<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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
<S> <C> <C> <C> <C>
Common Stock (par value $.001 per share)........ shares $ $34,500,000 $10,455
</TABLE>
(1) Includes 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.
------------------------
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 SEPTEMBER 16, 1997
PROSPECTUS
SHARES
BMJ MEDICAL MANAGEMENT, INC.
COMMON STOCK
All of the 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 $ and $ per share. See 'Underwriting' for
a discussion of the factors considered in determining the initial public
offering price. The Company intends to apply 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) 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 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' refer to the 20 Practices that have affiliated
with the Company 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 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. As of the date of this Prospectus, the Company
has affiliated (the 'Affiliation Transactions') by entering into management
services agreements (the 'Management Services Agreements') with 20 Existing
Practices comprising 87 doctors practicing in Arizona, California, Florida,
Pennsylvania and Texas.
The market for musculoskeletal care in the United States is significant and
growing. 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 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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................ shares
Common Stock to be outstanding after the offering.............. shares(1)
Use of proceeds................................................ Repayment of debt and general corporate
purposes, including possible future
affiliations. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol......................... BONS
</TABLE>
- ------------------
(1) Excludes 1,203,000 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 254,165 shares of Common Stock
issuable upon exercise of outstanding warrants to purchase Common Stock with
a weighted average exercise price of $4.35 per share. See 'Management' and
'Certain Transactions.'
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED PRO FORMA SIX MONTHS ENDED 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 AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Practice revenue, net................... $ 6,029 $63,748 $ -- $ 19,907 $ 34,845
Less: physician and other provider
services.............................. (2,912) (25,626) -- (9,509) (13,414)
------------ ------- ---------- ---------- -------
Management fee revenue.................. 3,117 38,122 -- 10,398 21,441
Costs and expenses:
Medical support services.............. 2,844 31,136 -- 9,541 17,852
General and administrative............ 1,278 1,278 51 2,433 2,433
Depreciation and amortization......... 104 733 1 300 534
Interest expense (income), net........ -- -- --
------------ ------- ---------- ---------- -------
Total costs and expenses............ 4,226 52 12,274
------------ ------- ---------- ---------- -------
Income (loss) before income taxes....... (1,109) (52) (1,876)
Income taxes(4)......................... -- -- --
------------ ------- ---------- ---------- -------
Net income (loss)....................... $ (1,109) $ $ (52) $ (1,876) $
------------ ------- ---------- ---------- -------
------------ ------- ---------- ---------- -------
Net income (loss) per common share:
Primary............................... $ (0.07) $ $ 0.00 $ (0.11) $
Diluted............................... $ (0.07) $ $ 0.00 $ (0.11) $
Weighted average common shares
outstanding:
Primary............................... 15,811 15,206 16,469
Diluted............................... 15,811 15,206 16,469
OTHER OPERATING DATA:
Number of Practices (end of period)..... 3 20 0 8 20
Number of physicians (end of period).... 34 87 0 57 87
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
------- --------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 6,915 $ 9,484 $
Working capital..................................................... 7,490 14,613
Total assets........................................................ 29,456 44,487
Long-term debt, less current portion................................ 6,540 17,340
Total stockholders' equity.......................................... 11,546 15,659
</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 $ 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 $ 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. 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; Rescission Rights. The
Company's revenues are dependent on its affiliation through Management Services
Agreements with the Practices and on the success of the Practices. 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. For a
further description of the Management Services Agreements, including a
description of their termination provisions and non-competition 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.'
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.
Some of the Existing Practices derive a significant portion of their
revenue from a limited number of physicians. 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.
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 and, to the extent permitted by
applicable law, contracting with or establishing
6
<PAGE>
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.'
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.'
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.'
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. 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.
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
7
<PAGE>
the Practices and, as a result, on the Company. These reductions could result
from changes in current reimbursement rates or from a shift in clinical
protocols to non-surgical solutions 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 13% 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.
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
8
<PAGE>
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. SCOI is 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 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. Violations of these laws 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 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. Although the Company believes that it
and the Existing Practices are in material compliance with applicable state laws
and regulations relating to licensing, certificate of need, the corporate
practice of medicine and fee-splitting, 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
9
<PAGE>
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.'
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. While the Company is in the process of
obtaining such a license, 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. 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.'
Dependence on 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
10
<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 or the Practices will be able to
establish or maintain satisfactory relationships with managed care and other
third party payors, many of which already have existing provider structures in
place and may not be able or willing to change their provider networks. In
addition, any significant loss of revenue by the 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, 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.'
11
<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 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 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 shares are
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act. Of these restricted shares, shares will be eligible
for sale pursuant to Rule 144 in 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 may
transfer securities pursuant to bona fide gifts and the Company may issue, and
grant options to purchase,
12
<PAGE>
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 % 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 $ per share. See 'Dilution.'
13
<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
20 Existing Practices comprising 87 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 the Southern California
Orthopedic Institute Medical Group ('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 addition to the foregoing Affiliation Transactions,
the Company has affiliated with 13 other Practices comprising 27 additional
physicians. In order to finance the Affiliation Transactions and provide for its
working capital needs, the Company has raised approximately $31.7 million
through a series of equity and debt financings. See '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.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby are estimated to be $ ($ if the
Underwriters' over-allotment option is exercised in full), based on an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and expenses of the Offering. The Company intends to use
approximately $14.5 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 $7.25 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'); and (iv)
approximately $750,000 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 1999 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 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.
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.'
15
<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 shares of
Common Stock offered hereby, based on an assumed initial public offering price
of $ per share and after deducting estimated underwriting discounts and
expenses of the Offering, and the application of the net proceeds therefrom. See
'Use of Proceeds.' 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 $ 1,536 $
------- --------- -----------
------- --------- -----------
Long-term debt and capital lease obligations, less current portion............ $ 6,540 $17,340 $ 4,000
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; 8,306,462
shares issued and outstanding; 10,277,479 shares issued and outstanding
pro forma; and shares issued and outstanding pro forma as
adjusted(1).............................................................. 9 11
Additional paid-in capital.................................................. 14,482 18,591
Accumulated deficit......................................................... (2,985) (2,985) (2,985)
------- --------- -----------
Total stockholders' equity............................................... 11,546 15,659
------- --------- -----------
Total capitalization................................................ $18,086 $32,999 $
------- --------- -----------
------- --------- -----------
</TABLE>
- ------------------
(1) Excludes 1,203,000 shares issuable upon exercise of outstanding options with
a weighted average exercise price of $0.39 per share and 254,165 shares of
Common Stock issuable upon exercise of outstanding warrants to purchase
Common Stock with a weighted average exercise price of $4.35 per share. See
'Management' and 'Certain Transactions.'
16
<PAGE>
DILUTION
As of June 30, 1997, the pro forma net tangible book value of the Company
was approximately $15,659,000, or approximately $1.08 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
shares of Common Stock offered by the Company hereby based on an assumed
initial public offering price of $ 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
$ or approximately $ per share of Common Stock, representing an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate, substantial dilution of $ 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................................. $
Pro forma net tangible book value per share at June 30, 1997.................. $ 1.08
Increase attributable to price paid by new investors per share................
--------
Pro forma net tangible book value per share after the Offering..................
--------
Dilution per share to new investors............................................. $
--------
--------
</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 shares of Common Stock offered hereby
based on an assumed initial public offering price of $ 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......................... 14,462,219 % $18,644,000 % $1.29
New investors.................................
---------- ------- ----------- -------
Total.................................. 100.0% $ 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>
The foregoing computations do not include the effect of the issuance of
1,203,000 shares of Common Stock issuable upon exercise of outstanding options
with a weighted average exercise price of $0.39 per share and 254,165 shares of
Common Stock issuable upon exercise of outstanding warrants with a weighted
average exercise price of $4.35 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.'
17
<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 $ 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 OTHER PRO FORMA PRO FORMA
COMPANY(B) TRI-CITY LOS COAST VALLEY AFFILIATIONS ADJUSTMENTS PRO FORMA AS ADJUSTED
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Patient revenues, net........... $19,907 $1,240 $1,600 $1,609 $1,358 $9,131 $ -- $34,845 $34,845
Less: physician and other
provider services............. 9,509 578 653 764 646 2,194 (940)(c) 13,404 13,404
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
Management fee revenue.......... 10,398 662 947 845 712 6,937 (940) 21,441 21,441
Costs and expenses:
Medical support services...... 9,541 538 787 604 576 5,806 -- 17,852
General and administrative.... 2,433 -- -- -- -- -- -- 2,433
Depreciation and
amortization................ 300 -- -- -- -- -- 234 (d) 534
Interest expense (income),
net......................... -- -- -- -- -- -- 614 (e) 614
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
Total costs and expenses.... 12,274 538 787 604 576 5,806 848 21,433
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
(Loss) income before income
taxes......................... (1,876) 124 160 241 136 1,131 92 8
Income taxes.................... -- -- -- -- -- -- 3 (f) 3 (g)
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
Net (loss) income............... $(1,876) $ 124 $ 160 $ 241 $ 136 $1,131 $ 89 $ 5 $
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
----------- -------- ------ ------ ------ ------------ ----------- --------- -----------
Net (loss) income per common share:
Primary....................... $ (0.11) $
Diluted....................... $ (0.11) $
Weighted average common shares
outstanding:
Primary....................... 16,469
Diluted....................... 16,469
</TABLE>
18
<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 ----------------------- GOLD SUN OTHER PRO FORMA
COMPANY(B) LVBMJ SCOI STSC TRI-CITY LOS COAST VALLEY AFFILIATIONS ADJUSTMENTS
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <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 $ 16,500 $ --
Less: physician and other
provider services........... 2,912 562 8,545 3,766 1,310 3,418 1,535 1,137 3,978 (1,537)(c)
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
Management fee revenue....... 3,117 978 9,362 2,261 2,168 2,947 1,899 1,331 12,522 (1,537)
Costs and expenses:
Medical support services.... 2,844 824 8,766 1,628 1,820 2,310 1,384 1,084 10,476 --
General and
administrative............ 1,278 -- -- -- -- -- -- -- -- --
Depreciation and
amortization.............. 104 -- -- -- -- -- -- -- -- 629 (d)
Interest expense (income),
net....................... -- -- -- -- -- -- -- -- -- 1,474 (e)
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
Total costs and
expenses................ 4,226 824 8,766 1,628 1,820 2,310 1,384 1,084 10,476 2,103
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
(Loss) income before income
taxes....................... (1,109) 154 596 633 348 637 515 247 2,046 (566)
Income taxes................. -- -- -- -- -- -- -- -- -- 1,330(f)
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
Net (loss) income............ $(1,109) $ 154 $ 596 $ 633 $ 348 $ 637 $ 515 $ 247 $ 2,046 $(1,896)
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
----------- ------ ------- ------ -------- ------ ------ ------ ------------ -----------
Net (loss) income per common share:
Primary..................... $ (0.07)
Diluted..................... $ (0.07)
Weighted average shares outstanding:
Primary..................... 15,811
Diluted..................... 15,811
<CAPTION>
PRO FORMA
AS
PRO FORMA ADJUSTED
--------- ---------
<S> <C> <C>
Patient revenues, net........ $63,748 $63,748
Less: physician and other
provider services........... 25,626 25,626
--------- ---------
Management fee revenue....... 38,122 38,122
Costs and expenses:
Medical support services.... 31,136
General and
administrative............ 1,278
Depreciation and
amortization.............. 733
Interest expense (income),
net....................... 1,474
--------- ---------
Total costs and
expenses................ 34,621
--------- ---------
(Loss) income before income
taxes....................... 3,501
Income taxes................. 1,330 (g)
--------- ---------
Net (loss) income............ $ 2,171 $
--------- ---------
--------- ---------
Net (loss) income per common
Primary..................... $
Diluted..................... $
Weighted average shares outst
Primary.....................
Diluted.....................
</TABLE>
19
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
Practice revenue represents the revenue of the Existing Practices 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 as if the affiliations had occurred on January 1, 1996 and reflects
the impact of applying the provisions of the Management Services Agreements
relating to management fees payable to the Company. 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 as if such transactions had occurred on January 1, 1996 and
reflects the impact of applying the provisions of the Management Services
Agreements. In the pro forma statements of operations for the six months
ended June 30, 1997, the Company column includes the operations of the
Existing Practices that affiliated with the Company in 1996 and the
Existing Practices that affiliated with the Company in the first six months
of 1997 from their respective dates of affiliation in 1997. The 1997
Affiliation column presents historical information of the 1997 Affiliation
Transactions as if such transactions had occurred on January 1, 1997 and
reflects the impact of applying the provisions of the Management Services
Agreements except for the Existing Practices that affiliated with the
Company in the first six months of 1997 for which the information reflects
the historical information for that portion of 1997 preceding the
Practice's affiliation with the Company and reflects the impact of applying
the provisions of the Management Services Agreements.
(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 amended and
restated Management Services Agreements of SCOI and LVBMJ relating to
management fees payable to the Company retroactively to January 1, 1996 and
1997.
(d) 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 $13.8 million at June 30, 1997 and are being amortized
over periods ranging from 7 to 30 years.
(e) 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.
(f) To reflect the estimated income tax effect at an effective rate of
approximately 38%.
(g) 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.'
20
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
AFFILIATION PRO FORMA
AND OTHER AS
THE COMPANY ADJUSTMENTS PRO FORMA ADJUSTED(A)
----------- ----------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 6,915 $(9,599)(b) $ 9,484 $
12,168(c)
Accounts receivable.......................................... 10,319 4,606(b) 14,925 14,925
Due from physician groups.................................... 1,578 -- 1,578 1,578
Prepaid expenses and other current assets.................... 48 66(b) 114
----------- ----------- --------- ------------
Total current assets...................................... 18,860 7,241 26,101
Furniture, fixtures and equipment, net......................... 2,546 1,253(b) 3,799 3,799
Management Services Agreements, net............................ 7,310 6,537(b) 13,847 13,847
Other assets................................................... 740 -- 740 740
----------- ----------- --------- ------------
Total assets.............................................. $29,456 $15,031 $44,487 $
----------- ----------- --------- ------------
----------- ----------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 353 $ -- $ 353 $ 353
Accrued expenses............................................. 826 -- 826 826
Accrued salaries and benefits................................ 841 -- 841 841
Due to physician groups...................................... 7,932 -- 7,932
Shareholder note payable..................................... 753 118 871
Current portion of long-term debt and capital lease
obligations............................................... 665 -- 665
----------- ----------- --------- ------------
Total current liabilities................................. 11,370 118 11,488
Long-term debt................................................. 6,540 10,800(c) 17,340
Stockholders' equity:
Convertible preferred stock.................................. 40 2 42 --
Common stock................................................. 9 2(c) 11
Additional paid-in capital................................... 14,482 2,861(b) 18,591
1,248(c)
Deficit...................................................... (2,985) -- (2,985) (2,985)
----------- ----------- --------- ------------
Total stockholders' equity................................ 11,546 4,113 15,659
----------- ----------- --------- ------------
Total liabilities and stockholders' equity........... $29,456 $15,031 $44,487 $
----------- ----------- --------- ------------
----------- ----------- --------- ------------
</TABLE>
21
<PAGE>
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 $ million (after deducting
underwriting discounts and estimated Offering expenses) and the repayment of
$ million of indebtedness 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 1,604,270 shares of common stock
and paid cash of approximately $9.6 million. 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 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.
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 7-30 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 $12.2 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 $10.8 million was provided from the Comdisco Loan, the
Galtney Loan and the Debentures. The Debentures are convertible into 555,556
shares of Common Stock.
22
<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 AND
OPERATING 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 2,433
Depreciation and amortization........................................ 104 1 300
-------- ------- -------
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............................................... $ (0.07) $0.00 $ (0.11)
-------- ------- -------
-------- ------- -------
Weighted average common shares outstanding.............................. 15,811 15,206 16,469
OTHER OPERATING DATA:
Number of Practices (end of period)..................................... 3 0 8
Number of physicians (end of period).................................... 34 0 57
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,439 $ 6,915
Working capital........................................................................ 1,819 7,490
Total assets........................................................................... 14,490 29,456
Long-term debt, less current portion................................................... 59 6,540
Total stockholders' equity............................................................. 7,724 11,546
</TABLE>
23
<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 twenty Existing Practices comprising 87 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 eight months of
1997, the Company entered into additional Management Services Agreements with 17
Existing Practices, comprising 50 physicians.
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. 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 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.
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.
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, building and equipment rental and other
24
<PAGE>
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 and the
transition period included in two of the Management Services Agreements during
which time the Company effectively received less than 10% of the net collected
revenue. 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 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
25
<PAGE>
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. Through June 30, 1997, the
Company had paid or committed to pay consideration of cash and stock in
connection with Affiliation Transactions aggregating $19.3 million. See 'Certain
Transactions.'
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 $8.1 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 $14.0 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
26
<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 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.'
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, 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.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company. The failure to raise the funds necessary to
finance its future cash requirements could adversely affect the Company's
ability to pursue its strategy and could adversely affect its results of
operations for future periods.
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.
27
<PAGE>
BUSINESS
GENERAL
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. 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 20 Existing Practices comprising 87
doctors practicing in Arizona, California, Florida, Pennsylvania, and Texas.
INDUSTRY OVERVIEW
The market for muscoloskeletal care in the United States is significant and
growing. 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 American Academy of
Orthopaedic Surgeons (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.
In 1996, 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
28
<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 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.
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.
BMJ OPERATIONS
Existing Practices. Since commencing operations in January 1996 until
September 1, 1997, the Company has affiliated with 20 Existing Practices,
comprising 87 physicians, in Arizona, California, Pennsylvania, Texas and
Florida. 82% of the physicians at the Existing Practices are orthopaedic
surgeons.
29
<PAGE>
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 AUGUST 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 1 2
1 Physiatry
1 Spine surgery
LOS Ft. Lauderdale, FL 4/1/97 6 Orthopaedics 2 3 10
1 Podiatry
Gold Coast Palm Beach 6/1/97 5 Orthopaedics 0 1 4
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.
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 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. The total consideration paid by the Company consists
of Common Stock, cash and the assumption of certain liabilities. 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
30
<PAGE>
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 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 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
31
<PAGE>
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.'
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................................................ %
Medicare(1)..........................................................
Managed care.........................................................
Private payors.......................................................
</TABLE>
- ------------------
(1) Includes attributable to Medicaid.
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
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. The Company seeks 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.
32
<PAGE>
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;
(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.
33
<PAGE>
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. In addition, 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.
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
34
<PAGE>
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 difficult to affiliate with, and to enter into agreements to
provide management services to, medical practices on terms beneficial to the
Company.
The Practices will compete with local musculoskeletal care service
providers as well as some managed care organizations. The Company believes that
changes in governmental and private reimbursement policies and other factors
have resulted in increased competition for consumers of medical services. The
Company believes that the cost, accessibility and quality of services provided
are the principal factors that affect competition. There can be no assurance
that the Practices will be able to compete effectively in the markets that they
serve. The inability of the Practices to compete effectively would have a
material adverse effect on the Company.
Further, the Practices 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 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. 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.
35
<PAGE>
FEDERAL LAW
The principal federal laws that apply to the Company's activities include
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. 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 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
36
<PAGE>
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 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 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 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 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 the physicians' ownership interests in the Company 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
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 Balanced Budget Act of 1997 (the '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
37
<PAGE>
the opinion. The Company has no present intention to seek an advisory opinion
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 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 $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, 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 money penalty provisions of the Anti-Kickback Statute.
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. 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 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 Health Insurance Portability and
Accountability Act of 1996, 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
38
<PAGE>
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'; (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 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
39
<PAGE>
relationship before the referral is made. Most of the states in which the
Company conducts business have adopted some form of self-referral law. Many
states, including California and Pennsylvania, among the states in which the
Company does business, have self-referral laws that are particularly applicable
to workers' compensation patients. The Company believes that its current
operations and the structure of the Existing Practices are in material
compliance with the self-referral laws of the states in which such Practices are
located. Additional risks under state self-referral laws could arise, however,
to the extent that the Company undertakes 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. Each
state in which the Existing Practices are located has adopted one or more anti-
kickback provisions. 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. There are strong arguments
under many state laws that it is not fee-splitting when a payment made by the
physician is reasonable reimbursement for management and other types of
administrative services furnished to the physician unrelated to the referral of
patients.
The Company is reimbursed by physicians in the Practices on whose behalf
the Company provides management services. The Company believes that the
compensation provisions of the Management Services Agreements have been designed
to comply with applicable state laws relating to fee-splitting. 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 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 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
40
<PAGE>
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, may
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. Accordingly, the Company believes that its
operations do not violate applicable state laws relating to the corporate
practice of medicine. However, as noted, such laws and legal doctrines have been
subjected to only limited judicial and regulatory interpretation and there can
be no assurance that, if challenged, the Company would be considered to be in
compliance with all such laws and doctrines. A determination in any state that
the Company is engaged in the corporate practice of medicine could render any
Management Services 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 (i) does not believe that the professional practice
laws of any of the states in which it currently does business have been
interpreted to prohibit its employment of the ancillary personnel and (ii)
believes 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 has initiated the application process for such licensure. 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
41
<PAGE>
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.
FEDERAL AND STATE INITIATIVES
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 September 11, 1997, the Company had approximately 555 employees, of
whom 16 are located at the Company's headquarters, 9 are located in the regional
offices and 530 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 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
42
<PAGE>
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, including successor liability. 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.'
43
<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
Tony Anderson........................................ 38 Treasurer
Ronald Garey......................................... 42 Controller
Sherry Pulliam....................................... 42 Director of Financial Operations and Assistant
Treasurer
David K. Ellwanger................................... 40 Senior Vice President, Eastern Region
Glenn Cozen.......................................... 43 Regional Vice President, Western Region
Joanna Robben........................................ 37 Regional Vice President, Central Region
Keith Bolton......................................... 35 Director of Ancillary Development, Central Region
Beth Landel.......................................... 33 Director of Ancillary Development, Eastern Region
Lee Bodendorfer...................................... 47 Director of Operations, Eastern Region
G. Steven Ensinger................................... 42 Co-Director of Development, Central Region
Randal J. Farwell.................................... 37 Director of Development, Eastern Region
Brent E. Mellecker................................... 35 Co-Director of Development, Central Region
Andrea Serrate....................................... 43 Director of Development, Western Region
Georges Daou......................................... 36 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
44
<PAGE>
operations and financial condition. The defendants have filed an answer to the
complaint, denying the principal allegations contained therein.
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.
David 'Deke' K. Ellwanger became Senior Vice President of the Eastern
Region 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.
Glenn Cozen became Regional Vice President, Western Region in March 1997.
Since November 1986, Mr. Cozen has been the Chief Financial Officer at SCOI.
Joanna Robben became Regional Vice President of the Central Region in June
1997. 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 Director of Ancillary Development, Central Region 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.
Lee Bodendorfer became Director of Operations, Eastern Region in April
1997. 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 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.
Beth A. Landel became Director of Ancillary Development, Eastern Region, In
July 1997. From June 1995 to July 1997, Ms. Landel was with HealthSouth
Corporation where she was Director of Corporate Development for the State of
Florida. 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.
45
<PAGE>
G. Steven Ensinger became Co-Director of Development for the Central Region
in August 1997. From December 1996 to July 1997, Mr. Ensinger functioned as the
Practice Administrator for STSC. Beginning in January 1997, business development
activities for the Company were added to his responsibilities at STSC. From
November 1994 to November 1995, Mr. Ensinger was the assistant administrator for
St. Mary's Hospital in Port Arthur, Texas, a member of the Sisters of Charity of
Houston Hospital Network. From November 1992 to July 1994, Mr. Ensinger was the
Chief Operating Officer of St. Luke's Lutheran Hospital.
Randal J. Farwell became Director of Development, Eastern Region in
December 1996. 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 became Co-Director of Development, Central Region in
April 1997. 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 became Director of Development, Western Region in February
1997. 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.
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.
46
<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
COMPENSATION
ANNUAL 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
47
<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.
48
<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 July 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
49
<PAGE>
declaring or paying cash dividends on its Common Stock. As security for
repayment of the 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 'HCFP Note'), which bears
interest at the Base Rate (defined as the prime rate designated by Fleet
National Bank of Connecticut plus 3.5%), 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
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 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
50
<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.
AFFILIATION TRANSACTIONS
Eastern Region
Effective July 1, 1996, the Company consummated its initial Affiliation
Transaction with LVBMJ in the State of Pennsylvania. Under the terms of the
Amended and Restated Management Services Agreement between LVBMJ and the Company
effective as of July 1, 1997 (the 'LVBMJ Management Services 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
achieved by the Company on behalf of the Practice. 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.
51
<PAGE>
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
achieved by the Company on behalf of the Practice. 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
265,725 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 achieved by the
Company on behalf of Gold Coast. 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. ('Broward'), Terrence Matthews, M.D., Wylie Scott, M.D., 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 Broward. 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
achieved by the Company on behalf of Broward. 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 Broward, Matthews,
Scott and Seavey for an aggregate purchase price of $2,020,000.
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 achieved by the
Company on behalf of PM&R. 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.
Other Eastern Region Affiliations
Effective July 1, 1997, the Company entered into a Management Services
Agreement with Neal Kramer, D.P.M. located in Bethlehem, Pennsylvania. Effective
September 1, 1997, in order to enhance the Company's presence in the Ft.
Lauderdale market, the Company entered into separate Management Services
Agreements with Jeffrey Beitler, M.D., located in Adventura, Florida, and
Michael Abrahams, M.D., located in Plantation, Florida. 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
52
<PAGE>
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings achieved by the
Company on behalf of these practices.
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 achieved by the Company on behalf
of STSC. 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 achieved by the Company
on behalf of SCOI. 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.
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 achieved by the Company on behalf of Tri-City. 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).
53
<PAGE>
Effective July 1, 1997, the Company entered into a Management Services
Agreement (the 'Sun Valley Management Services Agreement') with 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 achieved by the
Company on behalf of Sun Valley. 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
achieved by the Company on behalf of Stockdale. 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 achieved by the Company on behalf of these Practices.
54
<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) ........................................ 165,555 1.6% 1,394,912(3) %
3000 Sand Hill Road, Building One, Suite 135,
Menlo Park, California 94025
Oak Investment Partners VI, L.P.(4) ................................. 165,555 1.6 1,394,913(5)
One Gorham Island
Westport, Connecticut 06880
Naresh Nagpal, M.D................................................... 981,805(6) 9.6 2,211,163 6)(7)
David H. Fater....................................................... 0 -- 15,000(8)
Georges Daou......................................................... 0 -- 0
James M. Fox, M.D.................................................... 395,708 3.9 412,083(9)
Ann H. Lamont(4)..................................................... 165,555(10) 1.6 1,394,913(5)
Donald J. Lothrop(2)................................................. 165,555(11) 1.6 1,394,912(3)
All officers and directors as a group (6 persons) (12)............... 1,708,623 16.9 3,216,908
</TABLE>
- ------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 10,277,479 shares of Common
Stock outstanding as of September 12, 1997 and 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 September 12, 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 15,279.5 shares of Common Stock owned by the
stockholder and warrants to purchase 275.5 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 15,200.67 shares of Common Stock owned by the stockholder and
warrants to purchase 354.33 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.
55
<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 15,555 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 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.
(10) 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.
(11) 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.
(12) Includes beneficial ownership of an aggregate of 331,110 shares of Common
Stock and warrants to purchase Common Stock prior to the Offering and an
aggregate of 2,789,825 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 (10) and
(11) above.
56
<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. Application will be made to have the Common Stock approved 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.
57
<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 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
58
<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.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the shares of Common Stock offered hereby, the
Company will have outstanding 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 shares are 'restricted securities' within the meaning of
Rule 144 promulgated under the Securities Act. Of these restricted shares,
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.
60
<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.................................................
---------
---------
</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
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.
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
61
<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.'
62
<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
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.
63
<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-21
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996............................................. F-22
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-23
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Six Months Ended June 30, 1996....................................................................... F-24
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-25
Notes to Financial Statements.............................................................................. F-26
FINANCIAL STATEMENTS OF SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP
Report of Independent Auditors............................................................................. F-30
Balance Sheets at December 31, 1995 and October 31, 1996................................................... F-31
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-32
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-33
Notes to Financial Statements.............................................................................. F-34
FINANCIAL STATEMENTS OF SOUTH TEXAS SPINAL CLINIC, P.A.
Report of Independent Auditors............................................................................. F-39
Balance Sheets at December 31, 1994 and 1995 and October 31, 1996.......................................... F-40
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-41
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Ten Months Ended October 31, 1996.................................................................... F-42
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-43
Notes to Financial Statements.............................................................................. F-44
FINANCIAL STATEMENTS OF TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC.
Report of Independent Certified Public Accountants......................................................... F-47
Balance Sheets at December 31, 1995 and 1996............................................................... F-48
Statements of Operations for the Years Ended December 31, 1995 and 1996.................................... F-49
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996.......................... F-50
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-51
Notes to Financial Statements.............................................................................. F-52
</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-56
Balance Sheets at December 31, 1995 and 1996............................................................... F-57
Statements of Income and Change in Partners' Capital for the Years Ended December 31, 1995 and 1996........ F-58
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-59
Notes to Financial Statements.............................................................................. F-60
FINANCIAL STATEMENTS OF FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS
Report of Independent Certified Public Accountants......................................................... F-64
Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (Unaudited)................................. F-65
Statements of Income for the Years Ended December 31, 1995 and 1996 and the Six Months Ended June 30, 1996
and 1997 (Unaudited)..................................................................................... F-66
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and the Six Months Ended
June 30, 1997 (Unaudited)................................................................................ F-67
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-68
Notes to Financial Statements.............................................................................. F-69
FINANCIAL STATEMENTS OF SUN VALLEY ORTHOPAEDIC SURGEONS
Report of Independent Certified Public Accountants......................................................... F-73
Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited).......................................... F-74
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-75
Statements of Cash Flows for the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1996 and 1997 (Unaudited).................................................. F-76
Notes to Financial Statements.............................................................................. F-77
</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........................................................ 1,241,000 1,578,000
Prepaid expenses and other current assets........................................ 29,000 48,000
------------ -----------
Total current assets............................................................... 8,526,000 18,860,000
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....................................................................... $ 14,490,000 $29,456,000
------------ -----------
------------ -----------
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.......................................................... 5,751,000 7,932,000
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.......................................................... 6,707,000 11,370,000
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
8,306,462 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......................................... $ 14,490,000 $29,456,000
------------ -----------
------------ -----------
</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 2,433,000
Depreciation and amortization 104,000 1,000 300,000
----------- ------------ ------------
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....................................... $ (0.07) $ 0.00 $ (0.11)
----------- ------------ ------------
----------- ------------ ------------
Weighted average number of common shares outstanding..... 15,811,000 15,206,000 16,469,000
----------- ------------ ------------
----------- ------------ ------------
</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 $ -- $ --
----------- ---------- -----------
----------- ---------- -----------
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, primarily accounts receivable, and furniture, fixtures and equipment of
these groups. 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 incurred by the Company in supporting the group, a
percentage of professional practice cost savings realized by the group 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
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.
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
F-8
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 revenue, net less amounts
retained by the physician groups.
The Company's management fee revenue includes amounts based on a percentage
of the physician groups' net collected revenue plus an amount equal to 100% of
the non-physician affiliated practice expenses. 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. The
percentage of revenues paid to the Company as management fees generally ranges
from 10% to 15% of net collected revenue. 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.
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.
F-9
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 cost of
entering into Agreements with practices that are dominant in their market area
over periods that do not exceed 30 years. The Company amortizes the costs of
entering into Agreements over periods ranging from seven to thirty 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.
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.
F-10
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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 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.
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 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.
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 LVBMJ in the State of Pennsylvania. 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 issued an
F-11
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
aggregate of 518,031 shares of common stock recorded at its estimated fair value
of $0.10 per share and options to purchase 30,000 shares of common stock
representing consideration of $52,000.
On November 22, 1996, the Company issued 4,000,000 shares of common stock,
$3,706,000 of cash and deferred consideration of $2,224,000, which is based on
actual collections of the receivable balances and is due upon the earlier of an
initial public offering of the Company's common stock or November 1, 1997, in
conjunction with the purchase of certain assets and the execution of a
management services agreement with SCOI. The common stock issued was recorded at
$.35, based on an independent valuation, representing consideration of
$1,400,000.
On April 1, 1997, the Company entered into a transaction with the Center
for Orthopedic Surgery, Inc. (COSI), an outpatient surgery center owned by the
SCOI physicians, and issued 550,000 shares of common stock recorded at $0.40 per
share, based on an independent valuation, to the physician owners of COSI as
consideration for the management services agreement entered into between COSI
and the Company. The number of shares issued to the SCOI physicians in
connection with each of the SCOI and COSI transactions which exceed three
million shares, are subject to recalculation at the earlier to occur of the
filing by the Company of a preliminary prospectus with the Securities and
Exchange Commission or November 1, 1997. In accordance with the recalculation
provision, either (i) the management fee to be paid to the Company under the
Management Services Agreement may be reduced prospectively or (ii) the number of
shares issued may be increased or decreased based upon the revenue contribution
of the SCOI and COSI practices at such date as compared to the revenues of the
entire musculoskeletal network of the Company at such date.
On December 23, 1996, the Company issued 1,076,501 shares of common stock
and deferred consideration of $3,065,990 to STSC and is due upon the earlier of
an initial public offering of the Company's common stock or November 1, 1997.
The common stock was recorded at $.35, based on an independent valuation,
representing consideration of $376,775.
Effective April 1, 1997, the Company entered into asset purchase and
management services agreements with Tri-City Orthopedic Surgery Medical Group,
Inc., a California corporation, and two of its affiliates in exchange for
$948,000 in cash and the issuance of 402,723 shares of common stock recorded at
$.40 per share, based on an independent valuation, representing consideration of
$161,000.
Effective April 1, 1997, the Company entered into an asset purchase and
management services agreement with the Lauderdale Orthopaedic Surgeons (LOS), a
Florida partnership, in exchange for $2,640,000 in cash (subject to increase or
refund based upon the Company's collection of the purchased accounts receivable)
and the issuance of 466,417 shares of common stock recorded at $.40 per share,
representing consideration of $187,000. Additionally, the Company assumed a
lease between LOS and an entity controlled by an equity owner in LOS.
Effective June 1, 1997, the Company entered into three additional asset
purchase and management services agreements with Fishman and Stashak, M.D.'s,
P.A. (d/b/a Gold Coast Orthopedics) Clive M. Segil, M.D., a Professional
Corporation and H. Leon Brooks, a Medical Corporation (d/b/a Tower Orthopedics)
in exchange for $3,886,000 in cash and the issuance of 409,615 shares of common
stock recorded at $1.15 per share, based on an independent valuation,
representing consideration of $471,000. The LVBMJ and Gold Coast agreements
provide 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 such practices during a specified 12-month
period. The value of any subsequently issued shares will be allocated to the
management services agreements.
F-12
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
The cost to enter into the Agreements and acquire the assets, including
transaction costs, was allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
<S> <C> <C>
Cost of acquiring the Agreements.............................. $ 3,770,000 $3,043,000
Accounts receivable........................................... 6,532,000 4,044,000
Furniture, fixtures and equipment............................. 1,967,000 540,000
Other......................................................... 62,000 12,000
------------ --------------
$ 12,331,000 $7,639,000
------------ --------------
------------ --------------
</TABLE>
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>
4. AMOUNTS DUE TO/FROM PHYSICIAN GROUPS
Amounts due from 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>
Practice collections and short-term advances................... $ 426,000 $ 21,000
Management fees................................................ 815,000 1,557,000
------------ --------------
$1,241,000 $1,578,000
------------ --------------
------------ --------------
</TABLE>
F-13
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. AMOUNTS DUE TO/FROM PHYSICIAN GROUPS--(CONTINUED)
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
------------ --------------
(AUDITED)
<S> <C>
Amounts due for purchased receivables.......................... $1,879,000 $3,792,000
Deferred consideration for management services agreements...... 3,872,000 4,140,000
------------ --------------
$5,751,000 $7,932,000
------------ --------------
------------ --------------
</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 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>
F-14
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES--(CONTINUED)
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.
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 and expire ten years from 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, 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.
F-15
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
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. 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.
F-16
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
Shares of common stock reserved for future issuance at December 31, 1996 is
as follows:
<TABLE>
<S> <C>
Options..................................................... 2,000,000
Warrants.................................................... 254,165
Convertible preferred stock................................. 3,976,406
----------
6,230,571
----------
----------
</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, 1997, the Company issued 533,335 shares of Series E convertible
preferred stock with a par value of $.01 for $6.00 per share in exchange for
$3,200,000.
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.
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.
F-17
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
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.
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>
F-18
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS
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 July 1997 the Company entered into a series of credit
agreements with its lender secured by the accounts receivable acquired from each
of the affiliated physician groups. The Company may borrow up to an aggregate
limit of $14,000,000 subject to a borrowing base of 85% of eligible accounts
receivable. Outstanding loans bear interest at prime rate plus 1.75%. The credit
agreements require the Company to maintain a prescribed level of tangible net
worth, places limitations on indebtedness, liens, and investments, and prohibits
the payment of dividends. At June 30, 1997, $4,130,000 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. Outstanding loans bear interest at the prime rate plus 3.5%.
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
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. At June 30, 1997, $3,000,000 was
outstanding under this agreement.
On August 1, 1997 and August 21, 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.
F-19
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS--(CONTINUED)
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 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 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 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*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.
Effective July 1, 1997 and August 1, 1997 the Company entered into a total
of 13 additional asset purchase and management services agreements in exchange
for $7,124,806 in cash and the issuance of 1,604,270 shares of common stock
recorded at amounts ranging from $1.20 to $2.00 per share. One of the agreements
provides that the Company may be required to issue more shares of common stock
as additional consideration during 1998. The actual number of shares to be
issued will depend on actual collections of the practice during a specified
12-month period. The value of any subsequently issued shares will be allocated
to the management services agreement. Another agreement provides that the
Company will be required to pay additional cash consideration to the physician
shareholders of the practice if the value of the Company's common stock is not
at least equal to a specified price on the first anniversary of the agreement.
The guaranteed value is included in determining the cost of the management
services agreement as of the effective date of the agreement.
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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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:
DECEMBER 31, OCTOBER 31,
------------------------ -----------
1994 1995 1996
---------- ---------- -----------
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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1997
DECEMBER 31, -----------
1996
------------ (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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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.................................... 14
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Pro Forma Financial Information................ 18
Selected Financial Information................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 28
Management..................................... 44
Certain Transactions........................... 49
Principal Stockholders......................... 55
Description of Capital Stock................... 57
Shares Eligible for Future Sale................ 60
Underwriting................................... 61
Legal Matters.................................. 63
Experts........................................ 63
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.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
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................................................................................... $10,455
NASD filing fee........................................................................................ 3,950
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 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.
51. 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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. 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.
58. 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.
59. 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.
60. 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.
61. 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.
62. 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.
63. 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.
II-5
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
64. 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.
65. 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.
66. 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.
67. 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.
68. 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.
69. On September 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.
70. 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.
71. On September 5, 1997, the Company issued 72,600 shares of Common Stock
to Neal Kramer, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
72. 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.
73. 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.
74. 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.
75. 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <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.
</TABLE>
II-6
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*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.
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.
</TABLE>
II-7
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, 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, 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 August 1, 1997, as amended, among the Company, Sun
Valley and the indemnifying persons thereto.
*10.38 -- Asset Purchase Agreement, effective as of August 1, 1997, between the Company and Sun Valley.
*10.39 -- Restricted Stock Agreement, dated as of August 1, 1997, among the Company, Sun Valley and certain
physicians affiliated with Sun Valley.
*10.40 -- Stockholder Non-Competition Agreement, dated as of August 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, between the Company and Gold Coast.
*10.43 -- Restricted Stock Agreement, dated August 8, 1997, 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.
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.
(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.
II-8
<PAGE>
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 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-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS 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 16TH DAY OF SEPTEMBER, 1997.
BMJ MEDICAL MANAGEMENT, INC.
By: /s/ Naresh Nagpal
----------------------------------
Name: Naresh Nagpal, M.D.
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Naresh Nagpal, M.D. and David H. Fater or
either of them, each acting alone, his or her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for such person
and in his or her name, place and stead, in any and all capacities, in
connection with the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, including to sign the Registration Statement in the name
and on behalf of the undersigned as a director or officer of the Registrant and
any and all amendments or supplements thereto, including any and all stickers
and post-effective amendments thereto, and any and all additional registration
statements relating to the same offering of securities as those that are covered
by the Registration Statement that are filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his, her or their
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 16TH DAY OF SEPTEMBER, 1997, BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------
<S> <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)
/s/ ANN H. LAMONT Director
- ------------------------------------------
Ann H. Lamont
/s/ DONALD J. LOTHROP Director
- ------------------------------------------
Donald J. Lothrop
/s/ JAMES M. FOX Director
- ------------------------------------------
James M. Fox, M.D.
- ------------------------------------------ Director
Georges Daou
</TABLE>
II-10
<PAGE>
EXHIBIT A
===============================================================================
BONE, MUSCLE AND JOINT, INC.
Incorporated under the laws
of the State of Delaware
---------------------------
BY-LAWS
---------------------------
As adopted on May 6, 1996
===============================================================================
<PAGE>
BONE, MUSCLE AND JOINT, INC.
BY-LAWS
TABLE OF CONTENTS
Page
ARTICLE I Offices............................................... 1
SECTION 1. Registered Office..................................... 1
SECTION 2. Other Offices......................................... 1
ARTICLE II Meeting of Stockholders; Stockholders' Consent in
Lieu of Meeting................................... 1
SECTION 1. Annual Meetings....................................... 1
SECTION 2. Special Meetings...................................... 1
SECTION 3. Notice of Meetings.................................... 1
SECTION 4. Quorum................................................ 2
SECTION 5. Organization.......................................... 2
SECTION 6. Order of Business..................................... 3
SECTION 7. Voting................................................ 3
SECTION 8. Inspection............................................ 4
SECTION 9. List of Stockholders.................................. 4
SECTION 10. Stockholders' Consent in Lieu of Meeting.............. 5
ARTICLE III Board of Directors.................................... 5
SECTION 1. General Powers........................................ 5
SECTION 2. Number and Term of Office............................. 5
SECTION 3. Election of Directors................................. 5
SECTION 4. Resignation, Removal and Vacancies.................... 5
SECTION 5. Meetings.............................................. 6
SECTION 6. Directors' Consent in Lieu of Meeting................. 7
SECTION 7. Action by Means of Conference Telephone or Similar
Communications Equipment.......................... 7
SECTION 8. Committees............................................ 7
ARTICLE IV Officers.............................................. 8
SECTION 1. Executive Officers.................................... 8
SECTION 2. Authority and Duties.................................. 8
SECTION 3. Other Officers........................................ 8
SECTION 4. Term of Office, Resignation and Removal............... 8
SECTION 5. Vacancies............................................. 9
SECTION 6. The Chairman of the Board............................. 9
SECTION 7. The President......................................... 9
SECTION 8. The Vice-President.................................... 9
- i -
<PAGE>
SECTION 9. The Secretary......................................... 9
SECTION 10. The Treasurer......................................... 10
ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc......... 10
SECTION 1. Execution of Documents................................ 10
SECTION 2. Deposits.............................................. 10
SECTION 3. Proxies with Respect to Stock or Other Securities
of Other Corporations............................. 10
ARTICLE VI Shares and Their Transfer; Fixing Record Date......... 11
SECTION 1. Certificates for Shares............................... 11
SECTION 2. Record................................................ 11
SECTION 3. Transfer and Registration of Stock.................... 11
SECTION 4. Addresses of Stockholders............................. 12
SECTION 5. Lost, Destroyed and Mutilated Certificates............ 12
SECTION 6. Regulations........................................... 12
SECTION 7. Fixing Date for Determination of Stockholders
of Record........................................ 12
ARTICLE VII Seal.................................................. 13
ARTICLE VIII Fiscal Year........................................... 14
ARTICLE IX Indemnification and Insurance......................... 14
SECTION 1. Indemnification....................................... 14
SECTION 2. Insurance............................................. 16
ARTICLE X Amendment............................................. 16
- ii -
<PAGE>
BY-LAWS OF
BONE, MUSCLE AND JOINT, INC.
--------------------
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of BONE, MUSCLE AND
JOINT, INC. (the "Corporation"), in the State of Delaware shall be located at
1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805, and
the registered agent in charge thereof shall be The Prentice-Hall Corporation
System.
SECTION 2. Other Offices. The Corporation may also have an office or
offices at any other place or places within or outside the State of Delaware.
ARTICLE II
Meeting of Stockholders; Stockholders'
Consent in Lieu of Meeting
SECTION 1. Annual Meetings. The annual meeting of the stockholders for
the election of directors, and for the transaction of such other business as may
properly come before the meeting, shall be held at such place, date and hour as
shall be fixed by the Board of Directors (the "Board") and designated in the
notice or waiver of notice thereof, except that no annual meeting need be held
if all actions, including the election of directors, required by the General
Corporation Law of the State of Delaware (the "Delaware Statute") to be taken at
a stockholders' annual meeting are taken by written consent in lieu of meeting
pursuant to Section 10 of this Article II.
SECTION 2. Special Meetings. A special meeting of the stockholders for
any purpose or purposes may be called by the Board, the Chairman of the Board,
the President or the record holders of at least a majority of the issued and
outstanding shares of Common Stock of the Corporation, to be held at such place,
date and hour as shall be designated in the notice or waiver of notice thereof.
SECTION 3. Notice of Meetings. Except as otherwise required by statute,
the Certificate of Incorporation of the Corporation (the "Certificate") or these
By-laws, notice of each annual or special meeting of the stockholders shall be
given to each stockholder of record entitled to vote at such meeting not less
than 10 nor more than 60 days before the day on which the meeting is to be held,
by delivering written notice thereof to
- 1 -
<PAGE>
him personally, or by mailing a copy of such notice, postage prepaid, directly
to him at his address as it appears in the records of the Corporation, or by
transmitting such notice thereof to him at such address by telegraph, cable,
facsimile or other telephonic transmission. Every such notice shall state the
place, the date and hour of the meeting, and, in case of a special meeting, the
purpose or purposes for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy, or who shall, in person or by
attorney thereunto authorized, waive such notice in writing, either before or
after such meeting. Except as otherwise provided in these By-laws, neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any such notice or waiver of notice. Notice of
any adjourned meeting of stockholders shall not be required to be given, except
when expressly required by law.
SECTION 4. Quorum. At each meeting of the stockholders, except
where otherwise provided by the Certificate or these By-laws, the holders of a
majority of the issued and outstanding shares of Common Stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business. In the absence of a
quorum, a majority in interest of the stockholders present in person or
represented by proxy and entitled to vote, or, in the absence of all the
stockholders entitled to vote, any officer entitled to preside at, or act as
secretary of, such meeting, shall have the power to adjourn the meeting from
time to time, until stockholders holding the requisite amount of stock to
constitute a quorum shall be present or represented. At any such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the meeting as originally called.
SECTION 5. Organization.
(a) Unless otherwise determined by the Board, at each meeting of
the stockholders, one of the following shall act as chairman of the meeting and
preside thereat, in the following order of precedence:
(i) the Chairman of the Board;
(ii) the President;
(iii) any director, officer or stockholder of the Corporation
designated by the Board to act as chairman of such meeting and to preside
thereat if the Chairman of the Board or the President shall be absent from
such meeting; or
(iv) a stockholder of record who shall be chosen chairman of such
meeting by a majority in voting
- 2 -
<PAGE>
interest of the stockholders present in person or by proxy and entitled
to vote thereat.
(b) The Secretary or, if he shall be presiding over such meeting
in accordance with the provisions of this Section 5 or if he shall be absent
from such meeting, the person (who shall be an Assistant Secretary, if an
Assistant Secretary has been appointed and is
<PAGE>
present) whom the chairman of such meeting shall appoint, shall act as secretary
of such meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at each meeting of
the stockholders shall be determined by the chairman of such meeting.
SECTION 7. Voting. Except as otherwise provided by law, the Certificate
or these By-laws, at each meeting of the stockholders, every stockholder of the
Corporation shall be entitled to one vote in person or by proxy for each share
of Common Stock of the Corporation held by him and registered in his name on the
books of the Corporation on the date fixed pursuant to Section 7 of Article VI
as the record date for the determination of stockholders entitled to vote at
such meeting. Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. A person whose stock is pledged shall be entitled to
vote, unless, in the transfer by the pledgor on the books of the Corporation, he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent such stock and vote thereon. If shares or
other securities having voting power stand in the record of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary shall be
given written notice to the contrary and furnished with a copy of the instrument
or order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
(a) if only one votes, his act binds all;
(b) if more than one votes, the act of the majority so voting
binds all; and
(c) if more than one votes, but the vote is evenly split on any
particular matter, such shares shall be voted in the manner provided by law.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this Section 7 shall be
a majority or even-split in interest. The Corporation shall not vote directly or
indirectly any share of its own capital stock. Any vote of stock may be given by
the stockholder entitled thereto in person or by his proxy appointed
- 3 -
<PAGE>
by an instrument in writing, subscribed by such stockholder or by his attorney
thereunto authorized, delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted after three years from its date, unless
said proxy provides for a longer period. At all meetings of the stockholders,
all matters (except where other provision is made by law, the Certificate or
these By-laws) shall be decided by the vote of a majority in interest of the
stockholders present in person or by proxy at such meeting and entitled to vote
thereon, a quorum being present. Unless demanded by a stockholder present in
person or by proxy at any meeting and entitled to vote thereon, the vote on any
question need not be by ballot. Upon a demand by any such stockholder for a vote
by ballot upon any question, such vote by ballot shall be taken. On a vote by
ballot, each ballot shall be signed by the stockholder voting, or by his proxy,
if there be such proxy, and shall state the number of shares voted.
SECTION 8. Inspection. The chairman of the meeting may at any time
appoint one or more inspectors to serve at any meeting of the stockholders. Any
inspector may be removed, and a new inspector or inspectors appointed, by the
Board at any time. Such inspectors shall decide upon the qualifications of
voters, accept and count votes, declare the results of such vote, and subscribe
and deliver to the secretary of the meeting a certificate stating the number of
shares of stock issued and outstanding and entitled to vote thereon and the
number of shares voted for and against the question, respectively. The
inspectors need not be stockholders of the Corporation, and any director or
officer of the Corporation may be an inspector on any question other than a vote
for or against his election to any position with the Corporation or on any other
matter in which he may be directly interested. Before acting as herein provided,
each inspector shall subscribe an oath faithfully to execute the duties of an
inspector with strict impartiality and according to the best of his ability.
SECTION 9. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who shall have charge of its stock ledger to
prepare and make, at least 10 days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to any such meeting,
during ordinary business hours, for a period of at least 10 days prior to such
meeting, either at a place within the city where such meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. Such list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
- 4 -
<PAGE>
SECTION 10. Stockholders' Consent in Lieu of Meeting. Any action
required by the Delaware Statute to be taken at any annual or special meeting of
the stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, by a consent in writing, as permitted
by the Delaware Statute.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business, property and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate directed or required to be
exercised or done by the stockholders.
SECTION 2. Number and Term of Office. The number of directors shall be
fixed from time to time by the Board. Directors need not be stockholders. Each
director shall hold office until his successor is elected and qualified, or
until his earlier death or resignation or removal in the manner hereinafter
provided.
SECTION 3. Election of Directors. At each meeting of the stockholders
for the election of directors at which a quorum is present, the persons
receiving the greatest number of votes, up to the number of directors to be
elected, of the stockholders present in person or by proxy and entitled to vote
thereon shall be the directors; provided, however, that for purposes of such
vote no stockholder shall be allowed to cumulate his votes. Unless an election
by ballot shall be demanded as provided in Section 7 of Article II, election of
directors may be conducted in any manner approved at such meeting.
SECTION 4. Resignation, Removal and Vacancies.
(a) Any director may resign at any time by giving written notice
to the Board, the Chairman of the Board, the President or the Secretary. Such
resignation shall take effect at the time specified therein or, if the time be
not specified, upon receipt thereof; unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
(b) Any director or the entire Board may be removed, with or
without cause, at any time by vote of the holders of a majority of the shares
then entitled to vote at an election of directors or by written consent of the
stockholders pursuant to Section 10 of Article II.
- 5 -
<PAGE>
(c) Vacancies occurring on the Board for any reason may be filled
by vote of the stockholders or by the stockholders' written consent pursuant to
Section 10 of Article II, or by vote of the Board or by the directors' written
consent pursuant to Section 6 of this Article III. If the number of directors
then in office is less than a quorum, such vacancies may be filled by a vote of
a majority of the directors then in office.
SECTION 5. Meetings.
(a) Annual Meetings. As soon as practicable after each annual
election of directors, the Board shall meet for the purpose of organization and
the transaction of other business, unless it shall have transacted all such
business by written consent pursuant to Section 6 of this Article III.
(b) Other Meetings. Other meetings of the Board shall be held at
such times and places as the Board, the Chairman of the Board, the President or
any director shall from time to time determine.
(c) Notice of Meetings. Notice shall be given to each director of
each meeting, including the time, place and purpose of such meeting. Notice of
each such meeting shall be mailed to each director, addressed to him at his
residence or usual place of business, at least two days before the date on which
such meeting is to be held, or shall be sent to him at such place by telegraph,
cable, wireless or other form of recorded communication, or be delivered
personally or by telephone or facsimile not later than the day before the day on
which such meeting is to be held, but notice need not be given to any director
who shall attend such meeting. A written waiver of notice, signed by the person
entitled thereto, whether before or after the time of the meeting stated
therein, shall be deemed equivalent to notice.
(d) Place of Meetings. The Board may hold its meetings at such
place or places within or outside the State of Delaware as the Board may from
time to time determine, or as shall be designated in the respective notices or
waivers of notice thereof.
(e) Quorum and Manner of Acting. A majority of the total number of
directors then in office shall be present in person at any meeting of the Board
in order to constitute a quorum for the transaction of business at such meeting,
and the vote of a majority of those directors present at any such meeting at
which a quorum is present shall be necessary for the passage of any resolution
or act of the Board, except as otherwise expressly required by law or these
By-laws. In the absence of a quorum for any such meeting, a majority of the
directors present thereat may adjourn such meeting from time to time until a
quorum shall be present.
- 6 -
<PAGE>
(f) Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(i) the Chairman of the Board;
(ii) the President (if a director); or
(iii) any director designated by a majority of the
directors present.
The Secretary or, in the case of his absence, an Assistant Secretary, if an
Assistant Secretary has been appointed and is present, or any person whom the
chairman of the meeting shall appoint shall act as secretary of such meeting and
keep the minutes thereof.
SECTION 6. Directors' Consent in Lieu of Meeting. Any action required
or permitted to be taken at any meeting of the Board may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by all the directors then in
office and such consent is filed with the minutes of the proceedings of the
Board.
SECTION 7. Action by Means of Conference Telephone or Similar
Communications Equipment. Any one or more members of the Board may participate
in a meeting of the Board by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
SECTION 8. Committees. The Board may, by resolution or resolutions
passed by a majority of the whole Board, designate one or more committees, each
such committee to consist of one or more directors of the Corporation, which to
the extent provided in said resolution or resolutions shall have and may
exercise the powers of the Board in the management of the business and affairs
of the Corporation and may authorize the seal of the Corporation to be affixed
to all papers which may require it, such committee or committees to have such
name or names as may be determined from time to time by resolution adopted by
the Board. A majority of all the members of any such committee may determine its
action and fix the time and place of its meetings, unless the Board shall
otherwise provide. The Board shall have power to change the members of any such
committee at any time, to fill vacancies and to discharge any such committee,
either with or without cause, at any time.
- 7 -
<PAGE>
ARTICLE IV
Officers
SECTION 1. Executive Officers. The principal officers of the
Corporation shall be a Chairman of the Board, if one is appointed (and any
references to the Chairman of the Board shall not apply if a Chairman of the
Board has not been appointed), a President, a Secretary, and a Treasurer, and
may include such other officers as the Board may appoint pursuant to Section 3
of this Article IV. Any two or more offices may be held by the same person.
SECTION 2. Authority and Duties. All officers, as between themselves
and the Corporation, shall have such authority and perform such duties in the
management of the Corporation as may be provided in these By-laws or, to the
extent so provided, by the Board.
SECTION 3. Other Officers. The Corporation may have such other
officers, agents and employees as the Board may deem necessary, including one or
more Assistant Secretaries, one or more Assistant Treasurers and one or more
Vice Presidents, each of whom shall hold office for such period, have such
authority, and perform such duties as the Board, the Chairman of the Board, or
the President may from time to time determine. The Board may delegate to any
principal officer the power to appoint and define the authority and duties of,
or remove, any such officers, agents, or employees.
SECTION 4. Term of Office, Resignation and Removal.
(a) All officers shall be elected or appointed by the Board and
shall hold office for such term as may be prescribed by the Board. Each officer
shall hold office until his successor has been elected or appointed and
qualified or until his earlier death or resignation or removal in the manner
hereinafter provided. The Board may require any officer to give security for the
faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to
the Board, the Chairman of the Board, the President or the Secretary. Such
resignation shall take effect at the time specified therein or, if the time be
not specified, at the time it is accepted by action of the Board. Except as
aforesaid, the acceptance of such resignation shall not be necessary to make it
effective.
(c) All officers and agents elected or appointed by the Board
shall be subject to removal at any time by the Board or by the stockholders of
the Corporation with or without cause.
SECTION 5. Vacancies. If the office of Chairman of the Board,
President, Secretary or Treasurer becomes vacant for
- 8 -
<PAGE>
any reason, the Board will fill such vacancy, and if any other office becomes
vacant, the Board may fill such vacancy. Any officer so appointed or elected by
the Board shall serve only until such time as the unexpired term of his
predecessor shall have expired, unless reelected or reappointed by the Board.
SECTION 6. The Chairman of the Board. The Chairman of the Board shall
give counsel and advice to the Board and the officers of the Corporation on all
subjects concerning the welfare of the Corporation and the conduct of its
business and shall perform such other duties as the Board may from time to time
determine. Unless otherwise determined by the Board, he shall preside at
meetings of the Board and of the Stockholders at which he is present.
SECTION 7. The President. The President shall be the chief executive
officer of the Corporation. The President shall have general and active
management and control of the business and affairs of the Corporation subject to
the control of the Board and shall see that all orders and resolutions of the
Board are carried into effect. The President shall from time to time make such
reports of the affairs of the Corporation as the Board of Directors may require
and shall perform such other duties as the Board may from time to time
determine.
SECTION 8. The Vice-President. The Vice-President, or if there shall be
more than one, the Vice-Presidents in the order determined by the Board or by
the President, shall, in the absence or disability of the President, act with
all of the powers and be subject to all the restrictions of the President. The
Vice-Presidents shall also perform such other duties and have such other powers
as the Board, the President or these by-laws may, from time to time, prescribe.
SECTION 9. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of the
stockholders and shall record all votes and the minutes of all proceedings in a
book to be kept for that purpose. He may give, or cause to be given, notice of
all meetings of the stockholders and of the Board, and shall perform such other
duties as may be prescribed by the Board or the Chairman of the Board, under
whose supervision he shall act. He shall keep in safe custody the seal of the
Corporation and affix the same to any duly authorized instrument requiring it
and, when so affixed, it shall be attested by his signature or by the signature
of the Treasurer or, if appointed, an Assistant Secretary or an Assistant
Treasurer. He shall keep in safe custody the certificate books and stockholder
records and such other books and records as the Board may direct, and shall
perform all other duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the Board, the Chairman of
the Board or the President.
- 9 -
<PAGE>
SECTION 10. The Treasurer. The Treasurer shall have the care and
custody of the corporate funds and other valuable effects, including securities,
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, shall render to the Chairman of the Board and directors, at the
regular meetings of the Board, or whenever they may require it, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation and shall perform all other duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or the Chairman of the Board.
ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
SECTION 1. Execution of Documents. The Board shall designate, by either
specific or general resolution, the officers, employees and agents of the
Corporation who shall have the power to execute and deliver deeds, contracts,
mortgages, bonds, debentures, checks, drafts and other orders for the payment of
money and other documents for and in the name of the Corporation, and may
authorize such officers, employees and agents to delegate such power (including
authority to redelegate) by written instrument to other officers, employees or
agents of the Corporation; unless so designated or expressly authorized by these
By-laws, no officer, employee or agent shall have any power or authority to bind
the Corporation by any contract or engagement, to pledge its credit or to render
it liable pecuniarily for any purpose or amount.
SECTION 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board or Treasurer, or any other officer of the Corporation
to whom power in this respect shall have been given by the Board, shall select.
SECTION 3. Proxies with Respect to Stock or Other Securities of Other
Corporations. The Board shall designate the officers of the Corporation who
shall have authority from time to time to appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the powers
and rights which the Corporation may have as the holder of stock or other
securities in any other corporation, and to vote or consent with respect to such
stock or securities. Such designated officers may instruct the person or persons
so appointed as to the manner of exercising such powers and rights, and such
designated officers may execute or cause to be executed in the
- 10 -
<PAGE>
name and on behalf of the Corporation and under its corporate seal or otherwise,
such written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise its powers and
rights.
ARTICLE VI
Shares and Their Transfer; Fixing Record Date
SECTION 1. Certificates for Shares. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number and
class of shares owned by him in the Corporation, which shall be in such form as
shall be prescribed by the Board. Certificates shall be numbered and issued in
consecutive order and shall be signed by, or in the name of, the Corporation by
the Chairman of the Board, the President or any Vice President, and by the
Treasurer (or an Assistant Treasurer, if appointed) or the Secretary (or an
Assistant Secretary, if appointed). In case any officer or officers who shall
have signed any such certificate or certificates shall cease to be such officer
or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates shall have been delivered by
the Corporation, such certificate or certificates may nevertheless be adopted by
the Corporation and be issued and delivered as though the person or persons who
signed such certificate had not ceased to be such officer or officers of the
Corporation.
SECTION 2. Record. A record in one or more counterparts shall be kept
of the name of the person, firm or corporation owning the shares represented by
each certificate for stock of the Corporation issued, the number of shares
represented by each such certificate, the date thereof and, in the case of
cancellation, the date of cancellation. Except as otherwise expressly required
by law, the person in whose name shares of stock stand on the stock record of
the Corporation shall be deemed the owner thereof for all purposes regarding the
Corporation.
SECTION 3. Transfer and Registration of Stock.
(a) The transfer of stock and certificates which represent the
stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title 6
of the Delaware Code (the Uniform Commercial Code), as amended from time to
time.
(b) Registration of transfers of shares of the Corporation shall
be made only on the books of the Corporation upon request of the registered
holder thereof, or of his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the Corporation, and upon the
surrender of the certificate or certificates for such shares properly endorsed
or accompanied by a stock power duly executed.
- 11 -
<PAGE>
SECTION 4. Addresses of Stockholders. Each stockholder shall designate
to the Secretary an address at which notices of meetings and all other corporate
notices may be served or mailed to him, and, if any stockholder shall fail to
designate such address, corporate notices may be served upon him by mail
directed to him at his post-office address, if any, as the same appears on the
share record books of the Corporation or at his last known post-office address.
SECTION 5. Lost, Destroyed and Mutilated Certificates. The holder of
any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor, and the Board may,
in its discretion, cause to be issued to him a new certificate or certificates
for such shares, upon the surrender of the mutilated certificates or, in the
case of loss or destruction of the certificate, upon satisfactory proof of such
loss or destruction, and the Board may, in its discretion, require the owner of
the lost or destroyed certificate or his legal representative to give the
Corporation a bond in such sum and with such surety or sureties as it may direct
to indemnify the Corporation against any claim that may be made against it on
account of the alleged loss or destruction of any such certificate.
SECTION 6. Regulations. The Board may make such rules and regulations
as it may deem expedient, not inconsistent with these By-laws, concerning the
issue, transfer and registration of certificates for stock of the Corporation.
SECTION 7. Fixing Date for Determination of Stockholders of Record.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board, and which record date shall be not more than 60 nor less than 10
days before the date of such meeting. If no record date is fixed by the Board,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
may fix a record date, which record date shall not precede the date upon which
the resolution
- 12 -
<PAGE>
fixing the record date is adopted by the Board, and which date shall be not more
than 10 days after the date upon which the resolution fixing the record date is
adopted by the Board. If no record date has been fixed by the Board, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board is required by the
Delaware Statute, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board and prior action by the Board is required by the Delaware Statute, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the Board adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
ARTICLE VII
Seal
The Board may provide a corporate seal, which shall be in the form of a
circle and shall bear the full name of the Corporation, the year of
incorporation of the Corporation and the words and figures "Corporate Seal -
Delaware."
ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall be the calendar year unless
otherwise determined by the Board.
- 13 -
<PAGE>
ARTICLE IX
Indemnification and Insurance
SECTION 1. Indemnification.
(a) As provided in the Certificate of Incorporation, to the
fullest extent permitted by the Delaware Statute as the same exists or may
hereafter be amended, a director of this Corporation shall not be liable to the
Corporation or its stockholders for breach of fiduciary duty as a director.
(b) Without limitation of any right conferred by paragraph (a) of
this Section 1, each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director, officer or employee of the Corporation or is or was
serving at the request of the Corporation as a director, officer or employee of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity while serving as a director, officer or employee
or in any other capacity while serving as a director, officer or employee, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware Statute, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director, officer or employee and shall inure to the benefit of the indemnitee's
heirs, testators, intestates, executors and administrators; provided, however,
that such person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and with
respect to a criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful; provided further, however, that no indemnification
shall be made in the case of an action, suit or proceeding by or in the right of
the Corporation in relation to matters as to which it shall be adjudged in such
action, suit or proceeding that such director, officer, employee or agent is
liable to the Corporation, unless a court having jurisdiction shall determine
that, despite such adjudication, such person is fairly and reasonably entitled
to indemnification; provided further, however, that, except as provided in
Section 1(c) of this Article IX with respect to proceedings to enforce
- 14 -
<PAGE>
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) initiated by such indemnitee was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Article IX shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware Statute
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Section or otherwise.
(c) If a claim under Section (b) of this Article IX is not paid in full
by the Corporation with 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of any undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
Delaware Statute. Neither the failure of the Corporation (including the Board,
independent legal counsel, or the stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in the Delaware Statute, nor an actual
determination by the Corporation (including the Board, independent legal
counsel, or the stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of
- 15 -
<PAGE>
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Section or otherwise shall be on the Corporation.
(d) The rights to indemnification and to the advancement of
expenses conferred in this Article IX shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Certificate of Incorporation, agreement, vote of stockholders or disinterested
directors or otherwise.
SECTION 2. Insurance. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any person who is or was a
director, officer, employee or agent of the Corporation or any person who is or
was serving at the request of the Corporation as a director, officer, employer
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware Statute.
ARTICLE X
Amendment
Any by-law (including these By-laws) may be adopted, amended or
repealed by the vote of the holders of a majority of the shares then entitled to
vote or by the stockholders' written consent pursuant to Section 10 of Article
II, or by the vote of the Board or by the directors' written consent pursuant to
Section 6 of Article III.
* * * * *
* * *
*
- 16 -
<PAGE>
EXHIBIT E
BONE, MUSCLE AND JOINT, INC.
1996 Stock Option Plan
1. PURPOSE OF THE PLAN
The purpose of the BONE, MUSCLE AND JOINT, INC. 1996 STOCK OPTION PLAN
(the "Plan") is (i) to further the growth and success of BONE, MUSCLE AND JOINT,
INC. (the "Company") and its Subsidiaries (as hereinafter defined) by enabling
directors and employees of, and independent consultants and contractors to, the
Company and any of its Subsidiaries to acquire shares of the common stock, $.001
par value (the "Common Stock"), of the Company, thereby increasing their
personal interest in such growth and success, and (ii) to provide a means of
rewarding outstanding performance by such persons to the Company and/or its
Subsidiaries. Options granted under the Plan may be either "incentive stock
options" ("ISOs"), intended to qualify as such under the provisions of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options ("NSOs"). For purposes of the Plan, the terms
"Parent" and "Subsidiary" shall mean "Parent Corporation" and "Subsidiary
Corporation" respectively, as such terms are defined in Sections 425(e) and (f)
of the Code. Unless the context otherwise requires, any ISO or NSO shall
hereinafter be referred to as an "Option."
2. ADMINISTRATION OF THE PLAN
(a) Stock Option Committee
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or a three-person Stock Option Committee (the "Committee")
appointed from time to time by the Board; PROVIDED, HOWEVER, that, so long as it
shall be required to comply with Rule 16b-3 ("Rule 16b-3") promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934 (the "1934 Act") in order to permit officers and directors of the
Company to be exempt from the provisions of Section 16(b) of the 1934 Act with
respect to transactions pursuant to the Plan, each of such persons, at the
effective date of his or her appointment to the Committee, shall be a
"disinterested person" within the meaning of Rule 16b-3. The members of the
Committee may be removed by the Board at any time either with or without cause.
Any vacancy on the Committee, whether due to action of the Board or any other
cause, shall be filled by the Board. The term "Committee" shall, for all
purposes of the Plan other than this Section 2, be deemed to refer to the Board
if the Board is administering the Plan.
(b) Procedures
If the Plan is administered by a Committee, the Board shall from time
to time select a Chairman from among the members of the Committee. The Committee
shall adopt such rules and regulations as it shall deem
- 1 -
<PAGE>
appropriate concerning the holding of meetings and the administration
of the Plan. A majority of the entire Committee shall constitute a quorum and
the actions of a majority of the members of the Committee present at a meeting
at which a quorum is present, or actions approved in writing by all of the
members of the Committee, shall be the actions of the Committee.
(c) Interpretation
Except as otherwise expressly provided in the Plan, the Committee shall
have all powers with respect to the administration of the Plan, including,
without limitation, full power and authority to interpret the provisions of the
Plan and any Option Agreement (as defined in Section 5(b)), and to resolve all
questions arising under the Plan. All decisions of the Board or the Committee,
as the case may be, shall be conclusive and binding on all participants in the
Plan.
3. SHARES OF STOCK SUBJECT TO THE PLAN.
(a) Number of Shares
Subject to the provisions of Section 9 (relating to adjustments upon
changes in capital structure and other corporate transactions), the number of
shares of Common Stock subject at any one time to Options granted under the
Plan, plus the number of shares of Common Stock theretofore issued and delivered
pursuant to the exercise of Options granted under the Plan, shall not exceed
1,250,000 shares of Common Stock. If and to the extent that Options granted
under the Plan terminate, expire or are canceled without having been fully
exercised, new Options may be granted under the Plan with respect to the shares
of Common Stock covered by the unexercised portion of such terminated, expired
or canceled Options.
(b) Character of Shares
The shares of Common Stock issuable upon exercise of an Option granted
under the Plan shall be (i) authorized but unissued shares of Common Stock, (ii)
shares of Common Stock held in the Company's treasury or (iii) a combination of
the foregoing.
(c) Reservation of Shares
The number of shares of Common Stock reserved for issuance under the
Plan shall at no time be less than the maximum number of shares which may be
purchased at any time pursuant to outstanding Options.
- 2 -
<PAGE>
4. ELIGIBILITY
(a) General
Options may be granted under the Plan only to (i) persons who are
employees of, or independent consultants to, the Company or any of its
Subsidiaries and (ii) persons who are directors of the Company or any of its
Subsidiaries.
Options granted to employees of the Company or any of its Subsidiaries
shall be, in the discretion of the Committee, either ISOs or NSOs, and Options
granted to independent consultants to or directors of the Company or any of its
Subsidiaries who are not employees of the Company or any of its Subsidiaries
shall be NSOs. Notwithstanding the foregoing, Options may be conditionally
granted to persons who are prospective employees or directors of, or independent
consultants to, the Company or any of its Subsidiaries; PROVIDED, HOWEVER, that
any such conditional grant of an ISO to a prospective employee shall, by its
terms, become effective no earlier than the date on which such person actually
becomes an employee.
(b) Exceptions
Notwithstanding anything contained in Section 4(a) to the contrary:
(i) no ISO may be granted under the Plan to an employee who owns,
directly or indirectly (within the meaning of Sections 422(b)(6) and 425(d)
of the Code), stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its Parent, if any, or
any of its Subsidiaries, unless (A) the Option Price (as defined in Section
6(a)) of the shares of Common Stock subject to such ISO is fixed at not
less than 110% of the Fair Market Value on the date of grant (as determined
in accordance with Section 6(b)) of such shares and (B) such ISO by its
terms is not exercisable after the expiration of five years from the date
it is granted; and
(ii) no Option may be granted to a person (A) who has been
appointed pursuant to Section 2(a) to serve on the Committee effective as
of a future date at any time-during the period from the date such
appointment is made to the date such appointment is to become effective or
(B) who is serving as a member of the Committee.
5. GRANT OF OPTIONS
(a) General
Options may be granted under the Plan at any time and from time to time
on or prior to the tenth anniversary of the Effective Date (as defined in
Section 11). Subject to the
- 3 -
<PAGE>
provisions of the Plan, the Committee shall have plenary authority, in its
discretion, to determine:
(i) the persons (from among the class of persons eligible to
receive Options under the Plan) whom Options shall be granted (the
"Optionees");
(ii) the time or times at which Options shall be granted;
(iii) the number of shares subject to each Option;
(iv) the Option Price of the shares subject to each Option, which
price, in the case of ISOs, shall be not less than the minimum specified in
Section 4(b)(i) or 6(a) (as applicable); and
(v) the time or times when each Option shall become exercisable
and the duration of the exercise period.
(b) Option Agreements
Each Option granted under the Plan shall be designated as an ISO or an
NSO and shall be subject to the terms and conditions applicable to ISOs and/or
NSOs (as the case may be) set forth in the Plan. In addition, each Option shall
be evidenced by a written agreement (an "Option Agreement"), containing such
terms and conditions and in such form, not inconsistent with the Plan, as the
Committee shall, in its discretion, provide, including the forms of Option
Agreement attached hereto as Attachments 1, 2 and 3. Each Option Agreement shall
be executed by the Company and the Optionee.
(c) No Evidence of Employment or Service
Nothing contained in the Plan or in any Option Agreement shall confer
upon any Optionee any right with respect to the continuation of his or her
employment by or service with the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or any such Subsidiary
(subject to the terms of any separate agreement to the contrary) at any time to
terminate such employment or service or to increase or decrease the compensation
of the Optionee from the rate in existence at the time of the grant of an
Option.
(d) Date of Grant
The date of grant of an Option under the Plan shall be the date as of
which the Committee approves the grant; PROVIDED, HOWEVER, that in the case of
an ISO, the date of grant shall in no event be earlier than the date as of which
the Optionee becomes an employee of the Company or one of its Subsidiaries.
- 4 -
<PAGE>
6. OPTION PRICE
(a) General
Subject to Section 9, the price (the "Option Price") at which each
share of Common Stock subject to an Option granted under the Plan may
be purchased shall be determined by the Committee at the time the Option is
granted; provided, however, that in the case of an ISO, such Option Price shall
in no event be less than 100% of the Fair Market Value on the date of grant (as
determined in accordance with Section 6(b)) of such share of Common Stock; and
provided further, however, that in the case of an NSO granted at any time after
the initial public offering of the Common Stock, such Option Price shall in no
event be less than 100% of the Fair Market Value on the date of grant (as
determined in accordance with Section 6(b)) of such Common Stock.
(b) Determination of Fair Market Value
Subject to the requirements of Section 422 of the Code, for purposes of
the Plan, the "Fair Market Value" of shares of Common Stock shall be equal to:
(i) if such shares are publicly traded, (x) the closing price, if
applicable, or the average of the last bid and asked prices on the date of
grant or, if lower, the average of the daily closing prices (or the means
between the last bid and asked prices for days on which no sales took
place) of the 30 business days immediately preceding the date of grant, in
the over-the-counter market as reported by NASDAQ or (y) if the Common
Stock is then traded on a national securities exchange, the average of the
high and low prices on the date of grant or, if lower, the average of the
daily closing prices (or the means between the last bid and asked prices
for days on which no sales took place) of the 30 business days immediately
preceding the date of grant, on the principal national securities exchange
on which it is so traded; or
(ii) if there is no public trading market for such shares, the
fair value of such shares on the date of grant as determined in good faith
by the Committee.
Notwithstanding anything contained in the Plan to the contrary, all
determinations pursuant to Section 6(b)(ii) shall be made without regard to any
restriction other than a restriction which, by its terms, will never lapse.
(c) Repricing of NSOs
Subsequent to the date of grant of any NSO, the Committee may, at its
discretion and with the consent of the Optionee, establish a new Option Price
for such NSO so as to increase or decrease the Option Price of such NSO.
- 5 -
<PAGE>
7. EXERCISABILITY OF OPTIONS
(a) Committee Determination
Each Option granted under the Plan shall be exercisable at such time or
times, or upon the occurrence of such event or events, and for such number of
shares subject to the Option, as shall be determined by the Committee and set
forth in the Option Agreement evidencing such Option; provided, however, that if
the Company files a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), for the initial public offering of its
securities, no Option granted under the plan shall be exercisable during the
180-day period immediately following the effective date of such registration
statement. Subject to the proviso of the immediately preceding sentence, if an
Option is not at the time of grant immediately exercisable, the Committee may
(i) in the Option Agreement evidencing such Option, provide for the acceleration
of the exercise date or dates of the subject Option upon the occurrence of
specified events and/or (ii) at any time prior to the complete termination of an
Option, accelerate the exercise date or dates of such Option.
(b) Automatic Termination of Options
The unexercised portion of any Options granted under the Plan shall
automatically terminate and shall become null and void and be of no further
force or effect upon the first to occur of the following:
(i) the end of the stated term thereof or, in the case of any ISO
granted to a person described in Section 4(b), the tenth anniversary of the
date on which such ISO is granted;
(ii) the expiration of three months from the date that the
Optionee ceases to be an employee or director of, or independent consultant
or contractor to, the Company or any of its Subsidiaries (other than as a
result of an Involuntary Termination (as defined in clause (iii) below));
provided, however, that if the Optionee shall die during such three-month
period, the time of termination of the unexercised portion of such Options
shall be the expiration of 12 months from the date that such Optionee
ceased to be an employee or director of, or independent consultant or
contractor to, the Company or any of its Subsidiaries;
(iii) the expiration of 12 months from the date that the Optionee
ceases to be an employee or director of, or independent consultant or
contractor to, the Company or any of its Subsidiaries, if such termination
is due to such Optionee's death or permanent and total disability (within
the meaning of Section 22(e)(3) of the Code) or as a result
-6 -
<PAGE>
of a termination without "cause" (each, an "Involuntary Termination");
(iv) the expiration of such period of time or the occurrence of
such event as the Committee in its discretion may provide in the Option
Agreement;
(v) on the effective date of a Corporate Transaction (as defined
in Section 9(b)(i)) to which Section 9(b)(ii) (relating to assumptions and
substitutions of Options) does not apply; provided, however, that an
Optionee's right to exercise any ISO outstanding prior to such effective
date shall in all events be suspended during the period commencing 10 days
prior to the proposed effective date of such Corporate Transaction and
ending on either the actual effective date of such Corporate Transaction or
upon receipt of notice from the Company that such Corporate Transaction
will not in fact occur; and
(vi) except to the extent permitted by Section 9(b)(ii), the date
on which an Option or any part thereof or right or privilege relating
thereto is transferred (otherwise than by will or the laws of descent and
distribution), assigned, pledged, hypothecated, attached or otherwise
disposed of by the Optionee.
Anything contained in the Plan to the contrary notwithstanding, unless
otherwise provided in an Option Agreement, no Option granted under the Plan
shall be affected by any change of duties or position of the Optionee (including
a transfer to or from the Company or one of its Subsidiaries), so long as such
Optionee continues to be an employee or director of, or independent consultant
or contractor to, the Company or one of its Subsidiaries.
(c) Limitations on Exercise
Anything contained in the Plan to the contrary notwithstanding, an ISO
granted under the Plan to an Optionee shall not be considered an ISO to the
extent that the aggregate Fair Market Value on the date of grant of such ISO (as
determined in accordance with Section 6(b)) of all stock with respect to which
incentive stock options are exercisable for the first time by such Optionee
during any calendar year (under all plans of the Company and its subsidiaries)
exceeds $100,000.
Under certain circumstances, the exercise of an ISO may disqualify the
holder from recovering the favorable tax benefits ISOs offer. For example, ISO
tax treatment is currently not available if (i) an ISO is exercised with one
year of its date of grant or (ii) if the shares issuable upon exercise of an ISO
are sold within two years of the grant date of such ISO. Therefore, the Company
recommends that each Optionee holding an ISO consult
- 7 -
<PAGE>
with a competent tax advisor before taking any action with respect to his ISOs.
8. PROCEDURE FOR EXERCISE
(a) Payment
At the time an Option is granted under the Plan, the Committee shall
permit the Optionee to specify one or more of the following forms of payment
which may be used by an Optionee upon exercise of his Option:
(i) cash or personal or certified check payable to the Company in
an amount equal to the aggregate Option Price of the shares with respect to
which the Option is being exercised;
(ii) shares of Common Stock or Options having a Fair Market Value
on the date of exercise (as determined in accordance with Section 6(b) as
if the date of exercise were the date of grant) equal to the aggregate
Option Price of the shares with respect to which the Option is being
exercised (in the case of Options, the Fair Market Value of each share of
Common Stock subject to such Option shall be equal to the Fair Market Value
of such share less the exercise price set forth in such Option); or
(iii) a combination of the methods set forth in clauses (i)
and (ii).
(b) Notice
An Optionee (or other person, as provided in Section 10(b)) may
exercise an Option granted under the Plan in whole or in part (but for the
purchase of whole shares only), as provided in the Option Agreement evidencing
his Option, by delivering a written notice (the "Notice") to the Secretary of
the Company. The Notice shall state:
(i) that the Optionee elects to exercise the Option;
(ii) the number of shares with respect to which the Option is
being exercised (the "Optioned Shares");
(iii) the method of payment for the Optioned Shares (which method
must be available to the Optionee under the terms of his or her Option
Agreement);
(iv) the date upon which the Optionee desires to consummate the
purchase (which date must be prior so the termination of such Option);
- 8 -
<PAGE>
(v) a copy of any election filed by the Optionee pursuant to
Section 83(b) of the Code; and
(vi) such further provisions consistent with the Plan as the
Committee may from time to time require.
The exercise date of an Option shall be the date on which the Company
receives the Notice from the Optionee.
(c) Issuance of Certificates
The Company shall issue a stock certificate in the name of the Optionee
(or such other person exercising the Option in accordance with the provisions of
Section 10(b)) for the Optioned Shares as soon as practicable after receipt of
the Notice and payment of the aggregate Option Price for such shares. Neither
the Optionee nor any person exercising an Option in accordance with the
provisions of Section 10(b) shall have any privileges as a stockholder of the
Company with respect to any shares of stock subject to an Option granted under
the Plan until the date of issuance of a stock certificate pursuant to this
Section 8(c).
9. ADJUSTMENTS
(a) Changes in Capital Structure
Subject to Section 9(b), if the Common Stock is changed by reason of a
stock split, reverse stock split, stock dividend or recapitalization, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, the Committee shall make such adjustments in
the number and class of shares of stock with respect to which Options may be
granted under the Plan as shall be equitable and appropriate in order to make
such Options, as nearly as may be practicable, equivalent to such Options
immediately prior to such change. A corresponding adjustment changing the number
and class of shares allocated to, and the Option Price of, each Option or
portion thereof outstanding at the time of such change shall likewise be made.
Notwithstanding anything contained in the Plan to the contrary, in the case of
ISOs, no adjustment under this Section 9(a) shall be appropriate if such
adjustment (i) would constitute a modification, extension or renewal of such
ISOs within the meaning of Sections 422 and 425 of the Code, and the regulations
promulgated by the Treasury Department thereunder, or (ii) would, under Section
422 of the Code and the regulations promulgated by the Treasury Department
thereunder, be considered as the adoption of a new plan requiring stockholder
approval.
(b) Corporate Transactions
The following rules shall apply in connection with the dissolution or
liquidation of the Company, a reorganization, merger or consolidation in which
the Company is not the surviving corporation or in which the stockholders of the
Company receive
- 9 -
<PAGE>
consideration of the other party to such reorganization, merger or
consolidation, or a sale of all or substantially all of the assets of the
Company to another person or entity (each, a "Corporate Transaction"):
(i) each holder of an Option outstanding at such time shall be
given (A) written notice of such Corporate Transaction at least 20 days
prior to its proposed effective date (as specified in such notice) and (B)
an opportunity, during the period commencing with delivery of such notice
and ending 10 days prior to such proposed effective date, to exercise the
Option to the full extent to which such Option would have been exercisable
by the Optionee at the expiration of such 20-day period; provided, however,
that upon the occurrence of a Corporate Transaction, all Options granted
under the Plan and not so exercised shall automatically terminate; and
(ii) notwithstanding anything contained in the Plan to the
contrary, Section 9(b)(i) shall not be applicable if provision shall be
made in connection with such Corporate Transaction for the assumption of
outstanding Options by, or the substitution for such Options of new options
covering the stock of, the surviving, successor or purchasing corporation,
or a parent or subsidiary thereof, with appropriate adjustments as to the
number, kind and option prices of shares subject to such options; provided,
however, that in the case of ISOs, the Board shall, to the extent not
inconsistent with the best interests of the Company or its Subsidiaries
(such best interests to be determined in good faith by the Board in its
sole discretion), use its best efforts to ensure that any such assumption
or substitution will not constitute a modification, extension or renewal of
the ISOs within the meaning of Section 425(h) of the Code and the
regulations promulgated by the Treasury Department thereunder.
(c) Special Rules
The following rules shall apply in connection with Section 9(a) and (b)
above:
(i) no fractional shares shall be issued as a result of any such
adjustment, and any fractional shares resulting from the computations
pursuant to Section 9(a) or (b) shall be eliminated without consideration
from the respective Options;
(ii) no adjustment shall be made for cash dividends or the
issuance to stockholders of rights to subscribe for additional shares of
Common Stock or other securities;
- 10 -
<PAGE>
(iii) any adjustments referred to in Section 9(a) or (b) shall be
made by the Board or Committee (as the case may be) in its sole discretion
and shall be conclusive and binding on all persons holding Options granted
under the Plan; and
(iv) Fair Market Value of a share of Common Stock shall be deemed
to be the price to be paid in such Corporate Transaction for each share of
Common Stock.
10. RESTRICTIONS ON OPTIONS AND OPTIONED SHARES
(a) Compliance With Securities Laws
No Options shall be granted under the Plan, and no shares of Common
Stock shall be issued and delivered upon the exercise of Options granted under
the Plan, unless and until the Company and/or the Optionee shall have complied
with all applicable Federal or state registration, listing and/or qualification
requirements and all other requirements of law or of any regulatory agencies
having jurisdiction.
The Committee in its discretion may, as a condition to the exercise of
any Option granted under the Plan, require an Optionee (i) to represent in
writing that the shares of Common Stock received upon exercise of an Option are
being acquired for investment and not with a view to distribution and (ii) to
make such other representations and warranties as are deemed appropriate by the
Company. Stock certificates representing shares of Common Stock acquired upon
the exercise of Options that have not been registered under the Securities Act
shall, if required by the Committee, bear the following legend and such
additional legends as may be required by the Option Agreement evidencing a
particular Option:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SHARES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES
UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
(b) Nonassignability of Option Rights
No Option granted under the Plan shall be assignable or otherwise
transferable by the Optionee except by will or by the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee. If an Optionee dies, his or her Option shall thereafter be
exercisable, during the period specified in Section 7(b)(ii) or (iii) (as the
case may be), by his or her executors or administrators to the
- 11 -
<PAGE>
full extent to which such Option was exercisable by the Optionee at the time of
his or her death.
11. EFFECTIVE DATE OF PLAN
The Plan shall become effective on the date (the "Effective Date") of
its adoption by the Board; provided, however, that no Option shall be
exercisable by an Optionee unless and until the Plan shall have been approved by
the stockholders of the Company in accordance with the provisions of its
Certificate of Incorporation and By-laws, which approval shall be obtained by a
simple majority vote of stockholders, voting either in person or by proxy, at a
duly held stockholders' meeting, or by written consent, within 12 months before
or after the adoption of the Plan by the Board.
12. EXPIRATION AND TERMINATION OF THE PLAN
Except with respect to Options then outstanding, the Plan shall expire
on the first to occur of (i) the tenth anniversary of the date on which the Plan
is approved by the stockholders of the Company and (ii) the date as of which the
Board, in its sole discretion, determines that the Plan shall terminate (the
"Expiration Date"). Any Options outstanding as of the Expiration Date shall
remain in effect until they have been exercised or terminated or have expired by
their respective terms.
13. AMENDMENT OF PLAN
The Board may at any time prior to the Expiration Date modify and amend
the Plan in any respect; provided, however, that the approval of the holders of
a majority of the votes that may be cast by all of the holders of shares of
Common Stock and preferred stock of the Company, if any, entitled to vote
(voting as a single class) shall be obtained prior to any such amendment
becoming effective if such approval is required by law or is necessary to comply
with regulations promulgated by the SEC under Section 16(b) of the 1934 Act or
with Section 422 of the Code or the regulations promulgated by the Treasury
Department thereunder.
14. CAPTIONS
The use of captions in the Plan is for convenience. The captions are
not intended to provide substantive rights.
15. DISQUALIFYING DISPOSITIONS
If Optioned Shares acquired by exercise of an ISO granted under the
Plan are disposed of within two years following the date of grant of the ISO or
one year following the issuance of the Optioned Shares to the Optionee (a
"Disqualifying Disposition"), the holder of the Optioned Shares shall,
- 12 -
<PAGE>
immediately prior to such Disqualifying Disposition, notify the Company in
writing of the date and terms of such Disqualifying Disposition and provide such
other information regarding the Disqualifying Disposition as the Company may
reasonably require.
16. WITHHOLDING TAXES
Whenever under the Plan shares of Common Stock are to be delivered by
an Optionee upon exercise of an NSO, the Company shall be entitled to require as
a condition of delivery that the Optionee remit or, in appropriate cases, agree
to remit when due, an amount sufficient to satisfy all current or estimated
future Federal, state and local withholding tax and employment tax requirements
relating thereto. At the time of a Disqualifying Disposition, the Optionee shall
remit to the Company in cash the amount of any applicable Federal, state and
local withholding taxes and employment taxes.
17. OTHER PROVISIONS
Each Option granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Committee,
in its sole discretion. Notwithstanding the foregoing, each ISO granted under
the Plan shall include those terms and conditions which are necessary to qualify
the ISO as an "incentive stock option" within the meaning of Section 422 of the
Code and the regulations thereunder and shall not include any terms or
conditions which are inconsistent therewith.
18. NUMBER AND GENDER
With respect to words used in the Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, and
vice-versa, as the context requires
19. GOVERNING LAW
The validity and construction of the Plan and the instruments
evidencing the Options granted hereunder shall be governed by the laws of the
State of Delaware.
As adopted by the Board of Directors
of BONE, MUSCLE AND JOINT, INC.
on May 6, 1996.
- 13 -
<PAGE>
===============================================================================
STOCK PURCHASE AGREEMENT
DATED AS OF
NOVEMBER 12, 1996
AMONG
BONE, MUSCLE AND JOINT, INC.
AND
THE INVESTORS IDENTIFIED HEREIN
===============================================================================
<PAGE>
BONE, MUSCLE AND JOINT, INC.
4800 N. Federal Highway, Suite 104D
Boca Raton, Florida 33431
As of November 12, 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 Series B 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 2,000,000 shares (the "Shares") of
Series B Convertible Preferred Stock, $.01 par value (the "Series B 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 Shares set forth opposite the name of such
Investor on SCHEDULE I hereto, at a purchase price of $3.00 per 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 a certificate representing that
number of Shares set forth opposite such Investor's name on SCHEDULE I
registered in the name of such Investor and dated the Closing Date. Delivery to
each Investor of the Shares to be purchased by such Investor hereunder shall be
made against receipt by the Corporation of a check payable to the
- 1 -
<PAGE>
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
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 is qualified to do business as a foreign corporation in the States
of Florida and Pennsylvania 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) 1,790,000
shares will be validly issued and outstanding, fully paid and nonassessable; and
(ii) 1,250,000 shares will be reserved for issuance to senior management
employees pursuant to the Corporation's 1996 Stock Option Plan (the "Stock
Option Plan"), of which (A) 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 May 6, 1996 (the "Employment Letter"), between the
Corporation and Dr. Nagpal; (B) 20,000 shares will be reserved for issuance to
James Hoffman, M.D. ("Hoffman"), pursuant to that certain Option Agreement dated
as of July 1, 1996 (the "Hoffman Option Agreement") between the Corporation and
Hoffman; and (C) 135,000 shares will be reserved for issuance to John Finlay
("Finlay") pursuant to that certain Option Agreement dated as of ________ __,
1996 (the "Finlay Option Agreement"), between the Corporation and Finlay; 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; (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; (iii) 2,000,001
shares will be designated Series B Preferred Stock and all of such shares will
be validly issued and outstanding, fully paid and nonassessable; and (iv)
2,000,001 shares will be designated Series B-1 Preferred Stock and all of such
shares will be reserved for issuance upon conversion of the
- 2 -
<PAGE>
Series B Preferred Stock pursuant to Section 6 of Article IV of the Amended and
Restated Certificate of Incorporation;
Except for Common Stock issuable upon conversion of shares of Series A Preferred
Stock and Series B Preferred Stock and pursuant to the Stock Option Plan, the
Employment Letter, the Hoffman Option Agreement and the Finlay Option Agreement
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 Amended and Restated 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
Amended and Restated 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 Consents or Approvals Required. Except for the filing of any notice
which may be required under applicable Federal or state securities law (which,
if required, has been or shall be filed on a timely basis as may be so
required), no authorization, consent, approval or other order of, or declaration
to or filing with, any governmental agency or body or
- 3 -
<PAGE>
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 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 Financial Information. Attached hereto as EXHIBIT A is a copy of
the unaudited balance sheet of the Corporation as of September 30, 1996, and the
related unaudited income statement for the five-month period then ended,
prepared by the Corporation.
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 applicable to such Investor or its properties or assets or (b)
- 4 -
<PAGE>
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 Series B
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
- 5 -
<PAGE>
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 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 Filing of Amended and Restated Certificate of Incorporation. An
Amended and Restated Certificate of Incorporation in the form of EXHIBIT B
attached hereto setting forth the designations and preferences of the Common
Stock and Preferred 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.
4.5 Amended and Restated Stockholders Agreement. The Corporation and
each of the other Investors shall have executed and delivered an amended and
restated stockholders agreement (the "Amended and Restated Stockholders
Agreement") substantially in the form of EXHIBIT C attached hereto.
4.6 Amended and Restated Registration Rights Agreement. The Corporation
and each of the other Investors shall have executed and delivered an amended and
restated registration rights agreement (the "Amended and Restated Registration
Rights
- 6 -
<PAGE>
Agreement") substantially in the form of Exhibit D attached hereto.
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 Amended and Restated Stockholders Agreement. The Amended and
Restated Stockholders Agreement shall have been executed and delivered by the
Corporation and each of the Investors.
5.4 Amended and Restated Registration Rights Agreement. The Amended and
Restated 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 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,
- 7 -
<PAGE>
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 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
- 8 -
<PAGE>
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.
6.3 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
or Preferred 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 NOVEMBER 12, 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 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
- 9 -
<PAGE>
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
or Preferred 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 legend set forth in
Section 6.2(b) and not containing any other reference to the restrictions
imposed by this Section 6.2.
- 10 -
<PAGE>
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 amo unt
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.
4800 N. Federal Highway
Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D.
President
Telecopier: (407) 391-1389
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 (iii) in the case of mailing,
on the third business day following that on which the piece of mail containing
such communication is
- 11 -
<PAGE>
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 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 BIOINVESTMENTS III, L.P.
By: DELPHI MANAGEMENT
PARTNERS III, L.L.C.,
its General Partner
By:__________________________
Name:
Title:
_____________________________
Naresh Nagpal, M.D.
<PAGE>
<TABLE>
Schedule I
----------
<CAPTION>
Aggregate
Investor Number of Shares Purchase Price
<S> <C> <C>
Naresh Nagpal, M.D.
2378 N.W. 60th Street
Boca Raton, Florida 33496
Telephone: (407) 998-2351
Facsimile: (407) 998-4649 666,667 $2,000,001
Delphi Ventures III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Telephone: (415) 854-9650
Facsimile: (415) 854-2961 654,877 $1,964,631
Delphi BioInvestments III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Telephone: (415) 854-9650
Facsimile: (415) 854-2961 11,790 $35,370
Oak Investment
Partners VI, L.P.
One Gorham Island
Westport, Connecticut 06880
Telephone: (203) 226-8346
Facsimile: (203) 227-0372 651,467 $1,954,401
Oak VI Affiliates Fund, Limited
Partnership
One Gorham Island
Westport, Connecticut 06880
Facsimile: (203) 227-0372 15,200 $45,600
TOTAL 2,000,001 $6,000,003
========= ==========
</TABLE>
<PAGE>
===============================================================================
STOCK PURCHASE AGREEMENT
DATED AS OF
JANUARY 29, 1997
AMONG
BONE, MUSCLE AND JOINT, INC.
AND
THE INVESTORS IDENTIFIED HEREIN
===============================================================================
<PAGE>
BONE, MUSCLE AND JOINT, INC.
4800 N. Federal Highway, Suite 104D
Boca Raton, Florida 33431
As of January 29, 1997
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 Series C 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 185,000 shares (the "Shares") of the
Series C Convertible Preferred Stock, $.01 par value (the "Series C 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 Shares set forth opposite the name of such
Investor on SCHEDULE I hereto, at a purchase price of $3.00 per Share.
1.3 The Closing. The closing (the "Closing") hereunder with respect to
the purchase of 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 a certificate representing that
number of Shares set forth opposite such Investor's name on SCHEDULE I
registered in the name of such
- 1 -
<PAGE>
Investor and dated the Closing Date. Delivery to each Investor of the
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 Shares being purchased by such
Investor (such amount being determined by multiplying (i) the number of Shares
being purchased by such Investor by (ii) $3.00).
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 to carry out
the transactions contemplated hereby.
2.2 Capitalization. The authorized capital stock of the Corporation
immediately upon consummation of the transactions contemplated hereby shall
consist of:
(a) 15,000,000 shares of Common Stock, $.001 par value (the "Common
Stock"), of which (i) 5,790,000 shares will be validly issued and outstanding,
fully paid and nonassessable; and (ii) 1,250,000 shares will be reserved for
issuance to senior management employees pursuant to the Corporation's 1996 Stock
Option Plan (the "Stock Option Plan"); and
(b) 6,685,000 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; (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; (iii) 2,000,001
shares will be designated Series B Preferred Stock and all of such shares will
be validly issued and outstanding, fully paid and nonassessable; (iv) 2,000,001
shares will be designated Series B-1 Preferred Stock and all of such shares will
be reserved for issuance upon conversion of the Series B Preferred Stock
pursuant to Section 6 of Article IV of the Amended and Restated Certificate of
Incorporation; and (v) 185,000 shares will be designated Series C Preferred
Stock and all of such shares will be validly issued and outstanding, fully paid
and nonassessable.
Except for Common Stock issuable upon conversion of shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock and pursuant to the
Stock Option Plan, and upon the consummation of the transactions contemplated
hereby, there
- 2 -
<PAGE>
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 Amended and Restated 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 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 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 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
Amended and Restated Certificate of Incorporation or By-laws of the Corporation
or any material 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 Consents or Approvals Required. Except for (a) the filing of any
notice which may be required under applicable Federal or state securities law
(which, if required, has been or shall be filed on a timely basis as may be so
required) and (b) the approval of certain stockholders of the Company (which
approval has been obtained), 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.
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 Shares will be validly issued and outstanding, fully paid
and
- 3 -
<PAGE>
nonassessable and will not be subject to preemptive or other similar rights
of the stockholders of the Corporation or others.
2.6 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.
2.7 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 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 has been duly executed and delivered by
such Investor and constitutes the valid and binding obligation 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 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 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 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 such
Investor or any of such Investor's 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
- 4 -
<PAGE>
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 Amended and Restated Registration Rights
Agreement dated as of November 12, 1996 among the Corporation and the Investors
named therein and (iv) that the certificate(s) evidencing the shares of Series C
Preferred Stock will be imprinted with legends that prohibit 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
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.
- 5 -
<PAGE>
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 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 Filing of Amended and Restated Certificate of Incorporation. An
Amended and Restated Certificate of Incorporation in the form of EXHIBIT A
attached hereto setting forth the designations and preferences of the Series C
Preferred 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.
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 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.
- 6 -
<PAGE>
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 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.
- 7 -
<PAGE>
(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) 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 Legends. Each certificate for shares of Preferred
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 legends 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 JANUARY 29, 1997, 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 REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF BONE, MUSCLE AND JOINT, INC."
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE
HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN RESPECT
OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THE SECOND AMENDED AND RESTATED STOCKHOLDERS
AGREEMENT DATED AS OF NOVEMBER 22, 1996, AMONG BONE, MUSCLE AND
JOINT, INC. AND THE HOLDERS OF THE OUTSTANDING CAPITAL STOCK OF
SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO
COST BY WRITTEN 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 such Investor 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 Preferred
Stock until such opinion of counsel has been given
- 9 -
<PAGE>
(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 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. Each of the Corporation, on the one hand, and
the Investors, on the other hand, shall bear their own fees and expenses
incurred in connection with the preparation for and consummation of the
transactions contemplated by this Agreement.
SECTION 8. 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.
4800 N. Federal Highway
Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D.
President
Telecopier: (407) 391-1389
- 10 -
<PAGE>
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 (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 8, "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 9. 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 10. 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 Shares.
SECTION 11. 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 12. 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 13. 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.
- 11 -
<PAGE>
SECTION 14. Relationship among Investors. No Investor shall have any
responsibility for any representations, warranties, acts, or omissions of any
other Investor. Each Investor is entering into this Agreement for and on behalf
of such Investor only, and no partnership, joint venture, unincorporated
association, or any other legal entity is intended to be formed by or among the
Investors 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 Corporation
and each of the respective Investors for all purposes other than Section 10
hereof.
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:
____________________________________
David M. Auerbach, M.D.
The Richard Ferkel and Michelle Ferkel
Revocable Trust dated May 14, 1990
By:_________________________________
Richard D. Ferkel, M.D.,
co-trustee
By:_________________________________
Michelle Ferkel, co-trustee
____________________________________
James M. Fox, M.D.
Smith Barney, Inc., Custodian for
Marc Friedman, M.D. IRA
#196-62356-1-4-121 rollover
By:_________________________________
Marc J. Friedman, M.D.
<PAGE>
The Hanker Living Trust
By:_________________________________
Gregory J. Hanker, co-trustee
By:_________________________________
Mary Pat Hanker, co-trustee
Smith Barney, Inc., Custodian for
Herbert D. Huddleston, M.D. IRA
#571-62777-1-9-154 rollover
By:_________________________________
Herbert Dennis Huddleston, M.D.
____________________________________
Jonathan S. Jaivin, M.D.
Karzel Family Trust
By:_________________________________
Ronald P. Karzel, M.D.,
co-trustee
By:_________________________________
Sarah Karzel, co-trustee
____________________________________
Trevor P. Lynch, M.D.
____________________________________
Patricia C. McKeever, M.D.
<PAGE>
Todd D. Moldawer and Nancy P. Moldawer,
Trustees of the Moldawer Family Trust
dated May 6, 1990
By:_________________________________
Todd D. Moldawer, M.D.,
co-trustee
By:_________________________________
Nancy P. Moldawer, co-trustee
____________________________________
Todd J. Molnar, M.D.
Oppenheimer & Co., Inc., Custodian for
Steven A. Schopler IRA rollover
A/C #324-14840-17
By:_________________________________
Steven A. Schopler, M.D.
Stephen J. Snyder and Lee Ann Snyder
Family Trust
By:_________________________________
Stephen J. Snyder, M.D.,
co-trustee
By:_________________________________
Lee Ann Snyder, co-trustee
____________________________________
Glenn Cozen
SAPHIER AND HELLER LAW CORPORATION
RETIREMENT TRUST
By:_________________________________
Michael D. Saphier, co-trustee
By:_________________________________
Dona L. Heller, co-trustee
<PAGE>
<TABLE>
Schedule I
----------
<CAPTION>
Aggregate
Investor Number of Shares Purchase Price
<S> <C> <C>
David M. Auerbach, M.D.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 6,000 $18,000
The Richard Ferkel and Michelle
Ferkel Revocable Trust
dated May 14, 1990
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
James M. Fox, M.D.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
Smith Barney, Inc., Custodian for
Marc Friedman, M.D. IRA
#196-62356-1-4-121 rollover
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
The Hanker Living Trust
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
Smith Barney, Inc., Custodian for
Herbert D. Huddleston, M.D.
IRA #571-62777-1-9-154 rollover
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
<PAGE>
Aggregate
Investor Number of Shares Purchase Price
Jonathan S. Jaivin, M.D.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 1,667 5,001
Karzel Family Trust
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
Trevor P. Lynch
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 3,333 9,999
Patricia C. McKeever, M.D.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 5,000 15,000
Todd D. Moldawer and Nancy P.
Moldawer, Trustees of the Moldawer
Family Trust dated May 6, 1990,
as amended
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
Todd J. Molnar, M.D.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 8,333 24,999
Oppenheimer & Co., Inc., Custodian
for Steven A. Schopler IRA rollover
A/C #324-14840-17
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 11,333 33,999
<PAGE>
Aggregate
Investor Number of Shares Purchase Price
Stephen J. Snyder and Lee Ann
Snyder Family Trust
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 16,375 49,125
Glenn Cozen
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680 8,333 24,999
Saphier and Heller Law
Corporation Retirement Trust
1900 Avenue of the Stars
Suite 1900
Los Angeles, California 90067-4410
Attention: Michael D. Saphier and
Dona L. Heller
Telecopier: (310) 286-7821 8,333 24,999
</TABLE>
<PAGE>
===============================================================================
STOCK PURCHASE AGREEMENT
DATED AS OF
MARCH 12, 1997
AMONG
BONE, MUSCLE AND JOINT, INC.
AND
THE INVESTORS IDENTIFIED HEREIN
===============================================================================
<PAGE>
BONE, MUSCLE AND JOINT, INC.
4800 N. Federal Highway, Suite 104D
Boca Raton, Florida 33431
As of March 12, 1997
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 Series C 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 66,667 shares (the "Shares") of the
Series C Convertible Preferred Stock, $.01 par value (the "Series C 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 Shares set forth opposite the name of such
Investor on SCHEDULE I hereto, at a purchase price of $3.00 per Share.
1.3 The Closing. The closing (the "Closing") hereunder with respect to
the purchase of 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 a certificate representing that
number of Shares set forth opposite such Investor's name on SCHEDULE I
registered in the name of such
- 1 -
<PAGE>
Investor and dated the Closing Date. Delivery to each Investor of the 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 Shares being purchased by such
Investor (such amount being determined by multiplying (i) the number of Shares
being purchased by the Investor by (ii) $3.00).
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 to carry out
the transactions contemplated hereby.
2.2 Capitalization. The authorized capital stock of the Corporation
immediately upon consummation of the transactions contemplated hereby shall
consist of:
(a) 15,000,000 shares of Common Stock, $.001 par value (the "Common
Stock"), of which (i) 6,701,501 shares will be validly issued and outstanding,
fully paid and nonassessable; and (ii) 1,250,000 shares will be reserved for
issuance to senior management employees pursuant to the Corporation's 1996 Stock
Option Plan (the "Stock Option Plan"); and
(b) 6,685,000 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; (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; (iii) 2,000,001
shares will be designated Series B Preferred Stock and all of such shares will
be validly issued and outstanding, fully paid and nonassessable; (iv) 2,000,001
shares will be designated Series B-1 Preferred Stock and all of such shares will
be reserved for issuance upon conversion of the Series B Preferred Stock
pursuant to Section 6 of Article IV of the Amended and Restated Certificate of
Incorporation; and (v) 254,999 shares will be designated Series C Preferred
Stock and all of such shares will be validly issued and outstanding, fully paid
and nonassessable.
Except for Common Stock and Preferred Stock issuable upon conversion of shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock and pursuant to the Stock Option Plan, and upon the consummation of the
transactions
- 2 -
<PAGE>
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 Amended and Restated
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
constitute 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
Amended and Restated Certificate of Incorporation or By-laws of the Corporation
or any material 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 Consents or Approvals Required. Except for (a) the filing of any
notice which may be required under applicable Federal or state securities law
(which, if required, has been or shall be filed on a timely basis as may be so
required) and (b) the approval of certain stockholders of the Company (which
approval has been obtained), 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.
- 3 -
<PAGE>
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 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 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.
2.7 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 obligation 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 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 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 such Investor or any of
such Investor's properties or assets may be bound or affected.
- 4 -
<PAGE>
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 Amended and Restated Registration Rights
Agreement dated as of November 12, 1996 among the Corporation and the Investors
named therein and (iv) that the certificate(s) evidencing the shares of Series C
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
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Corporation such that the
Investor is
- 5 -
<PAGE>
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 Filing of Amendment to the Amended and Restated Certificate of
Incorporation. An amendment to the Amended and Restated Certificate of
Incorporation in the form of Exhibit A attached hereto increasing the number of
authorized shares of Series C Preferred 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.
4.5 Registration Rights Agreement. The Corporation, each of the
Investors and the requisite parties thereto shall have executed and delivered an
amended and restated registration rights agreement (the "Second Amended and
Restated Registration Rights Agreement") substantially in the form of Exhibit B
attached hereto.
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.
- 6 -
<PAGE>
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 Registration Rights Agreement. The Second Amended and Restated
Registration Rights Agreement shall have been executed and delivered by the
Corporation and each of the Investors.
5.4 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 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
- 7 -
<PAGE>
(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) 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 Preferred
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
- 8 -
<PAGE>
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 MARCH 12, 1997, 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 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 such Investor 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 Preferred
Stock until such opinion of counsel has been given
- 9 -
<PAGE>
(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 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. Each of the Corporation, on the one hand, and the
Investors, on the other hand, shall bear their own fees and expenses incurred in
connection with the preparation for and consummation of the transactions
contemplated by this Agreement.
SECTION 8. 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:
- 10 -
<PAGE>
(a) if to the Corporation, to:
Bone, Muscle and Joint, Inc.
4800 N. Federal Highway
Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D.
President
Telecopier: (407) 391-1389
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 (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 8, "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 9. 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 10. 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 Shares.
SECTION 11. 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.
- 11 -
<PAGE>
SECTION 12. 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 13. 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 14. 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:
CGJR HEALTH CARE SERVICES PRIVATE
EQUITIES, L.P.
By: CGJR Capital Management, Inc.
its General Partner
By:_________________________________
Christopher Grant, Jr.
President
CGJR II, L.P.
By: CGJR Capital Management, Inc.
its General Partner
By:_________________________________
Christopher Grant, Jr.
President
CGJR/MF III, L.P.
By: CGJR Capital Management, Inc.
its General Partner
By:_________________________________
Christopher Grant, Jr.
President
<PAGE>
<TABLE>
Schedule I
----------
<CAPTION>
Aggregate
Investor Number of Shares Purchase Price
<S> <C> <C>
CGJR Health Care Services Private
Equities, L.P.
104 Woodmont Boulevard
Suite 410
Nashville, Tennessee 37205
Telecopier: (615) 297-6730 44,140 $132,420
CGJR II, L.P.
104 Woodmont Boulevard
Suite 410
Nashville, Tennessee 37205
Telecopier: (615) 297-6730 14,367 43,101
CGJR/MF III, L.P.
104 Woodmont Boulevard
Suite 410
Nashville, Tennessee 37205
Telecopier: (615) 297-6730 8,160 24,480
Total 66,667 $200,001
</TABLE>
<PAGE>
$7,000,000.00
LOAN AND SECURITY AGREEMENT
by and between
BONE, MUSCLE & JOINT, INC.
(the "Borrower")
and
HCFP FUNDING, INC.
(the "Lender")
March 28, 1997
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of this
28th day of March, 1997, by and between BONE, MUSCLE & JOINT, INC., a Delaware
corporation (the "Borrower"), and HCFP FUNDING, INC., a Delaware corporation
("Lender").
Recitals
A. Borrower desires to establish certain financing arrangements with
and borrow funds from Lender, and Lender is willing to establish such
arrangements for and make loans and extensions of credit to Borrower with
respect to the medical practice of Southern California Orthopedic Institute
Medical Group (the "Medical Group") that is managed by Borrower pursuant to the
Management Services Agreement dated November 22, 1996, as amended, on the terms
and conditions set forth below.
B. The parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and covenants
contained in this Agreement, and for other consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
Section 1.1. Account. "Account" means any right to payment for goods
sold or leased or services rendered, whether or not evidenced by an instrument
or chattel paper, and whether or not earned by performance.
Section 1.2. Account Debtor. "Account Debtor" means any Person
obligated on any Account of Borrower, including without limitation, any Insurer
and any Medicaid/Medicare Account Debtor.
Section 1.3. Affiliate. "Affiliate" means, with respect to a specified
Person, any Person directly or indirectly controlling, controlled by, or under
common control with the specified Person, including without limitation their
stockholders and any Affiliates thereof. A Person shall be deemed to control a
corporation or other entity if the Person possesses, directly or
- 1 -
<PAGE>
indirectly, at least 50.1% of the outstanding voting securities or other
ownership interests of such corporation or other entity.
Section 1.4. Agreement. "Agreement" means this Loan and Security
Agreement, as it may be amended or supplemented from time to time.
Section 1.5. Base Rate. "Base Rate" means a rate of interest equal to
one and three quarters percent (1.75%) above the "Prime Rate of Interest".
Section 1.6. Borrowed Money. "Borrowed Money" means any obligation to
repay money, any indebtedness evidenced by notes, bonds, debentures or similar
obligations, any obligation under a conditional sale or other title retention
agreement and the net aggregate rentals under any lease which under GAAP would
be capitalized on the books of the Borrower or which is the substantial
equivalent of the financing of the property so leased.
Section 1.7. Borrower. "Borrower" has the meaning set forth in the
Preamble.
Section 1.8. Borrowing Base. "Borrowing Base" has the meaning set forth
in Section 2.1(d).
Section 1.9. Business Day. "Business Day" means any day on which
financial institutions are open for business in the State of Maryland, excluding
Saturdays and Sundays.
Section 1.10. Closing; Closing Date. "Closing" and "Closing Date" have
the meanings set forth in Section 5.3.
Section 1.11. Collateral. "Collateral" has the meaning set forth in
Section 3.1.
Section 1.12. Commitment Fee. "Commitment Fee" has the meaning set
forth in Section 2.4(a).
Section 1.13. Concentration Account. "Concentration Account" has the
meaning set forth in Section 2.3.
Section 1.14. Controlled Group. "Controlled Group" means a "controlled
group" within the meaning of Section 4001(b) of ERISA.
Section 1.15. INTENTIONALLY DELETED
Section 1.16. Default Rate. "Default Rate" means a rate per annum equal
to three percent (3%) above the then applicable Base Rate.
Section 1.17. ERISA. "ERISA" has the meaning set forth in Section 4.12.
- 2 -
<PAGE>
Section 1.18. Event of Default. "Event of Default" and "Events of
Default" have the meanings set forth in Section 8.1.
Section 1.19. GAAP. "GAAP" means generally accepted accounting
principles applied in a matter consistent with the financial statements referred
to in Section 4.7.
Section 1.20. Governmental Authority. "Governmental Authority" means
and includes any federal, state, District of Columbia, county, municipal, or
other government and any department, commission, board, bureau, agency or
instrumentality thereof, whether domestic or foreign.
Section 1.21. Hazardous Material. "Hazardous Material" means any
substances defined or designated as hazardous or toxic waste, hazardous or toxic
material, hazardous or toxic substance, or similar term, by any environmental
statute, rule or regulation or any Governmental Authority.
Section 1.22. Highest Lawful Rate. "Highest Lawful Rate" means the
maximum lawful rate of interest referred to in Section 2.7 that may accrue
pursuant to this Agreement.
Section 1.23. Insurer. A Person that insures a Patient against certain
of the costs incurred in the receipt by such Patient of Medical Services, or
that has an agreement with the Medical Group to compensate the Medical Group for
providing services to a Patient.
Section 1.24. Lender. "Lender" has the meaning set forth in the Preamble.
Section 1.25. Loan. "Loan" has the meaning set forth in Section 2.1(a).
Section 1.26. Loan Documents. "Loan Documents" means and includes this
Agreement, the Note, and each and every other document now or hereafter
delivered by or on behalf of the Borrower in connection with the transactions
evidenced by this Agreement, as any of them may be amended, modified, or
supplemented from time to time.
Section 1.27. Loan Management Fee. "Loan Management Fee" has the
meaning set forth in Section 2.4(c).
Section 1.28. INTENTIONALLY DELETED
Section 1.29. INTENTIONALLY DELETED
Section 1.30. Maximum Loan Amount. "Maximum Loan Amount" has the meaning
set forth in Section 2.1(a).
- 3 -
<PAGE>
Section 1.31. Medicaid/Medicare Account Debtor. "Medicaid/ Medicare
Account Debtor" means any Account Debtor which is (i) the United States of
America acting under the Medicaid/Medicare program established pursuant to the
Social Security Act, (ii) any state or the District of Columbia acting pursuant
to a health plan adopted pursuant to Title XIX of the Social Security Act or
(iii) any agent, carrier, administrator or intermediary for any of the
foregoing.
Section 1.31A. Medical Group. "Medical Group" has the meaning set forth
in the Recitals to this Agreement.
Section 1.32. Medical Services. Medical and health care services
provided to a Patient, including, but not limited to, medical and health care
services provided to a Patient and performed by the Medical Group which are
covered by a policy of insurance issued by an Insurer, and includes physician
services, nurse and therapist services, dental services, hospital services,
skilled nursing facility services, comprehensive outpatient rehabilitation
services, home health care services, residential and out-patient behavioral
healthcare services, and medicine or health care equipment provided by the
Medical Group to a Patient for a necessary or specifically requested valid and
proper medical or health purpose.
Section 1.33. Note. "Note" has the meaning set forth in Section 2.1(c).
Section 1.34. Obligations. "Obligations" has the meaning set forth in
Section 3.1.
Section 1.35. Patient. Any Person receiving Medical Services from the
Medical Group and all Persons legally liable to pay the Medical Group for such
Medical Services other than Insurers.
Section 1.36. Permitted Liens. "Permitted Liens" means: (a) liens for
taxes not delinquent, or which are being contested in good faith and by
appropriate proceedings which suspend the collection thereof and in respect of
which adequate reserves have been made (provided that such proceedings do not,
in Lender's reasonable discretion, involve any substantial risk of the sale,
loss or forfeiture of such property or assets or any interest therein); (b)
deposits or pledges to secure obligations under workmen's compensation, social
security or similar laws, or under unemployment insurance; (c) deposits or
pledges to secure bids, tenders, contracts (other than contracts for the payment
of money), leases, statutory obligations, surety and appeal bonds and other
obligations of like nature arising in the ordinary course of business; (d)
mechanic's, workmen's, materialmen's or other like liens arising in the ordinary
course of business with respect to obligations which are not due, or which are
being contested in good faith by appropriate proceedings which suspend the
collection thereof and in respect of which adequate reserves have been made
(provided that such proceedings do not, in Lender's reasonable discretion,
involve any substantial risk of the sale, loss or forfeiture of such property or
assets or any interest therein); (e) liens and encumbrances in favor of Lender;
(f) liens granted in connection with the lease or purchase of property or assets
financed by borrowings permitted by
- 4 -
<PAGE>
Section 7.1 (provided, however, that no such borrowing permitted by Section 7.1
may be secured by liens on any of the Collateral); (g) judgment liens not
affecting the Collateral to the extent the entry of such judgments does not
constitute an Event of Default under the terms of this Agreement; (h) statutory
landlord's liens not affecting the Collateral under leases to which the Borrower
or any of its Subsidiaries is a party; (i) zoning restrictions, easements,
rights of way, licenses and restrictions on the use of real property or minor
irregularities in title thereto which do not materially impair the use or value
of any such real property; (j) liens not affecting the Collateral securing
obligations under capital leases to the extent such capital leases are permitted
by the provisions of this Agreement and (k) liens set forth on Schedule 1.36.
Section 1.37. Person. "Person" means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
Section 1.38. Plan. "Plan" has the meaning set forth in Section 4.12.
Section 1.39. Premises. "Premises" has the meaning set forth in Section
4.14.
Section 1.40. Prime Rate of Interest. "Prime Rate of Interest" means
that rate of interest designated by Fleet National Bank of Connecticut, N.A., or
any successor thereto, as the same may from time to time fluctuate.
Section 1.41. Prohibited Transaction. "Prohibited Transaction" means a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975(c)(1) of the Internal Revenue Code.
Section 1.42. Qualified Account. "Qualified Account" means an Account
of Borrower generated in the ordinary course of the Medical Group 's business
from the sale of goods or rendition of Medical Services which Lender, in its
reasonable judgment, deems to be a Qualified Account. Without limiting the
generality of the foregoing, no Account shall be a Qualified Account if: (a) the
Account or any portion thereof is payable by an individual beneficiary,
recipient or subscriber individually and not to Borrower by a Medicaid/Medicare
Account Debtor or an Insurer; (b) the Account remains unpaid more than one
hundred fifty (150) days past the invoice date; (c) the Account is subject to
any defense, set-off, counterclaim, deduction, discount, credit, chargeback,
freight claim, allowance, or adjustment of any kind (but only to the extent
thereof); (d) any part of any goods the sale of which has given rise to the
Account has been returned, rejected, lost, or damaged prior to delivery; (e) if
the Account arises from the sale of goods by the Medical Group, such sale was
not an absolute sale or on consignment or on approval or on a sale-or-return
basis or subject to any other repurchase or return agreement, or such goods have
not been shipped to the Account Debtor; (f) if the Account arises from the
performance of services, such services have not actually been performed or were
undertaken in violation of any law; (g) the Account is subject to a lien other
than a Permitted Lien; (h) the Borrower knows or should have known of the
bankruptcy, receivership, reorganization, or
- 5 -
<PAGE>
insolvency of the Account Debtor obligated on the Account; (i) the Account is
evidenced by chattel paper or an instrument of any kind, or has been reduced to
judgment; (j) the Account is an Account of an Account Debtor domiciled outside
the United States; (k) the Account Debtor is an Affiliate or subsidiary of
Borrower; (l) more than twenty percent (20%) of the aggregate balance of all
Accounts owing from the Account Debtor obligated on the Account are outstanding
more than one hundred eighty (180) days past their invoice date; (m) fifty
percent (50%) or more of the aggregate unpaid Accounts from any individual
Account Debtor are not deemed Qualified Accounts hereunder; (n) the total unpaid
Accounts of the Account Debtor, except for a Medicaid/Medicare Account Debtor,
exceed thirty percent (30%) of the net amount of all Qualified Accounts
(including Medicaid/Medicare Account Debtors) and such Account Debtor (if an
Insurer) has a Best's rating lower than A; (o) any covenant, representation or
warranty contained in the Loan Documents with respect to such Account has been
breached; or (p) the Account fails to meet such other specifications and
requirements which may from time to time be established by Lender in its
reasonable credit judgment.
Section 1.43. Reportable Event. "Reportable Event" means a "reportable
event" as defined in Section 4043(b) of ERISA.
Section 1.44. Revolving Credit Loan. "Revolving Credit Loan" has the
meaning set forth in Section 2.1(b).
Section 1.45. Term. "Term" has the meaning set forth in Section 2.8.
ARTICLE II
LOAN
Section 2.1. Terms.
(a) The maximum aggregate principal amount of credit extended by
Lender to Borrower hereunder (the "Loan") that will be outstanding at any time
is Seven Million and No/100 Dollars ($7,000,000.00) (the "Maximum Loan Amount").
(b) The Loan shall be in the nature of a revolving line of credit,
and shall include sums advanced and other credit extended by Lender to or for
the benefit of the Borrower from time to time under this Article II (each a
"Revolving Credit Loan") up to the Maximum Loan Amount depending upon the
availability in the Borrowing Base, the requests of Borrower pursuant to the
terms and conditions of Section 2.2 below, and on such other basis as Lender may
reasonably determine. The outstanding principal balance of the Loan may
fluctuate from time to time, be reduced by repayments made by Borrower (which
may be made without penalty or premium), and may be increased or reborrowed by
future Revolving Credit Loans, advances and other extensions of credit to or for
the benefit of Borrower, and shall be due and payable in full upon the
expiration of the Term. For purposes of this Agreement, any determination as to
- 6 -
<PAGE>
whether there is ability within the Borrowing Base for advances or extensions of
credit shall be made by Lender in its reasonable discretion and is final and
binding upon Borrower absent manifest error.
(c) At Closing, Borrower shall execute and deliver to Lender a
promissory note evidencing the Borrower's unconditional obligation to repay
Lender for Revolving Credit Loans, advances, and other extensions of credit made
under the Loan, in the form of Exhibit A to this Agreement (the "Note"), dated
the date hereof, payable to the order of Lender in accordance with the terms
thereof. The Note shall bear interest from the date thereof until repaid, with
interest payable monthly in arrears on the first Business Day of each month, at
a rate per annum (on the basis of the actual number of days elapsed over a year
of 360 days) equal to the Base Rate, provided that after the occurrence and
during the continuation of an Event of Default such rate shall be equal to the
Default Rate. Each Revolving Credit Loan, advance and other extension of credit
shall be deemed evidenced by the Note, which is deemed incorporated by reference
herein and made a part hereof.
(d) Subject to the terms and conditions of this Agreement, advances
under the Loan shall be made against a borrowing base equal to eighty percent
(80%) of Qualified Accounts due and owing from any Medicaid/Medicare, Insurer or
other Account Debtor (the "Borrowing Base").
Section 2.2. Loan Administration. Borrowing under the Loan shall be as
follows:
(a) A request for a Revolving Credit Loan shall be made, or shall
be deemed to be made, in the following manner: (i) Borrower may give Lender
notice of its intention to borrow, in which notice Borrower shall specify the
amount of the proposed borrowing and the proposed borrowing date, not later than
2:00 p.m. Eastern time one (1) Business Day prior to the proposed borrowing
date; provided, however, that no such request may be made at a time when there
exists an Event of Default; and (ii) the becoming due of any amount required to
be paid under this Agreement, whether as interest or for any other Obligation,
shall be deemed irrevocably to be a request for a Revolving Credit Loan on the
day after the due date in the amount required to pay such interest or other
Obligation if not paid on the due date thereof.
(b) Borrower hereby irrevocably authorizes Lender to disburse the
proceeds of each Revolving Credit Loan requested, or deemed to be requested, as
follows: (i) the proceeds of each Revolving Credit Loan requested under
subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank
account as may be agreed upon by Borrower or Lender from time to time or
elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds
of each Revolving Credit Loan requested under subsection 2.2(a)(ii) shall be
disbursed by Lender by way of direct payment of the relevant interest or other
Obligation.
(c) All Revolving Credit Loans, advances and other extensions of
credit to or for the benefit of Borrower shall constitute one general Obligation
of Borrower, and shall be secured by Lender's lien upon all of the Collateral.
- 7 -
<PAGE>
(d) Lender shall enter all Revolving Credit Loans as debits to a
loan account in the name of Borrower and shall also record in said loan account
all payments, prepayments and repayments made by Borrower on any Obligations and
all proceeds of Collateral which are indefeasibly paid to Lender, and may record
therein, in accordance with customary accounting practice, other debits and
credits, including interest and all charges and expenses properly chargeable to
Borrower.
(e) Lender will account to Borrower monthly with a statement of
Revolving Credit Loans, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive upon Borrower unless Lender is notified by Borrower in writing to the
contrary within thirty (30) days of the date each accounting is mailed to
Borrower. Such notice shall be deemed an objection to those items specifically
objected to therein.
Section 2.3. Collections, Disbursements, Borrowing Availability, and
Lockbox Account. Borrower shall maintain a depository account (the "Depository
Account") with First Union National Bank of Florida (the "Depository Bank"),
subject to the provisions of this Agreement, and shall execute with the
Depository Bank a Depository Agreement in the form attached as Exhibit B, and
such other agreements related thereto as Lender may reasonably require. Borrower
shall ensure that all collections of Accounts are paid directly from Account
Debtors into a depository account in the name of the Medical Group, that
collected funds in such account are swept on a daily basis from the Medical
Group depository account to the Depository Account, and that all collected funds
paid into the Depository Account are immediately transferred into a depository
account maintained by Lender at Bank One Arizona, N.A. or First Bank, N.A., as
determined by Lender in its reasonable discretion and communicated to Borrower
(the "Concentration Account"). Lender shall apply, on a daily basis, all
collected funds transferred into the Concentration Account pursuant to this
Section 2.3 to reduce the outstanding indebtedness under the Revolving Credit
Loans. To the extent that any collections of Accounts or proceeds of other
Collateral are not sent to the Depository Account by the Medical Group but are
received by Borrower, such collections shall be held in trust for the benefit of
Lender and immediately remitted, in the form received, to the Concentration
Account immediately upon receipt by Borrower. All funds transferred from the
Concentration Account for application to Borrower's indebtedness to Lender shall
be applied to reduce the Loan balance on the date received in the Concentration
Account, but for purposes of calculating interest shall be subject to a nine (9)
Business Day clearance period. If as the result of collections of Accounts
pursuant to the terms and conditions of this Section 2.3 a credit balance exists
with respect to the Concentration Account, such credit balance shall not accrue
interest in favor of Borrower, but shall be available to Borrower at any time or
times for so long as no Event of Default exists.
- 8 -
<PAGE>
Section 2.4. Fees.
(a) At Closing, Borrower shall unconditionally pay to Lender a
commitment fee equal to five-sixths of one percent (0.8333%) of the Maximum Loan
Amount (the "Commitment Fee").
(b) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly usage fee (the "Usage Fee") equal
to one twelfth (1/12th) of one percent (0.08333%) of the average amount by which
the Maximum Loan Amount exceeds the average amount of the outstanding principal
balance of the Revolving Credit Loans during the preceding month. The Usage Fee
shall be payable monthly in arrears on the first Business Day of each successive
calendar month.
(c) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly loan management fee (the "Loan
Management Fee") equal to one tenth of one percent (0.10%) of the average amount
of the outstanding principal balance of the Revolving Credit Loans during the
preceding month. The Loan Management Fee shall be payable monthly in arrears on
the first day of each successive calendar month.
(d) Borrower shall pay to Lender all out-of-pocket audit and
appraisal fees in connection with audits and appraisals of Borrower's books and
records, which shall be due and payable on the first Business Day of the month
following the date of issuance by Lender of a request for payment thereof to
Borrower; provided, however, that except during the existence of an Event of
Default such audits and appraisals shall be limited to two per twelve month
period.
(e) Borrower shall pay to Lender, on demand, any and all fees,
costs or expenses which Lender pays to a bank or other similar institution
arising out of or in connection with (i) the forwarding to Borrower or any other
Person on behalf of Borrower, by Lender, of proceeds of Revolving Credit Loans
made by Lender to Borrower pursuant to this Agreement, and (ii) the depositing
for collection, by Lender of any check or item of payment received or delivered
to Lender on account of Obligations.
Section 2.5. Payments. Principal payable on account of Revolving Credit
Loans shall be payable by Borrower to Lender immediately upon the earliest of
(i) the receipt by Borrower or Lender of any proceeds of any of the Collateral,
to the extent of such proceeds, (ii) the occurrence of an Event of Default if
the Revolving Credit Loan and the maturity of the payment of the Obligations are
accelerated by the Lender, or (iii) the termination of this Agreement pursuant
to Section 2.8 hereof; provided, however, that if any Revolving Credit Loan made
by Lender in excess of the Borrowing Base shall exist at any time, Borrower
shall, immediately upon demand, repay such overadvance. Interest accrued on the
Revolving Credit Loans shall be due on the earliest of (i) the first Business
Day of each month (for the immediately preceding month), computed on the last
calendar day of the preceding month, (ii) the occurrence of an Event of Default
if the Revolving Credit Loan and the maturity of the payment of the Obligations
are accelerated by the Lender, or (iii) the termination of this Agreement
pursuant to Section 2.8
- 9 -
<PAGE>
hereof. Except to the extent otherwise set forth in this Agreement, all payments
of principal and of interest on the Loan, all other charges and any other
obligations of Borrower hereunder, shall be made to Lender to the Concentration
Account, in immediately available funds.
Section 2.6. Use of Proceeds. The proceeds of Lender's advances under
the Loan shall be used solely for general corporate purposes of Borrower.
Section 2.7. Interest Rate Limitation. The parties intend to conform
strictly to the applicable usury laws in effect from time to time during the
term of the Loan. Accordingly, if any transaction contemplated hereby would be
usurious under such laws, then notwithstanding any other provision hereof: (a)
the aggregate of all interest that is contracted for, charged, or received under
this Agreement or under any other Loan Document shall not exceed the maximum
amount of interest allowed by applicable law (the "Highest Lawful Rate"), and
any excess shall be promptly credited to Borrower by Lender (or, to the extent
that such consideration shall have been paid, such excess shall be promptly
refunded to Borrower by Lender); (b) neither Borrower nor any other Person now
or hereafter liable hereunder shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Highest Lawful Rate; and (c)
the effective rate of interest shall be reduced to the Highest Lawful Rate. All
sums paid, or agreed to be paid, to Lender for the use, forbearance, and
detention of the debt of Borrower to Lender shall, to the extent permitted by
applicable law, be allocated throughout the full term of the Note until payment
is made in full so that the actual rate of interest does not exceed the Highest
Lawful Rate in effect at any particular time during the full term thereof. If at
any time the rate of interest under the Note exceeds the Highest Lawful Rate,
the rate of interest to accrue pursuant to this Agreement shall be limited,
notwithstanding anything to the contrary herein, to the Highest Lawful Rate, but
any subsequent reductions in the Base Rate shall not reduce the interest to
accrue pursuant to this Agreement below the Highest Lawful Rate until the total
amount of interest accrued equals the amount of interest that would have accrued
if a varying rate per annum equal to the interest rate under the Note had at all
times been in effect.
Section 2.8. Term.
(a) Subject to Lender's right to cease making Revolving Credit
Loans to Borrower upon or after any Event of Default, this Agreement shall be in
effect for a period of two (2) years from the Closing Date, unless terminated as
provided in this Section 2.8 (the "Term"), and this Agreement shall be renewed
for one-year periods thereafter upon the mutual written agreement of the
parties; provided that without limiting the generality of the foregoing,
Borrower shall have the right to request, and Lender shall consider in good
faith, the renewal during the period commencing 14 months prior to the
expiration of the Term.
(b) Notwithstanding anything herein to the contrary, Lender may
terminate this Agreement without notice upon or after the occurrence and during
the continuation of an Event of Default.
- 10 -
<PAGE>
(c) Upon at least five (5) days prior written notice to Lender,
Borrower may terminate this Agreement, provided that, at the effective date of
such termination, Borrower shall pay to Lender (in addition to the then
outstanding principal, accrued interest and other Obligations owing under the
terms of this Agreement and any other Loan Documents) as liquidated damages for
the loss of bargain and not as a penalty, an amount equal to (i) two percent
(2%) of the Maximum Loan Amount if the effective date of such termination by
Borrower is on or prior to the first annual anniversary of the Closing Date, and
(ii) one percent (1%) of the Maximum Loan Amount if the effective date of such
termination by Borrower is after the first annual anniversary of the Closing
Date and prior to the second annual anniversary of the Closing Date.
(d) All of the Obligations shall be immediately due and payable
upon the termination date stated in any notice of termination of this Agreement.
All undertakings, agreements, covenants, warranties, and representations, of
Borrower contained in the Loan Documents shall survive any such termination and
Lender shall retain its liens in the Collateral and all of its rights and
remedies under the Loan Documents notwithstanding such termination until
Borrower has paid the Obligations to Lender, in full, in immediately available
funds.
ARTICLE III
COLLATERAL
Section 3.1. Generally. As security for the payment of all liabilities
of Borrower to Lender under this Agreement, including without limitation: (i)
indebtedness evidenced under the Note, repayment of Revolving Credit Loans,
advances and other extensions of credit, all fees and charges owing by Borrower,
and all other liabilities and obligations of every kind or nature whatsoever of
Borrower to Lender, whether now existing or hereafter incurred, joint or
several, matured or unmatured, direct or indirect, primary or secondary, related
or unrelated, due or to become due, including but not limited to any extensions,
modifications, substitutions, increases and renewals thereof, (ii) the payment
of all amounts advanced by Lender to preserve, protect, defend, and enforce its
rights hereunder and in the following property in accordance with the terms of
this Agreement, and (iii) the payment of all expenses incurred by Lender in
connection therewith (collectively, the "Obligations"), Borrower hereby assigns
and grants to Lender a continuing first priority lien on and security interest
in, upon, and to the following property (the "Collateral"):
(a) All of Borrower's now-owned and hereafter acquired or arising
Accounts, accounts receivable and rights to payment of every kind and
description, and any contract rights, chattel paper, documents and instruments
with respect thereto;
(b) All of Borrower's now owned and hereafter acquired or arising
general intangibles of every kind and description pertaining to its Accounts,
accounts receivable and other rights to payment, including, but not limited to,
all existing and future customer lists,
- 11 -
<PAGE>
choses in action, claims, books, records, contracts, returned and unearned
insurance premiums, rights and claims under insurance policies, and computer
information, software, records, and data related to the Accounts;
(c) All of Borrower's monies and other property of every kind and
nature now or at any time or times hereafter in the possession of or under the
control of Lender or a bailee or Affiliate of Lender; and
(d) The proceeds (including, without limitation, insurance
proceeds) of all of the foregoing.
Section 3.2. Lien Documents. At Closing and thereafter as Lender deems
necessary in its reasonable discretion, Borrower shall execute and deliver to
Lender, or have executed and delivered (all in form and substance satisfactory
to Lender in its sole discretion):
(a) UCC-1 Financing statements pursuant to the Uniform Commercial
Code in effect in the jurisdiction(s) in which Borrower operates, which Lender
may file in any jurisdiction where any Collateral is or may be located and in
any other jurisdiction that Lender deems appropriate; provided that a carbon,
photographic, or other reproduction or other copy of this Agreement or of a
financing statement is sufficient as and may be filed in lieu of a financing
statement; and
(b) Any other agreements, documents, instruments, and writings
deemed reasonably necessary by Lender or as Lender may otherwise request from
time to time in its reasonable discretion to evidence, perfect, or protect
Lender's lien and security interest in the Collateral required hereunder.
- 12 -
<PAGE>
Section 3.3. Collateral Administration.
(a) All Collateral (except deposit accounts) will at all times be
kept by Borrower at its principal office(s) as set forth on Exhibit C hereto and
shall not, without prior notice to Lender, be moved therefrom.
(b) Borrower shall keep accurate and complete records of its
Accounts and all payments and collections thereon and shall submit to Lender on
such periodic basis as Lender shall reasonably request a sales and collections
report for the preceding period, in form reasonably satisfactory to Lender. In
addition, if Borrower's chief financial officer has actual knowledge that
Accounts in an aggregate face amount in excess of $50,000.00 have become
ineligible because they fall within one of the specified categories of
ineligibility set forth in the definition of Qualified Accounts or otherwise,
Borrower shall notify Lender of such occurrence on the first Business Day
following such occurrence and the Borrowing Base shall thereupon be adjusted to
reflect such occurrence. If requested by Lender upon an Event of Default,
Borrower shall execute and deliver to Lender formal written assignments of all
of its Accounts weekly or daily, which shall include all Accounts that have been
created since the date of the last assignment, together with copies of claims,
invoices or other information related thereto.
(c) Whether or not an Event of Default has occurred, any of
Lender's officers, employees or agents shall have the right, at any time or
times hereafter, in the name of Lender or any designee of Lender to verify the
validity, amount or any other matter relating to any Accounts by mail,
telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender in
an effort to facilitate and promptly conclude such verification process.
(d) To expedite collection, Borrower shall endeavor in the first
instance to make collection of its Accounts for Lender. Lender retains the right
at all times after the occurrence and during the continuation of an Event of
Default, subject to applicable law regarding Medicaid/Medicare Account Debtors,
to notify Account Debtors that Accounts have been assigned to Lender and to
collect Accounts directly in its own name and to charge the collection costs and
expenses, including attorneys' fees, to Borrower.
Section 3.4. Other Actions. In addition to the foregoing, Borrower (i)
shall, upon Lender's request, provide prompt written notice to each private
indemnity, managed care or other Insurer who either is currently an Account
Debtor or becomes an Account Debtor at any time following the date hereof that
the Lender has been granted a first priority lien and security interest in, upon
and to all Accounts applicable to such Insurer, and (ii) shall do anything
further that may be lawfully required by Lender to secure Lender and effectuate
the intentions and objects of this Agreement, including but not limited to the
execution and delivery of continuation statements, amendments to financing
statements, and any other documents required hereunder. At Lender's request,
Borrower shall also immediately deliver to Lender all items for which
- 13 -
<PAGE>
Lender must receive possession to obtain a perfected security interest. Borrower
shall, on Lender's demand, deliver to Lender all notes, certificates, and
documents of title, chattel paper, warehouse receipts, instruments, and any
other similar instruments constituting Collateral.
Section 3.5. Searches. Prior to Closing, and thereafter (as and when
requested by Lender in its reasonable discretion), Borrower shall obtain and
deliver to Lender the following documents (the results of which are to be
consistent with Borrower's representations and warranties under this Agreement),
all at its own expense:
(a) Uniform Commercial Code searches with the Secretary of State
and local filing offices of each jurisdiction where Borrower maintains its
executive offices, a place of business, or assets;
(b) Judgment, federal tax lien and corporate and partnership tax
lien searches, in each jurisdiction searched under clause (a) above; and
(c) Good standing certificates showing Borrower to be in good
standing in its state of incorporation and in each other state in which it is
doing and presently intends to do business for which qualification is required.
Section 3.6. Power of Attorney. Each of the officers of Lender is
hereby irrevocably made, constituted and appointed the true and lawful attorney
for Borrower (without requiring any of them to act as such) effective upon the
occurrence and during the continuance of an Event of Default, with full power of
substitution to do the following: (a) endorse the name of Borrower upon any and
all checks, drafts, money orders, and other instruments for the payment of money
that are payable to Borrower and constitute collections on Borrower's Accounts;
(b) execute in the name of Borrower any financing statements, schedules,
assignments, instruments, documents, and statements that Borrower is obligated
to give Lender hereunder (provided that it deliver copies of the foregoing
promptly to the Borrower); and (c) do such other and further acts and deeds in
the name of Borrower that Lender may deem necessary or desirable to enforce any
Account or other Collateral or perfect Lender's security interest or lien in any
Collateral.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lender, and shall be deemed to
represent and warrant on each day on which any Revolving Credit Loans shall be
borrowed, that:
Section 4.1. Subsidiaries. Except as set forth in Schedule 4.1,
Borrower has no subsidiaries.
- 14 -
<PAGE>
Section 4.2. Organization and Good Standing. Borrower is a corporation
duly organized, validly existing, and in good standing under the laws of its
state of incorporation, is in good standing as a foreign corporation in each
jurisdiction in which the character of the properties owned or leased by it
therein or the nature of its business makes such qualification necessary except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, condition (financial or otherwise) or operations of
the Borrower and its Subsidiaries taken as a whole or on the ability of the
Borrower to perform its obligations under the Loan Documents (a "Material
Adverse Effect"), has the corporate power and authority to own its assets and
transact the business in which it is engaged, and has obtained all material
certificates, licenses and qualifications required under all laws, regulations,
ordinances, or orders of public authorities necessary for the ownership and
operation of all of its properties and transaction of its business.
Section 4.3. Authority. Borrower has full corporate power and authority
to enter into, execute, and deliver this Agreement and to perform its
obligations hereunder, to borrow the Loan, to execute and deliver the Note, and
to incur and perform the obligations provided for in the Loan Documents, all of
which have been duly authorized by all necessary corporate action. No consent or
approval of shareholders of, or lenders to, Borrower and no consent, approval,
filing or registration with any Governmental Authority is required as a
condition to the validity of the Loan Documents or the performance by Borrower
of its obligations hereunder.
Section 4.4. Binding Agreement. This Agreement and all other Loan
Documents constitute, and the Note, when issued and delivered pursuant hereto
for value received, will constitute, the valid and legally binding obligations
of Borrower, enforceable against Borrower in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other similar laws generally affecting creditors' rights or remedies..
Section 4.5. Litigation. Except as disclosed in Schedule 4.5, there are
no actions, suits, proceedings or investigations pending or threatened, to
Borrower's knowledge, against Borrower before any court or arbitrator or before
or by any Governmental Authority which, in any one case or in the aggregate,
could reasonably be expected to have a Material Adverse Effect. Borrower is not
in default with respect to any order of any court, arbitrator, or Governmental
Authority applicable to Borrower or its properties.
Section 4.6. No Conflicts. The execution and delivery by Borrower of
this Agreement and the other Loan Documents do not, and the performance of its
obligations thereunder will not, violate, conflict with, constitute a default
under, or result in the creation of a lien or encumbrance upon the property of
Borrower under: (a) any provision of Borrower's certificate of incorporation or
bylaws, (b) any provision of any law, rule, or regulation applicable to
Borrower, or (c) any of the following: (i) any material indenture or other
material agreement or instrument to which Borrower is a party or by which
Borrower or its property is bound; or (ii) any judgment, order or decree of any
court, arbitration tribunal, or Governmental Authority having jurisdiction over
Borrower which is applicable to Borrower.
- 15 -
<PAGE>
Section 4.7. Financial Condition. The financial statements of the
Borrower as of November 30, 1996, certified by the chief financial officer of
the Borrower, which have been delivered to Lender, fairly present in all
material respects the financial condition of the Borrower and the results of its
operations and changes in financial condition as of the dates and for the
periods referred to, and have been prepared in accordance with GAAP (subject to
year-end audit adjustments and the absence of footnote disclosure). There are no
material unrealized or anticipated liabilities, direct or indirect, fixed or
contingent, of the Borrower as of the dates of such financial statements which
are not reflected therein or in the notes thereto. There has been no material
adverse change in the business, properties, condition (financial or otherwise)
or operations of the Borrower since December 31, 1996. The Borrower's fiscal
year ends on December 31. The federal tax identification number of Borrower is
65-0676079.
Section 4.8. No Default. Borrower is not in default under or with
respect to any obligation which would cause a Material Adverse Effect. No Event
of Default or event which, with the giving of notice or lapse of time, or both,
could become an Event of Default, has occurred and is continuing.
Section 4.9. Title to Properties. Borrower has good and marketable
title to its properties and assets, including the Collateral and the properties
and assets reflected in the financial statements described in Section 4.7,
subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other
than Permitted Liens. Borrower has not agreed or consented to cause any of its
properties or assets whether owned now or hereafter acquired to be subject in
the future (upon the happening of a contingency or otherwise) to any lien,
mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.
Section 4.10. Taxes. Borrower has filed, or has obtained extensions for
the filing of, all federal, state and other tax returns which are required to be
filed, and has paid all taxes shown as due on those returns and all assessments,
fees and other amounts due as of the date hereof except for taxes being
contested in good faith by appropriate proceedings. All tax liabilities of
Borrower were, as of December 31, 1996 and are now, adequately provided for on
Borrower's books. No tax liability has been asserted by the Internal Revenue
Service or other taxing authority against Borrower for taxes in excess of those
already paid.
Section 4.11. Securities and Banking Laws and Regulations.
(a) The use of the proceeds of the Loan and Borrower's issuance of
the Note will not directly or indirectly violate or result in a violation of the
Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or
any regulations issued pursuant thereto, including without limitation
Regulations U, T, G, or X of the Board of Governors of the Federal Reserve
System. Borrower is not engaged in the business of extending credit for the
purpose of the purchasing or carrying "margin stock" within the meaning of those
regulations. No part of the proceeds of the Loan hereunder will be used to
purchase or carry any margin stock or to extend credit to others for such
purpose.
- 16 -
<PAGE>
(b) Borrower is not an investment company within the meaning of the
Investment Company Act of 1940, as amended, nor is it, directly or indirectly,
controlled by or acting on behalf of any Person which is an investment company
within the meaning of that Act.
Section 4.12. ERISA. Except as described in SCHEDULE 4.12, no employee
benefit plan (a "Plan") subject to the Employee Retirement Income Security Act
of 1974 ("ERISA") and regulations issued pursuant thereto that is maintained by
Borrower or under which Borrower could have any liability under ERISA (a) has
failed to meet minimum funding standards established in Section 302 of ERISA,
(b) has failed to comply with all applicable material requirements of ERISA and
of the Internal Revenue Code, including all applicable material rulings and
regulations thereunder, (c) has engaged in or been involved in a prohibited
transaction (as defined in ERISA) under ERISA or under the Internal Revenue
Code, or (d) has been terminated. Borrower has not assumed, or received notice
of a claim asserted against Borrower for, withdrawal liability (as defined in
the Multi-Employer Pension Plan Amendments Act of 1980, as amended) with respect
to any multi-employer pension plan and is not a member of any Controlled Group
(as defined in ERISA). Borrower has timely made when due all contributions with
respect to any multi-employer pension plan in which it participates and no event
has occurred triggering a claim against Borrower for withdrawal liability with
respect to any multi-employer pension plan in which Borrower participates.
Section 4.13. Compliance with Law. Except as described in SCHEDULE
4.13, Borrower is not in violation of any material statute, rule or regulation
of any Governmental Authority (including, without limitation, any material
statute, rule or regulation relating to employment practices or to
environmental, occupational and health standards and controls) except any
violation that would not have a Material Adverse Effect. Borrower has obtained
all licenses, permits, franchises, and other governmental authorizations
necessary for the ownership of its properties and the conduct of its business
which if not obtained would have a material adverse effect on Borrower and its
Subsidiaries taken as a whole. Borrower is current with all material reports and
documents required to be filed with any state or federal securities commission
or similar Governmental Authority and is in full compliance with all applicable
rules and regulations of such commissions.
Section 4.14. Environmental Matters. No use, exposure, release,
generation, manufacture, storage, treatment, transportation or disposal of
Hazardous Material is occurring on or from any real property on which the
Collateral is located or which is owned, leased or otherwise occupied by
Borrower (the "Premises"), as a result of any action of Borrower, except as
described in SCHEDULE 4.14. All Hazardous Material used, treated, stored,
transported to or from, generated or handled on the Premises, by Borrower, has
been disposed of on or off the Premises by or on behalf of Borrower in a lawful
manner. There are no underground storage tanks present on or under the Premises.
No material environmental, public health or safety hazards exist with respect to
the Premises.
- 17 -
<PAGE>
Section 4.15. Places of Business. As of the Closing Date, the only
places of business of Borrower, and the places where it keeps the Collateral and
records concerning the Collateral, are at the addresses set forth in SCHEDULE
4.15.
Section 4.16. Intellectual Property. Borrower owns or possesses all the
material patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, franchises, licenses, and rights with
respect to the foregoing necessary for the present and planned future conduct of
its business, without, to the Borrower's knowledge, any conflict with the rights
of others. Borrower is not in default of any obligation or undertaking with
respect to such intellectual property or rights which would have a Material
Adverse Effect.
Section 4.17. Stock Ownership. As of the Closing Date, the identity of
the stockholders of record of all classes of the outstanding stock of the
Borrower, together with the respective ownership percentages held by such
stockholders, are as set forth on SCHEDULE 4.17.
Section 4.18. Material Facts. Neither this Agreement nor any other Loan
Document nor any other agreement, document, certificate, or statement furnished
to Lender by or on behalf of Borrower in connection with the transactions
contemplated hereby contains any untrue statement of material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. To the Borrower's knowledge, there is no fact known
to Borrower that materially adversely affects or in the future may materially
adversely affect the business, operations, affairs or financial condition of
Borrower, or any of its properties or assets.
Section 4.19. Investments, Guarantees, and Certain Contracts. As of the
Closing Date, Borrower does not own or hold any equity or long-term debt
investments in, have any outstanding advances to, have any outstanding
guarantees for the obligations of, or have any outstanding borrowing from, any
Person, except as described on SCHEDULE 4.19.
Section 4.20. Business Interruptions. Within five years prior to the
date hereof, neither the business, property or assets, or operations of Borrower
has been materially adversely affected in any way by any casualty, strike,
lockout, combination of workers, or order of the United States of America or
other Governmental Authority, directed against Borrower. There are no pending
or, to the Borrower's knowledge, threatened labor disputes, strikes, lockouts,
or similar occurrences or grievances against Borrower or its business.
Section 4.21. Names. Within five years prior to the date hereof,
Borrower has not conducted business under or used any other name (whether
corporate, partnership or assumed) other than as shown on SCHEDULE 4.21.
Borrower is the sole owner of all names listed on that Schedule and any and all
business done and invoices issued in such names are Borrower's sales, business,
and invoices. Each trade name of Borrower represents a division or trading style
of Borrower and not a separate Person or independent Affiliate.
- 18 -
<PAGE>
Section 4.22 Joint Ventures. As of the Closing Date, Borrower is not
engaged in any joint venture or partnership with any other Person, except as set
forth on SCHEDULE 4.22.
Section 4.23 Accounts. Lender may rely, in determining which Accounts
are Qualified Accounts, on all statements and representations made by Borrower
with respect to any Account or Accounts. Except in the case of any
representation or statement known by Borrower to be inaccurate when made or
deemed made, the inaccuracy or breach thereof shall result in the applicable
Account ceasing to be a Qualified Account but shall not result in an Event of
Default if the applicable Account or Accounts are for an aggregate amount that
is less than two percent (2%) of the Maximum Loan Amount. Unless otherwise
indicated in writing to Lender, with respect to each Qualified Account:
(a) It is genuine and in all respects what it purports to be, and
has not been reduced by a judgment;
(b) It arises out of a completed, BONA FIDE sale and delivery of
goods or rendition of services by the Medical Group in the ordinary course of
its business and in accordance (in all material respects) with the terms and
conditions of all purchase orders, contracts, or other documents relating
thereto and forming a part of the contract between the Medical Group and the
Account Debtor;
(c) It is for an amount maturing as stated in an invoice covering
such sale or rendition of services;
(d) Such Account, and Lender's security interest therein, is not,
and will not (by voluntary act or omission by Borrower), be in the future,
subject to any lien or any known offset, deduction, defense, dispute,
counterclaim or any other adverse condition, and to the best of Borrower's
knowledge each such Account is absolutely owing to Borrower and is not
contingent in any respect or for any reason;
(e) To the best of Borrower's knowledge there are no facts, events
or occurrences which to Borrower's knowledge in any way impair the validity or
enforceability of any Qualified Accounts;
(f) To the best of Borrower's knowledge the Account Debtor
thereunder had the capacity to contract at the time any contract or other
document giving rise to the Qualified Account was executed;
(g) It has been billed and forwarded to the Account Debtor for
payment in accordance in all material respects with applicable laws and
compliance and conformance in all material respects with any requisite
procedures, requirements and regulations governing payment by such Account
Debtor with respect to such Qualified Account; and
- 19 -
<PAGE>
(h) the Medical Group has obtained and currently has all Medicaid
and Medicare provider numbers, licenses, permits and authorizations to the
extent necessary to ensure the validity of such Qualified Accounts.
Notwithstanding anything in this Agreement to the contrary, Lender
acknowledges and agrees that, where the context requires, all references to
herein to (i) Medical Services provided by Borrower (or language of similar
import), and (ii) contracts and other payment obligations from Insurers and
Medicaid/Medicare Account Debtors to Borrower shall mean and refer to the
Medical Group (as defined in the Recitals to this Agreement) in lieu of
Borrower; provided, however, that such construction shall in no way limit the
scope of any of Borrower's representations, warranties, covenants or Obligations
contained herein or in any of the other Loan Documents.
ARTICLE V
CLOSING AND CONDITIONS OF LENDING
Section 5.1. Conditions Precedent to Agreement. The obligation of
Lender to enter into and perform this Agreement and to make Revolving Credit
Loans is subject to the following conditions precedent:
(a) Lender shall have received two (2) originals of this Agreement
and all other Loan Documents required to be executed and delivered at or prior
to Closing (other than the Note, as to which Lender shall receive only one
original), executed by Borrower and any other required Persons, as applicable.
(b) Lender shall have received all searches and good standing
certificates required by Section 3.5.
(c) Borrower shall have complied and shall then be in compliance
with all the terms, covenants and conditions of the Loan Documents.
(d) There shall have occurred and be continuing no Event of Default
and no event which, with the giving of notice or the lapse of time, or both,
could constitute such an Event of Default.
(e) The representations and warranties contained in Article IV
shall be true and correct.
(f) Lender shall have received copies of all board of directors
resolutions of the Borrower, and other corporate action taken by Borrower to
authorize the execution, delivery and performance of the Loan Documents and the
borrowing of the Loan thereunder, as well as the names and signatures of the
officers of Borrower authorized to execute documents on its behalf
- 20 -
<PAGE>
in connection herewith, all as also certified as of the date hereof by
Borrower's chief financial officer, and such other papers as Lender may require.
(g) Lender shall have received copies, certified as true, correct
and complete by a corporate officer of Borrower, of the certificate of
incorporation of Borrower, with any amendments thereto and all other documents
necessary for performance of the obligations of Borrower under this Agreement
and the other Loan Documents.
(h) Lender shall have received a written opinion of counsel for
Borrower, dated the date hereof, in the form of EXHIBIT D.
(i) Lender shall have received such financial statements, reports,
certifications, and other operational information required to be delivered
hereunder, including without limitation an initial borrowing base certificate
calculating the Borrowing Base.
(j) Lender shall have received the Commitment Fee.
(k) The Depository Accounts and the Concentration Account shall
have been established.
(l) Lender shall have received a certificate of Borrower's chief
financial officer, dated the Closing Date, certifying that all of the conditions
specified in this Section have been fulfilled.
Section 5.2. Conditions Precedent to Advances. Notwithstanding any
other provision of this Agreement, no Loan proceeds, Revolving Credit Loans,
advances or other extensions of credit under the Loan shall be disbursed
hereunder unless the following conditions have been satisfied or waived
immediately prior to such disbursement:
(a) The representations and warranties on the part of Borrower
contained in Article IV of this Agreement shall be true and correct in all
respects at and as of the date of disbursement or advance, as though made on and
as of such date (except to the extent that such representations and warranties
expressly relate solely to an earlier date and except that the references in
Section 4.7 to financial statements shall be deemed to be a reference to the
then most recent annual and interim financial statements of Borrower furnished
to Lender pursuant to Section 6.1 hereof).
(b) No Event of Default or event which, with the giving of notice
or the lapse of time, or both, could become an Event of Default shall have
occurred and be continuing or would result from the making of the disbursement
or advance.
(c) No material adverse change in the condition (financial or
otherwise), properties, business, or operations of Borrower and its Subsidiaries
taken as a whole shall have occurred and be continuing with respect to Borrower
since the date hereof.
- 21 -
<PAGE>
Section 5.3. Closing. Subject to the conditions of this Article V, the
Loan shall be made available on the date as is mutually agreed by the parties
(the "Closing Date") at such time as may by mutually agreeable to the parties
upon the execution hereof (the "Closing") at such place as may be requested by
Lender.
Section 5.4. Waiver of Rights. By completing the Closing hereunder, or
by making advances under the Loan, Lender does not waive a breach of any
representation or warranty of Borrower hereunder or under any other Loan
Document, and all of Lender's claims and rights resulting from any breach or
misrepresentation by Borrower are specifically reserved by Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that for so long as Borrower may borrow
hereunder and until payment in full of the Note and performance of all other
obligations of Borrower under the Loan Documents:
Section 6.1. Financial Statements and Collateral Reports. Borrower will
furnish to Lender (a) an accounts receivable aging schedule on a form reasonably
acceptable to Lender within fifteen (15) days after the end of each calendar
month; (b) payable aging schedules within fifteen (15) days after the end of
each calendar month; (c) internally prepared monthly financial statements for
Borrower, certified by the chief financial officer of Borrower, within
forty-five (45) days of the end of each calendar month, accompanied by
management analysis and actual versus budget variance reports; (d) if and to the
extent prepared by Borrower, annual projected, profit and loss statements,
balance sheets, and cash flow reports (prepared on a monthly basis) for the
succeeding fiscal year within thirty (30) days before the end of each of
Borrower's fiscal years; (e) internally prepared annual financial statements for
Borrower within sixty (60) days after the end of each of Borrower's fiscal
years; (f) beginning with fiscal year ending December 31, 1996 annual audited
financial statements for the Borrower prepared by Ernst & Young, LLP, or a firm
of independent public accountants reasonably satisfactory to Lender, within one
hundred thirty-five (135) days (or one hundred fifty (150) days in the case of
the 1996 audit) after the end of each of Borrower's fiscal years; (g) promptly
upon receipt thereof, copies of any reports submitted to Borrower by independent
accountants in connection with any interim audit of the books of Borrower and
copies of each management control letter provided to Borrower by independent
accountants; (h) as soon as available, copies of all financial statements and
notices provided by Borrower to all of its stockholders; and (i) such additional
information, reports or statements as Lender may from time to time reasonably
request. Annual financial statements shall set forth in comparative form figures
for the corresponding periods in the prior fiscal year. All financial statements
shall include a balance sheet and statement of earnings and shall be prepared in
accordance with GAAP. All internally prepared financial statements shall be
preliminary, unaudited and subject to year end adjustments.
- 22 -
<PAGE>
Section 6.2. Payments Hereunder. Borrower will make all payments of
principal, interest, fees, and all other payments required hereunder, under the
Loan, and under any other Loan Documents, as and when due.
Section 6.3. Existence, Good Standing, and Compliance with Laws.
Borrower will do or cause to be done all things necessary (a) to obtain and keep
in full force and effect all material corporate existence, rights, licenses,
privileges, and franchises of Borrower necessary to the ownership of its
property or the conduct of its business, and comply in all material respects
with all applicable present and future laws, ordinances, rules, regulations,
orders and decrees of any Governmental Authority having or claiming jurisdiction
over Borrower; and (b) to maintain and protect the properties used or useful in
the conduct of the operations of Borrower, in a prudent manner, including
without limitation the maintenance at all times of such insurance upon its
insurable property and operations as required by law or by Section 6.7 hereof.
Section 6.4. Legality. The Borrower shall make sure that the making of
the Loan and each disbursement or advance under the Loan shall not be subject to
any penalty or special tax (other than withholding taxes), shall not be
prohibited by any governmental order or regulation applicable to Borrower, and
shall not violate any rule or regulation of any Governmental Authority, and
necessary consents, approvals and authorizations of any Governmental Authority
to or of any such disbursement or advance shall have been obtained.
Section 6.5. INTENTIONALLY DELETED.
Section 6.6. Taxes and Charges. Borrower will timely file all tax
reports and pay and discharge all taxes, assessments and governmental charges or
levies imposed upon Borrower, or its income or profits or upon its properties or
any part thereof, before the same shall be in default and prior to the date on
which penalties attach thereto, as well as all lawful claims for labor,
material, supplies or otherwise which, if unpaid, would become a lien or charge
upon the properties or any part thereof of Borrower; PROVIDED, HOWEVER, that the
Borrower shall not be required to pay and discharge or cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith and by appropriate
proceedings by Borrower, and the Borrower shall have set aside on their books
adequate reserve therefor; and PROVIDED FURTHER, that such deferment of payment
is permissible only so long as Borrower's title to, and its right to use, the
Collateral is not materially adversely affected thereby and Lender's lien and
priority on the Collateral are not materially adversely affected, altered or
impaired thereby.
Section 6.7. Insurance. Borrower will carry adequate public liability
and professional liability insurance with responsible companies reasonably
satisfactory to Lender in such amounts and against such risks as is customarily
maintained by similar businesses and by owners of similar property in the same
general area.
- 23 -
<PAGE>
Section 6.8. General Information. Subject to Section 9.20, Borrower
will furnish to Lender such information as Lender may, from time to time,
reasonably request with respect to the business or financial affairs of
Borrower, and permit upon reasonable notice and only during business hours, any
officer, employee or agent of Lender to visit and inspect any of the properties,
to examine the minute books, books of account and other records, including
management letters prepared by Borrower's auditors, of Borrower, and make copies
thereof or extracts therefrom, and to discuss its and their business affairs,
finances and accounts with, and be advised as to the same by, the accountants
and officers of Borrower, all at such times and as often as Lender may
reasonably require provided that Lender shall give Borrower reasonable
opportunity to participate in any discussions with Borrower's accountants.
Section 6.9. Maintenance of Property. Except as permitted by Section
7.4, Borrower will maintain, keep and preserve all of its properties in good
repair, working order and condition and from time to time make all needful and
proper repairs, renewals, replacements, betterment and improvements thereto, so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
Section 6.10. Notification of Events of Default and Adverse
Developments. Borrower promptly will notify Lender upon the occurrence of: (a)
any Event of Default; (b) any event which, with the giving of notice or lapse of
time, or both, would constitute an Event of Default; (c) any event, development
or circumstance whereby the financial statements previously furnished to Lender
fail in any material respect to present fairly, in accordance with GAAP, the
financial condition and operational results of Borrower as of the date of such
statements; (d) any judicial, administrative or arbitration proceeding pending
against Borrower, and any judicial or administrative proceeding known by
Borrower to be threatened against it which could reasonably be expected to
materially adversely affect its condition (financial or otherwise) or operations
or to expose Borrower to uninsured liability of $250,000.00 or more; (e) any
default claimed by any other creditor for Borrowed Money of Borrower other than
Lender in respect of Borrowed Money in a principal amount in excess of
$250,000.00; and (f) any other development in the business or affairs of
Borrower which would be materially adverse; in each case describing the nature
thereof and (in the case of notification under clauses (a) and (b)) the action
Borrower proposes to take with respect thereto.
Section 6.11. Employee Benefit Plans. Borrower will (a) comply with the
funding requirements of ERISA with respect to the Plans for its employees, or
will promptly satisfy any accumulated funding deficiency that arises under
Section 302 of ERISA; (b) furnish Lender, promptly after filing the same, with
copies of all reports or other statements filed with the United States
Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal
Revenue Service with respect to all Plans, or which Borrower, or any member of a
Controlled Group, may receive from such Governmental Authority with respect to
any such Plans, and (c) promptly advise Lender of the occurrence of any
Reportable Event or Prohibited Transaction with respect to any such Plan and the
action which Borrower proposes to take with respect thereto. Borrower will make
all contributions when due with respect to any multi-employer pension plan in
which it participates and will promptly advise Lender: (a) upon its receipt of
notice of the assertion
- 24 -
<PAGE>
against Borrower of a claim for withdrawal liability; (b) upon the occurrence of
any event which would trigger the assertion of a claim for withdrawal liability
against Borrower; and (c) upon the occurrence of any event which would place
Borrower in a Controlled Group as a result of which any member (including
Borrower) thereof may be subject to a claim for withdrawal liability, whether
liquidated or contingent.
Section 6.12. Financing Statements. Borrower shall provide to Lender
evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall cause to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests and
other liens in the Collateral (other than as permitted hereby) and to perfect
and protect Lender's first priority lien and security interest in the
Collateral, as Lender may request.
Section 6.13. Financial Records. Borrower shall keep current and
accurate books of records and accounts in which full and correct entries will be
made of its business transactions, and will reflect in its financial statements
adequate accruals and appropriations to reserves, all in accordance with GAAP.
Section 6.14. Collection of Accounts. Borrower shall continue to
collect its Accounts in the ordinary course of business.
Section 6.15. Places of Business. Borrower shall give ten (10) days'
prior written notice to Lender of any change in the location of any of its
places of business, of the places where its records concerning its Accounts are
kept, of the places where the Collateral is kept, or of the establishment of any
new, or the discontinuance of any existing, places of business.
Section 6.16. Business Conducted. Borrower shall continue in the
business presently conducted by it. Borrower shall not engage, directly or
indirectly, in any line of business substantially different from the business
conducted by it immediately prior to the Closing Date, or engage in business or
lines of business which are not reasonably related thereto.
Section 6.17. Litigation and Other Proceedings. Borrower shall give
prompt notice to Lender of any litigation, arbitration, or other proceeding
before any Governmental Authority against or affecting Borrower if the amount
claimed is more than $250,000.00
Section 6.18. Bank Accounts. Borrower shall assign to Lender all of its
depository and disbursement accounts into which proceeds of accounts are
deposited.
Section 6.19. Submission of Collateral Documents. Borrower will, on
reasonable demand of Lender, but subject to limitations under applicable law and
contractual or other confidentiality obligations, make available to Lender
copies of shipping and delivery receipts evidencing the shipment of goods that
gave rise to an Account, medical records, insurance verification forms,
assignment of benefits, in-take forms or other proof of the satisfactory
- 25 -
<PAGE>
performance of services that gave rise to an Account, a copy of the claim or
invoice for each Account and copies of any written contract or order from which
the Account arose. Borrower shall promptly notify Lender if an Account becomes
evidenced or secured by an instrument or chattel paper and upon request of
Lender, will promptly deliver any such instrument or chattel paper to Lender.
Section 6.20. Licensure; Medicaid/Medicare Cost Reports. The Medical
Group will maintain all provider numbers and licenses necessary to ensure the
validity of Qualified Accounts, and take any steps required to comply with any
such new or additional requirements that may be imposed on providers of medical
products and services. If required, all Medicaid/Medicare cost reports will be
properly filed by the Medical Group.
Section 6.21. Officer's Certificates. Together with the monthly
financial statements delivered pursuant to clause (c) of Section 6.1, and
together with the audited annual financial statements delivered pursuant to
clause (f) of that Section, Borrower shall deliver to Lender a certificate of
its chief financial officer, in form and substance reasonably satisfactory to
Lender setting forth:
(a) The information required in order to establish whether Borrower
is in compliance with the requirements of Section 7.18 as of the end of the
period covered by the financial statements then being furnished; and
(b) That the signer has reviewed the relevant terms of this
Agreement, and has made (or caused to be made under his supervision) a review of
the transactions and conditions of Borrower from the beginning of the accounting
period covered by the statements being delivered and that such review has not
disclosed the existence during such period of any condition or event which
constitutes an Event of Default or which is then, or with the passage of time or
giving of notice or both, could become an Event of Default, and if any such
condition or event existed during such period or now exists, specifying the
nature and period of existence thereof and what action Borrower has taken or
proposes to take with respect thereto.
Section 6.22. INTENTIONALLY DELETED.
Section 6.23. Retention of Key Officers. Absent death or disability,
Naresh Nagpal, M.D. and David Fater shall serve without interruption as
President and Chief Executive Officer, and Chief Financial Officer,
respectively, of Borrower.
- 26 -
<PAGE>
ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that so long as Borrower may borrow
hereunder and until payment in full of the Note and performance of all other
obligations of the Borrower under the Loan Documents:
Section 7.1. Borrowing. Borrower will not create, incur, assume or
suffer to exist any liability for Borrowed Money without Lender's prior written
consent, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, Borrower shall be permitted to incur the following: (a) indebtedness
to Lender; (b) indebtedness of Borrower secured by mortgages, encumbrances or
liens expressly permitted or not prohibited by Section 7.3 hereof; (c) accounts
payable to trade creditors and current operating expenses which are not aged
more than one hundred twenty (120) days from the billing date or more than sixty
(60) days from the due date, in each case incurred in the ordinary course of
business and paid within such time period, unless the same are being contested
in good faith and by appropriate and lawful proceedings, and Borrower shall have
set aside such reserves, if any, with respect thereto as are required by GAAP
and deemed adequate by Borrower and its independent accountants; (d) borrowing
incurred in the ordinary course of its business and not exceeding $100,000.00 in
the aggregate outstanding at any one time; (e) borrowed money not to exceed
$250,000.00 in the aggregate outstanding at any one time incurred by the
Borrower or any subsidiary after the Closing Date; provided, that (i) such
Indebtedness for Borrowed Money is incurred on account of purchase money or
finance lease arrangements of assets acquired by the Borrower or a Subsidiary
after the Closing Date, (ii) each such purchase money or finance lease
arrangement does not exceed the cost of the assets acquired or leased; (iii) any
Lien securing such purchase money or finance lease arrangement does not extend
to the Collateral or any assets or property other than that purchased or leased;
(f) capital leases of equipment not to exceed $100,000.00 of aggregate lease
obligations in any calendar year; (g) indebtedness for Borrowed Money as set
forth on Schedule 7.1 of this Agreement. If an Event of Default shall have
occurred, Borrower will not make voluntary prepayments on any existing or future
indebtedness for Borrowed Money to any Person (other than Lender, to the extent
permitted by this Agreement or any subsequent agreement between Borrower and
Lender).
Section 7.2. INTENTIONALLY OMITTED
Section 7.3. Liens and Encumbrances. Borrower will not create, incur,
assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any
kind (including the charge upon property purchased under a conditional sale or
other title retention agreement) upon, or any security interest in, any of its
Collateral, whether now owned or hereafter acquired, except for Permitted Liens.
Section 7.4. Merger, Acquisition, or Sale of Assets. Borrower will not
without Lender's prior written consent, which shall not be unreasonably
withheld, enter into any merger or consolidation with or acquire all or
substantially all of the assets of any Person, and will not sell, lease, or
otherwise dispose of any of the assets except in the ordinary course of its
business except for (a) sales of assets not to exceed $50,000.00 in any calendar
year; (b) asset purchases in
- 27 -
<PAGE>
the ordinary course of Borrower's business of acquiring/managing medical
practices (including without limitation purchases of assets from medical
practitioners for use in rendering services under management service agreements
with such practitioners); and (c) sales or dispositions of used or obsolete
equipment no longer useful in the business.
Section 7.5. Sale and Leaseback. Borrower will not, directly or
indirectly, enter into any arrangement whereby Borrower sells or transfers all
or any part of its assets and thereupon and within one year thereafter rents or
leases the assets so sold or transferred without the prior written notice to,
and the express written consent of, Lender, which consent may be withheld in
Lender's sole discretion.
Section 7.6. Distributions and Management Fees. Borrower will not
declare or pay any dividends or other distributions with respect to, purchase,
redeem or otherwise acquire for value any of its outstanding stock now or
hereafter outstanding, or return any capital of its stockholders, nor shall
Borrower pay or become obligated to pay management fees or fees of a similar
nature to any Person; provided, however, that so long as Lender has not notified
Borrower of the existence of an Event Default hereunder, Borrower may make any
such dividends or other distributions or purchase, redeem or otherwise acquire
for value such outstanding stock, return any such capital, or pay any such
management fees or fees of a similar nature subject any other terms and
conditions of this Agreement.
Section 7.7. Loans. Borrower will not make loans or advances to any
Person, other than (i) trade credit extended in the ordinary course of its
business; (ii) advances for business travel and similar temporary advances in
the ordinary course of business to officers, stockholders, directors, and
employees; and (iii) advances to physician groups under management services
agreements.
Section 7.8. Contingent Liabilities. Borrower will not assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except (i) by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business; and (ii) for Borrowed Money permitted to be incurred under
Section 7.1.
Section 7.9. Subsidiaries. Borrower will not, without Lender's prior
written consent, which shall not be unreasonably withheld, form any subsidiary.
Section 7.10. Compliance with ERISA. Borrower will not permit with
respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or
any Reportable Event.
Section 7.11. INTENTIONALLY DELETED.
Section 7.12. Transactions with Affiliates. Borrower will not enter
into any transaction, including without limitation the purchase, sale, or
exchange of property, or the
- 28 -
<PAGE>
loaning or giving of funds to any Affiliate or subsidiary, except in the
ordinary course of business and pursuant to the reasonable requirements of
Borrower's business and upon terms no less favorable to Borrower than it would
obtain in a comparable arm's length transaction with any Person not an Affiliate
or subsidiary, and so long as the transaction is not otherwise prohibited
hereunder. For purposes of the foregoing, Lender consents to the transactions
described on Schedule 7.12.
Section 7.13. Use of Lender's Name. Borrower may disclose to third
parties that Borrower has a borrowing relationship with Lender. Nothing herein
contained is intended to permit or authorize Borrower to make any contract on
behalf of Lender.
Section 7.14. INTENTIONALLY DELETED.
Section 7.15. Contracts and Agreements. Borrower will not become or be
a party to any contract or agreement which would cause the Borrower to breach
this Agreement.
Section 7.16. Margin Stock. Borrower will not carry or purchase any
"margin security" within the meaning of Regulations U, G, T or X of the Board of
Governors of the Federal Reserve System.
Section 7.17. Truth of Statements and Certificates. Borrower will not
furnish to Lender any certificate or other document that contains any untrue
statement of a material fact or that omits to state a material fact necessary to
make it not misleading in light of the circumstances under which it was
furnished.
Section 7.18. Net Worth. Borrower will not at any time allow its net
worth, as computed in accordance with GAAP, to fall below $5,000,000.00
(excluding the effect of accelerated write-offs of intangibles).
- 29 -
<PAGE>
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.1. Events of Default. Each of the following (individually, an
"Event of Default" and collectively, the "Events of Default") shall constitute
an Event of Default hereunder:
(a) A default in the payment of any installment of principal of, or
interest upon, the Note when due and payable, whether at maturity or otherwise,
which default shall have continued unremedied for a period of five (5) days
after written notice thereof from Lender to Borrower;
(b) A default in the payment of any other charges, fees, or other
monetary obligations owing to Lender arising out of or incurred in connection
with this Agreement when such payment is due and payable, which default shall
have continued unremedied for a period of five (5) days after written notice
from Lender;
(c) A default in the due observance or performance by Borrower of
any other term, covenant or agreement contained in any of the Loan Documents,
which default shall have continued unremedied for a period of twenty (20) days
after written notice from Lender;
(d) If any representation or warranty made by Borrower herein or in
any of the other Loan Documents, any financial statement, or any statement or
representation made in any other certificate, report or opinion delivered in
connection herewith or therewith proves to have been incorrect or misleading in
any material respect when made, which default shall have continued unremedied
for a period of ten (10) days after written notice from Lender;
(e) If any obligation of Borrower (other than its Obligations
hereunder or under any agreement referred to in Section 8.1(r)) for the payment
of Borrowed Money in a principal amount in excess of $250,000.00 is not paid
when due or within any applicable grace period, or such obligation becomes or is
declared to be due and payable prior to the expressed maturity thereof, or there
shall have occurred an event which, with the giving of notice or lapse of time,
or both, would cause any such obligation to become, or allow any such obligation
to be declared to be, due and payable;
(f) If Borrower makes an assignment for the benefit of creditors,
offers a composition or extension to creditors, or makes or sends notice of an
intended bulk sale of any business or assets now or hereafter conducted by
Borrower;
(g) If Borrower files a petition in bankruptcy, is adjudicated
insolvent or bankrupt, petitions or applies to any tribunal for any receiver of
or any trustee for itself or any substantial part of its property, commences any
proceeding relating to itself under any reorganization,
- 30 -
<PAGE>
arrangement, readjustment or debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect, or there is commenced
against Borrower any such proceeding which remains undismissed for a period of
sixty (60) days, or any Borrower by any act indicates its consent to, approval
of, or acquiescence in, any such proceeding or the appointment of any receiver
of or any trustee for a Borrower or any substantial part of its property, or
suffers any such receivership or trusteeship to continue undischarged for a
period of sixty (60) days;
(h) If one or more final judgments in excess of $250,000.00 against
Borrower or attachments against its property not fully and unconditionally
covered by insurance shall be rendered by a court of record and shall remain
unpaid, unstated on appeal, undischarged, unbounded and undismissed for a period
of ten (10) days;
(i) A Reportable Event which would constitute grounds for
termination of any Plan covered by Title IV of ERISA or for the appointment by
the appropriate United States District Court of a trustee to administer any such
Plan or for the entry of a lien or encumbrance to secure any deficiency, has
occurred and is continuing thirty (30) days after its occurrence, or any such
Plan is terminated, or a trustee is appointed by an appropriate United States
District Court to administer any such Plan, or the Pension Benefit Guaranty
Corporation institutes proceedings to terminate any such Plan or to appoint a
trustee to administer any such Plan, or a lien or encumbrance is entered to
secure any deficiency or claim;
(j) INTENTIONALLY DELETED.
(k) If there shall occur any uninsured damage to or loss, theft or
destruction of any portion of the Collateral with a fair market value in excess
of $100,000.00;
(l) INTENTIONALLY DELETED.
(m) INTENTIONALLY DELETED.
(n) If Borrower ceases any material portion of its business
operations as presently conducted;
(o) Borrower or any Affiliate of Borrower, shall challenge or
contest, in any action, suit or proceeding, the validity or enforceability of
this Agreement, or any of the other Loan Documents, the legality or the
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender;
(p) Borrower shall be criminally indicted or convicted under any
law that would lead to a forfeiture of substantially all of the Collateral.
(q) There shall occur a material adverse change in the financial
condition or business prospects of Borrower and its Subsidiaries taken as a
whole, which default shall have continued unremedied for a period of ten (10)
days after written notice from Lender.
- 31 -
<PAGE>
(r) Borrower or the Medical Group shall have breached any of the
material terms of the Tri-Party Agreement executed by Borrower, Lender and the
Medical Group in connection with this Agreement and such breach shall be
continuing, or an Event of Default shall have occurred and be continuing under
any other loan agreement between Borrower (or any of its subsidiaries or other
Affiliates) and Lender (or any Affiliate of Lender) having a loan commitment in
excess of $250,000; provided, however, that if such Event of Default arises
under either Article IV, Article VI or Article VII of a Loan and Security
Agreement that is substantially in the form of this Agreement (or any comparable
provisions in any other form of loan agreement) and pertains to a medical
practice other than the Medical Group, the Event of Default under such other
loan agreement shall not constitute an Event of Default under this Agreement
unless Lender determines, in its reasonable business judgment, that the Event of
Default in question has a material adverse effect on Lender's security interest
in the Collateral under this Agreement or on Borrower and its subsidiaries when
taken as a whole.
Section 8.2. Acceleration. Upon the occurrence and during the
continuation of any of the foregoing Events of Default, the Note shall become
and be immediately due and payable upon declaration to that effect delivered by
Lender to Borrower; provided that, upon the happening of any event specified in
Section 8.1.(g) hereof, the Note shall be immediately due and payable without
declaration or other notice to Borrower.
Section 8.3. Remedies.
(a) In addition to all other rights, options, and remedies granted
to Lender under this Agreement, upon the occurrence and during the continuance
of an Event of Default Lender may (i) terminate the Loan, whereupon all
outstanding Obligations shall be immediately due and payable, (ii) exercise all
other rights granted to it hereunder and all rights under the Uniform Commercial
Code in effect in the applicable jurisdiction(s) and under any other applicable
law, and (iii) exercise all rights and remedies under all Loan Documents now or
hereafter in effect, including the following rights and remedies (which list is
given by way of example and is not intended to be an exhaustive list of all such
rights and remedies):
(i) The right to take possession of, send notices regarding,
and collect directly the Collateral, with or without judicial process, and to
exercise all rights and remedies available to Lender with respect to the
Collateral under the Uniform Commercial Code in effect in the jurisdiction(s) in
which such Collateral is located;
(ii) The right to (by its own means or with judicial
assistance) enter any of Borrower's premises and take possession of the
Collateral, or render it unusable, or dispose of the Collateral on such premises
in compliance with subsection (b), without any liability for rent, storage,
utilities, or other sums, and Borrower shall not resist or interfere with such
action;
(iii) The right to require Borrower at Borrower's expense to
assemble all or any part of the Collateral and make it available to Lender at
any place designated by Lender;
- 32 -
<PAGE>
(iv) The right to reduce the Maximum Loan Amount or to use
the Collateral and/or funds in the Concentration Account in amounts up to the
Maximum Loan Amount for any reason; and
(v) The right to relinquish or abandon any Collateral or any
security interest therein.
(b) Borrower agrees that a notice received by it at least five (5)
days before the time of any intended public sale, or the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If permitted
by applicable law, any perishable Collateral which threatens to speedily decline
in value or which is sold on a recognized market may be sold immediately by
Lender without prior notice to Borrower. At any sale or disposition of
Collateral, Lender may (to the extent permitted by applicable law) purchase all
or any part of the Collateral, free from any right of redemption by Borrower,
which right is hereby waived and released. At any sale or disposition of
Collateral, Lender may (to the extent permitted by applicable law) purchase all
or any part of the Collateral, free from any right of redemption by Borrower,
which right is hereby waived and released. Borrower covenants and agrees not to
interfere with or impose any obstacle to Lender's exercise of its rights and
remedies with respect to the Collateral.
Section 8.4. Nature of Remedies. Lender shall have the right to proceed
against all or any portion of the Collateral to satisfy, in any order, (a) the
liabilities and Obligations of Borrower to Lender under this Agreement, or (b)
upon the occurrence of an Event of Default under the Loan and Security Agreement
relating to Orthopaedic Associates of Bethlehem, Inc./ Lehigh Valley Bone,
Muscle & Joint Group, L.L.C. (the "Pennsylvania Loan Agreement") that causes an
Event of Default hereunder pursuant to Section 8.1(r) above, the liabilities and
obligations of Borrower to Lender thereunder, or (c) upon the occurrence of an
Event of Default under the Loan and Security Agreement relating to South Texas
Spinal Clinic, P.A. (the "San Antonio Loan Agreement") that causes an Event of
Default hereunder pursuant to Section 8.1(r) above, the liabilities and
obligations of Borrower to Lender thereunder. All rights and remedies granted
Lender hereunder and under any agreement referred to herein, or otherwise
available at law or in equity, shall be deemed concurrent and cumulative, and
not alternative remedies, and Lender may proceed with any number of remedies at
the same time until the Loan, and all other existing and future liabilities and
obligations of Borrower to Lender (including, without limitation, those arising
under the Pennsylvania Loan Agreement and the San Antonio Loan Agreement), are
satisfied in full. The exercise of any one right or remedy shall not be deemed a
waiver or release of any other right or remedy, and Lender, upon the occurrence
of an Event of Default, may proceed against Borrower, and/or the Collateral, at
any time, under any agreement, with any available remedy and in any order.
Notwithstanding anything in this Section 8.4 to the contrary, Lender
acknowledges and agrees that if as of September 1, 1997 there is no continuing
Event of Default under either this Agreement, the Pennsylvania Loan Agreement or
the San Antonio Loan Agreement, the cross-collateralization provisions of this
Section 8.4 involving the Pennsylvania Loan Agreement and the San Antonio Loan
Agreement shall be eliminated.
- 33 -
<PAGE>
ARTICLE IX
MISCELLANEOUS
Section 9.1. Expenses and Taxes.
(a) Borrower agrees to pay, whether or not the Closing occurs, a
reasonable documentation preparation fee, together with all out-of-pocket
charges and expenses incurred by Lender in connection with the negotiation,
preparation and execution of each of the Loan Documents. Borrower also agrees to
pay all out-of-pocket charges and expenses incurred by Lender (including the
fees and expenses of Lender's counsel) in connection with the enforcement,
protection or preservation of any right or claim of Lender and the collection of
any amounts due under the Loan Documents.
(b) Borrower shall pay all taxes (other than taxes based upon or
measured by Lender's income or revenues, any personal property tax or any
withholding taxes), if any, in connection with the issuance of the Note and the
recording of the security documents therefor. The obligations of Borrower under
this clause (b) shall survive the payment of Borrower's indebtedness hereunder
and the termination of this Agreement.
Section 9.2. Entire Agreement; Amendments. This Agreement and the other
Loan Documents constitute the full and entire understanding and agreement among
the parties with regard to their subject matter and supersede all prior written
or oral agreements, understandings, representations and warranties made with
respect thereto. No amendment, supplement or modification of this Agreement nor
any waiver of any provision thereof shall be made except in writing executed by
the party against whom enforcement is sought.
Section 9.3. No Waiver; Cumulative Rights. No waiver by any party
hereto of any one or more defaults by the other party in the performance of any
of the provisions of this Agreement shall operate or be construed as a waiver of
any future default or defaults, whether of a like or different nature. No
failure or delay on the part of any party in exercising any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to any party hereto at law, in equity or
otherwise.
Section 9.4. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and personally delivered, mailed by
registered or certified mail (return receipt requested and postage prepaid),
sent by telecopier (with a confirming copy sent by regular mail), or sent by
prepaid overnight courier service, and addressed to the relevant party at its
address set forth below, or at such other address as such party may, by written
notice, designate as its address for purposes of notice hereunder:
- 34 -
<PAGE>
(a) If to Lender, at:
HCFP Funding, Inc.
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Attn: John K. Delaney, President
Telephone: (301) 961-1640
Telecopier: (301) 664-9860
(b) If to Borrower, at:
Bone, Muscle & Joint, Inc.
4800 North Federal Highway
Suite 104-D
Boca Raton, FL 33431
Attn: Mr. David H. Fater
Executive Vice President
and Chief Financial Officer
Telephone: (561) 391-1311
Telecopier: (561) 391-1389
Copies to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attn: Lawrence G. Graev, Esquire
Telephone: (212) 408-2400
Telecopier: (212) 408-2420
If mailed, notice shall be deemed to be given five (5) days after being sent, if
sent by personal delivery or telecopier, notice shall be deemed to be given when
delivered, and if sent by prepaid courier, notice shall be deemed to be given on
the next Business Day following deposit with the courier.
Section 9.5. Severability. If any term, covenant or condition of this
Agreement, or the application of such term, covenant or condition to any party
or circumstance shall be found by a court of competent jurisdiction to be, to
any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to the fullest extent permitted by law. Upon determination that any
such term is invalid, illegal or unenforceable, the parties hereto shall amend
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner.
- 35 -
<PAGE>
Section 9.6. Successors and Assigns. This Agreement, the Note, and the
other Loan Documents shall be binding upon and inure to the benefit of Borrower
and Lender and their respective successors and assigns. Notwithstanding the
foregoing, Borrower may not assign any of its rights or delegate any of its
obligations hereunder without the prior written consent of Lender, which may be
withheld in its sole discretion. Lender may sell, assign or transfer, all (but
not less than all) of its rights or obligations hereunder, or participate any or
all of its rights or obligations hereunder, without the consent of Borrower, but
will notify Borrower in advance of any such assignment, transfer or
participations. In the event of any such participation by Lender, Lender's
obligations under the Loan Documents shall remain unchanged, Lender shall remain
solely responsible to Borrower for the performance of such obligations, Lender
shall remain the holder of any Note for all purposes under the Loan Documents,
all amounts payable by the Borrower under this Agreement shall be determined as
if Lender had not sold such participating interest, and the Borrower shall
continue to deal solely and directly with Lender in connection with Lender's
rights and obligations under the Loan Documents. Lender shall retain the sole
right to approve, without the consent of participant, any amendment,
modification or waiver of any provision of the Loan Documents other than any
amendment, modification or waiver with respect to the Loan or any commitment in
which such participant has an interest which forgives principal, interest or
fees or reduces the interest rate or fees payable pursuant to the terms of this
Agreement with respect to the Loan or such commitment, postpones any date fixed
for any regularly-scheduled payment of principal of, or interest or fees on, any
the Loan or such commitment, or releases all or substantially all of the
Collateral.
Section 9.7. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one instrument.
Section 9.8. Interpretation. No provision of this Agreement or any
other Loan Document shall be interpreted or construed against any party because
that party or its legal representative drafted that provision. The titles of the
paragraphs of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. Any pronoun used in this
Agreement shall be deemed to include singular and plural and masculine, feminine
and neuter gender as the case may be. The words "herein," "hereof," and
"hereunder" shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.
Section 9.9. Survival of Terms. All covenants, agreements,
representations and warranties made in this Agreement, any other Loan Document,
and in any certificates and other instruments delivered in connection therewith
shall be considered to have been relied upon by Lender and shall survive the
making by Lender of the Loans herein contemplated and the execution and delivery
to Lender of the Note, and shall continue in full force and effect until all
liabilities and obligations of Borrower to Lender are satisfied in full.
- 36 -
<PAGE>
Section 9.10. Release of Lender. Borrower releases Lender, its
officers, employees, and agents, of and from any claims for loss or damage
resulting from acts or conduct of any or all of them, unless caused by Lender's
recklessness, gross negligence, or willful misconduct.
Section 9.11. Time. Whenever Borrower is required to make any payment
or perform any act on a Saturday, Sunday, or a legal holiday under the laws of
the State of Maryland (or other jurisdiction where Borrower is required to make
the payment or perform the act), the payment may be made or the act performed on
the next Business Day. Time is of the essence in Borrower's performance under
this Agreement and all other Loan Documents.
Section 9.12. Commissions. The transaction contemplated by this
Agreement was brought about by Lender and Borrower acting as principals and
without any brokers, agents, or finders being the effective procuring cause.
Borrower represents that it has not committed Lender to the payment of any
brokerage fee, commission, or charge in connection with this transaction. If any
such claim is made on Lender by any broker, finder, or agent or other person,
Borrower will indemnify, defend, and hold Lender harmless from and against the
claim and will defend any action to recover on that claim, at Borrower's cost
and expense, including Lender's counsel fees. Borrower further agrees that until
any such claim or demand is adjudicated in Lender's favor, the amount demanded
will be deemed a liability of Borrower under this Agreement, secured by the
Collateral.
Section 9.13. Third Parties. No rights are intended to be created
hereunder or under any other Loan Document for the benefit of any third party
donee, creditor, or incidental beneficiary of Borrower. Nothing contained in
this Agreement shall be construed as a delegation to Lender of Borrower's duty
of performance, including without limitation Borrower's duties under any account
or contract in which Lender has a security interest.
Section 9.14. Discharge of Borrower's Obligations. Lender, in its sole
discretion, shall have the right at any time, and from time to time, without
prior notice to Borrower if Borrower fails to do so in violation of the
provisions of this Agreement, to: (a) obtain insurance covering any of the
Collateral as required hereunder; (b) pay for the performance of any of
Borrower's obligations hereunder; (c) discharge taxes, liens, security
interests, or other encumbrances at any time levied or placed on any of the
Collateral in violation of this Agreement unless Borrower is in good faith with
due diligence by appropriate proceedings contesting those items; and (d) pay for
the maintenance and preservation of any of the Collateral. Expenses and advances
shall be added to the Loan, until reimbursed to Lender and shall be secured by
the Collateral. Such payments and advances by Lender shall not be construed as a
waiver by Lender of an Event of Default.
Section 9.15. Information to Participants. Lender may divulge (subject
to the confidentiality obligations contained in Section 9.20) to any it may
obtain in the Loan, or any portion thereof, all information, and furnish to such
participant copies of reports, financial
- 37 -
<PAGE>
statements, certificates, and documents obtained under any provision of this
Agreement or any other Loan Document.
Section 9.16. Indemnity. Borrower hereby agrees to indemnify and hold
harmless Lender, its partners, officers, agents and employees (collectively,
"Indemnitee") from and against any liability, loss, cost, expense, claim,
damage, suit, action or proceeding ever suffered or incurred by Lender
(including reasonable attorneys' fees and expenses) arising from Borrower's
failure to observe, perform or discharge any of its covenants, obligations,
agreements or duties hereunder, or from the breach of any of the representations
or warranties contained in Article IV hereof unless caused by Lenders
recklessness, gross negligence or willful misconduct. In addition, Borrower
shall defend Indemnitee against and save it harmless from all claims of any
Person with respect to the Collateral unless caused by Lenders recklessness,
gross negligence or willful misconduct. Notwithstanding any contrary provision
in this Agreement, the obligation of Borrower under this Section 9.16 shall
survive the payment in full of the Obligations and the termination of this
Agreement.
Section 9.17. Choice of Law; Consent to Jurisdiction. THIS AGREEMENT
AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF
CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS
COMMENCED BY LENDER IN THE STATE OF MARYLAND OR FEDERAL COURT LOCATED IN THE
STATE OF MARYLAND, BORROWER AND LENDER HEREBY CONSENT TO THE JURISDICTION OF ANY
SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF
MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY
REGISTERED MAIL, POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS DESCRIBED IN
SECTION 9.4 HEREOF.
Section 9.18. Waiver of Trial by Jury. EACH OF BORROWER AND LENDER
HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUES
TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO
THE EXTENT THAT ANY SUCH RIGHT SHALL NOW HEREAFTER EXIST. THIS WAIVER OF RIGHT
TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY EACH OF
BORROWER AND LENDER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE
ACCRUE. EACH PARTY IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT
TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO,
SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE FOREGOING WAIVER OF THE RIGHT TO
JURY TRIAL. FURTHER, EACH OF BORROWER AND LENDER HEREBY CERTIFIES THAT NO
REPRESENTATIVE OR AGENT OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT
- 38 -
<PAGE>
SUCH OTHER PARTY WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION.
Section 9.19. Confession of Judgment. UPON AN EVENT OF DEFAULT,
BORROWER AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD
IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON BEHALF OF BORROWER
IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OR
PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS JUDGMENT AGAINST BORROWER
IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS AGREEMENT (INCLUDING
PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS) PLUS
ATTORNEYS' FEES PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF
BORROWER FOR PRIOR HEARING. BORROWER AGREES AND CONSENTS THAT VENUE AND
JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF
MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND. BORROWER WAIVES THE BENEFIT OF ANY AND EVERY
STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING
UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR
IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE
AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT
BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE
THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO;
SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO
TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM
NECESSARY, CONVENIENT, OR PROPER.
Section 9.20 Confidentiality. Subject to the provisions of the
following paragraph, Lender shall hold all nonpublic information obtained
pursuant to the requirements of this Agreement in accordance with Lender's
customary procedures for handling confidential information of this nature and in
accordance with safe and sound practices of banks and other financial
institutions and in any event may make disclosure reasonably required by a
prospective assignee or participant (a participant or assignee being referred to
as a "Transferee") in connection with the contemplated participation or
assignment or as required by any Governmental Authority or representative
thereof or pursuant to legal process and shall require any such Transferee or
prospective Transferee to agree (and require any of its Transferees to agree) to
comply with this paragraph. Each prospective Transferee shall be required to
agree that if it does not become a participant or assignee it shall return all
materials furnished to it by or on behalf of the Borrower in connection with
this Agreement.
- 39 -
<PAGE>
The Borrower authorizes Lender to disclose to any Transferee and any
prospective Transferee any and all information in Lender's possession concerning
the Borrower and the Collateral; provided that prior to any such disclosure,
such prospective Transferee shall agree to preserve in accordance with the
immediately preceding paragraph the confidentiality of any confidential
information described therein.
- 40 -
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
ATTEST: HCFP FUNDING, INC.
(Seal) a Delaware corporation
By:________________________ By:__________________________
Name: Name:
Title: Title:
ATTEST: BONE, MUSCLE & JOINT, INC.
(Seal) a Delaware corporation
By:________________________ By:__________________________
Name: Name:
Title: Title:
- 41 -
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Concentration Account Agreement
Exhibit C - Locations of Collateral
Exhibit D - Form of Legal Opinion
- 42 -
<PAGE>
LIST OF SCHEDULES
Schedule 1.36 - Permitted Liens
Schedule 4.1 - Subsidiaries
Schedule 4.5 - Litigation
Schedule 4.13 - Non-Compliance with Law
Schedule 4.14 - Environmental Matters
Schedule 4.15 - Places of Business
Schedule 4.16 - Licenses
Schedule 4.17 - Stock Ownership
Schedule 4.19 - Borrowing and Guarantees
Schedule 4.21 - Trade Names
Schedule 4.22 - Joint Ventures
Schedule 7.12 - Transactions with Affiliates
- 43 -
<PAGE>
THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAW OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR
TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN COMPLIANCE WITH
APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER JURISDICTION OR (II) THERE IS AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION THEREFROM IS AVAILABLE AND THAT SUCH OFFER, SALE, PLEDGE, OR TRANSFER
IS IN COMPLIANCE WITH APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER
JURISDICTION.
BONE, MUSCLE AND JOINT, INC.
8.0% Promissory Note
January 10, 1997
$700,000
For value received, BONE MUSCLE AND JOINT, INC., a Delaware
corporation (the "Company"), hereby promises to pay to Naresh Nagpal, M.D., an
individual whose principal residence is located at 2378 N.W. 60th Street, Boca
Raton, Florida 33496, or his registered assigns (the "Holder"), the principal
sum of Seven Hundred Thousand Dollars ($700,000) plus interest thereon and on
any and all charges as hereinafter provided, on December 31, 1997, or at such
earlier time upon the occurrence of an "Event of Default" (as hereinafter
defined) (the "Maturity Date"). Principal and interest shall be payable in
lawful money of the United States of America, at the address of the Holder first
set forth above or at such other place as the legal holder may designate from
time to time in writing to the Company. Interest shall be computed on the basis
of a 360-day year of twelve (12) 30-day months.
The outstanding principal balance of this Note shall bear interest, in
arrears, from the date hereof at a rate per annum equal to eight percent (8.0%).
The Company agrees to pay interest (to the extent permitted by applicable law)
on any overdue principal or interest or from and after the occurren ce and
during the continuance of an Event of Default hereunder, at a rate per annum
equal to the lesser of (a) eleven percent (11.0%) per annum or (b) the highest
rate allowed by applicable law, with such interest on overdue principal or
interest accruing from the Maturity Date. This Note may be p repaid by the
Company, in whole or in part, without penalty or premium.
<PAGE>
ARTICLE I
REGISTRATION; TRANSFER; REPLACEMENT
-----------------------------------
1.1. PAYMENT ON NON-BUSINESS DAYS.
-----------------------------
Whenever any payment to be made shall be due on a Saturday, Sunday or
a public holiday under the laws of the State of New York, such payment may be
made on the next succeeding business day.
1.2. REGISTRATION, ETC.
------------------
The Company shall maintain at its principal office a register of this
Note and shall record therein the name and address of the registered holder of
this Note, the address to which notices are to be sent and the address to which
payments are to be made as designated by the registered holder if othe r than
the address of the initial Holder, and the particulars of all transfers,
exchanges and replacements of this Note. No transfer of this Note shall be valid
unless the registered holder or its duly appointed attorney requests such
transfer to be made on such register, upon surrender therefor f or exchange as
hereinafter provided, accompanied by an instrument in writing, in form and
execution reasonably satisfactory to the Company. Each Note issued, whether
originally or upon transfer, exchange or replacement of this Note, shall be
registered on the date of execution thereof by the Compa ny. The registered
holder of this Note shall be that person in whose name this Note has been so
registered by the Company. A registered holder shall be deemed the owner of this
Note for all purposes and, subject to the provisions hereof shall be entitled to
the principal and interest evidenced by such Note, free from all equities or
rights of set-off or counterclaim between the Company and the transferor of such
registered holder or any previous registered holder of such Note.
1.3. TRANSFER AND EXCHANGE.
----------------------
This Note may not be transferred without compliance with applicable
federal and state securities laws (including delivery of legal opinions
reasonably satisfactory to the Company, if such is requested by the Company).
The registered holder of this Note or its duly appointed attorney may, from and
after the date hereof and prior to repayment of the principal balance
outstanding hereunder, plus interest thereon, surrender this Note at the
principal office of the Company for transfer or exchange. Within a reasonable
time after notice to the Company from a registered holder of its intention to
make such exchange and, without expense (other than transfer taxes, if any) to
such registered holder, the Company shall issue in exchange therefor another
Note dated the date of this Note, and for the same
- 2 -
<PAGE>
aggregate principal amount as the unpaid principal amount of, the Note so
surrendered, havi ng the same maturity and containing the same provisions and
subject to the same terms and conditions as the Note so surrendered. Each new
Note shall be made payable to such person or registered assigns as the
registered holder of such surrendered Note may designate, and such transfer or
exchange shall be made in such a manner that no gain or loss of principal shall
result therefrom.
1.4. REPLACEMENT.
-----------
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note (or any replacement hereof) and,
if requested by the Company in the case of any such loss, theft or destruction,
upon delivery of an indemnity bond or other agreement or security reasonab ly
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Note, the Company will issue a new Note, of
like tenor and amount and dated the date of such subsequent issue, in lieu of
such lost, stolen, destroyed or mutilated Note.
ARTICLE II
EVENTS OF DEFAULT
-----------------
2.1. EVENTS OF DEFAULT.
-----------------
It shall be an "Event of Default" under this Note upon the occurrence
of any of the following events; or
(a) The Company shall fall to make any payment of principal, interest or
other amount when due hereunder, whether upon the Maturity Date or otherwise; or
(b) The Company shall fall to perform any other material covenant, term or
provision of this Note; or
(c) Bankruptcy, reorganization, arrangement or insolvency proceedings, or
other proceedings for the relief of creditors under any bankruptcy or similar
laws are instituted by or against the Company, and if instituted against the
Company, are consented to or are not dismissed within 60 days after such
institution; or
(d) The Company becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors or the Company applied for, or consents
to the appointment of a custodian, liquidator, trustee or receiver for the
Company of all or a majority of its assets.
- 3 -
<PAGE>
2.2. REMEDIES UPON AN EVENT OF DEFAULT.
---------------------------------
If an Event of Default shall have occurred and shall be continuing,
the Holder of this Note may at any time declare the entire unpaid principal
balance of this Note, together with interest thereon at the applicable rate, due
and payable, and thereupon, the same shall be so due and payable, without
presentment, demand, protest, or notice, all of which are hereby waived by the
Company. No course of delay on the part of the Holder shall operate as a waiver
thereof or otherwise prejudice the right of the Holder. No remedy conferred
hereby shall be exclusive of any other remedy referred to here in or now or
hereafter available at law, in equity, by statute or otherwise.
ARTICLE III
MISCELLANEOUS
-------------
3.1. LATE CHARGE.
-----------
The Holder may collect a "late charge" equal to five percent (5%) of
any payment of interest or principal or both which is not paid within five (5)
days of the Maturity Date. Late charges shall be separately charged to and
collected from the Company and shall be due upon demand by the Holder.
3.2. FEES AND EXPENSES.
-----------------
The Company shall pay all costs and expenses, including reasonable
attorneys' fees and expenses, incurred by the Holder in connection with the
preparation, negotiation, amendment, collection and enforcement of this Note.
3.3. GOVERNING LAW.
-------------
This Note is being delivered as a sealed instrument in the State of
New York and shall be construed in accordance with the laws thereof.
3.4. HEADINGS.
--------
Article and section headings in this Note are included herein for
purposes of convenience of reference only and shall not constitute a part of
this Note for any other purpose.
3.5. SURRENDER IN EXCHANGE.
---------------------
Any portion of the outstanding principal under this Note may be used
by the Holder hereof to pay for any securities,
- 4 -
<PAGE>
including equity securities, of the Company which the Holder hereof may from
time to time purchase from the Company.
3.6. BINDING EFFECT.
--------------
The obligations of the Company set forth herein shall be binding upon
the successors and assigns of the Company, whether or not such successors or
assigns are permitted by the terms hereof. The rights of the Holder hereof may
not be transferred, except in compliance with Section 1.3 hereof.
3.7. AMENDMENTS.
----------
This Note may not be modified or amended in any manner except in a
writing executed by the Company and the Holder.
3.8. COMPLIANCE WITH SECURITIES LAWS.
-------------------------------
The Holder of this Note acknowledges that this Note is being acquired
solely for the Holder's own account and not as a nominee for any other party,
and for investment, and that the Holder shall not offer, sell or otherwise
dispose of this Note except under circumstances that will not result in a vi
olation of the Act or any state securities laws. This Note and any Note issued
in substitution or replacement therefor shall be stamped or imprinted with a
legend in substantially the following form:
"THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAW OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR
I N CONNECTION WITH, THE DISTRIBUTION THEREOF. THESE
SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR TRANSFERRED
UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN
EFFECT AS TO THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE,
OR TRANSFER IS IN COMPLIANCE WITH APPLICABLE SECURITIES LAW
OF ANY STAT E OR OTHER JURISDICTION OR (II) THERE IS AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE
COMPANY, THAT AN EXEMPTION THEREFROM IS AVAILABLE AND THAT
SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN COMPLIANCE WITH
APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER
JURISDICTION."
3.9. COMPANY WAIVERS
---------------
(a) Except as otherwise specifically provided herein, the Company and
all others that may become liable for all or any part of the obligations
evidenced by this Note, hereby waive
- 5 -
<PAGE>
presentment, demand, notice of nonpayment, protest and all other demands' and
notices in connection with the delivery, acce ptance, performance or enforcement
of this Note, and do hereby consent to any number of renewals of extensions of
the time or payment hereof and agree that any such renewals or extensions may be
made without notice to any such persons and without affecting their liability
herein and do further cons ent to the release of any person liable hereon, all
without affecting the liability of the other persons, firms, or corporations
liable for the payment of this Note; AND DO HEREBY WAIVE TRIAL BY JURY.
(b) THE COMPANY ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE
IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE
LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY
PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO
USE.
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Name:
Title:
<PAGE>
THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAW OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE DISTRIBUTION THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR
TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN COMPLIANCE WITH
APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER JURISDICTION OR (II) THERE IS AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION THEREFROM IS AVAILABLE AND THAT SUCH OFFER, SALE, PLEDGE, OR TRANSFER
IS IN COMPLIANCE WITH APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER
JURISDICTION.
BONE, MUSCLE AND JOINT, INC.
8.0% Promissory Note
January 14, 1997
$167,000
For value received, BONE MUSCLE AND JOINT, INC., a Delaware
corporation (the "Company"), hereby promises to pay to Naresh Nagpal, M.D., an
individual whose principal residence is located at 2378 N.W. 60th Street, Boca
Raton, Florida 33496, or his registered assigns (the "Holder"), the principal
sum of One Hundred Sixty Seven Thousand Dollars ($167,000) plus interest thereon
and on any and all charges as hereinafter provided, on December 31, 1997, or at
such earlier time upon the occurrence of an "Event of Default" (as hereinafter
defined) (the "Maturity Date"). Principal and interest shall be payable in
lawful money of the United States of America, at the address of the Holder first
set forth above or at such other place as the legal holder may designate from
time to time in writing to the Company. Interest shall be computed on the basis
of a 360-day year of twelve (12) 30-day months.
The outstanding principal balance of this Note shall bear interest, in
arrears, from the date hereof at a rate per annum equal to eight percent (8.0%).
The Company agrees to pay interest (to the extent permitted by applicable law)
on any overdue principal or interest or from and after the occurren ce and
during the continuance of an Event of Default hereunder, at a rate per annum
equal to the lesser of (a) eleven percent (11.0%) per annum or (b) the highest
rate allowed by applicable law, with such interest on overdue principal or
interest accruing from the Maturity Date. This Note may be p repaid by the
Company, in whole or in part, without penalty or premium.
<PAGE>
ARTICLE I
REGISTRATION; TRANSFER; REPLACEMENT
-----------------------------------
1.1. PAYMENT ON NON-BUSINESS DAYS.
----------------------------
Whenever any payment to be made shall be due on a Saturday, Sunday or
a public holiday under the laws of the State of New York, such payment may be
made on the next succeeding business day.
1.2. REGISTRATION, ETC.
The Company shall maintain at its principal office a register of this
Note and shall record therein the name and address of the registered holder of
this Note, the address to which notices are to be sent and the address to which
payments are to be made as designated by the registered holder if other than
the address of the initial Holder, and the particulars of all transfers,
exchanges and replacements of this Note. No transfer of this Note shall be valid
unless the registered holder or its duly appointed attorney requests such
transfer to be made on such register, upon surrender therefor for exchange as
hereinafter provided, accompanied by an instrument in writing, in form and
execution reasonably satisfactory to the Company. Each Note issued, whether
originally or upon transfer, exchange or replacement of this Note, shall be
registered on the date of execution thereof by the Company. The registered
holder of this Note shall be that person in whose name this Note has been so
registered by the Company. A registered holder shall be deemed the owner of this
Note for all purposes and, subject to the provisions hereof shall be entitled to
the principal and interest evidenced by such Note, free from all equities or
rights of set-off or counterclaim between the Company and the transferor of such
registered holder or any previous registered holder of such Note.
1.3. TRANSFER AND EXCHANGE.
---------------------
This Note may not be transferred without compliance with applicable
federal and state securities laws (including delivery of legal opinions
reasonably satisfactory to the Company, if such is requested by the Company).
The registered holder of this Note or its duly appointed attorney may, from and
after the date hereof and prior to repayment of the principal balance
outstanding hereunder, plus interest thereon, surrender this Note at the
principal office of the Company for transfer or exchange. Within a reasonable
time after notice to the Company from a registered holder of its intention to
make such exchange and, without expense (other than transfer taxes, if any) to
such registered holder, the Company shall issue in exchange therefor another
Note dated the date of this Note, and for the same
- 2 -
<PAGE>
aggregate principal amount as the unpaid principal amount of, the Note so
surrendered, having the same maturity and containing the same provisions and
subject to the same terms and conditions as the Note so surrendered. Each new
Note shall be made payable to such person or registered assigns as the
registered holder of such surrendered Note may designate, and such transfer or
exchange shall be made in such a manner that no gain or loss of principal shall
result therefrom.
1.4. REPLACEMENT.
-----------
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note (or any replacement hereof) and,
if requested by the Company in the case of any such loss, theft or destruction,
upon delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Note, the Company will issue a new Note, of
like tenor and amount and dated the date of such subsequent issue, in lieu of
such lost, stolen, destroyed or mutilated Note.
ARTICLE II
EVENTS OF DEFAULT
-----------------
2.1. EVENTS OF DEFAULT.
-----------------
It shall be an "Event of Default" under this Note upon the occurrence
of any of the following events; or
(a) The Company shall fall to make any payment of principal, interest
or other amount when due hereunder, whether upon the Maturity Date or otherwise;
or
(b) The Company shall fall to perform any other material covenant,
term or provision of this Note; or
(c) Bankruptcy, reorganization, arrangement or insolvency proceedings,
or other proceedings for the relief of creditors under any bankruptcy or similar
laws are instituted by or against the Company, and if instituted against the
Company, are consented to or are not dismissed within 60 days after such
institution; or
(d) The Company becomes bankrupt or insolvent, or makes an assignment
for the benefit of creditors or the Company applied for, or consents to the
appointment of a custodian, liquidator, trustee or receiver for the Company of
all or a majority of its assets
- 3 -
<PAGE>
2.2. REMEDIES UPON AN EVENT OF DEFAULT.
---------------------------------
If an Event of Default shall have occurred and shall be continuing,
the Holder of this Note may at any time declare the entire unpaid principal
balance of this Note, together with interest thereon at the applicable rate, due
and payable, and thereupon, the same shall be so due and payable, without
presentment, demand, protest, or notice, all of which are hereby waived by the
Company. No course of delay on the part of the Holder shall operate as a waiver
thereof or otherwise prejudice the right of the Holder. No remedy conferred
hereby shall be exclusive of any other remedy referred to here in or now or
hereafter available at law, in equity, by statute or otherwise.
ARTICLE III
MISCELLANEOUS
-------------
3.1. LATE CHARGE.
-----------
The Holder may collect a "late charge" equal to five percent (5%) of
any payment of interest or principal or both which is not paid within five (5)
days of the Maturity Date. Late charges shall be separately charged to and
collected from the Company and shall be due upon demand by the Holder.
3.2. FEES AND EXPENSES.
-----------------
The Company shall pay all costs and expenses, including reasonable
attorneys' fees and expenses, incurred by the Holder in connection with the
preparation, negotiation, amendment, collection and enforcement of this Note.
3.3. GOVERNING LAW.
-------------
This Note is being delivered as a sealed instrument in the State of
New York and shall be construed in accordance with the laws thereof.
3.4. HEADINGS.
--------
Article and section headings in this Note are included herein for
purposes of convenience of reference only and shall not constitute a part of
this Note for any other purpose.
3.5. SURRENDER IN EXCHANGE.
---------------------
Any portion of the outstanding principal under this Note may be used
by the Holder hereof to pay for any securities,
- 4 -
<PAGE>
including equity securities, of the Company which the Holder hereof may from
time to time purchase from the Company.
3.6. BINDING EFFECT.
--------------
The obligations of the Company set forth herein shall be binding upon
the successors and assigns of the Company, whether or not such successors or
assigns are permitted by the terms hereof. The rights of the Holder hereof may
not be transferred, except in compliance with Section 1.3 hereof.
3.7. AMENDMENTS.
----------
This Note may not be modified or amended in any manner except in a
writing executed by the Company and the Holder.
3.8. COMPLIANCE WITH SECURITIES LAWS.
-------------------------------
The Holder of this Note acknowledges that this Note is being acquired
solely for the Holder's own account and not as a nominee for any other party,
and for investment, and that the Holder shall not offer, sell or otherwise
dispose of this Note except under circumstances that will not result in a vi
olation of the Act or any state securities laws. This Note and any Note issued
in substitution or replacement therefor shall be stamped or imprinted with a
legend in substantially the following form:
"THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAW OF ANY STATE OR OTHER JURISDICTION. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR
I N CONNECTION WITH, THE DISTRIBUTION THEREOF. THESE
SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR TRANSFERRED
UNLESS (I) A REGISTRATION STATEMENT UNDER THE ACT IS IN
EFFECT AS TO THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE,
OR TRANSFER IS IN COMPLIANCE WITH APPLICABLE SECURITIES LAW
OF ANY STAT E OR OTHER JURISDICTION OR (II) THERE IS AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE
COMPANY, THAT AN EXEMPTION THEREFROM IS AVAILABLE AND THAT
SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN COMPLIANCE WITH
APPLICABLE SECURITIES LAW OF ANY STATE OR OTHER
JURISDICTION."
3.9. COMPANY WAIVERS
---------------
Except as otherwise specifically provided herein, the Company and all
others that may become liable for all or any part of the obligations evidenced
by this Note, hereby waive
- 5 -
<PAGE>
presentment, demand, notice of nonpayment, protest and all other demands' and
notices in connection with the delivery, acce ptance, performance or enforcement
of this Note, and do hereby consent to any number of renewals of extensions of
the time or payment hereof and agree that any such renewals or extensions may be
made without notice to any such persons and without affecting their liability
herein and do further cons ent to the release of any person liable hereon, all
without affecting the liability of the other persons, firms, or corporations
liable for the payment of this Note; AND DO HEREBY WAIVE TRIAL BY JURY.
(b) THE COMPANY ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE
IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE
LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY
PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO
USE.
BONE, MUSCLE AND JOINT, INC.
By:_____________________________
Name:
Title:
<PAGE>
SECOND AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT dated as
of November 22, 1996, among BONE,
MUSCLE AND JOINT, INC., a Delaware
corporation (the "Corporation"), and
the STOCKHOLDERS (as defined herein).
Reference is made to the Restricted Stock Agreements dated as of
the date hereof among the Corporation and each of the SCOI Stockholders (as
hereinafter defined), pursuant to which the Corporation has agreed to sell and
issue an aggregate of up to 4,000,000 shares of Common Stock to the SCOI
Stockholders. It is deemed to be in the best interests of the Corporation and
the Stockholders to amend the Agreement to provide for a representative of the
SCOI Stockholders to serve as a member of the Board of Directors of the
Corporation and to include the SCOI Stockholders as Stockholders under this
Agreement.
Each of the Stockholders party hereto owns or has the right to
acquire that number of shares of Stock (as defined herein) set forth opposite
such Stockholder's name on Schedule I hereto. It is deemed to be in the best
interests of the Corporation and the Stockholders that provision made for the
continuity and stability of the business and policies of the Corporation and, to
that end, the Corporation and the Stockholders hereby set forth their agreement
with respect to the shares of Stock owned by the Stockholders.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and obligations hereinafter set forth, the parties hereto
hereby agree as follows:
SECTION 1. DEFINITIONS.
-----------
As used herein, the following terms shall have the following respective
meanings:
(a) "AFFILIATE", with respect to any Stockholder means any
Person that directly or indirectly Controls, is Controlled by or is under common
Control with such Stockholder.
(b) "COMMON STOCK" means the Common Stock, $.001 par value, of
the Corporation.
(c) "CONTROL" and "CONTROLLED" means, with respect to any
Person, the power to direct or cause the direction of the management and
policies of such Person, whether directly or indirectly, through ownership of
voting securities, by contract or otherwise.
(d) "CORPORATION ACQUISITION" means the consummation of any of
the following involving the Corporation: (i) any
<PAGE>
merger, consolidation, share exchange, business combination, or other similar
transaction pursuant to which Control of the Corporation would be transferred to
another Person; (ii) any sale, transfer or other disposition (other than in
connection with the creation of a security interest relating to an ordinary
course of business financing transaction) of 50% or more of the assets of the
Corporation, in a single transaction or series of transactions; or (iii) any
purchase, tender offer or exchange offer for in excess of 50% of the outstanding
shares of capital stock of the Corporation.
(e) "EXCLUDED SECURITIES" means (i) shares of Common Stock
issued or issuable upon exercise of any options granted pursuant to the
Corporation's 1996 Stock Option Plan; (ii) shares of Common Stock issued as a
stock dividend or upon any stock split or other subdivision or combination of
Common Stock; (iii) shares of Common Stock issuable upon conversion of shares of
Series A Preferred Stock or Series B Preferred Stock; and (iv) shares of Common
Stock issued by the Corporation to physicians and employees of a physician
practice group in connection with the execution and delivery of a management
services agreement between such physician(s) or such physician practice group
and the Corporation.
(f) "GROUP" means:
(i) In the case of any Investor or Stockholder who is an
individual, (A) such Stockholder, (B) the spouse and lineal
descendants of such Stockholder and (C) a trust for the benefit of any
of the foregoing;
(ii) In the case of any Investor or Stockholder that is a
partnership, (A) such partnership, (B) any of its limited or general
partners (and the direct or indirect equity holders of any
partnership, corporation or other entity which is such a partner) and
(C) any successor to such partnership, including without limitation,
any corporation or other business organization (and the direct or
indirect equity holders of such corporation or business organization)
to which such partnership shall sell all or substantially all of its
assets; and
(iii) In the case of any Investor or Stockholder that is a
corporation, (A) such corporation (and the direct or indirect equity
holders of such corporation) and (B) any successor to such
corporation, including, without limitation, any corporation or other
business organization ( the direct or indirect equity holders of such
corporation or business organization) to which such corporation shall
sell all or substantially all of its assets or with which it shall be
merged.
(g) "INITIAL GRANT" means the 850,000 shares of Common Stock
purchased by Nagpal pursuant to the Purchase Agreement.
-2-
<PAGE>
(h) "INVESTOR" means each of (i) Delphi Ventures III, L.P., (ii)
Delphi BioInvestments III, L.P., (iii) Oak Investment Partners VI, L.P., (iv)
Oak VI Affiliates Fund, L.P., (v) Scheer & Company, Inc. and (vi) Nagpal, and
shall include any successor to, or assignee or transferee any Investor who or
that agrees in writing to be treated as an Investor pursuant to this Agreement
and to be bound by the terms and comply with the provisions hereof.
(i) "MEMBER of the Group" with respect to any Investor or
Stockholder means any member of the Group of such Investor or Stockholder.
(j) "NAGPAL" means Naresh Nagpal, M.D., Chairman, President and
Chief Executive Officer of the Corporation.
(k) "PERSON" shall be construed broadly and shall include an
individual, a partnership, a corporation, an association, a joint stock company,
a limited liability company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency political
subdivision thereof.
(l) "PROPORTIONATE PERCENTAGE" shall mean, as to each Investor
and Stockholder, that percentage figure which expresses the ratio that (x) the
number of outstanding shares of Common Stock then owned by such Investor or
Stockholder bears to (y) the aggregate number of outstanding shares of Common
Stock then outstanding (for purposes solely of the computation required under
clauses (x) and (y) above, all of the Corporation's securities that are
convertible into or exercisable or exchangeable (regardless of whether such
securities are convertible, exercisable or exchangeable at the time of
determination) for shares of Common Stock at the rate at which such securities
are (or, but for the lapse of time, would then be) convertible into or
exercisable or exchangeable shares of Common Stock in effect at the time of
delivery by the Corporation of the notice of the Offer contemplated by Section
4(a) shall be deemed to have been issued and be outstanding; provided, however,
that any employee stock options that are not then currently exercisable, shall
be excluded from the computation required under clause (y) above).
(m) "PURCHASE AGREEMENT" means the Stock Purchase Agreement
dated as of May 6, 1996 among the Corporation and the Investors.
(n) "SCOI STOCKHOLDERS" means each of the persons identified as
a SCOI Stockholder on Schedule I attached hereto, and shall include any
successor to, or assignee or transferee of, any SCOI Stockholder who agrees in
writing to be treated as a SCOI Stockholder pursuant to this Agreement and to be
bound by the terms and comply with the provisions hereof.
-3-
<PAGE>
(o) "SERIES A PREFERRED STOCK" means the Series A Convertible
Preferred Stock, $.01 par value, of the Corporation or any series of stock into
which the Series A Preferred stock is convertible pursuant to Sections 4, 5 and
6 of Article IV of the Amended and Restated Certificate of Incorporation of the
Corporation.
(p) "SERIES A-1 PREFERRED STOCK" means the Series A-1
Convertible Preferred Stock, $.01 par value, of the Corporation or any series
into which the Series A-1 Preferred Stock is convertible pursuant to Sections 4,
5 and 6 of Article IV of the Amended and Restated Certificate of Incorporation
of the Corporation.
(q) "SERIES B PREFERRED STOCK" means the Series B Convertible
Preferred Stock, $.01 par value, of the Corporation or any series of stock into
which the Series B Preferred stock is convertible pursuant to Sections 4, 5 and
6 of Article IV of the Amended and Restated Certificate of Incorporation of the
Corporation.
(r) "SERIES B-1 PREFERRED STOCK" means the Series B-1
Convertible Preferred Stock, $.01 par value, of the Corporation or any series
into which the Series B-1 Preferred Stock is convertible pursuant to Sections 4,
5 and 6 of Article IV of the Amended and Restated Certificate of Incorporation
of the Corporation.
(s) "STOCK" means (i) the presently issued and outstanding
shares of capital stock of the Corporation and any options exercisable therefor
(which options shall be deemed to be that number of shares of Stock for which
they are exercisable); (ii) any additional shares of capital stock of the
Corporation hereafter issued and outstanding; and (iii) any shares of capital
stock into which such shares may be converted or for which they may be exchanged
or exercised.
(t) "STOCKHOLDER" means each of the persons identified on
Schedule I attached hereto as the holder of Stock and shall include any other
person who agrees in writing with the parties hereto to be bound by and to
comply with all applicable provisions of this Agreement.
(u) "UNVESTED STOCK" shall have the meaning ascribed thereto in
Section 5 hereof.
(v) "VESTED STOCK" shall have the meaning ascribed thereto in
Section 5 hereof.
-4-
<PAGE>
SECTION 2. ELECTION OF DIRECTORS; VOTING; ETC.
----------------------------------
(a) Until this Agreement is terminated pursuant to Section 7
hereof, (i) the number of directors constituting the entire Board of Directors
of the Corporation shall be four and (ii) at each annual or special meeting of
the holders of any class of the capital stock of the Corporation called for the
purpose of electing directors of the Corporation, and at any time at which
holders of any class of the capital stock of the Corporation shall have the
right to vote for or consent in writing to the election of directors of the
Corporation, then, and in each such event, the Stockholders shall vote, and
shall cause their respective Affiliates to vote, all shares of Stock owned by
them and entitled to be voted in the election of directors for, or consent in
writing with respect to such shares in favor of, the election of a Board of
Directors of the Corporation constituted as follows:
(i) Nagpal;
(ii) one director designated by Oak Investment Partners VI,
Limited Partnership and Oak VI Affiliates Fund, Limited
Partnership ("Oak");
(iii) one director designated by Delphi Ventures III, L.P.
("Delphi"); and
(iv) one director designated by a majority in interest of
the SCOI Stockholders.
(b) The Stockholders shall vote their shares of Stock (i) to
remove any director whose removal is required by the parties with the power to
designate such director pursuant to Section 2(a) above and (ii) to fill any
vacancy created by the removal, resignation or death of a director or the
increase in the size of the Board of Directors, in each case for the election of
a new director designated and approved in accordance with the provisions of this
Section 2.
(c) For purposes of this Section 2, the SCOI Stockholders hereby
designate James Fox, M.D., as their nominee to serve as a member of the Board of
Directors for each of the terms thereof ending on the date of the annual meeting
of stockholders occurring in 1997 and ending on the of the annual meeting of
stockholders occurring in 1998.
SECTION 3. RIGHT OF FIRST REFUSAL ON CORPORATION ISSUANCE.
-----------------------------------------------
(a) Except in the case of Excluded Securities, the Corporation
shall not at any time after January 31, 1997 issue or sell or agree to issue or
sell any shares of capital stock or any options or other securities exercisable
for or convertible into shares of capital stock (collectively, the "Equity
Securities")
-5-
<PAGE>
of the Corporation, unless in each case the Corporation shall have first offered
to sell to each Investor such Investor's Proportionate Percentage (as
hereinafter defined) of such securities (the "Offered Securities"), at a price
and on such other terms as shall have been specified by the Corporation in
writing delivered to such Investor (the "Offer"), which Offer by its terms shall
remain open and irrevocable for a period of 15 business days (the "Offer
Period") from the date it is delivered by the Corporation to the Investors.
(b) Notice of each Investor's intention to accept, in whole or
in part, an Offer shall be evidenced by a writing signed by such Investor and
delivered to the Corporation prior to the end of the Offer Period, setting forth
the portion of the Offered Securities such Investor elect purchase (the "Notice
of Acceptance"). If any Investor shall subscribe for less than its Proportionate
Percentage of the Offered Securities to be sold, the other subscribing Investors
shall be entitled to purchase the balance of that Investor's Proportionate
Percentage in the same proportion in which they were entitled to purchase the
Offered Securities in the first place (excluding for such purposes such
Investor). The Corporation shall notify each Investor within five business days
following the expiration of the Offer Period of the amount of Offered Securities
which each Investor may purchase pursuant to the foregoing sentence, and each
Investor shall then have five business days from the delivery of such notice to
indicate such additional amount, if any, that such Investor wishes to purchase.
(c) In the event that Notices of Acceptance are not given by the
Investors in respect of all the Offered Securities, the Corporation shall have
120 days from the expiration of the foregoing 15-business day or 25-business day
period, whichever is applicable, to sell all or any pa such Offered Securities
as to which Notices of Acceptance have not been given by the Investors (the
"Refused Securities") to any other person or persons, but only upon terms and
conditions in all respects, including, without limitation, unit price and
interest rates, which are not more favorable, in the aggregate, to such other
person or persons or less favorable to the Corporation than those set forth in
the Offer. Upon the closing, which shall include full payment to the
Corporation, of the sale to such other person or persons of all the Refused
Securities, and upon the execution and delivery by each Investor subscribing for
Offered Securities of such documentation as shall be required to be executed and
delivered by all other purchasers in such transaction, such Investors shall
purchase from the Corporation, and the Corporation shall sell to such Investors,
the Offered Securities in respect of which Notices of Acceptance were delivered
to the Corporation by the Investors, on the terms specified in the Offer.
(d) In each case, any Offered Securities not purchased by the
Investors or any other person or persons in accordance
-6-
<PAGE>
with Section 4(c) may not be sold or otherwise disposed of until they are again
offered to the Investors under the procedures specified in Sections 4(a), (b)
and
(e) The rights granted under this Section 3 shall terminate as
to any Investor upon such Investor's failure to purchase all of such Investor's
Proportionate Percentage of the Offered Securities and such Investor shall
forfeit its rights under this Section 3 as to any subsequent issuance of Equity
Securities by the Corporation; provided, however, that the rights under this
Section 3 shall not terminate as to Nagpal unless he fails to purchase the
following percentages of the Offered Securities: (i) 6.25 percent in the first
financing round to occur after the date hereof; and (ii) 3.00 percent in each
subsequent financing round.
SECTION 4. PROCEDURES ON SALE OF STOCK TO THIRD PARTIES. Except
as otherwise expressly provided in Section 5, each Investor and each Member of
the Group of each Investor shall sell or transfer or agree to sell or transfer
("Sell") Stock only in accordance with the following procedures; provided,
however, that with respect to Nagpal, Stock, as used in this Section 4, shall be
limited to Vested Stock (as defined in Section 5 hereof) and Unvested Stock (as
defined in Section 5 hereof) may not be the subject of any sale, transfer or
other disposition:
(a) In the event that any Investor or Member of the Group of an
Investor (such Investor or Member of the Group being hereinafter referred to as
a "Selling Investor") receives a bona fide offer from a third party (the
"Prospective Purchaser") to purchase all or any portion of the Stock owned by
the Selling Investor, the Selling Investor shall deliver to the other Investors
a written notice (the "Investor Offer Notice"), which shall be irrevocable for a
period of 15 business days after delivery thereof (the "Investor Offer Period"),
offering (the "Investor Offer") all of the Stock proposed to be Sold by the
Selling Investor to the Prospective Purchaser at the purchase price and on the
terms of the proposed Sale to the Prospective Purchaser (such Investor Offer
Notice shall include the foregoing information and all other relevant terms of
the proposed Sale, including the identification of the Prospective Purchaser).
The Investors shall have the right and option, for a period of 15 business days
after delivery of the Investors Offer Notice, to accept all or any portion of
its or his pro rata share in accordance with its or his Proportionate Percentage
of the Stock so offered at the purchase price and on the terms stated in the
Investor Offer Notice. Such acceptance shall be made by delivering a written
notice to the Selling Investor within said 15 business-day period.
(b) Sales of Stock under the terms of Section 4(a) shall be made
at the offices of the Corporation on a mutually satisfactory business day within
15 business days after the expiration of the Investor Offer Period. Delivery of
-7-
<PAGE>
certificates or other instruments evidencing such Stock duly endorsed for
transfer shall be made on such date against payment of the purchase price
therefor.
(c) If the Investors fail to accept all of the Stock offered for
Transfer pursuant to the Investor Offer Notice, then at any time within 60
business days after the expiration of the Investor Offer Period the Selling
Investor may Sell all or any part of the remaining Stock so off for Sale on the
terms stated in the Investor Offer Notice; provided, however, that the Selling
Investor may not, under any circumstances, Sell any Stock to the Prospective
Purchaser if the Board of Directors, in its sole discretion, determines in good
faith that the Prospective Purchaser is a competitor, or an Affiliate of a
competitor, of the Corporation or that such Prospective Purchaser's ownership of
Stock would be contrary to the best interests of the Corporation. In the event
that the Stock is not Transferred by the Selling Investor to the Prospective
Purchaser during such period, the right of the Selling Investor to Sell such
remaining Stock to the Prospective Purchaser shall expire and the obligations of
this Section 4 shall be reinstated.
SECTION 5. REPURCHASE OF STOCK UPON OCCURRENCE OF TERMINATING
EVENT.
(a) Anything contained in this Agreement to the contrary
notwithstanding, after the date (the "Termination Date") upon which the
employment of Nagpal with the Corporation is terminated for any reason
whatsoever, including death, disability, termination by the Corporation, or
resignation by Nagpal (hereinafter, a "Termination Event"), the Corporation
shall have the right to repurchase from Nagpal shares of Unvested Stock (as
hereinafter defined) owned by Nagpal on the terms specified in this Section 5.
(b) For purposes of this Section 5, the "Vested Stock" of Nagpal
on the Termination Date shall mean that number of shares of Stock that equals
the sum of (i) 150,000 and (ii) the product of 700,000 and a fraction, the
numerator of which equals the number of full calendar months elapsed since
January 1, 1996, and the denominator of which is 40; provided, however, that
such number of shares may be increased pursuant to the provisions of paragraphs
(f), (g), (h) and (i) of this Section 5.
(c) The "Unvested Stock" of Nagpal on the Termination Date shall
mean that number of shares of Stock which equals the Initial Grant minus the
Vested Stock of Nagpal.
(d) Anything contained in this Agreement to the contrary
notwithstanding, upon the occurrence of a Termination Event, the Corporation
shall have the right, but shall not be obligated, to repurchase from Nagpal and
Nagpal shall sell to the Corporation upon the exercise of such right, all shares
of Unvested Stock held by Nagpal on the Termination Date, at a price
-8-
<PAGE>
equal to $.01 per share of Stock. Such right may be exercised by the Corporation
at any time during the 15 business-day period following the Termination Date by
giving written notice to Nagpal of the exercise of such right.
(e) Each party hereto acknowledges that the Stock owned by
Nagpal on the date hereof, which is included in the Initial Grant, is
"restricted stock" within the meaning of Section 83(b) of the Internal Revenue
Code of 1986, as amended, and the Corporation shall cooperate with Nagpal
necessary to enable Nagpal to file the election contemplated by said Section
83(b).
(f) If Nagpal's employment with the Corporation is terminated
without Cause (as such term is defined in that certain letter of employment
dated as of the date hereof between the Corporation and Nagpal), an additional
number of shares of Unvested Stock shall become Vested Stock a the Termination
Date as follows: (i) if the Termination Date is prior to January 1, 1997,
210,000 additional shares of Unvested Stock shall become Vested Stock; (ii) if
the Termination Date is after December 31, 1996 but prior to January 1, 1998,
157,500 additional shares of Unvested Stock shall become Vested Stock; and (iii)
if the Termination Date is after December 31, 1997 but prior to January 1, 1999,
105,000 additional shares of Unvested Stock shall become Vested Stock.
(g) If Nagpal's employment with the Corporation is terminated as
a result of his death or by reason of his becoming permanently disabled, 210,000
additional shares of Unvested Stock shall immediately become Vested Stock as of
the Termination Date.
(h) Simultaneously with the effectiveness of a registration
statement filed under the Securities Act for the initial public offering of
securities of the Corporation, fifty percent (50%) of the shares which
constitute Unvested Stock (as determined as of the date of such effectiveness)
shall immediately become Vested Stock.
(i) Simultaneously with the closing of a Corporation
Acquisition, one hundred percent (100%) of the shares which constitute Unvested
Stock (as determined as of the date of such closing) shall immediately become
Vested Stock.
SECTION 6. LEGEND ON STOCK CERTIFICATES.
Each certificate representing shares of Stock held by the
Stockholders shall bear a legend containing words substantially similar to the
following:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE
HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN RESPECT OF
THE ELECTION OF DIRECTORS ARE
-9-
<PAGE>
SUBJECT TO THE TERMS AND CONDITIONS OF THE SECOND AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER 22, 1996, AMONG BONE,
MUSCLE AND JOINT, INC. AND THE HOLDERS OF THE OUTSTANDING CAPITAL
STOCK OF SUCH CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF BONE, MUSCLE AND JOINT, INC."
SECTION 7. DURATION OF AGREEMENT.
---------------------
The rights and obligations of each Stockholder under this
Agreement shall terminate as to such Stockholder upon the earliest to occur of
(a) the transfer of all Stock owned by such Stockholder (including the Stock
owned by all Members of the Group of such Stockholder) and (b) the consummation
of a firm commitment underwritten public offering of the Corporation's Common
Stock registered pursuant to the Securities Act of 1933, as amended.
SECTION 8. COVENANTS WITH RESPECT TO SPECIAL MANDATORY
CONVERSION. Reference is hereby made to the Special Mandatory Conversion of the
Series A Preferred Stock and Series B Preferred Stock, as provided for in
Section 6 of Article Fourth of the Amended and Restated Certificate of
Incorporation. In the event that any shares of Series A-1 Preferred Stock or
Series B-1 Preferred Stock are issued, concurrently with such issuance, the
parties hereto agree to take all such action as may be required, including
amending the Amended and Restated Certificate of Incorporation, (a) to cancel
all authorized Series A-1 Preferred Shares or Series B-1 Preferred Shares that
remain unissued after such issuance, (b) to create and reserve for issuance upon
Special Mandatory Conversion of the Series A Preferred Shares or Series B
Preferred Shares a new series of Preferred Stock equal in number to the number
of shares of Series A-1 Preferred Stock or Series B-1 Preferred Stock so
canceled and to designate a Series A-2 Preferred Stock or Series B-2 Preferred
Stock, as applicable, with the designations, powers, preferences and rights and
the qualifications, limitations and restrictions identical to those then
applicable to the Series A Preferred Stock except that the conversion price for
such shares of Series A-2 Preferred Stock or Series B-2 Preferred Stock once
initially issued shall be the conversion price in effect immediately prior to
such issuance and shall not be subject to adjustment under any "anti-dilution"
provision by reason of subsequent equity financings at lower per share prices,
and (c) to amend the provisions of Section 6 of Article IV of the Amended and
Restated Certificate of Incorporation relating to Special Mandatory Conversion
of the Series A Preferred Shares and the Series B Preferred Shares to provide
that any such subsequent conversion will be into shares of Series A-2 Preferred
Stock or Series B-2 Preferred Stock, as relevant, rather than Series A-1
Preferred Stock or Series B-1 Preferred Stock. The parties hereto further agree
to take the same actions with respect to the Series A-2 Preferred Stock and
Series B-2 Preferred Stock and each subsequently authorized
-10-
<PAGE>
series of Preferred Stock upon initial issuance of shares of the last such
series to be authorized.
SECTION 9. WAIVER OF RIGHT OF FIRST REFUSAL. Pursuant to Section
3(a) of the Stockholders Agreement dated as of May 6, 1996 (the "Original
Agreement"), prior to issuing any capital stock of the Corporation, the
Corporation must deliver an Offer (as defined in the Original Agreement to each
Stockholder at least 15 business days prior to the proposed date of such
issuance. Further, pursuant to Section 3(e) of the Original Agreement, any
Stockholder that fails to purchase all of such Stockholder's Proportionate
Percentage of the Offered Securities (each as defined in the Original Agreement)
forfeits its rights under Section 3 with respect to any future issuances of
capital stock by the Corporation. Scheer & Company, Inc., hereby acknowledges,
by execution of this Agreement, (a) its waiver of the 15-day notice required
under Section 3(a) of the Original Agreement and (b) its forfeiture of the right
of first refusal granted under the Original Agreement, as amended hereby.
SECTION 10. INVESTOR RIGHTS AND OBLIGATIONS. Notwithstanding
anything to the contrary contained herein, the parties hereto acknowledge and
agree that the rights and obligations set forth in Sections 3 and 4 hereof shall
be applicable as to the Investors only and not as to any other Stockholder party
hereto.
SECTION 11. SCOI STOCKHOLDER TRANSFEREES. Any transferee of
Stock held by any SCOI Stockholder shall, as a condition to such transfer, agree
to be bound by this Agreement as a SCOI Stockholder.
SECTION 12. 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.
-11-
<PAGE>
SECTION 13. GOVERNING LAW.
-------------
This Agreement shall be governed by, and construed in accordance
with, the domestic laws of the State of Delaware, without giving effect to any
choice or conflict of law provision or rule (whether in the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
SECTION 14. SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall bind and inure to the benefit of the
parties and their respective successors and assigns, legal representatives and
heirs.
SECTION 15. NOTICES.
-------
All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or by telecopy or sent by
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or at such other address as may hereafter be designated
in writing by such party to the other parties:
(a) if to the Corporation, to:
Bone, Muscle and Joint, Inc.
4800 N. Federal Highway
Suite 104D
Boca Raton, Florida 33431
Attention: President
Telecopier: (407) 391-1389;
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 Stockholders, to their respective
addresses set forth on Schedule I attached hereto.
----------
All such notices, requests, consents and other communications shall be deemed to
have been delivered (i) in the case of personal delivery or delivery by
telecopy, on the date of such delivery; (ii) in the case of dispatch by
nationally-recognized overnight courier, on the next business day following such
-12-
<PAGE>
dispatch; and (iii) in the case of mailing, on the third business day after the
posting thereof.
SECTION 16. MODIFICATION.
------------
Neither this Agreement nor any provisions hereof can be
modified, changed, discharged or terminated except by an instrument in writing
signed by the Corporation and the holders of at least 80% of the issued and
outstanding capital stock of the Corporation.
SECTION 17. HEADINGS.
--------
The headings of the 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 18. NOUNS AND PRONOUNS.
------------------
Whenever the context may require, any pronouns used herein shall
include the corresponding masculine, feminine or neuter forms, and the singular
shall include the plural and vice-versa.
SECTION 19. ENTIRE AGREEMENT.
----------------
This Agreement and the other writings referred to herein or
delivered pursuant hereto contain the entire agreement among the parties hereto
with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements and understandings with respect thereto.
SECTION 20. COUNTERPARTS.
------------
This Agreement may be executed in any number of counterparts,
and each such counterpart hereof shall be deemed to be an original instrument,
and all such counterparts together shall constitute but one agreement.
* * * *
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amended and Restated Stockholders Agreement on the date first above written.
CORPORATION:
BONE, MUSCLE AND JOINT, INC.
By: /s/ Naresh Nagpal, MD
Naresh Nagpal, MD
President and Chief Executive
Officer
INVESTORS:
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
General Partner
<PAGE>
OAK VI AFFILIATES FUND, LIMITED
PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By: /s/ Ann H. Lamont
Ann H. Lamont
Managing Member
SCHEER & COMPANY, INC.
By:
Name:
Title:
/s/ Naresh Nagpal, M.D.
Naresh Nagpal, M.D.
SCOI STOCKHOLDERS:
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, M.D.
President
MARC J. FRIEDMAN, M.D., INC.
By: /s/ Marc J.Friedman
Marc J. Friedman, M.D.
President
/s/ Stephen J. Michal, Snyder
Stephen J. Michal, Snyder
/s/Richard D. Ferkel
Richard D. Ferkel, M.D.
<PAGE>
/s/ Todd D. Moldawer, M.D.
Todd D. Moldawer, M.D.
/s/ Gregory J. Hanker, M.D.
Gregory J. Hanker, M.D.
HERBERT DENNIS HUDDLESTON, M.D., INC.
By:/s/Herbert Dennis Huddleston, M.D.
Herbert Dennis Huddleston, M.D.
President
/s/ A. Elizabeth Bloze, M.D.
A. Elizabeth Bloze, M.D.
/s/ Todd J. Molnar, M.D.
Todd J. Molnar, M.D.
TREVOR P. LYNCH, M.D.,
A MEDICAL CORPORATION
By: /s/ Trevor P. Lynch, M.D.
Trevor P. Lynch, M.D.
President
SAUL M. BERNSTEIN, M.D., INC.
By: /s/ Saul M. Bernstein, M.D.
Saul M. Bernstein, M.D.
President
/s/ Steven A. Schopler, M.D.
Steven A. Schopler, M.D.
/s/ Ronald P. Karzel, M.D.
Ronald P. Karzel, M.D.
/s/ Hrair E. Darakjian, M.D.
Hrair E. Darakjian, M.D.
/s/ Jonathan S. Jaivin, M.D.
Jonathan S. Jaivin, M.D.
<PAGE>
/s/ Donald A. Wiss, M.D.
Donald A. Wiss, M.D.
/s/ Patricia C. McKeever, M.D.
Patricia C. McKeever, M.D.
/s/ David M. Auerbach, M.D.
David M. Auerbach, M.D.
/s/ Pamela E. Westlin
Pamela E. Westlin
/s/ Glenn Cozen
Glenn Cozen
<PAGE>
SCHEDULE I
----------
Stockholders
------------
<TABLE>
<S> <C> <C> <C>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Investors:
- ---------
Naresh Nagpal, M.D. 850,000 333,333 666,667
2378 N.W. 60th Street
Boca Raton, Florida 33496
Telecopier: (407) 998-4649
Delphi Ventures III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, California 94025
Telecopier: (415) 854-2961 147,347 327,438 654,877
Delphi BioInvestments III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, California 94025
Telecopier: (415) 854-2961 2,653 5,895 11,790
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Oak Investment Partners VI, L.P. 146,580 325,733 651,467
One Gorham Island Westport,
Connecticut 06880
Telecopier: (203) 227-0372
Oak VI Affiliates Fund, Limited 3,420 7,600 15,200
Partnership
One Gorham Island
Westport, Connecticut 06880
Telecopier: (203) 227-0372
Scheer & Company, Inc. 25,000 0 0
250 West Main Street
P.O. Box 299
Branford, Connecticut 06405
Telecopier: (203) 481-4164
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
SCOI Stockholders:
- ------------------
James M. Fox, M.D., Inc. 311,094 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Wilson Del Pizzo, M.D., Inc. 159,096 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Marc J. Friedman, M.D., Inc. 250,485 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Stephen J. Snyder, M.D. 252,352 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Richard D. Ferkel, M.D. 278,686 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Todd D. Moldawer, M.D. 229,581 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Gregory J. Hanker, M.D. 257,379 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Herbert Dennis Huddleston, 155,232 0 0
M.D., Inc.
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
A. Elizabeth Bloze, M.D. 166,329 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Todd J. Molnar, M.D. 188,497 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Trevor P. Lynch, M.D., 189,580 0 0
A Medical Corporation
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Saul M. Bernstein, M.D., Inc. 166,989 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Steven A. Schopler, M.D. 169,052 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Ronald P. Karzel, M.D. 277,886 0 0
c/o Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Hrair E. Darakjian, M.D. 252,639 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Jonathan S. Jaivin, M.D. 169,202 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Donald A. Wiss, M.D. 184,070 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Patricia C. McKeever, M.D. 131,225 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
David M. Auerbach, M.D. 170,626 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
Pamela E. Westlin 20,000 0 0
c/o Southern California
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
<PAGE>
SERIES A SERIES B
PREFERRED PREFERRED
NAME AND ADDRESS COMMON STOCK STOCK STOCK
- ---------------- ------------ ----- -----
Glenn Cozen 20,000 0 0
c/o Southern California --------- ------- -------
Orthopedic Institute Medical
Group
6815 Noble Avenue
Van Nuys, California 91405
Telecopier: (818) 901-6680
5,175,000 999,999 2,000,001
</TABLE>
<PAGE>
EXECUTION COPY
================================================================================
AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP, L.L.C.
Effective as of July 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 -- Consent
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 -- 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 -- Office Sublease
EXHIBIT C -- Medical Equipment Master Lease Agreement
EXHIBIT D -- Restricted Stock Agreement
<PAGE>
THIS AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT (the
"Agreement") is entered into on September 9,
1997 (the "Signature Date"), and effective
as of July 1, 1997, by and between LEHIGH
VALLEY BONE, MUSCLE AND JOINT GROUP, L.L.C.,
a Pennsylvania limited liability company
(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 non-medical management, administrative,
financial, marketing, information technology, and related services to
professional medical organizations.
C. The Management Company and the Medical Group executed a management
services agreement effective as of July 1, 1996 (the "Original Agreement"). The
parties hereto desire to amend and restate in its entirety the Original
Agreement to reflect certain modifications to their agreement.
D. Concurrently herewith, the Management Company and Orthopaedic
Associates of Bethlehem, Inc. ("OAB"), an entity controlled by the physician
owners of 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
OAB, which assets are used by the Medical Group in its delivery of medical
services.
<PAGE>
E. The Management Company and the Medical Group desire to enter into
this 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, intending
to be legally bound, hereby agree as follows:
SECTION 1. Retention of the Management Company.
SECTION 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
-2-
<PAGE>
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 entering into any
arrangement on behalf, or for the benefit, of the Medical Group with a medical
facility or laboratory controlled, managed or operated by the Management
Company.
SECTION 2. Term.
Provided that the Closing under the Asset Purchase Agreement shall have
occurred as provided therein, the performance of services under this Agreement
shall commence as of July 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) months prior to the expiration of the
-3-
<PAGE>
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 the Management Company shall
reasonably deem necessary in
-4-
<PAGE>
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 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,
regulations, and ordinances in connection with the provision of the Management
Services hereunder.
3.2. Premises.
(a) The Medical Group, as of the Commencement Date, provides
Medical Services at the following location:
2597 Schoenersville Road
Bethlehem, Pennsylvania 18017
(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 Management Company shall
sublease such premises to the Medical Group pursuant to a sublease in the form
of Exhibit B attached hereto (each, an "Office Sublease"), in consideration of
the payments to be made by the Medical Group under such sublease. Each lease
entered into between the Management Company and a landlord is referred to herein
as an "Office Lease." Notwithstanding anything to the contrary contained in this
Agreement, the Management Company may, in its sole discretion,
-5-
<PAGE>
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.
(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
-6-
<PAGE>
connection with the provision of Medical Group Services (collectively, the
"Medical Equipment"). The Management Company shall acquire (or lease) and
replace (as necessary), at its cost, all Medical Equipment, and the Management
Company shall retain ownership of (or the leasehold interest with respect to)
all Medical Equipment. The Management Company shall lease the Medical Equipment
to the Medical Group pursuant to an equipment lease (a "Medical Equipment Master
Lease Agreement"), substantially in the form attached hereto as Exhibit C, and
in consideration thereof, the Medical Group shall make the rental payments set
forth in the Medical Equipment Master Lease Agreement. 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 by the Medical Group 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 Medical Group's right to use the Equipment shall be
subordinate to the rights of any unaffiliated third
-7-
<PAGE>
party lessor or lender 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. The Management Company shall use its best
efforts to ensure that the information systems technology recommended by the
Management Company for use by, and implemented at the offices of, the Medical
Group is suitable for use by the Medical Group to accomplish the intended
administrative functions. 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
-9-
<PAGE>
(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 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.
-10-
<PAGE>
(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 Operating Agreement (the "Operating
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
Operating 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 an equity
member 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.
(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 Operating
Agreement; provided, further, that all checks drawn
on any Medical Group bank account shall be signed by
an equity member in the Medical Group or other
authorized representative of the Medical Group.
(l) Calculating physicians' and limited liability
company's annual earnings based on the Medical
Group's profit and loss distribution formulas.
(m) Ongoing day-to-day communication with the managing
member (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.
(p) Coordinating payroll processing and payroll tax
payments.
(q) Providing ongoing personnel full time equivalent
analysis.
-12-
<PAGE>
(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.
(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.
(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
-13-
<PAGE>
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 equity members 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
-14-
<PAGE>
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.
(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
-15-
<PAGE>
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 Pennsylvania
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; 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:
-16-
<PAGE>
(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.
(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 non-medical personnel necessary for the
conduct of the Medical Group's business operations (collectively,
"Administrative
-17-
<PAGE>
Personnel"), which shall include but not be limited to the following:
(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, 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 Administrative Personnel's principal function (the
"Primary Duties") shall be to provide non-medical administrative services to the
Medical Group. Notwithstanding the foregoing, the Medical Group and the
Management Company acknowledge and agree that the Management Company may, from
time
-18-
<PAGE>
to time, assign tasks ("Other Tasks") to the Administrative Personnel that
are not directly related to the Primary Duties. The Management Company shall use
its best efforts to insure that the performance of the Other Tasks does not
materially interfere with the performance by any Administrative Personnel of his
or her Primary Duties. In the event that the Management Company during any
calendar year assigns Other Tasks to any Administrative Personnel, (i) the
salary or wages attributable to such Administrative Personnel's time spent on
such Other Tasks shall be excluded from the Authorized Management Company
Operating Costs for such year, and (ii) if so requested in writing by the
Medical Group at any time, the Management Company shall relieve such
Administrative Personnel of his or her responsibility for such Other Tasks.
(e) All of the personnel services shall be performed by the
Management Company in compliance with all applicable 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 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
-19-
<PAGE>
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.
-20-
<PAGE>
3.9. 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; 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.
(c) In addition to the foregoing, in connection with the
employment by the Medical Group of any New Physician, the Management Company
will grant to such New Physician an option to purchase that number of shares of
the Management Company's common stock as the Management Company shall, in its
sole discretion, determine to be appropriate; provided, that, in order to
receive the option, such New Physician must execute and deliver to the
Management Company an option agreement and a noncompetition agreement, each in a
form satisfactory to the Management Company.
-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 limited liability company
income tax returns.
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 and such other services as may be
reasonably determined by the Operations Committee to be necessary for the
operation of the Medical Business:
(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.
-23-
<PAGE>
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 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; provided that
during the period beginning April 1, 1997 and ending March 31, 1998, the
Management Company shall pay the reasonable expenses for such marketing and
advertising and shall not charge the Medical Group for any of such costs. 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. The Management
Company shall initially engage a professional marketing and advertising firm to
assist with the development of such marketing and advertising programs.
-24-
<PAGE>
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 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 and regulations. 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.
-25-
<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.
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>
3.17. 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 each person identified on Schedule III
attached hereto (the "Eligible Parties") the consideration set forth opposite
such person's name on Schedule III.
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, and the Medical Group shall execute a financing statement for the
benefit of the Management Company evidencing the foregoing transfer of
-27-
<PAGE>
the Accounts. The Medical Group acknowledges that the Lender is a third party
beneficiary of the benefits granted to the Management Company under this Section
5.1. 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 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).
-28-
<PAGE>
(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
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
-29-
<PAGE>
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 such 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:
(i) "Billings" means, for any applicable period, the
gross charges of the Medical Group for all Medical Group
Services furnished during such period.
-30-
<PAGE>
(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);
(B) interest income;
-31-
<PAGE>
(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, 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 the sum of (i) an amount equal to the Applicable Percentage
-32-
<PAGE>
(as hereinafter defined) of Collections, and (ii) an amount equal to sixty-six
and two-thirds percent (66-2/3%) of the Professional Management Cost Savings (as
hereinafter defined). 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; provided, however, that if (A) any Professional
Management Cost Savings are directly derived from any vendor
relationships initiated prior to the Commencement Date and
maintained thereafter by Debbie Flytuta, and (B) the savings
derived therefrom are not a result of any volume discounts or
other benefits obtained by the Management Company through its
relationship or negotiations with such vendor, then such
savings shall not be deemed Professional Management Cost
Savings for purposes of this Section 5.4.; and
(iii) "Professional Practice Cost Savings" means the
cost savings determined in the manner described on Schedule
VI.
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
-33-
<PAGE>
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;
(ii) the rent and any other payments due under
any of the Office Leases;
(iii) the cost of any Medical Equipment owned or
acquired by the Management Company for the
use by 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
-34-
<PAGE>
(vi) 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
-35-
<PAGE>
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.
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 incurred by the
Management Company for such 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
-36-
<PAGE>
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 any reimbursement for Management
Company Operating Costs, the Management Fee or the Annual Medical Group
Compensation Amount, as applicable, 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 leased 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 Operating Costs and all costs associated with the
development of such New Medical Office other than Medical Group Costs.
(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
-37-
<PAGE>
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 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;
-38-
<PAGE>
(c) the cost of prosthetics, prosthetic devices,
orthotics, braces, splints, appliances, allografts,
x-ray films;
(d) other items and supplies that are billable to
patients or to third party payors;
(e) all amounts payable for all Medical Equipment under
the Medical Equipment Master Lease Agreement;
(f) any lease payments for New Ancillary Service Medical
Equipment;
(g) all lease amounts payable under all of the Office
Subleases; 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:
(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
-39-
<PAGE>
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.
(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
a Medical Equipment Master Lease Agreement.
(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.
-40-
<PAGE>
(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 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;
-41-
<PAGE>
(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 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 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 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.
-42-
<PAGE>
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.
Notwithstanding anything contained herein to the contrary, during the
period beginning on the New Physician Start Date (as hereinafter defined) and
ending on the earlier to occur (such earlier date being referred to herein as,
the "Release Date") of (i) the date that is 180 days after the New Physician
Start Date or (ii) the New Physician Breakeven Date (as hereinafter defined),
the Management Company shall be responsible for the payment of all New Physician
Compensation (as hereinafter defined). In the event that the New Physician
Breakeven Date has not occurred by the Release Date, the Medical Group may
request that the Management Company extend the Release Date until the earlier to
occur of (x) the date that is 180 days after the Release Date or (y) the New
Physician Breakeven Date (such period being referred to herein as, the "Extended
Payment Period"). The
-43-
<PAGE>
Management Company will grant such request and continue paying the New Physician
Compensation through the Extended Payment Period; provided that the Medical
Group shall reimburse the Management Company the aggregate amount paid during
the Extended Payment Period to or for the benefit of the New Physician. The
Medical Group shall reimburse such amount in six equal monthly installments, the
first of such installments being due on the first day of the month immediately
following the end of the Extended Payment Period. The Billings and Collections
generated by such New Physician for those Medical Group Services performed by
such New Physician shall in all instances be included in determining Billings
and Collections for purposes of this Agreement. As of the Release Date or the
last day of the Extended Payment Period, as the case may be, the New Physician
Compensation shall be payable by, and become the responsibility of, the Medical
Group in accordance with Section 5.7 hereof.
(a) "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.
(b) "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
-44-
<PAGE>
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.
(c) "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.
(d) "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 limited liability company duly organized,
validly existing, and in good standing under the laws of the State of
Pennsylvania 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 Medical Equipment
Master Lease, the Office Subleases, 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 contemplated hereby and thereby. The Medical
Group has delivered to the Management Company a true and correct copy of its
Operating Agreement, in effect on the date hereof.
-45-
<PAGE>
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 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
-46-
<PAGE>
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 members' equity of the Medical Business at June 30, 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 six-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
the periods covered thereby, and (iv) are true, correct and complete in all
material respects as of the dates thereof.
-47-
<PAGE>
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 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;
-48-
<PAGE>
(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 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
-49-
<PAGE>
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 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
-50-
<PAGE>
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.
(c) The Medical Group has provided the Management Company with
true and complete copies of all Federal, state and
-51-
<PAGE>
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 of any court, governmental department,
commission, agency, instrumentality or arbitrator against the Medical Group, its
-52-
<PAGE>
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. 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 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
-53-
<PAGE>
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 July 31,
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 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,
-54-
<PAGE>
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.
(b) Schedule 6.12 lists each employment, severance or other
similar contract, arrangement or policy and each plan or
-55-
<PAGE>
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 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, health and other property and casualty forms of
insurance held by the Medical Group covering the assets, properties or
operations
-56-
<PAGE>
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. 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.
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
-57-
<PAGE>
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, 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, the Office
Subleases, the Medical Equipment Master Lease Agreement and the Stockholder
Non-Competition
-58-
<PAGE>
Agreements (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 amended and
restated certificate of incorporation (the "Amended and Restated Certificate of
Incorporation") and its bylaws (the "Bylaws"), each as in effect on the date
hereof.
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 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
-59-
<PAGE>
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 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 8,057,059 shares are
issued and outstanding, and 8,633,049 shares of preferred stock, of which (i)
999,999 shares 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 all 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
-60-
<PAGE>
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.
74. 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
(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.. 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
-61-
<PAGE>
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;
(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;
-62-
<PAGE>
(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
(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
-63-
<PAGE>
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.
7.9. 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
-64-
<PAGE>
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.
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
-65-
<PAGE>
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; and
(iv) Management Company Operating Costs.
(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;
-66-
<PAGE>
(ix) Lien account collection policies; and
(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 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.
-67-
<PAGE>
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 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.
-68-
<PAGE>
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 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
-69-
<PAGE>
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:
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, including, without limitation, Medicare and Medicaid
regulations. 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
-70-
<PAGE>
licensed by the State of Pennsylvania. 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 office 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.
-71-
<PAGE>
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 two business days any Medical Personnel who is not insurable or who loses
his or her malpractice 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. 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
-72-
<PAGE>
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.
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
-73-
<PAGE>
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 admission of new members, transfer of
limited liability company 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 AMENDED AND
RESTATED MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF JULY 1, 1997,
BETWEEN LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP, L.L.C., A
PENNSYLVANIA LIMITED LIABILITY COMPANY, AND BONE, MUSCLE AND JOINT,
INC., A DELAWARE CORPORATION."
-74-
<PAGE>
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.
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
-75-
<PAGE>
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 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 $300,000 per claim and with aggregate policy limits of not less
than $900,000 covering the Medical Group and each of the Medical Personnel of
the Medical Group (or such higher amounts and additional coverage (including
state mandated catastrophic coverage) 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
-76-
<PAGE>
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 equity member of the Medical
Group. The Management Company shall be designated as the beneficiary under any
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 (to the extent that
such acts or omissions of the Medical Personnel are within the scope of their
employment with the Medical Group), 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 equity member or employee of the Medical Group receiving stock of the
Management Company, in the form of Exhibit D attached hereto (the "Restricted
Stock
-77-
<PAGE>
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 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 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
-78-
<PAGE>
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.
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 that the Medical Group is excluded from the Medicaid or Medicare program
as a result of disciplinary action taken against any medical professional
affiliated with the Medical Group by the state or Federal agency responsible for
the operation and supervision of such program, and such agency
-79-
<PAGE>
delivers a notice of such exclusion to the Medical Group (a copy of which the
Medical Group will promptly deliver to the Management Company).
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 Group shall immediately forward any amounts received in
connection therewith to the Management Company) and all
-80-
<PAGE>
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:
(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
-81-
<PAGE>
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. Non-Disclosure of Confidential Information.
14.1. 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
-82-
<PAGE>
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.
(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 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 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
E.
-83-
<PAGE>
SECTION 16. Obligations of the Management Company.
16.1. 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.
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 an
equity member, 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 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 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
-84-
<PAGE>
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 18. 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:
Lehigh Valley Bone, Muscle and
Joint Group, L.L.C.
2597 Schoenersville Road
Bethlehem, Pennsylvania 18017
Attention: Ranjan Sachdev, M.D.
Telecopier: (610) 691-7882;
with a copy to:
Margolis Duckworth & Funt, P.C.
2045 Westgate Drive, Suite 404
Bethlehem, Pennsylvania 18017
Attention: Timothy J. Duckworth, Esq.
Telecopier: (610) 882-9822;
-85-
<PAGE>
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 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.
SECTION 20. Governing Law; Jurisdiction.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Pennsylvania, 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 Commonwealth of Pennsylvania. 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. 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
-86-
<PAGE>
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, the exhibits and schedules hereto, and the Restricted
Stock Agreements and Stockholder Non-Competition Agreements each dated as of
July 1, 1996, between the Management Company and each of the Medical Group and
each member thereof 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. This Agreement supersedes and replaces in its entirety the Original
Agreement. The parties hereto hereby acknowledge that (i) the Stock Purchase
Agreement dated as of July 1, 1996, among the Management Company, OAB and the
other parties thereto and (ii) the Termination Agreement dated as of July 1,
1996, among the Management Company, the Medical Group and the other parties
thereto, are each hereby terminated and of no further force or effect.
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.
SECTION 24. Severability.
The provisions of this Agreement shall be deemed severable and if any
portion shall be held invalid, illegal or
-87-
<PAGE>
unenforceable for any reason, the remainder of this Agreement shall be effective
and binding upon the parties.
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, 18, 19, 20, 22, 23 and this Section 27 shall
survive any expiration or termination of this Agreement.
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
-88-
<PAGE>
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 Pennsylvania, 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 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.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Amended and Restated Management Services Agreement as of the date first above
written.
LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP, L.L.C.
By:______________________________
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
By:______________________________
Name:
Title
Acknowledged and Agreed to
(as to Sections 4, 9.7, 12.2,
14 and 15):
_______________________________
Thomas S. Sauer, M.D.
_______________________________
Ranjan Sachdev, M.D.
_______________________________
Joseph L. Garbarino, M.D.
_______________________________
John M. Williams, M.D.
_______________________________
Peter W. Kozicky, M.D.
Acknowledged and Agreed to
(as to Section 3.2(a)):
Orthopaedic Associates of Bethlehem, Inc.
By:_____________________________________
Name:
Title:
<PAGE>
THIS ASSET PURCHASE AGREEMENT
is entered into on September 9, 1997 (the
"Signature Date"), and effective as of
July 1, 1997, between BONE, MUSCLE AND
JOINT, INC., a Delaware corporation (the
"Buyer"), and ORTHOPAEDIC ASSOCIATES OF
BETHLEHEM, INC., a Pennsylvania corporation
(the "Seller").
A. Lehigh Valley Bone, Muscle and Joint, Inc., an Affiliate (as hereinafter
defined) of the Seller (the "Medical Group"), 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 Medical Group and the Buyer are entering into
an Amended and Restated Management Services Agreement (the "Management Services
Agreement"), pursuant to which the Buyer will furnish to the Medical Group
management, administrative, and related services.
D. In order to effectuate the Management Services Agreement, the Buyer
desires to purchase from the Seller and the Seller desires to sell, transfer,
convey and assign to the Buyer, certain of the assets, properties, interests in
properties and rights of the Seller used by the Medical Group 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
<PAGE>
hereinafter set forth, and intending to be legally bound, the parties hereby
agree as follows:
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 deposits identified on Schedule 1.1(e);
(f) and any additional items identified on Schedule 1.1(f).
-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
(as hereinafter defined) 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. 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. 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 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 by the Seller.
-4-
<PAGE>
1.7. 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.
ARTICLE II
PURCHASE PRICE; ALLOCATION
2.1. Purchase Price; Payment.
The purchase price (the "Purchase Price") to be paid for the Purchased
Assets shall be $254,581.71, of which $204,581.71 (the "CoreStates Amount") will
be delivered by the Buyer to CoreStates Bank, N.A. as payment in full of that
certain promissory note dated April 26, 1994 issued by the Medical Group to
CoreStates Bank, N.A.
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.
-5-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties of the Seller.
The Seller and the Medical Group hereby jointly and severally represent and
warrant to the Buyer, as of the date hereof, as follows:
(a) Organization; Good Standing; Qualification and Power. The Seller is
a corporation duly formed, validly existing and in good standing under the laws
of the State of Pennsylvania 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 certificate of incorporation 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
-6-
<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
Seller's formation 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. 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.
-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, and the Seller is hereby
selling, transferring, conveying and assigning to the Buyer, the Purchased
Assets, and this Agreement, the Bill of Sale and the Assignment and Assumption
Agreement 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, (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, (iii) 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 (iv) 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
-8-
<PAGE>
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 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 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.
-9-
<PAGE>
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 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,
-10-
<PAGE>
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 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.
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. Each party agrees to use its best efforts to have
any such injunction or order lifted.
(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.
-11-
<PAGE>
(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.
4.2. 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:
(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 Closing Date and as of the Signature Date as
though made at and as of the Signature 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 any consents and 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.
-12-
<PAGE>
(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.
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 Closing Date and as of the Signature Date as
though made at and as of the Signature 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
-13-
<PAGE>
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:
(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 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.
-14-
<PAGE>
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) 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 amount of the Purchase
Price remaining after payment of the CoreStates Amount payable by cashier's
check or wire transfer of funds to an account designated in writing by the
Seller;
(d) The Medical Group and the Buyer shall execute and deliver a fully
executed copy of the Management Services Agreement;
(e) The Medical Group 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
Medical Group 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
-15-
<PAGE>
(g) The Medical Group 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.
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 or the Medical Group 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;
-16-
<PAGE>
(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
(iv) any non-compliance by the Seller with the "bulk sales laws"
of the State of Pennsylvania to the extent that such laws 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 and the
Medical Group, 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.
-17-
<PAGE>
(h) "Seller Indemnified Persons" shall mean and include the Seller and
its equity owners and employees.
6.2. Indemnification Generally.
(a) The Seller and the Medical Group shall jointly and severally
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
Person. Upon the giving of such written notice as aforesaid, the
-18-
<PAGE>
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, (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
-19-
<PAGE>
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
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 and the Medical Group
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 Signature Date;
provided, however, that the representations and warranties of the Seller and the
Medical Group 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
-20-
<PAGE>
expiration of the statute of limitations, if any, applicable to the matters set
forth therein (and indefinitely, if none).
ARTICLE VII
REPURCHASE OF ASSETS
The Purchased Assets are subject to repurchase by the Medical Group from
the Buyer upon termination of the Management Services Agreement in accordance
with Section 13.5 of the Management Services Agreement.
ARTICLE VIII
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 p from later pursuing any remedies or
insisting upon full performance for the same or any similar breach or failure.
ARTICLE IX
MISCELLANEOUS
9.1. Transfer Taxes, Etc.
The Seller shall pay all sales, use and excise taxes and all registration,
recording or transfer taxes which may be
-21-
<PAGE>
payable in connection with the transactions contemplated by this Agreement.
9.2. 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, including, without limitation the Stock
Purchase Agreement dated as of July 1, 1996, among the Buyer, the Seller and the
other parties thereto, which agreement is hereby terminated and of no further
force or effect.
9.3. Descriptive Headings.
Descriptive headings are for convenience only and shall not control or
affect the meaning or construction of any provisions of this Agreement.
9.4. 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:
(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;
-22-
<PAGE>
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:
Orthopaedic Associates of Bethlehem, Inc.
c/o Lehigh Valley Bone, Muscle
and Joint Group, L.L.C.
2597 Schoenersville Road
Bethlehem, Pennsylvania 18017
Attention: Ranjan Sachdev, M.D.
Telecopier: (610) 691-7882;
with a copy to:
Margolis Duckworth & Funt, P.C.
2045 Westgate Drive, Suite 404
Bethlehem, Pennsylvania 18017
Attention: Timothy J. Duckworth, Esq.
Telecopier: (610) 882-9822;
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 Pennsylvania are not required to be open.
9.5. 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.
-23-
<PAGE>
9.6. 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.
9.7. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Pennsylvania 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.
9.8. 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.
9.9. 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.
-24-
<PAGE>
9.10. Pronouns.
As used herein, all pronouns shall include the masculine, feminine,
neuter, singular and plural thereof whenever the context and facts require such
construction.
* * * *
<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:____________________________
Name:
Title:
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
By:______________________________
Name:
Title:
Acknowledged and Agreed
(as to Sections 2.1, 3.1,
5.2, 6.1, 6.2, 6.3, 6.4,
6.5 and Article VII:
LEHIGH VALLEY BONE, MUSCLE
AND JOINT GROUP, L.L.C.
By:__________________________
Name:
Title:
<PAGE>
SCHEDULE 1.1(a)
Medical Equipment
<PAGE>
SCHEDULE 1.1(b)
Furniture, Furnishings,
Trade Fixtures, and Office Equipment
<PAGE>
SCHEDULE 1.1(c)
Equipment Leases
<PAGE>
SCHEDULE 1.1(d)
Supplies
All of the medical supplies, office supplies, postage, and printed
materials owned by the Medical Group and located on the premises of any of the
Medical Group's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
SCHEDULE 1.1(e)
Deposits
None.
<PAGE>
SCHEDULE 1.1(f)
Additional Items
<PAGE>
SCHEDULE 2.2
Allocation of Purchase Price
Medical Equipment, Furniture, Furnishings,
Trade Fixtures, and Office Equipment $254,581.71
Supplies $ 0
Deposits $ 0
TOTAL: $254,581.71
<PAGE>
SCHEDULE 3.1(b)
Seller Consents
<PAGE>
SCHEDULE 3.1(c)
Claims
<PAGE>
SCHEDULE 3.1(d)
Litigation
<PAGE>
SCHEDULE 3.2(b)
Buyer Consents
<PAGE>
EXHIBIT A
BILL OF SALE
ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC., a Pennsylvania corporation (the
"Seller"), hereby sells, conveys, transfers, assigns and delivers to BONE,
MUSCLE AND JOINT, INC., a Delaware corporation (the "Buyer"), the following
assets, properties, interests in properties and rights of the Seller
(collectively, the "Purchased Assets"):
1. the medical equipment owned by the Seller and listed on Schedule
1.1(a) of that certain Asset Purchase Agreement between the Seller and the Buyer
entered into as of the date hereof (the "Asset Purchase Agreement");
2. the furniture, furnishings, trade fixtures, and office equipment owned
by the Seller and listed on Schedule 1.1(b) of the Asset Purchase Agreement;
3. the Seller's rights and interests under the equipment identified on
Schedule 1.1(c) of the Asset Purchase Agreement, subject to the Buyer's
assumption of the obligations accruing thereunder as provided in Section 1.3;
4. the supplies described on Schedule 1.1(d) of the Asset Purchase
Agreement;
5. the deposits identified on Schedule 1.1(f) of the Asset Purchase
Agreement; and
6. any additional items identified on Schedule 1.1(g) of the Asset
Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement (the "Excluded Assets") are expressly excluded from the assets of the
Seller being sold, assigned, or otherwise transferred to the Buyer.
<PAGE>
To the extent that there is a conflict between the terms and provisions of
this Bill of Sale and the Asset Purchase Agreement, the terms and provisions of
the Asset Purchase Agreement shall prevail.
IN WITNESS WHEREOF, the Seller has executed this instrument on September
__, 1997, effective as of the 1st day of July, 1997.
ORTHOPAEDIC ASSOCIATES OF
BETHLEHEM, INC.
By:______________________________
Name:
Title:
<PAGE>
AMENDED AND RESTATED RESTRICTED
STOCK AGREEMENT dated as of September 9,
1997, among BONE, MUSCLE AND JOINT, INC.,
a Delaware corporation (the "Company"),
LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP,
L.L.C., a Pennsylvania limited liability
company (the "Medical Group") and the
individuals identified on the signature
page hereto (each, a "Stockholder" and
collectively, the "Stockholders").
In connection with the original affiliation transaction
between the Company and the Medical Group, the Company, the Medical Group and
the Stockholders entered into a restricted stock agreement dated as of July 1,
1996 (the "Original Restricted Stock Agreement"), pursuant to which the Company
issued to the Stockholders shares (the "Original Shares") of the common stock,
$.001 par value (the "Common Stock"), of the Company, which shares are subject
to the terms and conditions set forth in such agreement. The parties hereto
desire to amend the terms of the Original Restricted Stock Agreement as it
pertains to the repurchase and transferability of the Original Shares, and
further deem it appropriate to restate the Original Restricted Stock Agreement,
as so amended, in its entirety.
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 hereby agree that the Original Restricted Stock
Agreement be amended and restated, to read in its entirety as follows:
"RESTRICTED STOCK AGREEMENT
AGREEMENT made as of this 1st day of July, 1996, between
BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), LEHIGH
VALLEY BONE, MUSCLE AND JOINT GROUP, L.L.C., a Pennsylvania limited liability
company (the "Medical Group"), and the individuals identified on the signature
page hereto (each, a "Stockholder" and collectively, the "Stockholders".
This Agreement is the Restricted Stock Agreement referred to
in Schedule IV of the Management Services Agreement dated as of the date hereof
(the "Management Services Agreement"), among the Company, the Medical Group and
the Stockholder.
<PAGE>
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 Schedule IV of the Management Services Agreement, issue to each
Stockholder that number of shares (such shares are referred to herein as the
"Restricted Shares") of common stock, $.001 par value (the "Common Stock"),
of the Company set forth opposite such 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 each Stockholder the certificate(s) representing the Restricted
Shares.
(b) In connection with the issuance of the Restricted
Shares hereunder, each Stockholder represents and warrants to the Company that:
(i) the Restricted Shares to be issued to such
Stockholder pursuant to this Agreement shall be acquired for such
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 Shares will not be
disposed of in contravention of the 1933 Act or any applicable state
securities laws;
(ii) such 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 such
Stockholder to understand and evaluate the risks and benefits of his or
her investment in the Restricted Shares;
(iii) such 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;
2
<PAGE>
(iv) such Stockholder understands that the exemption
from registration afforded by Rule 144 (the provisions of which are known
to such 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) such 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 such Stockholder otherwise
meets the requirements to be considered an accredited investor, as
defined under the 1933 Act; and
(vi) such 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 information concerning the Company as he or she
has requested.
(c) This Agreement constitutes the legal, valid and binding
obligation of each Stockholder, enforceable in accordance with its terms, and
the execution, delivery and performance of this Agreement by each such
Stockholder does not and will not conflict with, violate or cause a breach of
any agreement, contract or instrument to which such Stockholder is a party or
any judgment, order or decree to which such Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted
Shares to each Stockholder and as a condition thereto, each Stockholder
acknowledges and agrees that:
(i) neither the issuance of the Restricted Shares to
such 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 such Stockholder substantially the same information regarding the
Company that the Company regularly discloses to its other shareholders.
3
<PAGE>
2. Vesting of the Restricted Shares.
(a) Except as otherwise provided in Section 2(b) below,
the Restricted Shares held by 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 by such Stockholder (as defined in Section
2(c) below), (iii) such Stockholder has not become permanently disabled (as
described in Section 3(a)(iii) below), and (iv) such 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 July
1 of each year after 1996. 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 such 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 resignation from or termination of
employment with the Medical Group (other than by reason of death or permanent
disability).
3. Forfeiture and Repurchase of Restricted Shares.
(a) Forfeiture. 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) Such Stockholder or the estate (in the case of
death) of such Stockholder shall transfer to the Medical Group, all of the
Unvested Shares held by such Stockholder. 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
4
<PAGE>
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. The Unvested Shares distributed
according to this Section 3(a) shall remain subject to the terms of this
Agreement, including, without limitation, 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 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 through the affiliation transaction
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 the vesting schedule
set forth in Section 2(a) hereof.
(iii) For purposes of this Agreement, if such
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 such 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) Repurchase. In the event that the Management Services
Agreement is terminated for any reason prior to the fourth anniversary of the
Commencement Date (as defined therein) (the "Repurchase Event"), 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
Stockholders or one or more of any Stockholder's Permitted Transferees)
pursuant to the terms and conditions set forth in this Section 3(b).
(i) The Company may elect to exercise the Repurchase
Option and repurchase all or any portion of the Restricted Shares by
delivering written notice (the "Repurchase Notice") to each Stockholder
within ninety (90) days after the Repurchase Event; provided, however,
that, if the Company elects to repurchase less than all of the
5
<PAGE>
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
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 theStockholders 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) a check or wire transfer of funds, (B) 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 (C) a combination of both (A) and (B), in the aggregate amount of the
repurchase price for such shares. Any notes issued by the Company pursuant
to this paragraph 3(b)(ii) 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 such Stockholder
to be guaranteed and to receive representations and warranties from such
Stockholder regarding (x) such 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) such 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, default, or acceleration of any agreement or instrument
pursuant to which such Stockholder or such Stockholder's assets are
bound resulting from such sale.
6
<PAGE>
(iii) Notwithstanding anything to the contrary
contained in this Agreement, all repurchases of Restricted Shares by the
Company under this Section 3(b) 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 the
Delaware General Corporation Law. 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.
(iv) In the event that any Restricted Shares are
repurchased pursuant to this Section 3(b), such 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, no Stockholder may 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 any
Stockholder have the right to Sell Unvested Shares (other than pursuant to
Section 3 above):
(a) In the event that a 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 such Stockholder, such 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 such 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 or any part of the Restricted Shares so offered at the purchase price and
on the terms stated in the Offer Notice. Such acceptance shall be
7
<PAGE>
made by delivering a written notice to such 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 such
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 such
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 such Stockholder to the Prospective Stockholder during
such period, the right of such Stockholder to Sell such Restricted Shares to
the Prospective Stockholder shall expire and the obligations of such
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 such 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 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.
8
<PAGE>
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 1, 1996, AMONG THE
STOCKHOLDER, LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP,
L.L.C. 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. Definitions.
(a) "Affiliate" means, with respect to any Person, (a) any
director, officer, 10% stockholder 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 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,
9
<PAGE>
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 $0.05 (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) "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.
(g) "Permitted Transfer" means, as to any Stockholder, any
sale or transfer of Vested Shares to (A) the
10
<PAGE>
spouse or lineal descendants of such Stockholder or (B) a trust for the benefit
of any of the foregoing.
(h) "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.
(i) "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 Company and any 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 a 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.
(j) "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 sustained by such
Stockholder, 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 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)
(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
11
<PAGE>
transferee of such Restricted Shares 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 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 among the Medical Group, the Company and each of the
respective Stockholders for all purposes. This Agreement may be executed in
separate counterparts.
(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
12
<PAGE>
benefit of and be enforceable by each 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 any 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 Pennsylvania, without
giving effect to any choice of law or conflicting provision or rule (whether
of the State of Pennsylvania or any other jurisdiction), that would cause the
laws of any jurisdiction other than the State of Pennsylvania to be applied.
In furtherance of the foregoing, the internal law of the State of Pennsylvania
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, Etc.
(i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself or himself and its or his property,
to the jurisdiction of any Pennsylvania Commonwealth court or Federal
court of the United States of America sitting in the Commonwealth of
Pennsylvania, 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
Pennsylvania Commonwealth court or, to the extent permitted by law, in
such Federal court.
(ii) 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. Each
of the parties hereto irrevocably and unconditionally waives, to the
fullest extent it or he may legally and effectively do so, any objection
that it or he 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
Pennsylvania Commonwealth or Federal court. Each of the parties hereto
irrevocably waives, to the fullest extent permitted by law, the defense of
an
13
<PAGE>
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 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.
(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 Stockholders 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,
without any Stockholder's consent, amend Schedule A hereto upon consummation
of a Permitted Transfer of Restricted Shares hereunder by any Stockholder 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, three business 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;
14
<PAGE>
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 any Stockholder, to his or her address set
forth on the signature page hereto beneath his or her name;
with a copy to:
Lehigh Valley Bone, Muscle and Joint Group, L.L.C.
2597 Schoenersville Road
Bethlehem, Pennsylvania 18017
Attention: Ranjan Sachdev, M.D.
Telephone: (610) 691-0973
Telecopier: (610) 691-7882; and
Margolis Duckworth & Funt, P.C.
2045 Westgate Drive, Suite 404
Bethlehem, Pennsylvania 18017
Attention: Timothy J. Duckworth, Esq.
Telephone: (610) 882-9800
Telecopier: (610) 882-9822.
(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 Pennsylvania, 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 it relates. The language used in this
Agreement shall be deemed to be the language chosen by the parties to express
15
<PAGE>
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 singular form of nouns and pronouns shall include the
plural and vice-versa."
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amended and Restated Restricted Stock Agreement as of the date first written
above.
COMPANY
BONE, MUSCLE AND JOINT, INC.
By:__________________________
Name:
Title:
MEDICAL GROUP
LEHIGH VALLEY BONE, MUSCLE AND JOINT GROUP,
L.L.C.
By:__________________________
Name:
Title:
STOCKHOLDERS
-----------------------------
Signature
-----------------------------
Printed Name
Address for notices:
-----------------------------
-----------------------------
<PAGE>
SCHEDULE A
Stockholders
Number of
Name Restricted Shares
---- -----------------
Thomas S. Sauer, M.D. [ ]
Ranjan Sachdev, M.D. [ ]
Joseph L. Garbarino, M.D. [ ]
John M. Williams, M.D. [ ]
Peter W. Kozicky, M.D. [ ]
<PAGE>
EXECUTION COPY
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is
entered into as of December 23, 1996 (the "Signature Date"),
effective as of November 1, 1996, by and between SOUTH TEXAS
SPINAL CLINIC, .A., a Texas 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
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:
<PAGE>
SECTION I. 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 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
-3-
<PAGE>
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 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
-4-
<PAGE>
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,
provides Medical Services at the following locations:
(i) Suite Lease between Meadows Enterprises, L.C., as Lessor,
and Medical Group, as Lessee, dated March 1, 1994 for premises commonly
known as Suites 220 and 300, 7614 Louis Pasteur, San Antonio, TX;
(ii) Suite Lease between International Bank of Commerce, Inc.,
as Lessor, and Medical Group, as Lessee, dated September 7, 1994 for
premises commonly known as Suite 106, 12602 Toepperwein, San Antonio, TX;
(iii) Suite Lease between Memorial Professional Services Inc.,
as Lessor, and Medical Group, as Lessee, dated January 23, 1995 for
premises commonly known as Suite 209, 8711 Village Drive, San Antonio, TX;
(iv) Suite Lease between S.W.R.O.E., Inc. as Lessor, and Medical
Group, as Lessee dated April 30, 1996 for premises commonly known as 209
Village Blvd., Suite 1, Laredo, TX;
-5-
<PAGE>
(v) Suite Sub-Lease arrangement between J. Peter Forney, III,
M.D., P.A., and Medical Group dated February 28, 1996 at 712 North Houston
Street, New Braunfels, TX;
(vi) Suite Sub-Lease arrangement between Crossroads Orthopedics,
P.A., and Medical Group dated March 19, 1996 at 115 Medical Drive, Suite
101, Victoria, TX; and
(vii) Suite Lease arrangement between Medplex Rentals and
Medical Group dated December 1, 1996, Beeville, TX.
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. The parties
intend that the payments to be made by the Medical Group to the Management
Company pursuant to an Office Sublease shall equal the amounts payable by the
Medical Group to the landlord under the assigned lease corresponding to such
Office Sublease. Upon the expiration of each of the premises 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, and the parties shall amend the applicable
-6-
<PAGE>
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 Sublease attached hereto as Exhibit E, 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, financial analysis relating to the opening, closing, and
relocation of offices, arranging for necessary repairs, maintenance and
improvements, procurement of
-7-
<PAGE>
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
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
-8-
<PAGE>
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
-9-
<PAGE>
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 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;
-10-
<PAGE>
(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.
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.
-11-
<PAGE>
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.
(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.
-12-
<PAGE>
(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; and
(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.
(1) 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.
-13-
<PAGE>
(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.
(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
-14-
<PAGE>
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 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
-15-
<PAGE>
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, 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.
-16-
<PAGE>
(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.
(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 --
-17-
<PAGE>
(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 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.
-18-
<PAGE>
(xv) Ensure that revenue related to depositions, record review,
court appearances, athletic teams services, 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"):
<TABLE>
<S> <C>
(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
</TABLE>
(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
-19-
<PAGE>
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 Texas and Federal labor laws.
(e) Notwithstanding anything to the contrary contained in this
Agreement, the Management Company shall retain all of the Administrative
Personnel employed by the Medical Group as of the Commencement Date for the
six-month period beginning on the Commencement Date and ending on the six month
anniversary of the Commencement Date.
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
-20-
<PAGE>
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.
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
-21-
<PAGE>
(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 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
-22-
<PAGE>
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 5 fellows and residents, if any)
providing professional medical services who are employees, independent
contractors, partners, or physician-employees of corporate partners in the
-23-
<PAGE>
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 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
-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. 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
-25-
<PAGE>
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,
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 AND 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") the equity and the cash consideration
set forth on Schedule III.
-26-
<PAGE>
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 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
-26-
<PAGE>
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 1, 1998, and on or before April 1 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 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
-28-
<PAGE>
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 or its Medical
Personnel: all professional services rendered by or under the supervision
-29-
<PAGE>
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; and depositions, record review services, court
appearances, independent medical exams, 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; royalties payable to any
Medical Group physician for medical inventions; fees payable under
consulting agreements entered into by Medical Group physicians; income from
presentations, writings, and endorsements; proceeds from the sale of any
capital assets of the Medical Group; and any 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 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
-30-
<PAGE>
(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.
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.
-31-
<PAGE>
(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:
(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
-32-
<PAGE>
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.
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.
-33-
<PAGE>
(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.
-34-
<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) The Office Sublease Payments; 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.
-35-
<PAGE>
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.
(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.
-36-
<PAGE>
(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.
(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
-37-
<PAGE>
(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;
All initial occupancy costs, if any, including but not limited to rent deposits,
prepaid rent, and tenant improvements;
(iii) 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.
5.9. 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
-38-
<PAGE>
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.
<PAGE>
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.
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 professional association duly organized,
validly existing, and in good standing under the laws
-39-
<PAGE>
of the State of Texas 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 certificate of association and bylaws, 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
-40-
<PAGE>
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 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 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 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
-41-
<PAGE>
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, 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;
-42-
<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;
-43-
<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 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;
(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
-44-
<PAGE>
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 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
-45-
<PAGE>
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.
(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
-46-
<PAGE>
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 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
-47-
<PAGE>
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 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
-48-
<PAGE>
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.
(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
-49-
<PAGE>
(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)
-50-
<PAGE>
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:
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
-51-
<PAGE>
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 and the
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation filed November 25, 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
15,000,000 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
-52-
<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 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.
(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
-53-
<PAGE>
Restated Stockholders Agreement dated as of November 12, 1996, 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 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
-54-
<PAGE>
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 October 31,
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.
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.
-55-
<PAGE>
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);
(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
-56-
<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 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
-57-
<PAGE>
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
-58-
<PAGE>
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
<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
-59-
<PAGE>
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.
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
-60-
<PAGE>
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.
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
-61-
<PAGE>
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
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,
-62-
<PAGE>
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 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
-63-
<PAGE>
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
-64-
<PAGE>
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) Management Company Operating Costs
(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
-65-
<PAGE>
(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
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.
-66-
<PAGE>
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 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
-67-
<PAGE>
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 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
-68-
<PAGE>
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 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.
-69-
<PAGE>
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.
-70-
<PAGE>
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. 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. 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.
-71-
<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
-72-
<PAGE>
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.
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
SOUTH TEXAS SPINAL CLINIC, P.A., A TEXAS PROFESSIONAL
ASSOCIATION, 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
-73-
<PAGE>
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 [Name any agreements], 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.
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.
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.
-74-
<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 $200,000 per claim and with aggregate policy limits of not less
than $600,000 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 partner in the
-75-
<PAGE>
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
<PAGE>
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, 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
-76-
<PAGE>
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 or (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.
-77-
<PAGE>
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 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 28 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 27
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
-78-
<PAGE>
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, 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
-79-
<PAGE>
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.
SECTION 14. RESCISSION/DISENGAGEMENT
14.1. RESCISSION/DISENGAGEMENT BY MEDICAL GROUP.
(a) On (i) the earlier to occur of (A) the second (2nd) anniversary of
the Commencement Date or (B) the filing by the Management Company of a
Preliminary Prospectus for the initial public offering of its common stock with
the Securities and Exchange Commission (the "Second (2nd) Anniversary") and (ii)
the seventh (7th) anniversary of the Commencement Date (the "Seventh (7th)
Anniversary"), the Medical Group, at its option, may rescind this Agreement and
disengage itself from further participation in and from all of its obligations
under the terms of this Agreement. The option may be exercised by the Medical
Group by giving 30
-80-
<PAGE>
days' prior written notice of rescission/disengagement to the Management
Company, on or before the Second (2nd) or the Seventh (7th) Anniversary, as the
case may be, and by the Medical Group complying with provisions of Sections
14.1(c) through 14.1(d) below (subject however, to the performance of the
obligations imposed upon the Management Company in Section 14.1(e) below). The
effective date (the "Effective Date") of the rescission/disengagement shall be
the date specified in the written notice (which shall be either the Second (2nd)
Anniversary or the Seventh (7th) Anniversary).
(b) Effect of Rescission/Disengagement. The effect of the
rescission/disengagement by the Medical Group pursuant to the provisions of this
Section 14.1 shall be identical to the effect of termination, as described in
Section 13.4 of this Agreement.
(c) Repurchase of Assets. Within 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 and under the terms provided in Section 13.5 of this Agreement.
(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:
(A) Second (2nd) Anniversary: In the event the Medical Group
exercises its option as of the Second (2nd) Anniversary, a dollar
amount equal to the aggregate cash consideration received by the
Medical Group or by the Eligible Parties (the amount of which is set
forth opposite
-81-
<PAGE>
the name of each of the Eligible Parties on Schedule III hereto) from
the Management Company upon execution of this Agreement, SAVE AND
EXCEPT for that portion of the cash consideration payable under the
terms of that one (1) certain Asset Purchase Agreement executed
contemporaneously with the execution of this Agreement (the amount of
which is also set forth opposite the name of each of the Eligible
Parties on Schedule III hereto). The aggregate sum so determined shall
be payable to the Management Company in cash, by cashier's or
certified check or by wire transfer of good funds delivered to a
depository institution designated by the Management Company;
(B) Seventh (7th) Anniversary: In the event the Medical
Group shall exercise its option as of the Seventh (7th) Anniversary,
it shall have no obligation to return any portion of the cash
consideration received by the Medical Group upon execution of this
Agreement.
(ii) Stock of Management Company:
(A) Second (2nd) Anniversary: In the event the Medical Group
shall exercise its option as of the Second (2nd) Anniversary, all
shares of stock of the Management Company received by the Eligible
Parties associated with the Medical Group 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 the Eligible Parties associated with the Medical Group,
the Fair Market Value (as defined in the Restricted Stock Agreement)
of such portion, determined as of the Second (2nd) Anniversary, shall
be payable
-82-
<PAGE>
to the Management Company in cash, by cashier's or certified check or
by wire transfer of good funds delivered to a depository institution
designated by the Management Company;
(B) Seventh (7th) Anniversary: In the event the Medical
Group shall exercise its option as of the Seventh (7th) Anniversary,
fifty percent (50%) of the shares of stock of the Management Company
received by the Eligible Parties associated with the Medical Group
upon execution of this Agreement 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 the
Eligible Parties associated with the Medical Group, the Fair Market
Value of such portion, determined as of the Seventh (7th) Anniversary,
shall be payable to the Management Company in cash, by cashier's or
certified check or by wire transfer of good funds delivered to a
depository institution designated by the Management Company.
(e) Repayment of Management Fee. The performance of the obligations of
the Medical Group under the provisions of Sections 14.1(b) through (d) above
shall be expressly subject to and conditioned upon the delivery from the
Management Company to the Medical Group, in cash, by cashier's or certified
check or by wire transfer of good funds delivered to a depository institution
designated by the Medical Group, of the following amount:
(i) Second (2nd) Anniversary: In the event the Medical Group
shall exercise its option as of the Second (2nd) Anniversary, the
Management Company shall deliver to the Medical Group fifty percent (50%)
of the Management Fees paid by the Medical Group under
-83-
<PAGE>
the terms of this Agreement after the Commencement Date and on or before
the Second (2nd) Anniversary;
(ii) Seventh (7th) Anniversary: In the event the Medical Group
shall exercise its option as of the Seventh (7th) Anniversary, the
Management Company shall have no obligation to return any portion of the
Management Fees paid by the Medical Group under the terms of this
Agreement.
14.2. DISENGAGEMENT OF INDIVIDUAL MEMBER.
On each of the Second (2nd) Anniversary and the Seventh (7th)
Anniversary, a member of the Medical Group (the "Disengaging Member") may,
at his option, disengage from further participation in and from further
obligations under the terms and provisions of this Agreement. The option
may be exercised by a Disengaging Member by giving written notice of his
disengagement to the Management Company and by complying with the
obligations imposed by Sections 14.2(b)-14.2(c) below (subject however, to
the performance by the Management Company of the obligations imposed in
Section 14.2(c)(iii) below). The Effective Date of the disengagement shall
be the date specified in the written notice (which shall be either the
Second Anniversary or the Seventh Anniversary).
(a) Effect of Disengagement. The effect of the disengagement by the
Disengaging Member pursuant to the provisions of this Section 14.2 shall,
insofar as the Disengaging Member is concerned, be identical to the effect
of termination, as described in Section 13.4 of this Agreement. 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.
(b) Repurchase of Assets. Within thirty (30) days after the Effective
Date of the disengagement (that is, thirty
-84-
<PAGE>
(30) days after the Second (2nd) Anniversary or the Seventh (7th) Anniversary,
as the case may be), the Disengaging Member shall have the right, option and
privilege to purchase the furnishings, fixtures, furniture and equipment
contained in the Disengaging Member's personal office. Such option shall be
exercised by notifying the Management Company in writing of the Disengaging
Member's election to exercise the option and specifying the particular items of
property which the Disengaging Member desires to purchase. The purchase price
for such property items shall be determined in the manner provided in Section
13.5 of this Agreement.
(c) Repayment of Consideration. On or before the Effective Date of
disengagement, the Disengaging Member shall deliver to the Management Company
the following:
(i) Cash Consideration:
(A) Second (2nd) Anniversary: In the event the Disengaging
Member exercises his option as of the Second (2nd) Anniversary, a
dollar amount equal to the aggregate cash consideration received by
the Disengaging Member (the amount of which is set forth opposite such
Disengaging Member's name on Schedule III hereto) from the Management
Company upon execution of this Agreement, SAVE AND EXCEPT for the
Disengaging Member's portion of the cash consideration payable under
the terms of that one (1) certain Asset Purchase Agreement executed
contemporaneously with the execution of this Agreement (the amount of
which is also set forth opposite such Disengaging Member's name on
Schedule III hereto). The aggregate sum, so determined, shall be
payable to the Management Company in cash, by cashier's or certified
check or by wire transfer of good funds
-85-
<PAGE>
delivered to a depository institution designated by the Management
Company;
(B) Seventh (7th) Anniversary: In the event the Disengaging
Member shall exercise his option as of the Seventh (7th) Anniversary,
he shall have no obligation to return any portion of the cash
consideration received by such Disengaging Member upon execution of
this Agreement.
(ii) Stock of Management Company:
(A) Second (2nd) Anniversary: In the event the Disengaging
Member shall exercise his option as of the Second (2nd) Anniversary,
all shares of stock of the Management Company received by the
Disengaging Member 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 the Disengaging
Member, the Fair Market Value of such portion, determined as of the
Second (2nd) Anniversary, shall be payable to the Management Company
in cash, by cashier's or certified check or by wire transfer of good
funds delivered to a depository institution designated by the
Management Company;
(B) Seventh (7th) Anniversary: In the event the Disengaging
Member shall exercise his option as of the Seventh (7th) Anniversary,
fifty percent (50%) of the shares of stock of the Management Company
received by the Disengaging Member upon execution of this Agreement
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
-86-
<PAGE>
previously disposed of by the Disengaging Member, the Fair Market
Value of such portion, determined as of the Seventh (7th) Anniversary,
shall be payable to the Management Company in cash, by cashier's or
certified check or by wire transfer of good funds delivered to a
depository institution designated by the Management Company.
(iii) Repayment of Management Fee. The performance of the
obligations of the Disengaging Member under the provisions of Sections
14.2(b) and 14.2(c) shall be expressly subject to and conditioned upon the
delivery from the Management Company to the Disengaging Member, in cash, by
cashier's of certified check or by wire transfer of good funds delivered to
a depository institution designated by the Disengaging Member, of the
following amount:
(A) Second (2nd) Anniversary: In the event the Disengaging
Member shall exercise his option as of the Second (2nd) Anniversary,
the Management Company shall deliver to the Disengaging Member, fifty
percent (50%) of the Management Fees paid by the Medical Group under
the terms of this Agreement and allocable to income of the Medical
Group attributable to the Disengaging Member, after the Commencement
Date of this Agreement and on or before the Second (2nd) Anniversary.
(B) Seventh (7th) Anniversary: In the event the Disengaging
Member shall exercise his option as of the Seventh (7th) Anniversary,
the Management Company shall have no obligation to return any portion
of the Management Fees paid by the Medical Group under the terms of
this Agreement.
-87-
<PAGE>
14.3. SUPPLEMENTAL RESCISSION/DISENGAGEMENT RIGHT.
(a) If, on or before the Second (2nd) Anniversary, the Management
Company shall be providing Management Services within the metropolitan San
Antonio, Bexar County, Texas trade area for fewer than sixteen (16) medical
doctors having areas of specialty providing musculo-skeletal services which are
similar and complimentary to the areas of specialty represented by Management
Company affiliated physicians and the Medical Group, then in such event this
Agreement may be rescinded and terminated, at the election of the Medical Group.
If it shall so elect by notice in writing to the Management Company, delivered
on or before thirty (30) days before the Second (2nd) Anniversary, the Medical
Group shall no longer participate in or be obligated under the terms and
provisions of this Agreement if it shall comply with the provisions of Sections
14.3(c) through 14.3(d) below (subject however, to the performance by the
Management Company of the obligations imposed in Section 14.3(e) below). In such
case, the Effective Date of the rescission shall be the Second (2nd)
Anniversary.
(b) Effect of Rescission. The effect of the rescission of this
Agreement pursuant to the provisions of this Section 14.3 shall be identical to
the effect of termination, as described in Section 13.4 of this Agreement.
(c) Repurchase of Assets. Within 30 days following the Effective Date
of the rescission of this Agreement pursuant to the provisions of this Section
14.3, 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 the property described and under the terms provided in
Section 13.5 of this Agreement.
(d) Repayment of Consideration. On or before the Effective Date of the
rescission of this Agreement, the Medical Group shall deliver to the Management
Company the following:
-88-
<PAGE>
(i) Cash Consideration: A dollar amount equal to the aggregate
cash consideration received by the Medical Group or by the Eligible Parties
(the amount of which is set forth opposite the name of each of the Eligible
Parties on Schedule III hereto) from the Management Company upon execution
of this Agreement, SAVE AND EXCEPT for that portion of the cash
consideration payable under the terms of that one (1) certain Asset
Purchase Agreement executed contemporaneously with the execution of this
Agreement (the amount of which is also set forth opposite the name of each
of the Eligible Parties on Schedule III hereto). The aggregate sum so
determined shall be payable to the Management Company in cash, by cashier's
or certified check or by wire transfer of good funds delivered to a
depository institution designated by the Management Company.
(ii) Stock of Management Company: All shares of stock of the
Management Company received by the Medical Group or 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 the Medical Group or the Eligible Parties, the
Fair Market Value of such portion, determined as of the Second Anniversary,
shall be payable to the Management Company in cash, by cashier's or
certified check or by wire transfer of good funds delivered to a depository
institution designated by the Management Company.
(e) Return of Management Fee. The performance of the obligations of
the Medical Group under the provisions of Section 14.3(c) and 14.3(d) above
shall be expressly subject to and conditioned upon the delivery by the
Management Company to the Medical Group of fifty (50%) of the Management Fees
paid by the Medical Group after the Commencement Date of this Agreement
-89-
<PAGE>
and prior to or on the Second (2nd) Anniversary. Such sum shall be payable to
the Medical Group in cash, by cashier's or certified check or by wire transfer
of good funds delivered to a depository institution designated by the Medical
Group.
14.4. WAIVER OF RESCISSION/DISENGAGEMENT RIGHT.
Notwithstanding anything contained herein to the contrary, the parties
hereto expressly agree and acknowledge that if the Medical Group or any proposed
Disengaging Member, as applicable, shall fail to deliver the notice of
rescission/disengagement referenced in Sections 14.1-14.3 hereof within the time
periods prescribed by said Sections, then the Medical Group or such proposed
Disengaging Member, as the case may be, shall be deemed to have expressly and
irrevocably waived its or his right to rescind and/or disengage from the
Management Services Agreement pursuant to the applicable provisions of Sections
14.1-14.3 hereof.
14.5. 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
Article 13 or 14 hereof, the Management Company shall be entitled to all
Management Fees otherwise payable hereunder for all services provided by 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.
-90-
<PAGE>
SECTION 15. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
15.1. 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.
15.2. 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 16. NON-COMPETITION.
In consideration of the premises contained herein and the
consideration to be received hereunder, and in consideration
-91-
<PAGE>
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.
SECTION 17. OBLIGATIONS OF THE MANAGEMENT COMPANY
17.1. 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.
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 and procedures that have been instituted in accordance with this
Agreement.
-92-
<PAGE>
17.3. 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.
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. 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).
17.6. 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 17.6,
-93-
<PAGE>
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 17.6; 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.
17.7. 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 17.7 shall become
null and void upon the consummation of an initial public offering of the
Management Company's common stock.
17.8. 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 may attend and observe
meetings of the Management Company's Board of Directors; provided, however, that
such physician member shall not be entitled to vote on any matters acted upon by
the Management Company's Board of Directors; provided further, that the
obligations under this Section 17.8 shall become null and void upon the
consummation of an initial public offering of the Management Company's common
stock.
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
-94-
<PAGE>
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 19. 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, by registered or certified mail,
return receipt requested and postage prepaid, or by facsimile if also sent by
nationally recognized overnight courier for next day delivery, 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
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:
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur
Suite 300
San Antonio, Texas 78229
Attention: Steve Ensinger
with a copy to:
-95-
<PAGE>
Law Offices of Peter Wolverton
Nations Bank Plaza
300 Convent
Suite 1450
San Antonio, Texas 78285
Attention: Peter Wolverton, 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 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; ARBITRATION.
(a) This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas 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.
(b) All disputes, controversies, differences or claims arising out of,
relating to or in connection with this Agreement, or the breach thereof, except
controversies involving less than $5,000, shall be finally settled by binding
arbitration in San Antonio, Bexar County, Texas pursuant to the arbitration
rules of the American Arbitration Association. Arbitration shall take place
before three arbitrators with one arbitrator selected by each of the Management
Company and the Medical Group and a third arbitrator selected by the two
arbitrators chosen by the parties. The governing law of the arbitration shall be
the law
-96-
<PAGE>
set forth in Section 21(a). Any award or decision rendered by the arbitrators
shall clearly set forth the factual and legal basis for such award or decision.
Judgment on the award or decision rendered by the arbitrators shall be
non-appealable and enforceable in the Presiding District Court of Bear County,
Texas. Each party shall bear its own legal and administrative costs and expenses
relating to the arbitration and the Management Company and the Medical Group
shall equally share the fees and expenses of the arbitrators and the
administration of the arbitration by the American Arbitration Association.
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 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 24. ATTORNEYS' FEES.
Notwithstanding anything contained herein to the contrary, 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 arbitrators' fees and
expenses, 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
-97-
<PAGE>
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), 3.6, 11, 12, 13.4, 13.5, 15, 16(a), 18, 19, 20, 21, 24, 26, 28, and this
Section 27 shall survive any expiration or termination of this Agreement.
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 San Antonio, Texas, 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
-98-
<PAGE>
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.
* * * * *
-99-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management
Services Agreement as of the date first above written.
SOUTH TEXAS SPINAL CLINIC, P.A.
By: /s/ Gilbert R. Meadows, M.D.
Gilbert R. Meadows, M.D.
President
BONE, MUSCLE AND JOINT, INC.
By: /s/ Naresh Nagpal, M.D., President
Naresh Nagpal, M.D., President
and Chief Executive Officer
AGREED AND ACCEPTED BY
THE ELIGIBLE PARTIES
AS TO SECTIONS 4, 9.7,
14.1, 14.2, 14.3, 14.4
and 14.5:
/s/ Gilbert R. Meadows, M.D
- ----------------------------
Gilbert R. Meadows, M.D.
/s/ Jerjis J. Denno, M.D.
- ----------------------------
Jerjis J. Denno, M.D.
/s/ M. David Dennis, M.D.
- ---------------------------
M. David Dennis, M.D.
/s/ Paul T. Geibel, M.D.
- ----------------------------
Paul T. Geibel, M.D.
/s/ David M. Hirsch, D.O.
- ----------------------------
David M. Hirsch, D.O.
/s/ Gregg S. Gurwitz, M.D.
- ----------------------------
Gregg S. Gurwitz, M.D.
<PAGE>
ACCEPTED AND AGREED
AS TO SECTION 17.6
/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, Managing Member
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, Managing Member
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, Managing Member
Ann H. Lamont, Managing Member
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By:/s/ Ann H. Lamont, Managing Member
Ann H. Lamont, Managing Member
<PAGE>
Annex A
Medical Group Key Personnel
Gilbert R. Meadows, M.D.
Jerjis J. Denno, M.D.
C. Stuart Pipkin III, M.D.
Gregg S. Gurwitz, M.D.
Paul T. Geibel, M.D.
David M. Hirsch, D.O.
David Dennis, M.D.
<PAGE>
ANNEX B
-------
to Management Services Agreement
--------------------------------
Management Company Key Employees
--------------------------------
Naresh Nagpal, M.D.
<PAGE>
EXHIBIT F - - Medical Equipment Master Lease
<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
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
ANNEXES
- -------
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
<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 ........................................... 81
Base Term .................................................. 3
Billable Items ............................................. 30
Billings ................................................... 24
BMJ Formation Documents .................................... 44
Budgets .................................................... 21
Certificate of Designation ................................. 44
Collections ................................................ 24
Commencement Date .......................................... 3
Compensation Committee ..................................... 70
Competitive Business .......................................101
Confidential or Proprietary Information .................... 69
Corporate Overhead ......................................... 27
Cost Savings ............................................... 96
Documents .................................................. 13
Draw Date .................................................. 93
Draw Percentage ............................................ 22
Eligible Parties ........................................... 21
Employee Plans ............................................. 42
Employees .................................................. 41
Equipment .................................................. 7
ERISA ...................................................... 42
Excluded Costs ............................................. 27
<PAGE>
Facility ................................................... 59
FF&E ....................................................... 7
Incentive Based Costs ...................................... 96
Internal Financial Statements .............................. 35
IPO ........................................................ 94
Management Business ........................................ 1
Management Company ......................................... 1
Management Company Balance Sheet ........................... 46
Management Company Balance Sheet Date ...................... 47
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 ................................. 50
Management Company Transaction Documents ................... 44
Management Fee ............................................. 44
Management Services ........................................ 2
Medical Business ........................................... 1
Medical Equipment .......................................... 7
Medical Equipment Master Lease Payments .................... 26
Medical Group .............................................. 1
Medical Group Bank ......................................... 12
Medical Group Collections Account .......................... 12
Medical Group Cost ......................................... 30
Medical Group Key Personnel ................................ 38
Medical Group Services ..................................... 24
Medical Group Transaction Documents ........................ 34
Medical Personnel .......................................... 19
MGC ........................................................ 94
Monthly Draw ............................................... 22
MSAs ....................................................... 86
New Ancillary Service Medical Equipment .................... 31
New Ancillary Services ..................................... 9
New Medical Office ......................................... 29
New Medical Office-Start-Up Costs .......................... 29
New Ancillary Services ..................................... 9
New Medical Office ......................................... 29
<PAGE>
New Medical Office Start-Up Costs .......................... 29
New Medical Office Start-Up Period ......................... 29
Office Lease ............................................... 5
Office Sublease ............................................ 5
Office Sublease Payments ................................... 26
OGC ........................................................ 94
Operating Account .......................................... 22
Professional Practice Cost Savings ......................... 26
Real Property .............................................. 43
Restricted Stock Agreement ................................. 83
Returns .................................................... 38
Review Financial Statements ................................ 35
SEC ........................................................ 94
Selling Shareholders ....................................... 71
Shares ..................................................... 87
Stock ...................................................... 80
Stockholders Agreement ..................................... 46
Tax ........................................................ 39
Taxes ...................................................... 39
Tenant Improvement ......................................... 56
Term ....................................................... 3
Transaction Documents ...................................... 80
Unaudited Financial Statements ............................. 47
MANAGEMENT SERVICES AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
SOUTH TEXAS SPINAL CLINIC, P.A.
Effective as of November 1, 1996
<PAGE>
EXECUTION COPY
===============================================================================
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
SOUTH TEXAS SPINAL CLINIC, P.A.
Effective as of November 1, 1996
==============================================================================
<PAGE>
EXHIBITS
Exhibit A - Bill of Sale
Exhibit B - Assignment and Assumption Agreement
SCHEDULES
1.1(a) - Medical Equipment,
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
<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.............................................................. 5
A/R Balance............................................................. 6
A/R Collections......................................................... 6
Accounts Receivable..................................................... 2
Affiliate............................................................... 16
Assignment and Assumption Agreement..................................... 3
Assumed Obligations..................................................... 3
Bill of Sale............................................................ 3
Business Day............................................................ 22
Buyer................................................................... 1
Buyer Indemnification Event............................................. 16
Buyer Indemnified Persons............................................... 16
Claims.................................................................. 8
Closing................................................................. 14
Closing Date............................................................ 14
Determination Date...................................................... 5
Excluded Assets......................................................... 36
Excluded Assets......................................................... 2
Indemnified Persons..................................................... 3
Indemnified Persons..................................................... 16
Indemnifying Person..................................................... 16
Losses.................................................................. 17
Management Services Agreement........................................... 1
Permitted Liens......................................................... 9
Purchase Price.......................................................... 5
Purchased Assets........................................................ 2
Related Agreements...................................................... 12
Seller.................................................................. 1
Seller Indemnification Event............................................ 17
Seller Indemnified Persons.............................................. 17
Signature Date........................................................... 1
Statement of Allocation.................................................. 5
Subject Business......................................................... 1
<PAGE>
THIS ASSET PURCHASE AGREEMENT is entered into as
of December 23, 1996 (the "Signature Date"), effective
as of November 1, 1996, by and between BONE, MUSCLE AND
JOINT, INC., a Delaware corporation (the "Buyer"), and
SOUTH TEXAS SPINAL CLINIC, P.A., a Texas 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:
- 1 -
<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(a);
(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");
(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);
- 2 -
<PAGE>
(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, 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) and the office leases
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
- 3 -
<PAGE>
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 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 (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.
- 4 -
<PAGE>
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 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 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.
- 5 -
<PAGE>
ARTICLE II
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 Four Hundred Forty-Six Thousand Three Hundred and
Twenty-Seven U.S. Dollars ($446,327) payable to the Seller in cash on the
earlier to occur of (i) November 1, 1997, or (ii) on the date on which an
initial public offering of the Buyer's common stock pursuant to the Securities
Act of 1933 is consummated; and
(b) the sum of One Million Seven Hundred and Three Thousand Eight
Hundred and Twenty-Eight U.S. Dollars ($1,703,828) representing fifty percent
(50%) of the A/R Amount (as defined below), subject to adjustment and payable 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 parties acknowledge that the total of the
accounts receivable amounts set forth in Schedule 2.2 (the "A/R Amount")
represents the parties' best estimate 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.
- 6 -
<PAGE>
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 as follows:
(a) Within fifteen (15) days after the earlier of (i) the date
which occurs one year after the Commencement Date hereunder or (ii) the date on
which an initial public offering of the Buyer's common stock pursuant to the
Securities Act of 1933 is consummated (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 balances of the
Accounts Receivable, and any other detail relating thereto as the Seller may
reasonably request. The amount by which the A/R Collections exceed the sum of
$1,703,828 is hereinafter referred to as the "A/R Balance." The Buyer shall
deliver to the Seller a check in an amount equal to the A/R Balance together
with the statement referred to in this Section 2.3(a). If the A/R Collections
are less than $1,703,828, the Seller shall deliver to the Buyer a check in an
amount equal to such difference. The Buyer or the Seller, as the case may be,
may offset any amount payable by it under this Section 2.3(a) against any
amounts owed to it by the other party hereto under this Agreement or the
Management Services Agreement. Any amounts payable by the Buyer or the Seller,
as the case may be, under this Section 2.3(a) shall be payable over the six (6)
month period immediately following the date when due in six equal monthly
installments.
(b) The parties shall confer promptly after the Seller's receipt of
the notice and check described in Section 2.3(a) for the purpose of determining
the amount of collections then anticipated to be realized after the
Determination Date in respect of the then-outstanding Accounts Receivable. If
the parties agree on an amount that represents the amount of such
- 7 -
<PAGE>
collections anticipated to be realized, the Buyer shall promptly pay such amount
to the Seller in full satisfaction of the Buyer's obligation to purchase the
Accounts Receivable hereunder. If the parties fail to so agree, the Buyer shall
pay to the Seller on a monthly basis, within fifteen (15) days after the end of
each month, commencing with the month next following the month in which the
Determination Date occurred, 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.
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 organized, validly existing and in
good standing under the laws of the State of Texas 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 enter into
this Agreement, the Bill of Sale, and the Assignment and
- 8 -
<PAGE>
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 certificate of association
and bylaws 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 partnership 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 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 General Partnership Agreement 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. No permit, authorization, consent
or approval of or by, or any notification of or filing
- 9 -
<PAGE>
with, any person (governmental or private) is required in connection with the
execution, delivery or performance by the Seller of this Agreement or the
consummation of the transactions contemplated hereby.
(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.
(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 this Agreement, the Bill of Sale, and the Assignment and Assumption
Agreement 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.
- 10 -
<PAGE>
(iv) As used in this Agreement, "Permitted Liens" shall mean
(i) any lien for current taxes not yet due and payable, (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 and (iii) 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.
(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 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 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,
- 11 -
<PAGE>
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 Signature
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 and the Assignment and
Assumption Agreement, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby 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 Assignment and Assumption Agreement, and the consummation of
the transactions contemplated hereby and thereby, have been duly and validly
authorized by all
- 12 -
<PAGE>
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 both constitute 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. 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.
- 13 -
<PAGE>
ARTICLE IV
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 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.
- 14 -
<PAGE>
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 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 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
- 15 -
<PAGE>
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, and the Seller shall have received a certificate signed by an
authorized officer of the Buyer to that effect.
(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 the 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.
- 16 -
<PAGE>
(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:
(a) the Management Services Agreement, entered into by and between
the parties hereto;
(b) the Restricted Stock Agreements, entered into by and between
the Buyer and each of the Eligible Parties, respectively;
(c) the Stockholder Non-Competition Agreements, entered into by and
among the Seller, the Buyer, and each of the Eligible Parties, respectively;
(d) the Office Subleases relating to each of the medical offices
identified in Schedule 1.1(f), entered into by and between the parties hereto;
and
(e) the Medical Equipment Master Lease, entered into by and between
the parties hereto.
- 17 -
<PAGE>
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 November 1, 1996 (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) 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 a cashiers check or wire
transfer funds for that portion of the Purchase Price specified in Section
2.1(b) hereof;
(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 respectively by each of the Eligible Parties (as defined in the
Management Services
- 18 -
<PAGE>
Agreement), and the Buyer shall execute and deliver to the Seller Restricted
Stock Agreements for each of the Eligible Parties, respectively;
(f) The Buyer shall deliver to the Seller stock certificates issued
in the names of the Eligible Parties as required under the terms of the
Restricted Stock Agreements.
(g) The Seller shall deliver Stockholder Non-Competition Agreements
to the Buyer executed by the Seller and by each of the Eligible Parties,
respectively;
(h) Each of the parties shall execute and deliver to the other an
Office Sublease relating to each of the premises identified in Schedule 1.1(f);
and
(i) Each of the parties shall execute and deliver to the other a
copy of the Medical Equipment Master Lease.
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 or any
- 19 -
<PAGE>
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;
(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 the "bulk sales
laws" of Texas 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 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
- 20 -
<PAGE>
connection herewith (or any facts or circumstances constituting any such
untruth, inaccuracy or breach) or the breach of any agreement or covenant of the
Buyer contained in this Agreement.
(h) "Seller Indemnified Persons" shall mean and include the Seller
and its partners and 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
- 21 -
<PAGE>
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, (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
- 22 -
<PAGE>
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 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).
- 23 -
<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 and/or recission of
the Management Services Agreement in accordance with Sections 13.5, 14.1 and/or
14.3 of the Management Services Agreement. In addition, a portion of the
Purchased Assets are subject to repurchase by a Disengaging Member (as defined
in the Management Services Agreement) upon such Disengaging Member's
disengagement from the Management Services Agreement in accordance with the
provisions of Section 14.2 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.
- 24 -
<PAGE>
ARTICLE X
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, sent by certified mail, postage
prepaid, return receipt requested, or sent by facsimile if also sent by
nationally-recognized overnight courier for next day delivery, addressed as
follows:
- 25 -
<PAGE>
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
if to the Seller, to:
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur, Suite 300
San Antonio, Texas 78229
Attention: Steve Ensinger
Telecopier: (210) 614-7327
in each case, with a copy to:
Law Offices of Peter Wolverton
NationsBank Plaza
300 Convent, Suite 1450
San Antonio, Texas 78285
Attention: Peter Wolverton, Esq.
Telecopier: (210) 227-9363
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 Texas are not required to be open.
- 26 -
<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 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; Arbitration.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas 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. All disputes, controversies,
differences or claims arising out of, relating to or in connection with this
Agreement, or the breach thereof, except controversies involving less than
$5,000, shall be finally settled by binding arbitration in San Antonio, Bexar
County, Texas pursuant to the arbitration rules of the American Arbitration
Association. Arbitration shall take place before three arbitrators with one
arbitrator selected by each of the Management Company and the Medical Group and
a third arbitrator selected by the two arbitrators chosen by the parties. Any
award or decision rendered by the arbitrators shall clearly set forth the
factual and legal basis for such award or decision. Judgment on the award or
decision rendered by the arbitrators shall be non-appealable and enforceable in
the Presiding District Court of Bexar County, Texas. Each party shall bear its
own legal and
- 27 -
<PAGE>
administrative costs and expenses relating to the arbitration and the Management
Company and the Medical Group shall equally share the fees and expenses of the
arbitrators and the administration of the arbitration by the American
Arbitration Association.
10.8. Attorneys' Fees.
Notwithstanding anything contained herein to the contrary, 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 arbitrators' fees and expenses, 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 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.
* * *
- 28 -
<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.
By:____________________________
Naresh Nagpal, M.D., President
and Chief Executive Officer
SOUTH TEXAS SPINAL CLINIC, P.A.
By:______________________________
Name: Gilbert R. Meadows, M.D.
Title: President
<PAGE>
Schedule 1.1(a)
---------------
MEDICAL EQUIPMENT, FURNITURE, FURNISHINGS,
TRADE FIXTURES, AND OFFICE EQUIPMENT
SEE FOLLOWING PAGES
<PAGE>
Schedule 1.1(c)
---------------
EQUIPMENT LEASES
SEE FOLLOWING PAGES
<PAGE>
Schedule 1.1(d)
---------------
SUPPLIES
All of the medical supplies, office supplies, postage, and printed
materials owned by the Medical Group and located on the premises of any of the
Medical Group's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
Schedule 1.1(e)
---------------
ACCOUNTS RECEIVABLE
All of the accounts receivable of the Medical Group the payment of
which would constitute "Collections" as defined in Section 5.3(d)(ii) of the
Management Services Agreement, determined as of 12:01 a.m. of the Closing Date
hereunder.
SEE FOLLOWING PAGES
<PAGE>
Schedule 1.1(f)
---------------
OFFICE LEASES
1. Suite Lease between Meadows Enterprises, L.C., as Lessor, and
Medical Group, as Lessee, dated March 1, 1994 for premises commonly
known as Suites 220 and 300, 7614 Louis Pasteur, San Antonio, TX.
2. Suite Lease between International Bank of Commerce, Inc., as
Lessor, and Medical Group, as Lessee, dated September 7, 1994 for
premises commonly known as Suite 106, 12602 Toepperwein, San
Antonio, TX.
3. Suite Lease between Memorial Professional Services, Inc., as
Lessor, and Medical Group, as Lessee, dated January 23, 1995 for
premises commonly known as Suite 209, 8711 Village Drive, San
Antonio, TX.
4. Suite Lease between S.W.R.O.E., Inc., as Lessor, and Medical Group,
as Lessee, dated April 30, 1996 for premises commonly known as 209
Village Blvd., Suite 1, Laredo, TX.
5. Suite Sub-Lease arrangement between J. Peter Forney, III, M.D.,
P.A., and Medical Group dated February 28, 1996 at 712 North
Houston Street, New Braunfels, TX.
6. Suite Sub-Lease arrangement between Crossroads Orthopedics, P.A.,
and Medical Group dated March 19, 1996 at 115 Medical Drive, Suite
101, Victoria, TX.
7. Suite Lease arrangement between Medplex Rentals and Medical Group
dated December 1, 1996, Beeville, TX.
<PAGE>
Schedule 1.1(g)
---------------
DEPOSITS
1. Security deposits under leases of
offices located in San Antonio, TX,
Suite 300 only (Schedule 1.1(f), item #1) $ 19,952
--------
2. Security deposit under lease of office
located in San Antonio, TX Schedule
1.1(f), item #2 $ 1,375
-------
$ 21,327
========
<PAGE>
Schedule 1.1(h)
---------------
ADDITIONAL ITEMS
NONE
<PAGE>
Schedule 2.2
------------
STATEMENT OF ALLOCATION
OF PURCHASE PRICE
Medical Equipment, Furniture,
Furnishings, Trade Fixtures, and
Office Equipment (NOTE 1) $ 425,000
Deposits $ 21,327
SUBTOTAL: $ 446,327
==========
Fifty Percent (50%) of the estimated
collectible amount of Accounts
Receivable, subject to adjustment in
accordance with Section 2.3 $1,703,828
TOTAL: $2,150,155
NOTE 1. The actual cash payment for medical equipment, furniture furnishings,
trade fixtures, and office equipment still occur per Article II,
Section 2.3(a) of the Asset Purchase Agreement.
<PAGE>
Schedule 3.1(c)
---------------
CLAIMS
Except for the attached Promissory Note and Security Agreement both
dated April 26, 1993.
<PAGE>
Schedule 3.1(d)
---------------
LITIGATION
<PAGE>
EXHIBIT A
---------
BILL OF SALE
South Texas Spinal Clinic, P.A., a Texas professional association (the
"Seller"), hereby sells, conveys, transfers, signs and delivers to Bone, Muscle
and Joint, Inc., a Delaware corporation (the "Buyer"), the following assets,
properties, interests in properties and rights of the Seller (collectively, the
"Purchased Assets"):
1. the medical equipment owned by the Seller and listed on Schedule
1.1(a) of that certain Asset Purchase Agreement between the Seller
and the Buyer entered into as of the date hereof (the "Asset
Purchase Agreement");
2. the furniture, furnishings, trade fixtures, and office equipment
owned by the Seller and listed on Schedule 1.1(a) of the Asset
Purchase Agreement;
3. the Seller's rights and interests under the equipment leases
identified on Schedule 1.1(c) of the Asset Purchase Agreement,
subject to the Buyer's assumption of the obligations accruing
thereunder from and after the date hereof;
4. the supplies described on Schedule 1.1(d) of the Asset Purchase
Agreement;
5. the accounts receivable described on Schedule 1.1(e) of the Asset
Purchase Agreement;
6. the Seller's rights and interests under the office leases
identified in Schedule 1.1(f) of the Asset Purchase Agreement,
subject to the Buyer's assumption of the obligations accruing
thereunder from and after the date hereof;
7. the deposits identified on Schedule 1.1(g) of the Asset Purchase
Agreement; and
<PAGE>
8. any additional items identified on Schedule 1.1(h) of the Asset
Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement (the "Excluded Assets") are expressly excluded from the assets of the
Seller being sold, assigned, or otherwise transferred to the Buyer.
To the extent there is a conflict between the terms and provisions of
this Bill of Sale and the Asset Purchase Agreement, the terms and provisions of
the Asset Purchase Agreement shall govern.
IN WITNESS WHEREOF, the Seller has executed this instrument, by its
duly authorized signatory as of December 23, 1996, effective as of November 1,
1996.
SOUTH TEXAS SPINAL CLINIC, P.A.
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT B
---------
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Agreement") is entered
into as of December 23, 1996 and effective November 1, 1996 by and between South
Texas Spinal Clinic, P.A. ("Assignor") and Bone, Muscle and Joint, Inc.
("Assignee").
A. Pursuant to the terms of the Asset Purchase Agreement dated the date
hereof (the "Asset Purchase Agreement"), between Assignor, as Seller, and
Assignee, as Buyer, Assignor has concurrently with the delivery hereof, sold,
conveyed, transferred, assigned and delivered to Assignee certain assets of
Assignor (the "Purchased Assets"), which are specifically identified in the
Asset Purchase Agreement.
B. In partial consideration of the Purchased Assets, the Asset Purchase
Agreement provides that Assignee shall assume certain liabilities of Assignor,
identified in Section 1.3 of the Asset Purchase Agreement.
NOW, THEREFORE, Assignor and Assignee hereby agree as follows:
1. Assignment; Assumption.
Assignor hereby assigns, transfers and delivers to Assignee, and
Assignee does hereby accept, all of Assignor's rights, titles, and interests,
legal and equitable, in, to and under the equipment leases identified in
Schedule 1.1(c) of the Asset Purchase Agreement and the office leases identified
in Schedule 1.1(f) of the Asset Purchase Agreement (the "Assigned Contracts"),
and Assignee agrees to assume and to pay when due, those liabilities accruing
from and after the date hereof under the Assigned Contracts and to observe,
perform, and comply with the covenants, restrictions, limitations, and
conditions imposed upon Assignor under the Assigned Contracts.
2. Limitation of Assumption.
2.1 Right to Contest Obligations.
Nothing contained in this Agreement shall require that Assignee
perform, pay or discharge any obligation expressly assumed hereby so long as
Assignee shall in good faith contest or cause to be contested the amount or
validity thereof.
<PAGE>
2.2 Obligations Not Assumed.
Other than as specifically stated above, Assignee is not assuming any
liabilities or obligations of the Assignor (fixed or contingent, known or
unknown, matured or unmatured) whatsoever.
To the extent there is a conflict between the terms and provisions of
this Assignment and Assumption Agreement and the Asset Purchase Agreement, the
terms and provisions of the Asset Purchase Agreement shall govern.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SOUTH TEXAS SPINAL CLINIC, P.A.
By:______________________________
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
("Assignee")
By:______________________________
Naresh Nagpal, M.D., President
and Chief Executive Officer
<PAGE>
EXECUTION COPY
RESTRICTED STOCK AGREEMENT
--------------------------
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as
of December 23, 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 South Texas
Spinal Clinic, P.A. (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) 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. All of such
shares of Common Stock issued to the Stockholder are referred to herein as
"Restricted Stock." Simultaneously with the execution and delivery hereof, the
Company is delivering to the Stockholder the certificates representing the
Common Stock referred to in this paragraph 1(a).
(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
<PAGE>
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;
(vi) and 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;
(ii) and 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 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:
<TABLE>
<S> <C>
Anniversary Date Cumulative Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 50%
Third 75%
Fourth 100%
</TABLE>
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."
(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
- 3 -
<PAGE>
Valley"), on or about July 1, 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 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
- 4 -
<PAGE>
Group, subject to the approval of the Company, which approval shall not be
unreasonably withheld.
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
- 5 -
<PAGE>
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)
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 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 28
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
- 6 -
<PAGE>
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 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.
- 7 -
<PAGE>
(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. Return of Stock Upon Recission/Disengagement.
--------------------------------------------
(a) In the event that as of the second anniversary of the
Commencement Date (as defined in the Management Services Agreement) (i) the
Management Services Agreement is rescinded by the Medical Group or the Medical
Group disengages itself from further participation in and from its obligations
under the terms of the Management Services Agreement pursuant to Section 14.1
thereof, or (ii) the Stockholder disengages from further participation in and
from his obligations under the terms and provisions of the Management Services
Agreement pursuant to Section 14.2 thereof or (iii) the Medical Group elects to
rescind and terminate the Management Services Agreement pursuant to Section 14.3
thereof, the Stockholder shall immediately deliver to the Company all Restricted
Stock issued by the Company to the Stockholder pursuant to this Agreement
together with duly executed stock powers without any compensation payable by the
Company to the Stockholder therefor and/or, if all or part of such shares of
Restricted Stock have previously been disposed of by the Stockholder, the
Stockholder shall pay to the Company in cash, by cashier's or certified check or
by wire transfer of immediately available funds to an account designated by the
Company the Fair Market Value of such shares previously disposed of by the
Stockholder to be determined on the second anniversary of the Commencement Date.
(b) In the event that as of the seventh anniversary of the
Commencement Date (i) the Management Services Agreement is rescinded by the
Medical Group or the Medical Group disengages itself from further participation
in and from its obligations under the terms of the Management Services Agreement
pursuant to Section 14.1 thereof or (ii) the Stockholder disengages from further
participation in and from his obligations under the terms and provisions of the
Management Services Agreement pursuant to Section 14.2 thereof, the Stockholder
shall immediately deliver to the Company fifty percent (50%) of the Restricted
Stock issued by the Company to the Stockholder pursuant to this Agreement
together with duly executed stock powers without any compensation payable by the
Company to the Stockholder therefor and/or, if all or part of such shares of
Restricted Stock have previously been disposed of by the Stockholder, the
Stockholder shall pay to the Company in cash, by cashier's or certified check or
by wire transfer of immediately available funds to an account designated by the
Company the Fair Market Value of such shares previously disposed
- 8 -
<PAGE>
of by the Stockholder to be determined on the seventh anniversary of the
Commencement Date.
(c) If the Stockholder is required hereunder to deliver fewer
shares than is represented by the stock certificate actually delivered to the
Company by the Stockholder, the Company shall promptly deliver to the
Stockholder a new stock certificate representing the number of shares not
required to be returned and delivered to the Company hereunder, without any
further consideration.
5. 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 5(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 5 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 5(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
- 9 -
<PAGE>
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 5 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
DECEMBER 23, 1996 EFFECTIVE 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 5(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
5(g); provided, however, that the obligation under
- 10 -
<PAGE>
this paragraph 5(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).
6. 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 Stockholder, 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 Stockholder. 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:
- 11 -
<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 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
- 12 -
<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.
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) (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 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
- 13 -
<PAGE>
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 Texas without giving
effect to any choice of law or conflicting provision or rule (whether of the
State of Texas or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of Texas to be applied. In furtherance of the
foregoing, the internal law of the State of Texas 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 Texas state court or Federal court
of the United States of America sitting in the State of Texas 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 Texas state court or, to the extent permitted by law, in such
Federal court. Each of the
- 14 -
<PAGE>
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 Texas state or Federal
court in Bexar County. 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.
- 15 -
<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]
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur, Suite 300
San Antonio, Texas 78229
Telephone: (210) 614-6432
Telecopy: (210) 614-7327
with copies to:
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur, Suite 300
San Antonio, Texas 78229
Attention: Steve Ensinger
Telephone: (210) 614-6432
Telecopy: (210) 614-7327
and to:
Law Offices of Peter Wolverton
NationsBank Plaza
300 Convent, Suite 1450
San Antonio, Texas 78285
Attention: Peter Wolverton, Esq.
Telephone: (210) 227-9351
Telecopy: (210) 227-9363
(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 Texas, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
- 16 -
<PAGE>
(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.
* * *
- 17 -
<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:__________________________
Naresh Nagpal, M.D.,
President and Chief
Executive Officer
STOCKHOLDER
-----------
---------------------------
Signature
---------------------------
Printed Name
ACCEPTED AND AGREED
AS TO SECTION 5(g)
/s/ NARESH NAGPAL, M.D.
NARESH NAGPAL, M.D.
<PAGE>
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
<PAGE>
Schedule A
----------
<TABLE>
<S> <C>
Stockholder # Shares
Stock
----------- --------
Gilbert R. Meadows, M.D. 285,402
Jerjis J. Denno, M.D. 125,097
M. David Dennis, M.D. 145,247
Paul T. Geibel, M.D. 212,511
Gregg S. Gurwitz, M.D. 173,000
David M. Hirsch, D.O. 135,244
</TABLE>
<PAGE>
STOCKHOLDER NON-COMPETITION AGREEMENT
-------------------------------------
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") is
entered into as of December 23, 1996, effective as of November 1, 1996, by and
among SOUTH TEXAS SPINAL CLINIC, P.A., a (the "Medical Group"), the individual
identified on the signature page hereof (the "Stockholder"), and BONE, MUSCLE
AND JOINT, INC., a Delaware corporation ("BMJ"), with reference to the following
facts:
A. The Medical Group 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.
B. The Stockholder is a partner in or employee of the Medical Group.
C. The Medical Group and BMJ have entered into a Management Services
Agreement dated as of the date hereof (the "Management Services Agreement"),
under which the Medical Group has agreed to cause the Stockholder (among others)
to execute this Agreement.
D. The 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 between the Stockholder and BMJ, dated as of the
date hereof (the "Restricted Stock 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 the
Stockholder's status as a partner in or employee of the Medical Group, the
Stockholder hereby agrees with the Medical Group as follows:
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), or any other services provided by BMJ; provided,
however, that "Competitive Business" shall
<PAGE>
exclude a Stockholder's full-time employment on the medical school faculty at
the University of Texas Health Science Center at San Antonio.
2. Agreement Not to Compete or Interfere with Business.
---------------------------------------------------
(a) The 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 San Antonio, Texas, 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, the
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, or (iii) the effective date of the
Stockholder's resignation or termination of his or her association or employment
with the Medical Group, he or she will not:
(A) engage, directly or indirectly, in any Competitive
Business at any location within twenty-five (25) miles of any Medical Group
office in which he or she produced more than fifty percent (50%) of his or
her gross revenue during any calendar year during the term of this
Agreement (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 employee of (or partner
in) the Medical Group, BMJ, any affiliate of the Medical Group, or any
subsidiary of BMJ to terminate his or her employment (or partnership
status) or 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 terminate or materially diminish its
relationship with the Medical Group, BMJ, any affiliate of the Medical
Group, or any subsidiary of BMJ; or
2
<PAGE>
(E) 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 the
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 Medical Group acknowledges and agrees that the 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 Agreement terminates
such agreement pursuant to Section 13.3 thereof, or (iii) the Stockholder's
association or employment with the Medical Group is terminated without cause (if
permitted by the General Partnership Agreement of the Medical Group) by the
Medical Group and such termination is approved by BMJ.
3. Confidentiality.
---------------
(a) The 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 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 distributor 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;
3
<PAGE>
(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 or its
affiliates 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.
--------------
The 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 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.
-------------------
The Stockholder's covenants under this Agreement shall survive
termination of Stockholder's partnership status or employment with the Medical
Group. The Stockholder acknowledges 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.
4
<PAGE>
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, (c) sent by certified mail, postage
prepaid, return receipt requested, or (d) sent by facsimile if also sent by
nationally-recognized overnight courier for next day delivery, addressed as
follows:
If to the Medical Group, to:
South Texas Spinal Clinic, P.A.
7614 Louis Pasteur, Suite 300
San Antonio, Texas 78229
Attention: Steve Ensinger
with a copy to:
Law Offices of Peter Wolverton
Nations Bank Plaza
300 Convent, Suite 1450
San Antonio, Texas 78285
Attention: Peter Wolverton, Esq.
5
<PAGE>
If to the Stockholder, to:
c/o South Texas Spinal Clinic, P.A.
7614 Louis Pasteur, Suite 300
San Antonio, Texas 78229
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:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, 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 party 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. Entire Agreement; Amendments; Prior Agreements.
----------------------------------------------
The foregoing 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 between the parties hereto
with respect to the matters covered hereby.
10. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas without regard to the laws and principles thereof
or of any other jurisdiction which would direct the application of the laws of
another jurisdiction.
11. 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.
6
<PAGE>
12. Headings.
--------
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be part of this
Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered the
date first above written.
SOUTH TEXAS SPINAL CLINIC, P.A.
/s/ Gilbert R. Meadows, M.D.
Name: Gilbert R. Meadows, M.D.
Title: President
STOCKHOLDER
------------------------
Signature
-------------------------
Printed Name
BONE, MUSCLE AND JOINT, INC.
By: /s/ Naresh Nagpal, M.D.
Naresh Nagpal, M.D.,
President and Chief
Executive Officer
7
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is entered into as of April
1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation
(the "Buyer"), and TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC., a
California professional corporation (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:
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
-1-
<PAGE>
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. Without limiting the generality of the foregoing, the initial
contributions made by the Seller (and/or by any of the physicians who are
members of the medical group operated by the Seller) to Cooperative of American
Physicians, Inc./Mutual Protection Trust in respect of professional liability
coverage are Excluded Assets, and any refunds in respect of such contributions
shall be the property of the Seller (and/or of such physicians).
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 identified in 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 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
-3-
<PAGE>
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 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 expenses incurred in connection with the foregoing shall be
borne equally by the Buyer and the Seller.
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 Seventy-Nine Thousand Four Hundred Ninety Dollars
($79,490.00 ); and
(b) the sum of Five Hundred Nineteen Thousand Dollars ($519,000)
(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
-4-
<PAGE>
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 balances 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.
(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
-5-
<PAGE>
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 professional medical 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 and to
carry on its business as now being conducted and as proposed to be conducted, to
enter into this Agreement and the Bill of Sale, 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 and Bylaws, as in effect on the date hereof.
(b) Authority. The execution, delivery and performance of this
Agreement and the Bill of Sale 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 and the
Bill of Sale 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 or the Bill of Sale, 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
-6-
<PAGE>
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 this Agreement or the consummation of the
transactions contemplated hereby.
(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.
(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 this Agreement and the Bill of Sale are sufficient to sell, transfer, convey
-7-
<PAGE>
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 shareholder of the Seller, or 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 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
-8-
<PAGE>
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 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
-9-
<PAGE>
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.
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 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.
-10-
<PAGE>
(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 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.
-11-
<PAGE>
(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.
(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.
-12-
<PAGE>
(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 between the Seller, the Buyer, and the Eligible Parties;
(c) the Restricted Stock Agreement, entered into by and between
the Buyer and the Eligible Parties;
(d) an Assignment of Office Lease and an Office Sublease,
together with Consent of Landlord, relating to each of the medical offices
identified in Schedule 1.1(f), entered into by and between the parties hereto;
(e) the Medical Equipment Master Lease, entered into by and
between the parties hereto;
(f) the Asset Purchase Agreement entered into by and between
Tri-City Orthopaedic Building Partners and the Buyer (the "Building Partners
APA"); and
(g) the Asset Purchase Agreement entered into by and between
Richard K. Muir, M.D., Inc. and the Buyer (the "Dr. Muir APA").
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 April 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
-13-
<PAGE>
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 Assignment of Office Lease, Office Sublease, and Consent of Landlord
relating to the premises identified in Schedule 1.1(f);
(e) Each of the parties shall deliver to the other a fully
executed copy of the Medical Equipment Master Lease;
(f) The Seller shall deliver to the Buyer a copy of a corporate
resolution authorizing the transactions contemplated hereby, accompanied by a
certificate executed by the Seller's corporate secretary stating that such
resolution has been duly adopted by the corporation's Board of Directors and
approved by the corporation's shareholders;
(g) The Seller shall deliver to the Buyer an executed copy of the
Bill of Sale;
(h) The transactions required to be consummated concurrently
herewith, as described in Section 5.3 hereof, shall be closed as required by the
agreements identified in Section 5.3; and
(i) The Buyer shall deliver to the Seller a corporate check, or
evidence of Buyer's instructions to wire immediately available funds for credit
to Seller's bank account, for the Purchase Price as specified in Sections 2.1(a)
and 2.1(b) hereof and for the Additional Consideration specified in Schedule
III, Section C, of the Management Services Agreement.
5.3 Concurrent Closings. Concurrent with the Closing
hereunder --
-14-
<PAGE>
(a) The parties to the Building Partners APA shall deliver to
each other a fully executed copy of the Building Partners APA and shall take all
other actions required thereunder to close the transactions contemplated
thereby; and
(b) The parties to the Dr. Muir APA shall deliver to each other a
fully executed copy of the Dr. Muir APA and shall take all other actions
required thereunder to close the transactions contemplated thereby.
5.4 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;
(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 the "bulk sales
-15-
<PAGE>
laws" of California 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.
(h) "Seller Indemnified Persons" shall mean and include the
Seller and its officers, directors, and 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.
-16-
<PAGE>
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 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,
-17-
<PAGE>
(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 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
-18-
<PAGE>
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.
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.
-19-
<PAGE>
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) 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
if to the Seller, to:
-20-
<PAGE>
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
Attention: President
Facsimile: (619) 724-3686
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 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
-21-
<PAGE>
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, 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 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.
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, M.D.___________________
Naresh Nagpal, M.D., President
and Chief Executive Officer
-22-
<PAGE>
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
("Seller")
By:__/s/ James C. Esch, M.D.__________________
James C. Esch, M.D., President
<PAGE>
Schedule 1.1(a)
MEDICAL EQUIPMENT
See following pages -- only the items identified by
a circled number 2 are "Medical Equipment"
<PAGE>
Schedule 1.1(b)
FURNITURE, FURNISHINGS, TRADE FIXTURES, AND OFFICE
EQUIPMENT
See Schedule 1.1(a) -- all items identified by a circled number 1
<PAGE>
Schedule 1.1(c)
EQUIPMENT LEASES
None.
<PAGE>
Schedule 1.1(d)
SUPPLIES
All of the medical supplies, office supplies, postage, and printed
materials owned by the Medical Group and located on the premises of the Medical
Group's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
Schedule 1.1(e)
ACCOUNTS RECEIVABLE
All of the accounts receivable of the Medical Group the payment of which
would constitute "Collections" as defined in Section 5.3(d)(ii) of the
Management Services Agreement, determined as of 12:01 a.m. of the Closing Date
hereunder.
<PAGE>
Schedule 1.1(f)
OFFICE LEASES
Lease of office space located at 3905 Waring Road, Oceanside, California
92056, between Tri-City Orthopaedic Building Partners, as landlord, and the
Medical Group, as tenant.
<PAGE>
Schedule 1.1(g)
DEPOSITS
None.
<PAGE>
Schedule 1.1(h)
ADDITIONAL ITEMS
None.
<PAGE>
Schedule 2.2
ALLOCATION OF PURCHASE PRICE
<TABLE>
<S> <C>
Medical Equipment $ 2,800
Furniture, Furnishings, Trade $ 64,190
Fixtures, and Office Equipment
Supplies $ 12,500
One Hundred Percent (100%) of the $ 519,000
---------
estimated collectible amount
of Accounts Receivable
TOTAL: $ 598,490
</TABLE>
<PAGE>
Schedule 3.1(c)
CLAIMS
None.
<PAGE>
Schedule 3.1(d)
LITIGATION
See Management Services Agreement, Schedule 6.8
<PAGE>
Exhibit A
BILL OF SALE
Tri-City Orthopaedic Surgery Medical Group, Inc., a California professional
corporation (the "Seller"), hereby sells, conveys, transfers, assigns and
delivers to Bone, Muscle and Joint, Inc., a Delaware corporation (the "Buyer"),
the following assets, properties, interests in properties and rights of the
Seller:
(a) the medical equipment owned by the Seller and listed on Schedule
1.1(a) of that certain Asset Purchase Agreement between the Seller and the Buyer
entered into as of the date hereof (the "Asset Purchase Agreement");
(b) the furniture, furnishings, trade fixtures, and office equipment
owned by the Seller and listed on Schedule 1.1(b) of the Asset Purchase
Agreement;
(c) the Seller's rights and interests under any equipment leases
identified on Schedule 1.1(c) of the Asset Purchase Agreement, subject to the
Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
(d) the supplies described on Schedule 1.1(d) of the Asset Purchase
Agreement;
(e) the accounts receivable described on Schedule 1.1(e) of the Asset
Purchase Agreement;
(f) the Seller's rights and interests under the office leases
identified in Schedule 1.1(f) of the Asset Purchase Agreement, subject to the
Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
<PAGE>
(g) the deposits identified on Schedule 1.1(g) of the Asset Purchase
Agreement; and
(h) any additional items identified on Schedule 1.1(h) of the Asset
Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement are expressly excluded from the assets of the Seller being sold,
assigned, or otherwise transferred to the Buyer.
To the extent there is a conflict between the terms and provisions of this
Bill of Sale and the Asset Purchase Agreement, the terms and provisions of the
Asset Purchase Agreement shall govern.
IN WITNESS WHEREOF, the Seller has executed this instrument, by its duly
authorized officer, effective as of April 1, 1997.
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By:__/s/ James C. Esch, M.D.___________________
James C. Esch, M.D., President
<PAGE>
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC.
Effective as of April 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
Article Page
- ------- ----
1. Transfer of Purchased Assets, Assumption of Liabilities and
Related Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Transfer of Assets. . . . . . . . . . . . . . . . . . . . . 1
1.2 Assets Not Being Transferred. . . . . . . . . . . . . . . . 2
1.3 Liabilities Being Assumed . . . . . . . . . . . . . . . . . 3
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
2. Purchase Price; Allocation . . . . . . . . . . . . . . . . . . . 4
2.1 Purchase Price; Payment . . . . . . . . . . . . . . . . . . 4
2.2 Allocation of Purchase Price. . . . . . . . . . . . . . . . 4
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 . . . . . . . . 8
4. Conditions of Closing. . . . . . . . . . . . . . . . . . . . . .10
4.1 Conditions of Each Party's Obligations. . . . . . . . . . .10
4.2 Conditions of Obligations of the Buyer. . . . . . . . . . .10
4.3 Conditions of Obligations of the Seller . . . . . . . . . .11
4.4 Related Agreements. . . . . . . . . . . . . . . . . . . . .12
<PAGE>
5. Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.1 Closing Date. . . . . . . . . . . . . . . . . . . . . . . .13
5.2 Closing Transactions. . . . . . . . . . . . . . . . . . . .13
5.3 Concurrent Closings . . . . . . . . . . . . . . . . . . . .14
5.4 Post-Closing Obligations. . . . . . . . . . . . . . . . . .14
6. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . .15
6.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . .15
6.2 Indemnification Generally . . . . . . . . . . . . . . . . .16
6.3 Assertion of Claims . . . . . . . . . . . . . . . . . . . .16
6.4 Notice and Defense of Third Party Claims. . . . . . . . . .17
6.5 Survival of Representations, Warranties and Covenants . . .18
7. Non-Competition. . . . . . . . . . . . . . . . . . . . . . . . .18
8. Repurchase of Assets . . . . . . . . . . . . . . . . . . . . . .19
9. Amendment, Modification and Waiver . . . . . . . . . . . . . . .19
10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . .19
10.1 Transfer Taxes, Etc.. . . . . . . . . . . . . . . . . . . .19
10.2 Entire Agreement. . . . . . . . . . . . . . . . . . . . . .19
10.3 Descriptive Headings. . . . . . . . . . . . . . . . . . . .19
10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . .19
10.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . .21
10.6 Bulk Sales Compliance . . . . . . . . . . . . . . . . . . .21
10.7 Governing Law; Jurisdiction . . . . . . . . . . . . . . . .21
10.8 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . .21
<PAGE>
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
<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 . . . . . . . . . . . . . . . . . . . .4
Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . .2
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Assumed Obligations. . . . . . . . . . . . . . . . . . . . . . . .3
Building Partners APA. . . . . . . . . . . . . . . . . . . . . . 13
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Buyer Indemnification Event. . . . . . . . . . . . . . . . . . . 15
Buyer Indemnified Persons. . . . . . . . . . . . . . . . . . . . 15
Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Determination Date . . . . . . . . . . . . . . . . . . . . . . . .5
Dr. Muir APA . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . . .2
Excluded Obligations . . . . . . . . . . . . . . . . . . . . . . .3
Indemnified Persons. . . . . . . . . . . . . . . . . . . . . . . 15
Indemnifying Person. . . . . . . . . . . . . . . . . . . . . . . 16
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management Services Agreement. . . . . . . . . . . . . . . . . . .1
Permitted Liens. . . . . . . . . . . . . . . . . . . . . . . . . .7
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . .4
Purchased Assets . . . . . . . . . . . . . . . . . . . . . . . . .2
Related Agreements . . . . . . . . . . . . . . . . . . . . . . . 10
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Seller Indemnification Event . . . . . . . . . . . . . . . . . . 16
Seller Indemnified Persons . . . . . . . . . . . . . . . . . . . 16
Statement of Allocation. . . . . . . . . . . . . . . . . . . . . .4
Subject Business . . . . . . . . . . . . . . . . . . . . . . . . .1
<PAGE>
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") 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"), 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 engaged in the business of providing orthopedic
medical and surgical services and related medical and ancillary services (the
"Medical Services") to the general public.
B. Each Stockholder is a shareholder of the Medical Group.
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 have entered into a Management Services
Agreement effective as of the date hereof (the "Management Services Agreement"),
under which the Medical Group has 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").
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 shareholder of the Medical
-1-
<PAGE>
Group, each Stockholder hereby severally agrees with the Medical Group and BMJ
as follows:
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), or any other services provided by BMJ.
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 Oceanside, California, 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, or (iii) 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
-2-
<PAGE>
(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 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 terminate or materially diminish its relationship with the Medical
Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ; or
(E) 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) (i) BMJ acknowledges that Norman Kane, M.D. currently conducts a
medical practice in La Jolla, California, separate and apart from his practice
with the Medical Group. Dr. Kane's continuation of his La Jolla practice shall
not constitute a breach of this Agreement, provided that the following
conditions are satisfied:
(A) during the first four (4) years after the date hereof,
Dr. Kane shall devote at least sixty percent (60%) of his professional time,
excluding weekends and holidays, to his practice in Oceanside;
-3-
<PAGE>
(B) except on an occasional and isolated basis, Dr. Kane
shall not treat at the La Jolla office any patient previously seen at the
Medical Group's Oceanside office, or any patient who initially contacts or
attempts to contact Dr. Kane at the Oceanside office;
(C) Dr. Kane shall not request any physician, payor, or
patient referral source to direct or refer any patient to his La Jolla office if
such physician, payor, or patient referral source previously directed or
referred the majority of such patients to Dr. Kane at his office with the
Medical Group at Oceanside; and
(D) at no time shall Dr. Kane move his La Jolla office to
any location which is closer to the Medical Group's Oceanside office; provided,
however, that the relocation of Dr. Kane's La Jolla practice to any office
located on the current campus of Scripps Memorial Hospital shall not be
considered a violation of the condition set forth in this clause (D).
(ii) BMJ acknowledges that James A. Helgager, M.D. currently
provides services to patients at an occupational medicine clinic known as the
IMC Clinic, and that Dr. Helgager spends less than an average of four (4) hours
per week in such practice. Dr. Helgager's continuation of such practice at the
IMC Clinic shall not constitute a breach of this Agreement so long as Dr.
Helgager does not spend more than an average of four (4) hours per week in such
practice.
(iii) Notwithstanding anything to the contrary set forth in this
Agreement, the practice of medicine by Jacob Sharp, M.D. at a free clinic,
without compensation to Dr. Sharp, after Dr. Sharp has ceased to practice
medicine with the Medical Group, shall not constitute a breach of this
Agreement.
(iv) Notwithstanding anything to the contrary set forth in this
-4-
<PAGE>
Agreement, the practice of medicine by Leonard R. Ozerkis, M.D. at a location
which is south of Encinitas and outside of a radius of fifteen (15) miles from
the Medical Group's present office in Oceanside shall not constitute a breach of
this Agreement if (A) Dr. Ozerkis has ceased to practice medicine with the
Medical Group and (B) Dr. Ozerkis has attained the age of fifty-nine and
one-half (59-1/2) years.
(v) Notwithstanding anything to the contrary set forth in this
Agreement, if a Stockholder ceases to conduct his medical practice with the
Medical Group, it shall not be a violation of this Agreement for such
Stockholder to continue his medical practice in the Restricted Territory if (A)
the Stockholder enters into a Management Services Agreement with BMJ
substantially in the form of the Management Services Agreement entered into by
and between the Medical Group and BMJ and (B) the Stockholder enters into a new
Stockholder Non-Competition Agreement with BMJ substantially in the form of this
Agreement.
(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 Agreement terminates
such agreement pursuant to Section 13.3 thereof, or (iii) the Stockholder's
employment by the Medical Group is terminated without cause by the Medical Group
(unless such termination is not permitted under any applicable agreement with
the Medical Group) and such termination is approved by BMJ.
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 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
-5-
<PAGE>
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 or its
affiliates 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.
-6-
<PAGE>
(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 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 shareholder of the Medical Group
and/or employment with the Medical Group. Each Stockholder acknowledges 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
-7-
<PAGE>
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:
If to the Medical Group, to:
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
Attention: President
If to a Stockholder, to:
[Name of Stockholder]
Tri-City Orthopaedic Surgery
Medical Group, Inc.
3905 Waring Road
Oceanside, California 92056
-8-
<PAGE>
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 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.
-9-
<PAGE>
This Agreement may be executed in separate counterparts.
10. Entire Agreement; Amendments; Prior Agreements.
The foregoing 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 without regard to the laws and principles
thereof or of any other jurisdiction which would direct the application of the
laws of another jurisdiction.
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 of reference only and shall not be deemed to be part of this
Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of
the date first above written.
TRI-CITY ORTHOPAEDIC SURGERY
MEDICAL GROUP, INC.
By:__/s/ James C. Esch, M.D.______________
James C. Esch, M.D., President
-10-
<PAGE>
BONE, MUSCLE AND JOINT, INC.
By:___/s/ Naresh Nagpal, M.D.____________
Naresh Nagpal, M.D., President
and Chief Executive Officer
STOCKHOLDERS
=============================
Neville Alleyne, M.D. Richard K. Muir, M.D.
=============================
James C. Esch, M.D. Leonard R. Ozerkis, M.D.
=============================
James A. Helgager, M.D. Jacob Sharp, M.D.
- -----------------------------
Norman Kane, M.D.
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is entered into as of November 22, 1996 (the
"Signature Date"), effective as of November 1, 1996, by and between BONE, MUSCLE
AND JOINT, INC., a Delaware corporation (the "Buyer"), and SOUTHERN CALIFORNIA
ORTHOPEDIC INSTITUTE MEDICAL GROUP, a California general partnership (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:
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
<PAGE>
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(a);
(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");
(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. Without limiting the generality of the foregoing, the initial
contributions made by the Seller (and/or by any of the physicians who are
members of the medical group operated by the Seller) to Cooperative of American
Physicians, Inc./Mutual Protection Trust in respect of professional liability
coverage are Excluded Assets, and any refunds in respect of such contributions
shall be the property of the Seller (and/or of such physicians).
1.3 Liabilities Being Assumed. Except as otherwise provided herein and
<PAGE>
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) and the office leases 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 delivery of a Bill of Sale (the "Bill
of Sale") substantially in the form of Exhibit A 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
<PAGE>
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 (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 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 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 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
<PAGE>
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.
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 Three Million Seven Hundred Six Thousand Eight
Hundred Ninety-Seven Dollars ($3,706,897) payable at the Closing to the Seller
in cash; and
(b) the sum of Two Million Two Hundred Twenty-Four Thousand
Dollars ($2,224,000), representing fifty percent (50%) of the A/R Amount (as
defined below), subject to adjustment and payable 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 parties acknowledge that the total of the accounts receivable
amounts set forth in Schedule 2.2 (the "A/R Amount") represents the parties'
best estimate 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 and shall be paid as
follows:
(a) Within fifteen (15) days after the earlier of (i) the date
which occurs one year after the Commencement Date hereunder or (ii) the date on
which an initial public offering of the Buyer's common stock pursuant to the
Securities Act of 1933 is consummated (the "Determination Date"), the Buyer
shall furnish to the Seller a statement setting forth the
<PAGE>
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 balances of the Accounts Receivable, and any other detail relating
thereto as the Seller may reasonably request. The amount by which the A/R
Collections exceed the sum of $2,224,000 is hereinafter referred to as the "A/R
Balance." The Buyer shall deliver to the Seller a check in an amount equal to
the A/R Balance together with the statement referred to in this Section 2.3(a).
(b) The parties shall confer promptly after the Seller's receipt
of the notice and check described in Section 2.3(a) for the purpose of
determining the amount of collections then anticipated to be realized after the
Determination Date in respect of the then- outstanding Accounts Receivable. If
the parties agree on an amount that represents the amount of such collections
anticipated to be realized, the Buyer shall promptly pay such amount to the
Seller in full satisfaction of the Buyer's obligation to purchase the Accounts
Receivable hereunder. If the parties fail to so agree, the Buyer shall pay to
the Seller on a monthly basis, within fifteen (15) days after the end of each
month, commencing with the month next following the month in which the
Determination Date occurred, 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.
<PAGE>
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 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 and to carry on its
business as now being conducted and as proposed to be conducted, to enter into
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 General Partnership Agreement, 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 partnership 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 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 General Partnership Agreement 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,
<PAGE>
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 this Agreement or the consummation of the transactions contemplated hereby.
(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.
(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 this Agreement, the Bill of Sale, and the Assignment and Assumption
Agreement are sufficient to sell, transfer, convey and assign to the Buyer all
right, title and interest of the Seller in and to the Purchased
<PAGE>
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, (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 and (iii) 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.
(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 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 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
<PAGE>
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 Signature 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 and the Assignment and
Assumption Agreement, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby 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 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
<PAGE>
both constitute 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. 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.
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 agency or authority necessary for the consummation of the
transactions contemplated hereby shall have been filed, occurred or been
obtained.
<PAGE>
(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 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
<PAGE>
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 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, and the Seller shall have received a certificate signed by an
authorized officer of the Buyer to that effect.
(c) Authorization. All action necessary to authorize the
execution, delivery and performance of this Agreement by the Buyer and the
consummation of the
<PAGE>
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 the 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:
(a) the Management Services Agreement, entered into by and
between the parties hereto;
(b) the Restricted Stock Agreements, entered into by and between
the Buyer and each of the Eligible Parties, respectively;
(c) the Stockholder Non-Competition Agreements, entered into by
and between the Seller, the Buyer, and each of the Eligible Parties,
respectively;
(d) the Office Subleases relating to each of the medical offices
identified in Schedule 1.1(f), entered into by and between the parties hereto;
and
(e) the Medical Equipment Master Lease, entered into by and
between the parties hereto.
5. 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.
<PAGE>
on November 1, 1996 (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) 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 a corporate check for
that portion of the Purchase Price specified in Section 2.1(a) hereof;
(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 respectively by each of the Eligible Parties (as defined in
Schedule III, Section F, of the Management Services Agreement), and the Buyer
shall execute and deliver to the Seller Restricted Stock Agreements for each of
the Eligible Parties, respectively;
(f) The Buyer shall deliver to the Seller stock certificates
issued in the names of the Eligible Parties as required under the terms of the
Restricted Stock Agreements.
(g) The Seller shall deliver Stockholder Non-Competition
Agreements to the Buyer executed by the Seller and by each of the Eligible
Parties, respectively;
(h) Each of the parties shall execute and deliver to the other an
Office Sublease relating to each of the premises identified in Schedule 1.1(f);
and
(i) Each of the parties shall execute and deliver to the other a
copy of the Medical Equipment Master Lease.
<PAGE>
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;
(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 the "bulk sales
laws" of California 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,
<PAGE>
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.
(h) "Seller Indemnified Persons" shall mean and include the
Seller and its partners and 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,
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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
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
if to the Seller, to:
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Attention: Managing Partner
Telecopier: (818) 901-6680
in each case, 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.
Telecopier: (310) 286-7821
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
<PAGE>
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 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, 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.
<PAGE>
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.
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.
By:_/s/ Naresh Nagpal, M.D., President_______________
Naresh Nagpal, M.D., President
and Chief Executive Officer
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
JAMES M. FOX, M.D., INC.
By:_/s/ James M. Fox, M.D., President________________
James M. Fox, M.D., President
WILSON DEL PIZZO, M.D., INC.
By:_/s/ Wilson Del Pizzo, M.D._______________________
Wilson Del Pizzo, M.D.,
President
[Signatures Continued]
<PAGE>
MARC J. FRIEDMAN, M.D., INC.
By:_/s/ Marc J. Friedman, M.D., Inc._________________
Marc J. Friedman, M.D.,
President
- ------------------------------------------
STEPHEN J. SNYDER, M.D.
- ------------------------------------------
RICHARD D. FERKEL, M.D.
- ------------------------------------------
TODD D. MOLDAWER, M.D.
- ------------------------------------------
GREGORY J. HANKER, M.D.
HERBERT DENNIS HUDDLESTON,
M.D., INC.
By:_/s/ Herbert Dennis Huddleston, M.D., President___________
Herbert Dennis Huddleston,
M.D., President
- ------------------------------------------
A. ELIZABETH BLOZE, M.D.
- ------------------------------------------
TODD D. MOLNAR, M.D.
TREVOR P. LYNCH, M.D., A Medical
Corporation
By:_/s/ Trevor P. Lynch, M.D., President____________________
Trevor P. Lynch, M.D.,
President
[Signatures Continued]
<PAGE>
SAUL M. BERNSTEIN, M.D., INC.
By:__________________________________________________
Saul M. Bernstein, M.D.,
President
- ------------------------------------------
STEVEN A. SCHOPLER, M.D.
- ------------------------------------------
RONALD P. KARZEL, M.D.
- ------------------------------------------
HRAIR E. DARAKJIAN, M.D.
- ------------------------------------------
JONATHAN S. JAIVIN, M.D.
- ------------------------------------------
DONALD A. WISS, M.D.
- ------------------------------------------
PATRICIA C. McKEEVER, M.D.
<PAGE>
Schedule 1.1(a)
MEDICAL EQUIPMENT, FURNITURE, FURNISHINGS,
TRADE FIXTURES, AND OFFICE EQUIPMENT
See following pages.
<PAGE>
Schedule 1.1(c)
EQUIPMENT LEASES
See following pages.
<PAGE>
Schedule 1.1(d)
SUPPLIES
All of the medical supplies, office supplies, postage, and printed
materials owned by the Medical Group and located on the premises of any of the
Medical Group's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
Schedule 1.1(e)
ACCOUNTS RECEIVABLE
All of the accounts receivable of the Medical Group the payment of which
would constitute "Collections" as defined in Section 5.3(d)(ii) of the
Management Services Agreement, determined as of 12:01 a.m. of the Closing Date
hereunder.
<PAGE>
Schedule 1.1(f)
OFFICE LEASES
1. Suite Lease between SCVMC, Inc., as Lessor, and Medical Group, as
Lessee, dated December 15, 1995 for premises commonly known as 23861 McBean
Parkway, Suite A-4, Valencia, California 91355.
2. Suite Lease between SCVMC, Inc., as Lessor, and Medical Group, as
Lessee, dated May 6, 1992 for premises commonly known as 23861 McBean Parkway,
Suite A-2, Valencia, California 91355.
3. Lease between Paris Nourafchan and PRG Investments West dba West Hills
Plaza Associates, as Landlord, and Medical Group, as Tenant, dated April 30,
1993 for premises commonly known as 7230 Medical Center Drive, Suite 400, West
Hills, California 91307.
4. Office Sharing Agreement between Sharon K. Muenchow, M.D. and Medical
Group dated August 1, 1995 for the premises commonly known as 800 South
Fairmont, Suite 325, Pasadena, California 91105.
5. WBC/SCOI Operating Agreement between W. B. Christiansen, M.D., as
Sublessor, and Medical Group, as Sublessee, dated August 8, 1995 for the
premises commonly known as 2026 21st Street, Suite B, Bakersfield, California
93301.
<PAGE>
Schedule 1.1(g)
DEPOSITS
<TABLE>
<S> <C>
1. Security deposits under leases of $4,200
offices located in Valencia, California
(Schedule 1.1(f), items #1 and #2)
2. Security deposit under lease of 5,880
office located in West Hills, California
(Schedule 1.1(f), item #3)
-------
Total: $10,080
</TABLE>
<PAGE>
Schedule 1.1(h)
ADDITIONAL ITEMS
None
<PAGE>
Schedule 2.2
ALLOCATION OF PURCHASE PRICE
<TABLE>
<S> <C>
Medical Equipment, Furniture, $1,441,920
Furnishings, Trade Fixtures,
and Office Equipment
Supplies $ 30,897
Fifty Percent (50%) of the $2,224,000
estimated collectible amount
of Accounts Receivable
Deposits $ 10,080
----------
SUBTOTAL: $3,706,897
Fifty Percent (50%) of the $2,224,000
estimated collectible amount
of Accounts Receivable,
subject to adjustment in
accordance with Section 2.3
TOTAL: $5,930,897
</TABLE>
<PAGE>
Schedule 3.1(c)
CLAIMS
None
<PAGE>
Schedule 3.1(d)
LITIGATION
See Management Services Agreement, Schedule 6.8
<PAGE>
Exhibit A
BILL OF SALE
Southern California Orthopedic Institute Medical Group, a California
general partnership (the "Seller"), hereby sells, conveys, transfers, assigns
and delivers to Bone, Muscle and Joint, Inc., a Delaware corporation (the
"Buyer"), the following assets, properties, interests in properties and rights
of the Seller (collectively, the "Purchased Assets"):
(a) the medical equipment owned by the Seller and listed on Schedule
1.1(a) of that certain Asset Purchase Agreement between the Seller and the Buyer
entered into as of the date hereof (the "Asset Purchase Agreement");
(b) the furniture, furnishings, trade fixtures, and office equipment
owned by the Seller and listed on Schedule 1.1(a) of the Asset Purchase
Agreement;
(c) the Seller's rights and interests under the equipment leases
identified on Schedule 1.1(c) of the Asset Purchase Agreement, subject to the
Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
(d) the supplies described on Schedule 1.1(d) of the Asset Purchase
Agreement;
(e) the accounts receivable described on Schedule 1.1(e) of the Asset
Purchase Agreement;
(f) the Seller's rights and interests under the office leases
identified in Schedule 1.1(f) of the Asset Purchase Agreement, subject to the
Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
<PAGE>
(g) the deposits identified on Schedule 1.1(g) of the Asset Purchase
Agreement; and
(h) any additional items identified on Schedule 1.1(h) of the Asset
Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement (the "Excluded Assets") are expressly excluded from the assets of the
Seller being sold, assigned, or otherwise transferred to the Buyer.
To the extent there is a conflict between the terms and provisions of this
Bill of Sale and the Asset Purchase Agreement, the terms and provisions of the
Asset Purchase Agreement shall govern.
IN WITNESS WHEREOF, the Seller has executed this instrument, by its duly
authorized Managing Partner, as of November 22, 1996, effective as of November
1, 1996.
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
By:__/s/ Gregory J. Hanker, M.D.________
Gregory J. Hanker, M.D.,
Managing Partner
<PAGE>
Exhibit B
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of _______________, by
and between Southern California Orthopedic Institute Medical Group ("Assignor")
and Bone, Muscle and Joint, Inc. ("Assignee").
A. Pursuant to the terms of the Asset Purchase Agreement dated the date
hereof (the "Asset Purchase Agreement"), between Assignor, as Seller, and
Assignee, as Buyer, Assignor has concurrently with the delivery hereof, sold,
conveyed, transferred, assigned and delivered to Assignee certain assets of
Assignor (the "Purchased Assets"), which are specifically identified in the
Asset Purchase Agreement.
B. In partial consideration of the Purchased Assets, the Asset Purchase
Agreement provides that Assignee shall assume certain liabilities of Assignor,
identified in Section 1.3 of the Asset Purchase Agreement.
NOW, THEREFORE, Assignor and Assignee hereby agree as follows:
1. Assignment; Assumption.
Assignor hereby assigns, transfers and delivers to Assignee, and
Assignee does hereby accept, all of Assignor's rights, titles, and interests,
legal and equitable, in, to and under the equipment leases identified in
Schedule 1.1(c) of the Asset Purchase Agreement and the office leases identified
in Schedule 1.1(f) of the Asset Purchase Agreement (the "Assigned Contracts"),
and Assignee agrees to assume and to pay when due, those liabilities accruing
from and after the date hereof under the Assigned Contracts and to observe,
perform, and comply with the covenants, restrictions, limitations, and
conditions imposed upon Assignor under the Assigned Contracts.
2. Limitation of Assumption.
<PAGE>
2.1 Right to Contest Obligations.
Nothing contained in this Agreement shall require that Assignee
perform, pay or discharge any obligation expressly assumed hereby so long as
Assignee shall in good faith contest or cause to be contested the amount or
validity thereof.
2.2 Obligations Not Assumed.
Other than as specifically stated above, Assignee is not assuming
any liabilities or obligations of the Assignor (fixed or contingent, known or
unknown, matured or unmatured) whatsoever.
To the extent there is a conflict between the terms and provisions of this
Assignment and Assumption Agreement and the Asset Purchase Agreement, the terms
and provisions of the Asset Purchase Agreement shall govern.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
("Assignor")
By:__/s/ Gregory J. Hanker, M.D., Managing Partner________
Gregory J. Hanker, M.D.,
Managing Partner
BONE, MUSCLE AND JOINT, INC.
("Assignee")
By:___/s/ Naresh Nagpal, M.D., President__________________
Naresh Nagpal, M.D., President
and Chief Executive Officer
<PAGE>
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP
Effective as of November 1, 1996
<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 ................................ 3
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 ................................ 7
3.1 Representations and Warranties of the Seller ............. 7
3.2 Representations and Warranties of the Buyer .............. 10
4. Conditions of Closing ......................................... 11
4.1 Conditions of Each Party's Obligations ................... 11
4.2 Conditions of Obligations of the Buyer ................... 12
4.3 Conditions of Obligations of the Seller .................. 13
4.4 Related Agreements ....................................... 14
<PAGE>
5. Closing ....................................................... 14
5.1 Date ..................................................... 14
5.2 Closing Transactions ..................................... 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 ................. 18
6.5 Survival of Representations, Warranties and Covenants .... 19
7. Non-Competition ............................................... 19
8. Repurchase of Assets .......................................... 20
9. Amendment, Modification and Waiver ............................ 20
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 ............................................. 22
10.6 Bulk Sales Compliance .................................... 22
10.7 Governing Law; Jurisdiction .............................. 22
10.8 Attorneys' Fees .......................................... 22
10.9 Benefits of Agreement .................................... 23
10.10 Pronouns ............................................ 23
<PAGE>
EXHIBITS
--------
Exhibit A - Bill of Sale
Exhibit B - Assignment and Assumption Agreement
SCHEDULES
1.1(a) - Medical Equipment, 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
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A/R Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A/R Collections . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 16
Assignment and Assumption Agreement. . . . . . . . . . . . . . . . . 3
Assumed Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 3
Bill of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Buyer Indemnification Event. . . . . . . . . . . . . . . . . . . . . 16
Buyer Indemnified Persons. . . . . . . . . . . . . . . . . . . . . . 16
Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . 5
Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Excluded Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Excluded Obligations . . . . . . . . . . . . . . . . . . . . . . . . 3
Indemnified Persons. . . . . . . . . . . . . . . . . . . . . . . . . 16
Indemnifying Person. . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Management Services Agreement. . . . . . . . . . . . . . . . . . . . 1
Permitted Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Purchased Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 12
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Seller Indemnification Event . . . . . . . . . . . . . . . . . . . . 17
Seller Indemnified Persons . . . . . . . . . . . . . . . . . . . . . 17
Signature Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Statement of Allocation. . . . . . . . . . . . . . . . . . . . . . . 5
Subject Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
<PAGE>
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") is entered
into as of November 22, 1996, effective as of November 1, 1996, by and between
SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, a California general
partnership (the "Medical Group"), the individual identified on the signature
page hereof (the "Stockholder"), and BONE, MUSCLE AND JOINT, INC., a Delaware
corporation ("BMJ"), with reference to the following facts:
A. The Medical Group 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.
B. The Stockholder is a partner in or employee of the Medical Group.
C. The Medical Group and BMJ have entered into a Management Services
Agreement dated as of the date hereof (the "Management Services Agreement"),
under which the Medical Group has agreed to cause the Stockholder (among others)
to execute this Agreement.
D. The 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 between the Stockholder and BMJ, dated as of the
date hereof (the "Restricted Stock 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 the Stockholder's
status as a partner in or employee of the Medical Group, the Stockholder hereby
agrees with the Medical Group as follows:
<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), or any other services provided by BMJ.
2. Agreement Not to Compete or Interfere with Business.
(a) The 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 Los Angeles, California, 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, the
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, or (iii) the effective date of the
Stockholder's resignation or termination of partnership status or employment
with the Medical Group, he or she will not:
(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);
<PAGE>
(C) solicit, entice or induce any employee of (or partner in) the
Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ
to terminate his or her employment (or partnership status) or 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 terminate or materially diminish its relationship with the Medical
Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ; or
(E) 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
the 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 Medical Group acknowledges and agrees that the 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 Agreement terminates
such agreement pursuant to Section 13.3 thereof, or (iii) the Stockholder's
status as a partner in or employee of the Medical Group is terminated without
cause (if permitted by the General Partnership Agreement of the Medical Group)
by the Medical Group and such termination is approved by BMJ.
3. Confidentiality.
(a) The 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 constitutes the confidential and proprietary trade secrets of the
Medical Group or of BMJ and
<PAGE>
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 or its
affiliates 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.
The 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 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.
The Stockholder's covenants under this Agreement shall survive
termination of Stockholder's partnership status or employment with the Medical
Group. The Stockholder acknowledges 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
<PAGE>
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:
If to the Medical Group, to:
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
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.
<PAGE>
If to the Stockholder, to:
[Name of Stockholder]
6815 Noble Avenue
Van Nuys, California 91405
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:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Jeffrey S. Held, 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 party 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. Entire Agreement; Amendments; Prior Agreements.
The foregoing 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 between the parties hereto
with respect to the matters covered hereby.
10. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of California without regard to the laws and principles
thereof or of any other jurisdiction which would direct the application of the
laws of another jurisdiction.
<PAGE>
11. 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.
12. Headings.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be part of this
Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered the date
first above written.
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
By:___/s/ Gregory J. Hanger, M.D.____________
Gregory J. Hanker, M.D.,
Managing Partner
STOCKHOLDER
- ------------------------------------------
Signature
- ------------------------------------------
Printed Name
BONE, MUSCLE AND JOINT, INC.
By:_ /s/ Naresh Nagpal, M.D., President______
Naresh Nagpal, M.D., President
and Chief Executive Officer
<PAGE>
EXECUTION COPY
================================================================================
ASSET PURCHASE AGREEMENT
BETWEEN
BONE, MUSCLE AND JOINT, INC.
AND
LAUDERDALE ORTHOPAEDIC SURGEONS
Effective as of April 1, 1997
================================================================================
<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) - Office Leases
1.1(g) - Deposits
1.1(h) - Additional Items
2.2 - Allocation of Purchase Price
3.1(b) - Seller Consents
3.1(c) - Claims
3.1(d) - Litigation
3.2(b) - Buyer Consents
<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........................................................... 19
Assignment and Assumption Agreement................................. 4
Assumed Obligations................................................. 3
Bill of Sale........................................................ 4
bulk sales laws..................................................... 20
Business Day........................................................ 26
Buyer............................................................... 1
Buyer Indemnification Event......................................... 19
Buyer Indemnified Persons........................................... 20
Claims.............................................................. 11
Closing............................................................. 18
Closing Date........................................................ 18
Collections......................................................... 34
Determination Date.................................................. 7
Excluded Assets..................................................... 3
Excluded Obligations................................................ 4
Final Statement..................................................... 8
Indemnified Persons................................................. 20
Indemnifying Person................................................. 20
Losses.............................................................. 20
Management Services Agreement....................................... 1
Permitted Liens..................................................... 11
Purchase Price...................................................... 7
Purchased Assets.................................................... 2
Related Agreements.................................................. 15
Seller.............................................................. 1
Seller Indemnification Event........................................ 20
Seller Indemnified Persons.......................................... 21
Signature Date...................................................... 1
Statement of Allocation............................................. 7
Subject Business.................................................... 1
Threshold Month..................................................... 8
<PAGE>
THIS ASSET PURCHASE AGREEMENT is
entered into as of May 6, 1997 (the
"Signature Date"), effective as of April 1,
1997, between BONE, MUSCLE AND JOINT, INC.,
a Delaware corporation (the "Buyer"), and
LAUDERDALE ORTHOPAEDIC SURGEONS, a Florida
partnership (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 hereinafter defined)):
(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 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;
-2-
<PAGE>
(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,
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) and the
office leases identified in Schedule 1.1(f) (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
-3-
<PAGE>
collectively referred to as the "Excluded Obligations." The Seller hereby agrees
to pay all Excluded Obligations as and when such Excluded Obligations become
due.
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
-4-
<PAGE>
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 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 expenses
-5-
<PAGE>
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 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".
-6-
<PAGE>
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) $250,000; and
(b) $2,000,000 (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 as set forth below:
(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 September 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
-7-
<PAGE>
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
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,
-8-
<PAGE>
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.
ARTICLE II
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 partnership 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 General Partnership Agreement 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 partnership action on the part of
the Seller. This Agreement, the Bill of Sale and the
-9-
<PAGE>
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 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 General Partnership Agreement 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
-10-
<PAGE>
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.
(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 this Agreement, the Bill of Sale and the Assignment and
Assumption Agreement 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, (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,
(iii) 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 (iv) statutory landlord liens
securing rents not yet due and payable.
-11-
<PAGE>
(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 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
-12-
<PAGE>
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 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
-13-
<PAGE>
(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 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.
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. Each party agrees to use its
best efforts to have any such injunction or order lifted.
-14-
<PAGE>
(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.
4.2. 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:
(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.
-15-
<PAGE>
(d) Consents and Approvals. The Seller shall have
delivered to the Buyer duly executed copies of (i) consents to the assignment of
the 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, 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.
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
-16-
<PAGE>
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.
4.1. Related Agreements.
The Related Agreements referred to in this Agreement consist
of the following:
(a) the Management Services Agreement, entered into between
the parties hereto;
(b) the Restricted Stock Agreements, entered into between
the Buyer and each of the [Eligible Parties] (as defined in the Management
Services Agreement), respectively;
(c) the Stockholder Non-Competition Agreements, entered
into among the Seller, the Buyer, and each of the [Eligible Parties],
respectively;
(d) the Assignment of Office Leases, relating to each of
the medical office premises identified on Schedule 1.1(f), entered into between
the parties hereto; and
(e) the Assignment and Assumption Agreement entered into
between the Seller and the Buyer.
-17-
<PAGE>
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 April 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) 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 Eligible Parties, respectively, and the
Buyer shall execute and deliver to the
-18-
<PAGE>
Seller Restricted Stock Agreements for each of the Eligible Parties,
respectively;
(f) The Buyer shall deliver to the [Eligible Parties] 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 the each of the Eligible Parties.
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;
-19-
<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 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
(iv) any non-compliance by the Seller with the "bulk
sales laws" of Florida to the extent that such laws 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
-20-
<PAGE>
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.
(h) "Seller Indemnified Persons" shall mean and include
the Seller and its partners 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;
-21-
<PAGE>
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 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
-22-
<PAGE>
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 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
-23-
<PAGE>
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).
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 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
-24-
<PAGE>
prevent a party from later pursuing any remedies or insisting upon full
performance for the same or any similar breach or failure.
ARTICLE X
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, sent by
-25-
<PAGE>
nationally-recognized overnight courier, sent by certified mail, postage
prepaid, return receipt requested, addressed as follows:
(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:
Lauderdale Orthopaedic Surgeons
1212 East Broward Boulevard
Fort Lauderdale, Florida 33301
Attention: Martin Silverstein, M.D.
Telecopier: (954) 462-1526;
with a copy to:
Moore & Menkhaus, P.A.
4800 N. Federal Highway
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 Florida are not required to be open.
-26-
<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 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 may lie in any Federal or state court located
in Broward County, State of Florida; provided, however, that any such party may
also seek jurisdiction and venue in another jurisdiction. 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.
-27-
<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 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.
* * * *
-28-
<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:____________________________
Name:
Title:
LAUDERDALE ORTHOPAEDIC SURGEONS
By:______________________________
Name:
Title:
<PAGE>
SCHEDULE 1.1(a)
Medical Equipment
<PAGE>
SCHEDULE 1.1(b)
Furniture, Furnishings,
Trade Fixtures, and Office Equipment
<PAGE>
SCHEDULE 1.1(c)
Equipment Leases
<PAGE>
SCHEDULE 1.1(d)
Supplies
All of the medical supplies, office supplies, postage, and
printed materials owned by the Seller and located on the premises of any of the
Seller's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
SCHEDULE 1.1(e)
Accounts Receivable
All of the Accounts Receivable of the Medical Group the
payment of which would constitute "Collections" as defined in Section 5.3(c)(ii)
of the Management Services Agreement, determined as of 12:01 a.m. of the
Closing Date hereunder.
<PAGE>
SCHEDULE 1.1(f)
Office Leases
<PAGE>
SCHEDULE 1.1(g)
Deposits
1. Security deposits under leases of offices
located in _____________ (Schedule 1.1(f),
items #1 and #2) $ _______
2. Security deposit under lease of office
located in ________ Schedule 1.1(f), item #3 $ _______
$ _______
<PAGE>
SCHEDULE 1.1(h)
Additional Items
<PAGE>
SCHEDULE 2.2
Allocation of Purchase Price
Medical Equipment, Furniture, Furnishings,
Trade Fixtures, and Office Equipment $ 250,000.00
Supplies $ 0.00
_______ Percent (__%) of the estimated
collectible amount of Accounts Receivable,
subject to adjustment in accordance with
Section 2.3 $2,000,000.00
Deposits $ 0.00
TOTAL: $2,250,000.00
<PAGE>
SCHEDULE 3.1(c)
Claims
<PAGE>
SCHEDULE 3.1(d)
Litigation
<PAGE>
EXHIBIT A
BILL OF SALE
LAUDERDALE ORTHOPAEDIC SURGEONS, a Florida general partnership
(the "Seller"), hereby sells, conveys, transfers, assigns and delivers to BONE,
MUSCLE AND JOINT, INC., a Delaware corporation (the "Buyer"), the following
assets, properties, interests in properties and rights of the Seller
(collectively, the "Purchased Assets"):
1. the medical equipment owned by the Seller and listed on
Schedule 1.1(a) of that certain Asset Purchase Agreement between the Seller and
the Buyer entered into as of the date hereof (the "Asset Purchase Agreement");
2. the furniture, furnishings, trade fixtures, and office
equipment owned by the Seller and listed on Schedule 1.1(b) of the Asset
Purchase Agreement;
3. the Seller's rights and interests under the equipment
leases identified on Schedule 1.1(c) of the Asset Purchase Agreement, subject to
the Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
4. the supplies described on Schedule 1.1(d) of the Asset
Purchase Agreement;
5. the accounts receivable described on Schedule 1.1(e) of
the Asset Purchase Agreement;
6. the Seller's rights and interests under the office
leases identified in Schedule 1.1(f) of the Asset Purchase Agreement, subject to
the Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
7. the deposits identified on Schedule 1.1(g) of the Asset
Purchase Agreement; and
<PAGE>
8. any additional items identified on Schedule 1.1(h) of
the Asset Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement (the "Excluded Assets") are expressly excluded from the assets of the
Seller being sold, assigned, or otherwise transferred to the Buyer.
To the extent that there is a conflict between the terms and
provisions of this Bill of Sale and the Asset Purchase Agreement, the terms and
provisions of the Asset Purchase Agreement shall prevail.
IN WITNESS WHEREOF, the Seller has executed this instrument as
of the 6th day of May, 1997, effective as of April 1, 1997.
LAUDERDALE ORTHOPAEDIC SURGEONS
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT B
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of May 6,
1997, between LAUDERDALE ORTHOPAEDIC SURGEONS ("Assignor") and BONE, MUSCLE AND
JOINT, INC. ("Assignee").
A. Pursuant to the terms of the Asset Purchase Agreement dated
as of the date hereof (the "Asset Purchase Agreement"), between Assignor, as
Seller, and Assignee, as Buyer, Assignor has concurrently with the delivery
hereof, sold, conveyed, transferred, assigned and delivered to Assignee certain
assets of Assignor (the "Purchased Assets"), which are specifically identified
in the Asset Purchase Agreement.
B. In partial consideration of the Purchased Assets, the Asset
Purchase Agreement provides that Assignee shall assume certain liabilities of
Assignor, identified in Section 1.3 of the Asset Purchase Agreement.
NOW, THEREFORE, Assignor and Assignee hereby agree as follows:
1. Assignment; Assumption.
Assignor hereby assigns, transfers and delivers to Assignee,
and Assignee does hereby accept, all of Assignor's rights, titles, and
interests, legal and equitable, in, to and under the equipment leases identified
in Schedule 1.1(c) of the Asset Purchase Agreement and the office leases
identified in Schedule 1.1(f) of the Asset Purchase Agreement (the "Assigned
Contracts"), and Assignee agrees to assume and to pay when due, those
liabilities accruing from and after the date hereof under the Assigned Contracts
and to observe, perform, and comply with the covenants, restrictions,
limitations, and conditions imposed upon Assignor under the Assigned Contracts;
provided, however,
<PAGE>
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.
2. Limitation of Assumption.
2.1 Right to Contest Obligations.
Nothing contained in this Agreement shall require that
Assignee perform, pay or discharge any obligation expressly assumed hereby so
long as Assignee shall in good faith contest or cause to be contested the amount
or validity thereof.
2.2 Obligations Not Assumed.
Other than as specifically stated above, Assignee is not
assuming any liabilities or obligations of the Assignor (whether fixed or
contingent, known or unknown, matured or unmatured).
To the extent there is a conflict between the terms and
provisions of this Assignment and Assumption Agreement and the Asset Purchase
Agreement, the terms and provisions of the Asset Purchase Agreement shall
prevail.
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Assignment and Assumption Agreement as of the date first above written.
LAUDERDALE ORTHOPAEDIC SURGEONS
By:______________________________
Name:
Title:
BONE, MUSCLE AND JOINT, INC.
By:______________________________
Name:
Title:
<PAGE>
EXECUTION COPY
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement")
is entered into as of May 6, 1997, effective as of April 1, 1997, among
LAUDERDALE ORTHOPAEDIC SURGEONS, a Florida partnership (the "Medical Group"),
the individual identified on the signature page hereof (the "Stockholder"), and
BONE, MUSCLE AND JOINT, INC., a Delaware corporation ("BMJ"), with reference to
the following facts:
A. The Medical Group 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.
B. The Stockholder is a partner in or employee of the
Medical Group.
C. The Medical Group and BMJ have entered into a
Management Services Agreement dated as of the date hereof (the "Management
Services Agreement"), under which the Medical Group has agreed to cause the
Stockholder (among others) to execute this Agreement.
D. The Stockholder is acquiring stock in BMJ in
connection with the execution of the Management Services Agreement and pursuant
to a Restricted Stock Agreement entered into between the Stockholder and BMJ,
dated as of the date hereof (the "Restricted Stock 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 the
Stockholder's status as a partner in or employee of the Medical Group, the
Stockholder hereby agrees with the Medical Group and BMJ as follows:
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), or (iii) any other services provided by BMJ.
<PAGE>
2. Agreement Not to Compete or Interfere with Business.
(a) The 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 Broward County, Florida, 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, the
Stockholder hereby agrees that, during the period (such period being referred to
herein as the "Non-Compete Period") commencing on the date hereof and ending two
years after the earliest to occur of (x) the expiration of the Management
Services Agreement, (y) the termination of the Management Services Agreement by
BMJ pursuant to Section 13.2 thereof, or (z) the effective date of the
Stockholder's resignation or termination of partnership status or employment
with the Medical Group (the earliest to occur of clause (x), (y) or (z) being
referred to herein as the "Exit Date"), he or she will not:
(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 employee or
stockholder of, or any partner in, the Medical Group, BMJ, any affiliate of the
Medical Group, or any subsidiary of BMJ to terminate his or her employment or
partnership or stockholder status with such entity 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 terminate or materially diminish its relationship with
the Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of
BMJ; or
(E) 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 the
Stockholder from owning in the aggregate less than one percent (1.0%) of a class
of publicly-traded securities issued by any Competitive Business or any interest
in the Bahamas Practice (as defined in the Management Services Agreement).
(b) The Medical Group acknowledges and agrees that the
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 or the Stockholder exercises the Rescission Option set forth
in Section 14 of the Management Services Agreement.
3. Confidentiality.
(a) The 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 constitutes the confidential and
proprietary trade secrets of the Medical Group or of BMJ, as the case may be,
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 and/or any of its affiliates (the "Medical Group
Confidential Information") or from BMJ (the "BMJ Confidential Information")
(collectively, the "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 BMJ, as the case may be;
3
<PAGE>
(iii) becomes known to the Stockholder from a
source other than the Medical Group or its affiliates or BMJ without breach of
this Agreement by the Stockholder, without breach of any agreement between the
Medical Group or BMJ, as the case may be, and such source, and otherwise not in
violation of the Medical Group's or its affiliates' rights or the rights of BMJ;
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 or BMJ to seek a protective
order or otherwise prevent such disclosure.
(c) The Stockholder agrees to indemnify the Medical
Group or 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.
4. Acknowledgment.
The 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 such Stockholder's participation in any Competitive
Business. The Stockholder further acknowledges receiving sufficient
consideration under the Restricted Stock 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 fulfilling his
or her obligations under this Agreement.
5. Survival; Remedies.
The Stockholder's covenants under this Agreement shall survive
termination of Stockholder's partnership status or employment with the Medical
Group. The Stockholder acknowledges that a remedy at law for any breach or
threatened breach of the provisions of this Agreement would be inadequate and
therefore agrees that the Medical Group and 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.
4
<PAGE>
6. Benefits of Agreement.
This Agreement and the rights and obligations of the parties
hereto shall bind and inure to the benefit of any successors of the Medical
Group and successors of 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:
(i) If to the Medical Group, to:
Lauderdale Orthopaedic Surgeons
1212 East Broward Boulevard
Fort Lauderdale, Florida 33301
Attention: Martin Silverstein, M.D.
Telecopier: (954) 761-9625;
with a copy to:
Moore & Menkhaus, P.A.
4800 N. Federal Highway
Suite 210A
Boca Raton, Florida 33431
Attention: David Menkhaus, Esq.
Telecopier: (561) 393-6541;
5
<PAGE>
(ii) If to the Stockholder, to:
Paul M. Greenman, D.P.M.
10851 Angel Wing Drive
Tamarac, Florida 33321; and
(iii) 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
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) 408-2472;
or, in each case, to such other address as the party to whom notice is to be
given may have furnished to the other party 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. Entire Agreement; Amendments; Prior Agreements.
This Agreement, the Management Services Agreement and the
Restricted Stock Agreement constitute the entire agreement between 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 between the
parties hereto with respect to the matters covered hereby.
10. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without regard to the laws and
principles thereof or of any other jurisdiction which would direct the
application of the laws of another jurisdiction.
6
<PAGE>
11. 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.
12. Headings.
The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.
* * * *
7
<PAGE>
IN WITNESS WHEREOF, this Stockholder Non-Competition Agreement
has been executed and delivered as of the date first above written.
LAUDERDALE ORTHOPAEDIC SURGEONS
By:___________________________
Name:
Title:
STOCKHOLDER
______________________________
Name:
BONE, MUSCLE AND JOINT, INC.
By:___________________________
Name:
Title:
<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>
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").
<PAGE>
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.
4.2. 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:____________________________
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>
SCHEDULE 1.1(a)
Medical Equipment
<PAGE>
SCHEDULE 1.1(b)
Furniture, Furnishings,
Trade Fixtures, and Office Equipment
<PAGE>
SCHEDULE 1.1(c)
Equipment Leases
<PAGE>
SCHEDULE 1.1(d)
Supplies
All of the medical supplies, office supplies, postage, and
printed materials owned by the Medical Group and located on the premises of any
of the Medical Group's offices at 12:01 a.m. on the Closing Date hereunder.
<PAGE>
SCHEDULE 1.1(e)
Accounts Receivable
All of the Accounts Receivable of the Medical Group the
payment of which would constitute "Collections" as defined in Section 5.3(c)(ii)
of the Management Services Agreement, determined as of 12:01 a.m. of the
Closing Date hereunder.
<PAGE>
SCHEDULE 1.1(f)
Deposits
1. Security deposits under leases of offices located
in _____________ (Schedule 1.1(f), items #1 and #2) $ _______
2. Security deposit under lease of office located in
________ Schedule 1.1(f), item #3 $ _______
$ _______
<PAGE>
SCHEDULE 1.1(g)
Additional Items
<PAGE>
SCHEDULE 2.2
Allocation of Purchase Price
Medical Equipment, Furniture, Furnishings, Trade Fixtures,
and Office Equipment (including supplies) $ 140,000.00
_______ Percent (__%) of the estimated collectible amount of
Accounts Receivable, subject to adjustment in accordance with
Section 2.3 $ 950,000.00
Purchase of intangible assets for access and rights to same
(going concern, work force in place, access to patient records
and logs, and booked business) $1,812,250.50
TOTAL: $2,902,250.50
<PAGE>
SCHEDULE 3.1(c)
Claims
<PAGE>
SCHEDULE 3.1(d)
Litigation
<PAGE>
EXHIBIT A
BILL OF SALE
Fishman and Stashak, M.D.'s, P.A., a Florida professional
association (the "Seller"), hereby sells, conveys, transfers, assigns and
delivers to BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Buyer"),
the following assets, properties, interests in properties and rights of the
Seller (collectively, the "Purchased Assets"):
1. the medical equipment owned by the Seller and listed on
Schedule 1.1(a) of that certain Asset Purchase Agreement between the Seller and
the Buyer entered into as of the date hereof (the "Asset Purchase Agreement");
2. the furniture, furnishings, trade fixtures, and office
equipment owned by the Seller and listed on Schedule 1.1(b) of the Asset
Purchase Agreement;
3. the Seller's rights and interests under the equipment
leases identified on Schedule 1.1(c) of the Asset Purchase Agreement, subject to
the Buyer's assumption of the obligations accruing thereunder from and after the
date hereof;
4. the supplies described on Schedule 1.1(d) of the Asset
Purchase Agreement;
5. the accounts receivable described on Schedule 1.1(e) of
the Asset Purchase Agreement;
6. the deposits identified on Schedule 1.1(f) of the Asset
Purchase Agreement; and
7. any additional items identified on Schedule 1.1(g) of
the Asset Purchase Agreement.
All assets, properties, interests in properties, and rights of the Seller not
expressly identified above or in the schedules referenced in the Asset Purchase
Agreement (the "Excluded
<PAGE>
Assets") are expressly excluded from the assets of the Seller being sold,
assigned, or otherwise transferred to the Buyer.
To the extent that there is a conflict between the terms and
provisions of this Bill of Sale and the Asset Purchase Agreement, the terms and
provisions of the Asset Purchase Agreement shall prevail.
IN WITNESS WHEREOF, the Seller has executed this
instrument as of the 3rd day of July, 1997, effective as of June 1, 1997.
FISHMAN AND STASHAK, M.D.'S, P.A.
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT B
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of
July 3, 1997, effective as of June 1, 1997, between FISHMAN AND STASHAK, M.D.'S,
P.A. ("Assignor") and BONE, MUSCLE AND JOINT, INC. ("Assignee").
A. Pursuant to the terms of the Asset Purchase Agreement
dated as of the date hereof (the "Asset Purchase Agreement"), between Assignor,
as Seller, and Assignee, as Buyer, Assignor has concurrently with the delivery
hereof, sold, conveyed, transferred, assigned and delivered to Assignee certain
assets of Assignor (the "Purchased Assets"), which are specifically identified
in the Asset Purchase Agreement.
B. In partial consideration of the Purchased Assets, the
Asset Purchase Agreement provides that Assignee shall assume certain liabilities
of Assignor, identified in Section 1.3 of the Asset Purchase Agreement.
NOW, THEREFORE, Assignor and Assignee hereby agree as
follows:
1. Assignment; Assumption.
Assignor hereby assigns, transfers and delivers to Assignee,
and Assignee does hereby accept, all of Assignor's rights, titles, and
interests, legal and equitable, in, to and under the equipment leases identified
in Schedule 1.1(c) of the Asset Purchase Agreement (the "Assigned Contracts"),
and Assignee agrees to assume and to pay when due, those liabilities accruing
from and after the date hereof under the Assigned Contracts and to observe,
perform, and comply with the covenants, restrictions, limitations, and
conditions imposed upon Assignor under the Assigned Contracts; provided,
however, that any and all
<PAGE>
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.
2. Limitation of Assumption.
2.1 Right to Contest Obligations.
Nothing contained in this Agreement shall require that
Assignee perform, pay or discharge any obligation expressly assumed hereby so
long as Assignee shall in good faith contest or cause to be contested the amount
or validity thereof.
2.2 Obligations Not Assumed.
Other than as specifically stated above, Assignee is not
assuming any liabilities or obligations of the Assignor (whether fixed or
contingent, known or unknown, matured or unmatured).
To the extent there is a conflict between the terms and
provisions of this Assignment and Assumption Agreement and the Asset Purchase
Agreement, the terms and provisions of the Asset Purchase Agreement shall
prevail.
* * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Assignment and Assumption 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:
<PAGE>
EXECUTION COPY
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement")
is entered into as of August 8, 1997, among FISHMAN AND STASHAK, M.D.'S, P.A., a
Florida professional association (the "Medical Group"), the individual
identified on the signature page hereof (the "Stockholder"), and BONE, MUSCLE
AND JOINT, INC., a Delaware corporation ("BMJ"), with reference to the following
facts:
A. The Medical Group 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.
B. The Stockholder is a partner in or stockholder or
employee of the Medical Group.
C. The Medical Group and BMJ have entered into a
Management Services Agreement dated as of the date hereof (the "Management
Services Agreement"), under which the Medical Group has agreed to cause the
Stockholder (among others) to execute this Agreement.
D. The Stockholder is acquiring stock in BMJ in
connection with the execution of the Management Services Agreement and pursuant
to a Restricted Stock Agreement entered into between the Stockholder and BMJ,
dated as of the date hereof (the "Restricted Stock 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 the
Stockholder's status as an equity owner or employee of the Medical Group, the
Stockholder hereby agrees for the benefit of both the Medical Group and BMJ as
follows:
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), or (iii) any other services provided by BMJ.
<PAGE>
2. Agreement Not to Compete or Interfere with Business.
(a) The 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 Palm Beach County, Florida, and (iii) due to the
highly competitive nature of theMedical 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, the
Stockholder hereby agrees that, during the period (such period being referred to
herein as the "Non-Compete Period") commencing on the date hereof and ending two
years after the earliest to occur of (x) the expiration of the Management
Services Agreement, (y) the termination of the Management Services Agreement by
BMJ pursuant to Section 13.2 thereof, or (z) the effective date of the
Stockholder's resignation or termination of equity ownership status or
employment with the Medical Group (the earliest to occur of clause x, (y) or (z)
being referred to herein as the "Exit Date"), he or she will not:
(A) engage, directly or indirectly, in any
Competitive Business at any location within fifteen (15) 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),
provided that if the Stockholder becomes a partner in or other equity owner of
the Medical Group, the Restricted Territory shall be any location within
twenty-five (25) miles of any Medical Group office;
(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 employee or
stockholder of, or any partner in, the Medical Group, BMJ, or any affiliate or
subsidiary of the Medical Group or BMJ to terminate his or her employment or
equity owner or stockholder status with such entity 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, or any affiliate or subsidiary of the
Medical Group or BMJ to terminate or materially diminish its relationship with
the Medical Group, BMJ, or any affiliate or subsidiary of the Medical Group or
BMJ; or
2
<PAGE>
(E) otherwise knowingly damage, disparage or
interfere with the Medical Group, BMJ, or any affiliate or subsidiary of the
Medical Group or BMJ;
provided, however, that nothing contained in this Agreement shall prohibit the
Stockholder from owning in the aggregate less than three percent (3.0%) of a
class of publicly-traded securities issued by any Competitive Business.
(b) BMJ and the Medical Group acknowledge and agree that
the 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 exercises the Rescission Option set forth in Section 14
of the Management Services Agreement.
3. Confidentiality.
(a) The 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 and its affiliates constitutes the confidential and
proprietary trade secrets of the Medical Group or of BMJ, as the case may be,
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 and/or any of its affiliates (the "Medical Group
Confidential Information") or from BMJ and/or any of its affiliates (the "BMJ
Confidential Information") (collectively, the "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 or its affiliates
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;
3
<PAGE>
(ii) is disclosed with the prior written consent of
the Medical Group or BMJ, as the case may be;
(iii) becomes known to the Stockholder from a source
other than the Medical Group or its affiliates or BMJ or its affiliates without
breach of this Agreement by the Stockholder, without breach of any agreement
between the Medical Group or BMJ, as the case may be, and such source, and
otherwise not in violation of the Medical Group's or its affiliates' rights or
the rights of BMJ or its affiliates; 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 or BMJ or its affiliates to
seek a protective order or otherwise prevent such disclosure.
(c) The Stockholder agrees to indemnify the Medical Group
or its affiliates and BMJ or its affiliates 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.
4. Acknowledgment.
The 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 such Stockholder's participation in any Competitive
Business. The Stockholder further acknowledges receiving sufficient
consideration under the Restricted Stock 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 fulfilling his
or her obligations under this Agreement.
5. Buyout of Non-Compete Covenant.
(a) At any time from and after the Exit Date, the
Stockholder may request (a "Termination Request") that BMJ and the Medical Group
terminate such Stockholder's obligations under paragraph (A) of Section 2(a)
hereof. Such request shall be made by the Stockholder in writing and shall be
delivered to the Medical Group and BMJ in accordance with Section 9 hereof. The
copy of the Termination Request addressed to BMJ shall be
4
<PAGE>
accompanied by a certified check payable to BMJ in an amount equal to one-half
of $110,000 (the total amount being referred to herein as the "Buyout Amount").
The Stockholder shall deliver the remaining one-half (the "Second Payment") of
the Buyout Amount to BMJ no later than the first anniversary of the initial
payment pursuant to the previous sentence (such one year period being referred
to herein as the "Payment Period"). Notwithstanding the foregoing, in the event
the Stockholder fails to deliver the Second Payment by the end of the Payment
Period, then the terms of this Section 5(a) shall automatically be deemed null
and void and the provisions of paragraph (A) of Section 2(a) hereof shall be
deemed operative again (with the duration of the Payment Period not to be
counted as part of the Non-Compete Period).
(b) Nothing contained herein shall be construed to in any
way limit or reduce the remedies available to the Medical Group and BMJ
hereunder in the event of a breach of Section 2(a) hereof prior to the delivery
of a Termination Request.
(c) Notwithstanding anything to the contrary contained
herein, in the event that the Stockholder delivers a Termination Request to the
Medical Group and BMJ and complies with the other provisions of Section 5(a)
above, any solicitation by the Stockholder of those patients to which the
Stockholder provided medical services prior to the Exit Date shall not be deemed
a breach of Section 2 hereof.
6. Survival; Remedies.
The Stockholder's covenants under this Agreement shall survive
termination of Stockholder's equity owner status or employment with the Medical
Group. The Stockholder acknowledges that a remedy at law for any breach or
threatened breach of the provisions of this Agreement would be inadequate and
therefore agrees that the Medical Group and 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.
7. Benefits of Agreement.
This Agreement and the rights and obligations of the parties
hereto shall bind and inure to the benefit of any successors of the Medical
Group and successors of 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.
5
<PAGE>
8. 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.
9. 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:
(i) If to the Medical Group, 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;
6
<PAGE>
(ii) If to the Stockholder, to his or her address set
forth on the signature page hereto beneath his or her name;
and
(iii) 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
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) 408-2472;
or, in each case, to such other address as the party to whom notice is to be
given may have furnished to the other party 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.
10. Entire Agreement; Amendments; Prior Agreements.
This Agreement, the Management Services Agreement and the
Restricted Stock Agreement constitute the entire agreement between 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 between 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 Florida without regard to the laws and
principles thereof or of any other jurisdiction which would direct the
application of the laws of another jurisdiction.
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 other party all costs and expenses,
7
<PAGE>
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 of reference only and shall not be deemed to be part of
this Agreement.
* * * *
8
<PAGE>
IN WITNESS WHEREOF, this Stockholder Non-Competition Agreement
has been executed and delivered as of the date first above written.
FISHMAN AND STASHAK, M.D.'S, P.A.
By: ___________________________
Name:
Title:
STOCKHOLDER
______________________________
Name:
Address for notices:
______________________________
______________________________
______________________________
BONE, MUSCLE AND JOINT, INC.
By:___________________________
Name:
Title:
<PAGE>
Exhibit 11
BMJ Medical Management, Inc.
Computation of Per Share Earnings
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
Net loss $ (1,109,379) $ (52,000) $ (1,876,000)
------------------------------------------------------
Weighted average common shares outstanding 966,721 361,538 1,625,000
Shares related to Staff Accounting Bulletin No. 83(1):
Common stock 9,102,479 9,102,479 9,102,479
Common stock options 1,303,000 1,303,000 1,303,000
Common stock warrants 254,165 254,165 254,165
Convertible preferred stock 4,184,740 4,184,740 4,184,740
------------------------------------------------------
15,811,105 15,205,922 16,469,384
------------------------------------------------------
------------------------------------------------------
Net loss per common share $ (0.07) $ (0.00) $ (0.11)
------------------------------------------------------
------------------------------------------------------
</TABLE>
(1) Common share equivalents (stock options, warrants and convertible
preferred stock) are excluded from the computation of loss per share as
their effect is antidilutive, except that, pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common stock
options and warrants issued and common and convertible preferred
stock sold in the 12 months preceding the offering date have been
included in the calculation as if outstanding for all periods
presented.
<PAGE>
Subsidiaries
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ ---------------
1. BMJ of Lake Tahoe, Inc. Nevada
2. BMJ of Bethlehem, Inc. Pennsylvania
<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 the
Registration Statement on Form S-1 and related Prospectus of BMJ Medical
Management, Inc. dated September 16, 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
/s/ Ernst & Young LLP
West Palm Beach, Florida
September 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BMJ MEDICAL MANAGEMENT, INC. AND AFFILIATED MEDICAL
PRACTICES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,915,000
<SECURITIES> 0
<RECEIVABLES> 10,319,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,860,000
<PP&E> 2,848,000
<DEPRECIATION> 302,000
<TOTAL-ASSETS> 29,456,000
<CURRENT-LIABILITIES> 11,370,000
<BONDS> 0
0
40,000
<COMMON> 9,000
<OTHER-SE> 11,497,000
<TOTAL-LIABILITY-AND-EQUITY> 29,456,000
<SALES> 0
<TOTAL-REVENUES> 10,398,000
<CGS> 0
<TOTAL-COSTS> 12,274,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,876,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,876,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,876,000)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 0.00
</TABLE>
