless waived in
writing (to the extent such conditions can be waived) by the Seller and the
Buyer:
(a) Approvals. All authorizations, consents, orders or approvals of,
or declarations or filings with, or expiration of waiting periods imposed
by, any governmental
-10-
<PAGE>
agency or authority necessary for the consummation of the transactions
contemplated hereby shall have been filed, occurred or been obtained.
(b) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the
consummation of transactions contemplated hereby shall have been issued by
any Federal or state court and remain in effect. Each party agrees to use
its best efforts to have any such injunction or order lifted.
(c) Legislation. No Federal, state, local or foreign statute, rule or
regulation shall have been enacted which prohibits, restricts or delays the
consummation of the transactions contemplated by this Agreement or any of
the conditions to the consummation of such transactions.
(d) Related Agreements. Each of the related agreements identified in
Section 4.4 hereof (collectively, the "Related Agreements") shall have been
fully executed and delivered prior to or at the Closing by all of the
parties required to execute and deliver such agreements.
4.2 Conditions of Obligations of the Buyer. The obligation of the Buyer to
purchase the Purchased Assets is subject to the satisfaction of the following
conditions unless waived in writing (to the extent such conditions can be
waived) by the Buyer:
(a) Representations and Warranties. The representations and warranties
of the Seller set forth in Section 3.1 shall in each case be true and
correct in all material respects as of the date of this Agreement and as of
the Closing as though made at and as of the Closing.
(b) Performance of Obligations. The Seller shall have performed all
obligations required to be performed by it under this Agreement prior to
and at the Closing.
(c) Authorization. All action necessary to authorize the execution,
delivery and performance of this Agreement by the Seller and the
consummation of the
-11-
<PAGE>
transactions contemplated hereby and thereby shall have been duly and
validly taken by the Seller and the Seller shall have full power and right
to consummate the transactions contemplated hereby and thereby.
(d) Consents and Approvals. The Seller shall have delivered to the
Buyer duly executed copies of (i) consents to the assignment of any office
leases and equipment leases listed on Schedules 1.1(c) and 1.1(f) and (ii)
all other approvals, if any, required by this Agreement or the Schedules,
in each case in form and substance satisfactory to the Buyer and counsel to
the Buyer.
(e) Government Consents, Authorizations, Etc. All consents,
authorizations, orders or approvals of, and filings or registrations with,
any Federal, state, local or foreign governmental commission, board or
other regulatory body which are required for or in connection with the
execution and delivery by the Seller of this Agreement and the consummation
by the Seller of the transactions contemplated hereby shall have been
obtained or made.
4.3 Conditions of Obligations of the Seller. The obligation of the Seller
to sell the Purchased Assets to the Buyer is subject to the satisfaction of the
following conditions unless waived in writing (to the extent such conditions can
be waived) by the Seller:
(a) Representations and Warranties. The representations and warranties
of the Buyer set forth in Section 3.2 shall in each case be true and
correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made at and as of the Closing.
(b) Performance of Obligations. The Buyer shall have performed all
obligations required to be performed by it under this Agreement prior to
and at the Closing.
-12-
<PAGE>
(c) Authorization. All action necessary to authorize the execution,
delivery and performance of this Agreement by the Buyer and the
consummation of the transactions contemplated hereby shall have been duly
and validly taken by the Buyer.
(d) Consents and Approvals. The Seller shall have received duly
executed copies of (i) consents to the assignment of any office leases and
equipment leases listed on Schedules 1.1(c) and 1.1(f) and (ii) all other
approvals, if any, required by this Agreement or the Schedules, in each
case in form and substance satisfactory to the Seller and counsel to the
Seller.
(e) Government Consents, Authorizations, Etc. All consents,
authorizations, orders or approvals of, and filings or registrations with,
any Federal, state, local or foreign governmental commission, board or
other regulatory body which are required for or in connection with the
execution and delivery by the Buyer of this Agreement and the consummation
by the Buyer of the transactions contemplated hereby shall have been
obtained or made.
4.4 Related Agreements. The Related Agreements referred to in this
Agreement consist of the following, all of which are entered into as of the date
hereof:
(a) the Management Services Agreement, entered into by and between the
parties hereto;
(b) the Stockholder Non-Competition Agreement, entered into by and
among the Seller, the Buyer, and the Eligible Parties (the "Stockholder
Non-Competition Agreement");
(c) the Restricted Stock Agreement, entered into by and between the
Buyer and the Eligible Parties (the "Restricted Stock Agreement");
(d) the Provider Account Agreement, entered into by and between the
Seller, the Buyer, the Seller's bank, and the Buyer's lender (the "Provider
Account Agreement");
(e) an Assignment of Office Lease ("Assignment of Office Lease") and
an Office Sublease ("Office Sublease"), together with Consent of Landlord
("Consent of
-13-
<PAGE>
Landlord"), relating to each of the medical offices identified in Schedule
1.1(f), entered into by and between the parties hereto; and
(f) the Medical Equipment Master Lease, entered into by and between
the parties hereto (the "Medical Equipment Master Lease").
5. Closing.
5.1 Closing Date. The closing (the "Closing") for the consummation of the
transactions contemplated by this Agreement shall be deemed to have taken place
at 12:01 a.m. on July 1, 1997 (the "Closing Date"), irrespective of the actual
date(s) and time(s) that all of the documents required hereunder are executed
and delivered.
5.2 Closing Transactions. At the Closing, the parties shall take the
actions and deliver the documents identified in this Section 5.2. The Closing
shall not be deemed to have taken place, and the transactions contemplated by
this Agreement shall not be deemed to have been consummated, unless all of the
closing transactions identified in this Section 5.2 have been completed or
waived in writing by the parties.
(a) Each of the parties shall deliver to the other a fully executed copy of
the Management Services Agreement;
(b) Each of the parties shall deliver to the other a fully executed copy of
the Stockholder Non-Competition Agreement;
(c) Each of the parties shall deliver to the other a fully executed copy of
the Restricted Stock Agreement;
(d) Each of the parties shall deliver to the other a fully executed copy of
the Provider Account Agreement;
(e) Each of the parties shall deliver to the other a fully executed copy of
each Assignment of Office Lease, each Office Sublease, and each Consent of
Landlord relating to each of the premises identified in Schedule 1.1(f);
(f) Each of the parties shall deliver to the other a fully executed copy of
the Medical Equipment Master Lease;
-14-
<PAGE>
(g) The Seller shall deliver to the Buyer fully executed copies of the
Authorization and Approval by Partners and Resolutions of Corporate Partners
presented for signature herewith;
(h) The Seller shall deliver to the Buyer an executed copy of the Bill of
Sale;
(i) The Seller shall deliver to the Buyer a fully executed copy of the
Financing Statement;
(j) The Buyer shall instruct its bank to wire immediately available funds
for credit to Seller's bank account, for the Purchase Price as specified in
Section 2.1 hereof and for the Additional Consideration, if any, specified in
Schedule III, Section C, of the Management Services Agreement.
5.3 Post-Closing Obligations. Within fifteen (15) days after the Closing
Date, the Buyer shall deliver to the Seller stock certificates issued in the
names of the Eligible Parties as required by the Restricted Stock Agreement.
6. Indemnification.
6.1 Definitions. As used in this Agreement, the following terms shall have
the following meanings:
(a) "Affiliate", as to any person, means any other person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with such person.
(b) "Buyer Indemnification Event" shall mean the following:
(i) (A) the untruth, inaccuracy or breach of any representation
or warranty of the Seller contained in this Agreement, any Schedule or
Exhibit attached hereto or any certificate delivered by the Seller in
connection herewith (or any facts or circumstances constituting any
such untruth, inaccuracy or breach) or (B) the breach of any agreement
or covenant of the Seller contained in this Agreement;
-15-
<PAGE>
(ii) the assertion against the Buyer or any Buyer Indemnified
Person of any liability or obligation arising from, relating to, or in
any way connected with the operation of the Subject Business prior to
the Closing;
(iii) the assertion against the Buyer or any Buyer Indemnified
Person of any Excluded Obligation; and
(iv) any non-compliance by the Seller with any state "bulk sales
laws" to the extent that such laws may be applicable to the
transactions contemplated hereby.
(c) "Buyer Indemnified Persons" shall mean and include the Buyer and
its officers, directors, and employees.
(d) "Indemnified Persons" shall mean the Buyer Indemnified Persons or
the Seller Indemnified Persons, as the case may be.
(e) "Indemnifying Person" shall mean the Buyer or the Seller.
(f) "Losses" shall mean any and all losses, claims, damages,
liabilities, expenses (including reasonable attorneys' and accountants'
fees), assessments, tax deficiencies and taxes (including interest or
penalties thereon) sustained, suffered or incurred by any Indemnified
Person arising from any matter which is the subject of indemnification
under Section 6.2.
(g) "Seller Indemnification Event" shall mean (i) the untruth,
inaccuracy or breach of any representation or warranty of the Buyer
contained in this Agreement, any Schedule or Exhibit attached hereto or any
certificate delivered by the Buyer in connection herewith (or any facts or
circumstances constituting any such untruth, inaccuracy or breach) or (ii)
the breach of any agreement or covenant of the Buyer contained in this
Agreement.
-16-
<PAGE>
(h) "Seller Indemnified Persons" shall mean and include the Seller,
the Partners, the Principals, and Seller's employees.
6.2 Indemnification Generally.
(a) Buyer Indemnification. The Seller shall indemnify, defend and hold
harmless the Buyer Indemnified Persons, and each of them, from and against any
and all Losses resulting from Buyer Indemnification Events.
(b) Seller Indemnification. The Buyer shall indemnify, defend and hold
harmless the Seller Indemnified Persons, and each of them, from and against any
and all Losses resulting from Seller Indemnification Events.
6.3 Assertion of Claims. No claim, demand, suit or cause of action shall be
brought under Section 6.2 unless the Indemnified Persons, or any of them, give
the Indemnifying Person written notice of the existence of any such claim,
demand, suit or cause of action, stating with particularity the nature and basis
of said claim, and the amount thereof, to the extent known, and providing to the
extent reasonably available all written documentation relating thereto. Such
written notice shall be delivered to the Indemnifying Person as soon as
practicable upon receipt of actual knowledge of such claim, demand, suit or
cause of action; provided, however, that the failure to provide such written
notice shall not affect the Indemnified Persons' right to indemnification
hereunder if failure to provide such written notice does not materially
adversely affect the Indemnifying Person. Upon the giving of such written notice
as aforesaid, the Indemnified Persons, or any of them, shall have the right to
commence legal proceedings subsequent to the applicable survival date, if any,
for the enforcement of their rights under Section 6.2.
6.4 Notice and Defense of Third Party Claims. (a) In the event any action,
suit or proceeding is brought by a third party against an Indemnified Person,
with respect to which an Indemnifying Person may have liability under Section
6.2, the action, suit or proceeding shall, upon the written agreement of the
Indemnifying Person that it is obligated with respect to such action, suit or
proceeding, be
-17-
<PAGE>
defended (including all proceedings on appeal or for review which counsel for
the defendant shall deem appropriate) and, unless otherwise provided below,
controlled by such Indemnifying Person. The Indemnified Persons shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Persons
unless (i) the employment of such counsel shall have been authorized in writing
by the Indemnifying Person in connection with the defense of such action, suit
or proceeding, (ii) the Indemnifying Person shall fail actively and diligently
to defend such action, suit or proceeding, (iii) the Indemnified Persons shall
have reasonably concluded that such action, suit or proceeding involves to a
significant extent matters beyond the scope of the indemnity agreement contained
in Section 6.2 or (iv) the Indemnified Persons shall have reasonably concluded
that there may be one or more legal or equitable defenses available to the
Indemnified Persons which are different from or additional to those available to
the Indemnifying Person, in any of which events the Indemnifying Person shall
not have the right to direct the defense of such action, suit or proceeding on
behalf of the Indemnified Persons and that portion of any fees and expenses of
counsel related to matters covered by the indemnity agreement and contained in
Section 6.2 shall be borne by the Indemnifying Person. The Indemnified Persons
shall be kept fully informed of such action, suit or proceeding at all stages
thereof whether or not they are so represented. The Indemnifying Person shall
make available to the Indemnified Persons and their attorneys and accountants
all books and records of the Indemnifying Person relating to such action, suit
or proceeding and the parties hereto agree to render to each other such
assistance as they may reasonably require of each other in order to ensure the
proper and adequate defense of any such action, suit or proceeding.
(b) The Indemnifying Person shall not make any settlement of any action,
suit or proceeding without the written consent of the Indemnified Persons, which
consent shall not be unreasonably withheld; provided, however, that in the event
the Indemnified Persons refuse to consent to a settlement acceptable to the
Indemnifying Person which is capable of settlement by the payment of money only
and the Indemnifying Persons shall demonstrate to the reasonable satisfaction of
the Indemnified Persons their ability to pay such amount, the Indemnifying
Person may pay the amount of the proposed settlement to the Indemnified Persons
-18-
<PAGE>
and shall thereupon be released from any further liability with respect to such
action, suit or proceeding.
6.5 Survival of Representations, Warranties and Covenants. The
representations and warranties of the Seller contained in Section 3.1 and the
representations and warranties of the Buyer contained in Section 3.2 shall
survive the Closing and shall terminate forty-five (45) days following the first
anniversary of the Closing Date; provided, however, that the representations and
warranties of the Seller set forth in Sections 3.1(a), 3.1(b), 3.1(c) and
3.1(e), and the representations and warranties of the Buyer set forth in
Sections 3.2(a) and 3.2(b), shall survive the Closing and remain in full force
and effect until the expiration of the statute of limitations, if any,
applicable to the matters set forth therein (and indefinitely if none).
7. Non-Competition. The parties hereby acknowledge that they have entered
into an agreement regarding non-competition, as set forth in Section 15 of the
Management Services Agreement (identified at Recital C hereof).
8. Repurchase of Assets.
The Purchased Assets, except for the Accounts Receivable, are subject to
repurchase by the Seller from the Buyer upon termination of the Management
Services Agreement in accordance with Section 13.5 of the Management Services
Agreement.
9. Amendment, Modification and Waiver.
This Agreement shall not be altered or otherwise amended except pursuant to
an instrument in writing signed by each of the parties. The waiver by one party
of the performance of any covenant, condition or promise shall not invalidate
this Agreement, nor shall it be considered as a waiver by such party of any
other covenant, condition or promise. The delay in pursuing any remedy or in
insisting upon full performance for any breach or failure of any covenant,
condition or promise shall not prevent a party from later pursuing any remedies
or insisting upon full performance for the same or any similar breach or
failure.
-19-
<PAGE>
10. Miscellaneous.
10.1 Transfer Taxes, Etc. The Seller and the Buyer shall each pay one-half
(1/2) of all sales, use and excise taxes and all registration, recording or
transfer taxes which may be payable in connection with the transactions
contemplated by this Agreement.
10.2 Entire Agreement. This Agreement (including the recitals hereof and
the Schedules and the Exhibits attached hereto), together with the related
agreements referenced herein, contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supersedes all
prior agreements, representations, warranties and understandings, either oral or
written, between the parties with respect thereto.
10.3 Descriptive Headings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provisions of
this Agreement.
10.4 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by telecopier (if an addressee has set forth a telecopy number below),
sent by nationally-recognized overnight courier or sent by certified mail,
postage prepaid, return receipt requested, addressed as follows:
if to the Buyer, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: President
Facsimile: (561) 391-1389
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
Facsimile: (818) 995-8959
-20-
<PAGE>
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
Facsimile: (310) 286-7821
if to the Seller, to:
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
Facsimile: (602) 974-5655
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered if
personally delivered or sent by telecopier, (ii) on the Business Day after
dispatch if sent by nationally-recognized, overnight courier and (iii) on the
fifth Business Day after dispatch, if sent by mail. As used herein, "Business
Day" means a day that is not a Saturday, Sunday or a day on which banking
institutions in California are not required to be open.
10.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
10.6 Bulk Sales Compliance. The Buyer hereby waives compliance by the
Seller with the provisions of the "bulk sales laws" of any state which may be
applicable to the transactions contemplated hereby; provided, however, that the
Seller shall indemnify the Buyer in connection with such noncompliance to the
extent provided in Article 6 hereof.
10.7 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California
without giving effect to the laws and principles thereof, or of any other
jurisdiction, which would direct the
-21-
<PAGE>
application of the laws of another jurisdiction. The parties to this Agreement
agree that jurisdiction and venue in any action brought by any party hereto
pursuant to this Agreement shall exclusively lie in any federal or state court
located in the State of California. By execution and delivery of this Agreement,
the parties hereto irrevocably submit to the jurisdiction of such courts for
themselves and in respect of their property with respect to such action. The
parties hereto irrevocably agree that venue would be proper in such court, and
hereby waive any objection that such court is an improper or inconvenient forum
for the resolution of such action. The parties hereto shall act in good faith
and shall refrain from taking any actions to circumvent or frustrate the
provisions of this Agreement.
10.8 Attorneys' Fees. In the event of any dispute or controversy arising
out of or relating to this Agreement, all costs and expenses, including
attorneys' fees and accountants' fees, incurred in connection with such dispute
or controversy, shall be apportioned between the parties as ordered in the
discretion of the court.
10.9 Benefits of Agreement. The terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns. Anything contained herein to the
contrary notwithstanding, this Agreement shall not be assignable by any party
without the consent of the other parties hereto, and any purported assignment
without such consent shall be null and void.
10.10 Pronouns. As used herein, all pronouns shall include the masculine,
feminine, neuter, singular and plural thereof whenever the context and facts
require such construction.
-22-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf effective as of the day and year first above written.
BONE, MUSCLE AND JOINT, INC.
("Buyer")
By: /s/ Naresh Nagpal
------------------------------------------
Naresh Nagpal, M.D., President
SUN VALLEY ORTHOPAEDIC SURGEONS
("Seller")
By: ROBERT O. WILSON, M.D., P.C., General
Partner
By: /s/ Robert O. Wilson, M.D.
------------------------------------
Robert O. Wilson, M.D., President
By: /s/ Jon Edwin Gelsey, M.D.
-------------------------------------------
JON EDWIN GELSEY, M.D., General Partner
By: /s/ Martin G. Sterusky
-------------------------------------------
MARTIN G. STERUSKY, M.D., General Partner
By: /s/ Robert Waldrip
-------------------------------------------
ROBERT WALDRIP, M.D., General Partner
APPROVAL BY PRINCIPAL
- ---------------------
The undersigned individual (who is the sole shareholder of a professional
corporation which is a Partner in the Medical Group) hereby agrees,
individually, to those provisions contained in this Agreement which by their
terms are expressly applicable to "Principals."
/s/ Robert O. Wilson, M.D.
- ---------------------------------
Robert O. Wilson, M.D.
-23-
<PAGE>
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of
July 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware
corporation (the "Company"), and each of the individuals identified on the
signature page hereof (each, a "Stockholder," and collectively, the
"Stockholders"), with reference to the following facts.
A. This Agreement is entered into in connection with that certain
Management Services Agreement effective as of the date hereof (the "Management
Services Agreement") by and among the Company, Sun Valley Orthopaedic Surgeons
(the "Medical Group"), and the Indemnifying Parties thereto.
B. Concurrently herewith, Robert O. Wilson, M.D. ("Wilson") is entering
into a separate Restricted Stock Agreement (which agreement is substantially
identical to this Agreement), under which Wilson is the Stockholder, and Wilson
therefore shall not be considered to be a Stockholder under this Agreement.
C. Certain capitalized terms used herein are defined in paragraph 5 below.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the Company
and each Stockholder agree as follows:
1. Purchase and Sale of Restricted Stock. (a) The Company shall issue to
each Stockholder the number of shares specified opposite the Stockholder's name
in Schedule A attached hereto (the "Restricted Stock") of the common stock of
the Company, par value $0.001 per share (the "Common Stock"), pursuant to
Section 4 and Schedule III of the Management Services Agreement.
(b) In connection with the issuance of the Restricted Stock hereunder, each
Stockholder severally represents and warrants to the Company that:
(i) the Restricted Stock to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in violation of the 1933 Act, or any applicable state securities
laws, and the Restricted Stock will not be disposed of in contravention of
the 1933 Act or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Stock;
-1-
<PAGE>
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Stock and is able to bear the economic risk of
his or her investment in the Restricted Stock for an indefinite period of
time and understands that the Restricted Stock has not been registered or
qualified under the 1933 Act or any applicable state securities laws, by
reason of the issuance of the Restricted Stock in a transaction exempt from
the registration and qualification requirements of the 1933 Act or such
state securities laws and, therefore, cannot be sold unless subsequently
registered or qualified under the 1933 Act or such state securities laws or
an exemption from such registration or qualification is available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Stock and has had full access to or been provided with such
other information concerning the Company as he or she has requested.
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Stock to the
Stockholder and as a condition thereto, each Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Stock to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement; and
-2-
<PAGE>
(ii) the Company shall provide the Stockholder with substantially the
same information regarding the Company that the Company regularly discloses
to its other stockholders.
2. Vesting of the Restricted Stock. (a) Except as otherwise provided in
paragraph 2(b) hereof, the Restricted Stock with respect to each Stockholder
shall become vested in accordance with the following schedule, if, as of each
such date, (i) the Management Services Agreement has not been terminated, (ii)
there has not been a Cessation of Active Practice (as defined in paragraph 2(c)
below) by the Stockholder, or (iii) the Stockholder has not died or become
permanently disabled:
<TABLE>
<CAPTION>
Anniversary Cumulative Number of Cumulative Number Cumulative Number of
of the Date Shares of Restricted of Shares of Restricted Shares of Restricted
of this Stock Vested Stock Vested Stock Vested
Agreement (As to Dr. Gelsey) (As to Dr. Sterusky) (As to Dr. Waldrip)
--------- ------------------ -------------------- -------------------
<S> <C> <C> <C>
First 29,591 18,808 29,187
Second 38,625 27,346 38,356
Third 47,658 35,885 47,524
Fourth 56,692 44,423 56,692
</TABLE>
In the event that the Restricted Stock does not vest at the end of any year
under this Agreement based on Cessation of Active Practice by the Stockholder,
the Restricted Stock may nonetheless become vested in any subsequent year in
which a Cessation of Active Practice does not occur. In such case, vesting of
the Restricted Stock shall be postponed by one year for each year that a
Cessation of Active Practice has occurred. For example, if there is a Cessation
of Active Practice during the second year, the Stockholder would be vested as to
25% of the Restricted Stock as of the end of the second year, and if there is no
Cessation of Active Practice during the following three years, the Restricted
Stock would become vested as to a cumulative 50%, 75%, and 100%, respectively,
at the end of the third, fourth, and fifth years, respectively, under this
Agreement. Shares of the Restricted Stock which have become vested are referred
to herein as "Vested Shares" and all other shares of the Restricted Stock are
referred to herein as "Unvested Shares."
(b) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
paragraph 2(a) above, the number of Unvested Shares scheduled to become Vested
Shares pursuant to paragraph 2(a) above during the eighteen-month period
immediately following the date of death shall immediately become Vested Shares.
(c) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death or permanent
disability) to engage in the practice of medicine with the Medical Group on a
regular basis, including the performance
-3-
<PAGE>
of orthopedic surgical procedures on a regular basis (except in the case of any
Stockholder who did not practice surgery on a regular basis immediately prior to
the date hereof).
(d) If the Stockholder is insured under a disability insurance policy, the
determination under such policy as to whether the Stockholder's condition
constitutes a permanent disability shall be binding on the parties hereto for
purposes of this Agreement. If the Stockholder is not insured under a policy of
disability insurance, such determination shall be made by an independent
qualified physician proposed by the Medical Group, subject to the approval of
the Company, which approval shall not be unreasonably withheld.
(e) Transfer of Restricted Stock to the Medical Group.
(i) For purposes of this paragraph 2(e), each of the following shall
constitute a "Stockholder Termination Event":
(A) Cessation of Active Practice by the Stockholder;
(B) Death of the Stockholder; or
(C) Permanent disability of the Stockholder.
(ii) In the event of a Stockholder Termination Event, the Stockholder
shall transfer (or cause to be transferred) to the Medical Group all of the
Unvested Shares of Restricted Stock held by the Stockholder (or by the
Stockholder's permitted transferee(s)), pursuant to the terms and
conditions set forth in this paragraph 2(e).
(iii) The Medical Group shall accept such Unvested Shares and shall
pay to the Stockholder (or to the Stockholder's permitted transferee(s)) an
amount determined by multiplying the number of such Unvested Shares by the
Original Value (as defined in this Agreement). Such shares shall be
delivered and such sum shall be paid in full in cash not later than sixty
(60) days after the date of the Stockholder Termination Event.
(iv) A portion of the shares received by the Medical Group pursuant to
this paragraph 2(e) shall be held by the Medical Group as Vested Shares,
and a portion shall be held as Unvested Shares. The number of such shares
to be held as Vested Shares shall be determined by dividing the amount paid
by the Medical Group pursuant to paragraph 2(e)(iii) by the Fair Market
Value (as hereinafter defined) per share. The remainder of such shares
shall be Unvested Shares. Any such Vested Shares may be held, transferred,
or sold at the discretion of the Medical Group. Any Unvested Shares may be
transferred only in accordance with paragraph 2(e)(v), and such shares may
become Vested Shares only as provided in paragraph 2(e)(v).
(v) The Medical Group shall not sell or otherwise transfer any
Unvested Shares to any person or entity, except to one or more physician
employees, independent contractors, or partners in the Medical Group who
prior to the receipt of such shares from the Medical Group had not acquired
any shares of the Company. As
-4-
<PAGE>
a condition to any such sale or transfer, such physician(s) shall enter
into a Restricted Stock Agreement with the Company substantially in the
form of this Agreement, effective as of the date of transfer of such
shares. Any such sale or transfer to any such physician(s) shall be subject
to such additional terms and conditions as may be agreed upon by the
Medical Group and such physician(s).
3. Repurchase of Restricted Stock. (a) Except as provided in paragraph
3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below,
the Company may elect to repurchase the Restricted Stock (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
permitted transferees) pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option").
(b) Each of the following shall constitute a "Repurchase Event":
(i) Termination of the Management Services Agreement for any reason
whatsoever on or before the fourth anniversary of the date of this
Agreement;
(ii) Termination of the Management Services Agreement by the Medical
Group pursuant to Section 13.1(d) thereof (based on failure of the Company
to consummate an initial public offering of its Common Stock within
forty-eight (48) months after the Commencement Date under the Management
Services Agreement).
(c) The repurchase price for each Unvested Share shall be equal to the
Original Value of such share.
(d) The repurchase price for each Vested Share shall be the Fair Market
Value for such share.
(e) The Company may elect to repurchase all or a portion of the Restricted
Stock by delivering written notice (the "Repurchase Notice") to the Stockholder
within ninety (90) days after the Repurchase Event; provided, however, that if
the Company elects to repurchase less than all of the Restricted Stock, the
Company shall repurchase all of the Unvested Shares and may purchase that number
of Vested Shares as the Company may, in its discretion, determine. The
Repurchase Notice shall set forth the number of Unvested Shares and Vested
Shares to be acquired, the aggregate consideration to be paid for such shares,
and the time and place for the closing of the transaction. If the Repurchase
Event giving rise to the Company's election to repurchase consists of the
termination of the Management Services Agreement, and if the number of shares of
Restricted Stock that the Company has elected to repurchase is less than the
total number of shares of Restricted Stock held by all of the Stockholders, the
Company shall purchase the shares of Restricted Stock pro rata according to the
number of shares of Restricted Stock held by all of the Stockholders at the time
of delivery of such Repurchase Notice (determined as nearly as practicable to
the nearest share).
(f) The closing of the repurchase of Restricted Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the
-5-
<PAGE>
delivery of the Repurchase Notice. The Company shall pay for Restricted Stock to
be purchased pursuant to the Repurchase Option by delivery of (i) the Company's
check or wire transfer of funds, (ii) a subordinated note or notes payable in up
to five equal annual installments beginning on the first anniversary of the
closing of such purchase and bearing interest (payable quarterly) at a rate per
annum equal to the greater of either the prime rate announced from time to time
by The Chase Manhattan Bank (National Association) plus 1/2% or the "applicable
Federal rate" (as defined in Section 1274(d) of the Internal Revenue Code) in
effect from time to time, or (iii) both (i) and (ii), in the aggregate amount of
the repurchase price for such shares; provided, however, that in the event that
the Medical Group is obligated to pay to the Company any sums in connection with
the repurchase of assets by the Medical Group pursuant to the Management
Services Agreement, the total of such sums may be offset by the Company against
any amounts owed by the Company to the Stockholder pursuant to the Restricted
Stock Agreement, such offset amount to be allocated pro rata among all of the
Stockholders. Any notes issued by the Company pursuant to this paragraph 3(f)
shall be subject to the restrictive covenants, if any, to which the Company is
subject at the time of such repurchase. The Company shall be entitled to require
the signature of the Stockholder to be guaranteed and to receive representations
and warranties from the Stockholder regarding (A) the Stockholder's power,
authority and legal capacity to enter into such sale and transfer valid right,
title and interest in such Restricted Stock, (B) the Stockholder's ownership of
such Restricted Stock and the absence of any liens, pledges, and other
encumbrances on such Restricted Stock and (C) the absence of any violation,
default, or acceleration of any agreement or instrument pursuant to which the
Stockholder or the Stockholder's assets are bound resulting from such sale.
(g) Notwithstanding anything to the contrary set forth in this paragraph 3,
in the event of a Repurchase Event consisting of the termination of the
Management Services Agreement by the Medical Group pursuant to Section 13.1 of
the Management Services Agreement, or in the event of termination of the
Management Services Agreement by either party in accordance with Section 27
thereof (pursuant to Section 13.3), the Company shall have the obligation
(rather than the option) to purchase all of the Restricted Stock acquired by the
Stockholder pursuant to this Agreement, and the repurchase price shall be paid
in full in cash not later than sixty (60) days after the date of termination of
the Management Services Agreement; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in connection with the
repurchase of assets by the Medical Group pursuant to the Management Services
Agreement, the total of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to the Restricted Stock
Agreement, such offset amount to be allocated pro rata among all of the
Stockholders.
(h) [Intentionally omitted.]
(i) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Stock by the Company shall be subject to
applicable restrictions, if any, contained in Federal law or in the Delaware
General Corporation Law. Notwithstanding anything to the contrary contained in
this Agreement, if any such restrictions prohibit or otherwise delay the
repurchase of Restricted Stock hereunder which the Company is otherwise entitled
or required to make, the Company may make such repurchases as soon as it is
permitted to do so under such restrictions.
-6-
<PAGE>
(j) In the event that Restricted Stock is repurchased pursuant to this
paragraph 3, the Stockholder and his or her successors and assigns shall take
all reasonable steps to obtain all required third-party, governmental and
regulatory consents and approvals and take all other reasonable actions
necessary to facilitate consummation of such repurchase in a timely manner.
4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided
in paragraph 3, the Stockholder shall sell or transfer or agree to sell or
transfer ("Sale" or "Sell") Restricted Stock only in accordance with the
following procedures; provided, however, that with respect to this paragraph
4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares
and at no time shall the Stockholder have the right to sell Unvested Shares;
provided, further, that the restrictions on transfers of Vested Shares set forth
in this paragraph 4 shall expire, and shall be of no further force or effect,
upon the consummation of initial public offering of the Company's Common Stock
pursuant to the 1933 Act:
(b) In the event that the Stockholder receives a bona fide offer from a
third party (the "Prospective Stockholder") to purchase all or any portion of
the Restricted Stock owned by the Stockholder, the Stockholder shall deliver to
the Company a written notice (the "Offer Notice"), which shall be irrevocable
for a period of fifteen (15) business days after delivery thereof (the "Offer
Period"), offering (the "Offer") all of the Restricted Stock proposed to be Sold
by the Stockholder to the Prospective Stockholder at the purchase price and on
the terms of the proposed Sale to the Prospective Stockholder (such Offer Notice
shall include the foregoing information, a copy of the Prospective Stockholder's
bona fide offer and all other relevant terms of the proposed Sale, including the
identification of the Prospective Stockholder). The Company shall have the right
and option, for a period of fifteen (15) business days after delivery of the
Offer Notice, to repurchase all of the Restricted Stock so offered at the
purchase price and on the terms stated in the Offer Notice. Such acceptance
shall be made by delivering a written notice to the Stockholder within said
fifteen (15) business-day period.
(c) Sales of Restricted Stock under the terms of paragraph 4(b) above shall
be made on a mutually satisfactory business day within fifteen (15) business
days after the expiration of the Offer Period. Delivery of certificates or other
instruments evidencing such Restricted Stock duly endorsed for transfer shall be
made on such date against payment of the purchase price therefor.
(d) If the Company fails to purchase the Restricted Stock offered for Sale
pursuant to the Offer Notice, then at any time within sixty (60) business days
after the expiration of the Offer Period the Stockholder may Sell all or any
part of the Restricted Stock so offered for Sale on terms no more favorable than
the terms stated in the Offer Notice; provided, however, that the Stockholder
shall not, under any circumstances, Sell any Restricted Stock to the Prospective
Stockholder if the Board of Directors of the Company, in its sole discretion,
determines in good faith that the Prospective Stockholder is a competitor, or an
Affiliate of a competitor, of the Company or that such Prospective Stockholder's
ownership of Restricted Stock would be contrary to the best interests of the
Company. In the event that the Restricted Stock is not Sold by the Stockholder
to the Prospective Stockholder during such period, the right of the Stockholder
to Sell such remaining Restricted Stock to the Prospective Stockholder shall
expire and the obligations of the Stockholder pursuant to this paragraph 4 shall
be reinstated.
-7-
<PAGE>
(e) Any transferee of Restricted Stock (other than the Company) shall, as a
condition to such transfer, agree to be bound by all of the provisions of this
Agreement applicable to the Stockholder.
(f) The certificates representing the Restricted Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED
STOCK AGREEMENT EFFECTIVE AS OF JULY 1, 1997, BETWEEN THE STOCKHOLDER AND
BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY
THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE."
(g) The Stockholder shall have the right to participate on a pro rata basis
(based on the number of shares owned, whether preferred or common, held by the
Stockholder and by any other shareholders who hold the same rights that are
conferred by this paragraph 4(g), including members of other physician groups),
in any proposed sale of stock (whether preferred or common) in the Company by
Naresh Nagpal, M.D. to any unaffiliated third party; provided, however, that
this paragraph 4(g) shall become null and void upon the consummation of an
initial public offering of the Company's Common Stock pursuant to the 1933 Act.
5. Definitions.
(a) "Affiliate" means, with respect to any Person, any of (a) a director,
officer or partner of such Person and (b) any other Person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, another Person. The term "control" includes,
without limitation, the possession, directly or indirectly, of the power to
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value jointly determined by the Stockholder and the
Company, provided that if they cannot
-8-
<PAGE>
so agree, such value shall be determined by a mutually acceptable investment
banking or other qualified firm of national or regional reputation, retained
jointly by the Company and the Medical Group, and all fees, expenses and other
charges of such firm incurred in connection with such determination of Fair
Market Value shall be borne and shared equally by the Company and the Medical
Group. In the event that the parties are unable to agree upon such an investment
banking or other qualified firm within ten (10) days after the date on which
either party may initially propose such a firm, a qualified firm shall be
selected in the following manner:
First, the Stockholder shall send a list of names of four such firms,
arranged in order of the Stockholder's preference, by written notice to the
Company within seven (7) days after the expiration of the above referenced
10-day period. If the Stockholder does not furnish such a list to the
Company within such time period, the Company may, within the next seven (7)
days following expiration of such earlier seven-day period, submit a list
of names of four such firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed agreed to by the parties.
(c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as
the same may be amended or supplemented from time to time, or any successor
statute, and the rules and regulations thereunder, as the same are from time to
time in effect.
(d) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to Twenty Cents ($0.20) (as proportionately adjusted for all
subsequent stock splits, stock dividends and other recapitalizations).
(e) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
(f) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The
Restricted Stock will continue to be Restricted Stock in the hands of any holder
other than the Stockholder (except for the Company and except for transferees in
a Public Sale), and except as otherwise provided herein, each such other holder
of the Restricted Stock will succeed to all rights and obligations attributable
to the Stockholder as the holder of the Restricted Stock hereunder. The
Restricted Stock will also include shares of the Company's capital stock issued
-9-
<PAGE>
with respect to the Restricted Stock by way of a stock split, stock dividend or
other recapitalization.
(h) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
6. Indemnification. (a) The Company shall indemnify, defend and hold
harmless each Stockholder against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of the representations, warranties or agreements of the Company
contained in this Agreement.
(b) Each Stockholder, severally, shall indemnify and hold harmless the
Company against all liability, loss or damage, together with all reasonable
costs and expenses related thereto (including reasonable legal fees and
expenses), relating to or arising from the untruth, inaccuracy or breach of any
of the representations, warranties or agreements of such Stockholder contained
in this Agreement.
7. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of
any Restricted Stock in violation of any provision of this Agreement shall be
void, and the Company shall not record such Transfer on its books or treat any
purported transferee of such Restricted Stock as the owner of such stock for any
purpose.
(b) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(c) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
-10-
<PAGE>
(d) Relationship Among Stockholders. No Stockholder shall have any
responsibility for any breach of this Agreement by any other Stockholder or for
any representations, warranties, acts or omissions of any other Stockholder.
Each Stockholder is entering into this Agreement for and on behalf of such
Stockholder only, and no partnership, joint venture, unincorporated association,
or any other legal entity is intended to be formed by or among the Stockholders
as a result of or in connection with this Agreement. The parties have chosen to
execute a single instrument for convenience only, and this Agreement shall be
construed as separate and several agreements between the Company and each of the
respective Stockholders for all purposes. This Agreement may be executed in
separate counterparts.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, assigns, heirs,
representatives and estate, as the case may be (including subsequent holders of
Restricted Stock); provided that the rights and obligations of the Stockholder
under this Agreement shall not be assignable except in connection with a
permitted transfer of Restricted Stock hereunder.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
California, or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of California to be applied. In furtherance of
the foregoing, the internal law of the State of California will control the
interpretation and construction of this agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America sitting in the State of California, and any appellate court thereof,
in any action or proceeding arising out of or relating to this Agreement or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such California
state court or, to the extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that any party may otherwise have to bring any action or
proceeding relating to this Agreement in the courts of any other jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any California state
or Federal court. Each of the parties hereto irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
-11-
<PAGE>
(h) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that any party may
in its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or other injunctive relief (without
posting any bond or deposit) in order to enforce or prevent any violations of
the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof.
(j) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
reputable overnight courier service (charges prepaid) to the recipient at the
address below indicated or at such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. Notices will be deemed to have been given hereunder and received
when delivered personally, when received if transmitted via telecopier, five
days after deposit in the U.S. mail and one business day after deposit with a
reputable overnight courier service.
If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Facsimile: (561) 391-1389
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
Facsimile: (818) 995-8959
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
Facsimile: (310) 286-7821
-12-
<PAGE>
If to the Stockholder, to:
[Name of Stockholder]
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
Facsimile: (602) 974-5655
with a copy to:
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
Facsimile: (602) 974-5655
(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of California, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(l) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the losing party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(m) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(n) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(o) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of nouns and pronouns shall include the plural and vice-versa.
* * *
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Agreement effective as of the date first written above.
COMPANY
-------
BONE, MUSCLE AND JOINT, INC.
By: /s/ N Nagpal
---------------------------------
Naresh Nagpal, M.D., President
STOCKHOLDERS
/s/ Jon Edwin Gelsey, M.D.
------------------------------------
Jon Edwin Gelsey, M.D.
/s/ Martin G. Sterusky
------------------------------------
Martin G. Sterusky, M.D.
/s/ Robert Waldrip
------------------------------------
Robert Waldrip, M.D.
MEDICAL GROUP
- -------------
ACCEPTED AND AGREED
AS TO PARAGRAPHS 2(e) and 5(b)
SUN VALLEY ORTHOPAEDIC SURGEONS
By: ROBERT O. WILSON, M.D., P.C., General Partner
By: /s/ Robert O. Wilson, M.D
------------------------------------------
Robert O. Wilson, M.D., President
By: /s/ Jon Edwin Gelsey, M.D.
---------------------------------------------
JON EDWIN GELSEY, M.D., General Partner
By: /s/ Martin G. Sterusky
---------------------------------------------
MARTIN G. STERUSKY, M.D., General Partner
By: /s/ Robert Waldrip
---------------------------------------------
ROBERT WALDRIP, M.D., General Partner
ACCEPTED AND AGREED
AS TO SECTION 4(g)
/s/ N Nagpal
- ------------------------------------
NARESH NAGPAL, M.D.
-14-
<PAGE>
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") is entered
into as of July 1, 1997, by and between SUN VALLEY ORTHOPAEDIC SURGEONS, an
Arizona general partnership (the "Medical Group"), each of the individuals
identified on the signature page hereof (each, a "Stockholder," and
collectively, the "Stockholders"), and BONE, MUSCLE AND JOINT, INC., a Delaware
corporation ("BMJ"), with reference to the following facts:
A. The Medical Group is a general partnership comprised of individual
physicians and Arizona professional corporations, and is engaged in the
business of providing orthopedic medical and surgical services and related
medical and ancillary services (the "Medical Services") to the general
public. (Each partner in the Medical Group is referred to herein as a
"Partner," and each shareholder of a professional corporation that is a
Partner is referred to herein as a "Principal.")
B. Each Stockholder is a Partner, Principal or other person identified
as an Eligible Party in the Management Services Agreement entered into as
of the date hereof (the "Management Services Agreement").
C. BMJ is a corporation engaged in the business of providing
management, administrative, financial, marketing, information technology,
and related services to medical groups and related facilities.
D. The Medical Group and BMJ, under the terms of the Management
Services Agreement, have agreed to cause the Stockholders to execute this
Agreement.
E. Each Stockholder is acquiring stock in BMJ in connection with the
execution of the Management Services Agreement, pursuant to a Restricted
Stock Agreement entered into by and among the Stockholders and BMJ,
effective as of the date hereof (the "Restricted Stock Agreement").
F. Concurrently herewith, Robert O. Wilson, M.D., P.C. and Robert O.
Wilson, M.D. ("Wilson") are entering into a separate Stockholder
Non-Competition Agreement with the Management Company (which agreement is
substantially identical to this Agreement), under which Wilson is the
Stockholder, and Wilson therefore shall not be considered to be a
Stockholder under this Agreement.
NOW, THEREFORE, in consideration of and as an inducement to BMJ's entering
into the Management Services Agreement, the Restricted Stock Agreement, and the
other agreements related thereto, and in consideration of each Stockholder's
status as a Partner or Principal, or other interest in the Medical Group, each
Stockholder hereby severally agrees with the Medical Group and BMJ as follows:
1
<PAGE>
1. Definition.
For all purposes of this Agreement, "Competitive Business" shall mean any
business that provides (i) orthopedic medical and surgical services and related
medical and ancillary services to the general public, or (ii) administrative,
billing, collection, financial, marketing, information technology and
operational services to professional medical groups relating to such groups'
provision of the professional medical and related services described in clause
(i), (iii) any other services provided by BMJ, or (iv) any other business
proposed to be conducted by BMJ if such business has been approved by the Board
of Directors of BMJ and BMJ has allocated human resources or financial resources
to such proposed business.
2. Agreement Not to Compete or Interfere with Business.
(a) Each Stockholder acknowledges that (i) he or she is receiving benefits
from the purchase of securities from BMJ pursuant to the Restricted Stock
Agreement, (ii) the Medical Group and its affiliates conduct their business
primarily in Sun City West, Arizona, and (iii) due to the highly competitive
nature of the Medical Group's and BMJ's businesses, the value and goodwill of
the Medical Group's and BMJ's businesses would be substantially impaired if the
Stockholder engaged in a Competitive Business. Accordingly, each Stockholder
hereby agrees that, during the period commencing on the date hereof and ending
two years after the earliest of (i) the expiration of the Management Services
Agreement, (ii) the termination of the Management Services Agreement by BMJ
pursuant to Section 13.2 thereof, (iii) rescission! disengagement by the Medical
Group pursuant to Section 14 thereof, or (iv) the effective date of the
Stockholder's resignation or termination of employment with the Medical Group or
sale, transfer, or other disposition of all or substantially all of the
Stockholder's equity interest in the Medical Group, he or she will not, except
as otherwise provided herein --
(A) engage, directly or indirectly, in any Competitive Business at any
location within twenty-five (25) miles of any Medical Group office (the
"Restricted Territory"), whether such engagement shall be as an employee,
officer, director, owner, partner, advisor, consultant, stockholder or
other participant in any Competitive Business (or in any similar capacity
in which the Stockholder derives an economic benefit from a Competitive
Business);
(B) assist others in engaging in any Competitive Business within the
Restricted Territory in the manner described in the foregoing clause (A);
(C) solicit, entice or induce any Partner or Principal, or any
employee or independent contractor of the Medical Group, BMJ, any affiliate
of the Medical Group, or any subsidiary of BMJ to terminate his or her
employment or contract with any of the foregoing or to engage in any
Competitive Business within the Restricted Territory;
(D) solicit, entice or induce any vendor, customer or distributor of
the Medical Group, BMJ, any affiliate of the Medical Group, or any
subsidiary of BMJ to
2
<PAGE>
terminate or materially diminish its relationship with the Medical Group,
BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ;
(E) enter into a contractual or other relationship with a provider of
management services which provides a range of management services which is
substantially similar to that which is provided by BMJ; or
(F) otherwise knowingly damage, disparage or interfere with the
Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary
of BMJ;
provided, however, that nothing contained in this Agreement shall prohibit any
Stockholder from owning in the aggregate less than one percent (1.0%) of a class
of publicly-traded securities issued by any Competitive Business.
(b) The Stockholder has carefully considered the nature and extent of the
restrictions set forth herein and acknowledges that the same are reasonable with
respect to scope, duration and territory. It is the desire and intent of the
parties that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
without any action by any party shall be deemed amended to delete therefrom or
to modify the provisions thereof so as to restrict (including, without
limitation, a reduction in duration, geographical area or prohibited business
activity) the portion adjudicated to be invalid or unenforceable, such deletion
or modification to apply only with respect to the operation of such provision in
the particular jurisdiction in which such adjudication is made, and such
deletion or modification to be made only to the extent necessary to cause the
provision as amended to be valid and enforceable.
(c) The Medical Group and BMJ acknowledge and agree that a Stockholder
shall have no further obligation pursuant to this Agreement in the event that
(i) the Medical Group terminates the Management Services Agreement pursuant to
Section 13.1 thereof, (ii) either party to the Management Services Agreement
terminates such agreement pursuant to Section 13.3 thereof, or (iii) the Medical
Group terminates, without cause, the Stockholder's right to conduct his, her or
its professional practice with the Medical Group (unless such termination is not
permitted under any applicable agreement with the Medical Group) and such
termination is approved by BMJ.
(d) BMJ shall consult with the Medical Group in connection with the
identification and selection of additional medical groups and physicians with
whom BMJ may contract and regarding the development of New Ancillary Services
within twenty-five (25) miles of the Medical Group's principal office.
3. Confidentiality.
(a) Each Stockholder acknowledges and agrees that certain information he or
she has received or will receive from the Medical Group and its affiliates or
from BMJ
3
<PAGE>
constitutes the confidential and proprietary trade secrets of the Medical Group
or of BMJ and that the Stockholder's non-disclosure thereof is essential to this
Agreement and a condition to the Stockholder's use and possession thereof. The
Stockholder shall retain in strict confidence any and all such confidential
information received from the Medical Group ("Medical Group Confidential
Information") or from BMJ ("BMJ Confidential Information") (collectively,
"Confidential Information") and under no circumstances shall the Stockholder
distribute or in any way disseminate Confidential Information, directly or
indirectly, to any third party or use Confidential Information for the
Stockholder's personal benefit without the prior written consent of the Medical
Group (in the case of Medical Group Confidential Information) or without the
prior written consent of BMJ (in the case of BMJ Confidential Information).
(b) Notwithstanding the above, the Stockholder shall have no liability to
the Medical Group or its affiliates or to BMJ with respect to Confidential
Information which:
(i) was generally known and available in the public domain at the time
it was disclosed or becomes generally known and available in the public
domain through no fault of the Stockholder;
(ii) is disclosed with the prior written consent of the Medical Group
or its affiliate or BMJ;
(iii) becomes known to the Stockholder from a source other than the
Medical Group or its affiliates without breach of this Agreement by the
Stockholder and otherwise not in violation of the Medical Group's or its
affiliates' rights; or
(iv) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, however, that
the Stockholder shall provide prompt, advance notice thereof to enable the
Medical Group or its affiliate to seek a protective order or otherwise
prevent such disclosure.
(c) The Stockholder agrees to indemnify the Medical Group, its affiliates,
and BMJ for any damages the same may suffer as a result of the Stockholder's or
his or her agents' failure to abide by the provisions of this Section 3.
(d) The rights and obligations of the parties under this Section 3 shall
survive for five (5) years following the expiration or termination of this
Agreement.
4. Acknowledgment.
Each Stockholder acknowledges that the provisions of this Agreement are not
designed to prevent the Stockholder from earning a living or fostering his or
her own career. The provisions of this Agreement are designed to prevent any
third party from gaining unfair advantage from the Stockholder's knowledge of
confidential and proprietary information relating to the Medical Group or BMJ or
otherwise damaging or interfering with the business of the Medical Group or BMJ
or from his or her participation in any Competitive Business. The Stockholder
further acknowledges receiving sufficient consideration under the Restricted
Stock
4
<PAGE>
Agreement to compensate him or her for any losses he or she may suffer or incur
as a result of losing any employment or other professional opportunity as a
result of entering into and performing any obligations under this Agreement.
5. Survival; Remedies.
Each Stockholder's covenants under this Agreement shall survive termination
of the Stockholder's status as a Partner or Principal, and/or the Stockholder's
employment with the Medical Group. Each Stockholder acknowledges that a breach
by the Stockholder of this Agreement will cause irreparable and material loss
and damage to the Medical Group and/or BMJ and that a remedy at law for any
breach or threatened breach of the provisions of this Agreement would be
inadequate and therefore agrees that either the Medical Group or BMJ shall be
entitled to injunctive relief; provided, however, that nothing contained herein
shall be construed as prohibiting the Medical Group or BMJ from pursuing any
other remedies available for any such breach or threatened breach.
6. Benefits of Agreement.
This Agreement and the rights and obligations of the parties hereto shall
bind and inure to the benefit of any successor or successors of either the
Medical Group or BMJ by reorganization, merger or consolidation or otherwise and
any assignee of all or substantially all of the business and properties of the
Medical Group or BMJ.
7. Severability.
It is the desire and intent of the parties hereto that the provisions of
this Agreement shall be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, if any particular provision of this Agreement shall be
adjudicated to be invalid or unenforceable, such provision shall be deemed
amended to delete therefrom the portion thus adjudicated to be invalid or
unenforceable, such deletion to apply only with respect to the operation of such
provision in the particular jurisdiction in which such adjudication is made. In
addition, if any one or more of the provisions contained in this Agreement shall
for any reason be held to be excessively broad as to duration, geographical
scope, activity or subject, it shall be construed by limiting and reducing it,
so as to be enforceable to the extent compatible with the applicable law as it
shall then appear.
8. Notices.
All notices or other communications required or permitted hereunder shall
be in writing and sufficient if (a) delivered personally, (b) sent by
nationally-recognized overnight courier or (c) sent by certified mail, postage
prepaid, return receipt requested, addressed as follows:
5
<PAGE>
If to the Medical Group, to:
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
If to a Stockholder, to:
[Name of Stockholder]
Sun Valley Orthopaedic Surgeons
14506 West Granite Valley Drive, #205
Sun City West, Arizona 85375
If to BMJ, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
with a copy to:
Bone, Muscle and Joint, Inc.
15300 Ventura Boulevard, Suite 507
Sherman Oaks, California 91403
Attention: Glenn Cozen, Vice President, Western Region
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
or, in each case, to such other address as the party to whom notice is to be
given may have furnished to the other parties in writing in accordance herewith.
Any such communication shall be deemed to have been given (a) when delivered, if
personally delivered, (b) on the business day after dispatch, if sent by
nationally-recognized overnight courier and (c) on the third business day after
dispatch, if sent by mail.
9. Relationship Among Stockholders.
No Stockholder shall have any responsibility for any breach of this
Agreement by any other Stockholder or for any representations, warranties, acts,
or omissions of any other Stockholder. Each Stockholder is entering into this
Agreement for and on behalf of such
6
<PAGE>
Stockholder only, and no partnership, joint venture, unincorporated association,
or any other legal entity is intended to be formed by or among the Stockholders
as a result of or in connection with this Agreement. The parties have chosen to
execute a single instrument for convenience only, and this Agreement shall be
construed as separate and several agreements between the Medical Group, BMJ, and
each of the respective Stockholders for all purposes. This Agreement may be
executed in separate counterparts.
10. Entire Agreement; Amendments; Prior Agreements.
The foregoing, together with any related provisions of any other agreement
entered into in connection herewith, is the entire agreement of the parties with
respect to the subject matter hereof and may not be amended, supplemented,
canceled or discharged except by a written instrument executed by both parties
hereto. This Agreement supersedes any and all prior agreements among the parties
hereto with respect to the matters covered hereby.
11. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
12. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover from the
losing party all costs and expenses, including attorneys' fees and accountants'
fees, incurred in connection with such dispute or controversy.
13. Headings.
The headings of the sections of this Agreement have been inserted for
convenience only and shall not be deemed to be part of this Agreement.
* * *
7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the date first above written.
SUN VALLEY ORTHOPAEDIC SURGEONS
By: ROBERT O. WILSON, M.D., P.C., General Partner
By: /s/ Robert O. Wilson, M.D.
------------------------------------------
Robert O. Wilson, M.D., President
By: /s/ Jon Edwin Gelsey, M.D.
---------------------------------------------
JON EDWIN GELSEY, M.D., General Partner
By: /s/ Martin G. Sterusky, M.D.
---------------------------------------------
MARTIN G. STERUSKY, M.D., General Partner
By: /s/ Robert Waldrip
---------------------------------------------
ROBERT WALDRIP, M.D., General Partner
BONE, MUSCLE AND JOINT, INC.
By: /s/ Naresh Nagpal
---------------------------------------------
Naresh Nagpal, M.D., President
STOCKHOLDERS
/s/ /s/ Jon Edwin Gelsey, M.D.
- ------------------------------
Jon Edwin Gelsey, M.D.
/s/ /s/ Martin G. Sterusky
- ------------------------------
Martin G. Sterusky, M.D.
/s/ /s/ Robert Waldrip
- ------------------------------
Robert Waldrip, M.D.
8
EXECUTION COPY
================================================================================
MANAGEMENT SERVICES AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
FISHMAN AND STASHAK, M.D.'S, P.A.
Effective as of June 1, 1997
================================================================================
<PAGE>
ATTACHMENTS
SCHEDULES
- ---------
SCHEDULE I -- New Ancillary Services -- Exceptions
SCHEDULE II -- Management Company Operating Cost Budget
SCHEDULE III -- Equity Participation
SCHEDULE IV -- Draw Date and Draw Percentage
SCHEDULE V -- Management Fee -- Applicable Percentage
SCHEDULE VI -- Professional Practice Cost Savings
SCHEDULE VII -- Computation Example
SCHEDULE VIII -- Non-Competition
SCHEDULE 1.5 -- Future Affiliations
SCHEDULE 6.2 -- Equity Investments
SCHEDULE 6.3 -- Consents
SCHEDULE 6.4 -- Financial Information
SCHEDULE 6.5 -- Absence of Undisclosed Liabilities
SCHEDULE 6.6 -- Absence of Changes
SCHEDULE 6.7 -- Tax Matters
SCHEDULE 6.8 -- Litigation, Etc.
SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable
SCHEDULE 6.11 -- Labor Relations; Employees
SCHEDULE 6.12 -- Employee Benefit Plans
SCHEDULE 6.13 -- Insurance
SCHEDULE 6.15 -- Burdensome Restrictions
SCHEDULE 6.16 -- Disclosure
SCHEDULE 7.2 -- Consents
SCHEDULE 7.4 -- Financial Information
SCHEDULE 7.5 -- Absence of Undisclosed Liabilities
SCHEDULE 7.6 -- Absence of Changes
SCHEDULE 7.7 -- Litigation, Etc.
SCHEDULE 7.9 -- Employees
SCHEDULE 7.11 -- Burdensome Restrictions
<PAGE>
EXHIBITS
- --------
EXHIBIT A -- Asset Purchase Agreement
EXHIBIT B -- Restricted Stock Agreement
EXHIBIT C -- Stockholder Non-Competition Agreement
<PAGE>
THIS MANAGEMENT SERVICES
AGREEMENT (the "Agreement") is entered
into as of July 3, 1997, (the "Signature
Date"), effective June 1, 1997, by and
between FISHMAN AND STASHAK, M.D.'S,
P.A., a Florida professional association
(the "Medical Group"), and BONE, MUSCLE
AND JOINT, INC., a Delaware corporation
(the "Management Company"), with
reference to the following facts:
A. The Medical Group is engaged in the business (the "Medical Business") of
providing orthopedic medical and surgical services and related medical and
ancillary services to the general public.
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company and the Medical Group are
entering into an Asset Purchase Agreement (the "Asset Purchase Agreement"), in
the form of Exhibit A attached hereto, pursuant to which the Management Company
is acquiring substantially all of the assets of the Medical Group.
D. The Management Company and the Medical Group desire to enter into this
Management Services Agreement, pursuant to which, among other things, the
Management Company will render certain management and administrative services to
the Medical Group.
NOW, THEREFORE, the Medical Group and the Management Company hereby agree
as follows:
<PAGE>
SECTION 1. Retention of the Management Company.
1.1. Retention.
The Medical Group hereby retains the Management Company to provide all of
the management and related services identified or referenced in Section 3 hereof
and as otherwise required by this Agreement (collectively, the "Management
Services"), and the Management Company hereby accepts such retention and agrees
to provide such services, upon the terms and subject to the conditions set forth
herein.
1.2. Exclusivity.
During the term of this Agreement, the Management Company shall be the
exclusive provider of all management and administrative services utilized by the
Medical Group; provided, however, that the Medical Group may contract directly
with or otherwise engage individuals or companies for the provision of
accounting, legal, consulting, or other professional or advisory services
(provided that such services shall be in addition to, and not in replacement of,
the services to be provided by the Management Company hereunder), all in the
sole discretion of the Medical Group and at the sole cost of the Medical Group.
1.3. Relationship of Parties.
Notwithstanding anything contained herein to the contrary, (a) the
Management Company and the Medical Group intend to act and perform as
independent contractors, and the provisions hereof are not intended to create
any partnership, joint venture, or employment relationship between the parties,
and (b) the Management Company is hereby engaged solely to provide management
and administrative services to the Medical Group and shall not interfere with,
control, direct, or supervise the Medical Group or any medical professional
employed by the Medical Group in connection with the provision of professional
medical services.
-2-
<PAGE>
1.4. No Referral Obligation.
The parties agree that the benefits to the Medical Group hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral, purchase, or any other arrangement for the provision of any
item or service to or for any of the Medical Group's patients in or from any
medical facility or laboratory or from any other entity owned, operated,
controlled, or managed by the Management Company.
1.5. Future Affiliations.
The Management Company shall not at any time prior to June 1, 1998, without
the prior written consent of the Medical Group (which consent shall not be
unreasonably withheld), enter into any discussions with respect to, or otherwise
solicit a management services agreement with any of the physicians or medical
practices listed on Schedule 1.5 attached hereto. The Medical Group hereby
represents that it was, immediately prior to the date hereof, in active
discussion with each of such physicians and/or medical practices regarding a
possible affiliation between the Medical Group and such physicians and medical
practices, respectively.
SECTION 2. Term.
Provided that the Closing under the Asset Purchase Agreement shall have
occurred as provided therein, and subject to such start-up procedures as the
parties may agree upon for purposes of facilitating the transition of
responsibilities required by this Agreement, the performance of services under
this Agreement shall commence as of June 1, 1997 (the "Commencement Date") and
shall expire on the fortieth anniversary of the Commencement Date unless
terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term
of this Agreement shall be automatically extended for successive terms (each, an
"Additional Term," and together with the Base Term, the
-3-
<PAGE>
"Term") of five years each, unless either party delivers to the other party, not
less than six (6) months nor more than nine (9) months prior to the expiration
of the then-current Term, written notice of such party's intention not to so
extend the Term of this Agreement.
SECTION 3. Management Services.
3.1. Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager and
administrator of all day-to-day business functions for the Medical Group,
subject to the provisions of Section 1.2 hereof. The Management Company shall
provide all of the management and administrative services reasonably required by
the Medical Group in connection with the provision of any and all of the Medical
Group Services (as hereinafter defined) and as otherwise provided in this
Agreement, including without limitation the services described in Sections 3.2
through 3.17 hereof.
(b) Without limiting the generality of the provisions of Section 3.1(a),
and subject to the further provisions of this Agreement, the Management Services
shall include such management and administrative services as may be reasonably
required in connection with (i) all of the offices (including New Medical
Offices, as hereinafter defined) of the Medical Group, and (ii) all professional
services and all ancillary services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described in
this Agreement shall be applicable with respect to the items identified as
Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs
shall be paid by the Medical Group rather than by the Management Company.
Accordingly, the Management Company shall provide accounting, bookkeeping, and
related services with respect to all such costs.
-4-
<PAGE>
(d) The Management Company may enter into such contracts and agreements
with outside services and suppliers as the Management Company shall reasonably
deem necessary in connection with the provision of the Management Services, and,
to the extent permitted by applicable law, such contracts and agreements shall,
except as otherwise expressly provided in this Agreement, be in the name of the
Management Company; provided, however, that without the prior approval of the
Operations Committee (as hereinafter defined), the Management Company shall not
enter into any agreement pursuant to which an unaffiliated third party will
perform substantially all of the duties of the Management Company set forth in
Section 3.6(a) hereof. The Management Company shall have no authority, directly
or indirectly, to perform, and shall not perform or enter into any agreement to
perform, Medical Group Services or any other medical function required by law to
be performed by a licensed physician or by any other licensed health care
professional.
(e) The Management Company shall comply in all material respects with all
applicable material Federal, state and local laws, regulation, and ordinances in
connection with the provision of the Management Services hereunder.
3.2. Premises.
(a) The Medical Group, as of the Commencement Date, leases premises and
provides medical services at the following locations:
1411 N. Flagler Drive
West Palm Beach, Florida 33401
(b) A New Medical Office (as hereinafter defined) may be opened only upon
the agreement of the Medical Group and the Management Company. The capital costs
and start-up costs reasonably required in connection with the opening of any New
Medical Office shall be borne as set forth in Section 5 hereof.
-5-
<PAGE>
The premises of any New Medical Office shall be leased by the Management
Company, in the Management Company's name, and the Medical Group shall, subject
in each instance to the terms of any such lease, have the right to use the
premises of any such New Medical Office solely for the provision of Medical
Group Services in accordance with the terms of this Agreement. In connection
therewith, the Medical Group agrees in all instances to abide by all of the
terms and provisions of all such leases. Notwithstanding anything to the
contrary contained in this Agreement, the Management Company may, in its sole
discretion, determine to permanently close any New Medical Office if such office
is not, after 12 months of operation, profitable (as determined in the sole
discretion of the Management Company).
(c) Except as set forth in Sections 3.2(a) or (b) above, the closing or
relocation of any offices of the Medical Group shall be subject to agreement by
the Medical Group and the Management Company.
(d) The services to be provided by the Management Company with respect to
the premises leased in accordance with this Section 3.2 shall include, without
limitation, the negotiation and renegotiation of leases, communication with the
landlords of the respective premises, identification of potential new locations
for Medical Group offices, financial analysis relating to the opening, closing,
and relocation of any offices, arrangement of necessary repairs, maintenance and
improvements, procurement of property insurance, arrangement of telephone and
other utility services, and hazardous waste disposal, and all other reasonably
necessary or appropriate services related to all of the offices of the Medical
Group.
(e) The Management Company also shall provide all necessary or appropriate
leasehold improvements to each of the premises, subject to prior approval as
provided in Section 8.2 hereof.
-6-
<PAGE>
(f) The Medical Group acknowledges that the Management Company makes no
warranties or representations, expressed or implied, regarding the condition of
any of the leased premises.
3.3. Equipment.
(a) During the Term, the Management Company shall provide to the Medical
Group the diagnostic and therapeutic medical equipment reasonably required by
the Medical Group in connection with the provision of Medical Group Services
(collectively, the "Medical Equipment"). The Management Company shall acquire
(or lease), at its cost, all Medical Equipment, and the Management Company shall
retain ownership of (or the leasehold interest with respect to) all Medical
Equipment. As used herein, the term Medical Equipment shall not include medical
equipment used in connection with a New Ancillary Service (as hereinafter
defined).
(b) The Management Company also shall provide to the Medical Group all
furniture, furnishings, trade fixtures, and office equipment reasonably required
in connection with the provision of Medical Group Services pursuant to this
Agreement (collectively, "FF&E"). The Management Company shall acquire, at its
cost, all FF&E, and the Management Company shall retain ownership of all FF&E.
As used herein, the term FF&E does not include furniture, furnishings, trade
fixtures, and office equipment used in connection with a New Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation, or
other disposition of any Equipment shall require prior approval as provided in
Section 8.2 hereof.
(d) The Medical Group's right to use the Equipment shall be subordinate to
the rights of any unaffiliated third
-7-
<PAGE>
party to which the Management Company elects, in its sole discretion, to grant
any security interest, mortgage, lien or other encumbrance in or on the
Equipment. The Medical Group shall use the Equipment only in connection with its
provision of the Medical Group Services, and the Medical Group shall not alter,
repair, augment, or remove the Equipment from the premises of the Medical Group
without the prior written consent of the Management Company and any lessor
thereof, which approval may be granted or withheld in the Management Company's
or such lessor's sole discretion. To the extent the Equipment is utilized by the
Medical Group in the provision of Medical Group Services, the Medical Group
shall have the right to exercise reasonable control over the use of such
Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so that
all such Equipment shall function continuously (subject to interruptions not
reasonably avoidable) in accordance with the manufacturer's specifications and
so that all conditions imposed by the manufacturer to maintaining the continued
effectiveness of any warranty on such Equipment shall be satisfied. The
Management Company shall take all reasonable steps to provide that all necessary
service and maintenance is obtained in a prompt and timely manner, so as to
minimize the amount of time that any of the Equipment is not available for usage
by or for patients of the Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER
RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT,
THE CONFORMANCE THEREOF TO THE PROVISIONS AND
-8-
<PAGE>
SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE
EQUIPMENT FOR ANY PARTICULAR PURPOSE. Nothing in this Agreement shall be
construed to affect or limit in any way the professional discretion of the
Medical Group to select and use any Equipment acquired by the Management Company
in accordance with the terms of this Agreement insofar as such selection or use
constitutes or might constitute the practice of medicine.
3.4. New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means the
technical component (but not the professional component) of the following,
except as set forth in Schedule I:
(i) Physical therapy;
(ii) Magnetic resonance imaging and/or other imaging services (except
diagnostic radiology);
(iii) Outpatient surgery;
(iv) Densitometry; and
(v) Other revenue-producing services generally recognized as
ancillary services, but excluding the following:
(A) Any services provided on a regular basis by the Medical
Group immediately prior to the Commencement Date, including
without limitation (1) plain film and other diagnostic
radiology (if any) and (2) ultrasound for pediatric
patients; and
(B) Any service performed in connection with new Medical
Equipment acquired to
-9-
<PAGE>
replace existing Medical Equipment so long as the new
Medical Equipment performs substantially the same functions
as the replaced Medical Equipment.
New Ancillary Services do not include the sale or provision of (or services
rendered in connection with) prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, crutches, casts, or any other supplies or similar items
which are billable to patients or payors, all of which are to be included in the
scope of Medical Group Services.
(b) New Ancillary Services may be established only upon agreement of the
Medical Group and the Management Company. Such agreement shall be memorialized
in a written agreement executed by the parties (or in a written amendment to
this Agreement) under which the Management Company agrees to provide all of the
Management Services described in this Section 3 in connection with such New
Ancillary Service, and for which the Management Company shall be compensated as
described in Section 5.8 of this Agreement, except as may otherwise be agreed
upon by the parties.
3.5. Administration, Finance and Accounting.
The Management Company shall provide or arrange for the provision of all
administrative, financial, and accounting functions necessary for the operation
of the Medical Group, including, without limitation, the following (if
applicable):
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
-10-
<PAGE>
(c) Preparing accounts receivable summary reports, including various
analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical Group's
articles of incorporation (the "Articles of Incorporation") and its
bylaws (the "Bylaws") prior to distribution of payments to outside
parties; provided, however, that the Management Company shall not be
responsible for or liable with respect to interpretations of the
Articles of Incorporation or Bylaws.
(e) Disbursement of payables, including payables of the Medical Group;
provided, however, that payables of the Medical Group shall be paid
from an account of the Medical Group and not from any of the
Management Company's bank accounts, and all checks drawn on any
Medical Group account shall be signed by a partner in the Medical
Group or another authorized representative of the Medical Group.
(f) Negotiation of vendor contracts.
(g) Performing monthly accounting functions, including bank
reconciliations, maintenance of books and records, and preparation of
financial statements.
(h) Analyzing financial data as reasonably requested by physicians.
(i) Analyzing potential New Medical Office locations, and coordinating all
functions associated with opening New Medical Office locations.
-11-
<PAGE>
(j) Preparing monthly financial and medical practice statistics reports by
satellite office and by physician, and the Management Company shall
use its reasonable efforts to have such reports available, with
respect to any given month, 20 days after the end of such month.
(k) Providing from the Medical Group's bank account(s) monthly draws to
physicians and professional corporations pursuant to service
agreements, monthly profit and loss distributions, and quarterly bonus
calculations; provided, however, that the Management Company shall not
be responsible for or liable with respect to interpretations of the
Articles of Incorporation or Bylaws; provided, further, that all
checks drawn on any Medical Group bank account shall be signed by a
partner in the Medical Group or other authorized representative of the
Medical Group.
(l) Calculating physicians' and Medical Group's annual earnings based on
the Medical Group's profit and loss distribution formulas.
(m) Ongoing day-to-day communication with the managing partner (or other
manager of the Medical Group) and assisting such person in fulfilling
his responsibilities.
(n) Preparing agendas and information packages for Medical Group meetings.
(o) Developing budgets and long-term strategies for the Medical Group,
including an initial long-term plan and capital expenditures budget
-12-
<PAGE>
and the Management Company shall use its reasonable efforts to have
such plan and budget delivered to the Medical Group within 180 days
and 90 days, respectively, after the Commencement Date.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Sponsoring employee benefit plans and providing administrative
services relating thereto for the Medical Personnel (as hereinafter
defined), provided that if the Medical Group elects not to participate
in the employee benefit plans established by the Management Company,
the Management Company shall not be required to perform the services
set forth in this clause (r).
(s) Coordinating recruitment, interviewing, and hiring of new physicians
approved by the Medical Group, in its sole discretion.
(t) Implementing Medical Group fee schedule increases and/or decreases.
(u) Coordinating depositions and court appearances.
(v) Assisting in the coordination of call schedules.
(w) Assisting in the coordination of coverage of athletic team events.
(x) Acting as liaison to hospital administration, physical therapy,
surgery center, MRI, and other ancillary services entities.
-13-
<PAGE>
(y) Cooperating with outside accountants in preparing various schedules
and providing other information.
(z) Interacting with legal counsel as necessary.
3.6. Billing and Collection.
(a) The Medical Group acknowledges that ownership of all Accounts (as
hereinafter defined) is transferred by the Medical Group to the Management
Company as provided in greater detail in Section 5.1 of this Agreement. In order
to facilitate the collection of the Accounts, the Management Company shall (i)
bill patients and third party payors in the Medical Group's name; (ii) collect
accounts receivable resulting from such billing; (iii) receive payments and
prepayments from the Medical Group's patients, Blue Cross and Blue Shield
organizations, insurance companies, health care plans, Medicare, Medicaid, HMOs,
and any and all other third party payors; (iv) take possession of and deposit
into such bank (the "Medical Group Bank") as the Medical Group designates, in an
account established by the Medical Group in the name of the Medical Group (the
"Medical Group Collections Account"), any and all checks, insurance payments,
cash, cash equivalents and other instruments received for Medical Group
Services; and (v) initiate with the consent of the Medical Group, which consent
may be withheld by the Medical Group in its sole and absolute discretion, legal
proceedings in the name of the Medical Group to collect any Accounts and monies
owed to the Medical Group, to enforce the rights of the Medical Group as a
creditor under any contract or in connection with the rendering of any service,
and to contest adjustments and denials by governmental agencies (or their fiscal
intermediaries) as third-party payors.
(b) From time to time at the Management Company's request, the Medical
Group shall make available to the Management Company one or more authorized
partners or other authorized
-14-
<PAGE>
signatories (the "Authorized Partners") of the Medical Group to sign any
letters, checks, instruments or other documents (the "Documents") on behalf of
the Medical Group that are necessary for the Management Company to take the
actions specified in this Section 3.6 and to perform its duties under this
Agreement. If the Management Company notifies the Medical Group that an
Authorized Partner is not signing the Documents in a timely manner, the
Management Company shall not be liable for any failure to perform its duties
hereunder or for any failure to take the actions specified herein or to perform
the Management Services to the extent caused by the failure of an Authorized
Partner to sign the Documents in a timely manner.
(c) The Management Company shall submit all bills and manage the billing
process on a timely basis in accordance with the terms of this Agreement and
applicable law.
(d) Without limiting the generality of the foregoing, the Management
Company shall bill patients, bill and submit claims to third party payors,
perform appropriate coding for each bill, and collect all fees for professional
and other services rendered and for items supplied to patients by the Medical
Group, all in a timely manner and in accordance with parameters and criteria
established by the Operations Committee (as hereinafter defined). Additionally,
the Management Company shall provide the following services which are currently
being provided by or on behalf of the Medical Group:
(i) Receive and collect from patients at the time of visit all
appropriate payments and pre-payments, including co-pays, deductibles,
payments for non-covered medical services, and deposits for surgeries (if
applicable), and shall obtain all appropriate insurance and other
information required.
(ii) Submit claims utilizing electronic billing submission, whenever
appropriate.
-15-
<PAGE>
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanics for delinquent accounts of all insurance
classifications, all in a timely fashion as determined by the Operations
Committee.
(iv) Turn over to outside collection agencies all delinquent accounts
satisfying the criteria established by the Operations Committee. The
Management Company shall also follow-up on the performance of the outside
collection agencies and make changes, if necessary, and shall reconcile
each account turned over to the summary data provided by the collection
agency.
(v) Write-off account balances according to criteria approved by the
Operations Committee.
(vi) Prepare claim reviews in accordance with criteria approved by the
Operations Committee.
(vii) Bill workers' compensation medical services at rates equal to
the most recently approved Florida workers' compensation fee schedule.
(viii) Apply "insurance only" and other courtesy write-offs in
compliance with Operations Committee policy.
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), the Management Company shall determine that payments
received from PPOs and HMOs are in compliance with their respective
contracts with the Medical Group.
(x) With respect to capitation fee contracts with HMOs, the Management
Company shall:
-16-
<PAGE>
(A) Follow-up to ensure that payments to the Medical Group are
made on a timely basis; and
(B) Review and audit enrollment data provided by the HMO to
ensure that the Medical Group is being compensated for the
proper number of lives enrolled.
(xi) With respect to lien accounts, the Management Company shall:
(A) Ensure that appropriate documents are signed and agreed to
initially as between the Medical Group, attorney and
patient;
(B) Follow-up on a regular basis as to the status of the
account; and
(C) Apply the policies of the Operations Committee in resolving
open account balances.
(xii) With respect to student athlete accounts, the Management Company
shall coordinate insurance and other information in compliance with the
policy of the Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, the Management Company
shall follow-up on a timely basis to ensure that withheld amounts are
returned to the Medical Group, if warranted, and to ensure that amounts not
returned are verified and audited for appropriateness.
-17-
<PAGE>
(xiv) Coordinate the timely payment of refunds to patients and third
party payors when appropriate.
(xv) Ensure that revenues related to depositions, record review and
court appearances are accounted for, monitored, followed-up, and ultimately
collected.
3.7. Administrative Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of the following non-medical personnel necessary for the
conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration;
(ii) Accounting;
(iii) Billing and Collection;
(iv) Secretarial;
(v) Transcription;
(vi) Appointments;
(vii) Switchboard;
(viii) Medical Records;
(ix) Chart Preparation;
(x) Historians;
(xi) Clinic Support; and
(xii) Marketing.
(b) The Management Company shall determine and pay the salaries and fringe
benefits of the Administrative Personnel, and shall provide other personnel
services related to the Administrative Personnel, including, but not limited to,
-18-
<PAGE>
scheduling, determining personnel policies, administering continuing education
benefits, and payroll administration.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify
educational and employment experience, licensure, and insurability.
(d) The Management Company shall attempt, consistent with sound business
practices, to honor Medical Group requests with regard to the retention or
assignment of specific Administrative Personnel to the Medical Group. In the
event that the Management Company receives a complaint from the Medical Group
that any of the Administrative Personnel is interfering with or disrupting the
provision of Medical Group Services by the Medical Group, the Management Company
will use reasonable efforts to attempt to promptly remedy any such complaint. If
any such complaint is not remedied to the reasonable satisfaction of the Medical
Group, then the Management Company shall remove such Administrative Personnel,
if requested by the Medical Group, from the Medical Group's facilities, if and
to the extent such action by the Management Company will not violate any
applicable law.
(e) All of the services provided by the Management Company under this
Section 3.7, including the obligations set forth in Section 3.7(d), shall be
performed in compliance with all applicable laws.
3.8. Technical Personnel; Leased Employees.
(a) Subject to the conditions set forth in this Section 3.8, the Management
Company shall employ or contract with, or shall arrange for, and shall provide
to the Medical Group as leased employees, such Technical Personnel (as defined
below) as may reasonably be necessary for the conduct of the Medical Business.
-19-
<PAGE>
(b) For purposes of this Agreement, "Technical Personnel" means nurses,
medical assistants, x-ray technicians, other technicians, and other personnel
who perform diagnostic tests or other services that are covered by Medicare or
by other third party payors when performed by an employee of a physician under
the physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall exercise,
such supervision and control over the activities of the Technical Personnel as
may be necessary for the Technical Personnel to be considered leased employees
under the Medicare program and under applicable law. Without limiting the
generality of the foregoing, the Medical Group shall:
(i) have the right to have any Technical Personnel terminated from
employment;
(ii) furnish the Technical Personnel with the equipment and supplies
needed by the Technical Personnel for their work;
(iii) provide the Technical Personnel with any necessary training;
(iv) instruct the Technical Personnel regarding their activities
performed for the Medical Group;
(v) establish the hours of work for the Technical Personnel;
(vi) approve vacation time and other time off from work; and
(vii) provide that degree of supervision as is required by Medicare
and by other third party payors to satisfy applicable conditions for
coverage thereunder.
-20-
<PAGE>
(d) With respect to each of the Technical Personnel, the Management Company
shall verify or arrange for the verification of educational and employment
experience, licensure and insurability, and shall review and provide the Medical
Group with copies of any complaints contained in public files with applicable
state and Federal commissions.
3.9. Medical Personnel Recruiting.
(a) The Management Company shall, upon request by the Medical Group, assist
the Medical Group in recruiting Medical Personnel. The Medical Group shall be
solely responsible for the selection and retention of Medical Personnel,
provided that any such Medical Personnel shall possess all of the licensure
required under applicable Federal and state law for such individual to perform
his or her duties. "Medical Personnel" means:
(i) Physicians (including fellows and residents, if any) providing
professional medical services who are employees or independent contractors
of the Medical Group; and
(ii) Physician assistants, nurse practitioners, and other health care
professionals who provide services that are billable to patients or third
party payors under the name of such health care professional (as
distinguished from services that are billable under the name of the
supervising physician).
(b) With respect to each of the Medical Personnel, the Management Company
shall verify educational and employment experience, licensure and insurability,
and shall review and provide the Medical Group with copies of any complaints
contained in public files with applicable state and Federal sanctioned
commissions.
-21-
<PAGE>
3.10. Inventory and Supplies.
The Management Company shall order and purchase inventory and supplies on
behalf of the Medical Group, and such other ordinary or appropriate materials as
the Management Company and the Medical Group may mutually agree is necessary for
the Medical Group to carry out its Medical Group Services. Inventory and
supplies shall include, but not be limited, to:
(a) Medical supplies;
(b) Office supplies;
(c) Postage;
(d) Computer forms and supplies;
(e) Printing and stationary supplies;
(f) Printer supplies; and
(g) Linen and laundry supplies.
3.11. Taxes.
The Management Company shall provide the Medical Group with access to all
information necessary for the Medical Group to prepare its tax returns. The
Management Company shall have no responsibility for:
(a) The payment of the Medical Group's taxes; or
(b) The preparation of any income tax returns for the Medical Group.
3.12. Information Systems Management.
(a) The Management Company shall provide or arrange for the provision of
management information systems services to be utilized by the Medical Group.
These services shall include, but not be limited to, ongoing maintenance and
-22-
<PAGE>
improvement of the information systems used by the Medical Group in connection
with the provision of the following services:
(i) Accounts receivable - Billing/Insurance/ Collections;
(ii) On-line appointment scheduling;
(iii) Internal e-mail;
(iv) On-line transcription;
(v) Faxing subsystem;
(vi) Electronic claims submission;
(vii) Patient flow monitoring system;
(viii) Authorization module;
(ix) Prescription module;
(x) X-ray tracking system;
(xi) Voice mail;
(xii) Paperless medical records; and
(xiii) Bar code chart tracking system.
(b) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical Group's payor agreements; provided, however, that in no event
shall a breach of such confidentiality be deemed a default under this Agreement
if the Management Company acted reasonably and in good faith to protect such
confidentiality.
3.13. Use of New Technologies in the Practice of Medicine.
The Management Company shall utilize reasonable efforts to promote the
integration of new technologies into the professional practice of the Medical
Group, including, without
-23-
<PAGE>
limitation, the use of satellite and other telecommunications services that
permit the provision of remote consultations, virtual operations, and other
professional services; provided, however, that the foregoing shall be subject to
the terms of Section 8.2(e) hereof.
3.14. Public Relations; Marketing and Advertising.
The Management Company shall develop and implement community outreach
programs and public relations programs designed to educate the patient
population regarding the Medical Group, the availability of its medical
services, and the availability in terms of any managed care programs in which
the Medical Group participates. The Management Company also shall develop and
implement marketing and advertising programs as reasonably required to promote
and expand the Medical Business, subject to any approved budgets. These programs
shall be developed in such manner as the Management Company deems practical, and
shall be conducted in compliance with applicable laws and regulations governing
advertising by the medical profession. Any promotional materials created solely
for the purpose of marketing the services provided by the Medical Group and the
use of any individual physician's name in any promotional materials shall
require the consent of the Medical Group or such physician, as the case may be.
3.15. Insurance.
The Management Company shall, to the extent permitted by applicable law,
provide the insurance coverage described in Section 12.1, and may obtain the
insurance described in Section 12.2 of this Agreement.
3.16. Files and Records.
(a) To the extent permitted by applicable law, the Management Company shall
supervise and maintain custody of all
-24-
<PAGE>
files and records relating to the operation of the business of the Medical
Group, including, without limitation, accounting, billing, collection, or
patient medical records. The management of all files and records shall be in
compliance with applicable state and Federal statutes. Patient medical records
shall at all times be and remain the property of the Medical Group and shall be
located at a location that is readily accessible for patient care. The
Management Company shall preserve the confidentiality of patient medical records
and use information contained in such records only for the limited purposes
necessary to perform the Management Services set forth herein; provided,
however, that in no event shall a breach of such confidentiality be deemed a
default under this Agreement if the Management Company acted reasonably and in
good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of files and
records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the
Commencement Date. Any change in such policies shall be subject to the approval
of the Operations Committee.
(c) In the event of termination of this Agreement, the Management Company
shall deliver to the Medical Group at no charge a copy of the books and records
of the Medical Group in the Management Company's possession. In the event any
physician of the Medical Group terminates his affiliation with the Medical Group
during the Term, the Management Company shall, within 30 days after receipt of
written instructions from the Medical Group, deliver to such physician a copy of
the books and records pertaining to the Medical Group Services provided by such
physician during the five years prior to such physician's departure from the
Medical Group; provided that the Management
-25-
<PAGE>
Company shall not be obligated to return any books and records pertaining to
Medical Group Services provided prior to the Commencement Date.
3.17. Managed Care Contracts.
The Management Company shall solicit, negotiate and administer all managed
care contracts on behalf of the Medical Group based on parameters and criteria
established by the Operations Committee. Such services shall be performed by the
Management Company as agent of the Medical Group, and all managed care contracts
shall be subject to the Medical Group's prior approval of any such contract. The
Management Company shall prepare cost forecasts and other analyses as reasonably
requested by the Medical Group in order to allow the Medical Group to make an
informed decision with respect to each proposed contract.
3.18. Budgets.
The Management Company shall prepare, for the review and approval of the
Operations Committee, annual operating budgets (the "Budgets") reflecting in
reasonable detail projected Billings, Collections, Medical Group Costs, and
Management Company Operating Costs (all as hereinafter defined); provided,
however, that the Medical Group shall provide the Management Company with a
proposed Budget covering the initial three-month period under this Agreement.
The initial Budget, which shall be applicable to the period commencing on the
Commencement Date and ending three (3) months thereafter, is attached hereto as
Schedule II. All other budgets shall be on a calendar year basis. The Management
Company shall prepare and submit to the Operations Committee all subsequent
Budgets on or before December 15 of the year immediately preceding the calendar
year for which any Budget is applicable.
-26-
<PAGE>
3.19. Force Majeure.
The Management Company shall not be liable to the Medical Group for failure
to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, unavailability of supplies, changes in
applicable law or regulations or other events over which the Management Company
has no control for so long as such events continue and for a reasonable time
thereafter.
SECTION 4. Consideration.
In consideration of the Medical Group's entering into this Agreement, the
Management Company shall provide to the equity owners and employees of the
Medical Group to whom the Medical Group instructs the Management Company to
issue shares of Common Stock (the "Eligible Parties"), the consideration set
forth opposite such person's name on Schedule III in the amounts designated by
the Medical Group.
SECTION 5. Costs, Compensation, and Other Payments.
5.1. Ownership of Accounts; Security.
The Medical Group hereby transfers to the Management Company ownership of
all accounts receivable and other rights to payment arising from the provision
by the Medical Group of orthopedic medical and surgical services and related
medical services to the general public during the Term (the "Accounts");
provided, however, that the right to payment of Medicaid and Medicare
receivables shall remain with the Medical Group in accordance with applicable
Federal and state law. The Management Company shall have the right to grant to
any lender (the "Lender") a first priority lien and security interest in and
with respect to the Accounts, together with all books, records, computer
information and other general intangibles relating thereto (collectively, the
"Collateral"), as security for the obligations of the Management Company to the
Lender. The Medical
-27-
<PAGE>
Group shall cooperate with the Lender as reasonably requested in the event the
Lender seeks to enforce its rights and remedies under its agreement with the
Management Company, including granting the Lender access, to the extent
permitted by law, to all books and records associated with the Collateral.
Neither the Management Company nor the Lender shall be required to give the
Medical Group any notice in connection with any loan or related financing
arrangements affecting the Accounts or other Collateral.
5.2. Bank Accounts.
The Medical Group shall instruct the Medical Group Bank to transfer, on a
daily basis, all funds in the Medical Group Collections Account (less the amount
necessary to avoid the payment of bank charges or fees relating to the failure
to maintain a minimum balance in the Medical Group Collections Account) to a
bank (the "Management Company Bank") designated by the Management Company, for
credit to an account in the Management Company's name (the "Operating Account").
5.3. Medical Group Compensation.
(a) Monthly Draw.
(i) On each Draw Date (as hereinafter defined) during the Term hereof,
the Management Company shall distribute to the Medical Group an amount
equal to a percentage (the "Draw Percentage") of the Medical Group's total
Billings (as hereinafter defined) for Medical Group Services provided
during the previous month (the "Monthly Draw"). The Draw Date and the
initial Draw Percentage are as set forth on Schedule IV, and the Draw
Percentage shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each year
thereafter, the Draw Percentage shall be
-28-
<PAGE>
adjusted to equal a fraction, the numerator of which is the Annual Medical
Group Compensation Amount (as hereinafter defined) for the previous year,
and the denominator of which is the total amount of Billings for the
previous year.
(b) Annual Settlement.
(i) On or before April 30 of each year beginning 1998, the Management
Company shall determine the compensation (the "Annual Medical Group
Compensation Amount") earned by the Medical Group with respect to the prior
calendar year in accordance with the following calculation:
(A) The total Collections for all Medical Group Services
rendered during such year, minus
(B) the sum of the following:
(1) the Management Fee earned by the Management Company for
the previous calendar year; and
(2) the Authorized Management Company Operating Costs (as
hereinafter defined) incurred by the Management Company
during such year.
(ii) If the Annual Medical Group Compensation Amount thus determined
exceeds (the "Annual Shortfall") the total of the twelve (12) Monthly Draws
paid by the Management Company to the Medical Group during the previous
calendar year (the "Annual Draw Amount"), the Management Company shall pay
to the Medical Group on or before May 15, an amount equal to the Annual
Shortfall. If the Annual
-29-
<PAGE>
Medical Group Compensation is less (the "Annual Overpayment") than the
Annual Draw Amount, the Management Company shall withhold from the Monthly
Draw otherwise payable to the Medical Group, during each of the following
six (6) months, an amount equal to one-sixth (1/6) of such Annual
Overpayment.
(iii) With respect to this Section 5.3(b), for purposes of determining
the total Collections for all Medical Group Services provided during any
calendar year or portion thereof during the Term, all Collections during
January, February, and March of such year shall be deemed to be for Medical
Group Services rendered during the previous calendar year, and all
Collections during April through December shall be deemed to be for Medical
Group Services rendered during the calendar year in which such Collections
were received. The foregoing shall also apply with respect to determining
the Management Fee earned by the Management Company for the previous
calendar year, for purposes of this Section 5.3(b).
(iv) Notwithstanding anything to the contrary set forth herein, the
first period for which the annual settlement described in this Section
5.3(b) shall be applicable is the period commencing on the Commencement
Date and ending on December 31, 1997.
(c) For purposes of this Agreement:
(i) "Billings" means, for any applicable period, the gross charges of
the Medical Group for all Medical Group Services furnished during such
period.
(ii) "Collections" means, for any applicable period, all cash or cash
equivalents received during such period, net of refunds paid during such
period, for Medical Group Services.
-30-
<PAGE>
(iii) "Medical Group Services" means the following services rendered
by, through, or on behalf of the Medical Group: all professional services
rendered by or under the supervision of any of the Medical Personnel
(including professional services rendered in connection with New Ancillary
Services); all plain film and other diagnostic radiology services rendered
by or under the supervision of any of the Medical Personnel; all other
ancillary services (other than New Ancillary Services); all ultrasound for
pediatric patients; all prosthetics, prosthetic devices, orthotics, braces,
splints, appliances, and other items and supplies that are billable to
patients or to third party payors; depositions, record review services,
court appearances, and independent medical exams; and all other services
provided on a regular basis by the Medical Group immediately prior to the
Commencement Date (except as set forth below).
(iv) It is the intent of the parties that Billings, Collections, and
Medical Group Services not include any of the following:
(A) New Ancillary Services (excluding professional services
rendered by Medical Personnel in connection therewith, which
professional services are included under Section 5.3(c)(iii)
above);
(B) interest income;
(C) royalties payable to any Medical Group physician for medical
inventions;
(D) fees payable under consulting agreements entered into by
Medical Group physicians;
-31-
<PAGE>
(E) revenues from presentations, publications, medical
directorships, service as the head of a hospital department,
and endorsements;
(F) proceeds from the sale of any capital assets of the Medical
Group; and
(G) any income from investments.
Notwithstanding anything to the contrary contained therein, any revenues
received by any Billable Medical Personnel (as hereinafter defined) from any
source set forth in clause (E) above, shall be included in Billings, Collections
and Medical Group Services if the revenues from Medical Group Services generated
by such Billable Medical Personnel during any year are materially reduced by the
Billable Medical Personnel's participation in such activity.
(v) For illustrative purposes only, an example of the computation of
the Annual Settlement is set forth on Schedule VII attached hereto.
5.4. Management Fee.
(a) The compensation payable to the Management Company for the provision of
Management Services under this Agreement (the "Management Fee"), which the
Management Company may disburse from time to time at its discretion, shall be
equal to (i) the sum of (A) an amount equal to the Applicable Percentage (as
hereinafter defined) of Collections, (B) an amount equal to sixty-six and
two-thirds percent (66-2/3%) of the Professional Management Cost Savings (as
hereinafter defined) and (C) any amounts owed to the Management Company pursuant
to Section 5.11 hereof, if any, less (ii) an amount equal to the Medical Group's
pro rata portion of the Specialty Care Network
-32-
<PAGE>
Profit (as hereinafter defined) for such period, if any, based on the number of
claims generated by the Medical Group through the specialty care network owned
or operated by the Management Company during the applicable period; provided,
however, that in the event the Applicable Percentage of Collections shall equal
an amount that is less than $500,000 for any calendar year ending on or before
December 31, 2003, the Management Fee for such period shall, notwithstanding
anything to the contrary contained herein, equal $500,000 plus the amounts
described in clauses (ii) and (iii) above (the "Guaranteed Minimum Fee"). The
Management Fee shall not include any Professional Medical Cost Saving (as
hereinafter defined), but all of such savings will accrue for the benefit of the
Medical Group. For illustrative purposes only, an example of the computation of
the Management Fee is set forth on Schedule VII attached hereto.
(b) For purposes of this Section 5.4, the following terms have the meanings
set forth below:
(i) "Applicable Percentage" has the meaning set forth on Schedule V;
(ii) "Professional Management Cost Savings" means the Professional
Practice Cost Savings described in Section A.1 of Schedule VI;
(iii) "Professional Medical Cost Savings" means the Professional
Practice Cost Savings described in Section A.2 of Schedule VI.
(iv) "Professional Practice Cost Savings" means the cost savings
determined in the manner described on Schedule VI; and
(v) "Specialty Care Network Profit" means the excess of the fee(s)
received by the Management Company over the costs incurred by the
Management Company, each in
-33-
<PAGE>
connection with its ownership and/or operation of a specialty care network.
5.5. Management Company Costs.
(a) The Management Company shall pay all Management Company Operating Costs
and all Excluded Costs (collectively, the "Management Company Costs"). All
Management Company Costs shall be incurred in the name of the Management
Company, and not in the name of the Medical Group, except as specifically
approved by the Medical Group. Management Company Costs shall not include any
costs or expenses incurred prior to the Commencement Date.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the Management
Company Costs.
(c) For purposes of this Agreement, "Management Company Operating Costs"
means all operating costs and expenses incurred in connection with the provision
of the Management Services, including, without limitation, those costs and
expenses set forth in the Budget, except that any costs and expenses defined as
Medical Group Costs in Section 5.7 hereof, and any Excluded Costs (as
hereinafter defined) shall not be deemed Management Company Operating Costs. To
the extent that the Medical Group and the Management Company mutually determine
that an expenditure not included in the Budget needs to be incurred in
connection with the provision of Management Services hereunder, such expenditure
shall be included in Management Company Operating Costs for purposes of this
Agreement. "Excluded Costs" means all of the following costs and expenses
incurred in connection with the provision of the Management Services hereunder:
(i) New Medical Office Start-Up Costs;
-34-
<PAGE>
(ii) the cost of any FF&E provided by the Management Company to the
Medical Group, including the capital costs associated with any information
systems technology implemented by the Management Company (subject to the
provisions of Section 8.2(e) hereof); provided that the costs associated
with the maintenance of such technology shall be an expense included in the
Budget and shall be deemed an Authorized Management Company Operating Cost
for purposes of this Agreement;
(iii) depreciation, amortization, and interest; and
(iv) corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the following conditions are
satisfied, as determined by the Operations Committee:
(A) The Corporate Overhead is incurred in lieu of a pre-existing
Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not exceed the
amount of the Management Company Operating Costs being
eliminated; and
(C) The Corporate Overhead is allocated to the Medical Group and
to all other medical groups utilizing such Corporate
Overhead on a pro rata basis.
Any Corporate Overhead with respect to which all of the above conditions are
satisfied shall be considered Management Company Operating Costs.
-35-
<PAGE>
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in any
year reduced by any or all of the following, as applicable:
(i) any costs that exceed the applicable Management Company Operating
Costs Budget which are not approved by the Operations Committee;
(ii) any costs with respect to which the Medical Group has reasonably
requested supporting documentation or other backup detail which has not
been furnished by the Management Company or which does not reasonably
establish the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an audit under
Section 5.9 not to have been reasonably incurred in connection with the
Management Services required to be provided under this Agreement.
5.6. New Medical Office Start-Up Costs.
(a) The Management Company shall pay, to the extent provided herein, all
New Medical Office Start-Up Costs incurred in connection with the establishment
of any New Medical Office. The Management Company shall create a separate
division (the "New Office Division") for purposes of accounting for the income,
costs, profits, and losses of any New Medical Office. The Management Company
shall utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of each New
Medical Office. Notwithstanding anything to the contrary contained herein,
Corporate Overhead shall not be included in determining the costs and expenses
associated with any New Medical Office. At the end of the New Medical Office
Start-Up Period (as hereinafter defined), (i) the Management Company shall be
reimbursed for all of the Management Company Operating Costs
-36-
<PAGE>
incurred by the Management Company for each New Medical Office, (ii) the
Management Company shall be entitled to receive the aggregate Management Fee as
described in Section 5.4 and (iii) the Medical Group shall be entitled to
receive the Annual Medical Group Compensation Amount for such new Medical
Office, in each case, as if such New Medical Office had been any other office of
the Medical Group during the New Medical Office Start-Up Period; provided,
however, that notwithstanding the foregoing, if the aggregate Collections for
such New Medical Office during the New Medical Office Start-Up Period is equal
to or less than the New Medical Office Start-Up Costs associated with such New
Medical Office during the New Medical Office Start-up Period, then (A) the
Management Company and the Medical Group shall not be entitled to receive the
Management Fee, the Annual Medical Group Compensation Amount, as applicable, or
any reimbursement for Management Company Operating Costs and (B) the Management
Company shall be responsible for the deficit, if any, associated with such New
Medical Office.
(b) Except to the extent provided in Section 5.6(a) above, the billings,
collections, costs and expenses relating to any New Medical Office shall not,
during the New Medical Office Start-Up Period, be included in the computations
of Medical Group Compensation, the Management Fee, Management Company Costs,
Ancillary Services, or Medical Group Costs as described in Sections 5.3, 5.4,
5.5, 5.8, or 5.7, respectively.
(c) All Medical Equipment utilized at any New Medical Office shall be
acquired by the Management Company and provided to the Medical Group in
accordance with the terms of Section 3.3 hereof.
(d) For purposes of this Agreement, "New Medical Office" means any office
of the Medical Group other than those offices located in the premises identified
in Section 3.2(a) hereof.
-37-
<PAGE>
(e) For purposes of this Agreement, "New Medical Office Start-Up Costs"
means the following costs incurred in connection with the establishment of a New
Medical Office during the New Medical Office Start-Up Period: all Management
Company Operating Costs and all costs associated with the development of such
New Medical Office other than Medical Group Costs, provided that, the costs
incurred in connection with any New Physician (as hereinafter defined) shall be
borne in accordance with the provisions of Section 5.11 hereof.
(f) For purposes of this Agreement, "New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of a New Medical Office and ending on the last
day of the calendar month in which a period of twelve (12) months has elapsed
from and after the date on which the New Medical Office first opened for the
treatment of patients. In the event that the New Medical Office is profitable
(as determined by the Management Company) as of the end of the New Medical
Office Start-Up Period, at all times thereafter such New Medical Office shall,
for all purposes of this Agreement, be treated as any other office of the
Medical Group.
5.7. Medical Group Costs.
Except as otherwise provided in this Agreement, the Medical Group shall pay
all of the costs specified in this Section 5.7 (the "Medical Group Costs"). All
Medical Group Costs shall be incurred in the name of the Medical Group, and not
in the name of the Management Company, and shall be paid from an account of the
Medical Group and not from any bank account of the Management Company. The
Medical Group Costs are as follows:
(a) compensation of all Medical Personnel that (i) are authorized to
directly bill patients, Medicare, Medicaid and third party payors and
(ii) are employed directly by the Medical
-38-
<PAGE>
Group (such persons being referred to herein as the "Billable Medical
Personnel");
(b) any applicable fringe benefits for all Medical Personnel, including,
but not limited to, payroll taxes, workers' compensation, health
insurance (including drug coverage), dental insurance, disability
insurance, life insurance, 401(k) retirement plan, business buy-out
disability insurance and continuing education; and
(c) the cost of any items which are not required to be provided by the
Management Company under this Agreement and/or which were ordered,
purchased, or incurred by the Medical Group directly, including but
not limited to the cost of accounting, legal, consulting, or other
professional or advisory services, business meetings, and business
taxes.
5.8. New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
(i) The Management Company shall create a separate division
("Ancillary Division") for purposes of accounting for the income, costs,
profits, and losses of any New Ancillary Service. The Management Company
shall utilize generally accepted accounting principles in determining and
accounting for the profits and losses related to the operations of each New
Ancillary Service. Notwithstanding anything to the contrary contained
herein, Corporate Overhead shall not be included in determining the costs
and expenses associated with any New Ancillary Service.
-39-
<PAGE>
(ii) Profits and/or losses of any Ancillary Division shall be divided
equally between the Medical Group and the Management Company, and all
distributions to the Medical Group and to the Management Company shall be
made in equal amounts to each from available cash (after payment of all
currently due obligations incurred in connection with such New Ancillary
Division, including, without limitation, any principal and interest amounts
then due and payable under Section 5.8(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such Ancillary Division.
(iii) All diagnostic and therapeutic equipment utilized in connection
with any New Ancillary Service ("New Ancillary Service Medical Equipment")
shall be acquired by the Management Company and shall be provided to the
Medical Group on terms substantially similar to those set forth in Section
3.3 hereof.
(iv) The Management Company shall pay all of the Ancillary Service
Start-Up Costs (as hereinafter defined). Beginning with the month following
the expiration of the Ancillary Service Start-Up Period (as hereinafter
defined), the Management Company shall be entitled to recoup all of the
Ancillary Service Start-Up Costs previously paid by the Management Company
in sixty (60) equal monthly installments of principal, plus interest on the
unrecouped portion of such costs at the prevailing prime rate as set forth
in the Wall Street Journal or at the actual rate paid by the Management
Company with respect to any part of such costs that have been financed by
the Management Company, if applicable.
(v) The Management Company shall provide, in connection with any New
Ancillary Service, the full range of management services described in this
Agreement.
-40-
<PAGE>
(vi) The billings, collections, costs and expenses relating to any New
Ancillary Service shall not be included in the computations of Medical
Group Compensation, the Management Fee, Management Company Costs, New
Medical Office Start-Up Costs, or Medical Group Costs as described in
Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively.
(b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of the New Ancillary Service, which date shall
not be prior to the date of the agreement establishing such New Ancillary
Service, and ending on the earlier to occur of (i) the last day of the first
period of two (2) consecutive calendar months for which the New Ancillary
Service shows a profit (as determined by the Management Company) or (ii) the
last day of the twelfth month after the establishment of such New Ancillary
Service.
(c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs"
means the total of all of the following costs incurred in connection with the
establishment of a New Ancillary Service during the Ancillary Service Start-Up
Period (whether such costs would otherwise be considered Management Company
Costs or Medical Group Costs):
(i) Any lease payments for New Ancillary Service Medical Equipment;
(ii) All costs of acquiring furniture, fixtures, and office equipment;
(iii) All initial occupancy costs, if any, including but not limited
to prepaid rent, and tenant improvements;
-41-
<PAGE>
(iv) All costs related to the acquisition of materials and supplies
related to the provision of such New Ancillary Service; and
(v) All ongoing costs of the New Ancillary Service, including but not
limited to personnel (other than the Billable Medical Personnel) and
related benefits, the cost of operating any equipment utilized in providing
the service, supplies, insurance, rent, repairs and maintenance, outside
services, telephone, taxes, utilities, storage and other ordinary ongoing
expenses of providing the New Ancillary Service.
5.9. Review and Audit of Books and Records.
Each of the parties shall have the right, during ordinary business hours
and upon reasonable notice, to review and make copies of, or to audit through a
qualified certified public accountant approved by the other party (which
approval shall not be unreasonably withheld), the books and records of the other
party relating to the billing, collection, and disbursement of fees, and the
determination of costs, under this Agreement. Any such review or audit shall be
performed at the cost of the requesting party; provided, however, that in the
event that such review or audit requested by the Medical Group discloses a
discrepancy indicating that the Medical Group has actually been underpaid by an
amount in excess of three and one-half (3 1/2%) percent, but not more than five
percent (5%), of the total amount of Medical Group Compensation otherwise
payable to the Medical Group for the period covered by the audit (the "Audit
Compensation Amount"), the Management Company shall pay up to $5,000.00 of the
costs of such audit, and if the audit reveals an underpayment in excess of five
percent (5%) of the Audit Compensation Amount, the entire cost of the audit
shall be borne by the Management Company. All documents and other information
-42-
<PAGE>
obtained in the course of such review or audit shall be held in strict
confidence.
5.10 Start-Up Period.
Consistent with the provisions of Section 2 of this Agreement, the parties
acknowledge and agree that, in order to facilitate the transition of
responsibilities hereunder, certain requirements and procedures agreed to under
this Agreement may be implemented, in whole or in part and at any time during
the period commencing on the Commencement Date and ending 90 days thereafter
(subject to extension by agreement of the Medical Group and the Management
Company), rather than being fully implemented immediately on the Commencement
Date. Accordingly, the parties further agree that the Management Fee and Monthly
Draw payable in respect of the Management Services and the Medical Group
Services applicable to such period of time shall be computed, and any
appropriate adjustments shall be made, such that no material financial advantage
or disadvantage shall accrue to either party as a result of implementing such
requirements and procedures over the course of such start-up period rather than
immediately on the Commencement Date.
5.11. New Physician Compensation Costs.
(a) Notwithstanding anything contained herein to the contrary, upon the
Management Company's receipt of a written request from the Medical Group within
three (3) business days after the New Physician Start Date (as hereinafter
defined) the Management Company shall, during the period beginning on the New
Physician Start Date and ending on the Physician Breakeven Date (as hereinafter
defined), be responsible for the payment of all New Physician Compensation (as
hereinafter defined); provided, however, that if the Management Company does not
receive such written request within the specified time period, the Medical Group
shall be responsible for such compensation. In the event
-43-
<PAGE>
the Management Company pays the New Physician Compensation pursuant to the
preceding sentence, the Management Company shall, notwithstanding anything to
the contrary contained in this Agreement, receive, in consideration therefor,
sixty six and two-thirds percent (66 2/3%) of all Collections generated by such
New Physician for those Medical Group Services performed by such New Physician,
and such amounts shall not be included in determining Collections for purposes
of this Agreement. The remaining thirty three and one-third percent (33 1/3%) of
such Collections shall belong to the Medical Group), and such amounts shall not
be included in determining Collections for purposes of this Agreement. As of the
Physician Breakeven Date, the New Physician Compensation shall be payable by,
and become the responsibility of, the Medical Group in accordance with Section
5.7 hereof, and all of the Billings and Collections generated by such New
Physician thereafter shall be considered Billings and Collections for purposes
of this Agreement. In the event that the Medical Group pays the New Physician
Compensation as of the Physician Start Date, all Billings and Collections
generated by such New Physician shall be considered Billings and Collections for
purposes of this Agreement.
(b) "New Physician" means, any physician who, at any time after the
Commencement Date, becomes affiliated with or employed by the Medical Group;
provided that if such physician becomes affiliated with or employed by the
Medical Group pursuant to a transaction between the Management Company and such
physician or a medical group with which such physician is affiliated in which
the Management Company acquires any assets or accounts receivable from such
physician or such medical group or pays any other consideration to such
physician or such medical group in connection with such physician's affiliation
or employment with the Medical Group and/or the Management Company, then such
physician shall not be deemed to be a New Physician for purposes of this
Agreement.
-44-
<PAGE>
(c) "Physician Breakeven Date" means, with respect to any New Physician,
the date on which the Collections generated by such New Physician during the
period beginning on the New Physician Start Date and ending on the date of
determination first equal or exceed (i) the aggregate amount of New Physician
Compensation paid to such New Physician for the foregoing period plus (ii) that
portion of the Medical Group Costs and Management Company Costs associated with
such New Physician and/or the Medical Group Services provided by such New
Physician.
(d) "New Physician Compensation" means, with respect to any New Physician
and for any period in question, the amount of compensation (wages and otherwise)
payable to such New Physician by the Medical Group.
(e) "Physician Start Date" means, with respect to any New Physician, the
date such New Physician becomes affiliated with or employed by the Medical
Group.
SECTION 6. Representations and Warranties of the Medical Group
The Medical Group hereby represents and warrants to the Management Company,
as of the Signature Date, as follows:
6.1. Organization; Good Standing; Qualification and Power.
The Medical Group is a professional association duly organized, validly
existing, and in good standing under the laws of the State of Florida and has
all requisite power and authority to own, lease, and operate its properties, to
carry on its business as now being conducted and as proposed to be conducted, to
enter into this Agreement, the Asset Purchase Agreement, the Assignments of
Lease, and the Stockholder Non-Competition Agreements (as hereinafter defined)
(collectively, the "Medical Group Transaction Documents"), to perform its
obligations hereunder and thereunder, and to consummate the transactions
-45-
<PAGE>
contemplated hereby and thereby. The Medical Group has delivered to the
Management Company a true and correct copy of its Articles of Incorporation and
its Bylaws, each as in effect on the date hereof.
6.2. Equity Investments.
Except as set forth on Schedule 6.2, the Medical Group currently has no
subsidiaries, nor does the Medical Group currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.
6.3. Authority.
The execution, delivery and performance of this Agreement and the other
Medical Group Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of the Medical Group. This Agreement and the other
Medical Group Transaction Documents have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement or any other Medical Group Transaction Document by the Medical Group
nor the consummation by the Medical Group of the transactions contemplated
hereby or thereby, nor compliance by the Medical Group with any provision hereof
or thereof will conflict with or result in a breach of any provision of the
formation documents of the Medical Group, cause a default (with due notice,
lapse of time or both), or give rise to any right of termination, cancellation
or acceleration, under any of the terms, conditions
-46-
<PAGE>
or provisions of any note, bond, lease, mortgage, indenture, license or other
instrument, obligation or agreement to which the Medical Group is a party or by
which the Medical Group or any of its properties or assets may be bound (with
respect to which defaults or other rights all requisite waivers or consents
shall have been obtained at or prior to the date hereof) or violate any law,
statute, rule or regulation or order, writ, judgment, injunction or decree of
any court, administrative agency or governmental body applicable to the Medical
Group or any of its properties or assets or the Medical Business. Except as
provided on Schedule 6.3, to the best of the Medical Group's knowledge, no
permit, authorization, consent or approval of or by, or any notification of or
filing with, any person (governmental or private) is required in connection with
the execution, delivery or performance by the Medical Group of this Agreement or
any other Medical Group Transaction Document or the consummation of the
transactions contemplated hereby and thereby.
6.4. Financial Information.
Schedule 6.4 contains the Medical Group's internal statements of assets,
liabilities and partners' equity of the Medical Business at March 31, 1997 (the
"Balance Sheet"; and the date thereof being referred to as the "Balance Sheet
Date"), and the related internal statements of revenue and expenses for the
three-month period then ended (including the notes thereto and other financial
information included therein) (collectively, the "Internal Financial
Statements"), and (b) the compiled financial statements of the Medical Business
for the periods ended December 31, 1996, December 31, 1995, and December 31,
1994 (the "Review Financial Statements"). The Internal Financial Statements and
the Review Financial Statements (i) are in accordance with the books and records
of the Medical Business, (ii) fairly present the financial position of the
Medical Business as of the dates thereof, (iii) have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
-47-
<PAGE>
the periods covered thereby, and (iv) are true, correct and complete in all
material respects as of the dates thereof.
6.5. Absence of Undisclosed Liabilities.
Except as set forth on Schedule 6.5, as of the Balance Sheet Date, the
Medical Business did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Balance Sheet, all liability reserves established by the
Medical Business on the Balance Sheet were adequate and there were no loss
contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March
1975) which were not adequately provided for or disclosed on the Balance Sheet.
6.6. Absence of Changes.
Except as set forth on Schedule 6.6, since the Balance Sheet Date, the
Medical Business has been operated in the ordinary course and consistent with
past practice and there has not been:
(a) any material adverse change in the condition (financial or otherwise),
assets (including, without limitation, levels of working capital and the
components thereof), liabilities, operations, results of operations, earnings,
business or prospects of the Medical Business;
(b) any damage, destruction or loss (whether or not covered by insurance)
in an aggregate amount exceeding $25,000 affecting any asset or property of the
Medical Business;
(c) any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or
-48-
<PAGE>
commitment entered into, by the Medical Business other than such items created
or incurred in the ordinary course of the Medical Business and consistent with
past practice;
(d) any payment, discharge or satisfaction of any claim, lien, encumbrance,
liability or obligation by the Medical Business outside the ordinary course of
the Medical Business (whether absolute, accrued, contingent or otherwise and
whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition of
any tangible or intangible asset of the Medical Business except in the ordinary
course of the Medical Business and consistent with past practice;
(f) any write-off as uncollectible of any accounts receivable in connection
with the Medical Business or any portion thereof in excess of $5,000 in the
aggregate exclusive of all normal contractual adjustments from third party
payors;
(g) except for all normal contractual adjustments from third party payors,
any account receivable in connection with the Medical Business in an amount
greater than $10,000 which (i) has become delinquent in its payment by more than
90 days, (ii) has had asserted against it any claim, refusal to pay or right of
set-off, (iii) an account debtor has refused to pay for any reason or with
respect to which such account debtor has become insolvent or bankrupt or (iv)
has been pledged to any third party;
(h) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Medical Business;
(i) any general uniform increase in the compensation of employees of the
Medical Group or the Medical Business (including, without limitation, any
increase pursuant to
-49-
<PAGE>
any bonus, pension, profit-sharing, deferred compensation arrangement or other
plan or commitment) or any increase in compensation payable to any officer,
employee, consultant or agent thereof, or the entering into of any employment
contract with any officer or employee, or the making of any loan to, or the
engagement in any transaction with, any officer of the Medical Group or the
Medical Business;
(j) any change in the accounting methods or practices followed in
connection with the Medical Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(k) any agreement or commitment relating to the sale of any material fixed
assets of the Medical Business;
(l) any other transaction relating to the Medical Business other than in
the ordinary course of the Medical Business and consistent with past practice;
or
(m) any agreement or understanding, whether in writing or otherwise, for
the Medical Business to take any of the actions specified in items (a) through
(l) above.
6.7. Tax Matters.
(a) Except as set forth on Schedule 6.7, (i) all Taxes (as hereinafter
defined) relating to the Medical Business required to be paid by the Medical
Group through the date hereof have been paid and all returns, declarations of
estimated Tax, Tax reports, information returns and statements required to be
filed by the Medical Group in connection with the Medical Business prior to the
date hereof (other than those for which extensions shall have been granted prior
to the date hereof) relating to any Taxes with respect to any income, properties
or operations of the Medical Group prior to the date hereof (collectively,
"Returns") have been duly filed; (ii) as of the
-50-
<PAGE>
time of filing, the Returns correctly reflected in all material respects (and,
as to any Returns not filed as of the date hereof, will correctly reflect in all
material respects) the facts regarding the income, business, assets, operations,
activities and status of the Medical Business and any other information required
to be shown therein; (iii) all Taxes relating to the operations of the Medical
Business that have been shown as due and payable by the Medical Group on the
Returns have been timely paid and filed or adequate provisions made to the books
and records of the Medical Business; (iv) in connection with the Medical
Business (x) the Medical Group has made provision on the Balance Sheet for all
Taxes payable by the Medical Group for any periods that end on or before the
Balance Sheet Date for which no Returns have yet been filed and for any periods
that begin on or before the Balance Sheet Date and end after the Balance Sheet
Date to the extent such Taxes are attributable to the portion of any such period
ending on the Balance Sheet Date and (y) provision has been made for all Taxes
payable by the Medical Group for any periods that end on or before the date
hereof for which no Returns have then been filed and for any periods that begin
on or before the date hereof and end after such date to the extent such Taxes
are attributable to the portion of any such period ending on such date; (v) no
tax liens have been filed with respect to any of the assets of the Medical
Business, and there are no pending tax audits of any Returns relating to the
Medical Business; and (vi) no deficiency or addition to Taxes, interest or
penalties applicable to the Medical Group for any Taxes relating to the
operation of the Medical Business has been proposed, asserted or assessed in
writing (or any member of any affiliated or combined group of which the Medical
Group or any previous operator of the Medical Business was a member for which
the Medical Group could be liable).
(b) The Medical Group is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Code.
-51-
<PAGE>
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal, state and foreign Returns of the Medical Group
for the calendar years ending December 31, 1996 and 1995.
(d) For purposes of this Agreement, "Tax" means any of the Taxes and
"Taxes" means, with respect to any person or entity, (i) all Federal, state,
local and foreign income taxes (including any tax on or based upon net income,
or gross income, or income as specially defined, or earnings, or profits, or
selected items of income, earnings or profits) and all Federal, state, local and
foreign gross receipts, sales, use, ad valorem, transfer, franchise, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property or windfall profits taxes, alternative or add-on minimum taxes, customs
duties or other Federal, state, local and foreign taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) on such person or entity and (ii) any liability for the payment of
any amount of the type described in the immediately preceding clause (i) as a
result of being a `transferee' (within the meaning of Section 6901 of the Code
or any other applicable law) of another person or entity or a member of an
affiliated or combined group.
6.8. Litigation, Etc.
Except as set forth on Schedule 6.8, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Medical Group, threatened against the
Medical Group or in connection with the Medical Business, whether at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality or (b)
judgments, decrees, injunctions or orders
-52-
<PAGE>
of any court, governmental department, commission, agency, instrumentality or
arbitrator against the Medical Group, its assets or affecting the Medical
Business. The Medical Group has delivered to the Management Company all
documents and correspondence relating to matters referred to in said Schedule
6.8.
6.9. Compliance; Governmental Authorizations.
The Medical Group and the Medical Business have complied in all material
respects with all applicable material Federal, state, local or foreign laws,
ordinances, regulations and orders. The Medical Group has all Federal, state,
local and foreign governmental licenses and permits necessary in the conduct of
the Medical Business, the lack of which would have a material adverse effect on
the Medical Group's ability to operate the Medical Business after the date
hereof on substantially the same basis as presently operated, such licenses and
permits are in full force and effect, the Medical Group has not received any
notice indicating that any violations are or have been recorded in respect of
any thereof, and no proceeding is pending or, to the best knowledge of the
Medical Group, threatened to revoke or limit any thereof. To the best knowledge
of the Medical Group, none of such licenses and permits shall be affected in any
material respect by the transactions contemplated hereby. To the best knowledge
of the Medical Group, neither the Medical Group nor any of the Medical Personnel
employed by the Medical Group is now or in the last four years has been the
subject of or involved in any investigation by any Federal, state or local
regulatory agency related to its or his Medicare, Medicaid or other third party
payor billing practices.
6.10. Accounts Receivable; Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts receivable
owing to the Medical Group in connection
-53-
<PAGE>
with the Medical Business as of the date hereof constitute valid and enforceable
claims arising from bona fide transactions in the ordinary course of the Medical
Business, the amounts of which are actually due and owing, and as of the date
hereof, to the best knowledge of the Medical Group, there are no claims,
refusals to pay or other rights of set-off against any thereof. Except as set
forth on Schedule 6.10, as of the date hereof, there is no account receivable or
note receivable of the Medical Business pledged to any third party. The Medical
Group has provided the Management Company with an accounts receivable aging
report dated as of June 25, 1997 that is true and complete as of the date
thereof.
(b) All accounts payable and notes payable by the Medical Business to third
parties arose in the ordinary course of business and, except as set forth in
Schedule 6.10, there is no account payable or note payable past due or
delinquent in its payment.
6.11. Labor Relations; Employees.
Schedule 6.11 contains a true and complete list of the persons employed by
the Medical Group as of the date hereof (the "Employees"). Except as set forth
on Schedule 6.11, (a) the Medical Group and the Medical Business are not
delinquent in payments to any of the Employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them to
the date hereof or amounts required to be reimbursed to the Employees; (b) upon
termination of the employment of any of the Employees, neither the Medical
Group, the Medical Business nor the Management Company will by reason of
anything done prior to the date hereof, or by reason of the consummation of the
transactions contemplated hereby, be liable for any excise taxes pursuant to
Section 4980B of the Code or to any of the Employees for severance pay or any
other payments; (c) there is no unfair labor practice complaint against the
Medical
-54-
<PAGE>
Group or in connection with the Medical Business pending before the National
Labor Relations Board or any comparable state, local or foreign agency; (d)
there is no labor strike, dispute, slowdown or stoppage actually pending or, to
the best knowledge of the Medical Group, threatened against or involving the
Medical Group or Medical Business; (e) there is no collective bargaining
agreement covering any of the Employees; and (f) to the best knowledge of the
Medical Group, no Employee or consultant is in violation of any (i) employment
agreement, arrangement or policy between such person and any previous employer
(private or governmental) or (ii) agreement restricting or prohibiting the use
of any information or materials used or being used by such person in connection
with such person's employment by or association with the Medical Group or the
Medical Business.
6.12. Employee Benefit Plans.
(a) Schedule 6.12 identifies each 'employee benefit plan', as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and all other written or oral plans, programs, policies or agreements
involving direct or indirect compensation (including any employment agreements
entered into between the Medical Group or the Medical Business and any Employee
of the Medical Group or in connection with the Medical Business, but excluding
workers' compensation, unemployment compensation and other government-mandated
programs) currently or previously maintained or entered into by the Medical
Group or in connection with the Medical Business for the benefit of any Employee
or former employee of the Medical Group or in connection with the Medical
Business under which the Medical Group, any affiliate thereof or the Medical
Business has any present or future obligation or liability (the "Employee
Plans"). The Medical Group has provided the Management Company with true and
complete salary, service and related data for Employees of the Medical Group and
in connection with the Medical Business.
-55-
<PAGE>
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits currently
maintained by the Medical Group or in connection with the Medical Business.
(c) Except as set forth on the Schedule 6.12; (i) each Employee Plan has
been operated and administered in compliance with ERISA, the Code and in
accordance with the provisions of all other applicable Federal and state laws;
(ii) all reporting and disclosure obligations imposed under ERISA and the Code
have been satisfied with respect to each Employee Plan; (iii) to the best
knowledge of the Medical Group, no breaches of fiduciary duty or prohibited
transactions have occurred with respect to any Employee Plan; and (iv) all
reporting, disclosure and bonding obligations have been satisfied with respect
to each Employee Plan.
(d) The Medical Group has made available to the Management Company a true
and complete copy of each Employee Plan and a true and complete copy of each of
the following documents, prepared in connection with such Employee Plan; (i)
each trust or other funding arrangement, (ii) the two most recently filed Annual
Reports (Form 5500), including attachments, for each Employee Plan, and (iii)
the most recently received IRS determination letter.
6.13. Insurance.
Schedule 6.13 contains a list of all policies of professional liability
(medical malpractice), general liability, theft, fidelity, fire, product
liability, errors and omissions,
-56-
<PAGE>
health and other property and casualty forms of insurance held by the Medical
Group covering the assets, properties or operations of the Medical Group and the
Medical Business (specifying the insurer, amount of coverage, type of insurance,
policy number and any pending claims thereunder). All such policies of insurance
are valid and enforceable policies and are outstanding and duly in force and all
premiums with respect thereto are currently paid. Neither the Medical Group nor
its predecessor in interest has, during the last five fiscal years, been denied
or had revoked or rescinded any policy of insurance relating to the assets,
properties or operations of the Medical Group or the Medical Business.
6.14. Real Property.
The Medical Group has a valid leasehold interest in all real property
leased by the Medical Group. True and complete copies of all leases to which the
Medical Group is a party or by which the Medical Group leases space have been
delivered to the Management Company. The Medical Group does not own any real
property.
6.15. Burdensome Restrictions.
Except as set forth on Schedule 6.15, neither the Medical Group nor the
Medical Business is bound by any oral or written agreement or contract which by
its terms prohibits or restricts it from conducting the Medical Group or the
Medical Business (or any material part thereof).
6.16. Disclosure.
Neither the Medical Group Transaction Documents (including the Exhibits and
Schedules attached thereto) nor any other document, certificate or written
statement furnished to the Management Company by or on behalf of the Medical
Group in connection with the transactions contemplated hereby contains any
-57-
<PAGE>
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
Except as set forth on Schedule 6.16, there have been no events or transactions,
or information which has come to the attention of the Medical Group, which, as
they relate directly to the Medical Group or the Medical Business, could
reasonably be expected to have a material adverse effect on the business,
operations, affairs, prospects or condition of the Medical Group and the Medical
Business.
SECTION 7. Representations and Warranties of the Management Company.
The Management Company represents and warrants to the Medical Group, as of
the Signature Date, as follows:
7.1. Organization, Good Standing and Power.
The Management Company (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
has all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now being conducted, to execute and
deliver this Agreement and each of the Asset Purchase Agreement, the Restricted
Stock Agreements (as hereinafter defined), the Assignments of Lease, and the
Stockholder Non-Competition Agreements (collectively, the "Management Company
Transaction Documents"), to perform its obligations hereunder and thereunder,
and to consummate the transactions contemplated hereby and thereby.
7.2. Authority.
The execution, delivery and performance of this Agreement and the other
Management Company Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary
-58-
<PAGE>
corporate action on the part of the Management Company. This Agreement and each
Management Company Transaction Document has been duly and validly executed and
delivered by the Management Company, and this Agreement and each such Management
Company Transaction Document is the valid and binding obligation of the
Management Company, enforceable in accordance with its respective terms, except
as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally. Neither the execution, delivery or performance of this Agreement or
any other Management Company Transaction Document, nor the consummation by the
Management Company of the transactions contemplated hereby or thereby, nor
compliance by the Management Company with any provision hereof or thereof, will
(a) conflict with or result in a breach of any provisions of the Amended and
Restated Certificate of Incorporation or the Bylaws of the Management Company,
(b) cause a default (with due notice, lapse of time or both), or give rise to
any right of termination, cancellation or acceleration, under any of the terms,
conditions or provisions of any material note, bond, lease, mortgage, indenture,
license or other instrument, obligation or agreement to which the Management
Company is a party or by which it or any of its properties or assets is or may
be bound (with respect to which defaults or other rights all requisite waivers
or consents shall have been obtained at or prior to the date hereof) or (c)
violate any law, statute, rule or regulation or order, writ, judgment,
injunction or decree of any court, administrative agency or governmental body
applicable to the Management Company or any of its properties or assets. Except
as set forth on Schedule 7.2, to the best of the Management Company's knowledge,
no permit, authorization, consent or approval of or by, or any notification of
or filing with, any person (governmental or private) is required in connection
with the execution, delivery or performance by the Management Company of this
Agreement or any other Management Transaction Document or the consummation by
the
-59-
<PAGE>
Management Company of the transactions contemplated hereby or thereby.
7.3. Capitalization.
(a) The total authorized capital of the Management Company consists of
20,000,000 shares of common stock, of which [7,702,474] shares are issued and
outstanding, and 7,444,024 shares of preferred stock, of which (i) 999,999 of
Series A Convertible Preferred Stock, (ii) 2,000,001 shares of Series B
Convertible Preferred Stock, (iii) 254,999 shares of Series C Convertible
Preferred Stock, (iv) 188,072 shares of Series D Convertible Preferred Stock,
and (v) 533,335 shares of Series E Convertible Preferred Stock are issued and
outstanding. Each of the outstanding shares of capital stock has been duly and
validly authorized and issued, is fully paid for and non-assessable, and was
issued in compliance with all applicable Federal and state securities laws.
(b) The Management Company has taken all action necessary or appropriate to
duly authorize the creation, issuance and sale of the common stock to be issued
hereunder. Such shares of common stock, when issued, sold and delivered, as
provided for herein and in the Restricted Stock Agreements, will be validly
issued, fully paid and nonassessable, with no personal liability attaching to
the ownership of the shares. The issuance of such shares of common stock will
not violate any preemptive or similar right of any person.
7.4. Financial Information.
Schedule 7.4 contains (a) the unaudited statements of assets, liabilities
and stockholders' equity of the Management Business at March 31, 1997 (the
"Management Company Balance Sheet"; and the date thereof being referred to as
the "Management Company Balance Sheet Date"), and the related unaudited
statements of revenue and expenses for the periods then ended
-60-
<PAGE>
(including the notes thereto and other financial information included therein)
(collectively, the "Unaudited Financial Statements"). The Unaudited Financial
Statements (i) were prepared in accordance with the books and records of the
Management Business, (ii) fairly present the financial position of the
Management Business as of the dates thereof, and (iii) are true, correct and
complete in all material respects as of the date thereof.
7.5. Absence of Undisclosed Liabilities.
Except as set forth on Schedule 7.5, as of the Management Company Balance
Sheet Date, (a) the Management Business did not have any material liability of
any nature required to be disclosed on a balance sheet (matured or unmatured,
fixed or contingent, known or unknown) which was not provided for or disclosed
on the Management Company Balance Sheet, (b) all liability reserves established
by the Management Business on the Management Company Balance Sheet were adequate
and (c) there were no loss contingencies (as such term is used in Statement of
Financial Accounting Standards No. 5 issued by the Financial Accounting
Standards Board in March 1975) which were not adequately provided for or
disclosed on the Management Company Balance Sheet.
7.6. Absence of Changes.
Except as set forth on Schedule 7.6, since the Management Company Balance
Sheet Date, the Management Business has been operated in the ordinary course and
consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or otherwise),
assets, liabilities, operations, results of operations, earnings, business or
prospects of the Management Business;
-61-
<PAGE>
(b) any damage, destruction or loss (whether or not covered by insurance)
in an aggregate amount exceeding $25,000 affecting any asset or property of the
Management Business;
(c) any obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitment entered into, by the Management Business
other than such items created or incurred in the ordinary course of the
Management Business and consistent with past practice;
(d) any payment, discharge or satisfaction of any claim, lien, encumbrance,
liability or obligation by the Management Business outside the ordinary course
of the Management Business (whether absolute, accrued, contingent or otherwise
and whether due or to become due);
(e) any license, sale, transfer, pledge, mortgage or other disposition of
any material tangible or intangible asset of the Management Business except in
the ordinary course of the Management Business and consistent with past
practice;
(f) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(g) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(h) any other transaction relating to the Management Business other than in
the ordinary course of the Management Business and consistent with past
practice; or
-62-
<PAGE>
(i) any agreement or understanding, whether in writing or otherwise, for
the Management Business to take any of the actions specified in items (a)
through (h) above.
7.7. Litigation, Etc.
Except as set forth on Schedule 7.7, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Management Company, threatened against
the Management Company or in connection with the Management Business, whether at
law or in equity, or before or by any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
which, if adversely determined, could have a material adverse effect on the
Management Company or (b) judgments, decrees, injunctions or orders of any
court, governmental department, commission, agency, instrumentality or
arbitrator against the Management Company its assets or affecting the Management
Business.
7.8. Compliance; Governmental Authorizations.
The Management Company and the Management Business shall have complied in
all material respects with all applicable material Federal, state, local or
foreign laws, ordinances, regulations and orders. The Management Company has all
Federal, state, local and foreign governmental licenses and permits necessary in
the conduct of the Management Business, the lack of which would have a material
adverse effect on the Management Company's ability to operate the Management
Business after the date hereof on substantially the same basis as presently
operated, such licenses and permits are in full force and effect, the Management
Company has not received any notice indicating that any violations are or have
been recorded in respect of any thereof, and no proceeding is pending or, to the
best knowledge of the Management Company, threatened to revoke or limit any
-63-
<PAGE>
thereof. To the best knowledge of the Management Company, none of such licenses
and permits shall be affected in any material respect by the transactions
contemplated hereby.
7.9. Employees.
Except as set forth on Schedule 7.9, the Management Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them
through the date hereof.
7.10. Insurance.
The Management Company has obtained such policies of insurance as are usual
and customary for businesses of the type conducted by the Management Company.
All such policies of insurance are valid and enforceable policies, and all
premiums with respect thereto are currently paid.
7.11. Burdensome Restrictions.
Except as set forth on Schedule 7.11, neither the Management Company nor
the Management Business is bound by any oral or written agreement or contract
which by its terms prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
7.12. Disclosure.
Neither the Management Company Transaction Documents (including the
Exhibits and Schedules attached thereto) nor any other document, certificate or
written statement furnished to the Medical Group by or on behalf of the
Management Company in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading.
-64-
<PAGE>
SECTION 8. Operations Committee.
8.1. Formation and Operation of the Operations Committee.
The Management Company and the Medical Group shall establish a committee
(the "Operations Committee") responsible for directing the Management Company in
connection with the development of certain specific management and
administrative policies for the overall operation of the Medical Group. The
Operations Committee shall consist of six (6) members. The Medical Group shall
designate three (3) members of the Operations Committee, each of whom shall be a
physician in the Medical Group, and the Management Company shall designate three
(3) members of the Operations Committee. The business of the Operations
Committee shall be conducted in accordance with the policies and procedures
described in Section 8.4 hereof.
8.2. Authoritative Functions of the Operations Committee.
The Operations Committee shall perform the following functions, and the
decisions of the Operations Committee with respect to such functions shall be
binding on the Management Company and the Medical Group:
(a) Approve the annual budgets for:
(i) Billings and Collections;
(ii) Medical Group Costs;
(iii) Capital expenditures to be made by the Management Company in
fulfillment of its obligations hereunder;
(iv) Management Company Operating Costs (which, in the absence of
approval by the Operations Committee, shall be increased
-65-
<PAGE>
by five percent (5.0%) over the total amount approved for the
preceding period)
(b) Approve costs and expenses that exceed the Management Company
Operating Costs Budget.
(c) Establish parameters and criteria with respect to the establishment
and maintenance of relationships with institutional providers and
payors and managed care contracts (except with respect to the
establishment of professional fees).
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection agencies
(vi) Write-offs of account balances
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off policies
(ix) Lien account collection policies
(x) Student Athlete account policies
(e) Approve the acquisition, replacement, relocation, or other disposition
of Medical Equipment and FF&E, approve the integration of new
technologies into the professional practice of the Medical Group as
contemplated by Section 3.11 hereof, and approve the
-66-
<PAGE>
renovation and expansion of any offices of the Medical Group ("Tenant
Improvements"); provided, however, that the approval of the Management
Company also shall be required prior to (i) the acquisition of any
Equipment (including any Medical Equipment, FF&E or other items
relating to or necessary in connection with the integration of new
technologies into the professional practice of the Medical Group) if
and to the extent that the aggregate cost of such items in any
calendar year exceeds five percent (5%) of the Management Fee for the
prior year (or, with respect to the first year of the Term, the
projected Management Fee for such year), (ii) the undertaking of any
Tenant Improvements relating to patient care facilities that cost more
than $10,000 in the aggregate at any one of the Medical Group's office
locations in any calendar year, or (iii) the undertaking of any other
Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of files and
records of the Medical Group.
8.3. Advisory Functions of the Operations Committee.
The Operations Committee shall review, evaluate and make recommendations to
the Medical Group and the Management Company with respect to the following
matters:
(a) Identification of physician subspecialties required for the efficient
operation of the Medical Group; advice regarding all Medical Personnel
employment and recruitment contracts to be utilized by the Medical
Group.
-67-
<PAGE>
(b) Development of long-term strategic planning objectives for the Medical
Group.
(c) Public relations, advertising, and other marketing of Medical Group
Services, including design of exterior signs.
(d) The establishment of fees for professional services and ancillary
services rendered by the Medical Group.
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group and the
Management Company, as such coverage may relate to Medical Group
operations and activities.
(g) Any matters arising in connection with the operations of the Medical
Group that are not specifically addressed in this Agreement and as to
which the Management Company or the Medical Group requests
consideration by the Operations Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Management Company and the Medical Group, and except as provided herein, the
Operations Committee does not have the power to bind the Management Company or
the Medical Group. Where discretion with respect to any matters is vested in the
Management Company or the Medical Group under the terms of this Agreement, the
Management Company or the Medical Group, as the case may be, shall have ultimate
responsibility for the exercise of such discretion, notwithstanding any
recommendation of the Operations Committee. The Management Company and the
Medical Group shall, however, take such
-68-
<PAGE>
recommendations of the Operations Committee into account in good faith in the
exercise of such discretion.
8.4. Committee Policies and Procedures.
(a) The Medical Group shall designate one of its members to act as Chairman
of the Committee, and the Management Company shall designate one of its members
to act as Vice Chairman. Each party may substitute or change its designated
Operations Committee members at any time upon notice to the other party, and any
Operations Committee member may designate his or her own substitute at any
meeting without notice. Each member shall have one vote and shall have the right
to grant his or her proxy to another member of the Operations Committee. The
Chairman, if present, shall preside at all meetings of the Operations Committee.
In the absence of the designated Chairman, the Vice Chairman shall preside. The
only powers of the Chairman and the Vice Chairman that differ from those of the
other members of the Operations Committee shall be to call and preside over
meetings in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or formal
notice at such times and places as a quorum of its members may from time to time
determine. A meeting of the Operations Committee also may be called by at least
two (2) members of the Operations Committee or by the Chairman or Vice Chairman
thereof upon at least three (3) days' written notice to the other members of the
Operations Committee. Such notice requirement shall be deemed waived with
respect to any member of the Operations Committee who attends such meeting.
Meetings may be held in person or by telephone. The Operations Committee also
may act by written consent as provided in Section 8.4(c). Minutes shall be kept
of all formal actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of four (4) or more
-69-
<PAGE>
members of the Operations Committee present or represented by proxy at the
applicable meeting. A quorum of the Operations Committee shall be four (4)
members, in person, by telephone, or by proxy, and a quorum must remain for the
duration of the meeting. The Operations Committee may establish such procedures
to act by written consent, without a meeting, as the Operations Committee
determines are advisable, provided that all six (6) members (in person or by
proxy) must sign any written consent.
SECTION 9. Obligations of the Medical Group.
The Medical Group shall have the following obligations during the Term:
9.1. Compliance with Laws.
The Medical Group shall provide professional services to patients in
compliance at all times with those ethical standards, laws and regulations to
which they are subject. The Medical Group shall verify, with the assistance of
the Management Company, that each physician and other Medical Personnel
associated with the Medical Group for the purpose of providing medical care to
patients of the Medical Group is licensed by the State of Florida. The Medical
Group shall monitor the quality of medical care practiced by physicians and
other health care personnel associated with the Medical Group. In the event that
any disciplinary actions or medical malpractice actions are initiated against
any such physician by any payor, patient, state or Federal regulatory agency or
any other person or entity, the Medical Group shall promptly inform the
Management Company of such action and its underlying facts and circumstances.
9.2. Use of Facility.
The Medical Group shall use and occupy any Facility (as defined below)
exclusively for the practice of medicine, and shall comply with all applicable
Federal, state and local rules,
-70-
<PAGE>
ordinances and standards of medical care. The medical practice or practices
conducted at any Facility described in clause (i) of the definition of the term
"Facility" shall be conducted solely by Medical Personnel associated with the
Medical Group, and no other physician or medical practitioner shall be permitted
to use or occupy any Facility described in clause (i) below without the prior
written consent of the Management Company, which consent shall not be
unreasonably withheld or delayed. The term "Facility" shall mean (i) any medical
facility or laboratory controlled, managed or operated by the Management Company
or (ii) any hospital at which any Medical Personnel practices medicine or
maintains admitting privileges.
9.3. Choice of Braces, Splints, Appliances, Medical Supplies, and
Allografts.
The Medical Group shall have the exclusive control over the choice of
vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts.
9.4. Choice of Radiologists, Anesthesiologists, Hospitals, Physical
Therapy, MRI, and Other Medical Professionals and Facilities.
The Medical Group shall have exclusive control over the choice of specific
physicians and facilities to be utilized by the Medical Group with respect to
radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical
professionals and facilities; provided, however, that the foregoing shall not be
considered New Ancillary Services or New Medical Offices, as the case may be,
unless the parties have agreed thereto in accordance with Section 3.4(b) or
3.2(b), as the case may be.
-71-
<PAGE>
9.5. Insurability.
The Medical Group shall cooperate with the Management Company in (i)
ensuring that its Medical Personnel are insurable under commercially available
malpractice insurance policies or (ii) instituting proceedings to terminate
within thirty business days any Medical Personnel who is not so insurable or who
loses his or her malpractice insurance eligibility unless the Medical Group
makes (within such 30-day period) other arrangements reasonably appropriate
under the circumstances and reasonably acceptable to the Management Company. The
Medical Group shall notify the Management Company in writing of any change in
the insurance status of any Medical Personnel within two days after the Medical
Group receives notice of any such change. The Medical Group shall require all
Medical Personnel to participate in an on-going risk management program.
9.6. Medicare.
The Medical Group shall cause all physicians to be participating providers
and accept assignment under Medicare.
9.7. Accounts Receivable; Billing.
From the Commencement Date, the Medical Group acknowledges and agrees that
all Accounts of the Medical Group or its Medical Personnel shall be the property
of the Management Company hereunder and the Medical Group and the Medical
Personnel hereby transfer and assign all of their right, title and interest to
such Accounts to the Management Company; provided, however, that the right to
payment of Medicaid and Medicare receivables shall remain with the Medical Group
in accordance with applicable Federal law. The Medical Group's Medical Personnel
shall be responsible for providing the appropriate current CPT4 coding with
respect to the fee tickets prepared by such Medical Personnel.
-72-
<PAGE>
9.8. Medical Personnel Hiring.
The Medical Group shall have the ultimate control over and responsibility
for the hiring, compensation, supervision, evaluation and termination of its
Medical Personnel; provided, however, that at the request of the Medical Group,
the Management Company shall consult with the Medical Group regarding such
matters.
9.9. Continuing Education.
The Medical Group and its Medical Personnel shall be solely responsible for
ongoing membership in professional associations and continuing professional
education. The Medical Group shall ensure that its Medical Personnel participate
in such continuing professional education as is necessary for such physician or
professional to remain current in his or her field of medical practice.
9.10. Clinical Research.
The Medical Group shall have the ultimate control over and responsibility
for any clinical research program pertaining to patients of the Medical Group.
This shall include but not be limited to research personnel interviewing,
hiring, termination, compensation, day-to-day supervision, and assignment of
responsibilities and projects. However, the Medical Group will cooperate with
and take direction from the Management Company in its nationwide efforts to
provide an effective disease management information system and outcome studies
programs.
SECTION 10. Certain Covenants.
10.1. Change of Control.
During the Term of this Agreement, the Medical Group shall not enter into
any single transaction (or group of related transactions undertaken pursuant to
a common plan) involving the
-73-
<PAGE>
admission of new stockholders, transfer of ownership interests, or
reorganization or restructuring of the Medical Group, if in any such case the
effect would be to transfer a majority of the ownership interest in the Medical
Group, without the prior written consent of the Management Company, which
consent shall not be unreasonably withheld or delayed.
10.2. Legend on Securities.
During the Term of this Agreement, any certificate or similar evidence
representing an equity interest in the Medical Group issued by the Medical Group
shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR
LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER
CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS
OF JUNE 1, 1997, BETWEEN FISHMAN & STASHAK, M.D.'S, P.A., A
FLORIDA PROFESSIONAL ASSOCIATION, AND BONE, MUSCLE AND
JOINT, INC., A DELAWARE CORPORATION."
Nothing herein shall be construed as requiring the Medical Group to issue any
certificate or other evidence representing an equity interest in the Medical
Group, if such has not been issued prior to the date hereof.
-74-
<PAGE>
SECTION 11. Records.
11.1. Medical Records.
Upon termination of this Agreement, the Medical Group shall retain all
patient medical records maintained by the Medical Group or the Management
Company in the name of the Medical Group.
11.2. Management Business Records.
All books and records relating in any way to the operation of the
Management Business which are not patient medical records shall at all times be
the property of the Management Company. The Management Company shall maintain
custody of such records, and the Medical Group shall, upon its written request,
be entitled to copies of any such records relating to the Management Services
performed by the Management Company.
11.3. Access to Records Following Termination.
Following the termination of this Agreement, the Medical Group shall grant
(to the extent permitted by law) to the Management Company, for the purpose of
preparing for any actual or anticipated legal proceeding or for any other
reasonable purpose, reasonable access (which shall include making photocopies)
to the patient medical records described in Section 11.1 hereof and any other
pertinent information regarding the Medical Group during the Term. Prior to
accessing such patient medical records, the Management Company shall obtain any
required patient authorization.
Following the termination of this Agreement, the Management Company shall
provide to the Medical Group, promptly upon the Medical Group's written request,
photocopies of the Management Business records described in Section 11.2 hereof,
and
-75-
<PAGE>
shall grant to the Medical Group, for the purpose of preparing for any actual or
anticipated legal proceeding or for any other reasonable purpose, any other
pertinent information regarding the Management Company during the Term.
SECTION 12. Insurance and Indemnity.
12.1. Professional Liability Insurance.
During the Term, the Management Company shall, to the extent permitted by
applicable law, procure and maintain for the benefit of itself and the Medical
Group comprehensive professional liability insurance providing for (a) general
liability coverage and (b) medical malpractice coverage with limits of not less
than $250,000 per claim and with aggregate policy limits of not less than
$750,000 covering the Medical Group and each of the Medical Personnel of the
Medical Group (or such higher amounts as may be necessary to comply with any
regulatory requirement and/or contractual requirement to which such Medical
Personnel or the Medical Group may be subject), including coverage for claims
made after the Commencement Date relating to events or occurrences at any time
prior thereto. The parties hereto acknowledge that the Management Company is
procuring the malpractice insurance referenced herein to ensure that the
Management Company has protection in the event it is sued as a result of an act
or omission of an employee of the Medical Group. The Management Company shall
pay the premiums for such general and medical malpractice liability coverage,
and the Management Company shall be designated as a co-beneficiary under such
insurance policies.
12.2. Life Insurance.
The Management Company may, at its option, obtain a $500,000 life insurance
policy for each duly licensed physician partner in or equity owner of the
Medical Group. The Management Company shall be designated as the beneficiary
under any such
-76-
<PAGE>
policies. The premiums for such policies shall be paid by the Management Company
and shall not be included as Management Company Operating Costs or otherwise
charged to the Medical Group.
12.3. Indemnification by Medical Group.
The Medical Group shall indemnify, hold harmless and defend the Management
Company, its officers, directors, shareholders, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of Medical Group Services, including without limitation the
performance of such services prior to the Commencement Date, (ii) any other acts
or omissions of the Medical Group and its Medical Personnel, including without
limitation any such acts or omissions that occurred prior to the Commencement
Date, or (iii) any breach of or failure to perform any obligation under this
Agreement or the Medical Group Transaction Documents (which, for purposes
hereof, shall be deemed to include the Restricted Stock Agreement to be signed
by the Management Company and each partner, stockholder or employee of the
Medical Group receiving stock of the Management Company, in the form of Exhibit
B attached hereto (the "Restricted Stock Agreement")) by the Medical Group
and/or the Medical Personnel and/or their respective agents and/or
subcontractors (other than the Management Company) during the Term.
12.4. Indemnification by Management Company.
The Management Company shall indemnify, hold harmless and defend the
Medical Group, its officers, directors, shareholders, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims,
-77-
<PAGE>
causes of action and expenses (including reasonable attorneys' fees and
expenses), whether or not covered by insurance, caused or asserted to have been
caused, directly or indirectly, by or as a result of (i) the performance of
Management Services, (ii) any other acts or omissions of the Management Company
and its employees or (iii) any breach of or failure to perform any obligation
under this Agreement or the Management Company Transaction Documents by the
Management Company and/or its agents, employees and/or subcontractors (other
than the Medical Group) during the Term.
SECTION 13. Termination.
13.1. Termination by Medical Group.
The Medical Group may terminate this Agreement effective immediately by
giving written notice of termination to the Management Company (a) in the event
of the filing of a petition in voluntary bankruptcy or an assignment for the
benefit of creditors by the Management Company or upon other action taken or
suffered, voluntarily or involuntarily, under any Federal or state law for the
benefit of debtors by the Management Company, except for the filing of a
petition in involuntary bankruptcy against the Management Company which is
dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the
event the Management Company shall default in any material respect in the
performance of any duty or obligation imposed upon it by this Agreement and the
Management Company shall not have taken reasonable action commencing curing of
such default within thirty (30) days after written notice thereof has been given
to the Management Company by the Medical Group or the Management Company does
not thereafter diligently prosecute such action to completion; provided,
however, that the Management Company shall have only 10 days after written
notice to cure a default arising as a result of its failure to pay the Monthly
Draw pursuant to Section 5.3(a) or any other monetary obligation owed to the
-78-
<PAGE>
Medical Group hereunder, (c) in the event that any of the representations and
warranties made by the Management Company in Section 7 is untrue or misleading
in any material respect, provided that the Medical Group shall have previously
given written notice to the Management Company describing in reasonable detail
the nature of the item in question and the Management Company shall not have
cured such matter within thirty (30) days of such notice, or (d) the Management
Company shall have been sanctioned in writing by the Health Care Finance
Administration for any violation of the Social Security Act, the Health Care
Quality Improvement Act or any similar Federal law in a final, nonappealable
proceeding and such sanction prevents the Management Company from fulfilling its
obligations hereunder in accordance with all applicable law.
13.2. Termination by Management Company.
The Management Company may terminate this Agreement effective immediately
by giving written notice of termination to the Medical Group (a) in the event of
a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical
Group shall default in any material respect in the performance of any duty or
obligation imposed upon it by this Agreement and the Medical Group shall not
have taken reasonable action commencing curing of such default within thirty
(30) days after written notice thereof has been given to the Medical Group by
the Management Company or the Medical Group does not thereafter diligently
prosecute such action to completion; provided, however, that the Medical Group
shall have only 10 days after written notice to cure a default arising as a
result of its failure to pay any monetary obligation owed to the Management
Company hereunder, (c) in the event that any of the representations and
warranties made by the Medical Group in Section 6 is untrue or misleading in any
material respect, provided that the Management Company shall have previously
given written notice to the Medical Group describing in reasonable detail the
nature of the item in question and the
-79-
<PAGE>
Medical Group shall not have cured such matter within thirty (30) days of such
notice, or (d) in the event the Medical Group is excluded from the Medicaid or
Medicare program for any reason and the Medical Group has not successfully
appealed such exclusion within 120 days after the effectiveness thereof.
13.3. Termination by Medical Group or Management Company.
The Medical Group and the Management Company shall each have the right to
terminate this Agreement effective immediately by giving written notice of
termination to the other party pursuant to Section 27 of this Agreement.
13.4. Effect of Termination.
(a) Upon the termination of this Agreement in accordance with the terms
hereof, neither party hereto shall have any further obligation or liability to
the other party hereunder, except as provided in Sections 3.15(c), 5.3(b) (as
modified by Section 13.4(b) below), 13.5 and 26 hereof, and except to pay in
full and satisfy any and all outstanding obligations of the parties accruing
through the effective date of termination.
(b) Upon the termination of this Agreement, the Annual Medical Group
Compensation Amount described in Section 5.3(b) shall be calculated on or before
the end of the fourth month following the termination date, rather than on or
before April 30 as specified in Section 5.3(b), and the computation made under
such Section shall be made with respect to the portion of the year ending on the
termination date (if the termination date is other than December 31). In making
such computation, all Collections during January, February, and March of such
year shall be excluded, and all Collections during the three-month period
following termination shall be included. All Collections during the three-month
period following termination shall continue to be owned by the Management
Company (and the Medical
-80-
<PAGE>
Group shall immediately forward any amounts received in connection therewith to
the Management Company) and all Collections thereafter shall be owned by the
Medical Group. Any payment required under the terms of Section 5.3(b)(ii) shall
be made within fifteen (15) days after the date by which the foregoing
calculation is to be made, rather than on May 15.
13.5. Repurchase of Assets.
Promptly following termination of this Agreement for any reason, the
Management Company shall sell, transfer, convey, and assign to the Medical
Group, and the Medical Group shall purchase, assume, and accept from the
Management Company, at such price and upon such terms as may be agreed upon by
the parties -- or, if the parties are unable to agree, at fair market value,
determined in the manner set forth below -- all of the following items which are
used in connection with the professional practice and related activities of the
Medical Group and which, in the case of items (a), (b), (c) and (d), are
physically located in any of the offices of the Medical Group, subject to any
required consent from any third party having an interest therein but otherwise
free and clear of any liens, claims or encumbrances; provided that any leased
equipment or property shall be assigned to the Medical Group subject to the
applicable lease agreement and any liens granted thereunder:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office equipment owned
by the Management Company;
(c) the Management Company's rights and interests in any equipment leased
by the Management Company, subject to the Medical Group's assumption
of the obligations accruing
-81-
<PAGE>
thereunder after the date of termination of this Agreement;
(d) the supplies owned by the Management Company;
(e) the Management Company's rights and interests under all of the Office
Leases, subject to the Medical Group's assumption of the obligations
accruing thereunder after the date of termination of this Agreement;
and
(f) the deposits of the Management Company relating to the Medical Group.
Fair market value of the above described assets shall be determined by an
independent appraiser mutually agreed upon by the Medical Group and the
Management Company; provided, however, that if the Medical Group and the
Management Company are unable to agree upon such an appraiser, each of the
parties shall select an appraiser and the two appraisers thus selected shall
select a third appraiser. All of the appraisers shall appraise the assets, and
for purposes of determining the purchase price, the highest and lowest
appraisals shall be disregarded, and the remaining appraisal shall be used.
Notwithstanding anything contained herein to the contrary, the consideration
payable by the Medical Group to the Management Company under this Section 13.5
shall be reduced by the aggregate amount, if any, payable by the Management
Company to the Stockholders (as such term is defined in the Restricted Stock
Agreements).
SECTION 14. Rescission.
14.1. Rescission By Medical Group.
(a) In the event that the Management Company has not consummated an initial
public offering of its Common Stock under the Securities Act of 1933, as
amended, by December 1, 1998, the Medical Group may, in its sole discretion at
any time
-82-
<PAGE>
during the period beginning December 1, 1998 and ending January 31, 1999 (such
period being referred to herein as the "Rescission Period"), rescind (the
"Rescission Option") this Agreement and disengage itself from its obligations
under this Agreement. The Medical Group may exercise its Rescission Option
during the Rescission Period by giving 30 days' prior written notice (the
"Rescission Notice") to the Management Company and by complying with the other
provisions contained in this Section 14.1. The effective date (the "Rescission
Effective Date") of the rescission shall be the date of such Rescission Notice.
(b) Effect of Rescission. In the event that the Medical Group exercises its
Rescission Option pursuant to this Section 14.1, the procedures set forth in
Section 13.4 of this Agreement shall apply.
(c) Repurchase of Assets. Within 30 days following the Rescission Effective
Date the Management Company shall, subject to the prior receipt of any required
landlord and third party consents, transfer, convey and assign to the Medical
Group, and the Medical Group shall purchase, assume and accept from the
Management Company the property described in Section 13.5 hereof according to
the terms set forth in such Section.
(d) Repayment of Consideration. On or before the Rescission Effective Date,
the Medical Group shall deliver to the Management Company the cash consideration
received by the Medical Group from the Management Company pursuant to this
Agreement and the Asset Purchase Agreement less the aggregate amount of the
Management Fees paid to the Management Company hereunder; provided, however,
that the portion of such consideration attributed to the A/R Amount (as defined
in the Asset Purchase Agreement), as adjusted pursuant to Section 2.3 thereof,
shall not be returned to the Management Company.
(e) Stock of Management Company. The Medical Group shall cause each
physician receiving capital stock of the
-83-
<PAGE>
Management Company as of the date hereof to, and each such physician shall,
return and deliver to the Management Company the stock certificates representing
shares of common stock of the Management Company issued to each such physician
pursuant to a Restricted Stock Agreement. In the event any portion of such
shares shall have been previously transferred by any such physician, any
transferee of such physician shall, and the physician shall cause such
transferee to, deliver the certificate(s) representing such shares to the
Management Company. Certificates delivered pursuant to this Section 14.1(e)
shall be duly endorsed for transfer to the Management Company.
14.2. Waiver of Rescission Option.
Notwithstanding anything contained herein to the contrary, the parties
hereto expressly agree and acknowledge that if the Medical Group shall fail to
deliver the Rescission Notice prior to the end of the Rescission Period, then
the Medical Group shall be deemed to have expressly and irrevocably waived its
right to rescind this Agreement and to disengage itself from its obligations
hereunder.
14.3. Discontinuation of Management Fees
The parties hereto acknowledge that in the event this Agreement is
rescinded pursuant to the provisions of Article 14 hereof, the Management
Company shall not be entitled to any Management Fees otherwise payable hereunder
for Medical Group Services provided by the Medical Group from the date on which
the Rescission Notice is delivered through and including the Rescission
Effective Date.
SECTION 15. Non-Disclosure of Confidential Information.
15.1. Non-Disclosure.
(a) Neither the Management Company nor the Medical Group, nor their
respective employees, stockholders, consultants
-84-
<PAGE>
or agents shall, at any time after the execution and delivery hereof, directly
or indirectly disclose any Confidential or Proprietary Information relating to
the other party hereto to any person, firm, corporation, association or other
entity, nor shall either party, or their respective employees, stockholders,
consultants or agents make use of any of such Confidential or Proprietary
Information for its or their own purposes or for the benefit of any person,
firm, corporation or other entity except the parties hereto or any subsidiary or
affiliate thereof. The foregoing obligation shall not apply to any information
which a party hereto can establish to have (a) become publicly known without
breach of this Agreement by it or them, (b) to have been given to such party by
a third party who is not obligated to maintain the confidentiality of such
information, or (c) is disclosed to a third party with the prior written consent
of the other party hereto. Nothing contained herein shall be construed to
prevent any party hereto from disclosing any Confidential or Proprietary
Information of any other party to its professional advisers for purposes of
evaluating, negotiating or otherwise assisting such party in connection with the
transactions contemplated by this Agreement; provided that such party shall be
liable to such other party for the disclosure by any of its professional
advisers of such other party's Confidential or Proprietary Information, unless
such information falls within one of the categories set forth in clauses (a),
(b) or (c) of the preceding sentence.
(b) For purposes of this Section 14, the term "Confidential or Proprietary
Information" means all information known to a party hereto, or to any of its
employees, stockholders, officers, directors or consultants, which relates to
the Transaction Documents, patient medical and billing records, trade secrets,
books and records, supplies, pricing and cost information, marketing plans,
strategies and forecasts. Nothing contained herein shall prevent a party hereto
from
-85-
<PAGE>
furnishing Confidential or Proprietary Information pursuant to a direct order of
a court of competent jurisdiction.
SECTION 16. Non-Competition.
In consideration of the premises contained herein and the consideration to
be received hereunder, and in consideration of and as an inducement to the
Management Company to consummate the transactions contemplated hereby, the
Medical Group hereby (a) agrees to the Non-Competition covenants attached hereto
as Schedule VIII and (b) agrees to require each of the physicians receiving
capital stock of the Management Company as of the date hereof, and each person
who after the date hereof becomes entitled to receive stock (or options to
receive stock) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute a Stockholder
Non-Competition Agreement substantially in the form attached hereto as Exhibit
C.
SECTION 17. Obligations of the Management Company.
17.1. No Practice of Medicine.
During the Term, the Management Company shall not provide or otherwise
engage in services or activities which constitute the practice of medicine, as
defined in applicable state or Federal law, except in compliance therewith.
17.2. No Interference with Professional Judgment.
Without in any way limiting Section 16.1 hereof, during the Term, the
Management Company shall not interfere with the exercise of professional
judgment by any physician or other licensed health care professional who is a
partner, employee, or contractor of the Medical Group, nor shall the Management
Company interfere with, control, direct, or supervise any physician or other
licensed health care professional in connection with the provision of Medical
Group Services. The foregoing shall not
-86-
<PAGE>
preclude the Management Company from assisting in the development of
professional protocols and monitoring compliance with policies and procedures
that have been instituted in accordance with this Agreement.
SECTION 18. Assignment.
The Management Company shall have the right to assign its rights and
delegate its obligations hereunder to any affiliate and to assign its rights
hereunder to any lending institution from which the Management Company or any
affiliate obtains financing for security purposes or as collateral. Except as
set forth in the preceding sentence, neither the Management Company nor the
Medical Group shall have the right to assign their respective rights and
delegate their respective obligations hereunder without the prior written
consent of the other party; provided, however, that after the consummation of an
initial public offering of the Management Company's common stock, the Medical
Group's consent shall not be required in connection with any assignment by the
Management Company arising out of or in connection with a sale of all or
substantially all of the stock or assets of the Management Company or the
merger, consolidation, or reorganization of the Management Company.
SECTION 19. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed sufficient if personally delivered, telecopied
(with original sent by mail), sent by nationally-recognized overnight courier,
or by registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:
-87-
<PAGE>
If to the Management Company:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telecopier: (212) 408-2420; and
If to the Medical Group:
Fishman and Stashak, M.D.'s, P.A.
1411 North Flagler Drive
Suite 8800
West Palm Beach, Florida 33401
Attention: Eric S. Fishman, M.D.
Telecopier: (561) 659-9009;
with a copy to:
Moore & Menkhaus, P.A.
4800 North Federal Highway
Suite 210A
Boca Raton, Florida 33431
Attention: David Menkhaus, Esq.
Telecopier: (561) 393-6541;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (a) in the case of
personal delivery and telecopier, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after the
date when sent, and (c) in the case of mailing, on the third business day
following the day on which the piece of mail containing such communication is
posted.
-88-
<PAGE>
SECTION 20. Benefits of Agreement.
This Agreement shall bind and inure to the benefit of any successors to or
permitted assigns of the Management Company and the Medical Group.
SECTION 21. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida without giving effect to the
laws and principles thereof, or of any other jurisdiction, which would direct
the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought by any party
hereto pursuant to this Agreement shall lie exclusively in any Federal or state
court located in Palm Beach County, Florida or the Southern District of Florida.
By execution and delivery of this Agreement, the parties hereto irrevocably
submit to the jurisdiction of such courts for themselves and in respect of their
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in such court, and hereby waive any objection that such
court is an improper or inconvenient forum for the resolution of such action.
The parties hereto shall act in good faith and shall refrain from taking any
actions to circumvent or frustrate the provisions of this Agreement.
SECTION 22. Headings.
Section headings are used for convenience only and shall in no way affect
the construction of this Agreement.
SECTION 23. Entire Agreement; Amendments.
This Agreement, the exhibits and schedules hereto and the Amendatory
Agreement dated as of the Signature Date among the Medical Group, the Management
Company, Eric Fishman, M.D., and Gerald Stashak, M.D., contain the entire
understanding of the
-89-
<PAGE>
parties with respect to its subject matter, and neither this Agreement nor any
part of it may in any way be altered, amended, extended, waived, discharged or
terminated except by a written agreement signed by all of the parties against
whom enforcement is sought.
SECTION 24. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover from the other
party all reasonable costs and expenses, including attorneys' fees and
accountants' fees, incurred in connection with such dispute or controversy.
SECTION 25. Counterparts.
This Agreement may be executed in counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such counterparts together
shall constitute but one agreement.
SECTION 26. Waivers.
Any party to this Agreement may, by written notice to the other party,
waive any provision of this Agreement. The waiver by any party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
SECTION 27 Survival of Termination.
Notwithstanding anything contained herein to the contrary, Sections 3.3(f),
11, 12.3, 12.4, 13, 14, 15, 16, 19, 20, 21, 23, 24 and this Section 27 shall
survive any expiration or termination of this Agreement.
-90-
<PAGE>
SECTION 28. Contract Modification for Prospective Legal Events.
In the event any state or Federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Medical Group and the Management Company shall amend
this Agreement as necessary to avoid such violation. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between the Medical Group and the Management Company. If
an amendment is not possible, either party shall have the right to terminate
this Agreement. Any dispute between the parties hereto arising under this
Section 28 with respect to whether this Agreement violates any state or Federal
laws or regulations shall be jointly submitted by the parties and finally
settled by binding arbitration in Florida, pursuant to the arbitration rules of
the National Health Lawyers Association Alternative Dispute Resolution Service.
Arbitration shall take place before one arbitrator appointed in accordance with
such rules. The governing law of the arbitration shall be the law set forth in
Section 21. Any decision rendered by the arbitrator shall clearly set forth the
factual and legal basis for such decision. The decision rendered by the
arbitrator shall be non-appealable and enforceable in any court having
jurisdiction thereof. The administrative costs of the arbitration and the
arbitrator fees shall be equally borne by the parties. Each party shall pay its
own legal costs and fees in connection with such arbitration.
* * * * *
-91-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
FISHMAN AND STASHAK, M.D.'S, P.A.
By: ______________________________
Eric S. Fishman, M.D.
President
By: ______________________________
Gerald T. Stashak, M.D.
Secretary
BONE, MUSCLE AND JOINT, INC.
By: ______________________________
Name:
Title:
Acknowledged and Agreed to
(as to Sections 4, 9.7, 12.2,
14, 15 and 16):
______________________________
Eric S. Fishman, M.D.
______________________________
Gerald T. Stashak, M.D.
-92-
<PAGE>
EXECUTION COPY
AMENDMENT NO. 1 TO THE
MANAGEMENT SERVICES AGREEMENT dated as
of September 10, 1997, between FISHMAN
AND STASHAK, M.D.'S, P.A., a Florida
professional association (the "Medical
Group"), and BONE, MUSCLE AND JOINT,
INC., a Delaware corporation (the
"Management Company").
Reference is made to the Management Services Agreement effective as of June
1, 1997 (the "Management Services Agreement"), between the Medical Group and the
Management Company, pursuant to which the Management Company has agreed to
provide the Medical Group with certain management, administrative and other
related services in connection with the Medical Business (as defined in the
Management Services Agreement). The parties hereto desire to amend the
Management Services Agreement in accordance with the terms hereinafter set
forth.
NOW, THEREFORE, in consideration for the mutual agreements contained in
this Amendment No. 1 and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Medical Group and the
Management Company hereby agree as follows:
SECTION 1. All capitalized terms used but not defined herein have the
meanings ascribed thereto in the Management Services Agreement.
SECTION 2. Section 5.1 of the Management Services Agreement is hereby
amended by inserting the following at the end of the second sentence thereof ",
and the Medical Group shall execute a financing statement (the "Financing
Statement") for the benefit of the Management Company evidencing the foregoing
transfer of the Accounts and perfecting the Management Company's ownership
interests therein".
SECTION 3. Section 13.1(b) of the Management Services Agreement is hereby
amended by adding at the end thereof "and shall have no cure period with respect
to a breach of the covenant set forth in Section 17.3 hereof; provided further,
however, that if the Medical Group intends to terminate this Agreement due to
the Management Company's default under Section 17.3, the Medical Group must so
notify the Management Company by January 31, 1999 in order for such termination
to be effective,"
SECTION 4. Section 13.4 of the Management Services Agreement is hereby
amended in accordance with the following:
(a) by adding at the end of paragraph (a) thereof "; provided that in
the event this Agreement is
<PAGE>
terminated by the Medical Group as a result of the Management Company's
breach of its covenant in Section 17.3 hereof, those provisions set forth
in Section 13.6 shall also apply."
(b) by inserting after "Section 5.3(b)" in the fifth line of paragraph
(b) thereof "; provided, however, that if such termination is as a result
of the Management Company's breach of its covenant in Section 17.3 hereof,
such calculation shall be made on the effective date of such termination as
specified in Section 13.6".
(c) by adding at the end of such Section a new paragraph (c) to read
in its entirety as follows:
"(c) Upon termination of this Agreement, the Management Company
agrees to deliver to the Medical Group upon request by the Medical
Group, an executed Financing Statement amending the terms of any
Financing Statement previously filed with the Secretary of State of
the state in which the principal place of business of the Medical
Group is located, excluding from the collateral thereunder any
Accounts generated after the date of termination of this Agreement;
provided that if such termination is due to the Management Company's
breach of its covenant in Section 17.3 hereof, the Financing Statement
shall release all of the Accounts. In addition to the foregoing, the
Management Company shall, within 30 days after final resolution of the
settlement described in Section 5.3(b) of this Agreement, deliver to
the Medical Group upon request by the Medical Group an additional
Financing Statement terminating any Financing Statement filed with
respect to the Medical Group's Accounts."
SECTION 5. Section 13 of the Management Services Agreement is hereby
amended by adding at the end thereof a new Section 13.6 to read in its entirety
as follows:
"13.6. Effect of Termination Resulting from Failure to Publicly Report.
In the event that the Medical Group terminates this Agreement due to
the Management Company's breach of its covenant set forth in Section 17.3
hereof, the Medical Group shall deliver to the Management Company an amount
equal to $874,750. The Medical Group shall also cause each physician
affiliated with the Medical Group who received shares of capital stock of
the Management Company in connection with the execution and delivery of
this Agreement to, and each such physician
-2-
<PAGE>
shall, return and deliver to the Management Company the certificates
representing all of such shares of capital stock. Certificates delivered
pursuant to this Section 13.6 shall be duly endorsed for transfer to the
Management Company. The effective date of a termination of this Agreement
as a result of the Management Company's breach of its covenant set forth in
Section 17.3 shall be January 31, 1999 and, accordingly, both parties
hereto shall continue to perform their obligations under this Agreement
(including, without limitation, the performance of Management Services and
the payment of the Management Fee) through and including such date.
SECTION 6. Section 14 of the Management Services Agreement is hereby
amended and restated in its entirety to read as follows:
"Section 14. [Intentionally Omitted]"
SECTION 7. Section 17 of the Management Services Agreement is hereby
amended by adding a new Section 17.3 thereto, to read in its entirety as
follows:
"17.3 Covenant to Develop a Public Company.
The Management Company shall use its best efforts (a) to cause the
Management Company to become a public reporting company under the
Securities Exchange Act of 1934, as amended, and (b) to have the Management
Company's common stock quoted on the NASDAQ OTC Bulletin Board or listed on
the NASDAQ Small Cap or National Market or on the New York Stock Exchange
or American Stock Exchange, by December 1, 1998 . To the best knowledge of
the Management Company, there are no facts or circumstances currently
existing which (a) would prevent the Management Company from becoming a
public reporting company within such time period or (b) are inconsistent
with the Management Company's fulfillment of the foregoing covenant. The
parties hereto acknowledge that breach of this covenant by the Management
Company shall be a material breach of this Agreement."
SECTION 8. Section 23 of the Management Services Agreement is hereby
amended and restated in its entirety to read as follows:
"Section 23. Entire Agreement; Amendments.
This Agreement and the exhibits and schedules hereto contain the
entire understanding of the parties with respect to its subject matter, and
neither this Agreement nor any part of it may in any way be altered,
-3-
<PAGE>
amended, extended, waived, discharged or terminated except by a written
agreement signed by all of the parties against whom enforcement is sought."
SECTION 9. The Management Services Agreement is hereby amended by adding a
new Section 29, to read in its entirety as follows:
"Section 29. Severability.
It is the desire and intent of the parties hereto that the provisions
of this Agreement be enforced to the fullest extent permissible under the
laws and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, if any particular provision of this Agreement shall
be adjudicated by a court of competent jurisdiction to be invalid,
prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of
this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited
or unenforceable in such jurisdiction, it shall, as to such jurisdiction,
be so narrowly drawn, without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of such provision in
any other jurisdiction."
SECTION 10. Schedule III of the Management Services Agreement is hereby
amended and restated in its entirety to read as set forth on Annex I attached
hereto.
SECTION 11. Except as expressly provided in this Amendment No. 1, the
Management Services Agreement remains in full force and effect in accordance
with its terms.
SECTION 12. This Amendment No. 1 may be executed in more than one
counterparts, and by the parties hereto in separate counterparts, and each such
counterpart shall constitute an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
SECTION 13. This Amendment No. 1 shall by governed by, construed and
interpreted in accordance with the laws of the State of Florida.
* * * *
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
No. 1 to the Management Services Agreement as of the date first above written.
FISHMAN AND STASHAK, M.D.'S, P.A.
By: _________________________________
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
By: __________________________________
Name:
Title:
-5-
<PAGE>
EXECUTION COPY
===============================================================================
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
FISHMAN AND STASHAK, M.D.'S, P.A.
Effective as of June 1, 1997
===============================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I TRANSFER OF PURCHASED ASSETS, ASSUMPTION
OBLIGATIONS AND RELATED MATTERS............................ 2
1.1. Transfer of Assets......................................... 2
1.2. Assets Not Begin Transferred............................... 3
1.3. Liabilities Being Assumed.................................. 3
1.4. Liabilities Not Being Assumed.............................. 3
1.5. Instruments of Conveyance and Transfer, Etc. .............. 4
1.6. Right of Endorcement, Etc. ................................ 4
1.7. Further Assurances......................................... 5
1.8. Assignment of Leases....................................... 6
1.9. Condition of Purchased Assets.............................. 6
ARTICLE II PURCHASE PRICE: ALLOCATION................................. 6
2.1. Purchase Price; Payment.................................... 6
2.2. Allocation of Purchase Price............................... 7
2.3. Accounts Receivable Payment................................ 7
ARTICLE III REPRESENTATION AND WARRANTIES.............................. 9
3.1. Representations and Warranties of the Seller............... 9
3.2. Representations and Warranties of the Buyer................ 12
ARTICLE IV CONDITIONS TO CLOSING...................................... 15
4.1. Conditions to Each Party's Obligations..................... 15
4.2. Conditions to Obligations of the Buyer..................... 15
4.3. Conditions to Obligations of the Seller.................... 17
4.4. Related Agreements......................................... 17
ARTICLE V CLOSING.................................................... 18
5.1. Date....................................................... 18
5.2. Closing Transactions....................................... 18
ARTICLE VI INDEMNIFICATION............................................ 20
6.1. Definitions................................................ 20
6.2. Indemnification Generally.................................. 22
6.3. Assertion of Claims........................................ 22
-i-
<PAGE>
6.4. Notice and Defense of Third Party Claims................... 23
6.5. Survival of Representations, Warranties and Covenants...... 24
ARTICLE VII NON-COMPETITION............................................ 25
ARTICLE VIII REPURCHASE OF ASSETS....................................... 25
ARTICLE IX AMENDMENT, NOTIFICATION AND WAIVER......................... 25
ARTICLE X MISCELLANEOUS.............................................. 26
10.1. Transfer Taxes, Etc. ...................................... 26
10.2. Entire Agreement........................................... 26
10.3. Descriptive Headings....................................... 26
10.4. Notices.................................................... 26
10.5. Counterparts............................................... 28
10.6. Bulk Sales Compliance...................................... 28
10.7. Governing Law; Jurisdiction................................ 29
10.8. Attorney's Fees............................................ 29
10.9. Benefits of Agreement...................................... 29
10.10. Pronouns................................................... 29
-ii-
<PAGE>
EXHIBITS
- --------
Exhibit A - Bill of Sale
Exhibit B - Assignment and Assumption Agreement
SCHEDULES
- ---------
1.1(a) - Medical Equipment
1.1(b) - Furniture, Furnishings, Trade
Fixtures, and Office Equipment
1.1(c) - Equipment Leases
1.1(d) - Supplies
1.1(e) - Accounts Receivable
1.1(f) - Deposits
1.1(g) - Additional Items
2.2 - Allocation of Purchase Price
3.1(c) - Claims
3.1(d) - Litigation
<PAGE>
Definitions
The following terms which may appear in more than one Section of this Agreement
are defined at the following pages:
TERM PAGE
A/R Amount.................................................................. 7
A/R Balance................................................................. 7
A/R Collections............................................................. 7
A/R Shortfall............................................................... 8
Accounts Receivable......................................................... 2
Affiliate................................................................... 20
Assignment and Assumption Agreement......................................... 4
Assumed Obligations......................................................... 3
Bill of Sale................................................................ 4
bulk sales laws............................................................. 21
Business Day................................................................ 27
Buyer....................................................................... 1
Buyer Indemnification Event................................................. 20
Buyer Indemnified Persons................................................... 21
Bylaws...................................................................... 9
Certificate of Incorporation................................................ 9
Claims...................................................................... 10
Closing..................................................................... 18
Closing Date................................................................ 18
Collections................................................................. 35
Determination Date.......................................................... 7
Excluded Assets............................................................. 3
Excluded Obligations........................................................ 3
Final Statement............................................................. 8
Indemnified Persons......................................................... 21
Indemnifying Person......................................................... 21
Losses...................................................................... 21
Management Services Agreement............................................... 1
Permitted Liens............................................................. 11
Purchase Price.............................................................. 6
Purchased Assets............................................................ 2
Related Agreements.......................................................... 15
Seller...................................................................... 1
Seller Indemnification Event................................................ 21
Seller Indemnified Persons.................................................. 22
Signature Date.............................................................. 1
Statement of Allocation..................................................... 7
Subject Business............................................................ 1
Threshold Month............................................................. 7
<PAGE>
THIS ASSET PURCHASE
AGREEMENT is entered into as of
July 3, 1997 (the "Signature
Date"), effective as of June 1,
1997 , between BONE, MUSCLE AND
JOINT, INC., a Delaware corporation
(the "Buyer"), and FISHMAN AND
STASHAK, M.D.'S, P.A., a Florida
professional association (the
"Seller").
A. The Seller is engaged in the business (the "Subject Business") of
providing orthopedic medical and surgical services and related medical and
ancillary services to patients.
B. The Buyer is engaged in the business of providing management,
administrative, financial, marketing, information technology, and related
services to professional medical organizations.
C. Concurrently herewith, the Seller and the Buyer are entering into a
Management Services Agreement (the "Management Services Agreement"), pursuant to
which the Buyer will furnish to the Seller management, administrative, and
related services.
D. The Seller desires to sell, transfer, convey and assign to the Buyer
and the Buyer desires to purchase from the Seller, certain of the assets,
properties, interests in properties and rights of the Seller used in the Subject
Business upon the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereby agree as follows:
<PAGE>
ARTICLE I
TRANSFER OF PURCHASED ASSETS, ASSUMPTION OF
LIABILITIES AND RELATED MATTERS
1.1. Transfer of Assets.
On the terms and subject to the conditions of this Agreement,
at the Closing (as hereinafter defined), the Seller shall sell, transfer, convey
and assign to the Buyer, and the Buyer shall purchase, assume, and accept from
the Seller, the following assets, properties, interests in properties and rights
of the Seller (the "Purchased Assets"), as the same shall exist immediately
prior to the Closing, free and clear of all Claims (as defined below) (except
Permitted Liens (as defined below)):
(a) the medical equipment owned by the Seller and listed on Schedule
1.1(a);
(b) the furniture, furnishings, trade fixtures, and office equipment
owned by the Seller and listed on Schedule 1.1(b);
(c) the Seller's rights and interests under the equipment leases
identified on Schedule 1.1(c), subject to the Buyer's assumption of the
obligations accruing thereunder as provided in Section 1.3;
(d) the supplies described on Schedule 1.1(d);
(e) the accounts receivable described on Schedule 1.1(e) (the
"Accounts Receivable") (subject to applicable law and in accordance with Section
1.6 hereof);
(f) the deposits identified on Schedule 1.1(f); and
(g) any additional items identified on Schedule 1.1(g).
-2-
<PAGE>
1.2. Assets Not Being Transferred.
All assets, properties, interests in properties, and rights of the
Seller not expressly identified in Section 1.1 or the Schedules referenced
therein (the "Excluded Assets") are expressly excluded from the assets of the
Seller being sold, assigned, or otherwise transferred to the Buyer.
1.3. Liabilities Being Assumed.
Except as otherwise provided herein and subject to the terms and
conditions of this Agreement, simultaneously with the sale, transfer, conveyance
and assignment to the Buyer of the Purchased Assets, the Buyer shall assume, and
hereby agrees to pay when due, those liabilities accruing after the Closing Date
under the equipment leases identified in Schedule 1.1(c) (the "Assumed
Obligations"); provided, however, that any and all obligations and liabilities
arising under any such lease as of or prior to the Closing Date and any and all
obligations and liabilities arising out of or in connection with the Seller's
breach of any such lease shall, in each case, remain the obligations and
liabilities of the Seller.
1.4. Liabilities Not Being Assumed.
The Buyer is not assuming any liabilities or obligations of the Seller
(fixed or contingent, known or unknown, matured or unmatured) whatsoever other
than the Assumed Obligations. For convenience of reference, all liabilities and
obligations of the Seller not being assumed by the Buyer are collectively
referred to as the "Excluded Obligations." The Seller hereby agrees to pay all
Excluded Obligations as and when such Excluded Obligations become due.
-3-
<PAGE>
1.5. Instruments of Conveyance and Transfer, Etc.
At the Closing, the Seller shall deliver (or cause to be delivered) to
the Buyer such deeds, bills of sale, endorsements, assignments and other good
and sufficient instruments of sale, transfer, conveyance and assignment as shall
be necessary to sell, transfer, convey and assign to the Buyer, in accordance
with the terms hereof, title to the Purchased Assets, free and clear of all
Claims (except Permitted Liens), including, without limitation, the delivery of
a Bill of Sale (the "Bill of Sale") substantially in the form of Exhibit A
attached hereto and the delivery of an Assignment and Assumption Agreement (the
"Assignment and Assumption Agreement") substantially in the form of Exhibit B
attached hereto. Simultaneously therewith, the Seller shall take all steps as
may be reasonably required to put the Buyer in possession and operating control
of the Purchased Assets.
1.6. Right of Endorsement, Etc.
Effective upon the Closing, the Seller hereby constitutes and appoints
the Buyer, its successors and assigns, the true and lawful attorney-in-fact of
the Seller with full power of substitution, in the name of the Buyer, or the
name of the Seller, on behalf of and for the benefit of the Buyer, to collect
all Accounts Receivable assigned to the Buyer as provided herein, to endorse,
without recourse, checks, notes and other instruments received in payment of
such Accounts Receivable in the name of the Seller, and to institute and
prosecute, in the name of the Seller or otherwise, all proceedings which the
Buyer may deem proper in order to assert or enforce any claim, right or title of
any kind in or to the Purchased Assets (provided that the Buyer shall not,
without the consent of the Seller, initiate any such proceeding to collect on
Accounts Receivable acquired hereunder), to defend and compromise any and all
actions, suits or proceedings in respect of any of the Purchased Assets and to
-4-
<PAGE>
do all such acts and things in relation thereto as the Buyer may deem advisable.
The foregoing powers are coupled with an interest and shall be irrevocable by
the Seller, directly or indirectly, whether by the dissolution of the Seller or
in any manner or for any reason; provided, however that notwithstanding anything
to the contrary contained herein, collections of Medicare and Medicaid Accounts
Receivable shall first be deposited into the Medical Group Collections Account
(as defined in the Management Services Agreement) and shall thereafter be
transferred to an account designated by the Management Company in accordance
with the procedures outlined in Section 5.1 of the Management Services
Agreement. Notwithstanding anything contained herein to the contrary, the power
of attorney granted to the Management Company in this Section 1.6 shall be
terminated upon the termination of the Management Services Agreement.
1.7. Further Assurances.
The Seller shall pay or cause to be paid to the Buyer promptly any
amounts which shall be received by the Seller after the Closing which constitute
Purchased Assets, including all amounts paid to the Seller on account of the
Accounts Receivable. The Seller shall, at any time and from time to time after
the Closing, upon the reasonable request of the Buyer, execute, acknowledge,
deliver and file, or cause to be done, executed, acknowledged, delivered or
filed, all such further acts, transfers, conveyances, assignments or assurances
as may reasonably be required for better selling, transferring, conveying,
assigning and assuring to the Buyer, or for aiding and assisting in the
collection of or reducing to possession by the Buyer, any of the assets,
properties, interests in properties or rights being purchased by the Buyer
hereunder. Any reasonable expenses incurred in connection with the foregoing
shall be borne by the Seller.
-5-
<PAGE>
1.8. Assignment of Leases.
Anything contained in this Agreement to the contrary notwithstanding,
this Agreement shall not constitute an agreement or attempted agreement to
assign any office lease or equipment lease if an attempted assignment thereof,
without the consent of any other party thereto, would constitute a breach
thereof or in any way affect the rights of the Buyer or the Seller thereunder.
The Seller shall use its best efforts, and the Buyer shall cooperate with the
Seller, to obtain the consent of any such third party to the assignment thereof
to the Buyer. If such consent is not obtained, the Seller shall cooperate with
the Buyer in any arrangements reasonably necessary or desirable to provide for
the Buyer the benefits (together with the obligations to perform) thereunder.
1.9. Condition of Purchased Assets.
The Buyer acknowledges that the Seller makes no representations or
warranties, express or implied, as to any matter whatsoever relating to the
Purchased Assets, except for the representations and warranties expressly set
forth in this Agreement, and except as set forth expressly herein, the condition
of the Purchased Assets shall be "as is" and "where is".
ARTICLE II
PURCHASE PRICE; ALLOCATION
2.1. Purchase Price; Payment.
The purchase price (the "Purchase Price") to be paid for the Purchased
Assets shall equal the sum of the following amounts:
(a) $1,952,257; and
-6-
<PAGE>
(b) $950,000 (the "A/R Amount"), subject to adjustment in
accordance with Section 2.3, which amount is a good faith estimate of the
aggregate face value of all Accounts Receivable outstanding as of the Closing
Date and set forth on Schedule 1.1(e).
2.2. Allocation of Purchase Price.
The Purchase Price shall be allocated among the Purchased Assets in a
statement (the "Statement of Allocation") reflecting the allocation set forth in
Schedule 2.2 attached hereto. The parties shall complete their respective tax
returns for the period which includes the Closing Date in a manner that is
consistent with the Statement of Allocation.
2.3. Accounts Receivable Payment.
The portion of the Purchase Price specified in Section 2.1(b) is
subject to adjustment and shall be paid or repaid as follows:
(a) In the event that the aggregate amount of collections received
by the Buyer in payment of the Accounts Receivable (the "A/R Collections"), at
any point prior to June 30, 1998 (the "Determination Date"), exceeds the A/R
Amount (such excess amount being referred to herein as an "A/R Balance"), the
Buyer shall pay to the Seller on the last day of the month occurring after the
month in which the Buyer first determines such A/R Balance exists (such month in
which the Buyer determines that an A/R Balance occurred being referred to as the
"Threshold Month") an amount equal to the A/R Balance that had accrued through
the last day of the Threshold Month and, on the last day of each month occurring
thereafter through and including the Determination Date, the Buyer shall pay to
the Seller an amount, if any, equal to the A/R Balance as of the last day of the
previous month, less, in each case, the aggregate amount previously paid
pursuant to this sentence. The Buyer shall
-7-
<PAGE>
deliver to the Seller, within 30 days after delivery of the Final Statement (as
hereinafter defined), a check in an amount, if any, equal to the A/R Balance as
of the Determination Date less the total amount of all payments made to the
Seller prior to such date pursuant to this Section 2.3(a). Within thirty (30)
days after the Determination Date, the Buyer shall furnish to the Seller a
statement (the "Final Statement") setting forth the A/R Collections, including
detail of write-offs of any of the Accounts Receivable, the remaining
outstanding balances of the Accounts Receivable, and any other detail relating
thereto as the Seller may reasonably request. If, as of the Determination Date,
the A/R Collections are less than the A/R Amount (such deficit being referred to
herein as the "A/R Shortfall"), the Seller shall pay the A/R Shortfall to the
Buyer by check in six equal monthly installments (the first payment due 10 days
after delivery of the Final Statement). The parties hereto acknowledge and agree
that after delivery of the Final Statement and payment in full of the A/R
Balance or A/R Shortfall, as the case may be, neither party shall have any other
obligation to the other party with respect to the Accounts Receivable, except
that all remaining uncollected Accounts Receivable shall be turned over to the
Seller for disposition in such manner as the Seller, in its sole discretion,
shall determine. Notwithstanding anything to the contrary contained herein, in
the event that the Management Services Agreement is terminated prior to the
Determination Date, such date of termination shall be deemed the Determination
Date for purposes of this Section 2.3(a).
(b) All payments by patients and third party payors shall be
accounted for on a first-in-first-out basis unless any such payment is
identified as a payment in respect of a particular invoice or otherwise is
designated as payment of a particular invoice or for a particular service.
-8-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties of the Seller.
The Seller hereby represents and warrants to the Buyer, as of the
Signature Date hereof, as follows:
(a) Organization; Good Standing; Qualification and Power. The
Seller is a professional association duly formed, validly existing and in good
standing under the laws of the State of Florida and has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted and as proposed to be conducted, to execute and deliver
this Agreement, the Bill of Sale and the Assignment and Assumption Agreement, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The Seller has delivered to the
Buyer a true and correct copy of its articles of incorporation (the "Articles of
Incorporation") and its bylaws (the "Bylaws"), each as in effect on the date
hereof.
(b) Authority. The execution, delivery and performance of this
Agreement, the Bill of Sale and the Assignment and Assumption Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of the
Seller. This Agreement, the Bill of Sale and the Assignment and Assumption
Agreement have been duly and validly executed and delivered by the Seller and
constitute legal, valid and binding obligations of the Seller enforceable in
accordance with their respective terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally. Neither the execution, delivery or
performance by the Seller of this Agreement, the Bill of Sale or the Assignment
and Assumption
-9-
<PAGE>
Agreement nor the consummation by the Seller of the transactions contemplated
hereby or thereby, nor compliance by the Seller with any provision hereof or
thereof will (i) conflict with or result in a breach of any provision of the
Articles of Incorporation or Bylaws of the Seller, (ii) cause a default (with
due notice, lapse of time or both), or give rise to any right of termination,
cancellation or acceleration, under any of the terms, conditions or provisions
of any note, bond, lease, mortgage, indenture, license or other instrument,
obligation or agreement to which the Seller is a party or by which it or any of
its respective properties or assets may be bound or (iii) violate any law,
statute, rule or regulation or order, writ, judgment, injunction or decree of
any court, administrative agency or governmental body applicable to the Seller
or any of its respective properties or assets. Except as set forth on Schedule
3.1(b), no permit, authorization, consent or approval of or by, or any
notification of or filing with, any person (governmental or private) is required
in connection with the execution, delivery or performance by the Seller of this
Agreement, the Bill of Sale or the Assignment and Assumption Agreement or the
consummation of the transactions contemplated hereby or thereby.
(c) Title to Assets, Properties, Interests in Properties and
Rights and Related Matters.
(i) The Seller has good and valid title to all of the
Purchased Assets, free and clear of all security interests, judgments, liens,
pledges, claims, charges, escrows, encumbrances, easements, options, rights of
first refusal, rights of first offer, mortgages, indentures, security agreements
or other agreements, arrangements, contracts, commitments, understandings or
obligations, whether written or oral and whether or not relating in any way to
credit or the borrowing of money (collectively, "Claims"), of any kind or
character, except for (i) those Claims set forth on Schedule 3.1(c) and (ii)
Permitted Liens.
-10-
<PAGE>
(ii) There does not exist any condition which materially
interferes with the economic value or use (consistent with the Seller's past
practice) of any tangible personal property included in the Purchased Assets and
such property is in good operating condition and repair, reasonable wear and
tear excepted.
(iii) The Seller has the complete and unrestricted power and
the unqualified right to sell, transfer, convey and assign, and the Seller is
hereby selling, transferring conveying and assigning to the Buyer, the Purchased
Assets free and clear of all Claims except the Permitted Liens.
(iv) As used in this Agreement, "Permitted Liens" shall
mean (A) any lien for current taxes not yet due and payable, (B) liens of
carriers, warehousemen, mechanics and materialmen created in the ordinary course
of the Subject Business for amounts not yet due and payable which do not
materially detract from the value or impair the use of any property or assets,
(C) in the case of Purchased Assets, liens incurred in the ordinary course of
the Subject Business (including, without limitation, surety bonds and appeal
bonds) in connection with workers' compensation, unemployment insurance and
other types of social security benefits and (D) statutory landlord liens
securing rents not yet due and payable.
(d) Litigation. Except as set forth on Schedule 3.1(d), there are
no (i) actions, suits, claims, investigations or legal or administrative or
arbitration proceedings pending or, to the best knowledge of the Seller,
threatened against the Seller, the Purchased Assets or the Subject Business,
whether at law or in equity, or before or by any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality or (ii) judgments, decrees, injunctions or orders of any court,
governmental department, commission, agency, instrumentality or arbitrator
against the Seller or
-11-
<PAGE>
affecting the Purchased Assets or the Subject Business. The Seller has delivered
to the Buyer all documents and correspondence relating to matters referred to in
said Schedule 3.1(d).
(e) Compliance; Governmental Authorizations. To the best of its
knowledge, the Seller has complied in all material respects with all applicable
Federal, state, local or foreign laws, ordinances, regulations and orders. The
Seller has all Federal, state, local and foreign governmental licenses and
permits necessary in the conduct of the Subject Business the lack of which would
have a material adverse effect on the Seller's ability to operate the Subject
Business after the Closing Date on substantially the same basis as presently
operated, such licenses and permits are in full force and effect, no violations
are or have been recorded in respect of any thereof and no proceeding is pending
or, to the Seller's best knowledge, threatened to revoke or limit any thereof.
None of such licenses and permits shall be affected in any material respect by
the transactions contemplated hereby.
(f) Disclosure. Neither this Agreement (including the Exhibits
and Schedules attached hereto), the Bill of Sale, the Assignment and Assumption
Agreement nor any other document, certificate or written statement furnished to
the Buyer by or on behalf of the Seller in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading.
3.2. Representations and Warranties of the Buyer.
The Buyer represents and warrants to the Seller, as of the Signature
Date hereof, as follows:
(a) Organization, Good Standing and Power. The Buyer (i) is a
corporation duly organized, validly existing and
-12-
<PAGE>
in good standing under the laws of the State of Delaware, (ii) has all requisite
corporate power and authority to own, lease and operate its properties, to carry
on its business as now being conducted, to execute and deliver this Agreement
and the Assignment and Assumption Agreement, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby.
(b) Authority. The execution, delivery and performance of this
Agreement and the Assignment and Assumption Agreement, and the consummation of
the transactions contemplated hereby and thereby, have been duly and validly
authorized by all necessary corporate action on the part of the Buyer. This
Agreement and the Assignment and Assumption Agreement have been duly and validly
executed and delivered by the Buyer, and constitute legal, valid and binding
obligations of the Buyer, enforceable in accordance with their respective terms
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally. Neither the execution, delivery or performance by the Buyer of this
Agreement or the Assignment and Assumption Agreement nor the consummation by the
Buyer of the transactions contemplated hereby or thereby, nor compliance by the
Buyer with any provision hereof or thereof, will (i) conflict with or result in
a breach of any provisions of the Certificate of Incorporation or By-laws of the
Buyer, (ii) cause a default (with due notice, lapse of time or both), or give
rise to any right of termination, cancellation or acceleration, under any of the
terms, conditions or provisions of any material note, bond, lease, mortgage,
indenture, license or other instrument, obligation or agreement to which the
Buyer is a party or by which it or any of its properties or assets is or may be
bound or (iii) violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Buyer or any of its properties or assets.
Except as set forth on Schedule 3.2(b), no
-13-
<PAGE>
permit, authorization, consent or approval of or by, or any notification of or
filing with, any person (governmental or private) is required in connection with
the execution, delivery or performance by the Buyer of this Agreement or the
Assignment and Assumption Agreement or the consummation by the Buyer of the
transactions contemplated hereby or thereby.
(c) Litigation. Except as set forth on Schedule 3.2(d), there are no
(i) actions, suits, claims, investigations or legal or administrative or
arbitration proceedings pending or, to the best knowledge of the Buyer,
threatened against the Buyer, whether at law or in equity, or before or by any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality or (ii) judgments, decrees, injunctions or
orders of any court, governmental department, commission, agency,
instrumentality or arbitrator against the Buyer. The Buyer has delivered to the
Seller all documents and correspondence relating to matters referred to in said
Schedule 3.2(d), if any.
(d) Compliance; Governmental Authorizations. To the best of its
knowledge, the Buyer has complied in all material respects with all applicable
Federal, state, local or foreign laws, ordinances, regulations and orders.
(e) Disclosure. Neither this Agreement (including the Exhibits and
Schedules attached hereto), the Assignment and Assumption Agreement nor any
other document, certificate or written statement furnished to the Seller by or
on behalf of the Buyer in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading.
-14-
<PAGE>
ARTICLE IV
CONDITIONS TO CLOSING
4.1. Conditions to Each Party's Obligations.
The obligations of the Seller to sell the Purchased Assets, and
of the Buyer to purchase the Purchased Assets, are subject to the satisfaction
of the following conditions unless waived in writing (to the extent such
conditions can be waived by the Seller or the Buyer, as applicable):
(a) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the transactions contemplated hereby shall have been issued by any Federal or
state court and remain in effect.
(b) Legislation. No Federal, state, local or foreign statute, rule or
regulation shall have been enacted which prohibits, restricts or delays the
consummation of the transactions contemplated by this Agreement or any of the
conditions to the consummation of such transactions.
(c) Related Agreements. Each of the related agreements identified in
Section 4.4 hereof (collectively, the "Related Agreements") shall have been
fully executed and delivered prior to or at the Closing by all of the parties
required to execute and deliver such agreements.
4.3. Conditions to Obligations of the Buyer.
The obligation of the Buyer to purchase the Purchased Assets is
subject to the satisfaction of the following conditions unless waived in writing
(to the extent such conditions can be waived) by the Buyer:
-15-
<PAGE>
(a) Representations and Warranties. The representations and warranties
of the Seller set forth in Section 3.1 shall in each case be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made at and as of the Closing Date.
(b) Performance of Obligations. The Seller shall have performed all
obligations required to be performed by it under this Agreement prior to and at
the Closing.
(c) Authorization. All action necessary to authorize the execution,
delivery and performance of this Agreement, the Bill of Sale and the Assignment
and Assumption Agreement by the Seller and the consummation of the transactions
contemplated hereby and thereby shall have been duly and validly taken by the
Seller and the Seller shall have full power and right to consummate the
transactions contemplated hereby and thereby.
(d) Consents and Approvals. The Seller shall have delivered to the
Buyer duly executed copies of (i) consents to the assignment of the equipment
leases listed on Schedule 1.1(c) and (ii) all other approvals, if any, required
by this Agreement or the Schedules, in each case in form and substance
satisfactory to the Buyer and counsel to the Buyer.
(e) Government Consents, Authorizations, Etc. All consents,
authorizations, orders or approvals of, and filings or registrations with, any
Federal, state, local or foreign governmental commission, board or other
regulatory body which are required for or in connection with the execution and
delivery by the Seller of this Agreement, the Bill of Sale and the Assignment
and Assumption Agreement and the consummation by the Seller of the transactions
contemplated hereby and thereby shall have been obtained or made.
-16-
<PAGE>
4.3. Conditions to Obligations of the Seller.
The obligation of the Seller to sell the Purchased Assets to the Buyer
is subject to the satisfaction of the following conditions unless waived in
writing (to the extent such conditions can be waived) by the Seller:
(a) Representations and Warranties. The representations and warranties
of the Buyer set forth in Section 3.2 shall in each case be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made at and as of the Closing Date.
(b) Performance of Obligations. The Buyer shall have performed all
obligations required to be performed by it under this Agreement prior to and at
the Closing.
(c) Authorization. All action necessary to authorize the execution,
delivery and performance of this Agreement and the Assignment and Assumption
Agreement by the Buyer and the consummation of the transactions contemplated
hereby and thereby shall have been duly and validly taken by the Buyer.
(d) Government Consents, Authorizations, Etc. All consents,
authorizations, orders or approvals of, and filings or registrations with, any
Federal, state, local or foreign governmental commission, board or other
regulatory body which are required for or in connection with the execution and
delivery by the Buyer of this Agreement and the Assignment and Assumption
Agreement and the consummation by the Buyer of the transactions contemplated
hereby and thereby shall have been obtained or made.
4.4. Related Agreements.
The Related Agreements referred to in this Agreement consist of the
following:
-17-
<PAGE>
(a) the Management Services Agreement between the parties hereto;
(b) the Restricted Stock Agreements between the Buyer and each of the
physicians receiving capital stock of the Buyer as of the date hereof,
respectively;
(c) the Stockholder Non-Competition Agreements among the Seller, the
Buyer, and each of the physicians receiving capital stock of the Buyer as of the
date hereof, respectively;
(d) the Bill of Sale executed by the Seller; and
(e) the Assignment and Assumption Agreement between the Seller and the
Buyer.
ARTICLE V
CLOSING
5.1. Date.
The closing (the "Closing") for the consummation of the transactions
contemplated by this Agreement shall be deemed to have taken place at 12:01 a.m.
on June 1, 1997 (the "Closing Date"), irrespective of the actual date(s) and
time(s) that all of the documents required hereunder are executed and delivered.
5.2. Closing Transactions.
At the Closing, the parties shall take the actions and deliver the
documents identified in this Section 5.2. The Closing shall not be deemed to
have taken place, and the transactions contemplated by this Agreement shall not
be deemed to have been consummated, unless all of the closing transactions
identified in this Section 5.2 have been completed or waived in writing by the
parties.
-18-
<PAGE>
(a) The Seller shall deliver to the Buyer an executed copy of the Bill
of Sale;
(b) Each of the parties shall execute and deliver to the other a copy
of the Assignment and Assumption Agreement;
(c) The Buyer shall deliver to the Seller the Purchase Price payable
by cashier's check or wire transfer of funds to an account designated in writing
by the Seller;
(d) Each of the parties shall execute and deliver to the other a fully
executed copy of the Management Services Agreement;
(e) The Seller shall deliver Restricted Stock Agreements to the Buyer
executed by each of the physicians receiving capital stock of the Buyer as of
the date hereof, respectively, and the Buyer shall execute and deliver to the
Seller Restricted Stock Agreements for each of the physicians receiving capital
stock of the Buyer as of the date hereof, respectively;
(f) The Buyer shall deliver to the physicians receiving capital stock
of the Buyer as of the date hereof stock certificates issued in their respective
names as required under the terms of the Restricted Stock Agreements; and
(g) The Seller shall deliver to the Buyer Stockholder Non-Competition
Agreements executed by each of the physicians receiving capital stock of the
Buyer as of the date hereof.
-19-
<PAGE>
ARTICLE VI
INDEMNIFICATION
6.1. Definitions.
As used in this Agreement, the following terms shall have the
following meanings:
(a) "Affiliate", as to any person, means any other person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with such person.
(b) "Buyer Indemnification Event" shall mean the following:
(i) (A) the untruth, inaccuracy or breach of any representation or
warranty of the Seller contained in this Agreement, any Schedule or Exhibit
attached hereto, the Bill of Sale, the Assignment and Assumption Agreement or
any certificate delivered by the Seller in connection herewith (or any facts or
circumstances constituting any such untruth, inaccuracy or breach) or (B) the
breach of any agreement or covenant of the Seller contained in this Agreement,
the Bill of Sale, or the Assumption or Assignment Agreement;
(ii) the assertion against the Buyer or any Buyer Indemnified
Person of any liability or obligation arising from, relating to, or in any way
connected with the operation of the Subject Business at any time prior to the
Closing;
(iii) the assertion against the Buyer or any Buyer Indemnified
Person of any liability or obligation arising from, relating to, or in any way
connected with any Excluded Obligation; and
-20-
<PAGE>
(iv) any non-compliance by the Seller with the "bulk sales laws"
of Florida to the extent that such laws are in effect and may be applicable to
the transactions contemplated hereby.
(c) "Buyer Indemnified Persons" shall mean and include the Buyer, its
Affiliates and their respective officers, directors, and employees.
(d) "Indemnified Persons" shall mean the Buyer Indemnified Persons or
the Seller Indemnified Persons, as the case may be.
(e) "Indemnifying Person" shall mean the Buyer or the Seller, as the
case may be.
(f) "Losses" shall mean any and all losses, claims, damages,
liabilities, expenses (including reasonable attorneys' and accountants' fees),
assessments, tax deficiencies and taxes (including interest or penalties
thereon) sustained, suffered or incurred by any Indemnified Person arising from
any matter which is the subject of indemnification under Section 6.2.
(g) "Seller Indemnification Event" shall mean (i) the untruth,
inaccuracy or breach of any representation or warranty of the Buyer contained in
this Agreement, any Schedule or Exhibit attached hereto, the Assignment and
Assumption Agreement or any certificate delivered by the Buyer in connection
herewith (or any facts or circumstances constituting any such untruth,
inaccuracy or breach) or (ii) the breach of any agreement or covenant of the
Buyer contained in this Agreement or the Assignment and Assumption Agreement,
including, without limitation, the assertion against the Seller or any Seller
Indemnified Person of any liability or obligation arising from, relating to, or
in any way connected with any Assumed Obligation.
-21-
<PAGE>
(h) "Seller Indemnified Persons" shall mean and include the Seller and
its equity owners, directors, officers and employees.
6.2. Indemnification Generally.
(a) The Seller shall indemnify, defend and hold harmless the Buyer
Indemnified Persons, and each of them, from and against any and all Losses
resulting from Buyer Indemnification Events.
(b) The Buyer shall indemnify, defend and hold harmless the Seller
Indemnified Persons, and each of them, from and against any and all Losses
resulting from Seller Indemnification Events.
(c) The parties hereto agree that in the event of a conflict between
the terms of this Article VI and the terms of the Management Services Agreement,
the terms and provisions of the Management Services Agreement shall prevail.
6.3. Assertion of Claims.
No claim, demand, suit or cause of action shall be brought under
Section 6.2 unless the Indemnified Persons, or any of them, give the
Indemnifying Person written notice of the existence of any such claim, demand,
suit or cause of action, stating with particularity the nature and basis of said
claim, and the amount thereof, to the extent known, and providing to the extent
reasonably available all written documentation relating thereto. Such written
notice shall be delivered to the Indemnifying Person as soon as practicable upon
receipt of actual knowledge of such claim, demand, suit or cause of action;
provided, however, that the failure to provide such written notice shall not
affect the Indemnified Persons' right to indemnification hereunder if failure to
provide such written notice does not materially adversely affect the
Indemnifying
-22-
<PAGE>
Person. Upon the giving of such written notice as aforesaid, the Indemnified
Persons, or any of them, shall have the right to commence legal proceedings
subsequent to the applicable survival date, if any, for the enforcement of their
rights under Section 6.2.
6.4. Notice and Defense of Third Party Claims.
(a) In the event any action, suit or proceeding is brought by a third
party against an Indemnified Person, with respect to which an Indemnifying
Person may have liability under Section 6.2, the action, suit or proceeding
shall, upon the written agreement of the Indemnifying Person that it is
obligated with respect to such action, suit or proceeding, be defended
(including all proceedings on appeal or for review which counsel for the
defendant shall deem appropriate) and, unless otherwise provided below,
controlled by such Indemnifying Person. The Indemnified Persons shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Persons,
unless (i) the employment of such counsel shall have been authorized in writing
by the Indemnifying Person in connection with the defense of such action, suit
or proceeding, (ii) the Indemnifying Person shall fail actively and diligently
to defend such action, suit or proceeding, or (iii) the Indemnified Persons
shall have reasonably concluded that there may be one or more legal or equitable
defenses available to the Indemnified Persons which are different from or
additional to those available to the Indemnifying Person, in any of which events
the Indemnifying Person shall not have the right to direct the defense of such
action, suit or proceeding on behalf of the Indemnified Persons and that portion
of any fees and expenses of counsel related to matters covered by the indemnity
agreement and contained in Section 6.2 shall be borne by the Indemnifying
Person. The Indemnified Persons shall be kept fully informed of such action,
suit or proceeding at all stages thereof whether or not they are
-23-
<PAGE>
so represented. The Indemnifying Person shall make available to the Indemnified
Persons and their attorneys and accountants all books and records of the
Indemnifying Person relating to such action, suit or proceeding and the parties
hereto agree to render to each other such assistance as they may reasonably
require of each other in order to ensure the proper and adequate defense of any
such action, suit or proceeding.
(b) The Indemnifying Person shall not make any settlement of any
action, suit or proceeding without the written consent of the Indemnified
Persons, which consent shall not be unreasonably withheld; provided, however,
that in the event the Indemnified Persons refuse to consent to a settlement
acceptable to the Indemnifying Person which is capable of settlement by the
payment of money only and the Indemnifying Persons shall demonstrate to the
reasonable satisfaction of the Indemnified Persons their ability to pay such
amount, the Indemnifying Person may pay the amount of the proposed settlement to
the Indemnified Persons and shall thereupon be released from any further
liability with respect to such action, suit or proceeding.
6.5. Survival of Representations, Warranties and Covenants.
The representations and warranties of the Seller contained in
Section 3.1 and the representations and warranties of the Buyer contained in
Section 3.2 shall survive the Closing and shall terminate forty-five (45) days
following the second anniversary of the Closing Date; provided, however, that
the representations and warranties of the Seller set forth in Sections 3.1(a),
3.1(b), 3.1(c) and 3.1(e), and the representations and warranties of the Buyer
set forth in Sections 3.2(a) and 3.2(b), shall survive the Closing and remain in
full force and effect until the expiration of the statute of limitations, if
any, applicable to the matters set forth therein (and indefinitely, if none).
-24-
<PAGE>
ARTICLE VII
NON-COMPETITION
The parties hereby acknowledge that they have entered into an
agreement regarding non-competition, as set forth in Section 16 of the
Management Services Agreement.
ARTICLE VIII
REPURCHASE OF ASSETS
The Purchased Assets, except for the Accounts Receivable, are
subject to repurchase by the Seller from the Buyer upon termination or
rescission of the Management Services Agreement in accordance with Section 13.5
or Section 14.1, respectively, of the Management Services Agreement.
ARTICLE IX
AMENDMENT, MODIFICATION AND WAIVER
This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing signed by each of the parties. The waiver
by one party of the performance of any covenant, condition or promise shall not
invalidate this Agreement, nor shall it be considered as a waiver by such party
of any other covenant, condition or promise. The delay in pursuing any remedy or
in insisting upon full performance for any breach or failure of any covenant,
condition or promise shall not prevent a party from later pursuing any remedies
or insisting upon full performance for the same or any similar breach or
failure.
-25-
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1. Transfer Taxes, Etc.
The Seller shall pay all sales, use and excise taxes and all
registration, recording or transfer taxes which may be payable in connection
with the transactions contemplated by this Agreement.
10.2. Entire Agreement.
This Agreement (including the recitals hereof and the Schedules and
the Exhibits attached hereto), together with the Related Agreements referenced
herein and the Amendatory Agreement dated as of the Signature Date among Buyer,
Seller, Eric Fishman, M.D., and Gerald Stashak, M.D., contain the entire
agreement between the parties hereto with respect to the transactions
contemplated hereby and supersede all prior agreements, representations,
warranties and understandings, either oral or written, between the parties with
respect thereto.
10.3. Descriptive Headings.
Descriptive headings are for convenience only and shall not control or
affect the meaning or construction of any provisions of this Agreement.
10.4. Notices.
All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by telecopier, nationally-recognized overnight courier, or certified
mail, postage prepaid, return receipt requested, addressed as follows:
-26-
<PAGE>
(a) if to the Buyer, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: President
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telecopier: (212) 408-2420; and
(b) if to the Seller, to:
Fishman and Stashak, M.D.'s, P.A.
1411 North Flagler Drive
Suite 8800
West Palm Beach, Florida 33401
Attention: Eric S. Fishman, M.D.
Telecopier: (561) 659-9009;
with a copy to:
Moore & Menkhaus, P.A.
4800 North Federal Highway
Suite 210A
Boca Raton, Florida 33431
Attention: David Menkhaus, Esq.
Telecopier: (561) 393-6541;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered if
personally delivered or sent by telecopier, (ii) on the Business Day after
dispatch if sent by nationally-recognized, overnight courier and (iii) on the
fifth Business Day after dispatch, if sent by mail. As used herein, "Business
Day" means a day that is not a Saturday, Sunday or a day on which banking
institutions in the state of Florida are not required to be open.
-27-
<PAGE>
10.5. Counterparts.
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
10.6. Bulk Sales Compliance.
The Buyer hereby waives compliance by the Seller with the provisions
of the "bulk sales laws" of any state which may be in effect and applicable to
the transactions contemplated hereby; provided, however, that the Seller shall
indemnify the Buyer in connection with such noncompliance to the extent provided
in Article 6 hereof.
10.7. Governing Law; Jurisdiction.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida without giving effect to the
laws and principles thereof, or of any other jurisdiction, which would direct
the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought pursuant to
this Agreement by any party hereto shall lie exclusively in any Federal or state
court located in Palm Beach County, State of Florida. By execution and delivery
of this Agreement, the parties hereto irrevocably submit to the jurisdiction of
such courts for themselves and in respect of their property with respect to such
action. The parties hereto irrevocably agree that venue would be proper in such
court, and hereby waive any objection that such court is an improper or
inconvenient forum for the resolution of such action. The parties hereto shall
act in good faith and shall refrain from taking any actions to circumvent or
frustrate the provisions of this Agreement.
-28-
<PAGE>
10.8. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating
to this Agreement, the prevailing party shall be entitled to recover from the
other party all costs and expenses, including attorneys' fees and accountants'
fees, incurred in connection with such dispute or controversy.
10.9. Benefits of Agreement.
The terms and provisions of this Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns. Anything contained herein to the contrary notwithstanding,
this Agreement shall not be assignable by any party without the consent of the
other party hereto, and any purported assignment without such consent shall be
null and void.
10.10. Pronouns.
As used herein, all pronouns shall include the masculine, feminine,
neuter, singular and plural thereof whenever the context and facts require such
construction.
* * * *
-29-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Asset
Purchase Agreement to be executed on its behalf effective as of the day and year
first above written.
BONE, MUSCLE AND JOINT, INC.
By: /s/
----------------------------
Name:
Title: Vice President
FISHMAN AND STASHAK, M.D.'S, P.A.
By: /s/ Eric S. Fishman, M.D.
----------------------------
Name: Eric S. Fishman, M.D.
Title: President
By: /s/ Gerald T. Stashak, M.D.
----------------------------
Name: Gerald T. Stashak, M.D.
Title: Secretary
<PAGE>
EXECUTION COPY
AMENDMENT NO. 1 TO ASSET
PURCHASE AGREEMENT dated as of September
10, 1997 (the "Amendment"), between
BONE, MUSCLE AND JOINT, INC., a Delaware
corporation (the "Management Company"),
and FISHMAN AND STASHAK, M.D.'S, P.A.
(the "Medical Group").
Reference is made to the Asset Purchase Agreement (the "Asset Purchase
Agreement"), between the Management Company and the Medical Group, effective as
of June 1, 1997. Capitalized terms used but not defined herein have the meanings
ascribed thereto in the Asset Purchase Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
in the Management Services Agreement and the Amendatory Agreement and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. Section 10.2 of the Asset Purchase Agreement is hereby amended in its
entirety to read as follows:
"10.2. Entire Agreement.
This Agreement (including the recitals hereof and the Schedules and
Exhibits attached hereto) contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supersedes
all prior agreements, representations, warranties and understandings,
either oral or written, between the parties with respect thereto."
1. Except as expressly provided in this Amendment, the Asset Purchase
Agreement remains in full force and effect in accordance with its terms.
2. This Amendment may be executed in more than one counterpart, and by the
parties hereto in separate counterparts, and each such counterpart shall
constitute an original instrument, but all such counterparts taken together
shall constitute one and the same Amendment.
3. This Amendment shall be governed by, construed and interpreted in
accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1 to the
Asset Purchase Agreement to be duly executed as of the date and year first above
written.
BONE, MUSCLE AND JOINT, INC.
By: _____________________________
Name:
Title:
FISHMAN AND STASHAK, M.D.'S, P.A.
By: _____________________________
Eric S. Fishman, M.D.
President
By: _____________________________
Gerald T. Stashak, M.D.
Secretary
<PAGE>
EXECUTION COPY
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of
July 3, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the
"Company"), and the individual identified on the signature page hereto (the
"Stockholder"), with reference to the following facts. Certain capitalized terms
used herein are defined in Section 6 below.
A. This Agreement is entered into in connection with and concurrently with
that certain Management Services Agreement dated as of the date hereof and
effective as of June 1, 1997 (the "Management Services Agreement"), between the
Company and Fishman and Stashak, M.D.'s, P.A. (the "Medical Group").
B. This Agreement is being entered into concurrently with substantially
identical Restricted Stock Agreements between the Company and the other partners
in or equity owners or employees of the Medical Group identified on Schedule A
attached hereto (such individuals and their Permitted Transferees are referred
to herein collectively as the "Stockholders").
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Purchase and Sale of Restricted Shares; Representations and Warranties
of Stockholder.
(a) Upon execution of this Agreement, the Company shall, pursuant to
Section 4 and Schedule III of the Management Services Agreement, issue to the
Stockholder that number of shares (such shares together with those shares
hereafter acquired pursuant to the terms hereof, are referred to herein as the
"Restricted Shares") of common stock, $.001 par value (the "Common Stock"), of
the Company set forth opposite the Stockholder's name on Schedule A attached
hereto. The aggregate shares of Common Stock issued to the Stockholders are
referred to collectively herein as "Restricted Stock." Simultaneously with the
execution and delivery hereof, the Company is delivering to the Stockholder the
certificate(s) representing the Restricted Shares.
(b) In connection with the issuance of the Restricted Shares hereunder, the
Stockholder represents and warrants to the Company that:
(i) the Restricted Shares to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in
<PAGE>
violation of the 1933 Act, or any applicable state securities laws, and the
Restricted Shares will not be disposed of in contravention of the 1933 Act
or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Shares;
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Shares and is able to bear the economic risk
of his or her investment in the Restricted Shares for an indefinite period
of time and understands that the Restricted Shares have not been registered
or qualified under the 1933 Act or any applicable state securities laws, by
reason of the issuance of the Restricted Shares in a transaction exempt
from the registration and qualification requirements of the 1933 Act or
such state securities laws and, therefore, cannot be sold unless
subsequently registered or qualified under the 1933 Act or such state
securities laws or an exemption from such registration or qualification is
available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Shares and has had full access to or been provided with such
other
-2-
<PAGE>
information concerning the Company as he or she has requested.
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Shares to the
Stockholder and as a condition thereto, the Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Shares to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement in accordance with its terms;
and
(ii) the Company shall only be obligated to provide to the Stockholder
substantially the same information regarding the Company that the Company
regularly discloses to its other shareholders.
2. Vesting of the Restricted Shares.
(a) Except as otherwise provided in Section 2(b) below, the Restricted
Shares shall become vested in accordance with the following schedule, if, as of
each such date, (i) the Management Services Agreement has not been terminated,
(ii) there has not been a Cessation of Active Practice (as defined in Section
2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently
disabled (as described in Section 3(d)(iv)), and (iv) the Stockholder has not
died:
Anniversary Date Percentage of
of this Agreement Restricted Shares Vested
----------------- ------------------------
First 25%
Second 25%
Third 25%
Fourth 25%
For purposes of this Agreement, "Anniversary Date of this Agreement" means June
1 of each year after 1997. Restricted Shares which have become vested are
referred to herein as "Vested Shares" and all other Restricted Shares are
referred to herein as "Unvested Shares."
-3-
<PAGE>
(b) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
Section 2(a) above, the number of Unvested Shares, if any, that would have
become Vested Shares during the 12-month period immediately following the date
of death had such death not occurred shall be deemed Vested Shares as of the
date of death.
(c) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death), throughout any
twelve-month period (the "Determination Period") ending on the day before any of
the vesting dates described in Section 2(a) hereof, to engage in the practice of
medicine with the Medical Group on a regular basis, including the performance of
orthopedic surgical procedures on a regular basis (except in the case of any
Stockholder who did not practice surgery on a regular basis immediately prior to
the date hereof), such that (i) the Stockholder was engaged in patient care
activities for less than seventy-five percent (75%) of the time that the
Stockholder had been engaged in such activities during the twelve-month period
immediately preceding the date hereof, and (ii) the Stockholder generated
billings that were less than seventy-five percent (75%) of the amount of
billings generated by the Stockholder during the twelve-month period immediately
preceding the date hereof. Notwithstanding anything to the contrary contained
herein, for purposes of making the determination described in clauses (i) and
(ii) above with respect to the Stockholder for any Determination Period, the
activities and billings of the Stockholder shall be aggregated with the
activities and billings of Dr. Robert Green, for so long as Dr. Green continues
to be employed by the Medical Group.
3. Repurchase of Restricted Shares.
(a) In the event of the termination of the Management Services Agreement
pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth
anniversary of the date hereof, the Company shall have the right (but not the
obligation) (the "Repurchase Option"), to be exercised in its sole discretion,
to repurchase all or any portion of the Restricted Shares (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
Permitted Transferees) pursuant to the terms and conditions set forth in this
Section 3.
(b) The Company may elect to repurchase all or any portion of the
Restricted Shares by delivering written notice (the "Repurchase Notice") to the
Stockholder within ninety (90) days after the Repurchase Event; provided,
however, that if the Company elects to repurchase less than all of the
Restricted Shares, the Company shall first repurchase Unvested Shares and then
repurchase that number of Vested Shares, if any, as the
-4-
<PAGE>
Company may, in its sole discretion, elect. The Repurchase Notice shall set
forth the number of Unvested Shares and Vested Shares to be repurchased, the
aggregate consideration to be paid for such shares, and the time and place for
the closing of the transaction. The purchase price payable for each Unvested
Share shall equal the Original Value of such share and the purchase price
payable for each Vested Share shall equal the Fair Market Value of such share.
If the Company decides to repurchase Restricted Shares from any Stockholder
pursuant to this Section 3(b), then the Company must purchase that number of
Restricted Shares which it has elected to repurchase from all of the
Stockholders pro rata according to the number of shares of Restricted Stock held
by all of the Stockholders at the time of delivery of such Repurchase Notice
(determined as nearly as practicable to the nearest whole share).
(c) The closing of the repurchase of Restricted Shares pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the delivery of the Repurchase Notice. The Company
shall pay for the Restricted Shares to be purchased pursuant to the Repurchase
Option by delivery of a check or wire transfer of funds in the aggregate amount
of the repurchase price for such shares; provided, however, that in the event
the Medical Group is obligated to pay to the Company any sums in connection with
the repurchase of assets by the Medical Group pursuant to Section 13.5 or 14.1
of the Management Services Agreement, the total amount of such sums may be
offset by the Company against any amounts owed by the Company to the Stockholder
pursuant to this Agreement (if such Stockholder is, at such time, an equity
owner of or partner in the Medical Group), such offset amount to be allocated
pro rata among all of the Stockholders who at such time hold equity of or are
partners in the Medical Group. The Company's payment under this Section 3(c)
shall be subject to the terms and provisions of any financing agreement, if any,
to which the Company is a party, its certificate of incorporation and the
operation of law. The Company shall be entitled to receive representations and
warranties from the Stockholder regarding (i) the Stockholder's power, authority
and legal capacity to enter into such sale and to transfer valid right, title
and interest in such Restricted Shares, (ii) the Stockholder's ownership of such
Restricted Shares and the absence of any liens, pledges, and other encumbrances
on such Restricted Shares and (iii) the absence of any violation, default, or
acceleration of any agreement or instrument pursuant to which the Stockholder or
the Stockholder's assets are bound resulting from such sale.
(d) In the event of the Cessation of Active Practice, the death or
permanent disability of the Stockholder
-5-
<PAGE>
(the "Reallocation Event"), the following provisions shall apply.
(i) Such Stockholder or the estate (in the case of death) of such
Stockholder shall transfer to the remaining Stockholders, if any, all of
the Unvested Shares (not Vested Shares) held by such Stockholder (such
transfer to be made pro rata according to the number of shares of
Restricted Stock (vested and unvested) held by all of the Stockholders at
the time of the Reallocation Event). Such Unvested Shares shall be
transferred for no consideration and the stock certificate(s) representing
those shares shall be delivered to the Company, no later than sixty (30)
days after the Cessation of Practice, death or disability of the
Stockholder, duly endorsed for transfer in accordance with this Section
3(d). The Company shall within thirty (30) days thereafter issue and
deliver to each of such remaining Stockholders a certificate representing
that number of shares of Restricted Stock which such Stockholder is
entitled to receive pursuant to this Section 3(d). The Unvested Shares
acquired by the remaining Stockholders shall remain subject to the vesting
schedule set forth in Section 2(a) hereof.
(ii) Notwithstanding anything contained herein to the contrary, in the
event that the Management Fee (as defined in the Management Services
Agreement) for the 12-month period immediately following the Reallocation
Event is less than ninety percent (90%) of the greater of (A) the
Management Fee for the 12-month period immediately preceding the
Reallocation Event (the "Preceding Period") and (B) the Management Fee for
the 12-month period prior to the Preceding Period, the Company shall have
the right (but not the obligation), to be exercised in its sole discretion,
to repurchase from each of those remaining Stockholders who acquired shares
pursuant to Section 3(d)(i) above all or any portion of such shares of
Restricted Stock. In the event the Company elects to repurchase such
shares, which shares shall be deemed Unvested Shares for the purposes of
this Section 3(d)(ii) and Section 3(d)(iii) below, the Company shall do so
within 60 days after its determination that such circumstance exists in
accordance with the provisions of Section 3(d)(iii) below.
(iii) In the event that there are no remaining Stockholders to whom
the Unvested Shares may be transferred in accordance with Section 3(d)(i)
above, the Company shall repurchase all of the Unvested Shares of the
Stockholder pursuant to the following terms. The repurchase price for each
Unvested Share shall be equal to the Original Value of such share, and such
repurchase price shall be paid in full in cash not later than sixty (60)
days after the date on
-6-
<PAGE>
which the Company determines that such Reallocation Event has occurred.
(iv) For purposes of this Section 3(d), if the Stockholder is insured
under a disability insurance policy, the determination under such policy as
to whether the Stockholder's condition constitutes a permanent disability
shall be binding on the parties hereto for purposes of this Section 3(d).
If the Stockholder is not insured under a policy of disability insurance,
such determination shall be made by an independent qualified physician
proposed by the Medical Group, subject to the approval of the Company,
which approval shall not be unreasonably withheld.
(v) Nothing contained in this Section 3(d) shall be construed to
eliminate or reduce the right of the Company to repurchase shares of
Restricted Stock (whether vested or unvested) from any Stockholder in
accordance with the terms and provisions of Section 3(a).
(e) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Shares by the Company under this Section 3 shall
be subject to applicable restrictions, if any, contained in its certificate of
incorporation, any financing agreement to which the Company is a party, Federal
law or in the Delaware General Corporation Law and, if any such restrictions
prohibit or otherwise delay the repurchase of Restricted Shares hereunder which
the Company is otherwise entitled or required to make, the Company may make such
repurchases as soon as it is permitted to do so.
(f) In the event that any Restricted Shares are repurchased pursuant to
this Section 3, the Stockholder and his or her successors and assigns shall, at
the Company's expense, take all reasonable steps to obtain all required
third-party, governmental and regulatory consents and approvals and take all
other reasonable actions necessary to facilitate consummation of such repurchase
in a timely manner.
4. Transfer Restriction; Legend.
Except as otherwise expressly provided in Section 3 and except for
Permitted Transfers, the Stockholder may not sell or transfer or agree to sell
or transfer ("Sale" or "Sell") any Restricted Shares unless such Sale shall be
in accordance with the procedures set forth in this Section 4; provided,
however, that with respect to this Section 4, Restricted Shares, at any point in
time, shall be limited to Vested Shares and at no time shall the Stockholder
have the right to Sell Unvested Shares (except as provided in Sections 3(b) and
3(d) hereof):
(a) In the event that the Stockholder receives a bona fide offer from a
third party (the "Prospective
-7-
<PAGE>
Stockholder") to purchase all or any part of the Restricted Shares owned by the
Stockholder, the Stockholder shall deliver to the Company a written notice (the
"Offer Notice"), which shall be irrevocable for a period of fifteen (15)
business days after delivery thereof (the "Offer Period"), offering (the
"Offer") all of the Restricted Shares proposed to be Sold by the Stockholder to
the Prospective Stockholder at the purchase price and on the terms of the
proposed Sale to the Prospective Stockholder (such Offer Notice shall include
the foregoing information, a copy of the Prospective Stockholder's bona fide
offer and all other relevant terms of the proposed Sale, including the
identification of the Prospective Stockholder). The Company shall have the right
and option, for a period of fifteen (15) business days after delivery of the
Offer Notice, to repurchase all of the Restricted Shares so offered at the
purchase price and on the terms stated in the Offer Notice. Such acceptance
shall be made by delivering a written notice to the Stockholder within said
fifteen (15) business-day period.
(b) Sales of Restricted Shares under the terms of Section 4(a) above shall
be made on a mutually satisfactory business day within fifteen (15) business
days after the expiration of the Offer Period. Delivery of certificates or other
instruments evidencing such Restricted Shares duly endorsed for transfer shall
be made on such date against payment of the purchase price therefor.
(c) If the Company fails to purchase all of the Restricted Shares offered
for Sale pursuant to the Offer Notice, then at any time within sixty (60)
business days after the expiration of the Offer Period the Stockholder may Sell
all or any part of the remaining Restricted Shares so offered for Sale on terms
no more favorable to the Prospective Stockholder than the terms stated in the
Offer Notice; provided, however, that the Stockholder shall not, under any
circumstances, Sell any Restricted Shares to the Prospective Stockholder if the
Board of Directors of the Company, in its sole discretion, determines in good
faith that the Prospective Stockholder is a competitor, or an Affiliate of a
competitor, of the Company or that such Prospective Stockholder's ownership of
such Restricted Shares would be contrary to the best interests of the Company.
In the event that all of such Restricted Shares are not Sold by the Stockholder
to the Prospective Stockholder during such period, the right of the Stockholder
to Sell such Restricted Shares to the Prospective Stockholder shall expire and
the obligations of the Stockholder pursuant to this Section 4 shall be
reinstated.
(d) Any Permitted Transferee (other than the Company) shall, as a condition
to such transfer, (i) agree to be bound by all of the provisions of this
Agreement applicable to the Stockholder and shall evidence such agreement by
executing and delivering to the Company a joinder to this Agreement in form and
substance satisfactory to the Company, and (ii) if such
-8-
<PAGE>
transferee is an equity owner or employee of the Medical Group, execute a
noncompetition agreement in form and substance satisfactory to the Company (if
such transferee is not, as of the date of such transfer, a party to such an
agreement with the Company).
(e) The certificate(s) representing the Restricted Shares will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.
ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN REPURCHASE OPTIONS, TRANSFER RESTRICTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT DATED AS OF JULY 3,
1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF
SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(f) The restrictions on transfers of Vested Shares set forth in this
Section 4 shall expire, and shall be of no further force or effect, upon the
consummation of the initial public offering of the Company's Common Stock
pursuant to the 1933 Act.
5. Registration Rights.
(a) Piggyback Registration. If the Company, at any time after that date
which is six months after the consummation of the initial public offering of the
Common Stock, proposes for any reason to register Primary Shares or Other Shares
under the Securities Act (other than on Form S-4 or Form S-8 promulgated under
the Securities Act or any successor forms thereto), it shall promptly give
written notice to the Stockholders of its intention so to register the Primary
Shares or Other Shares and, upon the written request, given within 15 days after
delivery of any such notice by the Company, of any Stockholder to include in
such registration Registrable Shares held by such Stockholder (which request
shall specify the number of Registrable Shares proposed to be included in such
registration), the Company shall use its best efforts to cause all such
Registrable Shares to be included in such registration on the same terms and
conditions as the securities otherwise being sold in such registration;
provided, however, that if the managing underwriter advises the Company in
writing that the inclusion of all Registrable Shares requested by the
Stockholders to be included in such
-9-
<PAGE>
registration, together with the inclusion of all Other Shares, would interfere
with the successful marketing (including pricing) of Primary Shares proposed to
be registered by the Company, then the number of Primary Shares, Registrable
Shares and Other Shares proposed to be included in such registration shall be
included in the following order:
(i) first, the Primary Shares;
(ii) second, the Venture Capital Shares requested to be included in
such registration by the Venture Capitalists;
(iii) third, the Lender Securities requested to be included in such
registration by the Lenders; and
(iv) fourth, the Other Shares and the Registrable Shares requested to
be included in such registration by the Stockholders and the holders of
Other Shares (pro rata based on the number of Other Shares and Registrable
Shares held by such holders of Other Shares and Registrable Shares).
(b) Condition to Registration Obligations. The Corporation shall not be
obligated to effect the registration of the Registrable Shares pursuant to
Section 5(a) above unless the Stockholder executes a power of attorney, custody
arrangement and other documents customary in such transactions and reasonably
required by the managing underwriter thereof prior to the filing of the
registration statement.
(c) Holdback Agreement. If the Company at any time shall register shares of
Common Stock under the Securities Act for sale to the public and includes in
such registration any Registrable Shares beneficially owned by the Stockholder,
the Stockholder shall not sell publicly, make any short sale of, grant any
option for the purchase of, or otherwise dispose publicly of, any Restricted
Shares (other than those Registrable Shares included in such registration)
without the prior written consent of the Company for a period designated in
writing by the underwriters managing such offering to the Company (and the
Company will so notify the holders of Registrable Shares), which period shall
not begin more than 10 days prior to the effectiveness of the registration
statement pursuant to which such public offering shall be made and shall not
last more than 180 days after the effective date of such registration statement.
-10-
<PAGE>
(d) Indemnification.
(i) In connection with any registration of Registrable Shares under
the Securities Act pursuant to this Agreement, the Stockholder shall
indemnify and hold harmless the Company, each director of the Company, each
officer of the Company who shall sign such registration statement, each
underwriter, broker or other person acting on behalf of the holders of
Registrable Shares and each person who controls any of the foregoing
persons within the meaning of the Securities Act with respect to any
statement or omission from such registration statement, any preliminary
prospectus or final prospectus contained therein or otherwise filed with
the Commission, any amendment or supplement thereto or any document
incident to registration or qualification of any Registrable Shares, if
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company or such underwriter through an
instrument duly executed by such holder of Registrable Shares specifically
for use in connection with the preparation of such registration statement,
preliminary prospectus, final prospectus, amendment, supplement or
document.
(ii) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Company shall
indemnify and hold harmless the Stockholder against any losses, claims,
damages or liabilities (or actions in respect thereof), to which the
Stockholder may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the registration
statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained
therein or otherwise filed with the Commission, any amendment or supplement
thereto or any document incident to registration or qualification of any
Registrable Shares, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or state securities or "blue
sky" laws applicable to the Company and relating to action or inaction
required of the Company in connection with such registration or
qualification under such state securities or blue sky laws; provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in said registration statement,
preliminary prospectus,
-11-
<PAGE>
final prospectus, amendment, supplement or document incident to
registration or qualification of any Registrable Shares in reliance upon
and in conformity with written information furnished to the Company through
an instrument duly executed by the Stockholder.
(e) Information by Stockholder. In the event the Stockholder elects to sell
Registrable Shares pursuant to Section 5(a) above, the Stockholder shall furnish
to the Company such written information regarding the Stockholder and the
distribution proposed by the Stockholder as the Company may reasonably request
in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Section 5.
6. Definitions.
(a) "Affiliate" means, with respect to any Person, (a) any director,
officer or equity owner of such Person and (b) any other Person that, directly
or indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with, such Person. The term "control" includes,
without limitation, the possession, directly or indirectly, of the power to
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value jointly determined by the Stockholder and the
Company, provided that if they cannot so agree, such value shall be determined
by a mutually acceptable investment banking or other qualified firm of national
or regional reputation, retained jointly by the Company and the Medical Group,
and all fees, expenses and other charges of such firm incurred in connection
with such determination of Fair Market Value shall be borne and
-12-
<PAGE>
shared equally by the Company and the Medical Group. In the event that the
parties are unable to agree upon such an investment banking or other qualified
firm within ten (10) days after the date on which either party may initially
propose such a firm, a qualified firm shall be selected in the following manner:
First, the Stockholder shall send a list of four such firms, arranged
in order of the Stockholder's preference, by written notice to the Company
within seven (7) days after the expiration of the above referenced 10-day
period. If the Stockholder does not furnish such list to the Company within
the required time period, the Company may, within seven (7) days following
expiration of the initial seven-day period, submit a list of four such
firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed acceptable and agreeable to each of the parties.
(c) "Internal Revenue Code" means the Internal Revenue Code of 1986, as the
same may be amended or supplemented from time to time, or any successor statute,
and the rules and regulations thereunder, as the same are from time to time in
effect.
(d) "Lender Securities" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and securities received in respect thereof, which
are held by a Lender and which have not theretofore been sold to the public
pursuant to a registration under the Securities Act or pursuant to Rule 144.
(e) "Lender" means any Person that has loaned (prior to the date hereof) or
may lend (at any time hereafter) funds to the Company and in connection with
such lending has obtained or may obtain registration rights.
(f) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to seventy-five cents ($.75) (as proportionately adjusted for all
subsequent stock splits, stock dividends and other recapitalizations).
(g) "Other Shares" means at any time those issued and outstanding shares of
Common Stock that do not constitute Primary Shares or Registrable Shares.
(h) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership,
-13-
<PAGE>
a corporation, an association, a joint stock company, a trust, a joint venture,
an unincorporated organization and a governmental entity or any department,
agency or political subdivision thereof.
(i) "Permitted Transferee" means, as to the Stockholder, any transferee who
acquires the Restricted Shares pursuant to a Permitted Transfer or any other
transfer made in accordance with the provisions of this Agreement.
(j) "Permitted Transfer" means, as to the Stockholder, (i) any sale or
transfer of Vested Shares to (A) the spouse or lineal descendants of such
Stockholder or (B) a trust for the benefit of any of the foregoing and (ii) any
sale or transfer of Vested Shares or Unvested Shares to any other Stockholder,
or any physician who, as of the date of such transfer, is an equity owner in the
Medical Group.
(k) "Primary Shares" means at any time the authorized but unissued shares
of Common Stock or shares of Common Stock held by the Company in its treasury.
(l) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(m) "Registrable Shares" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by the Stockholders and which have not theretofore been sold to
the public pursuant to a registration statement under the Securities Act or
pursuant to Rule 144; provided that, unvested shares shall not under any
circumstance be Registrable Shares.
(n) "Restricted Shares" has the meaning set forth in Section 1(a). The
Restricted Shares will continue to be Restricted Shares in the hands of any
holder other than the Stockholder (except for the Company and except for
transferees in a Public Sale), and except as otherwise provided herein, each
such other holder of the Restricted Shares will succeed to all rights and
obligations attributable to the Stockholder as the holder of the Restricted
Shares hereunder. The Restricted Shares will also include shares of the
Company's capital stock issued with respect to the Restricted Stock by way of a
stock split, stock dividend or other recapitalization.
(o) "Venture Capitalists" means Naresh Nagpal and those venture capital
firms that have acquired, prior to the date hereof, and may acquire, at any time
hereafter, securities
-14-
<PAGE>
of the Company and in connection with such acquisition have obtained or may
obtain registration rights.
(p) "Venture Capital Shares" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by a Venture Capitalist and which have not theretofore been sold
to the public pursuant to a registration statement under the Securities Act or
pursuant to Rule 144.
(q) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
7. Indemnification.
(a) The Company shall indemnify, defend and hold harmless the Stockholder
against all liability, loss or damage, together with all reasonable costs and
expenses related thereto (including reasonable legal fees and expenses),
relating to or arising from the untruth, inaccuracy or breach of any of the
representations, warranties or agreements of the Company contained in this
Agreement.
(b) The Stockholder shall indemnify and hold harmless the Company against
all liability, loss or damage, together with all reasonable costs and expenses
related thereto (including reasonable legal fees and expenses), relating to or
arising from the untruth, inaccuracy or breach of any of the representations,
warranties or agreements of the Stockholder contained in this Agreement.
8. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (each, a "Transfer") or attempted
Transfer of any Restricted Shares in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Restricted Shares as the owner
of such stock for any purpose.
(b) Binding Effect of Management Services Agreement. The Stockholder hereby
agrees to be bound by the provisions of Section 14 of the Management Services
Agreement, which provisions such Stockholder has reviewed.
(c) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be
-15-
<PAGE>
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if any
particular provision of this Agreement shall be adjudicated by a court of
competent jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
(d) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(e) Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
(f) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, permitted assigns,
heirs, representatives and estate, as the case may be (including subsequent
holders of Restricted Stock); provided, however, that the rights and obligations
of the Stockholder under this Agreement shall not be assignable except in
connection with a Permitted Transfer of Restricted Shares hereunder.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice of law or conflicting provision or rule (whether of the State of Florida
or any other jurisdiction), that would cause the laws of any jurisdiction other
than the State of Florida to be applied. In furtherance of the foregoing, the
internal law of the State of Florida will control the interpretation and
construction of this agreement, even if under such jurisdiction's choice of law
or conflict of law analysis, the substantive law of some other jurisdiction
would ordinarily apply.
-16-
<PAGE>
(h) Jurisdiction. Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the exclusive
jurisdiction of any Florida state court or Federal court of the United States of
America sitting in Palm Beach County, Florida, and any appellate court thereof,
in any action or proceeding arising out of or relating to this Agreement or for
recognition or enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such Florida state
court or, to the extent permitted by law, in such Federal court. Each of the
parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law.
(i) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any Florida state or
Federal court. Each of the parties hereto irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
(j) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for the Company in the event of a breach of the provisions of this
Agreement by the Stockholder and that the Company may, in its sole discretion,
apply to any court of law or equity of competent jurisdiction for specific
performance and/or other injunctive relief (without posting any bond or deposit)
in order to enforce or prevent any violations of the provisions of this
Agreement.
(k) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof; provided, however, that the Company may amend, without the
Stockholder's consent, Schedule A hereto upon consummation of a Permitted
Transfer of shares hereunder to reflect the then current ownership of the
Restricted Stock.
-17-
<PAGE>
(l) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
nationally-recognized overnight courier service (charges prepaid) to the
recipient at the address below indicated or at such other address or to the
attention of such other person as the recipient party has specified by prior
written notice to the sending party. Notices will be deemed to have been given
hereunder and received when delivered personally, when received if transmitted
via telecopier, five days after deposit in the U.S. mail and one business day
after deposit with a nationally-recognized overnight courier service.
(i) If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telephone: (561) 391-1311
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telephone: (212) 408-2417
Telecopier: (212) 408-2420; and
(ii) If to the Stockholder, to his or her address set forth on
the signature page hereto beneath his or her name;
with copies to:
Fishman and Stashak, M.D.'s, P.A.
1411 North Flagler Drive
Suite 8800
West Palm Beach, Florida 33401
Attention: Eric S. Fishman, M.D.
Telephone: (561) 659-9000
Telecopier: (561) 659-9009; and
Moore & Menkhaus, P.A.
4800 North Federal Highway
Suite 210A
Boca Raton, Florida 33431
Attention: David Menkhaus, Esq.
Telephone: (561) 394-7910
Telecopier: (561) 393-6541.
-18-
<PAGE>
(m) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of Florida, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(n) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the other party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(o) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(p) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(q) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of nouns and pronouns shall include the plural and vice-versa.
* * * *
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock
Agreement effective as of the date first written above.
COMPANY
BONE, MUSCLE AND JOINT, INC.
By:
-----------------------------
Name:
Title:
STOCKHOLDER
-----------------------------
Signature
-----------------------------
Printed Name
Address for notices:
-----------------------------
-----------------------------
------------------------------
MEDICAL GROUP
ACCEPTED AND AGREED
AS TO PARAGRAPHS 3(a) and 5(b)
FISHMAN AND STASHAK, M.D.'S, P.A.
By:
- ------------------------------
Name:
Title:
<PAGE>
EXECUTION COPY
AMENDMENT NO. 1 TO THE RESTRICTED STOCK AGREEMENT
dated as of September 10, 1997, between BONE,
MUSCLE AND JOINT, INC., a Delaware corporation
(the "Company"), and the individual identified on
the signature page hereof (the "Stockholder").
Reference is made to the Restricted Stock Agreement entered into as of July
3, 1997 (the "Restricted Stock Agreement"), pursuant to which the Stockholder
acquired shares (the "Restricted Shares") of the common stock of the Company,
par value $0.001 per share (the "Common Stock"). The parties hereto desire to
amend certain of the provisions of the Restricted Stock Agreement relating to
the vesting of the Restricted Shares and the transferability thereof.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
SECTION 1. All capitalized terms used but not defined herein have the
meanings ascribed in the Restricted Stock Agreement.
SECTION 2. Section 2 to the Restricted Stock Agreement is hereby amended in
its entirety, to read as follows:
"2. Vesting of the Restricted Shares.
(a) Except as otherwise provided in Section 2(b) below, the Restricted
Shares shall become vested in accordance with the following schedule, if,
as of each such date, (i) the Management Services Agreement has not been
terminated, (ii) there has not been a Cessation of Active Practice (as
defined in paragraph 2(c) below) by the Stockholder, (iii) the Stockholder
has not become permanently disabled (as described in Section 3(a)(iii)
below), and (iv) the Stockholder has not died:
Anniversary Date Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 25%
Third 25%
Fourth 25%
<PAGE>
For purposes of this Agreement, "Anniversary Date of this
Agreement" means June 1 of each year after 1997. Restricted Shares
which have become vested are referred to herein as "Vested Shares" and
all other Restricted Shares are referred to herein as "Unvested
Shares."
(b) Notwithstanding the foregoing, in the event of the death of
the Stockholder, in addition to any shares that have vested in
accordance with paragraph 2(a) above, the number of Unvested Shares,
if any, that would have become Vested Shares during the 12-month
period immediately following the date of death had such death not
occurred shall be deemed Vested Shares as of the date of death.
(c) For purposes of this Agreement, "Cessation of Active
Practice" means the Stockholder's resignation from or termination of
employment with the Medical Group (other than by reason of death or
permanent disability)."
SECTION 3. Section 3 to the Restricted Stock Agreement is hereby
amended in its entirety, to read as follows:
"3. Forfeiture and Repurchase of Restricted Shares.
(a) In the event of the Cessation of Active Practice by or the
death or permanent disability of the Stockholder (the "Forfeiture
Event"), the following provisions shall apply.
(i) The Stockholder or the estate (in the case of death) of the
Stockholder shall transfer to the Medical Group, all of the Unvested
Shares held by the Stockholder. Such Unvested Shares shall be
transferred for no consideration from the Company and the stock
certificate(s) representing those shares shall be delivered to the
Company, no later than thirty (30) days after the Forfeiture Event,
duly endorsed for transfer in accordance with this Section 3(a). The
Company shall, within thirty (30) days after its receipt of a joinder
to this Agreement executed by the Medical Group, issue and deliver to
the Medical Group a certificate representing the Unvested Shares. Such
Unvested Shares shall continue to vest according to the vesting
schedule set forth in Section 2(a) above.
(ii) The Medical Group shall not Sell (as hereinafter defined)
any Unvested Shares to any person or entity, other than to one or more
physician employees or equity owners of the
-2-
<PAGE>
Medical Group, who prior to the receipt of such shares from the
Medical Group had not acquired any shares of the Company's Common
Stock pursuant to the Management Services Agreement between the
Company and the Medical Group. As a condition to any such Sale, the
transferee shall execute and deliver to the Company a Restricted Stock
Agreement in substantially the form of this Agreement, effective as of
the date of transfer of such shares. Any Unvested Shares distributed
according to this Section 3(a) shall be subject to a vesting schedule
identical to the schedule set forth in Section 2(a) hereof.
(iii) For purposes of this Agreement, if the Stockholder is
insured under a disability insurance policy, the determination under
such policy as to whether such Stockholder's condition constitutes a
permanent disability shall be binding on the parties hereto. If the
Stockholder is not insured under a policy of disability insurance,
such determination shall be made by an independent qualified physician
proposed by the Medical Group, subject to the approval of the Company,
which approval shall not be unreasonably withheld.
(b) In the event of the termination of the Management Services
Agreement pursuant to Section 13 thereof (the "Repurchase Event") on
or before the fourth anniversary of the Commencement Date (as defined
therein), the Company shall have the right (but not the obligation)
(the "Repurchase Option"), to be exercised in its sole discretion, to
repurchase all or any portion of the Restricted Shares (whether vested
or unvested and whether held by the Stockholder or one or more of the
Stockholder's Permitted Transferees) pursuant to the terms and
conditions set forth in this Section 3.
(i) The Company may elect to repurchase all or any portion
of the Restricted Shares by delivering written notice (the
"Repurchase Notice") to the Stockholder within ninety (90) days
after the Repurchase Event; provided, however, that, if the
Company elects to repurchase less than all of the Restricted
Shares, the Company shall first repurchase Unvested Shares and
then repurchase that number of Vested Shares, if any, as the
Company may, in its sole discretion, elect. The Repurchase Notice
shall set forth the number of Unvested Shares and Vested Shares
to be repurchased, the aggregate consideration to be paid for
such shares, and the time and place for
-3-
<PAGE>
the closing of the transaction. The purchase price payable for
each Unvested Share shall equal the Original Value for such share
and the purchase price payable for each Vested Share shall equal
the Fair Market Value for such share. If the Company decides to
repurchase Restricted Shares from any Stockholder pursuant to
this Section 3(b), then the Company must purchase that number of
Restricted Shares which it has elected to repurchase from all of
the Stockholders pro rata according to the number of shares of
Restricted Shares held by all of the Stockholders at the time of
delivery of such Repurchase Notice (determined as nearly as
practicable to the nearest whole share).
(ii) The closing of the repurchase of Restricted Shares
pursuant to the Repurchase Option shall take place on the date
designated by the Company in the Repurchase Notice, which date
shall not be more than sixty (60) days nor less than five (5)
days after the delivery of the Repurchase Notice. The Company
shall pay for Restricted Shares to be purchased pursuant to the
Repurchase Option by delivery of a check or wire transfer of
funds in the aggregate amount of the repurchase price for the
shares; provided, however, that in the event that the Medical
Group is obligated to pay to the Company any sums in connection
with the repurchase of assets by the Medical Group pursuant to
Section 13.5 of the Management Services Agreement, the total
amount of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to this
Agreement (if such Stockholder is, at such time, an equity owner
of or partner in the Medical Group), such offset amount to be
allocated pro rata among all of the Stockholders who at such time
hold equity of or are partners in the Medical Group. The
Company's payment under this Section 3(b) shall be subject to the
terms and provisions of any financing agreement, if any, to which
the Company is a party, its certificate of incorporation and the
operation of law. The Company is entitled to receive
representations and warranties from the Stockholder regarding (x)
the Stockholder's power, authority and legal capacity to enter
into such sale and to transfer valid right, title and interest in
such Restricted Shares, (y) the Stockholder's ownership of such
Restricted Shares and the absence of any liens, pledges, and
other encumbrances on such Restricted Shares and (z) the absence
of any violation,
-4-
<PAGE>
default, or acceleration of any agreement or instrument pursuant
to which the Stockholder or the Stockholder's assets are bound
resulting from such sale.
(c) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Restricted Shares by the Company under this
Section 3 shall be subject to applicable restrictions, if any, contained in
its certificate of incorporation, any financing agreement to which the
Company is a party, Federal law or in the Delaware General Corporation Law
and, if any such restrictions prohibit or otherwise delay the repurchase of
Restricted Shares hereunder which the Company is otherwise entitled or
required to make, the Company may make such repurchases as soon as it is
permitted to do so.
(d) In the event that any Restricted Shares are repurchased pursuant
to this Section 3, the Stockholder and his or her successors and assigns
shall, at the Company's expense, take all reasonable steps to obtain all
required third-party, governmental and regulatory consents and approvals
and take all other reasonable actions necessary to facilitate consummation
of such repurchase in a timely manner."
SECTION 4. Section 8(b) of the Restricted Stock Agreement is hereby amended
by deleting "Section 14" on the third line thereof and inserting "Section 13.6"
in lieu thereof.
SECTION 5. This Amendment No. 1 shall be deemed effective as of July 3,
1997. Except as expressly provided in this Amendment No. 1, the Restricted Stock
Agreement remains in full force and effect in accordance with its terms.
SECTION 6. This Amendment No. 1 may be executed in more than one
counterpart, and by the parties hereto in separate counterparts, and each such
counterpart shall constitute an original instrument, but all such counterparts
taken together shall constitute one and the same Amendment.
SECTION 7. This Amendment No. 1 shall by governed by, construed and
interpreted in accordance with the laws of the State of Florida.
* * * *
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to the Restricted Stock Agreement effective as of the date first written above.
COMPANY
-------
BONE, MUSCLE AND JOINT, INC.
By:
---------------------------
STOCKHOLDER
-----------
---------------------------
Gerald T. Stashak, M.D.
<PAGE>
BONE, MUSCLE AND JOINT, INC.
4800 N. Federal Highway, Suite 104D
Boca Raton, Florida 33431
July 3, 1997
Fishman and Stashak, M.D.'s, P.A.
1411 N. Flagler Drive, Suite 8800
West Palm Beach, Florida 33401
Amendatory Agreement
--------------------
Dear Sirs:
Reference is made to the Management Services Agreement (the "Management
Services Agreement"), and the Asset Purchase Agreement (the "Asset Purchase
Agreement"), each dated as of the date hereof and effective as of June 1, 1997,
between Bone, Muscle and Joint, Inc. (the "Company"), and Fishman and Stashak,
M.D.'s, P.A. (the "Medical Group"). Capitalized terms used but not defined
herein have the meanings ascribed thereto in the Management Services Agreement.
1. Notwithstanding anything to the contrary contained in Section 4
and Schedule III of the Management Services Agreement or Sections 2.1 and 5.2(c)
of the Asset Purchase Agreement, on the date hereof the Company will pay by wire
transfer of funds to the account(s) designated by the Medical Group an amount
equal to $2,297,102 and will issue to Eric Fishman, M.D., Gerald Stashak, M.D.
and Practice Solutions, Inc., 93,243, 93,243 and 3,806 shares of the Company's
common stock, $.001 par value (the "Common Stock"), in fulfillment of its
obligations under such Sections and Schedule; provided, however, that if Chaim
Arlosoroff, M.D. becomes an equity owner of the Medical Group and executes a
Restricted Stock Agreement and Stockholder Non-Competition Agreement at any time
on or before August 1, 1997, the Company will pay the remaining consideration,
$605,155 to the Medical Group (pursuant to the Asset Purchase Agreement) and an
aggregate of 50,130 shares of its Common Stock (pursuant to the Management
Services Agreement) to Eric Fishman, M.D., Gerald Stashak, M.D., Practice
Solutions, Inc. and such other physician equity owners or employees of the
Medical Group as the Medical Group shall designate in writing to the Company
(which writing will also set forth the allocation of such shares of Common
Stock); provided further, however, that such designation shall allot 15,000
shares to Dr. Arlosoroff. Any such other physician equity owners or employees of
the Medical Group shall execute an Restricted Stock Agreement in the form of
agreement previously executed by Drs. Fishman and Stashak and a Stockholder
Non-Competition Agreement in a form satisfactory to
<PAGE>
the Company. In connection with the execution of such agreements by Dr.
Arlosoroff, the Company will increase the consideration payable under the
Management Services Agreement by 7,500 shares of its Common Stock and such
shares will be issued simultaneously with the issuance referenced in the proviso
of the preceding sentence. The parties to the Management Services Agreement and
the parties to the Asset Purchase Agreement agree that in the event the
foregoing occurs and as a condition to the fulfillment of their respective
obligations under this Section 1, the parties shall execute and deliver an
amendment to each such agreement in the form of Exhibit A hereto; provided,
however, that if the foregoing does not take place, the parties to each such
agreement shall execute and deliver amendments in the form of Exhibit B hereto
(which shall, among other things, decrease the Base Year Collections).
2. In addition to the foregoing, the Company hereby agrees that in
the event that (a) each of Mark Rubenstein, M.D. and Robert Green, M.D.,
physician employees of the Medical Group, executes and delivers a Restricted
Stock Agreement and Stockholder Noncompetition Agreement to the Company by
August 1, 1997 and (b) the Medical Group directs the Company in writing to issue
and deliver to such physician 10,000 shares of the Company's Common Stock
issuable pursuant to Schedule III of the Management Services Agreement, the
Company will increase the stock consideration payable to the Medical Group by
5,000 and 5,000 shares, respectively, of its Common Stock. In connection with
the foregoing and as a condition thereto, the parties to the Management Services
Agreement shall execute and deliver an amendment thereto in the form of Exhibit
C attached hereto.
3. None of the parties hereto, nor their respective employees,
stockholders, consultants or agents shall, at any time after the execution and
delivery of this Amendatory Agreement, directly or indirectly disclose the terms
of this agreement to any person, firm, corporation, association or other entity
without the prior written consent of the other parties hereto. Nothing contained
herein shall be construed to prevent any party hereto from disclosing the terms
of this agreement to his or its professional advisers for purposes of
evaluating, negotiating or otherwise assisting such party in connection with the
transactions contemplated by this Amendatory Agreement; provided that such party
shall be liable to the other parties for the disclosure by any of its
professional advisers of such information in violation of the preceding
sentence.
-2-
<PAGE>
If the foregoing meets with your satisfaction, please acknowledge our
agreement by signing in the space indicated below and returning a copy of this
letter to the undersigned.
Very truly yours,
Bone, Muscle and Joint, Inc.
By: /s/ Randal J. Farwell
_____________________________
Name: Randal J. Farwell
Title: VP
Agreed to and Acknowledged:
Fishman and Stashak, M.D.'s, P.A.
By: /s/ Eric S. Fishman, MD
__________________________
Eric S. Fishman, M.D.
President
By: /s/ Gerald T. Stashak, MD
__________________________
Gerald T. Stashak, M.D.
Secretary
/s/ Eric S. Fishman, Pres
- -----------------------------
Eric S. Fishman, M.D.
/s/ Gerald T. Stashak, MD
- -----------------------------
Gerald T. Stashak, M.D.
-3-
<PAGE>
EXHIBIT A
AMENDMENT NO. 1 TO
MANAGEMENT SERVICES AGREEMENT and ASSET
PURCHASE AGREEMENT dated as of July __,
1997 (the "Amendment"), between BONE,
MUSCLE AND JOINT, INC., a Delaware
corporation (the "Management Company"),
and FISHMAN AND STASHAK, M.D.'S, P.A.
(the "Medical Group").
Reference is made to the Management Services Agreement (the "Management
Services Agreement") and to the Asset Purchase Agreement (the "Asset Purchase
Agreement"), each between the Management Company and the Medical Group, dated as
of July 3, 1997, and effective as of June 1, 1997. Capitalized terms used but
not defined herein have the meanings ascribed thereto in the Management Services
Agreement.
Execution and delivery of this Amendment is a condition to the
Management Company's performance of its obligations set forth in Section 1 of
that certain Amendatory Agreement dated as of July 3, 1997 (the "Amendatory
Agreement"), among the Management Company, the Medical Group, Eric Fishman,
M.D., and Gerald Stashak, M.D.
NOW THEREFORE, in consideration of the mutual covenants contained
herein, in the Management Services Agreement and the Amendatory Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Section 23 of the Management Services Agreement is hereby amended
in its entirety to read as follows:
"SECTION 23. Entire Agreement; Amendments.
This Agreement and the exhibits and schedules
hereto contain the entire understanding of the
parties with respect to its subject matter, and
neither this Agreement nor any part of it may in
any way be altered, amended, extended, waived,
discharged or terminated except by a written
agreement signed by all of the parties against
whom enforcement is sought."
2. Schedule III to the Management Services Agreement is amended and
restated in its entirety to read as set forth in Annex I attached hereto.
<PAGE>
3. Section 10.2 of the Asset Purchase Agreement is hereby amended in
its entirety to read as follows:
"10.2. Entire Agreement.
This Agreement (including the recitals hereof
and the Schedules and Exhibits attached hereto)
contains the entire agreement between the parties
hereto with respect to the transactions contemplated
hereby and supersedes all prior agreements,
representations, warranties and understandings,
either oral or written, between the parties with
respect thereto."
4. Except as expressly provided in this Amendment, the Management
Services Agreement and the Asset Purchase Agreement remain in full force and
effect in accordance with their respective terms.
5. This Amendment may be executed in more than one counterpart, and by the
parties hereto in separate counterparts, and each such counterpart shall
constitute an original instrument, but all such counterparts taken together
shall constitute one and the same Amendment.
6. This Amendment shall be governed by, construed and interpreted in
accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the Amendment to be duly
executed as of the date and year first above written.
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Name:
Title:
FISHMAN AND STASHAK, M.D.'S, P.A.
By:_____________________________
Eric S. Fishman, M.D.
President
By:_____________________________
Gerald T. Stashak, M.D.
Secretary
<PAGE>
ANNEX I
SCHEDULE III
Equity Participation
In connection with the execution and delivery of this Agreement, the
Management Company is paying an aggregate consideration to the Medical Group of
247,922 shares of Common Stock of the Management Company (the "Practice
Compensation"). In order to accomplish the foregoing, the Company is entering
into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to
which each such Eligible Party shall receive the number of shares set forth in
such agreement (which amount will be designated by the Medical Group in writing
to the Management Company). A portion of the stock consideration (an aggregate
of 4,808 shares of Common Stock) is being paid to an advisor of the Medical
Group in accordance with the schedule below. The Medical Group shall indemnify
and defend the Management Company from and against any and all liabilities,
losses, damages, claims, causes of action and expenses (including reasonable
attorneys' fees and expenses) arising out of or in connection with any claim by
any of the Eligible Parties or any other person with respect to such allocation
of shares.
The Practice Compensation has been determined based upon the
assumption that the Medical Group will achieve aggregate Collections for the
calendar year ending December 31, 1997 (the "Base Year") equal to $3,750,000
(the "Base Year Collections"). On or before October 31, 1998, the Management
Company will notify (the "Comparison Notice") the Medical Group of its actual
aggregate Collections for the period beginning on the Commencement Date and
ending on August 31, 1998 (the "Comparison Period"). In the event that the
actual Collections for the Comparison Period are less than the Base Year
Collections (the "Shortfall"), the Medical Group will be obligated to, and will
cause the Eligible Parties to, return to the Management Company the number of
shares (rounded to the nearest whole number) of Common Stock determined by
taking six times 15% of the Shortfall and dividing that number by $6.50. In the
event that the actual Collections for the Comparison Period are greater than the
Base Year Collections (the "Excess"), the Management Company will be obligated
to issue to the Medical Group the additional number of shares (rounded to the
nearest whole number) of Common Stock determined by taking six times 15% of the
Excess and dividing that number by $6.50. If there is an Excess and the
Management Company is required to issue additional shares of Common Stock to the
Medical Group, such shares will be allocated to the Eligible Parties as the
Medical Group may direct in writing within 30 days after receipt of the
Comparison Notice and such allocation shall be made according to the proportions
set forth in such written notice; provided that if the Medical Group fails to so
notify
<PAGE>
the Management Company, the Excess shall be allocated equally between Dr.
Fishman and Dr. Stashak.
<PAGE>
EXHIBIT B
AMENDMENT NO. 1 TO MANAGEMENT
SERVICES AGREEMENT and ASSET PURCHASE
AGREEMENT dated as of August 1, 1997
(the "Amendment"), between BONE, MUSCLE
AND JOINT, INC., a Delaware corporation
(the "Management Company"), and FISHMAN
AND STASHAK, M.D.'S, P.A. (the "Medical
Group").
Reference is made to the Management Services Agreement (the "Management
Services Agreement") and to the Asset Purchase Agreement (the "Asset Purchase
Agreement"), each between the Management Company and the Medical Group, dated as
of July 3, 1997, and effective as of June 1, 1997. Capitalized terms used but
not defined herein have the meanings ascribed thereto in the Management Services
Agreement.
As of the date hereof Chaim Arlosoroff, M.D., has not executed and
delivered a Restricted Stock Agreement or Stockholder Non-Competition Agreement.
As a result thereof, the parties hereto are executing and delivering this
Amendment pursuant to the terms and provisions set forth in Section 1 of that
certain Amendatory Agreement dated as of July 3, 1997 (the "Amendatory
Agreement"), among the Management Company, the Medical Group, Eric Fishman,
M.D., and Gerald Stashak, M.D.
NOW THEREFORE, in consideration of the mutual covenants contained
herein, in the Management Services Agreement and the Amendatory Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Schedule III to the Management Services Agreement is hereby amended
in its entirety to read as set forth on Annex I attached hereto.
2. Section 2.1 of the Asset Purchase Agreement is hereby amended in its
entirety to read as follows:
"2.1. Purchase Price; Payment.
The purchase price (the "Purchase Price") to be paid for the Purchased
Assets shall equal the sum of the following amounts:
(a) $1,691,947; and
<PAGE>
(b) $950,000 (the "A/R Amount"), subject to adjustment in
accordance with Section 2.3, which amount is a good faith estimate of the
aggregate face value of all Accounts Receivable outstanding as of the Closing
Date and set forth on Schedule 1.1(e)."
3. Except as expressly provided in this Amendment, the Management
Services Agreement and the Asset Purchase Agreement remain in full force and
effect in accordance with their respective terms.
4. This Amendment may be executed in more than one counterpart, and by
the parties hereto in separate counterparts, and each such counterpart shall
constitute an original instrument, but all such counterparts taken together
shall constitute one and the same Amendment.
5. This Amendment shall be governed by, construed and interpreted in
accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the Amendment to be
duly executed as of the date and year first above written.
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Name:
Title:
FISHMAN AND STASHAK, M.D.'S, P.A.
By:_____________________________
Eric S. Fishman, M.D.
President
By:_____________________________
Gerald T. Stashak, M.D.
Secretary
<PAGE>
ANNEX I
SCHEDULE III
Equity Participation
In connection with the execution and delivery of this Agreement, the
Management Company is paying an aggregate consideration to the Medical Group of
190,292 shares of Common Stock of the Management Company (the "Practice
Compensation"). In order to accomplish the foregoing, the Company is entering
into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to
which each such Eligible Party shall receive the number of shares set forth in
such agreement (which amount will be designated by the Medical Group in writing
to the Management Company). A portion of the stock consideration (an aggregate
of 4,808 shares of Common Stock) is being paid to an advisor of the Medical
Group in accordance with the schedule below. The Medical Group shall indemnify
and defend the Management Company from and against any and all liabilities,
losses, damages, claims, causes of action and expenses (including reasonable
attorneys' fees and expenses) arising out of or in connection with any claim by
any of the Eligible Parties or any other person with respect to such allocation
of shares.
Eligible Party Common Stock Proportions
-------------- ------------ -----------
Eric S. Fishman, M.D. 93,243 50%
Gerald T. Stashak, M.D. 93,243 50%
Advisor Common Stock
------- ------------
Practice Solutions, Inc. 3,806
============
Grand Total 190,292
The Practice Compensation has been determined based upon the assumption
that the Medical Group will achieve aggregate Collections for the calendar year
ending December 31, 1997 (the "Base Year") equal to $2,910,000 (the "Base Year
Collections"). On or before October 31, 1998, the Management Company will notify
(the "Comparison Notice") the Medical Group of its actual aggregate Collections
for the period beginning on the Commencement Date and ending on August 31, 1998
(the "Comparison Period"). In the event that the actual Collections for the
Comparison Period are less than the Base Year Collections (the "Shortfall"), the
Medical Group will be obligated to, and will cause the Eligible Parties to,
return to the Management Company the number of shares (rounded to the nearest
whole number) of Common Stock determined by taking six times 15% of the
Shortfall and dividing that number by $6.50. In the event that the actual
<PAGE>
Collections for the Comparison Period are greater than the Base Year Collections
(the "Excess"), the Management Company will be obligated to issue to the Medical
Group the additional number of shares (rounded to the nearest whole number) of
Common Stock determined by taking six times 15% of the Excess and dividing that
number by $6.50. If there is an Excess and the Management Company is required to
issue additional shares of Common Stock to the Medical Group, such shares will
be allocated to the Eligible Parties as the Medical Group may direct in writing
within 30 days after receipt of the Comparison Notice and such allocation shall
be made according to the proportions set forth in such written notice; provided
that if the Medical Group fails to so notify the Management Company, the Excess
shall be allocated equally between Dr. Fishman and Dr. Stashak.
<PAGE>
EXHIBIT C
AMENDMENT NO. 2 TO MANAGEMENT SERVICES
AGREEMENT dated as of July __, 1997 (the
"Amendment"), between BONE, MUSCLE AND
JOINT, INC., a Delaware corporation (the
"Management Company"), and FISHMAN AND
STASHAK, M.D.'S, P.A. (the "Medical
Group").
Reference is made to the Management Services Agreement dated as of
July 3, 1997, and effective as of June 1, 1997 (the "Management Services
Agreement"). Capitalized terms used but not defined herein have the meanings
ascribed thereto in the Management Services Agreement.
Execution and delivery of this Amendment is a condition to the Management
Company's performance of its obligations set forth in Section 2 of that certain
Amendatory Agreement dated as of July 3, 1997 (the "Amendatory Agreement"),
among the Management Company, the Medical Group, Eric Fishman, M.D., and Gerald
Stashak, M.D.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
in the Management Services Agreement and the Amendatory Agreement and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. Schedule III to the Management Services Agreement is amended and
restated in its entirety to read as set forth in Annex I attached hereto.
2. Except as expressly provided in this Amendment, the Management
Services Agreement remains in full force and effect in accordance with their
respective terms.
3. This Amendment may be executed in more than one counterpart, and by
the parties hereto in separate counterparts, and each such counterpart shall
constitute an original instrument, but all such counterparts taken together
shall constitute one and the same Amendment.
4. This Amendment shall be governed by, construed and interpreted in
accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused the Amendment to be duly
executed as of the date and year first above written.
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Name:
Title:
FISHMAN AND STASHAK, M.D.'S, P.A.
By:_____________________________
Eric S. Fishman, M.D.
President
By:_____________________________
Gerald T. Stashak, M.D.
Secretary
<PAGE>
ANNEX I
SCHEDULE III
Equity Participation
In connection with the execution and delivery of this Agreement, the
Management Company is paying an aggregate consideration to the Medical Group of
257,922 shares of Common Stock of the Management Company (the "Practice
Compensation"). In order to accomplish the foregoing, the Company is entering
into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to
which each such Eligible Party shall receive the number of shares set forth in
such agreement (which amount will be designated by the Medical Group in writing
to the Management Company). A portion of the stock consideration (an aggregate
of 4,808 shares of Common Stock) is being paid to an advisor of the Medical
Group in accordance with the schedule below. The Medical Group shall indemnify
and defend the Management Company from and against any and all liabilities,
losses, damages, claims, causes of action and expenses (including reasonable
attorneys' fees and expenses) arising out of or in connection with any claim by
any of the Eligible Parties or any other person with respect to such allocation
of shares.
The Practice Compensation has been determined based upon the assumption
that the Medical Group will achieve aggregate Collections for the calendar year
ending December 31, 1997 (the "Base Year") equal to $3,750,000 (the "Base Year
Collections"). On or before October 31, 1998, the Management Company will notify
(the "Comparison Notice") the Medical Group of its actual aggregate Collections
for the period beginning on the Commencement Date and ending on August 31, 1998
(the "Comparison Period"). In the event that the actual Collections for the
Comparison Period are less than the Base Year Collections (the "Shortfall"), the
Medical Group will be obligated to, and will cause the Eligible Parties to,
return to the Management Company the number of shares (rounded to the nearest
whole number) of Common Stock determined by taking six times 15% of the
Shortfall and dividing that number by $6.50. In the event that the actual
Collections for the Comparison Period are greater than the Base Year Collections
(the "Excess"), the Management Company will be obligated to issue to the Medical
Group the additional number of shares (rounded to the nearest whole number) of
Common Stock determined by taking six times 15% of the Excess and dividing that
number by $6.50. If there is an Excess and the Management Company is required to
issue additional shares of Common Stock to the Medical Group, such shares will
be allocated to the Eligible Parties as the Medical Group may direct in writing
within 30 days after receipt of the Comparison Notice and such allocation shall
be made according to the proportions set forth in such written notice; provided
that if the Medical Group fails to so notify
<PAGE>
the Management Company, the Excess shall be allocated equally between Dr.
Fishman and Dr. Stashak.
<PAGE>
BONE, MUSCLE AND JOINT, INC.
4800 N. Federal Highway
Suite 104D
Boca Raton, Florida 33431
April 30, 1997
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur
Suite 300
San Antonio, Texas 78229
Tri-Party Agreement
Dear Sirs:
Reference is made to the Management Services Agreement dated as of December
23, 1996, between Bone, Muscle and Joint, Inc. (the "Company"), and South Texas
Spinal Clinic, P.A. (the "Medical Group"). Capitalized terms used but not
defined herein have the meanings ascribed thereto in the Management Services
Agreement.
In connection with the provision of Management Services under the
Management Services Agreement, the Company proposes to enter into a loan
agreement (the "Loan Agreement") with HCFP Funding, Inc. ("HCFP"). In order to
effectuate the financing provided under the Loan Agreement, HCFP has requested
that the Company and the Medical Group enter into an amendment (the "Amendment")
to the Management Services Agreement, substantially in the form attached hereto
as Annex I.
To induce the Medical Group to enter into the Amendment, the Company hereby
agrees to, and does by its signature hereon, instruct HCFP to deliver to the
Medical Group, for so long as the Management Services Agreement and the Loan
Agreement are in effect, the Semi-Monthly Draw, if any, payable by the Company
to the Medical Group under the Management Services Agreement. HCFP is hereby
instructed to deliver the Semi-Monthly Draw by wire transfer of funds to an
account designated by the Medical Group on the first day and the fifteenth day
of each month (or the business day immediately following, if such date occurs on
a day on which HCFP is not open for business). The Company and, by its signature
below, the Medical Group hereby acknowledge that HCFP's performance in
accordance with the foregoing instructions is subject to the terms and
conditions of the Loan Agreement with respect to the extension of credit to the
Company by HCFP.
In addition to the foregoing, HCFP agrees (by its countersignature hereto)
to deliver to the Medical Group a copy
<PAGE>
South Texas Spinal Clinic, P.A.
April 30, 1997
Page 2
of any notice of default under the Loan Agreement (a "Default Notice") sent by
HCFP to the Company. HCFP's obligation set forth in the preceding sentence shall
in no event serve to modify the obligations of the Company or the rights of HCFP
under the Loan Agreement.
The parties hereto acknowledge that in the event the Medical Group receives
a Default Notice from HCFP or does not receive the Semi-Monthly Draw on the
applicable Draw Date, the Medical Group shall have the right (to be exercised in
its sole discretion) to terminate the Management Services Agreement by written
notice to the Company (with a copy to HCFP), which notice must be delivered no
later than 15 days prior to the Termination Date (as hereinafter defined). Such
termination shall be effective as of the date (the "Termination Date") that is
30 days after the last Draw Date on which the Medical Group received its Draw.
In the event of such termination, the Company's rights set forth in Section
3.19(a) of the Management Services Agreement with respect to any Accounts
generated after the Termination Date shall be revoked.
<PAGE>
South Texas Spinal Clinic, P.A.
April 30, 1997
Page 2
If the foregoing meets with your approval, please sign this letter in the
space provided below and return a copy of this letter to me via facsimile and
the original via regular mail.
Very truly yours,
Bone, Muscle and Joint, Inc.
By:
--------------------------------
David H. Fater
Executive Vice President and
Chief Financial Officer
Acknowledged and Agreed to
by each of the following:
HCFP Funding, Inc.
By:
-----------------------------
Name:
Title:
Address for Notices:
2 Wisconsin Circle
Suite 320
Chevy Chase, Maryland 20815
South Texas Spinal Clinic, P.A.
By:
-----------------------------
Dr. Gilbert Meadows, M.D.
President
Address for Notices:
7614 Louis Pasteur
Suite 300
San Antonio, Texas 78229
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports as follows in Amendment
No. 1 to the Registration Statement on Form S-1 (File No. 333-35759) and
related Prospectus of BMJ Medical Management, Inc. dated November 6, 1997.
Report on Finacial Statements Date of Report
- --------------------------------------------------------------------------------
BMJ Medical Management, Inc. June 4, 1997
Orthopaedic Associates of Bethlehem, Inc. May 28, 1997, except
for Note 13, as to
which the date is
August 14, 1997
Southern California Orthopedic Institute Medical May 23, 1997
Group, a California General Partnership
South Texas Spinal Clinic, P.A. June 5, 1997
Tri-City Orthopedic Surgery Medical Group, Inc. May 17, 1997
Lauderdale Orthopaedic Surgeons May 21, 1997
Fishman and Stashak, M.D.'s, P.A. d/b/a/ Gold Coast July 9, 1997
Orthopedics
Sun Valley Orthopaedic Surgeons, an Arizona General July 18, 1997
Partnerahip
Orthopaedic Surgery Associates, P.A. October 10, 1997
Broward Institute of Orthopaedic Specialties, P.A. September 5, 1997
/s/ Ernst & Young LLP
West Palm Beach, Florida
November 6, 1997
