<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1998
REGISTRATION NO. 333-35759
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BMJ MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 65-0676079
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
4800 NORTH FEDERAL HIGHWAY, SUITE 101E
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 101E
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 CRAVATH, SWAINE & MOORE
30 ROCKEFELLER PLAZA 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10019
(212) 408-2400 (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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT 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 te
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 sall not constitute an offer to sell or the
solication 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 JANUARY 8, 1998
PROSPECTUS
4,000,000 SHARES
[BMJ LOGO]
COMMON STOCK
All of the 4,000,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $9.00 and $11.00 per share. See 'Underwriting'
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market ('Nasdaq') under the symbol BONS, subject to official
notice of issuance.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' COMMENCING ON PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total (3)............................................. $ $ $
</TABLE>
(1) Does not include a $ non-accountable expense allowance to be
received by the Underwriters. See 'Underwriting' for indemnification
arrangements with the several Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 600,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See 'Underwriting.'
----------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, 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
, 1998
<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.
As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act,
as amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the public reference facilities, regional offices and Web site
referred to above.
------------------------
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, the
potential inability of the Company to establish ancillary service facilities,
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 BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE 'UNDERWRITING.'
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements including the notes thereto appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading 'Risk Factors.' As used herein, the term
the 'Company' refers to BMJ Medical Management, Inc., a Delaware corporation;
the term 'Existing Practices' collectively refers to the 25 Practices that have
affiliated with the Company via management services agreements as of the date of
this Prospectus; and the term 'Practices' includes the Existing Practices and
other practices with which the Company may affiliate in the future. Unless
otherwise indicated, all information in this Prospectus (i) gives effect to a
5-for-7 reverse stock split of the Company's Common Stock to be effected
immediately prior to the Offering and (ii) assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
The Company is principally a physician practice management company (a
'PPM') that provides management services to physician practices that focus on
musculoskeletal care, which involves the medical and surgical treatment of
conditions relating to bones, muscles, joints and related connective tissues.
The broad spectrum of musculoskeletal care offered by the physician practices
ranges from acute procedures, such as spine or other complex surgeries, to the
treatment of chronic conditions, such as arthritis and back pain. The management
services provided by the Company include physician practice and network
development, marketing, payor contracting and financial, administrative and
clinical information management. In addition, the Company, through its wholly
owned subsidiary, Orthopaedic Management Network, Inc. ('OMNI'), operates an
Independent Physician Association (the 'IPA') that negotiates and administers
payor contracts for the delivery of health care services by physicians and
physician practices that focus on musculoskeletal care on behalf of a specified
patient population. Since its formation in January 1996, the Company has
affiliated (the 'Affiliation Transactions') with 25 Existing Practices
comprising 117 doctors practicing in Arizona, California, Florida, Pennsylvania,
New Jersey and Texas by entering into management services agreements (the
'Management Services Agreements') and operates an IPA with 42 physicians in
Arizona.
The market for musculoskeletal care in the United States is significant and
growing. According to the American Academy of Orthopaedic Surgeons (the 'AAOS'),
total direct costs associated with the delivery of musculoskeletal care exceeded
$60 billion in 1988 and increased to approximately $72 billion in 1992. The
increase in expenditures can be attributed to various factors, including
improvements in medical technology, more active lifestyles which have resulted
in the growth of sports medicine and the overall aging of the population. In
1992, the 65-and-over age group represented approximately 12% of the U.S.
population, but accounted for more than half of all musculoskeletal care
expenditures. Historically, surgical and non-surgical orthopaedic specialists
have maintained separate practices; recently, however, musculoskeletal
physicians have begun to follow the consolidation trend seen elsewhere in the
health care industry.
The Company's goal is to develop the leading musculoskeletal network in
each of its markets by aligning the Company's interests with those of the
Practices' physicians. The Company has divided the United States into three
geographic regions, and selects specific markets based primarily on population
size, which must be large enough to support a viable musculoskeletal physician
network. The Company's strategy consists of (i) expanding into targeted new
markets by affiliating with leading musculoskeletal practices; (ii) continuing
to develop its existing markets by strengthening and expanding the Practices in
order to achieve significant local market presence; (iii) introducing ancillary
services to expand the breadth of care directly offered by the Practices'
physicians; and (iv) developing and implementing a disease management
information system to foster curative and palliative regimens, improve provider
and patient access to resources and technology and deliver cost-effective,
quality care.
Under the Management Services Agreements, the Company provides management,
administrative and development services to the Existing Practices, while the
Existing Practices retain, among other things, sole responsibility for all
aspects of the practice of medicine. The Company's revenues under the Management
Services Agreements are typically based on a specified percentage of Practice
revenues, generally 10% to 15%, rather than on a percentage of net operating
income. In addition, the Company typically assumes the Practices' clinic
overhead expenses and charges them back to the Practices at actual cost, and
receives two-thirds of savings
3
<PAGE>
realized through the Company's purchasing power. Pursuant to the Management
Services Agreements, the Company collects revenues on behalf of the Practices,
pays clinic overhead expenses and pays physician draws to the Practices. See
'Business--BMJ Operations.' The Company seeks to develop and maintain long-term
relationships with the Practices by providing physician performance incentives
through equity ownership in the Company, ensuring physician clinical autonomy
and participation in Practice governance and delivering national support
services on a regional basis. The Company believes that its affiliation model,
versus other existing models, provides less financial risk to the Company while
enhancing its relationships with the Practices' physicians.
In addition to a Management Services Agreement, the Company typically
enters into an asset purchase agreement (the 'Asset Purchase Agreement'), a
restricted stock agreement (the 'Restricted Stock Agreement') and a stockholder
noncompetition agreement (the 'Stockholder Noncompetition Agreement') with a
Practice that affiliates with the Company. Under the Asset Purchase Agreement,
the Company purchases from the Practice substantially all of those assets used
or generated by the Practice in the operation of the Practice. The Restricted
Stock Agreement governs the Common Stock issued by the Company to the physician
owners of the Practice as partial consideration for affiliating with the
Company. Under the Stockholder Noncompetition Agreement, the Practice's
physicians agree not to compete with or disclose confidential information about
the Company. See 'Business--Contractual Agreements with Practices.' The Company
will use approximately $9.4 million of the proceeds to repay outstanding notes
issued to four Practices in Affiliation Transactions. See 'The Company --
Affiliation Transactions' and 'Use of Proceeds'.
The Company's executive offices are located at 4800 North Federal Highway,
Suite 101E, Boca Raton, Florida 33431, and its telephone number is (561)
391-1311.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................ 4,000,000 shares
Common Stock to be outstanding after the offering.............. 16,163,133 shares(1)
Use of proceeds................................................ Repayment of debt and general corporate
purposes. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol......................... BONS
</TABLE>
- ------------------
(1) Excludes 1,135,046 shares of Common Stock issuable upon exercise of
outstanding options to purchase Common Stock with a weighted average
exercise price of $1.47 per share and 301,189 shares of Common Stock
issuable upon exercise of outstanding warrants to purchase Common Stock with
a weighted average exercise price of $4.62 per share. See 'Management' and
'Certain Transactions.'
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
AS
NINE MONTHS ENDED ADJUSTED(2)(3)
PRO FORMA NINE MONTHS
YEAR ENDED AS ADJUSTED(1)(2) SEPTEMBER 30, ENDED
DECEMBER 31, YEAR ENDED ------------------------ SEPTEMBER 30,
1996 DECEMBER 31, 1996 1996 1997 1997
------------ ----------------- ---------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Practice revenues, net.................. $ 6,029 $94,145 $ 674 $ 38,325 $ 77,226
Less: amounts retained by physician
groups................................ (2,912) (33,392) (336) (17,878) (31,676)
------------ ------- ---------- ---------- -------
Management fee revenue.................. 3,117 60,753 338 20,447 45,550
Costs and expenses:
Medical support services.............. 2,844 50,571 343 17,934 36,219
General and administrative............ 1,299 1,299 675 5,962 5,962
Depreciation and amortization......... 737 3,642 83 4,489 3,089
Interest expense (income), net........ (21) 256 (6) 922 296
------------ ------- ---------- ---------- -------
Total costs and expenses............ 4,859 55,768 1,095 29,307 45,566
------------ ------- ---------- ---------- -------
Income (loss) before income taxes....... (1,742) 4,985 (757) (8,860) (16)
Income taxes............................ -- 1,894 -- -- --
------------ ------- ---------- ---------- -------
Net income (loss)....................... $ (1,742) $ 3,091 $ (757) $ (8,860) $ (16)
------------ ------- ---------- ---------- -------
------------ ------- ---------- ---------- -------
Net income (loss) per common share:
Primary............................... $ (0.21) $ 0.17 $ (0.10) $ (1.02) $ 0.00
Diluted............................... $ (0.21) $ 0.17 $ (0.10) $ (1.02) $ 0.00
Weighted average number of common shares
outstanding:
Primary............................... 8,273 18,152 7,820 8,722 18,152
Diluted............................... 8,273 18,549 7,820 8,722 18,549
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
------- --------------- ------------------
(IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 2,404 $ 3,363 $ 4,646
Working capital..................................................... 10,578 37 20,597
Total assets........................................................ 61,367 85,904 87,187
Long-term debt and capital lease obligation, less current portion... 16,480 18,491 4,051
Total stockholders' equity.......................................... 33,694 40,089 75,089
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ----------------------
1996 ACTUAL PRO FORMA(4)
------------ ------ ------------
<S> <C> <C> <C>
OTHER OPERATING DATA (AT END OF PERIOD):
Number of Practices....................................................... 3 22 25
Number of physicians...................................................... 34 106 117
</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 $10.00 per
share and the receipt and application of the estimated net proceeds
therefrom. See 'Use of Proceeds' and 'Capitalization.'
(3) Gives effect to the Affiliation Transactions completed in 1997 (the '1997
Affiliation Transactions') as if they had occurred on January 1, 1997. See
'The Company,' 'Pro Forma Financial Information' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
(4) Gives effect to the 1997 Affiliation Transactions completed after September
30, 1997 as if such transactions had occurred on September 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 $10.00 per share and the receipt and application of the
estimated net proceeds therefrom as if such transactions had occurred on
September 30, 1997. See 'Use of Proceeds' and 'Capitalization.'
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business,' as well as in the Prospectus generally. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Prospectus generally.
Lack of Significant Combined Operating History. The Company was
incorporated in January 1996 and, prior to its affiliation with the first
Existing Practice in July 1996, had no history of operations or earnings. Before
affiliating with the Company, the Existing Practices operated as independent
entities, and there can be no assurance that the Company will be able to
integrate and manage profitably the assets and personnel of the Existing
Practices or of any other Practices. In addition, there can be no assurance that
the Company's affiliation with any Practice will not result in a loss of
patients or other unanticipated adverse consequences, any of these events could
have a material adverse effect on the Company. Prior to the Company's
acquisition of the IPA in October 1997, the Company had no history of operating
an IPA. There can be no assurance that the Company will be able to successfully
and profitably manage payor contracting on behalf of the IPA. Additionally,
there can be no assurance that the Company's affiliation with the IPA will not
result in the termination of the agreements pursuant to which the physicians
affiliated with the IPA provide services to enrollees of health care plans and
other specified patient populations (the 'IPA Provider Agreements') or other
unanticipated adverse consequences, any of which could have a material adverse
effect on the Company. The Company's strategy is predicated on its ability to
achieve significant consolidation of Practices and to sustain and enhance the
profitability of such Practices. There can be no assurance that the Company's
personnel, systems and infrastructure will be sufficient to achieve effective
and profitable management of the Practices under the Management Services
Agreements or to implement effectively the Company's strategies. See
'Business--Strategy' and 'Management.'
Dependence on the Practices and Physicians. The Company's revenues are
dependent on its affiliation through Management Services Agreements with the
Practices and on the success of the Practices, including the IPA. There can be
no assurance that the Practices will maintain successful operations, that they
will not terminate their Management Services Agreements or that key physicians
in a particular Practice will continue to affiliate with such Practice. On a pro
forma basis for the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company received approximately 19% and 21%,
respectively, of its total revenue from management fees paid by the Southern
California Orthopedic Institute Medical Group ('SCOI'). The termination of the
SCOI Management Services Agreement would have a material adverse effect on the
Company. For a further description of the Management Services Agreements,
including a description of their termination provisions and noncompetition
arrangements with the Practices' physicians, see 'Business--Contractual
Agreements with the Practices.' For a discussion of circumstances under which a
Management Services Agreement may be rendered unenforceable, see '--Government
Regulation.'
Some of the Existing Practices derive a significant portion of their
revenue from a limited number of physicians. The physicians are employees of the
Practices, not of the Company, and there can be no assurance that the Company or
the Existing Practices will maintain cooperative relationships with key members
of any such Practice. In addition, key members of a Practice could retire,
become disabled or otherwise become unable or unwilling to continue generating
revenues at the current level or practicing medicine with such Practice. The
loss by a Practice of one or more key members would have a material adverse
effect on the revenue of such Practice and on the Company. The Company has the
right under the Management Services Agreements to obtain and maintain life
insurance in the amount of $500,000 on the life of each licensed physician
employed by each Practice for the benefit of the Company. Nonetheless, the loss
of revenue by any Practice as a result of a physician's death could have a
material adverse effect on the Company. Additionally, although the Company has
entered into noncompetition agreements with each Practice and its respective
physicians, there can be no assurance as to the enforceability of such
noncompetition agreements.
6
<PAGE>
Rescission Rights. The Company has entered into a Management Services
Agreement with South Texas Spinal Clinic, P.A. ('STSC') which permits STSC and
the individual physicians to rescind the Affiliation Transaction on November 1,
2003. In addition, the Management Services Agreements for seven other Existing
Practices comprising 29 physicians contain provisions that permit such Existing
Practices to rescind their Affiliation Transactions on their respective seventh
anniversaries.
Risk of Termination. The Management Services Agreement may be terminated
by either party if the other party (a) files a petition in bankruptcy or other
similar events occur, or (b) defaults in any material respect in the performance
of any duty or obligation under the Management Services Agreement, which default
is not cured within a specified period after receipt of notice thereof or (c)
any of the representations and warranties made by such party in the Management
Services Agreement is materially untrue or misleading and such party fails to
correct such matter after receipt of written notice thereof. The Company also
has the right to terminate the Management Services Agreement in the event that
the Practice is excluded from participation in the Medicaid or Medicare program
for any reason. Either party may also terminate the Management Services
Agreement if such party determines that the structure of the Management Services
Agreement violates any state or federal laws or regulations existing at such
time and that an amendment to the Management Services Agreement will be unable
to correct such defect.
Risks Related to New Affiliations and Expansion. The Company is exposed to
significant growth-related risks because an essential element of its strategy is
to affiliate with and/or to merge affiliated musculoskeletal practices and to
expand the business of such practices. The Company's strategy also involves
assisting the Practices in recruiting physicians, expansion and development of
the IPA and, to the extent permitted by applicable law, contracting with or
establishing ancillary musculoskeletal facilities (the 'Ancillary Service
Facilities'), such as ambulatory surgery, physical therapy and magnetic
resonance imaging ('MRI') centers and mobile units, and contracting with
associated providers. Identifying appropriate physician group practices,
individual physicians and ancillary providers and facilities, and proposing,
negotiating and implementing economically attractive affiliations with such
practices, physicians and providers, as well as merging such practices, can be a
lengthy, complex and costly process. The failure of the Company to affiliate
with additional musculoskeletal practices or merge practices would have a
material adverse effect on the Company's ability to execute its expansion
strategy. Moreover, future affiliations or mergers, if any, may not contribute
to the Company's profitability or otherwise facilitate the successful
implementation of the Company's overall strategy. See 'Business--Strategy.'
The Company's expansion is also dependent upon factors such as the ability
of the Company and the Practices to (i) adapt the Company's arrangements with
the Practices to comply with current and future legal requirements, including
state prohibitions on fee-splitting and corporate practice of medicine, state
and federal limitations on physicians ordering ancillary services from, or
referring patients to, facilities with which such physicians have a financial
relationship, state and federal anti-kickback provisions and state regulation of
the business of insurance; (ii) obtain regulatory approval and certificates of
need, where necessary; and (iii) comply with licensing requirements applicable
to physicians and to facilities operated, and services offered, by physicians.
No assurance can be given that the application of current laws or changes in
legal requirements would not have a material adverse effect on the Company.
Moreover, the Company and the Practices may not be able to obtain and maintain
all necessary regulatory approvals or comply with all applicable laws,
regulations and licensing requirements. See '--Government Regulation' and
'Business--Government Regulation and Supervision.'
Since its inception, the Company's business has grown rapidly. Continued
rapid growth through affiliation and expansion could impair the Company's
ability to efficiently provide its management services to the Practices, to
adequately manage and supervise its employees and to effectively operate the
IPA. There can be no assurance that the Company will be able to expand its
infrastructure and management to achieve planned growth. In addition, the
Company may be unable to retain personnel or acquire other resources necessary
to service growth adequately. Moreover, the Company is still in the process of
integrating the Practices that have affiliated with the Company to date and no
assurance can be given that the Company will be successful in integrating all of
such Practices or any Practices that affiliate with the Company in the future.
Risks Associated with Ancillary Service Facilities. To date, the Company
has not opened any Ancillary Service Facilities. The Company is unable to
predict whether it will be able to obtain the critical mass in any
7
<PAGE>
particular market needed to establish Ancillary Service Facilities and, if so,
whether the Company and/or the Practices will be able to consistently minimize
costs and maintain a sufficient volume of patient visits to the Ancillary
Service Facilities for such facilities to be profitable. Moreover, such
facilities must be structured and operated to comply with various federal and
state laws. Future judicial or regulatory interpretation could adversely affect
such operations. See '--Government Regulation.'
Dependence on Information Systems. No assurance can be given that the
Company will be able to enhance existing and/or implement new information
systems that can be integrated with the Practices' existing operational,
financial and clinical information gathering systems. In addition to their
integral role in helping the Practices realize operating efficiencies, such new
systems are critical to developing and implementing a disease management
information database. See 'Business--Strategy.' To develop its network, the
Company must continue to invest in and administer sophisticated management
information systems. The Company may experience unanticipated delays,
complications and expenses in implementing, integrating and operating such
systems. Furthermore, such systems may require modifications, improvements or
replacements as the Company expands and as new technologies become available.
Such modifications, improvements or replacements may require substantial
expenditures and may require interruptions in operations during periods of
implementation. Moreover, implementation of such systems is subject to the
availability of information technology and skilled personnel to assist the
Company in creating and implementing the system. The failure to successfully
implement and maintain operational, financial and clinical information systems
would have a material adverse effect on the Company. See 'Business--BMJ
Operations.'
Reductions in Third Party Reimbursements. The health care industry is
experiencing a trend toward cost containment as third party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, seek to impose lower reimbursement and utilization rates and
to negotiate reduced capitated payment schedules with service providers. Further
reductions in payments to health care providers or other changes in
reimbursement for health care services could have a material adverse effect on
the Practices and/or the IPA and, as a result, on the Company. These reductions
could result from changes in current reimbursement rates or from a shift in
clinical protocols to non-surgical solutions for orthopaedic conditions. The
Company may not be able to successfully offset any or all of the payment
reductions that may occur.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ('RBRVS') payment methodology for heath care
provider services. RBRVS is a fee schedule that, except for certain geographical
and other adjustments, pays similarly situated health care providers the same
amount for the same services. The RBRVS is subject to annual increases or
decreases at the discretion of Congress or the federal Health Care Financing
Administration ('HCFA'). To date, the implementation of RBRVS has reduced
payment rates for certain of the procedures historically provided by the
Existing Practices. Furthermore, HCFA is required by law to recalibrate the
practice expense component of the RBRVS over the next four years in a way that
will have positive effects on payments to primary care providers but will
decrease payments for most services provided by specialists, including many
services provided by the Existing Practices. For the nine months ended September
30, 1997, the net practice revenue from Medicare constituted approximately 15%
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. See
'Business--Payor Mix of Existing Practices.'
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
8
<PAGE>
laws applicable to the Company are subject to evolving interpretations, and
therefore there can be no assurance that a review of the Company's operations by
federal or state judicial or regulatory authorities would not result in a
determination that the Company, or one of the Practices has violated one or more
provisions of federal or state law. Any such determination could have a material
adverse effect on the Company.
Expansion of the operations of the Company to certain jurisdictions may
require modification of the Company's form of relationship with the Practices,
which could have a material adverse effect on the Company. Furthermore, the
Company's ability to expand into, or to continue to operate within, certain
jurisdictions may depend on the Company's ability to modify its or the
Practices' operational structure to conform to such jurisdictions' regulatory
framework or to obtain necessary approvals, licenses and/or permits. Any
limitation on the Company's ability to expand could have a material adverse
effect on the Company. See 'Business-- Government Regulation and Supervision.'
Physician Self-Referral Laws. The federal Self-Referral Law (also known as
the 'Stark Law') imposes restrictions on physicians' referrals for designated
health services reimbursable by Medicare or Medicaid to entities with which any
such physician (or an immediate family member of such physician) has a financial
relationship, whether through an ownership, debt or compensation arrangement.
Many states, including several of the states in which the Company conducts
business, also have adopted self-referral laws. Unlike the Stark Law, however,
many state self-referral laws are not limited to Medicare or Medicaid reimbursed
services. In addition, state self-referral laws may apply to all health care
services, not just certain designated health services, and state self-referral
laws may apply only to ownership relationships and not to compensation
relationships. State workers' compensation laws also may contain self-referral
prohibitions. Unless a statutory exception applies, if a physician has a
financial relationship in or with the Company, then that physician is prohibited
from referring patients to any Ancillary Service Facilities owned (or possibly
managed) by the Company for the furnishing of designated health services or
other health care services as defined by federal or state law. In addition,
neither the Company nor the physician is authorized to bill for services
furnished to such physician's patients by the Company or at such Ancillary
Service Facilities where there is no exception available for the physician's
financial relationship with the Company. Violations of this law may result in
substantial civil penalties and exclusion from participation in Medicare and
Medicaid programs. State laws also may require a physician to disclose to
patients the nature of the physician's financial relationship with the Company
and any Ancillary Service Facilities prior to recommending the Company and any
Ancillary Service Facilities to that patient.
In the preamble to the adoption of certain regulations regarding the Stark
Law, adopted when such law only regulated clinical laboratory services, HCFA
stated that it would not recognize any group in which the physicians were in
multiple corporate entities as a 'group practice' under the Stark Law. In
November 1996, the Company affiliated with SCOI, a partnership comprised of
individual physician members as well as single member professional corporations
('P.C.s'). The use of P.C.s as partners at SCOI was historical and designed to
accommodate practice structures that existed prior to the creation of SCOI.
Recently, at the Eighteenth Annual Institute on Medicare and Medicaid Payment
Issues, co-sponsored by the American Academy of Healthcare Attorneys and
National Health Lawyer's Association, an HCFA representative stated that HCFA
will recognize a 'group practice' consisting of multiple physician entities,
such as P.C.s, provided that each P.C. or other physician entity is limited to
one physician member. Nevertheless, given HCFA's prior written statement and
HCFA's position that its written comments on the Stark Law as applied to
clinical laboratories reflect its view on the Stark Law in its current expanded
form, it may be necessary to restructure SCOI before any Stark-designated health
services are provided. Failure to do so would result in the risk of the
penalties described above, or the 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
9
<PAGE>
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. See
'Business--Government Regulation and Supervision.'
State Regulation of the Practices. The laws of many states, including one
or more of the states in which the Company conducts business: (i) prohibit
business corporations, such as the Company, from practicing medicine or
exercising control over the medical judgments or decisions of physicians and
from engaging in certain financial arrangements involving the division of
professional fees earned by physicians (commonly referred to as
'fee-splitting'); (ii) require entities seeking to provide certain ancillary
services (including ambulatory surgery) to be licensed and/or to have obtained a
certificate of need related to the service; and (iii) require licensure or
certification of, and regulate provider networks that agree to provide or
arrange for the provision of certain health services to members of health care
plans. These laws and their interpretations vary from state to state and are
enforced by both the courts and regulatory authorities, each of which has broad
discretion. In particular, with regard to the corporate practice of medicine,
Texas and California have taken the position that control by a management
company over certain business aspects of a medical practice is effectively the
prohibited practice of medicine by the management company. In addition, recent
developments in Florida's fee-splitting law may have changed how management
arrangements may be structured there. The State of Florida Board of Medicine has
ruled that a management services fee based on a percentage of revenues violates
Florida's prohibition on fee splitting by licensed professionals. The Company
has included such percentage fees in all of its Management Services Agreements
with physicians in Florida. Thus, no assurance can be given that the Company's
Management Services Agreements based on such percentage fees will be
enforceable. To avoid this risk, the Company will seek to restructure such
agreements in Florida to comply with the order, but such modifications, or the
failure to obtain agreement on such modifications, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Violations of state laws regulating the Practices could result in censure or
loss of license for the physician, civil or criminal penalties, or other
sanctions. The licensure or certificate of need laws of applicable states could
also preclude the Company from expanding its operated or managed services to
include certain ancillary services, which could have a material adverse effect
on the Company. In addition, a determination in any state that the Company is
engaged in the corporate practice of medicine, any unlawful fee-splitting
arrangement, or other practices in violation of these state laws could render
any Management Services Agreement or IPA Provider Agreement between the Company
and a Practice located in such state unenforceable or subject to modification,
which could have a material adverse effect on the Company. There can be no
assurance that regulatory authorities or other parties will not assert that the
Company or a Practice is engaged in the business of insurance or the corporate
practice of medicine in such states or that the management and administrative
fees paid to the Company by the Practices constitute unlawful fee-splitting or
the corporate practice of medicine. If such a claim were asserted successfully,
the Company could be subject to civil and criminal penalties and the Company or
the Practices could be required to restructure their contractual arrangements.
Such results or the inability of the Company or the Practices to restructure
their relationships to comply with such prohibitions could have a material
adverse effect on the Company's financial condition and results of operations.
See 'Business--Government Regulation and Supervision--State Law.'
In Texas, it is unlawful to provide 'staff leasing services' without a
license issued by the State. The Company has learned that the provision of
non-physician personnel to STSC in connection with the Management Services
Agreement between the Company and STSC is deemed staff leasing services subject
to licensure under Texas law (the 'Staff Leasing Law'). The Company filed an
application on October 14, 1997 for such license, but there can be no guaranty
that the State of Texas will approve the Company's application. Failure to
obtain a license to provide staff leasing services may result in civil or
criminal penalties, may prevent the Company from providing personnel to STSC and
may, therefore, have a material adverse effect on the Company. The Company was
notified on December 2, 1997 that a fine of $20,000 has been recommended to be
assessed against it as a result of its operations in violation of the Staff
Leasing Law between April 1, 1997 and November 30, 1997. The Company is
currently negotiating with the Texas regulators to decrease the fine. See
'Business--Government Regulation and Supervision--State Law--Texas Staff Leasing
Law.'
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
10
<PAGE>
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, expansion of malpractice liability to entities that provide managed care,
and additional prohibitions related to financial relationships between health
care providers that are in a position to generate business for each other.
Certain of these health care proposals, if adopted, could have a material
adverse effect on the Company.
In the recently enacted Balanced Budget Act of 1997 (the '1997 Budget
Bill') and Health Insurance Portability and Accountability Act of 1996
('HIPAA'), Congress has responded to perceived fraud and abuse in the Medicare
and Medicaid programs. This legislation has fortified the government's
enforcement authority with increased resources and greater civil and criminal
penalties for offenses. It is anticipated that there will be further restrictive
legislative and regulatory measures to reduce fraud, waste and abuse in the
Medicare and Medicaid programs. There can be no assurance that any such
legislation will not have a material adverse impact on the Company. See
'--Reliance on Affiliation and Expansion,' '--Reductions in Third Party
Reimbursements' and 'Business--Government Regulation and Supervision.'
Changes in Workers' Compensation Market. Legislative reforms in some
states permit employers to designate health plans such as HMOs to cover workers'
compensation claimants. Because many health plans have the capacity to manage
health care for workers' compensation claimants, such legislation may intensify
competition in the market served by the Company. Within the past few years,
several states have experienced decreases in the number of workers' compensation
claims and the average cost per claim, both of which have been reflected in
workers' compensation insurance premium rate reductions in those states. The
Company believes that declines in workers' compensation costs in these states
are due principally to intensified efforts by payors to manage and control claim
costs, improved risk management by employers and legislative reforms. In Florida
(a state in which the Company does business), all workers' compensation services
must be provided under a managed care arrangement approved by Florida's Agency
for Health Care Administration. If declines in workers' compensation costs occur
in many states and persist over the long-term, they may have an adverse impact
on the Company's business and results of operations. A number of states,
including California and Pennsylvania (states in which the Company does
business), have regulations such as anti-kickback and self-referral laws that
are specific to the workers' compensation program. See 'Business--Payor
Contracting-- Workers' Compensation' and 'Business--Government Regulation and
Supervision.'
Potential Risks of Managed Care Contracts. As more patients enter into
health care coverage arrangements with managed care payors, no assurance can be
given that the Company will be able to negotiate contracts on behalf of the
Practices with health maintenance organizations ('HMOs'), employer groups and
other private third party payors. The inability of the Company to enter into
such arrangements on behalf of the Practices, or unfavorable terms that may be
contained in such arrangements, could have a material adverse effect on the
Company.
The Company may seek to negotiate with third party payors on behalf of the
Practices and other physicians or group practices willing to permit the Company
to negotiate on their behalf. The Company anticipates that, in 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
11
<PAGE>
effect on a Practice and, therefore, on the Company. Revenue negotiated under
risk-sharing or capitated contracts could be insufficient to cover the costs of
the health care services provided. Any such reduction or elimination of earnings
to the Practices under such fee arrangements could have a material adverse
effect on the Company.
No assurance can be given that the Company, the Practices or the IPA will
be able to establish or maintain satisfactory relationships with managed care
and other third party payors, many of which already have existing provider
structures in place and may not be able or willing to change their provider
networks. In addition, any significant loss of revenue by the Practices as a
result of the termination of third party payor contracts or otherwise would have
a material adverse effect on the Company. See 'Business--Government Regulation
and Supervision.'
Need for Additional Funds. The Company's expansion and affiliation
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 $32.5 million have
been recorded on the Company's balance sheet as of September 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 September 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.'
Risks Related to the IPA Provider Agreements. There can be no assurance
that the IPA will maintain successful operations, that agreements between the
IPA and payors ('IPA Payor Agreements') will not be terminated, that the IPA
will successfully enter into additional IPA Payor Agreements or that the IPA
Provider Agreements will not be terminated. Each IPA Provider Agreement now in
effect permits the physician member to terminate the agreement without cause
upon 90 days' written notice to the IPA. Because the IPA contracts with payors
to arrange for specialty provider services sufficient to furnish care as needed
to a specified patient population, termination of IPA Provider Agreements could
jeopardize the IPA's ability to satisfy its obligations under IPA Payor
Agreements, and may result in termination of those agreements. Any termination
of IPA Provider Agreements or IPA Payor Agreements could have a material adverse
effect on the Company.
Intense Competition. Competition for affiliation with additional
musculoskeletal physician practices is intense and may limit the availability of
suitable practices with which the Company may be able to affiliate. Several
companies with established operating histories and greater resources than the
Company, including multi-specialty companies, companies that specialize in
orthopedics, some hospitals, IPAs, clinics and HMOs, are pursuing activities
similar to those of the Company. The Company may not be able to compete
effectively with such competitors, additional competitors could enter the market
and such competition could make it more difficult and costly to affiliate with,
and provide management services to, musculoskeletal physician practices on terms
beneficial to the Company. The Company also believes that changes in
governmental and private reimbursement policies, among other factors, have
resulted in increased competition among providers of medical services. The
Practices face competition from several sources, including sole practitioners,
single and multi-specialty groups, hospitals and managed care organizations. The
Company's strategy includes the development of Ancillary Service Facilities.
Pursuit of this strategy will subject the Company to competition with other
providers of such facilities, some of which will have greater financial
resources and experience than the Company. There can be no assurance that the
Company or the Practices will be able to compete effectively in the markets they
serve. See 'Business--Competition.'
12
<PAGE>
Dependence on Key Personnel. The Company is dependent upon the ability and
experience of its executive officers and key personnel, including Dr. Naresh
Nagpal, the Company's President and Chief Executive Officer, for the management
of the Company and the implementation of its business strategy. The Company
currently has an employment contract with Dr. Nagpal. Because of the difficulty
in finding an adequate replacement for Dr. Nagpal, the loss of his services,
regardless of whether he may choose to compete with the Company, or the
Company's inability in the future to attract and retain management and other key
personnel could have a material adverse effect on the Company. See
'Management--Employment Agreement.'
Exposure to Professional Liability. Due to the nature of its business, the
Company from time to time may become a defendant in medical malpractice
lawsuits, and may become subject to the attendant risk of substantial damage
awards. Direct claims, suits or complaints could be asserted against the Company
relating to services delivered by the Practices (including claims with regard to
services rendered by the Existing Practices prior to the Affiliation
Transactions). While the Company has attempted to address these risks by
maintaining malpractice and other types of insurance, with coverage limits of
$1,000,000 per individual claim and $3,000,000 in the aggregate, on behalf of
itself and the Existing Practices, there can be no assurance that any claim
asserted against the Company, any of the Existing Practices, or any other
Practice will be covered by, or will not exceed the coverage limits of,
applicable insurance. However, the Company may not be able to maintain insurance
in the future at a cost that is acceptable to the Company, or at all. A
successful malpractice claim against any of the Practices, even if covered by
insurance, or any claim made against the Company that is not fully covered by
insurance, could have a material adverse effect on the Company. See
'Business--Corporate Liability and Insurance.'
No Prior Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
continue after the Offering. The initial public offering price will be
determined by negotiations among the Company and Hambrecht & Quist LLC, Raymond
James & Associates, Inc. and Volpe Brown Whelan & Company, LLC and may not be
indicative of the market price for the Common Stock after the Offering. See
'Underwriting' for factors to be considered in determining the initial public
offering price. From time to time after the Offering, there may be significant
volatility in the market price of the Common Stock. Deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the health care industry or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and have often been unrelated to the operating
performance of these companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following the Offering. Any such fluctuations that
occur following completion of the Offering may adversely affect the market price
of the Common Stock.
Shares Eligible for Future Sale. The market price of the Common Stock of
the Company could be materially adversely affected by the sale of substantial
amounts of the Common Stock in the public market following the Offering. After
giving effect to the shares of Common Stock offered hereby, the Company will
have outstanding 16,163,133 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 12,163,133 shares are
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act. Of such shares, 4,834,074 became eligible for sale under Rule
144 in December 1997 and the remaining 7,329,059 shares will be eligible for
sale under Rule 144 at various times in 1998, subject to the lock-up
arrangements described in the following paragraph. 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
13
<PAGE>
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 affiliation transactions, provided such shares are subject to
the 180-day lock-up agreement.
Certain holders of shares of Common Stock outstanding on the date of this
Prospectus have certain registration rights with respect to such shares and
additional shares that may be issued to such persons upon exercise of options
and warrants (subject to certain limitations on the number of shares such
holders are entitled to have registered under any registration statement),
although all such holders have agreed to refrain from selling their shares
during the lock-up period. In addition, the Company intends to register
approximately 2,000,000 shares of Common Stock reserved for issuance under the
BMJ Medical Management, Inc. 1996 Stock Option Plan (the 'Option Plan') as soon
as practicable after completion of the Offering. See 'Management' and
'Underwriting.'
Control by Existing Stockholders. Following the completion of the
Offering, the officers and directors of the Company and the physician owners of
the Existing Practices will beneficially own approximately 81% of the
outstanding shares of Common Stock. Following the Offering, such persons may
effectively be able to control the affairs of the Company, including the ability
to delay or prevent a change of control of the Company. See 'Principal
Stockholders.'
Potential Anti-Takeover Effects of Charter and By-laws Provisions; Possible
Issuances of Preferred Stock. Certain provisions of the Amended and Restated
Certificate of Incorporation (the 'Certificate of Incorporation') and by-laws
(the 'By-laws') of the Company that will become operative upon the closing of
this Offering may be deemed to have anti-takeover effects and may delay, deter
or prevent a change in control of the Company that a stockholder might consider
in his/her best interest. These provisions (i) classify the Company's Board of
Directors into three classes, each of which will serve for different three-year
periods; (ii) provide that only the Board of Directors or certain members
thereof or officers of the Company may call special meetings of the
stockholders; and (iii) authorize the issuance of 'blank check' preferred stock
having such designations, rights and preferences as may be determined from time
to time by the Board of Directors. See 'Description of Capital Stock.'
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
Offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock of $5.55 per share. See 'Dilution.'
14
<PAGE>
THE COMPANY
GENERAL
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
25 Existing Practices comprising 117 physicians in six states as of the date of
this Prospectus.
In July 1996, the Company affiliated with its first Practice, Lehigh Valley
Bone, Muscle and Joint Group, LLC ('LVBMJ'), comprising five physicians. In
November 1996, the Company affiliated with STSC and SCOI, resulting in the
addition of a total of 29 physicians located in Texas and California. The
Company affiliated with Lauderdale Orthopaedic Surgeons ('LOS') and Tri-City
Orthopedic Surgery Medical Group, Inc. ('Tri-City') in April 1997, Fishman &
Stashak, M.D.'s, P.A. (d/b/a Gold Coast Orthopaedics) ('Gold Coast') in June
1997 and Sun Valley Orthopaedic Surgeons ('Sun Valley') in July 1997, resulting
in the addition of a total of 23 physicians. In September 1997, the Company
affiliated with Broward Institute of Orthopaedic Specialties, P.A. ('BIOS') and
Orthopaedic Surgery Associates, P.A. ('OSA'), resulting in the addition of a
total of 15 physicians. In addition to the foregoing Affiliation Transactions,
the Company has affiliated with 17 other Practices comprising 45 additional
physicians. In order to finance the Affiliation Transactions and provide for its
working capital needs, the Company has raised approximately $51.0 million
through a series of preferred stock and debt financings. See 'Risk Factors--Lack
of Significant Combined Operating History' and 'Certain Transactions.'
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 101E, Boca Raton, Florida 33431 and its telephone number is (561)
391-1311.
AFFILIATION TRANSACTIONS
The Company has divided the United States into the eastern, central and
western regions. Set forth below is a description of the Affiliation
Transactions that the Company has entered into in each region as of the date of
this Prospectus.
Eastern Region
Effective July 1, 1996, the Company entered into a Management Services
Agreement with LVBMJ in Bethlehem, Pennsylvania. Under the terms of the initial
Management Services Agreement between LVBMJ and the Company, the Company
received a fee equal to 50% of the net collected revenues of LVBMJ and became
responsible for all the clinic overhead expenses (medical support services).
Effective July 1, 1997, the Company and LVBMJ entered into an amended and
restated Management Services Agreement, (the 'LVBMJ Management Services
Agreement'). Under the terms of the LVBMJ Management Services Agreement the
Company is entitled to receive a fee equal to 10% of net collections received
for professional services by the Practice during the period in question net of
refunds paid during such period ('Collections') plus reimbursement of clinic
overhead expenses and 66-2/3% of the cost savings the Company is able to achieve
through its purchasing power. As consideration to LVBMJ for entering into the
LVBMJ Management Services Agreement, the Company issued an aggregate of 370,023
shares of Common Stock and options to purchase an aggregate of 21,429 shares of
Common Stock and additional consideration of $324,582 to the physician owners of
LVBMJ. The Company may be required to issue more shares of Common Stock to the
Practice in 1998 based on the Practice's actual Collections for a specified
twelve month period.
Effective April 1, 1997, the Company entered into a Management Services
Agreement (the 'LOS Management Services Agreement') with LOS located in Ft.
Lauderdale, Florida. As consideration to LOS for entering into the agreement,
the Company issued an aggregate of 329,259 shares of its Common Stock and paid
additional consideration of $512,514 to the LOS physicians. The Company may be
required to issue more shares of Common Stock to the Practice in 1998 based on
the Practice's actual Collections for a specified twelve month period. Under the
terms of the LOS Management Services Agreement, the Company is entitled to
receive a fee equal to (i) the aggregate of (A) 20% of net operating income (as
defined in the LOS Management Services Agreement) of the Practice, plus (B)
66-2/3% of the cost savings the Company is able to achieve through its
purchasing power. Notwithstanding the foregoing, during the first seven years of
the term of the LOS
15
<PAGE>
Management Services Agreement, 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
179,010 shares of Common Stock and paid no additional consideration to the
physician owners of Gold Coast. The Company may be required to issue more shares
of Common Stock to the Practice in 1998 based on the Practice's actual
Collections for a specified twelve month period. Under the terms of the Gold
Coast Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 15% of the Collections plus reimbursement of
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is
able to achieve through its purchasing power. Notwithstanding the foregoing,
during the first six years of the term of the Gold Coast Management Services
Agreement, the Company is entitled to receive a guaranteed minimum annual
management fee of $500,000. In connection with the Gold Coast Affiliation
Transaction, the Company also entered into an Asset Purchase Agreement,
effective as of June 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from Gold Coast for an aggregate purchase
price of $2,976,577.
Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'BOS Management Services Agreement') with Broward Orthopedic
Specialists, Inc. ('BOS') located in Ft. Lauderdale, Florida, pursuant to which
the Company issued 446,977 shares of Common Stock and paid no additional
consideration to the physician owners of BOS. The Company may be required to
issue more shares of Common Stock to the Practice in 1998 based on the
Practice's actual Collections for a specified twelve month period. Under the
terms of the BOS Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 15% of the Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. Notwithstanding the
foregoing, during the first four years of the term of the BOS Management
Services Agreement, the Company is entitled to receive a guaranteed minimum
annual management fee of $810,000. In connection with the BOS Affiliation
Transaction, the Company also entered into Asset Purchase Agreements, effective
as of August 1, 1997, pursuant to which the Company purchased certain assets
(including accounts receivable) from BOS, Matthews, Scott and Seavey for an
aggregate purchase price of $4,222,498.
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 90,659 shares of Common Stock and paid no
additional consideration to the physician owners of PM&R. Under the terms of the
PM&R Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 10% of the Collections plus reimbursement of
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is
able to achieve through its purchasing power. Notwithstanding the foregoing,
during the first five years of the term of the PM&R Management Services
Agreement, the Company is entitled to receive a guaranteed minimum annual
management fee of $136,000. In connection with the PM&R Affiliation Transaction,
the Company also entered into an Asset Purchase Agreement, effective as of
August 1, 1997, pursuant to which the Company purchased certain assets
(including accounts receivable) from PM&R, for an aggregate purchase price of
$830,700.
In October 1997, the Company entered into a Management Services Agreement
(the 'OSA Management Services Agreement') with OSA located in Boca Raton,
Florida, pursuant to which the Company issued 44,364 shares of Common Stock and
paid no additional consideration to the physician owners of OSA. The Company may
be required to issue more shares of Common Stock to OSA in 1998 and 1999. Under
the terms of the OSA Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 12.5% of Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. Notwithstanding the
foregoing, during the first four years of the term of the OSA Management
Services Agreement, the Company is entitled to receive a guaranteed minimum
annual management fee of $799,000. In connection with the OSA Affiliation
Transaction, the Company also entered into an Asset Purchase Agreement,
effective as of September 1, 1997, pursuant to which the Company purchased
certain assets (including accounts receivable) from OSA for an aggregate
purchase price of $6,773,951 and issued 177,455 shares of Common Stock to the
physician owners of OSA.
16
<PAGE>
In October 1997, the Company entered into a Management Services Agreement
(the 'BIOS Management Services Agreement') with BIOS located in Hollywood,
Florida. As consideration to BIOS for entering into the agreement, the Company
issued an aggregate of 182,312 shares of its Common Stock and paid additional
consideration of $24,000 to the BIOS physicians. The Company may be required to
issue more shares of Common Stock to BIOS in 1998 based on BIOS's actual
Collections for a twelve month period. Under the terms of the BIOS Management
Services Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 15% of net operating income (as defined in the BIOS Management
Services Agreement) of the Practice, plus (ii) 66-2/3% of the cost savings the
Company is able to achieve through its purchasing power. The Company also
purchased certain assets from BIOS for an aggregate purchase price of
$2,761,563.
In October 1997, the Company entered into a Management Services Agreement
(the 'LOAS Management Services Agreement') with Lighthouse Orthopaedic
Associates, P.A. ('LOAS') located in Lighthouse Point, Florida. As consideration
to LOAS for entering into the agreement, the Company issued an aggregate of
37,837 shares of its Common Stock and paid no additional consideration to the
LOAS physicians. The Company may be required to issue more shares of Common
Stock to the Practice in 1998 based on the Practice's actual Collections for a
twelve month period. Under the terms of the LOAS Management Services Agreement,
the Company is entitled to receive a fee equal to the aggregate of (i) 12.5% of
the Collections plus reimbursement of clinic overhead expenses, plus (ii)
66-2/3% of the cost savings the Company is able to achieve through its
purchasing power. Notwithstanding the foregoing, during the first four years of
the term of the LOAS Management Services Agreement, the Company is entitled to
receive a guaranteed minimum annual management fee of $535,000. In connection
with the LOAS Affiliation Transaction, the Company also entered into Asset
Purchase Agreements, effective as of September 1, 1997, pursuant to which the
Company purchased certain assets (including accounts receivable) from each of
LOAS, certain affiliates of LOAS and each of the physicians of LOAS, for an
aggregate purchase price of $3,899,930 and issued an aggregate of 156,383 shares
of Common Stock to the physician owners of LOAS.
In October 1997, the Company acquired all of the issued and outstanding
shares of common stock of Valley Sports Surgeons, Inc., a physician practice
management company located in Allentown, Pennsylvania ('VSI'), in exchange for
an aggregate of 359,464 shares of Common Stock. Pursuant to the terms of a
Management Services Agreement (the 'Valley Management Services Agreement'), VSI
currently manages Valley Sports & Arthritis Surgeons, P.C., an orthopedic
medical practice also located in Allentown, Pennsylvania ('VSAS'). Under the
terms of the Valley Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. Prior to the
acquisition of the capital stock of VSI, the Company purchased substantially all
of the assets of VSAS used in connection with its medical practice, including
certain accounts receivable, for an aggregate purchase price of $897,727.
Effective November 1, 1997, the Company entered into a Management Services
Agreement (the 'New Jersey Management Services Agreement') with New Jersey
Orthopedic Associates, P.A., a New Jersey professional association ('NJOA'),
located in Freehold, New Jersey, pursuant to which the Company issued 67,859
shares of Common Stock and paid additional consideration of $411,680 to the
physician owners of NJOA. Under the terms of the New Jersey Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 10% of the Collections plus reimbursement of clinic overhead expenses, plus
(ii) 66-2/3% of the cost savings the Company is able to achieve through its
purchasing power. In connection with the NJOA Affiliation Transaction, the
Company entered into an Asset Purchase Agreement, effective November 1, 1997,
pursuant to which the Company purchased certain assets from Orthopedic
Associates of New Jersey, an affiliate of NJOA, for a purchase price of $75,000.
Additionally, NJOA and the Company entered into a Stockholders Noncompetition
Agreement and paid consideration of $954,194 to the physician owners of NJOA.
Other Eastern Region Affiliations
Effective July 1, 1997, the Company entered into a Management Services
Agreement with Kramer & Maehrer, LLC, located in Bethlehem, Pennsylvania. In
order to enhance the Company's presence in the Ft. Lauderdale market, the
Company entered into Management Services Agreements with Jeffrey Beitler, M.D.,
P.A., located in Aventura, Florida, and Michael Abrahams, M.D., P.A., located in
Plantation, Florida, effective as of September 1, 1997 and August 1, 1997,
respectively. Under the terms of these Management Services
17
<PAGE>
Agreements, the Company is entitled to receive a fee equal to the aggregate of
(i) 10% (15% in the case of Dr. Abrahams) of the Collections plus reimbursement
of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company
is able to achieve through its purchasing power.
Central Region
The Company's initial Affiliation Transaction in the central region was
with STSC. The Company entered into a Management Services Agreement with STSC,
located in San Antonio, Texas, effective as of November 1, 1996, pursuant to
which the Company issued 768,929 shares of Common Stock and deferred
consideration of $915,835. Pursuant to the STSC Management Services Agreement,
the Company is entitled to receive a management fee equal to an aggregate of (i)
11-1/2% of Collections of the Practice (less certain lease payments) plus
reimbursement of clinic overhead expenses, plus (B) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. The Company also
entered into an asset purchase agreement with STSC, pursuant to which the
Company agreed to purchase certain assets (including accounts receivable) and
assume certain liabilities for a purchase price of (i) $1,703,826 (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., P.A., 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, located in Van
Nuys, California, and, in connection therewith, the Company issued 2,857,140
shares of Common Stock to the physician owners and certain key employees of
SCOI. Under the SCOI Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of the Collections of the
Practice (if certain conditions are met) less certain equipment lease payments
plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost
savings the Company is able to achieve through its purchasing power.
Simultaneously with the execution and delivery of the SCOI Management Services
Agreement and pursuant to an Asset Purchase Agreement, the Company acquired
certain assets (including the outstanding accounts receivable), and assumed
certain liabilities, of SCOI for an aggregate purchase price of $5,930,897
(which included $4,448,000 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 392,857 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 was subject to recalculation as of
November 1, 1997. As a result of such recalculation provisions, the Company
expects to issue approximately 887,000 additional shares of Common Stock to the
SCOI physicians.
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 287,659 shares of Common Stock and paid $202,900 to
the physician owners of Tri-City. Under the terms of the Tri-City Management
Services Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 10% of Collections of the Practice (less certain lease
payments) plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of
the cost savings the Company is able to achieve through its purchasing power. In
connection with the Tri-City Affiliation Transaction, the Company also entered
into three Asset Purchase Agreements with Tri-City or affiliates thereof, all
effective as of April 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from such parties for an aggregate
purchase price of $745,300 ($519,000 of which is subject to adjustment, based
upon the Company's actual collection of the purchased accounts receivable).
18
<PAGE>
Effective July 1, 1997, the Company entered into a Management Services
Agreement (the 'Sun Valley Management Services Agreement') with Sun Valley
Orthopaedic Surgeons, an Arizona general partnership ('Sun Valley'), located in
Sun City, Arizona, pursuant to which the Company issued 112,719 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 Management Services Agreement, the Company is entitled to receive
a fee equal to the aggregate of (i) 10% of the Collections plus reimbursement of
clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is
able to achieve through its purchasing power. In connection with the 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 July 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 88,846 shares of Common Stock and paid additional
consideration of $300,435 to the physician owners of Stockdale. Under the terms
of the Stockdale Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of the Collections plus
reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings
the Company is able to achieve through its purchasing power. In connection with
the Stockdale Affiliation Transaction, the Company also entered into an Asset
Purchase Agreement, effective as of August 1, 1997, pursuant to which the
Company purchased certain assets (including accounts receivable) from Stockdale
for an aggregate purchase price of $516,065.
Other Western Region Affiliations
Effective June 1, 1997 in order to enhance the Company's presence in the
Los Angeles market area, the Company entered into separate Management Services
Agreements with H. Leon Brooks, M.D. and Clive Segil, M.D., both located in Los
Angeles, California. In addition, effective July 1, 1997, in order to establish
a presence in the Lake Tahoe area, the Company entered into separate Management
Services Agreements with R.C. Watson, M.D., Inc., Swanson Orthopedic Medical
Corporation and Lake Tahoe Sports Medicine Center, all located in South Lake
Tahoe, California. In addition, effective July 1, 1997, the Company entered into
a Management Services Agreement with Robert O. Wilson, M.D. located in Sun City,
Arizona. Effective August 1, 1997 the Company entered into a Management Services
Agreement with John Zimmerman, M.D. located in Bakersfield, California. Under
the terms of each of these Management Services Agreements, the Company is
entitled to receive a fee equal to the aggregate of (ii) 10% of the Collections
plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost
savings the Company is able to achieve through its purchasing power.
In October 1997, the Company acquired its IPA, Orthopaedic Management
Network, Inc., an Arizona corporation, in exchange for $63,000 in cash, the
assumption of $809,332 in accounts payable and accrued liabilities and the
issuance of 40,740 shares of Common Stock.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby are estimated to be $35.7 million ($41.3 million if
the Underwriters' over-allotment option is exercised in full), based on an
assumed initial public offering price of $10.00 per share and after deducting
estimated underwriting discounts and expenses of the Offering. The Company
intends to use approximately $34.4 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 $12.2 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 $6.0 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. (iv) approximately $3.4
million of subordinated debt due to certain stockholders ('the Stockholder
Debt'); (v) approximately $9.4 million of notes and obligations payable to
physician groups issued in connection with Affiliation Transactions (the
'Physician Notes'); and (vi) approximately $1.9 million of debt owed to Dr.
Nagpal (the 'Nagpal Debt'). See 'Certain Transactions.'
The HCFP Debt was incurred for working capital purposes and to finance
Affiliation Transactions, bears interest at rates ranging from 10 1/4% to 12%
per annum and matures from 1998 to 2000. The indebtedness under the Comdisco
Loan and the Galtney Loan was incurred to finance Affiliation Transactions,
bears interest at 14% per annum and matures on December 1 and December 31, 2000.
The Stockholder Debt was incurred to finance Affiliation Transactions, bears
interest at the prime rate plus 3.5% (12% at December 31, 1997) and matures on
January 10, 1998. The Company expects to extend the maturity date of the
Stockholder Debt. The Physician Notes were issued in connection with Affiliation
Transactions, bear interest at rates ranging from 6% to 11% and mature between
March 1998 and October 1998. The Nagpal Debt was also incurred to finance
Affiliation Transactions, bears interest at 14% per annum and is payable on
demand.
Pending use of the remaining net proceeds for general corporate purposes,
the Company intends to invest such net proceeds in short-term, investment grade,
interest-bearing securities. The Company continues to review and evaluate
additional Practices for purposes of future Affiliation Transactions, but as of
the date of this Prospectus has not entered into agreements with any such
Practices.
DIVIDEND POLICY
The Company has never paid or declared dividends on the Common Stock and
does not anticipate paying any dividends on the Common Stock in the foreseeable
future. Under the terms of the HCFP Loan Agreements and the Debenture Purchase
Agreement (as defined) the Company is prohibited from declaring or paying any
cash dividend or making any distribution on any class of stock, except pursuant
to an employee repurchase plan or with the consent of its lenders. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources' and 'Certain Transactions.'
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1997, the pro forma capitalization of the Company at September 30,
1997 after giving effect to the Affiliation Transactions and the pro forma
capitalization as adjusted to give effect to the sale of the 4,000,000 shares of
Common Stock offered hereby (based on an assumed initial public offering price
of $10.00 per share and after deducting estimated underwriting discounts and
expenses of the Offering), the application of the net proceeds therefrom and the
automatic conversion of all outstanding shares of preferred stock into shares of
Common Stock. See 'Use of Proceeds' and 'Description of Capital Stock.' The
table should be read in conjunction with the Pro Forma Financial Information and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the historical financial statements of the Company and the
Existing Practices appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion of long-term debt and capital
lease obligations......................................................... $ 3,102 $ 19,213 $ 15
-------- --------- -----------
-------- --------- -----------
Long-term debt and capital lease obligation, less current portion........... $ 16,480 $ 18,491 $ 4,051
Stockholders' equity:
Convertible preferred stock, $0.01 par value--9,233,049 shares authorized,
4,184,740 shares issued and outstanding; 4,184,740 shares authorized,
issued and outstanding pro forma; and no shares issued and outstanding
pro forma as adjusted.................................................. 42 42 --
Common stock, $0.001 par value--25,000,000 shares authorized; 7,177,481
shares issued and outstanding; 9,174,033 shares issued and outstanding
pro forma; and 16,163,133 shares issued and outstanding pro forma as
adjusted(1)............................................................ 7 9 16(2)
Additional paid-in capital................................................ 45,953 65,792 101,527
Deferred compensation..................................................... (1,706) (1,706 ) (1,706)
Accumulated deficit....................................................... (10,602) (24,048 ) (24,748)
-------- --------- -----------
Total stockholders' equity............................................. 33,694 40,089 75,089
-------- --------- -----------
Total capitalization.............................................. $ 50,174 $ 58,580 $ 79,140
-------- --------- -----------
-------- --------- -----------
</TABLE>
- ------------------
(1) Excludes 1,135,046 shares issuable upon exercise of outstanding options with
a weighted average exercise price of $1.47 per share and 301,189 shares of
Common Stock issuable upon exercise of outstanding warrants to purchase
Common Stock with a weighted average exercise price of $4.62 per share. See
'Management' and 'Certain Transactions.'
(2) Includes 2,989,100 shares of Common Stock issuable upon conversion of the
Preferred Stock upon consummation of the Offering.
21
<PAGE>
DILUTION
As of September 30, 1997, the pro forma net tangible book value of the
Company was approximately $36,957,000 or approximately $3.04 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 4,000,000 shares of Common Stock offered by the Company hereby based on an
assumed initial public offering price of $10.00 per share and after deducting
estimated underwriting discounts and expenses of the Offering, the pro forma net
tangible book value of the Company at September 30, 1997 would have been
approximately $71,957,000 or approximately $4.45 per share of Common Stock,
representing an immediate increase in pro forma net tangible book value of $1.41
per share to existing stockholders and an immediate, substantial dilution of
$5.55 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....................................... $10.00
Pro forma net tangible book value per share at September 30, 1997................... $3.04
Increase attributable to price paid by new investors per share...................... 1.41
-----
Pro forma net tangible book value per share after the Offering........................ 4.45
------
Dilution per share to new investors................................................... $ 5.55
------
------
</TABLE>
The following table sets forth, as of September 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 4,000,000 shares of Common Stock offered
hereby based on an assumed initial public offering price of $10.00 per share and
before deducting estimated underwriting discounts and expenses of the Offering
and (ii) the conversion of all outstanding shares of Preferred Stock of the
Company into shares of Common Stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 11,276,559 73.8% $ 62,964,000 61.2% $ 5.58
New investors.............................. 4,000,000 26.2 40,000,000 38.8 $ 10.00
---------- ------- ------------ -------
Total............................... 15,276,559 100.0% $102,964,000 100.0%
---------- ------- ------------ -------
---------- ------- ------------ -------
</TABLE>
The foregoing computations do not include the effect of the issuance of
1,135,046 shares of Common Stock issuable upon exercise of outstanding options
with a weighted average exercise price of $1.47 per share and 301,189 shares of
Common Stock issuable upon exercise of outstanding warrants with a weighted
average exercise price of $4.62 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.'
22
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The pro forma statement of operations for the nine months ended September
30, 1997 gives effect to (i) the 1997 Affiliation Transactions, (ii) receipt and
application of the estimated net proceeds from this Offering at an assumed
initial public offering price of $10.00 per share and (iii) adjustments to the
amortization periods for the Management Services Agreements from four years to 7
to 25 years as a result of amendments that the Company expects to enter into
with the Practices to eliminate the four year vesting periods contained in the
Restricted Stock Agreements, as if each of 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, (ii) the
receipt and application of the estimated net proceeds from this Offering and
(iii) adjustments to the amortization periods for the Management Services
Agreements from four years to 7 to 25 years as a result of amendments that the
Company expects to enter into with the Practices to eliminate the four year
vesting periods contained in the Restricted Stock Agreements, as if each of such
transactions had occurred on January 1, 1996. The pro forma balance sheet as of
September 30, 1997 gives effect to (i) the 1997 Affiliation Transactions
occurring after September 30, 1997, (ii) the receipt and application of the
estimated net proceeds from this Offering and, (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 September 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 nine months ended September
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
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997 AFFILIATIONS (A)
---------------------------------------------------------------------
THE GOLD SUN OTHER PRO FORMA
COMPANY(B) TRI-CITY LOS COAST VALLEY BIOS OSA AFFILIATIONS ADJUSTMENTS
---------- -------- ------ ------ ------ ------- ------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Practice revenues, net........... $ 38,325 $1,240 $1,600 $1,609 $1,358 $ 5,333 $5,245 $ 22,516 $ --
Less: amounts retained by (6,513)(c)
physician groups................ (17,878) (702) (813) (1,005) (782) (2,874) (2,846) (11,594) (305)(d)
---------- -------- ------ ------ ------ ------- ------ ------ -----------
Management fee revenue........... 20,447 538 787 604 576 2,459 2,399 10,922 (6,818)
Costs and expenses:
Medical support services........ 17,934 538 787 604 576 2,459 2,399 10,922 --
General and administrative
(e)........................... 5,962 -- -- -- -- -- -- -- --
Depreciation and amortization... 4,489 -- -- -- -- -- -- -- 6,737(f)
Interest expense (income),
net........................... 922 -- -- -- -- -- -- -- 2,630(h)
---------- -------- ------ ------ ------ ------- ------ ------ -----------
Total costs and expenses...... 29,307 538 787 604 576 2,459 2,399 10,922 9,367
---------- -------- ------ ------ ------ ------- ------ ------ -----------
(Loss) income before income
taxes........................... (8,860) -- -- -- -- -- -- -- (2,549)
---------- -------- ------ ------ ------ ------- ------ ------ -----------
Income taxes..................... -- -- -- -- -- -- -- -- --
---------- -------- ------ ------ ------ ------- ------ ------ -----------
Net (loss) income................ $ (8,860) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $(2,549)
---------- -------- ------ ------ ------ ------- ------ ------ -----------
---------- -------- ------ ------ ------ ------- ------ ------ -----------
Net (loss) income per common share:
Primary......................... $ (1.02)
Diluted......................... $ (1.02)
Weighted average number of common shares
outstanding:
Primary......................... 8,722
Diluted......................... 8,722
<CAPTION>
OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Practice revenues, net........... $ 77,226 $ -- $ 77,226
Less: amounts retained by
physician groups................ (31,676 ) -- (31,676)
--------- ----------- -----------
Management fee revenue........... 45,550 -- 45,550
Costs and expenses:
Medical support services........ 36,219 -- 36,219
General and administrative
(e)........................... 5,962 -- 5,962
Depreciation and amortization... 11,226 (8,137)(g) 3,089
Interest expense (income),
net........................... 3,552 (3,256)(i) 296
--------- ----------- -----------
Total costs and expenses...... 56,959 (11,393) 45,566
--------- ----------- -----------
(Loss) income before income
taxes........................... (11,409 ) 11,393 (16)
--------- ----------- -----------
Income taxes..................... -- -- --
--------- ----------- -----------
Net (loss) income................ $(11,409 ) $11,393 $ (16)
--------- ----------- -----------
--------- ----------- -----------
Net (loss) income per common shar
Primary......................... $ 0.00
Diluted......................... $ 0.00
Weighted average number of common
outstanding:
Primary......................... 18,152(j)
Diluted......................... 18,549(j)
</TABLE>
23
<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
COMPANY(B) LVBMJ SCOI STSC TRI-CITY LOS COAST VALLEY BIOS OSA
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Practice revenues, net...... $ 6,029 $1,540 $17,907 $ 6,027 $ 3,478 $ 6,365 $ 3,434 $ 2,468 $ 7,615 $ 8,470
Less: amounts retained by
physician groups........... (2,912) (716 ) (9,141) (4,399) (1,658) (4,055) (2,050) (1,384) (2,353) (2,656)
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
Management fee revenue...... 3,117 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 5,814
Costs and expenses:
Medical support services... 2,844 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 5,814
General and administrative
(e)...................... 1,299 -- -- -- -- -- -- -- -- --
Depreciation and
amortization............. 737 -- -- -- -- -- -- -- -- --
Interest expense (income),
net...................... (21) -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- --
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
Total costs and
expenses................ 4,859 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 5,814
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
(Loss) income before income
taxes...................... (1,742) -- -- -- -- -- -- -- -- --
Income taxes................ -- -- -- -- -- -- -- -- -- --
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
Net (loss) income........... $ (1,742) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
---------- ------ ------- ------- -------- ------- ------- ------- ------- -------
Net (loss) income per
common share:
Primary.................... $ (0.21)
Diluted.................... $ (0.21)
Weighted average number of common
shares outstanding:
Primary.................... 8,273
Diluted.................... 8,273
<CAPTION>
1997 AFFILIATES (A)
OTHER PRO FORMA OFFERING PRO FORMA
AFFILIATIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Practice revenues, net...... $ 30,812 $ -- $ 94,145 $ -- $ 94,145
Less: amounts retained by 8,372(c)
physician groups........... (11,977) 1,537(d) (33,392) -- (33,392)
------ ----------- ----------- ----------- -----------
Management fee revenue...... 18,835 9,909 60,753 -- 60,753
Costs and expenses:
Medical support services... 18,835 -- 50,571 -- 50,571
General and administrative
(e)...................... -- -- 1,299 -- 1,299
Depreciation and
amortization............. -- 13,754(f) 14,491 (10,849)(g) 3,642
Interest expense (income),
net...................... -- 4,297(h) 4,276 (4,020)(i) 256
-- -- -- -- --
------ ----------- ----------- ----------- -----------
Total costs and
expenses................ 18,835 18,051 70,637 (14,869) 55,768
------ ----------- ----------- ----------- -----------
(Loss) income before income
taxes...................... -- (8,142) (9,884) 14,869 4,985
Income taxes................ -- -- -- 1,894(k) 1,894
------ ----------- ----------- ----------- -----------
Net (loss) income........... $ -- $ (8,142) $ (9,884) $12,975 $ 3,091
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
Net (loss) income per
common share:
Primary.................... $ 0.17
Diluted.................... $ 0.17
Weighted average number of c
shares outstanding:
Primary.................... 18,152(j)
Diluted.................... 18,549(j)
</TABLE>
24
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
Practice revenue represents the revenue of the Existing Practices and the
COSI ambulatory surgery center reported at the estimated realizable amounts from
patients, third party payors and others for services rendered, net of
contractual and other adjustments. Management fee revenue represents practice
revenue less amounts retained by the Existing Practices (consisting of amounts
retained by physician groups, principally compensation and fees paid to
physicians). 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 Emerging Issues Task Force of the Financial Accounting Standards Board
recently reached a consensus concerning certain matters relating to the PPM
industry with respect to consolidation of professional corporation revenues and
the accounting for business combinations. As an interim step before the
consensus, the Commission allowed PPMs to display the revenues and expenses of
managed physician practices in the statement of operations (the 'alternative
display' method) if the terms of the management agreement provided the PPM with
a 'net profits or equivalent interest'. It is the Company's understanding that
the Commission will not object to the continued use of the 'alternative display'
method in PPM financial statements for periods ending before December 15, 1998.
Thereafter, the alternative display method will no longer be accepted.
Consequently, for years ended after December 31, 1997, the Company will no
longer present physician groups' revenue less amounts retained by the physician
groups as management fee revenue in its statements of operations. The Company is
currently evaluating the impact that this consensus may have on its affiliation
strategy. The Company does not expect this consensus to have an impact on the
allocation of consideration to affiliations or the amortization life assigned to
intangible assets.
The Company's operating expenses consist of the expenses incurred in
fulfilling its obligations under the Management Services Agreements. These
expenses include medical support services (principally clinic overhead expenses
that would have been incurred by the Existing Practices, including
non-professional employee salaries, employee benefits, medical supplies,
malpractice insurance premiums, rent and other expenses related to clinic
operations) and general and administrative expenses (personnel and
administrative expenses in connection with maintaining a corporate office that
provides management, contracting, administrative, marketing and development
services to the Existing Practices). The Practices' operating expenses prior to
affiliation with the Company consist of the clinic overhead expenses, including
non-professional employee salaries, employee benefits, medical supplies,
malpractice insurance premiums, rent, depreciation and amortization and general
and administrative expenses related to clinic operations which have been
presented as medical support services.
(a) The 1996 Affiliations column presents historical information for
the portion of the year preceding the Practices' affiliation with the
Company recognizing that the Practices typically distribute any net income
to the physicians as compensation. In the pro forma statement of operations
for the year ended December 31, 1996, the 1997 Affiliations columns present
historical information of the 1997 Affiliation Transactions for the year
ended December 31, 1996, recognizing that the Practices typically
distribute any net income to the physicians as compensation. In the pro
forma statement of operations for the nine months ended September 30, 1997,
the 1997 Affiliations column presents historical information of the 1997
Affiliation Transactions for the portion of the year preceding the
Practices' affiliation with the Company recognizing that the Practices
typically distribute any net income to the physicians as compensation.
Physician compensation is presented as amounts retained by physician
groups.
25
<PAGE>
The Other Affiliations column presents the information from the following
practices:
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRACTICE AMOUNTS RETAINED MANAGEMENT MEDICAL
REVENUES, BY FEE SUPPORT
PRACTICE NET PHYSICIAN GROUPS REVENUE SERVICES
- ---------------------------------------------------------- --------- ----------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower Orthopedics......................................... $ 376 $ 150 $ 226 $ 226
Clive Segil, M.D.......................................... 285 100 185 185
R.C. Watson, M.D.......................................... 441 169 272 272
Swanson Orthopedics....................................... 316 126 190 190
Lake Tahoe Sports......................................... 270 89 181 181
San Antonio Bone & Joint.................................. 196 71 125 125
Stockdale Podiatry........................................ 1,008 397 611 611
John Zimmerman, M.D....................................... 338 141 197 197
Broward Orthopedic Specialists............................ 4,239 1,753 2,486 2,486
Jeffrey Beitler, M.D...................................... 340 157 183 183
Michael Abrahams, M.D..................................... 1,118 486 632 632
Physical Medicine and Rehabilitation...................... 835 468 367 367
Kramer & Maehrer, LLC..................................... 412 261 151 151
Lighthouse Orthopaedics................................... 5,661 3,032 2,629 2,629
Valley Sports & Arthritis Surgeons........................ 3,340 1,904 1,436 1,436
New Jersey Orthopedic Associates.......................... 2,110 1,224 886 886
Orthopaedic Management Network, Inc. (Omni IPA)........... 1,231 1,066 165 165
--------- -------- ---------- --------
Totals.................................................. $22,516 $11,594 $ 10,922 $ 10,922
--------- -------- ---------- --------
--------- -------- ---------- --------
</TABLE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRACTICE AMOUNTS RETAINED MANAGEMENT MEDICAL
REVENUES, BY FEE SUPPORT
PRACTICE NET PHYSICIAN GROUPS REVENUE SERVICES
- ---------------------------------------------------------- --------- ----------------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower Orthopedics......................................... $ 536 $ 214 $ 322 $ 322
Clive Segil, M.D.......................................... 535 187 348 348
R.C. Watson, M.D.......................................... 610 244 366 366
Swanson Orthopedics....................................... 550 180 370 370
Lake Tahoe Sports......................................... 618 236 382 382
San Antonio Bone & Joint.................................. 464 167 297 297
Stockdale Podiatry........................................ 1,856 731 1,125 1,125
John Zimmerman, M.D....................................... 676 283 393 393
Broward Orthopedic Specialists............................ 6,407 2,044 4,363 4,363
Jeffrey Beitler, M.D...................................... 501 138 363 363
Michael Abrahams, M.D..................................... 1,398 587 811 811
Physical Medicine and Rehabilitation...................... 1,600 539 1,061 1,061
Kramer & Maehrer, LLC..................................... 749 474 275 275
Lighthouse Orthopaedics................................... 5,747 1,743 4,004 4,004
Valley Sports & Arthritis Surgeons........................ 4,687 1,663 3,024 3,024
New Jersey Orthopedic Associates.......................... 2,927 1,698 1,229 1,229
Orthopaedic Management Network, Inc. (Omni IPA)........... 951 849 102 102
--------- -------- ---------- -------
Totals.................................................. $30,812 $11,977 $ 18,835 $18,835
--------- -------- ---------- -------
--------- -------- ---------- -------
</TABLE>
(b) In the pro forma statement of operations for the year ended
December 31, 1996, the Company column includes the operations of the
Existing Practices that affiliated with the Company in 1996 from the date
of affiliation and all actual expenses related to corporate infrastructure,
which were primarily general and administrative expenses. In the pro forma
statement of operations for the nine months ended September 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 nine months of 1997
from the date of affiliation and all actual expenses related to corporate
infrastructure, which were primarily general and administrative expenses
and included $2.2 million of non-cash compensation expenses related to
stock options. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'
26
<PAGE>
(c) Reflects the impact of applying the provisions of the Management
Services Agreements relating to the portion of the management fees payable
to the Company that are based on a percentage of revenue.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
PRACTICE 1996 1997
- ------------------------------------------------------------------------------------ ------------ -------------
(IN THOUSANDS)
-----------------------------
<S> <C> <C>
LVBMJ/Orthopaedic Associates of Bethlehem........................................... $ 154 $ 1,052
Southern California Orthopedic Institute............................................ 596 531
COSI................................................................................ -- 286
South Texas Spinal Clinic........................................................... 633 310
Tri-City Orthopedics................................................................ 348 124
Lauderdale Orthopaedic Surgeons..................................................... 637 160
Gold Cost Orthopedics............................................................... 515 241
Sun Valley Orthopaedics............................................................. 247 136
Tower Orthopedics................................................................... 53 37
Clive Segil, M.D.................................................................... 53 29
R.C. Watson, M.D.................................................................... 61 45
Swanson Orthopedics................................................................. 55 31
Lake Tahoe Sports................................................................... 62 27
San Antonio Bone & Joint............................................................ 53 23
Stockdale Podiatry.................................................................. 185 101
John Zimmerman, M.D................................................................. 68 34
Broward Orthopedic Specialists...................................................... 961 636
Jeffrey Beitler, M.D................................................................ 50 34
Michael Abrahams, M.D............................................................... 210 112
Physical Medicine and Rehabilitation................................................ 160 125
Kramer & Maehrer, LLC............................................................... 75 41
Broward Institute of Orthopaedic Specialties........................................ 609 427
Lighthouse Orthopaedics............................................................. 718 708
Orthopaedic Surgery Associates...................................................... 1,059 656
Valley Sports & Arthritis Surgeons.................................................. 469 334
New Jersey Orthopedic Associates.................................................... 293 211
Orthopaedic Management Network, Inc. (Omni IPA)..................................... 48 62
------------ -------------
Totals............................................................................ $8,372 $ 6,513
------------ -------------
------------ -------------
</TABLE>
(d) Reflects the impact of applying the provisions of the SCOI
Management Services Agreement and the amended and restated LVBMJ Management
Services Agreement relating to management fees payable to the Company
retroactively to January 1, 1996 and 1997 whereby the base management fees
are adjusted to 10% of net collected revenue.
(e) Excludes the impact of recording noncash compensation expense of
$12 million to $14 million relating to the recalculation provisions
contained in the SCOI and COSI Management Services Agreements to be
incurred in the fourth quarter of 1997 with respect to the 887,000 shares
issuable to the SCOI physicians as a result of such provisions. No other
Management Services Agreements contain or are expected to contain similar
recalculation provisions. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of
Operations--General and Administrative.'
27
<PAGE>
(f) 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 $37.2 million at September 30, 1997 and are being
amortized over four years. The adjustment by Practice is as follows (see
Note 2 to the financial statements for the allocation of consideration in
the Affiliation Transactions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
PRACTICE 1996 1997
- ------------------------------------------------------------------------------------ ------------ -------------
(IN THOUSANDS)
-----------------------------
<S> <C> <C>
LVBMJ/Orthopaedic Associates of Bethlehem........................................... $ 334 $ 87
Southern California Orthopedic Institute............................................ 1,541 (14)
COSI................................................................................ 371 93
South Texas Spinal Clinic........................................................... 805 0
Tri-City Orthopedics................................................................ 351 88
Lauderdale Orthopaedic Surgeons..................................................... 513 128
Gold Cost Orthopedics............................................................... 825 344
Sun Valley Orthopaedics............................................................. 398 199
Tower Orthopedics................................................................... 115 48
Clive Segil, M.D.................................................................... 105 44
R.C. Watson, M.D.................................................................... 109 55
Swanson Orthopedics................................................................. 128 64
Lake Tahoe Sports................................................................... 91 46
San Antonio Bone & Joint............................................................ 107 54
Stockdale Podiatry.................................................................. 265 133
John Zimmerman, M.D................................................................. 97 48
Broward Orthpedic Specialists....................................................... 1,555 907
Jeffrey Beitler, M.D................................................................ 77 51
Michael Abrahams, M.D............................................................... 222 129
Physical Medicine and Rehabilitation................................................ 287 167
Kramer & Maehrer, LLC............................................................... 108 54
Broward Institute of Orthopaedic Specialties........................................ 1,030 773
Lighthouse Orthopaedics............................................................. 1,114 836
Orthopaedic Surgery Associates...................................................... 1,740 1,305
Valley Sports & Arthritis Surgeons.................................................. 807 605
New Jersey Orthopedic Associates.................................................... 499 374
Orthopaedic Management Network, Inc. (Omni IPA)..................................... 160 119
------------ -------------
Totals............................................................................ $ 13,754 $ 6,737
------------ -------------
------------ -------------
</TABLE>
(g) To adjust the amortization of the Management Services Agreements
to give effect to a revised estimated useful life ranging from 7 to 25
years resulting from amendments to the Restricted Stock Agreements that the
Company expects to enter into with the Practices in 1998 to eliminate the
four-year vesting provisions contained therein.
(h) 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.
(i) 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.'
(j) The pro forma as adjusted weighted average number of common shares
includes (i) all shares of Common Stock issued in the Affiliation
Transactions, (ii) the shares issuable in connection with the recalculation
provisions contained in the SCOI and COSI Management Services Agreements,
(iii) the conversion of all outstanding shares of Preferred Stock and (iv)
the 4,000,000 shares of Common Stock offered hereby.
(k) To reflect the estimated income tax effect at an effective rate of
approximately 38%.
28
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
AFFILIATION PRO FORMA
AND OTHER OFFERING AS
THE COMPANY ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED(A)
----------- ----------- --------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 2,404 $ 6,875(c) $ 3,363 $ 1,283(a) $ 4,646
(5,916)(b)
Accounts receivable.................... 19,325 4,047(b) 23,372 -- 23,372
Prepaid expenses and other current
assets............................... 42 584(b) 626 -- 626
----------- ----------- --------- ----------- ------------
Total current assets................. 21,771 5,590 27,361 1,283 28,644
Furniture, fixtures and equipment, net... 3,877 1,227(b) 5,104 -- 5,104
Management Services Agreements, net...... 32,485 17,720(b) 50,205 -- 50,205
Other assets............................. 3,234 -- 3,234 -- 3,234
----------- ----------- --------- ----------- ------------
Total assets......................... $61,367 $24,537 $85,904 $ 1,283 $ 87,187
----------- ----------- --------- ----------- ------------
----------- ----------- --------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 299 $ -- $ 299 $ -- $ 299
Accrued expenses....................... 2,856 20(b) 2,876 -- 2,876
Accrued salaries and benefits.......... 946 -- 946 -- 946
Due to physician groups................ 3,990 -- 3,990 (79)(a) 3,911
Shareholder note payable............... 894 -- 894 (894)(a) --
Current portion of long-term debt and
capital lease obligations............ 2,208 9,986(b) 18,319 (18,304)(a) 15
6,125(c)
----------- ----------- --------- ----------- ------------
Total current liabilities............ 11,193 16,131 27,324 (19,277) 8,047
Long-term debt and capital lease
obligation, less current portion....... 16,480 750(c) 18,491 (14,440)(a) 4,051
1,261(b)
Stockholders' equity..................... 33,694 6,395(b) 40,089 35,000(a) 75,089
----------- ----------- --------- ----------- ------------
Total liabilities and stockholders'
equity............................. $61,367 $24,537 $85,904 $ 1,283 $ 87,187
----------- ----------- --------- ----------- ------------
----------- ----------- --------- ----------- ------------
</TABLE>
NOTES TO PRO FORMA BALANCE SHEET
(a) To reflect (i) the net proceeds from the sale of shares of Common Stock
in the Offering estimated to be approximately $35.7 million (after deducting
underwriting discounts and estimated Offering expenses) and the repayment of
$34.4 million of indebtedness consisting of (A) approximately $12.2 million of
HCFP Debt, including $700,000 for a success fee and payment for the exercise of
a put option due at the completion of the Offering; (B) approximately $6.0
million of the Comdisco Loan; (C) approximately $1.5 million of the Galtney
Loan; (D) approximately $1.9 million of the Nagpal Debt; (E) approximately $3.4
million of the Stockholder Debt; and (F) approximately $9.4 million of the
Physician Notes and (ii) the conversion of the Preferred Stock and all other
outstanding equity securities into Common Stock upon the closing of the
Offering.
(b) To record the historical basis of the assets acquired and liabilities
assumed by the Company in the Affiliation Transactions. In connection with the
Affiliation Transactions, the Company issued 1,109,970 shares of common stock,
paid cash of approximately $5.9 million and issued $11.3 million of the
Physician Notes. The accounts receivable were recorded at net realizable value
and the furniture, fixtures and equipment was recorded at fair market value. In
connection with the recording of intangible assets, primarily Management
Services 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
29
<PAGE>
existence and the term and enforceability of the Management Services Agreement.
The Management Services Agreements are for a term of 40 years and typically
cannot be terminated by the Practice without cause, consisting primarily of
bankruptcy or material default. See Notes 1 and 2 to the financial statements.
The breakdown of the Affiliation Transactions in the aggregate resulted in
total consideration of $26.2 million, consisting of cash of $5.9 million, the
Physician Notes in the aggregate amount of $11.3 million and Common Stock of
$9.0 million. Of such total consideration, $20.4 million was allocated to
Management Services Agreements, $4.0 million was allocated to accounts
receivable, $.6 million was allocated to other current assets, and $1.2 million
was allocated to furniture, fixtures and equipment. See Note 2 to the financial
statements.
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 four
years.
(c) To record $6.9 million raised after September 30, 1997. Of such amount,
$3.4 million was provided from the stockholder debt, $2.5 million was provided
from the additional HCFP debt and $1.0 million was provided from the additional
Comdisco debt.
30
<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 nine
months ended September 30, 1997 and the balance sheet data at December 31, 1996
and September 30, 1997 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 nine
months ended September 30, 1996 is unaudited and was 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 nine months ended September 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>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ------------------
DECEMBER 31, 1996 1996 1997
----------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Practice revenues, net.......................................... $ 6,029 $ 674 $38,325
Less: amounts retained by physician groups...................... (2,912) (336) (17,878)
-------- ------- -------
Management fee revenue.......................................... 3,117 338 20,447
Costs and expenses:
Medical support services..................................... 2,844 343 17,934
General and administrative................................... 1,299 675 5,962
Depreciation and amortization................................ 737 83 4,489
Interest expense (income), net............................... (21) (6) 922
-------- ------- -------
Total costs and expenses................................... 4,859 1,095 29,307
Loss before income taxes........................................ (1,742) (757) (8,860)
Income taxes.................................................... -- -- --
-------- ------- -------
Net loss........................................................ $(1,742) $ (757) $(8,860)
-------- ------- -------
-------- ------- -------
Net loss per common share....................................... $ (0.21) $ (0.10) $ (1.02)
-------- ------- -------
-------- ------- -------
Weighted average number of common shares outstanding............ 8,273 7,820 8,722
-------- ------- -------
-------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS, EXCEPT
OPERATING DATA)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 1,439 $ 2,404
Working capital.......................................................... 1,819 10,578
Total assets............................................................. 25,332 61,367
Long-term debt and capital lease obligation, less current portion........ 59 16,480
Total stockholders' equity............................................... 19,381 33,694
OTHER OPERATING DATA:
Number of Practices...................................................... 3 22
Number of physicians..................................................... 34 106
</TABLE>
31
<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 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 and the COSI ambulatory surgery center 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 25
Existing Practices comprising 117 physicians practicing in Arizona, California,
Florida, Pennsylvania, New Jersey 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 eleven months of 1997, the Company entered
into additional Management Services Agreements with 22 Existing Practices,
comprising 80 physicians and acquired the IPA with 42 physicians in Arizona.
Generally, 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
outstanding accounts receivable. The consideration paid by the Company consists
of Common Stock, cash and the assumption of certain liabilities (principally
notes payable to financial institutions secured by receivables of the Practice,
which notes are repaid at the time the Affiliation Transaction is consummated).
In exchange for this consideration, the Practice enters into a 40-year
Management Services Agreement with the Company.
Practice revenue represents the revenue of the Existing Practices and the
COSI ambulatory surgery center reported at the estimated realizable amounts from
patients, third party payors and others for services rendered, net of
contractual and other adjustments. Management fee revenue represents Practice
revenue less amounts retained by the Existing Practices (consisting of amounts
retained by physician groups, principally compensation and fees paid to
physicians and other health care providers) which are paid to the physicians
pursuant to the Management Services Agreements. Under each Management Services
Agreement, the Company assumes responsibility for the management of the
non-medical operations of the Practice, employs substantially all of the
non-professional personnel utilized by the Practice and may provide the Practice
with the facilities and equipment used in its medical practice. For a more
detailed discussion of the rights and obligations of the parties to the
Management Services Agreements, see 'Business--Contractual Agreements With the
Practices--Management Services Agreement.'
The Company's management fee revenue consists of three components: (i)
percentage of the Practices' net collected revenue (generally ranging from 10%
to 15%), plus (ii) 100% of the non-physician affiliated practice expenses
(generally ranging from 45% to 55% of the Practices' net collected revenue),
plus (iii) 66 2/3% of the cost savings the Company is able to achieve through
its purchasing power (generally related to medical malpractice insurance,
property and liability insurance, group benefits and certain major medical
supplies). The portion of the management fee revenue that represents a
percentage of net collected revenue is dependent upon the Practices' revenue
which must be billed and collected. See 'The Company--Affiliation Transactions.'
The Company's operating expenses consist primarily of the expenses incurred
in fulfilling its obligations under the Management Services Agreements. These
expenses include medical support services (principally clinic overhead expenses
that would have been incurred by the Existing Practices, including
non-professional employee
32
<PAGE>
salaries, employee benefits, medical supplies, malpractice insurance premiums,
building and equipment rental and other expenses related to clinic operations)
and general and administrative expenses (personnel and administrative expenses
in connection with maintaining a corporate office function that provides
management, contracting, administrative, marketing and development services to
the Existing Practices).
As a result of the Company's rapid growth, costs and expenses exceeded
management fee revenue due to the start-up nature of the Company. The level of
these costs and expenses are expected to continue to increase as affiliations
with additional Practices are achieved and the Company adds to its management
infrastructure.
Following the Offering, the Company intends to change its fiscal year from
a calendar year to the twelve months ended March 31.
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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Practice revenues, net..................................................... 100.0% 100.0%
Less: amounts retained by physician groups................................. 48.3 46.6
------ ------
Management fee revenue..................................................... 51.7 53.4
Costs and expenses:
Medical support services................................................. 47.2 46.8
General and administrative............................................... 21.5 15.6
Depreciation and amortization............................................ 12.2 11.7
Interest expense (income), net........................................... (0.3) 2.4
------ ------
Total costs and expenses............................................... 80.6 76.5
------ ------
Loss before income taxes................................................... (28.9) (23.1)
Income taxes............................................................... -- --
------ ------
Net loss................................................................... (28.9)% (23.1)%
------ ------
------ ------
</TABLE>
Practice Revenues, 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 nine months ended September 30, 1997, net practice revenue was $38.3
million arising from the 1996 Affiliations and affiliations with 19 additional
Practices comprising 69 physicians at April 1, 1997 (LOS and Tri-City), June 1,
1997 (Gold Coast and two additional Practices in Los Angeles, CA), July 1, 1997
(Sun Valley, three Practices in Lake Tahoe, CA, two Practices in Bakersfield,
CA, one Practice in Bethlehem, PA, and one in San Antonio, TX), August 1, 1997
(three additional Practices in Broward and Palm Beach counties in South Florida)
and September 1, 1997 (four Practices comprised of three in South Florida and
one in Allentown, PA).
Amounts Retained by Physician Groups. Amounts retained by physician groups
for the year ended December 31, 1996 was $2.9 million, consisting of
compensation and fees paid to physicians and other health care providers by the
Practices pursuant to Management Services Agreements entered into on July 1,
1996 and November 1, 1996. For the nine months ended September 30, 1997, amounts
retained by physician groups was $17.9 million, reflecting the effect of the
1996 Affiliations and affiliations with 16 additional Practices pursuant to
Management Services Agreements executed in the first nine 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
nine months ended September 30, 1997, management fee revenue was $20.4 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 nine months ended September 30,
1997, medical support services was $17.9 million, reflecting the 1996
Affiliations, plus the effect of 16 additional Management Services Agreements
executed in the first nine months of 1997.
33
<PAGE>
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 nine months ended September 30, 1997, general and
administrative expenses were $6.0 million, of which $5.3 million was incurred in
the last six months of the period, reflecting the Company's increased
development of corporate infrastructure to support the additional affiliations
as they occur, and $2.2 million of compensation expense, substantially all of
which was incurred in the last three months of the period, related to the
acceleration of the vesting of stock options granted to certain employees. 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. However, the Company expects to issue approximately 887,000 additional
shares of Common Stock to the SCOI physicians effective as of December 31, 1997
as a result of the recalculation provisions contained in the SCOI and COSI
Management Services Agreements and record non-cash compensation expense in the
fourth quarter of 1997 ranging from $12 million to $14 million related to the
recalculation provisions as well as approximately $2.0 million of additional
compensation expense related to the accelerated stock options. See Note 2 to the
financial statements.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $737,000, 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 nine months ended September 30, 1997, depreciation and
amortization were $414,000 and $4.2 million, respectively, reflecting the
additional Affiliation Transactions entered into during the nine months. The
intangible assets related to the Management Services Agreements are being
amortized over four years as a result of the vesting provisions contained in the
Restricted Stock Agreements. The Company expects to enter into amendments to the
Restricted Stock Agreements to eliminate the vesting provisions related to the
shares of the Company's Common Stock issued in connection with the Affiliation
Transactions. At the time the amendments are executed, the Company expects to
revise the estimated useful lives of its Restricted Stock Agreements and
amortize the remaining balances of the Management Services Agreements over
periods ranging from 7 to 25 years. Consequently, the amortization expense
related to the 25 Existing Practices will decrease in the future; however, the
Company expects that depreciation and amortization expense levels will continue
to increase as additional Practices affiliate with the Company. The depreciation
and amortization expense, based on amortization periods ranging from 7 to 25
years, is expected to 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 ($32.5 million at September
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.
Net interest expense. Net interest expense for the nine months ended
September 30, 1997 was $922,000 compared to interest income of $21,000 for the
year ended December 31, 1996. The increase in interest expense was due primarily
to borrowings related to the affiliation transactions.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 and September 30, 1997, the Company had $1.8 million
and $10.6 million, respectively, in working capital and $1.4 million and $2.4
million, respectively, in cash and cash equivalents. The Company's principal
sources of liquidity as of December 31, 1996 and September 30, 1997 consisted of
the cash and cash equivalents and net accounts receivable of $5.8 million and
$19.3 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;
(iii) short-term borrowings from stockholders; and (iv) issuance of promissory
notes to certain physicians.
For the year ended December 31, 1996 and the nine months ended September
30, 1997, cash used in operations was $1.0 million and $3.2 million,
respectively, resulting primarily from net operating losses adjusted for
non-cash expenses.
34
<PAGE>
Cash used in investing activities for the year ended December 31, 1996 and
the nine months ended September 30, 1997 was $4.6 million and $20.6 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 nine months ended September 30, 1997 was $7.1 million and $24.8 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 nine months ended September 30, 1997, cash
provided by financing activities resulted primarily from $20.2 million in net
borrowings and $5.2 million in proceeds from the issuance of three series of
preferred stock.
Beginning in March 1997, the Company entered into the HCFP Loan Agreements
with HCFP Funding, secured by the accounts receivable acquired from Existing
Practices. The Company may borrow up to an aggregate of $17.0 million under HCFP
Loan Agreements, subject to a borrowing base of 85% of eligible accounts
receivable. Upon completion of 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 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
28,572 shares of the Common Stock. The warrants contain put rights which give
the holder the right to receive payment, based on a minimum put price of $14 per
share, for the value of these stock warrants at the earlier of the effective
date of the Company's initial public offering or January 15, 1998.
In August 1997 and November 1997, the Company borrowed an aggregate of $7.5
million under the Comdisco Loan Agreement and the Galtney Loan Agreement to fund
Practice affiliations. The Comdisco Loan and the Galtney Loan have three year
terms, bear interest at 14% per annum and are secured by a second lien on all of
the Company's tangible and intangible personal property. In connection with
these loans the Company issued warrants to Comdisco and Galtney of 107,145 and
26,785 shares, respectively.
On September 9, 1997, the Company issued $4.0 million principal amount of
its 6% convertible debentures due 2000 (the 'Debentures') to fund Practice
affiliations. The Debentures are convertible into Common Stock. See 'Certain
Transactions.'
On October 14, 1997, the Company obtained short-term financing in the form
of a secured term note for $2.5 million payable to HCFP Funding to fund Practice
affiliations, secured by a lien on substantially all of the assets of the
Company. The loan bears interest at the prime rate plus 3.5% (12% at October 31,
1997). Interest only is payable through December 31, 1997 and the entire
principal sum is due and payable on January 10, 1998. In connection with this
loan agreement, the Company will pay HCFP Funding a fee in the amount of
$300,000 on the maturity date.
On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3.4 million from certain stockholders, including Dr.
Nagpal, to fund Practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggregate of 48,215
shares of Common Stock at an exercise price of $0.01 per share. Outstanding
loans bear interest at the prime rate plus 3.5% (12% at October 31, 1997). The
principal of and accrued interest on such loans are due and payable on January
10, 1998.
During October and November 1997, in connection with several Practice
affiliations, the Company issued the Physician Notes in the aggregate amount of
approximately $11.3 million. These outstanding promissory notes bear interest at
rates ranging from 6% to 11%. Approximately $1.9 million of the Physician Notes
was repaid on January 2, 1998. The remaining Physician Notes are due and payable
either on the date of the completion of the Offering or at various maturity
dates ranging from March 31, 1998 to October 31, 1998.
35
<PAGE>
On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from Dr. Nagpal in the amount of $1.0 million to repay certain
of the Physician Notes. In connection with this loan, the Company issued
warrants to Dr. Nagpal to purchase 14,286 shares of Common Stock at an exercise
price of $0.01 per share. The demand note bears interest at 8% per annum.
The Company's affiliation and expansion programs will require substantial
capital resources. In addition, the operations and expansion of the Practices,
including the addition of Ancillary Service Facilities, and of the IPA will
require ongoing capital expenditures. The financing of future affiliations and
business expansion is anticipated to be provided by a combination of the
proceeds of the Offering, borrowings under the HCFP Loan Agreements and cash
flows from operations. The Company believes that the combination of these
sources will be sufficient to meet its currently anticipated operating and
capital expenditure requirements and working capital needs through 1998. In
order to meet its affiliation and expansion goals as well as its long-term
liquidity needs, the Company expects to incur, from time to time, additional
short-term and long-term indebtedness and to issue additional debt and equity
securities, the availability and terms of which will depend upon market and
other conditions. See 'Risk Factors--Risks Related to Intangible Assets.'
REIMBURSEMENT RATES
The health care industry is experiencing a trend toward cost containment as
payors seek to improve lower reimbursement and utilization rates with providers.
Further reductions in payments to health care providers or other changes in
reimbursement for health care services could adversely affect the Practices with
which the Company is affiliated and adversely affect the Company's results of
operations.
36
<PAGE>
BUSINESS
GENERAL
The Company is principally a PPM that provides management services to
physician practices that focus on musculoskeletal care, which involves the
medical and surgical treatment of conditions relating to bones, muscles, joints
and related connective tissues. The broad spectrum of musculoskeletal care
offered by the physician practices ranges from acute procedures, such as spine
or other complex surgeries, to the treatment of chronic conditions, such as
arthritis and back pain. The management services provided by the Company include
physician practice and network development, marketing, payor contracting and
financial, administrative and clinical information management. As of the date of
this Prospectus, the Company has entered into Affiliation Transactions by
entering into Management Services Agreements with 25 Practices comprising 117
physicians practicing in Arizona, California, Florida, Pennsylvania, New Jersey
and Texas and owns and operates one IPA with 42 physicians in Arizona.
INDUSTRY OVERVIEW
The market for muscoloskeletal care in the United States is significant and
growing. According to the AAOS, total direct costs associated with the delivery
of musculoskeletal care exceeded $60 billion in 1988 and increased to
approximately $72 billion in 1992. The increase in expenditures can be
attributed to various factors, including improvements in medical technology,
more active lifestyles which have resulted in the growth of sports medicine and
the overall aging of the population. In 1992, the 65-and-over age group
represented approximately 12% of the U.S. population, but accounted for more
than half of all musculoskeletal care expenditures.
Musculoskeletal care is provided by a variety of medical and surgical
specialists. Although the orthopaedic surgeon is the primary musculoskeletal
provider, musculoskeletal care is also provided by physiatrists,
rheumatologists, podiatrists, occupational medicine physicians, rehabilitative
therapists, neurosurgeons and neurologists. In addition, there are a number of
subspecialties of orthopaedics, including adult reconstructive (joint
replacement) surgery, spinal care, sports medicine, foot and ankle care, hand
and upper extremity care, pediatrics and trauma care. The AAOS estimates that in
1995 there were approximately 23,000 orthopaedic surgeons, as well as
approximately 5,500 physiatrists, 3,500 rheumatologists, 3,000 occupational
medicine physicians, 4,900 neurosurgeons and 11,400 neurologists in the United
States.
Historically, most orthopaedic procedures have been performed on an
inpatient basis. Recently, however, there has been a trend towards handling
these procedures on an outpatient basis. The Company believes this trend may be
attributable to a number of factors: less invasive surgery with the arthroscope
and new anaesthetic techniques have significantly reduced post-operation trauma;
outpatient procedures are less costly and thus more desirable to both patients
and payors; outpatient settings represent a 'health environment' which promotes
wellness and improved patient attitudes; and outpatient settings foster
preventive team situations which minimize waste and improve efficiency. For
these reasons, the Company believes that the trend toward treatment in the
outpatient setting will continue to increase in the foreseeable future.
According to the AAOS, in 1996, the principal payors for musculoskeletal
care were Medicare and Medicaid at 27% (combined), managed care, including
discounted fee-for-service and capitation, at 26%, private pay (indemnity
insurers) at 23% and workers' compensation at 17%. Reflecting the emergence of
managed care, the percentage of payments by private payors declined from 39% in
1988 to 23% in 1996, while payments from managed care sources increased from 12%
to 26%. This shift from private pay to managed care reimbursement has added the
complexity of managing the clinical and administrative aspects of the
physicians' practices and increased the emphasis on managing practices more
efficiently.
Historically, surgical and non-surgical orthopaedic specialists have
maintained separate practices; recently, however, musculoskeletal physicians
have begun to follow the consolidation trend seen elsewhere in the health care
industry. The AAOS estimates that approximately 3% to 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
37
<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. For a discussion of the applicability of the
Stark Law to the operation of the Ancillary Service Facilities, see
'Business--Governmental Regulation and Supervision--The Stark Self-Referral
Laws.'
Develop Disease Management and Clinical Information System. Following the
implementation of a uniform practice management system, the Company has a
two-step strategy for creating a disease management and clinical information
system. The Company is in the process of developing standard procedures for
gathering clinical and financial information, such as personal patient data,
physician and procedure identifier codes, payor class and amounts charged and
reimbursed. The Company's goal is to establish a non-patient identifiable
information database across all Practices pursuant to which efficiencies may be
achieved by gathering, interpreting and sharing clinical information,
standardizing referral patterns and treatment protocols within a physician
network and coordinating the needs of the patient population in any geographic
market. Utilization of the database is expected to result in an increased
ability to control and predict the cost of care for various patient diagnoses.
The Company believes that its network of musculoskeletal physicians with access
to reliable clinical outcome information will make the Company more attractive
to payors because the Company will be able to demonstrate cost-effective quality
care.
38
<PAGE>
BMJ OPERATIONS
Existing Practices. Since commencing operations in January 1996 through
the date of this Prospectus, the Company has affiliated with 25 Existing
Practices, comprising 117 physicians, in Arizona, California, Florida,
Pennsylvania, New Jersey and Texas, and owns and operates one IPA, comprising 42
physicians, in Phoenix, Arizona. Approximately 83% of the physicians at the
Managed Practices are orthopaedic surgeons.
The following table sets forth certain information concerning the Existing
Practices.
<TABLE>
<CAPTION>
ADDITIONAL PRACTICES
IN
NUMBER/SPECIALITIES MARKET SINCE
OF PHYSICIANS AFFILIATION
EFFECTIVE ------------------- NUMBER OF ---------------------
AFFILIATION AT OCTOBER 31, SATELLITE NUMBER OF NUMBER OF
REGION PRACTICE MARKET DATE 1997 OFFICES PRACTICES PHYSICIANS
- -------- ----------- --------------------- ---------- ------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Eastern LVBMJ Bethlehem, PA 7/1/96 6 Orthopaedics 0 3 10
1 Physiatry
1 Spine surgery
LOS Ft. Lauderdale, FL 4/1/97 6 Orthopaedics 2 5 23
1 Podiatry
Gold Coast Palm Beach 6/1/97 5 Orthopaedics 0 2 13
County, FL
Central STSC San Antonio, TX 11/1/96 6 Orthopaedics 9 1 1
1 Physiatry
Western SCOI Los Angeles, CA 11/1/96 20 Orthopaedics 4 7 10*
2 Physiatry
Tri-City Oceanside, CA 4/1/97 7 Orthopaedics 0 0 0
Sun Valley Sun City, AZ 7/1/97 4 Orthopaedics 0 0 0**
</TABLE>
- ------------------
* Includes three doctors and three separate practices in South Lake Tahoe,
California.
** Does not include the IPA with 42 physicians in Phoenix, Arizona.
Regional Business Model. While health care has become an increasingly
significant national issue, it is still delivered on a local level. Therefore,
in order to execute its growth and operating strategies, the Company has divided
the United States into the eastern, central and western regions. The Company
believes that its regional business model benefits both the Company and the
Practices. Local management teams allow the Company to better understand the
specific characteristics of a region, such as the demographics, the payor mix,
the competitive landscape and the managed care environment, thus enabling the
Company to be more effective in marketing to patients and negotiating with third
party payors and suppliers. In addition, the regional management team is able to
develop and maintain long-term relationships with both the Practices' physicians
and local entities such as hospitals, managed care networks, suppliers and
non-musculoskeletal physician groups. The Company believes that due to its
regional business model, it is better equipped to develop relationships with
such local entities than PPMs with centralized business models.
A regional vice president is responsible for a management team that
supervises the development of each market within a region. The regional
management team coordinates market expansion initiatives and integration of
administrative services within the region. The regional team provides management
and network services related to the following: (i) integration and transition;
(ii) physician services including cost containment and operating efficiencies;
(iii) ancillary services development and management; (iv) physician recruitment
and professional development; (v) workers' compensation; and (vi) payor
contracting.
Affiliation Structure. The Company believes its affiliation model aligns
the interests of the Company and the Practices' physicians by (i) providing
equity ownership in the Company to the physicians; (ii) assuring that the
physicians and the Company share in the profits from the Ancillary Service
Facilities and Practice cost savings; (iii) focusing on revenue enhancement; and
(iv) reducing the amount of time the physicians must spend on administrative
matters, thereby enabling them to dedicate more of their efforts to the delivery
of health care services. Additionally, each Practice retains professional
autonomy and control over its medical practice through continued ownership and
participation in Practice governance.
The total consideration generally 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
39
<PAGE>
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. See 'Business-- Contractual
Agreements with the Practices--Asset Purchase Agreement.' The multiple of the
Company's management fee is determined by reference to a number of factors,
including the geographic location of the Practice, the size and specialty mix of
the Practice, the Practice's competitive market position, the Practice's
historical financial performance and the potential for the development of
Ancillary Service Facilities. See '-- Strategy--Expand into New Markets.' The
total consideration paid by the Company consists of Common Stock, cash and the
assumption of certain liabilities (principally notes payable to financial
institutions secured by receivables of the Practice, which notes are repaid at
the time the Affiliation Transaction is consummated). In exchange for this
consideration, the Practice enters into a 40-year Management Services Agreement
with the Company.
The revenue to the Company from a Practice is typically based on a
specified percentage (typically 10% to 15%) of the Practice's revenues (rather
than on a percentage of the net operating income of the Practice) plus
reimbursement of the Practice's overhead expenses and two-thirds of the cost
savings the Company is able to achieve through its purchasing power. See 'The
Company--Affiliation Transactions.' In addition, the Company will be responsible
for arranging the funding of Ancillary Service Facilities when appropriate and
will, subject to applicable laws, share appropriately in the profits from such
facilities.
Upon affiliating with a Practice, the Company assumes the management of
substantially all aspects of the Practice's operations other than the provision
of medical services. Pursuant to the Management Services Agreements, the Company
assists the Practices in the preparation of operating budgets and capital
project analyses, the coordination of group purchases of medical supplies and
insurance and the introduction of physician candidates. The Company provides the
full range of administrative services required for a Practice's day-to-day
non-medical operations, including management and monitoring of the Practice's
billing and collection, accounting, payroll, legal services, recordkeeping, cash
flow activity, physician recruiting, payor contracting and marketing.
Comprehensive administrative support should facilitate more effective billing
and collections, and, as the Company grows, economies of scale in effecting
purchases. In addition, the Company plans to integrate the Practices' management
information systems into a single system that will expand the financial and
clinical reporting capabilities of each of the Practices and facilitate the
analysis of data collected.
The Company believes that through its affiliation with Practices across
multiple markets it can achieve benefits in the aggregate purchasing of products
and services for the Practices. The Company believes that, in particular, it can
assist the Practices in reducing its purchasing expenses such as insurance,
medical equipment and clinical and administrative supplies. Pursuant to the
Management Services Agreements, the Company receives two-thirds of any such cost
savings.
Financial and Practice Management Systems. To date, the Company has
implemented an interconnected financial accounting system in the Practices. This
system allows the Company to analyze the financial aspects of the Practices from
a centralized location and ensure uniformity with respect to financial
classifications at the Practice level.
The Company receives daily cash receipts related to the collection of
patient accounts receivable and revenues. The Company utilizes these funds to
pay the clinic overhead expenses (medical support services) as they are incurred
and pays to the Practice a physician draw based upon a predetermined percentage
of estimated net collected revenue. Annually, the cash actually collected and
paid as physician draw, medical support services or management fee is reconciled
with the Practice and any over/under payments are settled.
The Company believes that the implementation of a uniform practice
management system will enable it to monitor the operations of the Practices in a
cost-effective manner, enhance utilization of the Practices, develop practice
protocols and provide the Company with a competitive advantage in negotiating
contracts with third party payors. The Company is currently reviewing various
practice management software programs and expects to select and implement such a
program within 12 to 18 months following completion of the Offering.
The Company believes that the implementation of the practice management
system, together with the integrated financial accounting system, will enable it
to gather data that will be the foundation for a disease management and clinical
information system. The Company intends to capture, retain and use such
information
40
<PAGE>
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 generally provide facilities
and equipment to the Practices and, to this end, the Company assumes the
Practice's existing leases for the facilities and equipment and purchases the
assets, or a leasehold interest in the assets, utilized by the Practice.
DEVELOPMENT OF ANCILLARY SERVICE FACILITIES
Within each market, the Company plans to establish Ancillary Service
Facilities including, ambulatory surgery centers, physical therapy facilities
and MRI centers and mobile units. In order to establish such facilities, the
Company has designated professionals within each market to locate sites,
identify acquisition opportunities and otherwise arrange for the provision of
the ancillary services. Additionally, the Company's regional management teams
are responsible for marketing the Ancillary Service Facilities to payors and
referral sources and staffing, operating and financial management of the
facilities. For risks associated with the establishment of Ancillary Service
Facilities, see 'Risk Factors--Reliance on New Affiliations and Expansion.' For
a discussion of the applicability of the Stark Law to the operation of the
Ancillary Service Facilities, see 'Business-- Governmental Regulation and
Supervision--The Stark Self-Referral Laws.'
PAYOR MIX OF EXISTING PRACTICES
The Company's Practices derive revenue from a broad mix of third party
payors. This payor mix is a result of a number of underlying trends in the
patient base of musculoskeletal specialists. A significant portion of
reimbursement to physicians in musculoskeletal practices is derived from
workers' compensation insurance programs, which generally pay higher
reimbursements per procedure than health insurance payors and are generally not
subject to co-payments and deductibles. The Company believes that reimbursement
from workers' compensation payors will continue to represent a substantial
portion of practice revenues because of broader definitions of work-related
injuries, the shift of medical costs from health insurance payors to workers'
compensation payors, aging of the work force, and the requirement that employers
pay the total cost of medical treatment for work-related injuries.
The following table sets forth the payor mix of the Existing Practices for
the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Workers' compensation........................................... 27%
Medicare(1)..................................................... 17
Private payors and managed care(2).............................. 56
</TABLE>
- ------------------
(1) Includes 2% attributable to Medicaid.
(2) Includes managed care, substantially all of which is on a fee-for-service
basis.
Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. Provider reimbursement methods vary on a state-by-state basis. A
majority of states have adopted fee schedules pursuant to which all health care
providers are uniformly reimbursed. The fee schedules are set by each state and
generally prescribe the maximum amounts that may be reimbursed for a designated
procedure. In
41
<PAGE>
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 HCFA will be required by
law to recalibrate the practice expense component of the RBRVS over the next
four years in a way that will have positive effects on payments to primary care
providers, but will decrease payments for most services provided by specialists,
including many services provided by the Existing Practices.
Managed Care Payors. An increasing portion of the net revenue of the
Existing Practices is derived from managed care payors which make payments under
discounted fee-for-service and capitation arrangements. Although rates paid by
managed care payors are generally lower than commercial indemnity rates, managed
care payors can provide access to large patient volumes. To date, the Company
has not entered into any contracts on behalf of the Managed Practices with
managed care payors; however, the Company intends to seek to negotiate both
discounted fee-for-service and capitated contracts on behalf of the Practices.
Discounted fee-for-service contracts involve negotiated rates for specified
procedures and services. Under capitated arrangements, providers deliver health
care services to managed care enrollees and typically bear all or a portion of
the risk that the cost of such services may exceed capitated payments.
Private Payors. Rates paid by private third party payors are based on
established health care provider and hospital charges and are generally higher
than Medicare payment rates. Recently, RBRVS types of payment systems have been
adopted by certain private third party payors and may become a predominant
payment methodology. Wider implementation of such programs would reduce payments
from private third party payors, and could indirectly reduce revenue to the
Company.
CONTRACTUAL AGREEMENTS WITH THE PRACTICES
The Company has entered into Management Services Agreements and, in most
cases, Asset Purchase Agreements, Restricted Stock Agreements and Stockholder
Noncompetition Agreements (collectively, the 'Affiliation Agreements'), with
each of the Existing Practices, and intends to enter into Affiliation Agreements
with each additional Practice, to provide management, administrative and
development services. The following summary of the Affiliation Agreements is
intended to be a general summary of the form of the Affiliation Agreements. The
actual terms of the individual Affiliation Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
respects from the description below as a result of negotiations with the
individual Practices and the requirements of local regulations. The Management
Services Agreements and certain related agreements are filed as exhibits to the
registration statement of which this Prospectus forms a part. The following
summary is qualified in its entirety by reference to such exhibits. For a
discussion of circumstances under which a Management Services Agreement may be
rendered unenforceable, see 'Risk Factors--Government Regulation.'
Management Services Agreement. Under the Management Services Agreement,
the Practices are solely responsible for all aspects of the practice of medicine
and the Company has the primary responsibility for the business and
administrative aspects of the Practices. Pursuant to the Management Services
Agreements, the Company provides or arranges for various management,
administrative and development services relating to the day-to-day non-medical
operations of the Practices. Pursuant to the Management Services Agreements, the
Company acts as the exclusive manager and administrator of non-medical services
relating to the operation of the Practices. Subject to matters for which the
Practices maintain responsibility or which are governed by the Operations
Committee (as defined herein) of the Practices, the Company (i) bills patients,
insurance companies and other third party payors and collects, on behalf of the
Practices, the fees for medical and other services rendered, including goods and
supplies sold by the Practices; (ii) provides or arranges for, as necessary,
clerical,
42
<PAGE>
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 physician employees and other medical professionals on behalf of the
Practices; 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. The Management Services
Agreements provide that each Practice will retain an amount equal to net
collections less the management fee earned by the Company, which includes the
authorized operating costs incurred. If the amount of such costs incurred and
paid by the Company exceeds the amount authorized, approval to reimburse the
Company for such excess must come from the Operations Committee. See 'The
Company--Affiliation Transactions.' The Company is required to pay up to 5% of
its annual management fee from a Practice for new fixed asset additions at such
Practice. In addition, the Company will be responsible for arranging the funding
of Ancillary Service Facilities when appropriate and will, subject to applicable
laws, share appropriately in the profits from such facilities.
Each Management Services Agreement has an initial term of 40 years, with
automatic extensions (unless at least six months' notice is given) of additional
five-year terms. The Management Services Agreement may be terminated by either
party if the other party (a) files a petition in bankruptcy or other similar
events occur, or (b) defaults in any material respect in the performance of any
duty or obligation under the Management Services Agreement, which default is not
cured within a specified period after receipt of notice thereof or (c) any of
the representations and warranties made by such party in the Management Services
Agreement is materially untrue or misleading and such party fails to correct
such matter after receipt of written notice thereof. The Company also has the
right to terminate the Management Services Agreement in the event that the
Practice is excluded from participation in the Medicaid or Medicare program for
any reason. Either party may also terminate the Management Services Agreement if
such party determines that the structure of the Management Services Agreement
violates any state or federal laws or regulations existing at such time and that
an amendment to the Management Services Agreement will be unable to correct such
defect.
Upon termination of the Management Services Agreement, neither party is
obligated to the other party except as set forth below. In the event of such
termination, the Company is required to complete, within four months after the
termination date, the annual settlement of the respective obligations of the
Company and Practice for the period prior to the termination date. Furthermore,
following any such termination, the Company must sell to the Practice all of the
Company's interest in the assets that are located in the offices of the Practice
and used in connection with the medical practice. The purchase price for all of
such assets will be agreed upon by the parties; however, if an agreement is not
reached, the purchase price will be determined by an independent appraisal.
Under the Management Services Agreement, the Company is typically 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 November 1, 2003. Management Services Agreements for seven other
Existing Practices comprising 29 physicians contain provisions that permit such
43
<PAGE>
Existing Practices to rescind their Affiliation Transactions on their respective
seventh anniversaries. See 'Risk Factors--Rescission Rights.'
Under the Management Services Agreement, the Practice agrees generally not
to, at any time prior to the second anniversary of the termination of the
Management Services Agreement, compete with the Company by providing services to
other medical groups similar to those provided by the Company under the
Management Services Agreement or by entering into a management relationship with
another provider of non-professional management services that provides such
services to multiple physician groups. The Company and the Practice agree not to
disclose to third parties any confidential information relating to the other
party.
Asset Purchase Agreement. Subject to the terms and conditions of an asset
purchase agreement (the 'Asset Purchase Agreement'), the Company typically
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 generally include annual vesting of 25% of the Common Stock each
year in a four year period, a right of first refusal for the Company in the
event the physician decides to sell such Common Stock and the authority of the
Company's Board of Directors to prevent a physician's sale of such Common Stock
to a competitor of the Company. The Restricted Stock Agreement further provides
that the shares of Common Stock issued by the Company to the physicians remain
issued and outstanding regardless of whether such physicians remain with the
Practice, but the rights of the individual physicians to such shares (as opposed
to the right of the Practice) will vest equally over four years, with the
Practice retaining the right to utilize unvested shares to recruit new
physicians. Upon termination of the Management Services Agreement, the Company
has the right to repurchase all or any part of the Common Stock issued in the
Affiliation Transaction. If the Company elects to repurchase unvested shares,
the price per share is the original value of such Common Stock as set forth in
the Restricted Stock Agreement. If the Company elects to purchase vested shares,
the price per share is the then fair market value of the Common Stock. 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. The Company expects to enter into amendments to the
Restricted Stock Agreements to eliminate the vesting provisions.
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 Stockholder 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
44
<PAGE>
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 and the IPA will compete with local musculoskeletal care
service providers as well as some managed care organizations. The Company
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition for consumers of medical
services. The Company believes that the cost, accessibility and quality of
services provided are the principal factors that affect competition. There can
be no assurance that the Practices or the IPA will be able to compete
effectively in the markets that they serve. The inability of the Practices or
the IPA to compete effectively would have a material adverse effect on the
Company.
Further, the Practices and the IPA compete with other providers for
musculoskeletal managed care contracts. The Company believes that trends toward
managed care have resulted in increased competition for such contracts. Other
practices and management service organizations may have more experience than the
Practices, the IPA and the Company in obtaining such contracts. There can be no
assurance that the Company and the Practices will be able to successfully obtain
sufficient managed care contracts to compete effectively in the markets they
serve. The inability of the Practices to compete effectively for and obtain such
contracts could materially adversely affect the Company. See 'Risk
Factors--Intense Competition.'
GOVERNMENT REGULATION AND SUPERVISION
The delivery of health care services is regulated at both the federal and
state level. The laws applicable to the Company are subject to evolving
interpretations, and therefore there can be no assurance that a review of the
Company's operations by federal or state judicial or regulatory authorities
would not result in a determination that the Company, the IPA or one of the
Practices has violated one or more provisions of federal or state law. Any such
determination could have a material adverse effect on the Company.
Federal Law
Among the significant federal laws that apply to the Company's activities
are those that prohibit: (a) the filing of false or improper claims with a
federally funded health program; (b) unlawful inducements for the referral of
business reimbursable under most federally funded health programs; (c) fraud in
regard to payment or service in any health program; and (d) the billing for the
provision of certain Medicare or Medicaid covered items or services where such
items or services were provided based upon a referral to the providing entity by
a physician who has, or whose immediate family member has, a financial
relationship with that entity that does not fall within an applicable exception.
False and Other Improper Claims. Under numerous federal laws, including
the Federal False Claims Act (the 'False Claims Act'), the federal government is
authorized to impose criminal, civil and administrative penalties on any health
care provider that files a false claim for reimbursement from a federally funded
health program (such as Medicare or Medicaid). The False Claims Act provides for
a civil penalty of not less than $5,000 and not more than $10,000 per false
claim and between two to three times the amount of damages depending on the
facts and circumstances. The Medicare civil monetary penalty is now ten thousand
dollars ($10,000) per false item or service claimed. Recently enacted federal
legislation also imposes federal criminal penalties on persons who file false or
fraudulent claims with private insurers. While the criminal statutes are
generally reserved for instances of fraud, the civil and administrative penalty
statutes are being applied by the government in an increasingly broad range of
circumstances. Civil sanctions may be imposed if the claimant knew or should
have known that billing was improper. The government also has taken the position
that claiming reimbursement for services that are substandard is a violation of
these false claims statutes if the claimant knew or should have known that the
care was substandard or rendered under improper circumstances. Private persons
may bring civil actions to enforce the False Claims Act. Under certain lower
court decisions, claims derived from a violation of the Anti-Kickback Statute
(as defined herein) or the Stark Law have been deemed to be, or may under
certain circumstances be construed to be, false claims.
The Stark Self-Referral Law. The Stark Law prohibits a physician from
referring a patient for certain designated health services reimbursable by
Medicare or Medicaid to an entity with which the physician (or the
45
<PAGE>
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
health services within each Practice, the Stark Law will require that the
arrangements between the Company and the physicians in each Practice that
provide designated health services be structured to meet a Stark Law exception.
Under this scenario, the physicians' ability to order designated health services
within the Practices and the ability of the Practices to bill Medicare or
Medicaid for such designated health services will be permissible only if the
financial arrangements under the Management Services Agreements or IPA Provider
Agreements entered into by the Company and the Practices meet certain exceptions
set forth in the Stark Law. The Company believes that the financial arrangements
under the Management Services Agreements or IPA Provider Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by the courts or regulatory authorities would not result in a
contrary determination. Also, to the extent that the Company in the future owns,
manages or operates Ancillary Service Facilities that provide designated health
services, the Stark Law may require the arrangements for the Company's
acquisition of certain non-clinical assets of the Practices and its Management
Services Agreements or IPA Provider Agreements with each Practice to be
structured to meet Stark Law exceptions in order for the physicians within each
Practice to refer patients to the Ancillary Service Facilities for designated
health services.
It is also possible that, as a result of the Company's Management Services
Agreements and IPA Provider Agreements with the Practices, the physicians in the
Practices will be deemed to have indirect financial interests in Practices by
virtue of the physicians' ownership interests in the Company. Under such
interpretation of the Stark Law, the physicians' ability to order and bill for
designated health services provided within the Practices and the ability of the
Practices to bill Medicare or Medicaid for such designated health services will
be permissible only if an exception under the Stark Law is applicable. The
current Stark Law exception related to physicians' ownership interests in
entities to which they refer patients may be relevant to the physicians' ability
to make referrals for designated health services to any Ancillary Service
Facilities owned or managed by the Company in the future. The Company will not
be in a position to meet that exception related to investment interests until
the Company's stockholders' equity exceeds $75 million.
46
<PAGE>
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 1997 Budget Bill, Congress directed the Secretary
of the U.S. Department of Health and Human Services ('HHS') to issue advisory
opinions as to whether a referral relating to designated health services (other
than clinical laboratory services) is prohibited under the Stark Law. The
advisory opinion mechanism is authorized beginning on or about November 3, 1997.
An advisory opinion issued by the Secretary will be binding as to the Secretary
and the party or parties requesting the opinion. The Company has no present
intention to seek an advisory opinion from HHS, HCFA or any other governmental
authority regarding its current operations, arrangements with physicians or the
referral activities of physicians in the Practices.
Federal Anti-Kickback Statute. A federal law commonly known as the
'Anti-Kickback Statute' prohibits the offer, solicitation, payment or receipt of
anything of value (direct or indirect, overt or covert, in cash or in kind)
which is intended to induce business for which payment may be made under a
federal health care program. A 'federal health care program' is any plan or
program that provides health benefits, whether directly, through insurance, or
otherwise, which is funded directly, in whole or in part, by the United States
Government (e.g., Medicare, Medicaid, and CHAMPUS). Excluded from the definition
of federal health care program is the Federal Employee Health Benefits Program.
The type of remuneration covered by the Anti-Kickback Statute is very broad. It
includes not only kickbacks, bribes and rebates, but also proscribes any such
remuneration, whether made directly or indirectly, overtly or covertly, in cash
or in kind. Moreover, prohibited conduct includes not only remuneration intended
to induce referrals, but also remuneration intended to induce the purchasing,
leasing, arranging or ordering of any goods, facilities, services, or items paid
for by a federal health care program. The Anti-Kickback Statute has been
interpreted broadly by a number of courts to prohibit remuneration that is
offered or paid for otherwise legitimate purposes if one purpose of the payment
is to induce referrals. Even bona fide investment interests in a health care
provider may be questioned under the Anti-Kickback Statute if the government
concludes that the opportunity to invest was offered as an inducement for
referrals.
In part to address concerns regarding the implementation of the
Anti-Kickback Statute, in 1991 the federal government published regulations that
provide exceptions or 'safe harbors' for certain transactions that are deemed
not to violate the Anti-Kickback Statute. Among the safe harbors included in the
regulations are transactions involving the sale of physician practices,
management and personal services agreements and employee relationships. Congress
recently added a significant new statutory exception related to 'remuneration
between an organization and an individual or entity' if the organization is a
Medicare risk contracting
47
<PAGE>
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 fifty
thousand dollars ($50,000) for each violation and/or civil damages of not more
than three times the total amount of remuneration offered, paid, solicited or
received may be imposed without regard to whether any portion of such
remuneration was for a lawful purpose. Both the offeror and the recipient of the
illegal remuneration are potentially liable. In addition, violators are subject
to civil exclusion from participation in the federal health care programs,
regardless of whether they also have been convicted under the criminal penalty
provisions or have been found liable under the civil monetary penalty provisions
of the Anti-Kickback Statute. Also, there is a risk that, in a civil lawsuit to
enforce a contract that contains a structure in violation of the Anti-Kickback
Statute, a court might conclude that the contract is unenforceable as against
public policy.
There are several aspects of the Company's relationships with the
physicians and the Practices to which the Anti-Kickback Statute may be relevant.
In some instances, for example, the government may construe some of the
Company's marketing and managed care contracting activities as arranging for the
referral of patients to the physicians with whom the Company has a Management
Services Agreement or IPA Provider Agreement. Further, any referral of patients
between physicians within the Practices and between the Practices could be
construed as a referral to which the Anti-Kickback Statute applies. Although
neither the investments in the Company by physicians nor the Management Services
Agreements or the IPA Provider Agreements between the Company and the Practices
qualify for protection under the statutory exception or the safe harbor
regulations described above, the Company does not believe that these activities
fall within the type of activities the Anti-Kickback Statute were intended to
prohibit. The Company also does not believe that referral activities within the
Practices violate the Anti-Kickback Statute. A determination that the Company
has violated the Anti-Kickback Statute would have a material adverse effect on
the Company.
As a component of the recently enacted HIPAA, Congress directed the
Secretary of the U.S. Department of Health and Human Services to issue advisory
opinions regarding compliance with the Anti-Kickback Statute. The advisory
opinion mechanism is authorized for a trial period, beginning six months after
the date of enactment, August 21, 1996. Advisory opinions are available
concerning what constitutes prohibited remuneration within the meaning of the
Anti-Kickback Statute, whether an arrangement satisfies the statutory exceptions
to the Anti-Kickback Statute, whether an arrangement meets a safe harbor, what
constitutes an illegal inducement to reduce or limit services to individuals
entitled to benefits covered by the Anti-Kickback Statute, and whether an
activity constitutes grounds for the imposition of a civil or criminal penalty
under the applicable exclusion, civil money penalty and criminal provisions.
Advisory opinions, however, will not assess fair market value for any goods,
services or property or determine whether an individual is a bona fide employee
within the meaning of the Internal Revenue Code. The statutory language makes
clear that advisory opinions are available for both proposed and existing
arrangements. The failure of a party to seek an advisory opinion, however, may
not be introduced into evidence to prove that the party intended to violate the
Anti-Kickback Statute. The Company has not sought, and has no present intention
to seek an advisory opinion regarding any aspect of its current operations or
arrangements with physicians.
PIP Regulations. HCFA has issued final regulations (the 'PIP regulations')
covering the use of physician incentive plans ('PIPs') by HMOs and other managed
care contractors and subcontractors that contract to arrange for services to
Medicare or Medicaid beneficiaries ('Organizations'), potentially including the
Company. Any Organization that contracts with a physician group that places the
individual physician members of the group at substantial financial risk for the
provision of services that the group does not directly provide (e.g., a primary
care group takes risk but subcontracts with a specialty group to provide certain
services), must satisfy certain disclosure, survey and stop-loss requirements.
Under the PIP regulations, payments of any kind, direct or indirect, to induce
providers to reduce or limit covered or medically necessary services are
prohibited ('Prohibited Payments'). Further, where there are no Prohibited
Payments, but there is risk sharing among
48
<PAGE>
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 in particular its IPA) and will utilize the DOJ and
FTC approved 'messenger model'--which avoids joint price negotiations--for those
agreements that do not involve sufficient financial or clinical integration.
Nevertheless, there can be no assurance that a review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operation of the Company and the Practices.
State Law
State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions on referrals than the Stark Law. These various state self-referral
laws have different requirements. Some states, for example, only prohibit
referrals when the physician's financial relationship with a health care
provider is based upon an investment interest. Other state laws apply only to a
limited number of designated health services or, alternatively, to all health
care services furnished by a provider. Some states do not prohibit referrals at
all, but require only that a patient be informed of the financial relationship
before the referral is made.
The following provides a brief review of the self-referral laws in each of
the states in which the Company does business:
Arizona law requires that physicians, when making referrals to an entity
they own that is not part of their group practice, disclose to patients (i) that
the physician has a direct financial interest in the separate diagnostic or
treatment agency or non-routine goods or services that such patient is being
prescribed, and (ii) that the prescribed treatment, goods or services are
available on a competitive basis from other agencies.
California's principal self-referral law applies to all payors and provides
that it is unlawful to refer a person for certain defined categories of services
(including laboratory, physical therapy, physical rehabilitation and diagnostic
imaging) to an entity in which or with which the referring person has a
financial interest (broadly defined). Several exceptions apply, including an
exception for group practices and for referrals to certain publicly traded
entities. Any financial interest by a physician in a health related facility
providing the listed services must be disclosed to the state as a condition of
licensure. The California self-referral statute also requires all physicians to
make disclosure to patients in the event of any referral to a service in which
the physician or his or her family has a significant beneficial interest (even
if such service is not one of the covered services affected by the self-referral
prohibition). In the context of a group practice, the patient disclosure
requirement may be met by providing a written disclosure to each patient or
posting a notice in a common area. Disclosure to the state of physician referral
interests is also a condition of payment under the California Medi-Cal
(Medicaid) program.
49
<PAGE>
California also has a separate self-referral law with respect to care that is
covered under workers' compensation insurance, although the scope of the
prohibition, the list of covered services, and the exceptions provided are
virtually identical to those contained in the state's all-payor self-referral
law summarized above.
Florida's Patient Self-Referral Act of 1992 prohibits health care
providers, including physicians, from referring a patient for the provision of
designated health care services, and in some circumstances any health care
services, to an entity in which the health care provider has an investment
interest, unless an exception, such as for referrals within a group practice,
applies.
New Jersey statutes and regulations contain a general prohibition against
self-referrals of a patient to any 'health care service' in which the
practitioner or his or her immediate family has a significant beneficial
interest. This self-referral prohibition is, however, subject to certain
exceptions, including an exception for referrals to a referring physician's own
'medical office' for services billed directly by and in the name of the
referring physician. In general, the Company is aware that significant portions
of New Jersey regulations addressing the issues of self-referral, anti-kickback,
fee splitting and corporate practice of medicine are currently in the process of
being developed and revised by appropriate agencies for possible publication as
proposed rules.
In Pennsylvania, there is no comprehensive self-referral prohibition,
although Pennsylvania does require disclosure to patients where a financial
interest exists in the entity or with the person to which a referral is made.
For providers treating Medicaid patients, Pennsylvania Medicaid regulations
contain a limited self-referral ban, prohibiting, without exceptions, referrals
to an independent laboratory, pharmacy, radiology or ancillary medical service
in which the referring practitioner has an ownership interest. Finally,
Pennsylvania's workers' compensation statute also prohibits the referral of
workers' compensation patients from a provider to a person or an entity with
which the provider has a financial relationship. The Pennsylvania's workers'
compensation self-referral law applies all of the exceptions, including the
group practice exception, applicable under the federal Stark Law.
Texas law does not have a specific self-referral law.
Failure to comply with the foregoing laws may result in loss of licensure,
which would be imposed against the physicians in the Practices, or other civil
or criminal penalties, which may be imposed against the physicians in the
Practices, or against the Company in its capacity as billing agent for the
physicians (pursuant to the Management Services Agreements) or in the event the
Company becomes or is deemed to be a provider of health care services subject to
the various self-referral laws, or if the Company becomes or is deemed to be in
a position to make or influence referrals to the Practices. In addition, any
determination that any Management Services Agreement violates any of the
foregoing laws may result in such agreement being unenforceable. Additional
risks under state self-referral laws could arise, however, to the extent that
the Company or the Practices undertake to own, manage or operate any Ancillary
Service Facilities to which the physicians within the Practices may wish to
refer patients.
State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Some state laws governing workers'
compensation and other insurance also include an anti-kickback prohibition.
The following provides a brief review of the anti-kickback laws of the
states in which the Company does business:
In Arizona, the state's Professions and Occupations statute declares it
unprofessional conduct for a physician to divide fees for professional services
with another health care provider or health care institution. Arizona's Medicaid
statute also includes a broad general anti-kickback proscription.
California has a general, all-payor anti-kickback statute which prohibits
the offer or acceptance of any compensation by a licensed provider as
compensation or inducement for referring patients, clients or customers.
Significantly, however, this statute also provides that payments for services
other than the referral of patients based on a percentage of gross revenue (or
other similar type of contractual arrangement) is not unlawful if the
consideration is commensurate with the value of the services furnished.
Prohibitions against receiving
50
<PAGE>
remuneration for patient referrals also exist elsewhere in the California
statutes, including the state Medicaid statute, the workers' compensation
statute, and the insurance code.
Florida's patient brokering law prohibits any person, including health care
providers, from offering or paying, soliciting or receiving, any commission,
bonus, rebate, kickback, or bribe, or from engaging in any split-fee
arrangement, in return for referring patients. Exceptions include payment
arrangements that are not prohibited by the federal Anti-Kickback law, and
financial arrangements within a group practice. Florida law contains a number of
similar anti-kickback prohibitions. For example, Florida law governing medical
practice provides that licensed physicians are subject to disciplinary action
for these kinds of activities, and Florida's Medicaid statute prohibits similar
activities, but as applied to items and services reimbursed by Medicaid.
New Jersey's professional licensure statutes and regulations prohibit
payment and the receipt of payments for referrals of patients and for
recommending purchasing or prescribing any medical product or other device or
appliance. In addition, under New Jersey's Medicaid statute, criminal penalties
are imposed for any provider or other person who solicits, offers or receives
any kickback, rebate or bribe in connection with the furnishing of Medicaid
items or services. In general, the Company is aware that significant portions of
New Jersey regulations addressing the issues of self-referral, anti-kickback,
fee splitting, and corporate practice of medicine are currently in the process
of being developed and revised by appropriate agencies for possible publication
as proposed rules.
In Pennsylvania, the criminal code provides a general anti-kickback
prohibition, which defines the crime of insurance fraud to include a health care
provider's giving of anything of value in consideration of a referral with
respect to services subject to insurance benefits or claims. Substantially
similar anti-kickback prohibitions are also contained in Pennsylvania's statute
and regulations dealing with providers who participate in the Pennsylvania
Medicaid program or who are paid under the state's workers' compensation
program.
Texas anti-kickback law applies to remuneration or compensation for
referrals made between a licensed provider and an unlicensed person or entity,
but it permits any activity that complies with the federal anti-Kickback Statute
or any regulations promulgated thereunder. In addition, the medical practice
standards in Texas prohibit physicians from paying any person for soliciting or
securing referrals.
Failure to comply with the foregoing laws may result in loss of licensure,
which would be imposed against the physicians in the Practices, or other civil
or criminal penalties, which may be imposed against the physicians in the
Practices, or against the Company in its capacity as billing agent for the
physicians (pursuant to the Management Services Agreements) or in the event the
Company becomes or is deemed to be a provider of health care services subject to
the various anti-kickback laws, or if the Company becomes or is deemed to be in
a position to make or influence referrals to the Practices. In addition, any
determination that any Management Services Agreement violates any of the
foregoing laws may result in such Agreement being unenforceable. The laws in
most states regarding kickbacks have been subjected to limited judicial and
regulatory interpretation and therefore, no assurances can be given that the
Company's activities will be found to be in compliance. Noncompliance with such
laws could have a material adverse effect upon the Company and subject it and
the Practices' physicians to penalties and sanctions.
Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any division of a physician's fees, regardless of
whether the other party is a referral source. Some states have laws that
specifically address payments for services rendered to physicians based on a
percentage of revenues from the physician's practice.
The following provides a brief review of the fee-splitting laws in each of
the states where the Company does business:
Arizona does not explicitly prohibit the sharing of fees between physicians
and non-professionals (e.g., a management company). However, as noted above,
Arizona does declare it unprofessional conduct for a physician to divide fees
for professional services with another health care provider or health care
institution in return for a patient referral.
As noted above in the discussion of California's anti-kickback provisions,
California explicitly permits payment for services (other than the referral of
patients) based on a 'percentage of gross revenue or similar type of contractual
arrangement,' provided that the consideration is commensurate with the value of
the services
51
<PAGE>
furnished. However, even if a contractual arrangement does not involve unlawful
fee splitting, the arrangement nonetheless could be deemed to constitute an
arrangement involving payment for referrals under the state anti-kickback laws.
On November 3, 1997, the State of Florida Board of Medicine ruled that
percentage-based management services fees violate Florida's prohibition on fee
splitting by licensed professionals. The Company has included such percentage
fees in all of its Management Services Agreements with physicians in Florida.
Thus, no assurance can be given that the Company's Management Services
Agreements based on such percentage fees will be enforceable. To avoid this
risk, the Company will seek to restructure such agreements in Florida to comply
with the order, but such modifications, or the failure to obtain agreement on
such modifications, could have a material adverse effect on the Company.
New Jersey does not explicitly prohibit the sharing of fees between
physicians and nonprofessionals, but such fee sharing may be a factor in the
determination as to whether New Jersey's corporate practice of medicine doctrine
has been violated. In general, the Company is aware that significant portions of
New Jersey regulations addressing the issues of self-referral, anti-kickback,
fee splitting, and corporate practice of medicine are currently in the process
of being developed and revised by appropriate agencies for possible publication
as proposed rules.
Pennsylvania does not explicitly prohibit the sharing of fees between
physicians and nonprofessionals, but such fee sharing may be a factor in the
determination as to whether Pennsylvania's corporate practice of medicine
doctrine has been violated.
In Texas, judicial interpretation of the state's corporate practice of
medicine doctrine in Texas has suggested that payments of a percentage of
profits from a physician's medical practice to a management company is a factor
indicative of the corporate practice of medicine.
The Company is reimbursed by physicians in the Practices on whose behalf
the Company provides management services. There can be no certainty that, if
challenged, the Company and the Practices will be found to be in compliance with
each state's fee-splitting (or related corporate practice) laws. Failure to
comply with the foregoing laws may result in loss of licensure, which would be
imposed against the physicians in the Practices, or other civil or criminal
penalties, which may be imposed against the physicians in the Practices, or
against the Company in its capacity as agent for the physicians (pursuant to the
Management Services Agreements) or in the event the Company becomes or is deemed
to be a provider of health care services subject to the various fee-splitting
laws, or if the Company becomes or is deemed to be in a position to make or
influence referrals to the Practices. A determination in any state that the
Company is engaged in any unlawful fee-splitting arrangement could render any
Management Services Agreement or IPA Provider Agreement between the Company and
a Practice located in such state unenforceable or subject to modification in a
manner materially adverse to the Company.
Corporate Practice of Medicine. The laws of many states prohibit business
corporations, including the Company, from employing physicians, exercising
control over the medical judgments or decisions of physicians and from engaging
in certain financial arrangements, such as fee-splitting with physicians. These
laws and their interpretations vary from state to state and are enforced by both
the courts and regulatory authorities, each with broad discretion. Some states
interpret the 'practice of medicine' broadly to include activities of
corporations such as the Company that have an indirect impact on the practice of
medicine, even where the physician rendering the medical services is not an
employee of the corporation and the corporation exercises no discretion with
respect to the diagnosis or treatment of a particular patient.
The following provides a brief review of the corporate practice of medicine
doctrine as applied in each of the states in which the Company does business:
Although Arizona case law dated 1967 suggests a long-standing proscription
against the practice of medicine by corporate entities, there are no reported
cases or Arizona Attorney General opinions of this proscription in recent years.
In addition, Arizona's professional corporation statute permits up to forty-nine
percent (49%) ownership of professional medical corporations by non-physicians.
The prohibition on the corporate practice of medicine in California is
reflected both in statute and in case law. In California, a management contract
can be interpreted as unlawfully violating the prohibition on the
52
<PAGE>
corporate practice of medicine if it concedes too much power to the management
company. Examples of such power would be the ability of the management company
to select office sites, require payment to the management company of a
substantial percentage of the practice's gross income, require adherence to
design specifications for practice offices, require approval of goods and
supplies used by the practice, or other matters which singly or in combination
may interfere with the ability of the physician to exercise independent
professional judgment. The Company also is aware that the California Medical
Association has developed guidelines for physicians on the extent to which a
management company can exercise decision-making over a physician practice.
The Florida Board of Medicine has ruled that Florida law does not prohibit
licensed physicians from engaging in the practice of medicine as employees of
business entities, such as business corporations or limited liability companies,
as long as the physicians maintain control over medical decision-making.
New Jersey regulations specify permitted practice forms for physicians and
provide examples of relationships a medical practice may enter into with
non-professional entities for space, equipment and management services. These
regulations require that the physicians retain control of the professional
medical aspects of the practice, as well as control over fee schedules and
certain other functions. In general, the Company is aware that significant
portions of New Jersey regulations addressing the issues of self-referral,
anti-kickback, fee splitting, and corporate practice of medicine are currently
in the process of being developed and revised by appropriate agencies for
possible publication as proposed rules.
Pennsylvania's corporate practice of medicine doctrine permits only
licensed professionals and entities owned solely by such professionals to
practice medicine, not business corporations or similar entities. Although there
are no regulations or case law regarding management services agreements with
professionals, the Company believes Pennsylvania will require the professionals
to maintain control of their practices.
Texas' physician licensure statute contains a broad prohibition against the
'aiding or abetting, directly or indirectly,' of the corporate practice of
medicine. Further, judicial interpretation in Texas of the state's corporate
practice doctrine has suggested that payments of a percentage of profits from a
physician's medical practice to a management company is a factor indicative of
the corporate practice of medicine.
The Company's practice management structure, which the Company believes is
consistent with standard practices for PPMs, uses an operations committee (the
'Operations Committee') of six members, three of whom are designated by each of
the Company and the Practice. Among other things, the Operations Committee
approves a budget, medical group costs, costs and expenses that exceed the
budget, the acquisition and replacement of equipment and the integration of new
technologies. In addition, the Company's explicit approval is required for
implementation or acquisition of new technologies or medical equipment if the
costs of such equipment or technology exceeds 5% of the management fee. Company
approval is also required for all new offices and new ancillary services. If a
new medical office is not profitable, the Company may, in its sole discretion,
close the new office. Finally, a change in control of the Practice requires the
consent of the Company (not to be unreasonably withheld). While these provisions
in the Company's Management Services Agreements are designed to give the Company
control over certain business transactions by the Practices, which explicitly
retain their professional independence, the Management Services Agreements give
the Company either control over or require the agreement of the Company and the
Practices with respect to certain matters that might be viewed as indicia of the
corporate practice of medicine. While the Company is not given any control over
clinical care decisions, its control or substantial influence over other
decisions may be deemed to be great enough to constitute the corporate practice
of medicine.
The Company's intent is not to exercise any responsibility on behalf of the
Practices' physicians that interferes with the physicians' independent patient
care and professional judgments. However, as noted, the laws and legal doctrines
relating to the corporate practice of medicine have been subjected to only
limited judicial and regulatory interpretation and there can be no assurance
that, if challenged, the Company would be considered to be in compliance with
all such laws and doctrines. A determination in any state that the Company is
engaged in the corporate practice of medicine could render any Management
Services Agreement or IPA Provider Agreement between the Company and a Practice
located in such state unenforceable or subject to modification in a manner
materially adverse to the Company.
53
<PAGE>
The Company hires certain ancillary health personnel (nurses and
technicians) and leases their services back to the Practices in a manner that it
believes accords with applicable Medicare billing requirements. The Company's
ability to hire such ancillary personnel is subject to various state
regulations. The Company believes 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 Law. The Texas Staff Leasing 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.
After the Company commenced operations in Texas, the Company first learned that
it may be required to obtain a license under the Staff Leasing Law. (It had not
been clear from the statute that the Company would be required to obtain such a
license.) Upon inquiry, regulators in Texas confirmed that the Staff Leasing Law
applies to the operations of the Company, and the Company promptly filed an
application to be licensed under the Staff Leasing Law on October 14, 1997. The
Staff Leasing Law provides that the Attorney General may seek injunctive relief
and that violation is a Class A misdemeanor. Administrative remedies for
operating without a license include denial of a subsequent application for
licensure and a fine of up to $50,000 per violation. The Company was notified on
December 2, 1997 that a fine of $20,000 has been recommended to be assessed
against it as a result of its operations in violation of the Staff Leasing Law
between April 1, 1997 and November 30, 1997. The Company is currently
negotiating with the Department of Licensing and Regulation to decrease the
fine. See 'Risk Factors--Government Regulation--State Regulation of the
Practices.'
Licensure and Certificate of Need Laws. Certain of the ancillary services
that the Company anticipates providing or managing on behalf of the Practices
are now or may in the future be subject to licensure or certificate of need laws
in various states. There can be no assurance that the Company or the Practices
will be able to obtain such licenses or certificates of need approval to the
extent required for the particular ancillary service. Failure to obtain such
licenses or certificates of need could have a material adverse effect on the
Company.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, they have
been construed in some states to apply to such companies and there can be no
assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that its proposed operations are in compliance with these laws in the
states in which it currently does business, but there can be no assurance that
future interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may expand
will not require licensure or a restructuring of some or all of the Company's
operations. See 'Risk Factors--Government Regulation.'
The National Association of Insurance Commissioners ('NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
practices are precluded from entering into capitated contracts directly with
employers, individuals and benefit plans unless they qualify to do business as
HMOs or insurance companies. The Existing Practices currently provide services
under very few capitated payment contracts. The Company intends to limit the
number of capitated payments or other risk-sharing arrangements into which it
enters on its own behalf or on behalf of the Practices. The Company expects to
make such arrangements only with HMOs or insurance companies. In addition, in
December 1996, the NAIC issued a white paper entitled 'Regulation of Health Risk
Bearing Entities,' which sets forth issues to be considered by state insurance
regulators when considering new regulations, and encourages that a uniform body
of regulation be adopted by the states. Certain states have enacted statutes or
adopted regulations affecting risk assumption in the health care industry. In
some states, including California, these statutes and regulations subject any
physician or physician network engaged in risk-based contracting, even if
through HMOs and insurance companies, to applicable insurance laws and
regulations,
54
<PAGE>
which may include, among other things, laws and regulations providing for
minimum capital requirements and other safety and soundness requirements. The
Company believes that additional regulation at the state level will be
forthcoming in response to the NAIC initiatives.
The IPA that is owned by the Company operates as a specialty physician
network in Arizona, and contracts directly or indirectly with licensed HMOs or
insurance companies to arrange for the provision of specialty orthopedic
physician services on behalf of enrollees of the HMOs or insurance companies. In
return, the IPA accepts a fee from the relevant payor, which fee the IPA passes
along to the participating physician provider, less the IPA's fee (generally
13%) to compensate the IPA for its services. The two IPA Payor Agreements
currently in place with the IPA involve 'capitation' fees--a fixed per month per
enrollee fee for all designated orthopedic services. Arizona law does not permit
a provider network to enter into such agreement directly with enrollees, unions,
employers or other patient group on behalf of their members or employees, as
applicable; the direct acceptance of risk by such a network, under Arizona law,
would constitute the 'business of insurance' subject to licensure and regulation
by the Arizona Department of Insurance. However, where the capitation or other
risk-based payment is accepted by a provider network as a 'downstream' risk from
a licensed HMO or insurance company, the Arizona Department of Insurance has
indicated that such risk contracting would not subject the Company to licensure
or regulation by the Department. However, there can be no assurance that the
laws governing the business of insurance in Arizona will not be revised or
interpreted in a manner that would prohibit operation of the IPA under either
the IPA Payor Agreements or the IPA Provider Agreements, and in such event, the
Company would be required to modify or terminate its relationships with payors
or providers in Arizona. Such modification or termination could have a material
adverse effect on the Company.
FEDERAL AND STATE INITIATIVES
Fraud and Abuse. In the recently enacted 1997 Budget Bill and HIPAA,
Congress has responded to perceived fraud and abuse in the Medicare and Medicaid
programs. This legislation has fortified the government's enforcement authority
with increased resources and greater civil and criminal penalties for offenses.
It is anticipated that there will be further restrictive legislative and
regulatory measures to reduce fraud, waste and abuse in the Medicare and
Medicaid programs. There can be no assurance that any such legislation will not
have a material impact on the Company.
Health Care Reform. As a result of the continued escalation of health care
costs and the inability of many individuals to obtain insurance, numerous
proposals have been or may be introduced in Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which may
be material, on the Company.
Confidentiality of Patient Records. The confidentiality of patient records
and the circumstances under which such records may be released is subject to
substantial regulation under state and federal laws and regulations. To protect
patient confidentiality, data entries to the Company's databases delete any
patient identifiers, including name, address, hospital and physician. Further,
the Company obtains the informed, written consent of the patient to use or
disclose patient information where the Company believes that such consent is
necessary or appropriate. The Company believes that its procedures comply with
the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. Furthermore, the Health
Insurance Portability and Accountability Act of 1996 requires the Secretary of
Health and Human Services to recommend legislation or promulgate regulations
governing privacy standards for individually identifiable health information and
creates a federal criminal offense for knowing disclosure or misuse of such
information. These statutes and regulations may require holders of such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
would not materially restrict the ability of the Company to obtain patient
information originating from records.
55
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had approximately 845 employees, of
whom 26 are located at the Company's headquarters, seven are located in the
regional offices and 812 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
aggregateannual lease payments of approximately $1.5 million as of September 30,
1997. For additional information, see 'Certain Transactions.'
LEGAL PROCEEDINGS
On August 15, 1997, an action entitled John Finlay v. Bone, Muscle & Joint,
Inc., was filed. In this action, which is currently pending in the United States
District Court for the Southern District of Texas, plaintiff has asserted claims
for breach of contract arising out of an alleged employment agreement and
alleged non-qualified stock option agreement between plaintiff and the Company.
Plaintiff's complaint seeks compensatory damages of approximately $135,000
pursuant to the alleged employment agreement as well as 16,071 shares of the
Company's Common Stock pursuant to the alleged non-qualified stock option
agreement. The Company believes that each of plaintiff's claims is without
merit, and it intends to defend against the action vigorously.
On September 3, 1997, an action entitled Robert P. Lehmann, M.D., et al. v.
Bone, Muscle & Joint, Inc., et al., was filed. In this action, which is
currently pending in the United States District Court for the Southern District
of Texas, plaintiffs have asserted claims for breach of contract, common law
fraud and promissory estoppel arising out of an alleged restricted stock
purchase agreement between plaintiffs and the Company. Plaintiffs' amended
complaint seeks unspecified compensatory and exemplary damages as well as
specific performance for delivery of 117,860 shares of the Company's Common
Stock. The Company believes that each of the plaintiffs' claims is without
merit, and it intends to defend against the action vigorously.
The Company is subject to legal proceedings in the ordinary course of its
business. The Company does not believe that any such legal proceedings will have
a material adverse effect on the Company, although there can be no assurance to
this effect. In addition, the Company may become subject to certain pending
claims as the result of successor liability in connection with the assumption of
certain liabilities of the Practices; nevertheless, the Company believes that
the ultimate resolution of such additional claims will not have a material
adverse effect on the Company. See 'Risk Factors--Exposure to Professional
Liability.'
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Practices, the Company may become subject to some medical
malpractice actions under various theories. There can be no assurance that
claims, suits or complaints relating to services and products provided by the
Practices will not be asserted against the Company in the future. The Company
maintains medical professional liability insurance and general liability
insurance and believes that such insurance will extend to professional liability
claims that may be asserted against employees of the Company that work on-site
at Practice locations. In addition, pursuant to the Management Services
Agreements, the Practices are required to maintain comprehensive professional
liability insurance. The availability and cost of such insurance has been
affected by various factors, many of which are beyond the control of the Company
and the Practices. The cost of such insurance to the Company and the Practices
may have a material adverse effect on the Company. In addition, successful
malpractice or other claims asserted against the Practices or the Company that
exceed applicable policy limits would have a material adverse effect on the
Company. See 'Risk Factors--Exposure to Professional Liability.'
56
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and other key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Naresh Nagpal, M.D. ................................ 47 President, Chief Executive Officer and Director
David H. Fater...................................... 50 Executive Vice President, Chief Financial Officer
and Director
David K. Ellwanger.................................. 40 Senior Vice President of Operations
Sheldon Lutz........................................ 54 Senior Vice President of Corporate Development
Tony Anderson....................................... 39 Treasurer
Ronald Garey........................................ 42 Controller
Sherry Pulliam...................................... 42 Director of Financial Operations and Assistant
Treasurer
Glenn Cozen......................................... 43 Vice President of Development, Western Region
Joanna Robben....................................... 37 Vice President of Development, Central Region
Keith Bolton........................................ 35 Vice President of Ancillary Services
Beth Landel......................................... 33 Vice President of Ancillary Services
Juan Vallarino...................................... 37 Vice President of Provider Services Contracting
Lee Bodendorfer..................................... 47 Vice President of Operations, Eastern Region
Randolph Farber..................................... 38 Vice President of Operations, Western Region
Randal J. Farwell................................... 37 Vice President of Development, Eastern Region
Brent E. Mellecker.................................. 35 Vice President of Development, Central Region
Andrea Serrate...................................... 43 Vice President of Operations, Southwest Region
Georges Daou(2)..................................... 36 Director
Stewart G. Eidelson, M.D............................ 47 Director
James M. Fox, M.D.(1)............................... 55 Director
Ann H. Lamont(1).................................... 40 Director
Donald J. Lothrop(2)................................ 38 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Upon consummation of the Offering, the Company's Board of Directors will be
classified into three classes which consist of, as nearly as practicable, an
equal number of directors. The members of each class will serve staggered
three-year terms. Messrs. Eidelson and Fox will be Class I directors, Mr. Fater
and Ms. Lamont will be Class II directors and Messrs. Nagpal, Daou and Lothrop
will be Class III directors. Nominees for director will be divided among the
three classes upon their election or appointment. The terms of Class I, Class II
and Class III directors expire at the annual meeting of stockholders to be held
in 1999, 2000 and 2001, respectively. See 'Description of Capital Stock--Certain
Provisions of the Company's Certificate of Incorporation and By-laws--
Classified Board of Directors.'
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
57
<PAGE>
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 operations and financial
condition. The defendants have filed an answer to the complaint, denying the
principal allegations contained therein.
David 'Deke' K. Ellwanger became Senior Vice President of Operations in
July 1997. From July 1994 to July 1997, Mr. Ellwanger was the Vice President of
Managed Care for MedPartners/InPhyNet Medical Management Inc. From August 1985
to June 1994, Mr. Ellwanger worked for Aetna Health Plans/PARTNERS National
Health Plans managing various HMO's and HMO acquisitions.
Sheldon Lutz became Senior Vice President of Corporate Development in
November 1997. From February 1992 until 1997, Mr. Lutz was the Vice President of
Development for Columbia/HCA Healthcare Corporation responsible for acquisitions
and joint ventures and development of a marketwide joint venture model.
Tony Anderson became Treasurer in May 1997. From May 1995 to April 1997,
Mr. Anderson was the Vice President and Chief Financial Officer of Florida
Physician Services. From September 1993 to April 1995, he was Vice President and
Director of Internal Audit for Coastal. From February 1989 to August 1993, Mr.
Anderson was Controller for AKZO Coatings, Inc.
Ronald Garey became Controller in August 1996. Mr. Garey was the
International Finance Manager for Whirlpool Corporation from August 1995 to July
1996. From June 1993 to July 1995, he was the Corporate Controller of Innovet,
Inc. From July 1985 to May 1993, Mr. Garey was the Assistant Controller for Dole
Fresh Fruit International.
Sherry Pulliam became Director of Financial Operations and Assistant
Treasurer in November 1996. From February 1985 to December 1995, Ms. Pulliam
functioned in several different positions for Coastal such as, Financial
Operations Manager (from June 1994 to December 1995), Assistant Treasurer (from
July 1993 to May 1994), Vice President of Mergers and Acquisitions (from April
1992 to June 1993) and Vice President and Controller for Coastal Emergency
Services, Inc., the largest subsidiary of Coastal (from May 1988 to March 1992).
From March 1996 to October 1996 Ms. Pulliam was engaged as a Consultant in
Corporate Development for Community Care of America, Inc.
Glenn Cozen joined the Company in March 1997 and is the Vice President of
Development in the Western Region. Since November 1986, Mr. Cozen has been the
Chief Financial Officer at SCOI.
Joanna Robben joined the Company in June 1997 and is a Vice President of
Development in the Central Region. From 1995 to May 1997, Ms. Robben was Vice
President of Network Strategy & Management and Executive Director of Government
Programs for CIGNA Healthcare. From 1990 to 1995 Ms. Robben worked with First
Health Strategies, Inc. (formerly ALTA Health Strategies, Inc.), most recently
as Vice President, Provider Networks. From 1985 to 1990, Ms. Robben was
Director, Network Marketing for Partners National Health Plans. Ms. Robben is
also a registered physical therapist in private practice from 1982 to 1994.
Keith Bolton became Vice President of Ancillary Services in April 1997. Mr.
Bolton was the Vice President of Corporate Development from April 1995 to March
1997, for Onecare Health Industries, Inc. From July 1993 to March 1995, he was
the Regional Vice President for Surgical Health Corporation. From March 1992 to
June 1993, Mr. Bolton was the President and Chief Executive Officer of Southern
California Surgery Centers, a small consulting firm.
Beth A. Landel became Vice President of Ancillary Services in July 1997.
From June 1995 to July 1997, Ms. Landel was with HealthSouth Corporation where
she was a Regional Director of Corporate Development for
58
<PAGE>
the State of Florida and Maryland through Maine. From May 1994 to June 1995, Ms.
Landel was with Surgical Health Corporation and Physicians Health Corporation, a
PPM, as Regional Marketing and Managed Care Manager for the State of Florida.
From August 1992 to May 1994, Ms. Landel was Director of Managed Care for
Wellington Regional Medical Center, an acute hospital in the Universal Health
Services system.
Juan Vallarino became Vice President of Provider Services Contracting in
January 1998. From 1993 to 1997, Mr. Vallarino served in several positions for
FPA Medical Management, including Vice President of Corporate Development, Vice
President for Network Development (Western Group) and Director of Managed Care
and Development (South Florida Division). From 1988 to 1993, Mr. Vallarino
worked for JFK Health System, most recently as Director of Finance and Planning.
Lee Bodendorfer joined the Company in April 1997 and is the Vice President
of Operations in the Eastern Region. Mr. Bodendorfer was the Executive Vice
President of Intellex Medical Management Systems, Inc. from February 1995 to
April 1997. From October 1993 to February 1995, he acted as Regional Practice
Administrator for Columbia/HCA. From June 1989 to October 1993, Mr. Bodendorfer
was the Managing Director for Melbourne Neurologic, P.A., a neurosurgical and
neurological group medical practice ('Melbourne'). During this period he also
served as President and Board Chairman for Partners in Rehabilitation, Inc., an
industrial rehabilitation and chronic pain management company and an affiliate
of Melbourne. During this time he also served as General Manager of South
Brevard Imaging, Ltd., a limited partnership MRI.
Randolph Farber joined the Company in September 1997 and is the Vice
President of Operations in the Western Region. From 1994 to 1997, Mr. Farber was
an Executive Director for American Oncology Resources. From 1993 to 1994, Mr.
Farber was Assistant Vice President, Provider Relations for Lifeguard Group
Health Care. From 1982 to 1993, Mr. Farber was the Assistant Director, Provider
Relations for CIGNA Healthplans of California.
Randal J. Farwell joined the Company in December 1996 and is the Vice
President of Development for the Eastern Region. From February 1996 to December
1996, Mr. Farwell was the Vice President of Marketing for PhyMatrix Corporation.
He was Vice President of Development for MedPartners from March 1995 to February
1996. From August 1993 to March 1995, Mr. Farwell was the Executive Director of
Marketing and Network Development for Florida Specialty Care Network, Ltd. Prior
to that, Mr. Farwell was the Director of Advertising and Promotions for Industry
Publishers Inc., a southern Florida medical business publication.
Brent E. Mellecker joined the Company in April 1997 and is a Vice President
of Development for the Central Region. From June 1995 to March 1997, Mr.
Mellecker was Vice President of Sales and Marketing for Combined Orthopaedic
Specialists. He was a Practice Consultant at Health Directions from December
1993 to June 1995. Prior to that, Mr. Mellecker was the Director of Business
Development at Same Day Surgery.
Andrea Seratte joined the Company in February 1997 and is the Vice
President of Operations for the Southwest Region. From February 1995 to March
1997, Ms. Seratte was the sole proprietor of SHARP Consulting, a healthcare
consulting firm. From September 1993 to February 1995, Ms. Seratte was the Vice
president of Operations for the Rehab Managed Care division of NovaCare, a
managed care company. From March 1993 to September 1993, she was the Vice
President of Finance for the Hospital Division of NovaCare.
Georges Daou became a director in September 1997. Mr. Daou is a founder of
DAOU Systems, Inc. and has served as Chairman of the Board and Chief Executive
Officer of such company since 1987. Mr. Daou sits on the boards of various
healthcare and community organizations, including the College of Healthcare
Management Executives and the Healthcare Information Managers Association.
Stewart G. Eidelson, M.D. became a director in October 1997. Dr. Eidelson
is a shareholder of, and since 1990 has been an orthopaedic surgeon at, OSA.
James M. Fox, M.D. became a director in November 1996. Dr. Fox was a
founding partner of, and since 1992 has been an orthopaedic surgeon at, SCOI.
Ann H. Lamont became a director in May 1996. Ms. Lamont is a managing
member of each of the general partner of Oak Investment Partners VI, Limited
Partnership ('Oak Partners') and Oak VI Affiliates Fund, Limited Partnership
('Oak VI'). Since September 1983, Ms. Lamont has been a general partner or
managing member of the general partner of four other venture capital
partnerships affiliated with Oak Partners and Oak VI. Ms. Lamont currently
serves as a director on the board of ViroPharma, Incorporated.
59
<PAGE>
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.
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 currently receive $10,000 annual compensation for their
service on the Board of Directors, $2,000 for each meeting attended in person
and $1,000 for each meeting attended telephonically and are reimbursed for their
out-of-pocket expenses. Under the Company's Option Plan, non-employee directors
are eligible to receive option grants. See '--Stock Option Plan.'
The Board of Directors currently includes a Compensation Committee composed
of two directors, Ms. Lamont and Dr. Fox, and an Audit Committee composed of two
directors, Messrs. Daou and Lothrop. The Compensation Committee determines
compensation for executive officers of the Company and administers the Company's
Option Plan. The Audit Committee reviews the scope and results of audits and
internal accounting controls and all other tasks performed by the independent
public accountants of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the establishment of the Compensation Committee in February 1997,
the Board of Directors determined the compensation payable to the Company's
executive officers. Stock options have been granted to employees of the Company
and, at the end of fiscal 1996, the Board of Directors approved an incentive
bonus for Dr. Nagpal.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to the President and Chief Executive Officer of
the Company during the fiscal year ending December 31, 1996 (the only executive
officer of the Company during such year).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- AWARDS ALL OTHER
OTHER ------------ COMPENSATION
FISCAL SALARY BONUS ANNUAL SECURITIES ------------
NAME AND PRINCIPAL POSITION YEAR ------- ------- COMPENSATION UNDERLYING
- --------------------------------- ----------- ------------ OPTIONS/SARS ($)
($) ($) ($) ------------
(#)
<S> <C> <C> <C> <C> <C> <C>
Naresh Nagpal, M.D. ............. 1996 225,000 67,500 -- -- --
President and Chief Executive
Officer
</TABLE>
60
<PAGE>
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 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 December 31, 1997, the Company has granted
options under the Option Plan to purchase an aggregate of 1,240,046 shares of
Common Stock, of which 7,143 have been exercised, 64,285 have been canceled and
70,760 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.
61
<PAGE>
EMPLOYMENT AGREEMENT
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 $300,000 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.
62
<PAGE>
CERTAIN TRANSACTIONS
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 $0.014 and $1.00, respectively: (a) Oak Partners purchased 104,700 and
325,733 shares of Common Stock and Series A Preferred Stock, respectively; (b)
Oak VI purchased 2,445 and 7,600 shares of Common Stock and Series A Preferred
Stock, respectively; (c) Delphi Ventures purchased 105,250 and 327,438 shares of
Common Stock and Series A Preferred Stock, respectively; (d) Delphi
BioInvestments III, L.P. ('Delphi BioInvestments') purchased 1,895 and 5,895
shares of Common Stock and Series A Preferred Stock, respectively; (e) Dr.
Nagpal purchased 607,145 and 333,333 shares of Common Stock and Series A
Preferred Stock, respectively and (f) Scheer & Co. purchased 17,855 shares of
Common Stock. Upon consummation of the Offering, each outstanding share of
Series A Preferred Stock will automatically convert into .7143 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, $0.01 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. Upon consummation of the Offering, each
outstanding share of Series B Preferred Stock will automatically convert into
.7143 shares of Common 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, $0.01 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, each outstanding
share of Series C Preferred Stock will automatically convert into .7143 shares
of 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 23,810 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 $4.20 per share. The Company
borrowed an additional $866,667 (of which $130,000 has been repaid) from Dr.
Nagpal on January 10, 1997 and January 14, 1997. Each of the foregoing loans
bears interest at 14% per annum. On June 19, 1997, pursuant to a letter
agreement, the Company issued an aggregate of 188,072 shares of Series D
Convertible Preferred Stock, $0.01 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, each outstanding share of Series D Preferred Stock will automatically
convert into .7143 shares of 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, $0.01 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, each outstanding
share of Series E Preferred Stock will automatically convert into .7143 shares
of Common Stock.
From March 1997 to November 1997, the Company entered into the HCFP Loan
Agreements with HCFP Funding. Each of the HCFP Loan Agreements is in the nature
of a revolving line of credit, with each such loan to be made against a
borrowing base equal to 85% of the qualified accounts receivable generated by
the subject Practice. Each HCFP Loan had an initial term of two years, subject
to renewals of one-year periods upon the mutual agreement of the parties, and
bears interest at the Base Rate (defined as 1.75% above the prime rate
designated by Fleet National Bank of Connecticut, N.A.), subject to increase
upon the occurrence of an event of default. In addition, upon the occurrence and
during the continuance of an event of default, the Company is prohibited from
declaring or paying cash dividends on its Common Stock. As security for
repayment of the
63
<PAGE>
HCFP Loans, the Company granted HCFP Funding a first priority lien and security
interest in its accounts receivable.
On June 30, 1997, the Company issued a secured term note in the aggregate
principal amount of $3,250,000 to HCFP Funding (the 'June HCFP Note'), which
bears interest at the Base Rate (defined as the prime rate designated by Fleet
National Bank of Connecticut plus 3.5%) (the 'Fleet Base Rate'), subject to
increase upon the occurrence of an event of default, with interest payable on
the last business day of each month for the first six months commencing July 31,
1997 through December 31, 1997. Commencing on January 31, 1998, the Company is
required to make 36 equal monthly installments of principal, plus accrued
interest at the Base Rate. The June HCFP Note is secured by a lien on
substantially all of the assets of the Company and $1.5 million of the Company's
obligations under the June HCFP Note are guaranteed by Dr. Nagpal, Delphi
Ventures III, L.P., Delphi BioInvestments III, L.P., Oak Investment Partners VI,
L.P. and Oak VI Affiliates Fund, L.P. In connection with such guarantees, the
Company issued warrants to purchase an aggregate of 9,525 shares of Common Stock
to such guarantors. In connection with the HCFP Note, the Company issued
warrants to purchase 28,570 shares (subject to increase) of Common Stock to HCFP
Funding at an exercise price of $0.01 per share. The warrants contain put rights
which give the holder the right to receive payment, based on a minimum put price
of $14.00 per share, for the value of these stock warrants at the earlier of the
effective date of the Company's initial public offering or January 15, 1998.
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 $6,000,000. The Comdisco Loan Agreement was subsequently
amended on November 14, 1997, to increase the amount of the Comdisco Loan. To
secure its obligations to Comdisco under the Comdisco Loan Agreement, the
Company granted to Comdisco a secured 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 Cedar. The Comdisco Loan initially
bears 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 warrants to
purchase up to 150,000 shares of the Company's Series E Preferred Stock at a
price per share equal to $6.00; provided, however, that because an initial
public offering of the Company's capital stock was not consummated on or prior
to December 31, 1997, the number of shares of Series E Preferred Stock issuable
upon exercise of the warrant increased to 160,000. Upon the completion of the
Company's initial public offering, such warrant becomes exercisable for 114,286
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. In
November 1997, the Master Lease Agreement was increased and an additional 10,000
warrants were issued for the purchase of 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 7,143 shares of Common Stock.
On August 22, 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 secured 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
64
<PAGE>
to HCFP Funding. The Galtney Liens rank pari passu with the liens granted to
Comdisco. The Galtney Loan bears 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 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
because an initial public offering of the Company's capital stock was not
consummated on or prior to December 31, 1997, the number of shares of Series E
Preferred Stock issuable upon exercise of the warrant increased to 40,000. Upon
the completion of the Company's initial public offering, such warrant becomes
exercisable for 28,571 shares of Common Stock. 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 Galtney, for an aggregate purchase price of
$1,000,000.
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. 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 a conversion price equal to $10.08 per share. Pursuant to the
terms of the Debenture Purchase Agreement, the holders of the Debentures have
rights of first offer on future issuances of capital stock of the Company or
other securities convertible into capital stock of the Company. The Debenture
Purchase Agreement places limitations on indebtedness and liens and prohibits
the payment of dividends.
On October 14, 1997, the Company issued a secured term note in the
principal amount of $2,500,000 to HCFP Funding (the 'October HCFP Note'), which
bears interest at the Fleet Base Rate, subject to increase upon the occurrence
of an event of default, with interest payable on the last business day of each
quarter through December 31, 1998. The entire principal sum is due and payable
on January 1, 1999. Pursuant to the terms of the October HCFP Note, the Company
is also obligated to pay a fee in the amount of $300,000 to HCFP Funding on the
maturity date. The October HCFP Note is secured by a lien on substantially all
of the assets of the Company.
On October 15, 1997, the Company issued promissory notes (the 'October
Notes') in the aggregate principal amount of $3,375,000 to Dr. Nagpal, Delphi
Ventures, Delphi BioInvestments, Oak Partners, Oak IV and Dr. Fox (collectively,
the 'October Note Holders'). The October Notes bear interest at the Fleet Base
Rate, subject to increase upon the occurrence of an event of default. The entire
principal sum is due and payable on January 10, 1998. In connection with the
October Notes, the Company issued warrants to purchase 48,215 shares of Common
Stock to the October Note Holders at an exercise price of $0.01 per share.
65
<PAGE>
On November 21, 1997, the Company issued warrants to purchase 23,214 shares
of Common Stock to Dr. Nagpal at an exercise price of $0.01 per share.
On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from Dr. Nagpal in the amount of $1.0 million to repay certain
of the Physician Notes. In connection with this loan, the Company issued
warrants to Dr. Nagpal to purchase 14,286 shares of Common Stock at an exercise
price of $0.01 per share. The demand note bears interest at 8% per annum.
66
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31, 1997
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 101E, 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) ..................................... 132,540 1.44% 1,010,650(3) 6.24%
3000 Sand Hill Road, Building One, Suite 135,
Menlo Park, California 94025
Oak Investment Partners VI, L.P.(4) .............................. 132,540 1.44 1,010,650(5) 6.24
One Gorham Island
Westport, Connecticut 06880
Naresh Nagpal, M.D................................................ 753,075(6) 8.14 1,631,190(6)(7) 10.04
David H. Fater.................................................... 100,000 1.09 100,000 *
Georges Daou...................................................... 17,855(8) * 17,855(8) *
Stewart G. Eidelson, M.D.......................................... 10,020(9) * 10,020(9) *
James M. Fox, M.D.(10)............................................ 373,005 4.06 384,700(11) 2.38
Ann H. Lamont(4).................................................. 132,540(12) 1.44 1,010,650(5) 6.24
Donald J. Lothrop(2).............................................. 132,540(13) 1.44 1,010,650(3) 6.24
All officers and directors as a group (7 persons) (14)............ 1,519,035 16.29 4,147,065 25.42
</TABLE>
- ------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 9,174,033 shares of Common
Stock outstanding as of December 31, 1997 and 16,163,133 shares of Common
Stock outstanding upon consummation of the Offering. Beneficial ownership
is determined in accordance with the rules of the Commission and includes
voting and investment power with respect to securities. Securities subject
to options or warrants currently exercisable or exercisable within 60 days
of November 15, 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
ownership of any other person. Except for shares held jointly with a
person's spouse or subject to applicable community property laws, or as
indicated in the footnotes to this table, each stockholder identified in
the table possesses sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by such stockholder.
(2) Includes (i) 1,895 shares of Common Stock owned by Delphi BioInvestments
and (ii) warrants to purchase 24,945 shares of Common Stock owned by the
stockholder and warrants to purchase 450 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 862,585 and 15,530 shares of Common Stock,
respectively, upon completion of the Offering.
(4) Includes (i) 2,445 shares of Common Stock owned by Oak VI and (ii) warrants
to purchase 24,820 shares of Common Stock owned by the stockholder and
warrants to purchase 580 shares of Common Stock owned by Oak VI.
67
<PAGE>
(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 858,090 and 20,020 shares of Common Stock, respectively, upon
completion of the Offering.
(6) Includes (i) 13,395 shares of Common Stock reserved for issuance upon
exercise of presently-exercisable stock options and (ii) warrants to
purchase 62,895 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 878,115 shares of Common Stock upon completion
of the Offering.
(8) Consists of 17,855 Common Stock options which vest immediately.
(9) Consists of 10,020 shares of Common Stock issued pursuant to a Management
Services Agreement.
(10) Includes warrants to purchase 5,355 shares of Common Stock owned by the
stockholder.
(11) Includes 16,375 shares of Preferred Stock owned by the stockholder which
automatically convert into 11,696 shares of Common Stock upon completion of
the Offering.
(12) 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.
(13) 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.
(14) Includes beneficial ownership of an aggregate of 265,080 shares of Common
Stock and warrants to purchase Common Stock prior to the Offering and an
aggregate of 2,021,305 shares of Common Stock and warrants to purchase
Common Stock after the Offering attributable to the affiliation of Ms.
Lamont and Mr. Lothrop with the entities described in footnotes (11) and
(12) above.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of (i) 35,000,000 shares of Common Stock and (ii)
10,000,000 shares of preferred stock, par value $0.01 per share (the 'Preferred
Stock'), which are subject to future issuance as determined by the Board of
Directors of the Corporation.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
on which the holders of Common Stock are entitled to vote and do not have any
cumulative voting rights. Holders of Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of the
Company out of funds legally available therefor. Holders of Common Stock have no
preemptive, conversion, redemption or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share ratably in the assets of the Company, if any, remaining
after the payment of all debts and liabilities of the Company and the
liquidation preference of any outstanding class or series of preferred stock.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered by the Company hereby when issued will be, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject to
the Preferred Stock currently outstanding and any series of Preferred Stock
which the Company may issue in the future.
Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved for quotation on Nasdaq under the
symbol BONS, subject to official notice of issuance. The transfer agent and
registrar for the Common Stock is Chase Mellon Shareholder Services.
PREFERRED STOCK
As of November 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 consummation of the Offering, each outstanding share of
Preferred Stock automatically converts into .7143 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.
69
<PAGE>
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Certificate of Incorporation and By-laws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by
stockholders.
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, as amended (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, 500,000 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 after December 31, 1996 but prior to January 1, 1998, 112,500 additional
shares vest; (ii) termination of Dr. Nagpal's employment without cause after
December 31, 1997 but prior to January 1, 1999, an additional 75,000 shares
vest; (iii) termination of Dr. Nagpal's employment as a result of his death or
permanent disability, 150,000 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 $0.01 per share. The Stockholders Agreement terminates
upon consummation of the Offering.
REGISTRATION RIGHTS
The beneficial owners of 3,733,750 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.
70
<PAGE>
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 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.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the shares of Common Stock offered hereby, the
Company will have outstanding 16,163,133 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 12,163,133 shares are 'restricted securities' within
the meaning of Rule 144. Of such shares, 4,834,074 became eligible for sale
under Rule 144 in December 1997 and the remaining 7,329,059 shares will be
eligible for sale under Rule 144 at various times in 1998, subject to the lockup
arrangements described in the following paragraph.
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.
72
<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................................................................................. 4,000,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain
other dealers. After the initial public offering of the shares, the offering
price and other selling terms may be changed by the Representatives of the
Underwriters. The Representatives have informed the Company that the
Underwriters do not intend to conform sales to accounts over which they exercise
discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of $ upon completion of the Offering.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate shares of Common Stock after
the Offering, have agreed that they will not, without prior
73
<PAGE>
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 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 will be determined
by negotiation between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are 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.'
74
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon by
O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal matters will
be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New
York.
EXPERTS
The financial statements of the following entities appearing in this
Prospectus have been audited by Ernst & Young LLP, independent certified public
accountants, as set forth in their reports thereon also appearing elsewhere in
this Prospectus:
BMJ Medical Management, Inc.
Orthopaedic Associates of Bethlehem, Inc.
Southern California Orthopedic Institute Medical Group
South Texas Spinal Clinic, P.A.
Tri-City Orthopedic Surgery Medical Group, Inc.
Lauderdale Orthopaedic Surgeons
Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics
Sun Valley Orthopaedic Surgeons
Orthopaedic Surgery Associates, P.A.
Broward Institute of Orthopedic Specialties, P.A.
Such financial statements have been included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
75
[This page left intentionally left blank]
<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 September 30, 1997................................................. F-4
Statements of Operations for the Year Ended December 31, 1996 and the Nine Months Ended
September 30, 1996 (Unaudited) and 1997.................................................................. F-5
Statements of Stockholders' Equity for the Year Ended December 31, 1996 and the Nine Months Ended September
30, 1997................................................................................................. F-6
Statements of Cash Flows for the Year Ended December 31, 1996 and the Nine Months Ended September 30, 1996
(Unaudited) and 1997..................................................................................... F-7
Notes to Financial Statements.............................................................................. F-8
The following financial statements are presented to provide supplemental historical financial information
about the significant physician practices with which BMJ Medical Management, Inc. (the Company) has
entered into affiliation transactions since its inception. The Company does not own or control these
practices. These financial statements should not be viewed as indicative of the future operating
performance of the Company.
FINANCIAL STATEMENTS OF ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC.
Report of Independent Auditors............................................................................. F-27
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996............................................. F-28
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-29
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Six Months Ended June 30, 1996....................................................................... F-30
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30,
1996..................................................................................................... F-31
Notes to Financial Statements.............................................................................. F-32
FINANCIAL STATEMENTS OF SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP
Report of Independent Auditors............................................................................. F-36
Balance Sheets at December 31, 1995 and October 31, 1996................................................... F-37
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-38
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-39
Notes to Financial Statements.............................................................................. F-40
FINANCIAL STATEMENTS OF SOUTH TEXAS SPINAL CLINIC, P.A.
Report of Independent Auditors............................................................................. F-45
Balance Sheets at December 31, 1994 and 1995 and October 31, 1996.......................................... F-46
Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-47
Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and
the Ten Months Ended October 31, 1996.................................................................... F-48
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October
31, 1996................................................................................................. F-49
Notes to Financial Statements.............................................................................. F-50
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC.
Report of Independent Certified Public Accountants......................................................... F-53
Balance Sheets at December 31, 1995 and 1996............................................................... F-54
Statements of Operations for the Years Ended December 31, 1995 and 1996.................................... F-55
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996.......................... F-56
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-57
Notes to Financial Statements.............................................................................. F-58
FINANCIAL STATEMENTS OF LAUDERDALE ORTHOPAEDIC SURGEONS
Report of Independent Certified Public Accountants......................................................... F-62
Balance Sheets at December 31, 1995 and 1996............................................................... F-63
Statements of Income and Change in Partners' Capital for the Years Ended December 31, 1995 and 1996........ F-64
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-65
Notes to Financial Statements.............................................................................. F-66
FINANCIAL STATEMENTS OF FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS
Report of Independent Certified Public Accountants......................................................... F-70
Balance Sheets at December 31, 1995 and 1996............................................................... F-71
Statements of Income for the Years Ended December 31, 1995 and 1996........................................ F-72
Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996.......................... F-73
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-74
Notes to Financial Statements.............................................................................. F-75
FINANCIAL STATEMENTS OF SUN VALLEY ORTHOPAEDIC SURGEONS
Report of Independent Certified Public Accountants......................................................... F-79
Balance Sheet at December 31, 1996......................................................................... F-80
Statement of Operations and Changes in Partners' Capital for the Year Ended
December 31, 1996........................................................................................ F-81
Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-82
Notes to Financial Statements.............................................................................. F-83
FINANCIAL STATEMENTS OF ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
Report of Independent Certified Public Accountants......................................................... F-86
Balance Sheet at December 31, 1996......................................................................... F-87
Statement of Income for the Year Ended December 31, 1996................................................... F-88
Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-89
Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-90
Notes to Financial Statements.............................................................................. F-91
FINANCIAL STATEMENTS OF BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
Report of Independent Certified Public Accountants......................................................... F-95
Balance Sheet at December 31, 1996......................................................................... F-96
Statement of Income for the Year Ended December 31, 1996................................................... F-97
Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-98
Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-99
Notes to Financial Statements.............................................................................. F-100
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
BMJ Medical Management, Inc.
We have audited the accompanying balance sheets of BMJ Medical Management Inc.,
(the Company) as of December 31, 1996 and September 30, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1996 and the nine month period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BMJ Medical Management, Inc. at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1996 and the nine month period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG, LLP
West Palm Beach, Florida
November 11, 1997, except
for the 5th paragraph of Note 1,
as to which the date is December 23, 1997
F-3
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 1,439,000 $ 2,404,000
Accounts receivable.............................................................. 5,817,000 19,325,000
Due from physician groups........................................................ 426,000 --
Prepaid expenses and other current assets........................................ 29,000 42,000
------------ -------------
Total current assets........................................................ 7,711,000 21,771,000
Furniture, fixtures and equipment, net............................................. 2,142,000 3,877,000
Management services agreements, net of accumulated amortization of $663,000 at
December 31, 1996 and $4,716,000 at September 30, 1997........................... 15,447,000 32,485,000
Other assets....................................................................... 32,000 3,234,000
------------ -------------
Total assets....................................................................... $ 25,332,000 $ 61,367,000
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 149,000 $ 299,000
Accrued expenses................................................................. 366,000 2,856,000
Accrued salaries and benefits.................................................... 383,000 946,000
Due to physician groups.......................................................... 4,936,000 3,990,000
Shareholder notes payable........................................................ 40,000 894,000
Current portion of long-term debt and capital lease obligations.................. 18,000 2,208,000
------------ -------------
Total current liabilities................................................... 5,892,000 11,193,000
Long-term debt and capital lease obligations, less current portion................. 59,000 16,480,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock...................................................... 30,000 42,000
Common stock, $0.001 par value--15,000,000 shares authorized; 4,786,782 shares
issued and outstanding at December 31, 1996; 25,000,000 shares authorized,
7,177,481 shares issued and outstanding at September 30, 1997................. 5,000 7,000
Additional paid-in capital....................................................... 21,088,000 45,953,000
Deferred compensation............................................................ -- (1,706,000)
Accumulated deficit................................................................ (1,742,000) (10,602,000)
------------ -------------
Total stockholders' equity......................................................... 19,381,000 33,694,000
------------ -------------
Total liabilities and stockholders' equity......................................... $ 25,332,000 $ 61,367,000
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------------
1996 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Practice revenues, net................................... $ 6,029,000 $ 674,000 $ 38,325,000
Less: amounts retained by physician groups............... (2,912,000) (336,000) (17,878,000)
----------- ------------ ------------
Management fee revenue................................... 3,117,000 338,000 20,447,000
Costs and expenses:
Medical support services............................... 2,844,000 343,000 17,934,000
General and administrative............................. 1,299,000 675,000 5,962,000
Depreciation and amortization.......................... 737,000 83,000 4,489,000
Interest expense (income), net......................... (21,000) (6,000) 922,000
----------- ------------ ------------
Total costs and expenses............................ 4,859,000 1,095,000 29,307,000
----------- ------------ ------------
Net loss................................................. $(1,742,000) $ (757,000) $ (8,860,000)
----------- ------------ ------------
----------- ------------ ------------
Net loss per share..................................... $ (0.21) $ (0.10) $ (1.02)
----------- ------------ ------------
----------- ------------ ------------
Weighted average number of common shares outstanding..... 8,273,000 7,820,000 8,722,000
----------- ------------ ------------
----------- ------------ ------------
</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 (January
16, 1996)...................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Initial issuance of convertible
preferred stock................ 3,000,000 10,000 20,000 -- -- -- -- 6,970,000
Issuance of common stock........ 839,285 -- -- -- -- -- 1,000 11,000
Issuance of common stock
in connection with
practice affiliation
agreements .................... 3,947,497 -- -- -- -- -- 4,000 14,107,000
Net loss........................ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ------- -----------
Balance at December 31, 1996.... 10,000 20,000 -- -- -- 5,000 21,088,000
Issuance of convertible
preferred
stock.......................... 846,245 -- -- 3,000 2,000 7,000 -- 6,237,000
Issuance of common stock in
connection with practice
affiliation agreements......... 2,313,913 -- -- -- -- -- 2,000 13,751,000
Issuance of common stock in
exchange for services.......... 69,643 -- -- -- -- -- -- 292,000
Issuance of options to purchase
common stock................... -- -- -- -- -- -- 3,871,000
Issuance of stock purchase
warrants for 181,546 shares of
common stock................... -- -- -- -- -- -- 714,000
Exercise of stock options....... 7,145
Net loss........................ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ------- -----------
Balance at September 30, 1997... $10,000 $20,000 $ 3,000 $ 2,000 $ 7,000 $7,000 $45,953,000
--------- --------- --------- --------- --------- ------- -----------
--------- --------- --------- --------- --------- ------- -----------
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ -----------
<S> <<C> <C> <C>
Balance at inception (January
16, 1996)...................... $ -- $ -- $ --
Initial issuance of convertible
preferred stock................ -- -- 7,000,000
Issuance of common stock........ -- -- 12,000
Issuance of common stock
in connection with
practice affiliation
agreements .................... -- -- 14,111,000
Net loss........................ -- (1,742,000) (1,742,000)
------------ ------------ -----------
Balance at December 31, 1996.... -- (1,742,000) 19,381,000
Issuance of convertible
preferred
stock.......................... -- -- 6,249,000
Issuance of common stock in
connection with practice
affiliation agreements......... -- -- 13,753,000
Issuance of common stock in
exchange for services.......... -- -- 292,000
Issuance of options to purchase
common stock................... (1,706,000 ) -- 2,165,000
Issuance of stock purchase
warrants for 181,546 shares of
common stock................... -- -- 714,000
Exercise of stock options.......
Net loss........................ -- (8,860,000) (8,860,000)
------------ ------------ -----------
Balance at September 30, 1997... $(1,706,000 ) $(10,602,000) $33,694,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED -------------------------
DECEMBER 31, 1996
1996 ---------- 1997
------------ (UNAUDITED) -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................... $ (1,742,000) $ (757,000) $(8,860,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 74,000 5,000 414,000
Amortization of management services agreements and deferred financing
costs............................................................. 663,000 78,000 4,196,000
Interest expense converted to preferred stock........................ -- -- 34,000
Compensation expense related to issuance of common stock options..... -- -- 2,165,000
Changes in operating assets and liabilities:
Accounts receivable............................................... (449,000) -- (4,733,000)
Due from physician groups......................................... (426,000) (415,000) 426,000
Prepaid expenses and other current assets......................... 2,000 (27,000) 24,000
Accounts payable.................................................. 149,000 119,000 150,000
Accrued expenses.................................................. 366,000 211,000 2,090,000
Accrued salaries and benefits..................................... 383,000 120,000 855,000
------------ ---------- -----------
Net cash used in operating activities.................................. (980,000) (666,000) (3,239,000)
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment......................... (697,000) (93,000) (559,000)
Payments for management services agreements............................ (206,000) -- (7,455,000)
Payments for deferred offering costs................................... -- -- (1,924,000)
Cash used for acquisition of non-cash assets of affiliated practices... (3,707,000) -- (10,406,000)
Payments for deposits and other assets................................. (22,000) -- (280,000)
------------ ---------- -----------
Net cash used in investing activities.................................. (4,632,000) (93,000) (20,624,000)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock.............................. 7,000,000 1,000,000 5,215,000
Proceeds from debt issuance............................................ -- -- 18,339,000
Payments on stockholder notes payable.................................. -- -- (130,000)
Proceeds from issuance of stockholder notes payable.................... 40,000 40,000 1,984,000
Proceeds from issuance of common stock................................. 11,000 12,000 --
Payment on capital lease............................................... -- -- (11,000)
Amounts due to physician groups........................................ -- -- (569,000)
------------ ---------- -----------
Net cash provided by financing activities.............................. 7,051,000 1,052,000 24,828,000
------------ ---------- -----------
Net increase in cash and cash equivalents.............................. 1,439,000 293,000 965,000
Cash and cash equivalents at beginning of period....................... -- -- 1,439,000
------------ ---------- -----------
Cash and cash equivalents at end of period............................. $ 1,439,000 $ 293,000 $ 2,404,000
------------ ---------- -----------
------------ ---------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................................................... $ 9,000 $ 4,000 $ 633,000
------------ ---------- -----------
------------ ---------- -----------
Value of stock issued upon execution of management services
agreements........................................................... $ 14,111,000 $ 405,000 $13,753,000
------------ ---------- -----------
------------ ---------- -----------
Note issued upon execution of management services agreements........... $ -- $ -- $ 284,000
------------ ---------- -----------
------------ ---------- -----------
Noncash transactions from practice affiliations including accounts
receivable, management services agreements and due to/from
physicians........................................................... $ 4,905,000 $ 806,000 $ 93,000
------------ ---------- -----------
------------ ---------- -----------
Equipment under capital lease obligations.............................. $ 77,000 $ -- $ --
------------ ---------- -----------
------------ ---------- -----------
Short-term loans converted to preferred stock.......................... $ -- $ -- $ 1,000,000
------------ ---------- -----------
------------ ---------- -----------
Deferred financing cost related to the issuance of warrants............ $ -- $ -- $ 714,000
------------ ---------- -----------
------------ ---------- -----------
Deferred financing cost related to accrued liabilities................. $ -- $ -- $ 400,000
------------ ---------- -----------
------------ ---------- -----------
Common stock issued in payment of accrued salaries..................... $ -- $ -- $ 292,000
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(INFORMATION PERTAINING TO SEPTEMBER 30, 1996 AND TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 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, including ancillary services such as
ambulatory surgery centers, magnetic resonance imaging and rehabilitative
therapy. The Company manages physician groups under long-term management
services agreements (Management Services Agreements) with affiliated physician
groups located in various states. The Company may also acquire certain assets
under Asset Purchase Agreements, primarily accounts receivable, and furniture,
fixtures and equipment from these groups. The cost of these assets is determined
based on their appraised or net realizable value. The Company was incorporated
in Delaware in January 1996.
Under the Management Services 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, 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 Management Services Agreements are 40 years and
automatically renew for successive 5-year periods thereafter unless terminated
by one of the parties. As compensation for services provided by the Company, the
Company generally receives a percentage of the group's net collected revenue,
reimbursement of all nonmedical expenses of the practice incurred by the Company
in supporting the group, 66 2/3% of the cost savings the Company is able to
achieve through its purchasing power and a percentage of the profits from new
ancillary services.
The laws of many states, including some of the states in which the Company
presently has Management Services 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 Management Services
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.
On December 23, 1997, the Board of Directors approved a five-for-seven
reverse stock split of the Company's common stock. All common share and per
share data presented herein give effect to such changes. Concurrent with the
consummation of the Company's initial public offering, the Company's certificate
of incorporation will be amended to increase the Company's authorized common
stock from 25,000,000 shares to 35,000,000 shares.
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 Management Services 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.
F-8
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
PRACTICE REVENUES, NET
Practice revenues, net, represent the gross revenue earned from patients by
the physician groups and one ambulatory surgery center, net of contractual and
other adjustments and uncollectible amounts. Contractual adjustments typically
result from differences between the physician groups' established rates for
services and the amounts paid by government sponsored health care programs and
other insurers.
There are no material claims, disputes, or other unsettled matters that
exist to management's knowledge concerning third-party reimbursements. In
addition, management believes there are no retroactive adjustments that would be
material to the financial statements. The Company estimates that approximately
15% and 17% of practice revenues, net, were received under government sponsored
health care programs (principally, the Medicare and Medicaid programs) during
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. The physician groups have numerous agreements with managed care
and other organizations to provide physician services based on negotiated fee
schedules.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
MANAGEMENT FEE REVENUE
Management fee revenue represents practice and ambulatory surgery center
net revenue less amounts retained by the physician groups.
The Company's management fee revenue is comprised of three components: (i)
percentage of the physician groups' net collected revenue (generally ranging
from 10%-15%), plus (ii) 100% of the non-physician affiliated practice expenses
(generally ranging from 45%-55% of the physician groups' net collected revenue),
plus (iii) 66 2/3% of the cost savings the Company is able to achieve through
its purchasing power (generally related to medical malpractice insurance,
property and liability insurance, group benefits and certain major medical
supplies). The portion of the management fee revenue that represents a
percentage of net collected revenue is dependent upon the physician groups'
revenue which must be billed and collected.
Management fee revenue included in the accompanying statements of
operations is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED ---------------------------
DECEMBER 31, 1996
1996 ------------ 1997
------------ (UNAUDITED) -----------
<S> <C> <C> <C>
Component based upon percentage of physician
groups' net collected revenues.................. $1,079,000 $338,000 $ 3,547,000
Reimbursement of non-physician affiliated practice
expenses........................................ 2,038,000 -- 16,900,000
------------ ------------ -----------
Management fee revenue............................ $3,117,000 $338,000 $20,447,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
For the year ended December 31, 1996, three affiliated practices; Southern
California Orthopedic 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%, respectively, of management fee
revenue. For the nine months ended September 30, 1997, SCOI, STSC and Lauderdale
Orthopaedic Surgeons (LOS) comprised approximately 42%, 13%, and 11%,
respectively, of management fee revenue.
F-9
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
COSTS AND EXPENSES
Medical support services represent costs incurred by the Company relative
to the operations of the physician groups including non-physician personnel
salaries and benefits, medical supplies, malpractice insurance premiums,
building and equipment rental expense, general and administrative expenses,
supplies, maintenance and repairs, insurance, utilities and other indirect
expenses.
General and administrative expenses primarily represent the salaries of
corporate headquarters personnel, rent, travel, and other administrative
expenses.
CASH AND CASH EQUIVALENTS
Cash in excess of daily requirements invested in short-term investments
with maturities of three months or less is considered to be cash equivalents for
financial statement purposes. Deposits in banks may exceed the amount of
insurance provided on such deposits. The Company performs reviews of the credit
worthiness of its depository banks. The Company has not experienced any losses
on its deposits of cash.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables purchased from the
medical groups for medical services provided by the physician groups. Risk of
collection is borne by the physician groups and any amounts paid by the Company
for accounts receivable that are uncollected 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 Management
Services Agreements, legal and accounting fees and other similar transaction
costs. The Management Services Agreements are for a term of 40 years and eight
agreements are subject to rescission by a physician group on the seventh
anniversary. Under the terms of the related Restricted Stock Agreements, if a
physician leaves the practice within four years the common stock issued is
returned to the applicable practice. Therefore, the Company amortizes the costs
of entering into Management Services Agreements over four 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 September 30, 1997.
DUE TO/FROM PHYSICIAN GROUPS
Due from physician groups consists of non-interest bearing short-term
advances due to the Company.
Due to physician groups represents cash consideration related to the
Management Services Agreements that is payable without interest 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 Management Services
Agreements 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 in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The interim financial statements as of September 30, 1996 and for the nine
month period then ended and the related disclosures 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 results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of the
results of operations that may be expected for the entire year ending December
31, 1997.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, generally recognizes no compensation
expense for stock options granted at fair value. The Company recognizes
compensation expense for stock options granted with an exercise price below the
fair value of the shares on the date of grant.
Under the Company's stock option plans, the Company may grant stock options
for a fixed number of shares to independent consultants and contractors
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants using the fair
value method of FASB Statement No. 123 Accounting for Stock-Based Compensation.
The fair value for these options is estimated at the date of grant using a stock
option pricing model and recognized as compensation cost.
NET LOSS PER SHARE
For the year ended December 31, 1996, and the nine months ended September
30, 1996 and 1997, pursuant to the Securities and Exchange Commission's Staff
Accounting Bulletins, common shares and common equivalent shares issued at
prices below the estimated public offering price during the 12 months
immediately preceding the date of the proposed initial filing of the
registration statement, using the treasury stock method, have been included in
the calculation of common shares and common share equivalents as if they were
outstanding for all periods presented even when the effect is antidilutive.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
SFAS No. 128, which applies to entities with publicly held common stock,
simplifies the standards for computing earnings per share previously required in
APB Opinion No. 15, Earnings per Share, and makes them comparable to
international earnings per share standards. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier adoption is not permitted. Management is
currently reviewing the provisions of SFAS No. 128, and does not believe that
adoption of this new accounting pronouncement will have a material impact on the
calculation and presentation of earnings per share due to the antidilutive
effect of the Company's common stock equivalents.
FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value as
of December 31, 1996 and September 30, 1997. The carrying amounts of the
Company's borrowings approximate their fair value due to the recent issuance of
such borrowings which represents current market value.
F-11
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS
Effective July 1, 1996, the Company entered into an affiliation transaction
with Lehigh Valley Bone, Muscle and Joint Group, L.L.C. a Pennsylvania limited
liability company (LVBMJ), under which the Company would receive as a management
fee 50% of the net collected revenues of LVBMJ and would be responsible for all
the clinic overhead expenses (medical support services). In connection with this
transaction, on July 1, 1996, the Company issued 321,429 shares of common stock
recorded at $1.26 per share. This agreement was amended on July 1, 1997. Under
the terms of the Amended and Restated Management Services Agreement between
LVBMJ and the Company, effective July 1, 1997 (the LVBMJ Management Services
Agreement), the Company paid $320,000 in cash, issued an additional 48,594
shares of common stock (effective July 1, 1997) recorded at $7.56 per share and
options to purchase 21,429 shares of common stock at an exercise price of $.35
per share representing consideration of $687,368 in connection with this
transaction. Effective July 1, 1997, the Company and LVBMJ amended and restated
their agreement to adjust the management fee to 10% of net collected revenues
plus reimbursement of clinic overhead expenses. The aggregate consideration of
$1,106,916, including transaction costs of $14,549, has been allocated as
follows: furniture, fixtures and equipment--$50,000, and Management Services
Agreement--$1,056,916. The LVBMJ Management Services Agreement provides that the
Company may be required to issue more shares of common stock as additional
consideration during 1998. The total number of shares to be issued will depend
on actual collections of the practice during a specified twelve month period.
The value of any subsequently issued shares will increase the cost of the LVBMJ
Management Services Agreement.
On November 22, 1996, the Company entered into an Asset Purchase Agreement
in exchange for $5,930,897 in cash and a Management Services Agreement,
effective November 1, 1996, (SCOI Management Services Agreement) with Southern
California Orthopedic Institute Medical Group, California general partnership
(SCOI), in exchange for the issuance of 2,857,140 shares of common stock
recorded at $3.78 per share, representing consideration of $10,800,000. The SCOI
Management Services Agreement calls for management fees to be earned by the
Company equal to 3 1/3% of the net collected revenues until certain conditions
are met at which time the management fee will increase to 6 2/3% of net
collected revenues until the filing of a preliminary prospectus for the initial
public offering of the Company's common stock with the Securities and Exchange
Commission at which time the management fee will increase to 10% of the net
collected revenues. For the period from November 1, 1996 through September 30,
1997, the Company recognized management fees for SCOI of 3 1/3% of net collected
revenues. The number of shares issued in connection with this transaction which
exceed 2,142,857, are subject to recalculation effective November 1, 1997 and
payable at a future date upon review of the calculation by the SCOI physicians.
On April 1, 1997, the Company entered into a Management Services Agreement with
the Center for Orthopedic Surgery, Inc., a California corporation (COSI), owned
by SCOI physicians, in exchange for 392,857 shares of common stock recorded at
$3.78 per share, representing consideration of $1,485,000. The number of shares
issued in connection with this transaction are also subject to recalculation at
the later of the SCOI recalculation or January 1, 1998. The aggregate
consideration of $18,336,999, including transaction costs of $121,102, has been
allocated as follows: net accounts receivable--$4,448,000, furniture, fixtures
and equipment--$1,441,920, supplies--$30,897, deposits-- $10,080 and Management
Services Agreements--$12,406,102. In accordance with the recalculation
provisions, the Company expects to issue approximately 887,000 additional shares
of common stock to SCOI physicians for both the SCOI and COSI recalculations,
the exact amount of which will be determined in the fourth quarter of 1997.
These shares and 714,286 of the original 2,857,140 shares issued in November
1996 in connection with the SCOI transaction represent consideration based upon
performance and will be accounted for as non-cash compensation expense.
Accordingly, the Company will incur a charge to earnings in the fourth quarter
of 1997 ranging from $12,000,000 to $14,000,000 relating to the resolution of
this contingency and the final settlement of the recalculation provisions.
On December 23, 1996, the Company entered into an Asset Purchase Agreement
and a Management Services Agreement, effective November 1, 1996, (STSC
Management Services Agreement) with South Texas Spinal Clinic, P.A., a Texas
professional association (STSC), in exchange for the issuance of 768,929 shares
of
F-12
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
common stock recorded at $3.78 per share, representing consideration of
$2,906,553 and cash of $3,065,990. The aggregate consideration of $6,014,009,
including transaction costs of $41,466 has been allocated as follows: net
accounts receivable--$1,703,826, furniture, fixtures and equipment--$425,000,
supplies--$21,328 and Management Services Agreement--$3,863,855. The STSC
Management Services Agreement permits STSC and individual physicians to rescind
the Affiliation Transaction on November 1, 2003. In the event of a rescission of
the transaction, the transaction will be unwound, with the assets (other than
the accounts receivable) acquired by the Company being returned to STSC, and the
purchase price paid therefore being returned to the Company. In addition, the
physician owners and the employed physicians, if any, who received common stock
of the Company in connection with the transaction will be required to return 50%
of such capital stock to the Company.
Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Tri-City Management Services
Agreement) with Tri-City Orthopedic Surgery Medical Group, Inc., a California
corporation (Tri-City), and two of its affiliates in exchange for $948,200 in
cash, the issuance of 287,659 shares of common stock recorded at $3.78 per
share, representing consideration of $1,087,352. The aggregate consideration of
$2,088,861, including transaction costs of $53,309, has been allocated as
follows: net accounts receivable--$519,000, furniture, fixtures and
equipment--$167,590, Management Services Agreement--$1,402,271.
Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (LOS Management Services
Agreement) with Lauderdale Orthopaedic Surgeons, a Florida partnership, in
exchange for $2,698,359 in cash and the issuance of 329,259 shares of common
stock recorded at $3.78 per share, representing consideration of $1,244,598. The
aggregate consideration of $4,154,824, including transaction costs of $211,867,
has been allocated as follows: accounts receivable--$2,000,000, furniture,
fixtures and equipment--$103,915 Management Services Agreement--$2,050,909.
Effective June 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (GCO Management Services
Agreement) with Fishman and Stashak, M.D.'s, P.A. (GCO), a Florida professional
association, (d/b/a Gold Coast Orthopedics), Clive Segil, M.D. (Segil), a
California professional corporation, and H. Leon Brooks, M.D. (Brooks), a
California professional corporation, in exchange for an aggregate amount of
$3,769,172 in cash, the issuance of 281,789 shares of common stock recorded at
$6.93 per share, representing consideration of $1,952,796. The aggregate
consideration of $6,092,016, including transaction costs of $370,048, has been
allocated as follows: accounts receivable--$1,759,000, furniture, fixtures and
equipment--$194,150, supplies--$3,650 and Management Services
Agreement--$4,135,216. The GCO agreement provides that the Company may be
required to issue more shares of common stock as additional consideration during
1998. The total number of shares to be issued will depend on actual collections
of the practice during a specified twelve month period. The value of any
subsequently issued shares will be allocated to the Management Service
Agreements.
Effective July 1, 1997, the Company entered into three separate Asset
Purchase Agreements and Management Services Agreements with Swanson Orthopedic
Medical Corporation, a professional corporation, Randy C. Watson, M.D., a
professional corporation and Lake Tahoe Sports Medicine Center, a medical
corporation, all located in South Lake Tahoe, California, in exchange for an
aggregate amount of $986,000 in cash and the issuance of 107,648 shares of
common stock recorded at $7.56 per share, representing consideration of
$813,824. The aggregate consideration of $2,064,780, including transaction costs
of $264,956, has been allocated as follows: accounts receivable--$726,000,
furniture, fixtures and equipment--$67,200, supplies-- $10,000, and Management
Services Agreement--$1,261,580.
Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Sun Valley
Orthopaedic Surgeons, an Arizona general partnership (Sun Valley) and Robert O.
Wilson, M.D., P.C., an Arizona professional corporation, both located in Sun
City, Arizona, in exchange for an aggregate amount of $616,125 in cash and the
issuance of 141,332 shares of common stock recorded at $7.56 per share,
representing consideration of $1,068,471. Sun Valley has the right to receive
F-13
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
additional consideration if the fair market value of the Company's common stock,
as determined on July 1, 1998, is less than $9.10. The additional consideration
would be determined by multiplying the per share dollar amount below $9.10 by
36,318 shares and would be payable in full in cash no later than July 31, 1998.
The aggregate consideration of $2,075,553, including transaction costs of
$121,478, has been allocated as follows: accounts receivable--$457,000,
furniture, fixtures and equipment--$67,500, supplies--$7,000, deposits--$4,564,
and Management Services Agreement--$1,539,489 (including the additional
consideration of $269,479).
Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Stockdale Podiatry
Group, Inc., a California professional corporation, and John C. Zimmerman,
D.P.M., both located in Bakersfield, California, in exchange for an aggregate
amount of $1,032,842 in cash, a contractual obligation to pay John C. Zimmerman,
M.D. $78,858 in cash at a future specified date and the issuance of 121,066
shares of common stock recorded at $7.56 per share, representing consideration
of $915,263. The aggregate consideration of $2,111,337, including transaction
costs of $84,374, has been allocated as follows: accounts receivable--$637,200,
furniture, fixtures and equipment--$85,207, supplies--$10,000, and Management
Services Agreement--$1,378,930.
Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Kramer Management Services
Agreement) with Kramer & Maehrer, L.L.C., a Pennsylvania limited liability
company, in exchange for $45,981 in cash and the issuance of 51,857 shares of
common stock recorded at $7.56 per share, representing consideration of
$392,040. The aggregate consideration of $441,047, including transaction costs
of $3,026, has been allocated as follows: furniture, fixtures and
equipment--$45,981, Management Services Agreement--$395,066.
Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (SAB Management Services
Agreement) with San Antonio Bone and Joint Clinic, P.A., a Texas professional
association, in exchange for an aggregate amount of $288,978 in cash and the
issuance of 27,306 shares of common stock recorded at $7.56 per share,
representing consideration of $206,437. The aggregate consideration of $557,236,
including transaction costs of $61,821, has been allocated as follows: accounts
receivable--$92,289, furniture, fixtures and equipment--$175,801,
supplies--$649, and Management Services Agreement--$288,497.
Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (PM & R Management Services
Agreement) with Physical Medicine and Rehabilitation Associates, Inc., a Florida
corporation, in exchange for $830,166 in cash and the issuance of 90,659 shares
of common stock recorded at $7.56 per share, representing consideration of
$685,384. The aggregate consideration of $1,651,063, including transaction costs
of $135,513, has been allocated as follows: accounts receivable-- $465,000,
furniture, fixtures and equipment--$165,000, deposits--$5,166, and Management
Services Agreement--$1,015,897.
Effective August 1, 1997, the Company entered into separate Asset Purchase
Agreements with Broward Orthopaedic Specialists, Inc., a Florida corporation
(Broward), Terence Matthews, M.D. P.A., Wylie Scott, M.D. P.A. and Mitchell S.
Seavey, M.D. and a Management Services Agreement with Broward (Broward
Management Services Agreement), in exchange for $3,938,996 in cash, a promissory
note issued to Dr. Seavey for $283,502 and the issuance of 446,977 shares of
common stock recorded at $7.56 per share, representing consideration of
$3,379,147. The aggregate consideration of $8,015,174, including transaction
costs of $413,529, has been allocated as follows: accounts
receivable--$1,685,000, furniture, fixtures and equipment--$420,000 and
Management Services Agreement--$5,910,174.
Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Abrahams Management Services
Agreement) with Michael A. Abrahams, M.D. P.A., a Florida professional
association, in exchange for $620,004 in cash and the issuance of 68,131 shares
of common stock recorded at $7.56 per share, representing consideration of
$515,074. The aggregate consideration of
F-14
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
$1,181,694, including transaction costs of $46,616, has been allocated as
follows: accounts receivable-- $285,000, furniture, fixtures and
equipment--$47,500, and Management Services Agreement--$849,194.
Effective September 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Beitler Management Services
Agreement) with Jeffrey Beitler, M.D. P.A., a Florida professional corporation,
in exchange for $275,000 in cash and the issuance of 26,066 shares of common
stock recorded at $8.40 per share, representing consideration of $218,952. The
aggregate consideration of $513,952, including transaction costs of $20,000, has
been allocated as follows: accounts receivable--$200,000, furniture, fixtures
and equipment--$35,000, and Management Services Agreement--$278,952.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (OSA Management Services Agreement) with
Orthopaedic Surgery Associates, P.A., a Florida professional corporation (OSA)
in exchange for $4,396,250 in cash, issuance of a promissory note for
$2,377,701, bearing interest at 8.5%, and the issuance of 221,819 shares of
common stock recorded at $8.40 per share, representing consideration of
$1,863,276. The aggregate consideration of $9,059,944, including transaction
costs of $422,717, has been allocated as follows: accounts
receivable--$2,000,000, furniture, fixtures and equipment--$500,000, and
Management Services Agreement--$6,559,944.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (LOM Management Services Agreement) with
Lighthouse Orthopaedic Management Group, Inc (LOM), a Florida corporation, in
exchange for the issuance of promissory notes for $3,899,930, bearing interest
at 8.5% and the issuance of 194,220 shares of common stock recorded at $8.40 per
share, representing consideration of $1,631,448. The aggregate consideration of
$5,808,421, including transaction costs of $277,043, has been allocated as
follows: accounts receivable--$1,300,000 furniture, fixtures, and
equipment--$250,000, and Management Services Agreement--$4,258,421.
In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (BIOS Management Services Agreement) with Broward
Institute of Orthopaedic Specialties, P.A., a Florida professional association
(BIOS), in exchange for $119,311 in cash, the issuance of promissory notes for
$3,396,252, bearing interest at 8%, and the issuance of 182,312 shares of common
stock recorded at $8.40 per share, representing consideration of $1,531,422. The
aggregate consideration of $5,076,985, including transaction costs of $30,000,
has been allocated as follows: advances--$800,000, furniture, fixtures, and
equipment--$281,197, supplies--$61,189, deposits--$37,966 and Managements
Services Agreement-- $3,896,633.
In October 1997, the Company entered into a Management Services Agreement
(Valley Management Services Agreement) with Valley Sports & Arthritis Surgeons,
P.C., a Pennsylvania professional corporation (Valley), in exchange for a
promissory note of $897,727, bearing interest at 8.5% and the issuance of
359,464 shares of common stock recorded at $8.40 per share, representing
consideration of $3,019,501. The aggregate consideration of $3,917,228 has been
allocated as follows: accounts receivable--$630,000, furniture, fixtures, and
equipment--$120,833, supplies--$35,000, and Managements Services
Agreement--$3,131,395.
In October 1997, the Company acquired Orthopaedic Management Network, Inc.,
an Arizona corporation, in exchange for $63,000 in cash, the assumption of
$809,332 in accounts payable and accrued liabilities and the issuance of 40,740
shares of common stock recorded at $8.40 per share, representing consideration
of $342,216. The aggregate purchase price of $1,214,548 has been allocated to
certain assets and liabilities including a Management Services
Agreement--$638,183.
Effective November 1, 1997, the Company entered into a Management Services
Agreement with New Jersey Orthopedic Associates, P.A., a New Jersey professional
association. Additionally, the Company entered into an Asset Purchase Agreement
with Orthopedic Associates of New Jersey, a New Jersey professional association.
The aggregate consideration consisted of $1,029,194 in cash, issuance of a
promissory note for $411,680, bearing interest at 8.0%, and the issuance of
67,859 shares of common stock recorded at $8.40 per
F-15
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PRACTICE AFFILIATIONS--(CONTINUED)
share, representing consideration of $570,012. The aggregate consideration of
$2,010,886 has been allocated as follows: furniture, fixtures and
equipment--$75,000, and Management Services Agreement--$1,935,886.
The Management Services 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
Management Services 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 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, 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.
The cost to enter into the Management Services Agreements and acquire the
assets, including transaction costs, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Cost of acquiring the Management Services Agreements........... $ 16,110,000 $ 37,201,000
Accounts receivable............................................ 6,152,000 14,977,000
Furniture, fixtures and equipment.............................. 1,867,000 3,492,000
Other.......................................................... 62,000 103,000
------------ -------------
Total................................................... $ 24,191,000 $ 55,773,000
------------ -------------
------------ -------------
</TABLE>
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Office, computer, and telephone equipment....................... $ 999,000 $ 2,105,000
Medical equipment............................................... 659,000 1,265,000
Furniture and fixtures.......................................... 558,000 806,000
Construction-in-progress, ambulatory surgery centers............ -- 189,000
Less: accumulated depreciation.................................. 74,000 488,000
------------ -------------
Furniture, fixtures and equipment, net.......................... $2,142,000 $ 3,877,000
------------ -------------
------------ -------------
</TABLE>
4. AMOUNTS DUE TO PHYSICIAN GROUPS
Amounts due to physician groups at December 31, 1996 and September 30, 1997
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Amounts due for patient receivables, net........................ $ 1,064,000 $ 1,241,000
Amounts due as consideration for management services agreements,
excluding promissory notes, due upon closing of initial public
offering...................................................... 3,872,000 2,749,000
------------- -------------
$ 4,936,000 $ 3,990,000
------------- -------------
------------- -------------
</TABLE>
5. PROFESSIONAL LIABILITY
The Company and its affiliated physician practices are insured with respect
to medical malpractice risks on either an occurrence-rate or a claims-made
basis. Management is not aware of any claims against it or its
F-16
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROFESSIONAL LIABILITY--(CONTINUED)
affiliated physician practices 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 at September 30, 1997, are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING EQUIPMENT
LEASES LEASES
---------- ---------
<S> <C> <C>
1998................................................................ $1,485,000 $20,750
1999................................................................ 1,305,000 20,750
2000................................................................ 1,077,000 20,750
2001................................................................ 947,000 20,750
2002................................................................ 568,000 1,700
Thereafter.......................................................... 3,477,000 --
---------- ---------
Total minimum lease obligations..................................... $8,859,000 84,700
----------
----------
Less amount representing interest................................... 19,000
---------
Present value of minimum lease obligations.......................... $65,700
---------
---------
</TABLE>
Rent expense for the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997 under all operating leases was approximately
$602,000, $90,000 and $1,333,000, 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 were $193,000 for the year ended December 31, 1996,
$73,000 and $894,000 for the nine months ended September 30, 1996 and 1997,
respectively. The commitments under these leases are included above.
On August 1, 1997, in connection with a $5,000,000 loan (see Note 10) the
Company entered into an agreement (the Master Lease Agreement) with the lender
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.
No transactions have occurred with respect to 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. This warrant is exercisable for a period of
7 years or 3 years from the effective date of the Company's initial public
offering, whichever is longer. The fair value per share for this warrant based
on the Black-Scholes valuation method is $4.29 using the assumptions described
in Note 7 and the actual life of the warrant. In November 1997, the Master Lease
Agreement was increased and an additional 10,000 warrants were issued for the
purchase of Series E Preferred Stock at a price per share equal to $6.00.
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 1,250,000 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
F-17
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
Option Plan, which will terminate no later than May 6, 2006. The granting and
vesting of options under the Option Plan are authorized by the Company's Board
of Directors or a committee of the Board of Directors. Under the terms of the
Option Plan, incentive stock options vest pro rata over four years, except for
options covering 10,715 shares which vest at the completion of an initial public
offering of the Company's common stock and have an exercise price of $0.49 per
share, and expire ten years from the date of grant. None of the incentive stock
options were exercisable as of December 31, 1996.
During 1997, the Company granted stock options to employees at exercise
prices ranging from $0.01 to $2.80 per share. In accordance with the provisions
of the option plan, the options vest over a four year period. During August
1997, the Company modified the vesting terms of the options relating to 328,571
shares of common stock such that these options vested immediately. Total
compensation expense related to the granting of options for the nine months
ended September 30, 1997, based on a fair value ranging from $3.78 to $8.40 per
share, amounted to $2,165,000 of which approximately $1,900,000 resulted from
the acceleration of the vesting provisions.
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 and the nine months ended September 30,
1997: risk-free interest rate of 6%; dividend yield of 0%; volatility factor of
the expected market price of the Company's common stock of .68; and a
weighted-average expected option life of four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at inception...................................... -- $ --
Granted............................................................. 110,715 0.27
Exercised........................................................... -- --
Canceled............................................................ -- --
---------
Options outstanding at December 31, 1996.............................. 110,715 0.27
Granted............................................................. 841,430 0.59
Exercised........................................................... (7,143) 0.01
Canceled............................................................ (64,285) 0.39
---------
Options outstanding at September 30, 1997............................. 880,713 $ 0.55
--------- --------
--------- --------
Exercisable at December 31, 1996...................................... --
---------
---------
Exercisable at September 30, 1997..................................... 334,820
---------
---------
Reserved for future option grants at September 30, 1997............... 297,855
---------
---------
Weighted average fair value of options granted during 1996............ $ 2.20
--------
--------
Weighted average fair value of options granted during 1997............ $ 4.62
--------
--------
</TABLE>
F-18
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLAN--(CONTINUED)
The following table sets forth information about stock options outstanding
at September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OUTSTANDING REMAINING AVERAGE NUMBER EXERCISABLE
RANGE OF EXERCISE AS OF SEPTEMBER CONTRACTUAL EXERCISE AS OF SEPTEMBER
PRICES 30, 1997 LIFE PRICE 30, 1997
- ------------------ ------------------ ----------- ----------- ------------------
<S> <C> <C> <C> <C>
$0.01 ....... 110,715 9.0 $0.01 108,035
$0.35-$0.84....... 759,285 9.6 $0.62 226,785
$2.80 ....... 10,715 9.9 $2.80 --
------------------ --- ----------- ----------
$0.01-$2.80 880,715 9.5 $0.55 334,820
------------------ ----------
------------------ ----------
</TABLE>
The pro forma effects of adopting SFAS No. 123's fair value based method
for the nine months ended September 30, 1996 and the year ended December 31,
1996 were not materially different from the corresponding APB Opinion 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, was $3.78 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 and the nine month period ended September 30, 1997 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 year ended December 31, 1996 is not materially different from the APB
No. 25 methodology. The Company's pro forma information for the nine months
ended September 30, 1997 follows:
<TABLE>
<S> <C>
Pro forma net loss.......................................... $9,278,000
----------
----------
Pro forma net loss per share................................ $ 1.04
----------
----------
</TABLE>
Additionally, the FASB has added to its agenda a project regarding certain
APB No. 25 issues, including such things as incorporating the SFAS No. 123 grant
date definition into APB No. 25, readdressing the criteria under broad-based
plans qualifying for noncompensatory accounting and defining what constitutes
employees. The resolution of these issues could result in modification in the
Company's accounting for stock-based compensation arrangements.
Shares of common stock reserved for future issuance at September 30, 1997
is as follows:
<TABLE>
<S> <C>
Options..................................................... 1,178,572
Convertible preferred stock................................. 2,989,100
Warrants.................................................... 181,545
Convertible debentures...................................... 396,825
----------
4,746,042
----------
----------
</TABLE>
F-19
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1996 1997
----------- ------------
<S> <C> <C>
Convertible preferred stock--Series A, $0.01 par value--999,999 shares
authorized, issued and outstanding..................................... $ 10,000 $ 10,000
Convertible preferred stock--Series B, $0.01 par value--2,000,001 shares
authorized, issued and outstanding..................................... 20,000 20,000
Convertible preferred stock--Series C, $0.01 par value--254,999 shares
authorized, issued and outstanding..................................... -- 3,000
Convertible preferred stock--Series D, $0.01 par value--189,000 shares
authorized, 188,072 shares issued and outstanding...................... -- 2,000
Convertible preferred stock--Series E, $0.01 par value--1,300,025 shares
authorized, 741,669 shares issued and outstanding...................... -- 7,000
Convertible preferred stock--Series A-1, B-1, D-1 and E-1, $0.01 par
value--4,489,025 shares authorized; none issued and outstanding........ -- --
Common stock, $0.001 par value--15,000,000 shares authorized; 4,786,782
shares issued and outstanding at December 31, 1996, 25,000,000 shares
authorized; 7,177,481 shares issued and oustanding at September 30,
1997................................................................... 5,000 7,000
Additional paid-in capital............................................... 21,088,000 45,953,000
Deferred compensation.................................................... -- (1,706,000)
Accumulated deficit...................................................... (1,742,000) (10,602,000)
----------- ------------
$19,381,000 $ 33,694,000
----------- ------------
----------- ------------
</TABLE>
On May 6, 1996, the Company issued 839,285 shares of $.001 par value common
stock for cash consideration of $0.014 per share, which resulted in proceeds to
the Company of approximately $12,000.
On May 6, 1996, the Company issued 999,999 shares of Series A convertible
preferred stock with a par value of $0.01 for $1.00 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
$0.01 for $3.00 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 $0.01 per share.
On June 19, 1997, the Company issued 188,072 shares of Series D convertible
preferred stock with a par value of $0.01 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 23,810 shares of the Company's
common stock at a price of $4.20 per share, exercisable through January 14,
2002, resulting in deferred financing costs of approximately $2,400 based on the
Black-Scholes valuation method. The unamortized portion of this amount was
charged to interest expense when the loan was converted.
On June 19, July 31 and August 18, 1997, the Company issued an aggregate of
741,669 shares of Series E convertible preferred stock with a par value of $0.01
for $6.00 per share in exchange for $4,450,000.
All classes of convertible preferred stock have the right to share in any
dividends declared and paid or set aside for the common stock of the Company,
pro rata, in accordance with the number of shares of common stock into which
such shares of preferred stock are then convertible; liquidation preference of
the original issuance price per share; and voting rights equal to the number of
shares of common stock into which the preferred stock is then convertible. All
classes of preferred shares are convertible into common shares at a ratio of 7:5
and are
F-20
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
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. As more fully described in Note 10,
certain of the Company's debt agreements prohibit the Company from declaring or
paying dividends.
The Company is a party to a stockholders agreement dated as of November 22,
1996 (the Stockholders Agreement), with its President, certain stockholders and
the SCOI physicians. Under the Stockholders Agreement, the stockholders agreed
to vote their shares to appoint to the Company's board of directors certain
designees of such stockholders. The stockholders (other than the SCOI
physicians) also have the right of first refusal with respect to issuances of
the Company's capital stock or securities convertible into capital stock and are
subject to various restrictions on transfers of the Company's securities. Under
the terms of the Stockholders Agreement, 500,000 shares of the common stock that
the Company's President acquired for cash on May 6, 1996, are subject to vesting
over a 40-month period subject to acceleration in certain circumstances. In the
event of the termination of the President's employment with the Company for any
reason, the Company has the right to repurchase from the President all of the
shares of unvested stock at a purchase price equal to $0.01 per share. The
Stockholders Agreement terminates at the completion of an initial public
offering of the Company's common stock.
9. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109,
Accounting for Income Taxes. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 319,000 $ 1,899,000
Accrued compensation.................................... 174,000 876,000
Amortization of intangible assets....................... 188,000 1,347,000
Deferred revenue........................................ -- 120,000
Other................................................... -- 30,000
------------ -------------------
Deferred tax assets....................................... 681,000 4,272,000
Less valuation allowance.................................. 670,000 4,079,000
------------ -------------------
Total deferred tax assets................................. 11,000 193,000
Deferred tax liabilities:
Tax over book depreciation.............................. (11,000) (193,000)
------------ -------------------
Total deferred tax liabilities............................ (11,000) (193,000)
------------ -------------------
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 $670,000 and $4,079,000 valuation allowance at December
31, 1996 and September 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
F-21
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
the valuation allowance for the current period is $3,409,000. 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 $415,000 per year relating
to approximately $690,000 of the net operating losses at December 31, 1996. At
December 31, 1996 and September 30, 1997, the Company has available net
operating loss carryforwards of $826,000 and $4,917,000, which expire in the
years 2011 and 2012, respectively.
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED --------------------------
DECEMBER 31, 1996
1996 ----------- 1997
----------------- (UNAUDITED) -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate.......................................... (34.00%) (34.00%) (34.00%)
State taxes, net of federal benefit................................. (4.60%) (2.82%) (4.54%)
Non-deductible items................................................ 0.16% 0.25% 0.06%
Change in valuation allowance....................................... 38.44% 38.92% 38.48%
Other............................................................... -- (2.35%) --
------- ----------- -----------
0.00% 0.00% 0.00%
------- ----------- -----------
------- ----------- -----------
</TABLE>
10. BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1996 1997
------------ ------------
<S> <C> <C>
Borrowing under senior revolving lines of credit................ $ -- $ 4,589,000
Senior secured term note, payable in monthly installments of
$90,000 through December 2000, plus interest at prime plus
3.5% (12% at September 30, 1997).............................. -- 3,250,000
Subordinated debt, payable in monthly installments of $229,000
through December 2000, including interest at 14% until January
1, 1998, increasing to 15% thereafter......................... -- 6,500,000
Subordinated convertible debentures, due August 31, 2000, plus
interest, payable semiannually at 6%.......................... -- 4,000,000
Promissory notes to physician due January 31, 1999, plus
interest at 9%................................................ -- 283,000
Shareholder notes payable....................................... 40,000 894,000
Obligation under capital lease.................................. 77,000 66,000
------------ ------------
117,000 19,582,000
Less current portion............................................ 58,000 3,102,000
------------ ------------
$ 59,000 $ 16,480,000
------------ ------------
------------ ------------
</TABLE>
In January 1997, the Company obtained short-term loans in the aggregate
amount of $999,999 from certain stockholders, including its President. In
connection with such loans, the Company issued warrants to such stockholders to
purchase an aggregate of 23,810 shares of Common Stock at an exercise price of
$4.20 per share, and are immediately exercisable for a period of five years. The
fair value of the warrants based on the Black-Scholes valuation method is $2.30
per share using the assumptions described in Note 7 and the actual life of the
warrant. In June 1997, such loans and related accrued interest were converted
into 188,072 shares of Series D Preferred Stock. Also, in January 1997, the
Company issued two promissory notes to the Company's
F-22
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. BORROWINGS--(CONTINUED)
President totaling $867,000. The notes bear interest at a rate of 14% and are
due on December 31, 1997. At September 30, 1997, the balance outstanding was
$894,000, plus accrued interest of $92,000.
From March 1997 to September 30, 1997, the Company entered into a series of
credit agreements with its senior lender secured by the accounts receivable
acquired from each of the affiliated physician groups. The Company may borrow up
to an aggregate limit of $14,000,000, subject to a borrowing base of 85% of
eligible accounts receivable. Outstanding loans bear interest at the prime rate
plus 1.75% (10 1/4% at September 30, 1997) and mature at various dates ranging
from March 1999 to July 1999. The credit agreements require the Company to
maintain a prescribed level of tangible net worth and place limitations on
indebtedness, liens and investments, and prohibit the payment of dividends. At
September 30, 1997, $4,589,000 was outstanding under these agreements, the
maximum allowable under the borrowing base restriction. In October 1997, the
Company entered into additional credit agreements with its senior lender to
increase its aggregate borrowing limit to $17,000,000, subject to the same
terms. The $3,000,000 increase in the credit agreement matures in October 1999.
On June 30, 1997, the Company obtained a senior credit facility to fund
practice affiliations with its senior lender secured by a lien on substantially
all of the assets of the Company. The Company may borrow up to $3,250,000 for
practice affiliations, of which $3,250,000 is outstanding as of September 30,
1997. The loan bears interest at the prime rate plus 3.5% (12% at September 30,
1997). Interest only is payable through December 31, 1997, at which time the
loan converts to a term loan repayable in 36 monthly installments. In addition,
in September 1997 the Company issued the senior lender warrants to purchase
28,570 shares of the Company's common stock for nominal cash consideration. The
warrants contain put rights which give the holders the right to receive payment,
based on a minimum put price of $14 per share, for the value of these stock
warrants at the earlier of the effective date of the Company's initial public
offering or January 15, 1998. The warrants are exercisable for 10 years. Under
this facility, $1,500,000 of the Company's obligations are guaranteed by the
Company's President and other stockholders, and in connection therewith the
Company issued warrants to purchase an aggregate of 9,525 shares of common stock
for nominal cash consideration which are exercisable for a period of five years.
The fair value per warrant based on the Black-Scholes valuation method is $8.39
per share using the assumptions described in Note 7 and the actual life of the
warrant.
On August 1, 1997 and August 22, 1997, the Company entered into
subordinated loan agreements, with two different lenders, in the principal
amounts of $5,000,000 (the $5 million loan) and $1,500,000 (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 subsequent to 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 senior 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% per annum.
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. These warrants are immediately exercisable for a period of
10 years or 5 years, respectively from the effective date of the Company's
initial public offering whichever is earlier. The fair value per warrant based
on the Black-Scholes valuation method is $3.77 per share using the assumptions
described in Note 7 and the actual life of the warrant. 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
F-23
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. BORROWINGS--(CONTINUED)
financing at any time after the earlier to occur of (i) a payment default under
the loan agreement or (ii) the failure of the Company to consummate an initial
public offering of its capital stock prior to December 31, 1997. The conversion
price will be equal to the purchase price per share paid by the purchasers in
such equity financings.
On September 9, 1997, the Company issued and sold $4,000,000 in aggregate
principal amount of its subordinated convertible debentures due August 31, 2000
(the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement,
dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The
Debentures were purchased by the Company's President, certain stockholders and
certain of the Company's underwriters. 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. 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 $10.08 per share subject to
reduction in the event that the Company sells its common stock for a price less
than $10.08 per share. Should such sale occur, the initial conversion price will
be reduced to the lower sale price. 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.
On October 14, 1997, the Company obtained short-term financing in the form
of a secured term note from its senior lender, to fund practice affiliations in
an aggregate amount of $2,500,000. The note is secured by a lien on
substantially all of the assets of the Company. Outstanding loans bear interest
at the prime rate plus 3.5% (12% at October 31, 1997). Interest only is payable
through December 31, 1997 and the entire principal amount is due and payable on
January 10, 1998. In connection with this loan agreement, the Company will pay
to the lender a fee in the amount of $300,000 on the maturity date which was
recorded on October 14, 1997 as debt-issuance cost and is being amortized over
the term of the debt.
On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3,375,000 from certain stockholders, including its
President, to fund practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggregate of 48,215
shares of Common Stock at an exercise price of $0.01 per share which are
immediately exercisable for a period of 5 years. The fair value per warrant
based on the Black-Scholes valuation method is $8.39 per share using the
assumptions described in Note 7 and the actual life of the warrant. Outstanding
loans bear interest at the prime rate plus 3.5%. (12% at October 31, 1997). The
principal amounts and accrued interest are due and payable on January 10, 1998.
During October and November 1997, in connection with several practice
affiliations, the Company issued promissory notes that in the aggregate total
$11,314,197 (Physician Notes). These outstanding promissory notes bear interest
ranging from 6% to 11%. Substantially all of these promissory notes are due and
payable either on the date of the Company's completion of an initial public
offering or at various maturity dates ranging from December 31, 1997 to March
31, 1998.
Under the terms of all the credit agreements and credit facilities with the
senior lender, the subordinated loan agreements and the subordinated convertible
debentures, the Company is prohibited from declaring or paying any cash dividend
or making any distribution on any class of stock, except pursuant to an employee
repurchase plan or with the consent of the lender.
F-24
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. BORROWINGS--(CONTINUED)
Unaudited Information
On November 14, 1997, the Company entered into an additional subordinated
loan agreement in the principal amount of $1,000,000 (the $1 million loan) with
the lender of the $5 million loan. The $1 million loan is due on December 1,
2000 and contains the same terms as the $5 million loan. A warrant to purchase
25,000 shares of the Company's Series E Preferred Stock, that increases to
26,667 shares if an initial public offering of the Company's stock is not
consummated on or prior to December 31, 1997, was issued to the lender. The
warrant is immediately exercisable, at an exercise price of $.01 per share, for
a period of five years. The fair value of the warrant based on the Black-Scholes
valuation method is $4.82 per share using the assumptions described in Note 7
and the actual life of the warrant at an exercise price of $.01 per share. The
warrant is immediately exercisable for a period of 5 years. The fair value per
warrant based on the Black-Scholes valuation method is $8.39 per share using the
assumptions described in Note 7 and the actual life of the warrant.
On November 21, 1997, the Company issued to its President a warrant to
purchase 23,214 shares of common stock at an exercise price of $.01 per share.
The warrant is exercisable for a period of five years. The fair value of the
warrant based on the Black-Scholes valuation method is $8.39 per share using the
assumptions described in Note 7 and the actual life of the warrant.
On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from its President in the amount of $1.0 million to repay
certain of the Physician Notes. In connection with this loan, the Company issued
a warrant to the President to purchase 14,286 shares of common stock at an
exercise price of $0.01 per share. The demand note bears interest at 8% per
annum. The fair value of the warrants based on the Black-Scholes valuation
method is $8.39 per share using the assumptions described in Note 7 and the
actual life of the warrant. The warrant is immediately exercisable for a period
of 5 years.
11. COMMITMENTS AND CONTINGENCIES
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 $300,000 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.
The Company is a defendant in an action entitled John Finlay v. Bone,
Muscle & Joint, Inc., which is currently pending in the United States District
Court for the Southern District of Texas. The action asserts claims for breach
of contract arising out of an alleged employment agreement and alleged
non-qualified stock option agreement. The action seeks compensatory damages
pursuant to the alleged employment agreement as well as specific performance for
the delivery of 16,071 shares of the Company's common stock. The Company
believes that the ultimate resolution of this matter will not have a material
impact on the Company's financial position, results of operations or cash flows.
The Company is a defendant in an action entitled Robert P. Lehmann, M.D. et
al. v. Bone, Muscle & Joint, Inc., et al. which has been filed in the United
States District Court for the Southern District of Texas. The action asserts
claims for breach of contract, common law fraud and promissory estoppel arising
from an alleged restricted stock purchase agreement. The action seeks
compensatory and exemplary damages as well as specific performance for the
delivery of 117,860 shares of the common stock. The Company believes that the
ultimate resolution of this matter will not have a material impact on the
Company's financial position, results of operations or cash flows.
The Company is subject to legal proceedings in the ordinary course of its
business including certain claims resulting from the result of successor
liability in connection with the assumption of certain liabilities of the
F-25
<PAGE>
BMJ MEDICAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
physician practices. The Company does not believe that any of such legal
proceedings, after consideration of professional and other liability insurance,
will have a material adverse effect on the Company's financial position, results
of operations or cash flows.
12. CERTAIN RISKS AND UNCERTAINTIES
As explained in Notes 2 and 10, the Company affiliated with five additional
physician practices subsequent to September 30, 1997. In connection with these
affiliation transactions, the Company issued promissory notes to certain
physicians aggregating approximately $11,314,000 and borrowed approximately
$5,875,000 from certain stockholders and its senior lender. These notes and
borrowings are due in varying amounts from December 31, 1997 through March 31,
1998.
On September 16, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to offer 4,000,000 authorized and unissued
shares of Common Stock to the public. The proceeds of this offering are
anticipated to be used to repay the indebtedness when it matures. In the event
the offering is not completed, management of the Company has developed a plan
which will enable it to meet its obligations as they come due. This plan
includes the following:
(i) $3,900,000 of the indebtedness due to certain stockholders will be
converted into additional shares of preferred stock:
(ii) The senior lender has agreed to postpone payment of the
$2,800,000 note (including the $300,000 fee due at maturity) until January
1, 1999 for a quarterly financing fee of $300,000;
(iii) Commitments have been obtained from certain stockholders to
provide additional capital sufficient to pay the physician notes as they
mature;
(iv) Additional borrowing capacity has been obtained in the aggregate
amount of approximately $1,650,000 and,
(v) Curtailment of development activities including a restructuring of
operational activities.
In addition, the Company continues to pursue negotiations to obtain
additional debt or equity capital and believes it has obtained sufficient
financing commitments through January 1, 1999.
F-26
<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-27
<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-28
<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>
Practice revenues, net................................................. $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-29
<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-30
<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-31
<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.
The financial statements of OAB have been prepared as supplemental
information about the affiliated practices to which BMJ Medical Management, Inc.
(BMJ) provides management services. OAB previously operated as a separate
corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Practice Revenues, Net
Practice revenues, net 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-32
<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-33
<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-34
<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 issued an aggregate of 370,023 shares of
common stock and options to purchase 21,429 shares of common stock.
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-35
[This page intentionally left blank]
<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-36
<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-37
<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>
Practice revenues, net.............................................. $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-38
<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-39
<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').
The financial statements of SCOI have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. SCOI previously operated as a separate partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Practice revenues, net consist 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-40
<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-41
<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-42
<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-43
<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
2,857,143 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-44
[This page intentionally left blank]
<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-45
<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-46
<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>
Practice revenues, 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-47
<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-48
<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-49
<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. (BMJ).
The financial statements of STSC have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. STSC previously operated as a separate professional association.
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-50
<PAGE>
SOUTH TEXAS SPINAL CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
------------------------ -----------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Gross patient accounts receivable........................... $3,122,491 $3,169,931 $ 2,711,718
Less allowances for contractual adjustments and
uncollectibles............................................ 624,498 633,986 1,022,738
---------- ---------- -----------
$2,497,993 $2,535,945 $ 1,688,980
---------- ---------- -----------
---------- ---------- -----------
Net revenue consists of the following:
<CAPTION>
DECEMBER 31, OCTOBER 31,
------------------------ -----------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Gross patient revenue....................................... $8,717,201 $9,685,260 $10,045,273
Less contractual adjustments and uncollectibles............. 1,743,440 1,937,052 4,018,109
---------- ---------- -----------
$6,973,761 $7,748,208 $ 6,027,164
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
4. FURNITURE, FIXTURES, AND EQUIPMENT
Furniture, fixtures, and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Furniture, fixtures, and equipment................................. $674,272 $676,117 $ 690,815
Equipment under capital leases..................................... -- 10,330 10,330
-------- -------- -----------
674,272 686,447 701,145
Less accumulated depreciation and amortization..................... 120,173 210,184 285,098
-------- -------- -----------
$554,099 $476,263 $ 416,047
-------- -------- -----------
-------- -------- -----------
</TABLE>
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
-------------------- -----------
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Note payable to bank with maturity date of August 26, 1997, with a
variable interest rate based upon the Prime rate as described in
the note agreement at each monthly payment date. (effective rate
of 8.5%, 9.5% and 9.25%, at December 31, 1994 and 1995 and
October 31, 1996, respectively).................................. $333,333 $208,333 $ 104,166
Less current maturities............................................ 125,000 125,000 104,166
-------- -------- -----------
$208,333 $ 83,333 $ --
-------- -------- -----------
-------- -------- -----------
</TABLE>
The note payable to the bank is collateralized by the assets of STSC. The
note payable requires STSC to comply with certain covenants. Actual interest
payments were $36,956, $27,246, and $12,583 during the years ended December 31,
1994, 1995, and the ten months ended October 31, 1996, respectively.
6. LEASE COMMITMENTS
STSC leases various equipment, clinic and office space, and office
buildings under operating leases and certain computer and medical equipment
under capital leases. Rent expenses charged to operations totaled approximately
$837,662, $868,272, and $460,623 during the years ended December 31, 1994, 1995,
and the ten months ended October 31, 1996, respectively.
F-51
<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-52
<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-53
<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-54
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Practice revenues, net........................................................ $ 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-55
<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-56
<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:
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-57
<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. (BMJ) and agreed to sell substantially all of
its assets.
The financial statements of Tri-City have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. Tri-City previously operated as a separate corporation.
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.
F-58
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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>
F-59
<PAGE>
TRI-CITY ORTHOPEDIC SURGERY
MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE--(CONTINUED)
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 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-60
<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-61
[This page intentionally left blank]
<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-62
<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-63
<PAGE>
LAUDERDALE ORTHOPAEDIC SURGEONS
STATEMENTS OF INCOME AND CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996
---------- ----------
<S> <C> <C>
Practice revenues, net.......................................................... $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-64
<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
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (794,618) (220,259)
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:
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)
--------- ---------
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-65
<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. (BMJ) and agreed to sell
substantially all of its assets.
The financial statements of LOS have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. LOS previously operated as a separate partnership.
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-66
<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-67
<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-68
<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-69
<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-70
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ -- $ --
Accounts receivable, net............................................................ 1,586,752 1,756,545
Advance to stockholder.............................................................. 4,606 --
Prepaid expenses.................................................................... 43,606 74,748
---------- ----------
Total current assets.................................................................. 1,634,964 1,831,293
Furniture, fixtures and equipment, net................................................ 171,194 141,298
---------- ----------
Total assets.......................................................................... $1,806,158 $1,972,591
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 24,935 $ 33,605
Accrued consulting fee.............................................................. -- --
Due to BMJ Medical Management, Inc.................................................. -- --
Due to stockholder.................................................................. 18,893 --
Accrued compensation................................................................ 130,732 101,209
Accrued professional liability insurance............................................ 130,271 166,131
Accrued profit sharing plan contribution............................................ 50,000 --
Current portion of long-term debt................................................... 141,118 146,080
---------- ----------
Total current liabilities............................................................. 495,949 447,025
Long-term debt........................................................................ 279,232 230,357
Stockholders' equity:
Common stock, $1 par value--1,000 shares authorized, 600 shares issued and
outstanding
in 1995, 1996 and 1997........................................................... 600 600
Retained earnings................................................................... 1,030,377 1,294,609
---------- ----------
Total stockholders' equity............................................................ 1,030,977 1,295,209
---------- ----------
Total liabilities and stockholders' equity............................................ $1,806,158 $1,972,591
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-71
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Practice revenues, net................................................................ $3,236,573 $3,433,831
Costs and expenses:
Physician and other provider services............................................... 1,414,343 1,785,478
Medical support services............................................................ 1,290,412 1,204,912
Management service fee.............................................................. -- --
Depreciation........................................................................ 40,823 33,163
Interest............................................................................ 44,821 30,940
Rent................................................................................ 121,454 115,106
---------- ----------
Total costs and expenses.............................................................. 2,911,853 3,169,599
---------- ----------
Net income............................................................................ $ 324,720 $ 264,232
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-72
<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
--------- ------ ---------- -------------
--------- ------ ---------- -------------
</TABLE>
See accompanying notes.
F-73
<PAGE>
FISHMAN AND STASHAK, M.D.'S, P.A.
D/B/A GOLD COAST ORTHOPEDICS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................. $ 324,720 $ 264,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................. 40,823 33,163
Bonus paid with note payable............................................................. 200,000 --
Changes in operating assets and liabilities:
Accounts receivable................................................................... (179,258) (169,793)
Prepaid expenses...................................................................... (38,835) (31,142)
Accounts payable...................................................................... (32,127) 8,670
Accrued consulting fee................................................................ -- --
Due to BMJ Medical Management, Inc. .................................................. -- --
Accrued compensation.................................................................. 119,270 (29,523)
Accrued professional liability insurance.............................................. (157,201) 35,860
Accrued profit sharing plan contribution.............................................. 50,000 (50,000)
--------- ---------
Net cash provided by operating activities.................................................. 327,392 61,467
INVESTING ACTIVITIES
Advance to stockholder..................................................................... (8,000) --
Payments received on advance to stockholder................................................ 3,394 4,606
Purchases of furniture, fixtures and equipment............................................. (73,269) (3,267)
--------- ---------
Net cash (used in) provided by investing activities........................................ (77,875) 1,339
FINANCING ACTIVITIES
Distributions to stockholders.............................................................. -- --
Payments on due to stockholder............................................................. (75,000) (100,893)
Proceeds of loan from stockholder.......................................................... 82,000
Proceeds of related party advance.......................................................... 55,000
Payments on related party advance.......................................................... (55,000)
Proceeds from long-term debt............................................................... 100,000 157,500
Payments on long-term debt................................................................. (274,517) (201,413)
--------- ---------
Net cash used in financing activities...................................................... (249,517) (62,806)
--------- ---------
Net change in cash and cash equivalents.................................................... -- --
Cash and cash equivalents at beginning of period........................................... -- --
--------- ---------
Cash and cash equivalents at end of period................................................. $ -- $ --
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................................................... $ 46,932 $ 30,940
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-74
<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 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.
The financial statements of Gold Coast have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. Gold Coast previously operated as a separate professional association.
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 practice revenues, net 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-75
<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.
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-76
<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-77
<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.
F-78
[This page intentionally left blank]
<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-79
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash.............................................................................................. $137,982
Accounts receivable, net.......................................................................... 512,267
Due from related parties.......................................................................... 183,062
Inventories....................................................................................... 9,500
Prepaid expenses and other current assets......................................................... 24,949
------------
Total current assets................................................................................ 867,760
Furniture, fixtures and equipment, net.............................................................. 34,935
Other assets........................................................................................ 7,515
Due from related parties............................................................................ 48,781
------------
Total assets........................................................................................ $958,991
------------
------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.................................................................................. $ 23,665
Accrued expenses and other current liabilities.................................................... 14,273
Due to bank under line of credit.................................................................. 100,000
------------
Total current liabilities........................................................................... 137,938
Due to related parties.............................................................................. 31,174
Commitments and contingencies.......................................................................
Partners' capital................................................................................... 789,879
------------
Total liabilities and partners' capital............................................................. $958,991
------------
------------
</TABLE>
See accompanying notes.
F-80
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
STATEMENT OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Practice revenues,net............................................................................... $2,467,989
Other revenue....................................................................................... 22,798
Other revenue from related party.................................................................... 12,005
------------
Total revenue....................................................................................... 2,502,792
Costs and expenses:
Physician and other provider services............................................................. 1,456,127
Medical support services.......................................................................... 1,044,879
Depreciation...................................................................................... 26,912
Interest.......................................................................................... 10,873
Other............................................................................................. 1,452
------------
Total costs and expenses............................................................................ 2,540,243
------------
Net loss............................................................................................ (37,451)
Beginning partners' capital......................................................................... 827,330
------------
Ending partners' capital............................................................................ $ 789,879
------------
------------
</TABLE>
See accompanying notes.
F-81
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
OPERATING ACTIVITIES
Net loss............................................................................................ $ (37,451)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation...................................................................................... 26,912
Changes in operating assets and liabilities:
Accounts receivable, net....................................................................... 14,298
Due from related parties....................................................................... 18,518
Inventories.................................................................................... (500)
Prepaid expenses and other current assets...................................................... (8,658)
Accounts payable............................................................................... 2,393
Accrued expenses and other current liabilities................................................. 819
------------
Net cash provided by (used in) operating activities................................................. 16,331
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment...................................................... (7,404)
Repayments of amounts due from partners and affiliates.............................................. 48,492
------------
Net cash provided by investing activities........................................................... 41,088
FINANCING ACTIVITIES
Amounts received on line of credit.................................................................. 25,000
Repayments of line of credit........................................................................ (44,000)
Repayments of amounts due to related parties........................................................ (39,500)
------------
Net cash (used in) provided by financing activities................................................. (58,500)
------------
(Decrease) increase in cash......................................................................... (1,081)
Cash, beginning of period........................................................................... 139,063
------------
Cash, end of period................................................................................. $ 137,982
------------
------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid....................................................................................... $ 10,873
------------
------------
</TABLE>
See accompanying notes.
F-82
<PAGE>
SUN VALLEY ORTHOPAEDIC SURGEONS,
AN ARIZONA GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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. (BMJ).
The financial statements of Sun Valley have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. Sun Valley previously operated as a separate partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Patient Service Revenue
Practice revenues, net are reported at the estimated realizable amounts due
from patients, third-party payors and others for medical services rendered.
During 1996, approximately 60% of practice revenues, net were 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.
F-83
<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-84
<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-85
[This page intentionally left blank]
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Orthopaedic Surgery Associates, P.A.
We have audited the accompanying balance sheet of Orthopaedic Surgery
Associates, P.A. (OSA) as of December 31, 1996, and the related statements of
income, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of OSA's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orthopaedic Surgery Associates,
P.A. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG, LLP
West Palm Beach, Florida
October 10, 1997
F-86
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 26,590 $ --
Accounts receivable, net.......................................................... 1,382,082 1,503,826
Prepaid expenses.................................................................. 34,216 61,305
------------ -------------
Total current assets................................................................ 1,442,888 1,565,131
Furniture, fixtures and equipment, net.............................................. 1,792,079 1,712,627
Loan receivable--OSA Investments, PA, net of discount of $265,176 and $255,232 as
of September 30, 1997.......................................................... 64,488 74,432
Other............................................................................... 5,000 5,000
------------ -------------
Total assets........................................................................ $3,304,455 $ 3,357,190
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses.................................................................. $ 150,427 $ 108,370
Due to BMJ Medical Management, Inc................................................ -- 55,893
Note payable...................................................................... 500,000 500,000
Current portion of capital lease obligations...................................... 66,901 72,465
------------ -------------
Total current liabilities........................................................... 717,328 736,728
Long-term capital lease obligations, less current portion........................... 1,318,957 1,263,889
Stockholders' equity:
Common stock, $1 par value--500 shares authorized, issued and outstanding......... 500 500
Additional paid-in capital........................................................ 1,090,450 1,090,450
Retained earnings................................................................. 177,220 265,623
------------ -------------
Total stockholders' equity.......................................................... 1,268,170 1,356,573
------------ -------------
Total liabilities and stockholders' equity.......................................... $3,304,455 $ 3,357,190
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-87
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ------------------------
DECEMBER 31, 1996 1996 1997
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Practice revenues, net............................................ $ 7,520,949 $6,210,772 $7,356,636
Other income...................................................... 12,107 12,107 89,284
----------------- ---------- ----------
Total revenue..................................................... 7,533,056 6,222,879 7,445,920
Costs and expenses:
Physician and other provider services........................... 3,175,685 2,532,582 2,417,162
Medical support services........................................ 3,489,020 2,824,749 4,297,136
Management service fee.......................................... -- -- 55,893
Depreciation.................................................... 90,369 62,892 97,234
Interest........................................................ 91,458 22,433 123,216
Rent............................................................ 244,128 219,055 366,876
Amortization of discount on loan receivable..................... 265,176 265,176 --
----------------- ---------- ----------
Total costs and expenses.......................................... 7,355,836 5,926,887 7,357,517
----------------- ---------- ----------
Net income........................................................ $ 177,220 $ 295,992 $ 88,403
----------------- ---------- ----------
----------------- ---------- ----------
</TABLE>
See accompanying notes.
F-88
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996....................... 500 $500 $ -- $ -- 50$0.........
Contribution of capital........................ -- -- 1,090,450 -- 1,090,450
Net income..................................... -- -- -- 177,220 177,220
--- ------ ---------- ---------- --------------
Balance at December 31, 1996..................... 500 $500 $1,090,450 $ 177,220 $1,268,170
Net income (Unaudited)........................... -- -- -- 88,403 88,403
--- ------ ---------- ---------- --------------
Balance at September 30, 1997 (Unaudited)........ 500 $500 $1,090,450 $ 265,623 $1,356,573
--- ------ ---------- ---------- --------------
--- ------ ---------- ---------- --------------
</TABLE>
See accompanying notes.
F-89
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 177,220 $ 295,992 $ 88,403
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of discount on loan receivable.......................... 265,176 265,176 --
Depreciation......................................................... 90,369 62,892 97,234
Changes in operating assets and liabilities:
Accounts receivable............................................... (1,382,082) (1,715,768) (121,744)
Prepaid expenses.................................................. (39,216) (34,768) (27,089)
Due to BMJ Medical Management, Inc................................ -- -- 55,893
Accrued liabilities............................................... 998,864 1,107,034 (42,057)
------------ ----------- ---------
Net cash provided by (used in) operating activities.................... 110,331 (24,442) 50,640
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment......................... (277,649) (117,594) (17,782)
Loan receivable........................................................ (306,592) (329,664) (9,944)
------------ ----------- ---------
Net cash used in investing activities.................................. (584,241) (447,258) (27,726)
FINANCING ACTIVITIES
Contribution of capital................................................ 500 500 --
Proceeds from borrowing under notes payable............................ 500,000 500,000 --
Payments on capital leases payable..................................... -- -- (49,504)
------------ ----------- ---------
Net cash provided by (used in) financing activities.................... 500,500 500,500 (49,504)
------------ ----------- ---------
Net increase (decrease) in cash........................................ 26,590 28,800 (26,590)
Cash at beginning of period............................................ -- -- 26,590
------------ ----------- ---------
Cash at end of period.................................................. $ 26,590 $ 28,800 --
------------ ----------- ---------
------------ ----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 91,458 $ 22,433 $ 123,216
------------ ----------- ---------
------------ ----------- ---------
Noncash transactions:
Equipment under capital lease obligations.............................. $ 1,331,000 $ 1,318,813 $ --
------------ ----------- ---------
------------ ----------- ---------
Equipment financed by loan payable-related party....................... $ 250,650 $ 150,650 $ --
------------ ----------- ---------
------------ ----------- ---------
Conversion of debt to equity........................................... $ 1,090,450 $ 1,090,450 $ --
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
F-90
See accompanying notes.
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
Orthopaedic Surgery Associates, P.A. (OSA) was organized under the laws of
the State of Florida and specializes in providing orthopedic medical and
surgical services and related medical and ancillary services in Palm Beach
County, Florida. OSA receives payment for patient services primarily from
private insurers, health maintenance organizations, preferred provider
organizations, the federal government primarily under the Medicare program,
state governments under their respective Medicaid programs, and directly from
patients.
On October 16, 1997, certain assets and liabilities of OSA were acquired by
BMJ Medical Management, Inc. (BMJ) in exchange for 221,819 shares of BMJ common
stock, cash of $4,496,250 and a promissory note for $2,450,465. In connection
therewith, OSA entered into a 40-year management service agreement with BMJ,
whereby BMJ will provide substantially all nonmedical services to the practice
in exchange for a management fee based on 12.5% of OSA's net collected revenue.
On March 1, 1997, OSA changed its name to Orthopaedic Surgery Associates,
Inc.
The financial statements of OSA have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. OSA previously operated as a separate professional association.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
OSA's accounting records are maintained on the basis of cash receipts and
cash disbursements for income-tax purposes. The accompanying financial
statements have been prepared on the accrual basis and thus reflect accounts
receivable, prepaid expenses, and liabilities that are not recorded in the
accounting records.
Concentration of Credit Risk
OSA grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Furniture,Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from 5 to 40 years. Amortization
expense for assets under capital leases is included in accumulated depreciation.
Financial Instruments
The fair value of OSA's financial instruments (primarily long and
short-term capital lease obligations and debt) are estimated using discount cash
flow analyses, based on OSA's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amounts of financial instruments
as reported in the accompanying balance sheet approximate their fair value.
Revenue Recognition
Practice revenues, net are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
generally less than OSA's customary charges, and the differences are recorded as
contractual adjustments or policy discounts at the time the related service is
rendered.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action, including fines, penalties, and exclusion from
the Medicare and Medicaid programs. OSA believes that it is in compliance with
all applicable laws and regulations. OSA is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing.
F-91
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to physicians and other health care providers.
Income Taxes
OSA is taxed under the provisions of Subchapter S of the Internal Revenue
Code (IRC), which generally provides that in lieu of corporate taxes, the
stockholders shall be taxed on OSA's taxable income in accordance with their
ownership interests. As a result, the accompanying financial statements include
no provision for income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Interim Financial Statements
The interim financial statements as of September 30, 1997 and for the nine
months ended September 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 OSA'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 nine months
ended September 30, 1997 are not necessarily indicative of the results of
operations that may be expected for the entire year ending December 31, 1997.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Assets under capital leases:
Land...................................................... $ 372,300
Building and leasehold improvements....................... 1,119,350
Furniture, fixtures and office equipment.................. 39,905
Medical equipment......................................... 142,985
----------
1,674,540
----------
----------
Owned assets:
Building and leasehold improvements....................... 96,657
Furniture, fixtures and offfice equipment................. 45,997
Medical equipment......................................... 62,437
----------
1,879,631
Less accumulated depreciation............................... (87,552)
----------
$1,792,079
----------
----------
</TABLE>
4. NOTE PAYABLE
The note payable is a $500,000 line of credit which was due on August 22,
1997 bearing interest at the prime rate, 8.5% at December 31, 1996. The line of
credit is secured by substantially all of the assets of OSA. Effective August
22, 1997, OSA extended the $500,000 line of credit maturity date to November 22,
1997.
In October 1997, OSA repaid the outstanding balance on the line of credit.
F-92
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
OSA has employment agreements with four physician-stockholders which
provide for, among other things, various insurance coverages and base pay for
one physician-stockholder. Future payments required to be made to physicians
approximate $360,000 in 1997 and $100,000 in 1998, subject to certain
adjustments. Management cannot estimate future adjustments under these
provisions.
Effective July 1, 1997, OSA entered into an employment agreement with a
physician for the payment of a base salary. Future payments required to be made
to the physician approximate: 1997--$80,000, 1998-- $160,000, 1999--$160,000,
2000--$80,000, subject to certain adjustments. Management cannot estimate the
number of hours of service to be performed during the contract term, future
adjustments under these provisions. Effective August 1, 1997, OSA entered into a
12-month physician employment agreement for the payment of $200 for each
documented hour of service performed on behalf of OSA. Management cannot
estimate future adjustments under these provisions. These contracts are for
various time periods and may be terminated by mutual agreement or upon the
occurrence of other specified events such as death and disability.
OSA leases office space and equipment under noncancelable operating leases,
two of which contain an escalation clause. Rent expense charged to operations
totaled approximately $244,000 during 1996.
Future minimum rental commitments under noncancelable operating leases at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................................ $ 215,839
1998............................................................................ 218,890
1999............................................................................ 229,835
2000............................................................................ 241,327
2001............................................................................ 223,833
----------
$1,129,724
----------
----------
</TABLE>
Future minimum capital lease obligations at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................................ $ 187,918
1998............................................................................ 189,916
1999............................................................................ 186,691
2000............................................................................ 176,073
2001............................................................................ 160,363
Thereafter...................................................................... 1,583,399
----------
2,484,360
Interest........................................................................ (1,098,502)
Less current amount............................................................. (66,901)
----------
$1,318,957
----------
----------
</TABLE>
Effective June 1996, OSA entered into a medical office building capital
lease with OSA Investments, PA, (OSAI), a related party. The lease payment is
equal to OSAI's mortgage payment for the building and the term of the lease is
concurrent with the mortgage term.
Effective August 1, 1997, OSA entered into an equipment lease for $228,000
for a 12-month period.
OSA procures professional liability coverage on behalf of its physicians on
a claims made basis. The insurance contracts specify that coverage is available
only during the term of each insurance contract and cover only those claims
reported while the policies are in force. An estimate of losses for incurred but
unreported claims is recorded based upon historical experience. Management of
OSA intends to renew the existing claims made policy annually and expects to be
able to obtain such coverage. If coverage is not renewed, OSA intends to
F-93
<PAGE>
ORTHOPAEDIC SURGERY ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
OSA is involved in litigation regarding a medical malpractice dispute.
Legal counsel and management are unable to reasonably predict the ultimate
outcome of the dispute at this time; however, the estimated range of potential
loss is $200,000 to $2,000,000. At the time the claim was made, OSA had
malpractice insurance coverage of $500,000. OSA has not recorded any liability
related to this matter.
6. PROFIT SHARING PLAN
OSA maintains a profit sharing plan (the Plan) under the provisions of
Section 401(k) of the IRC. Employees who meet the minimum length of service and
age requirements are eligible for participation. OSA is responsible for the
administration of the Plan as the plan administrator and OSA's stockholders are
trustees. Under the provisions of the Plan, contributions by OSA are
discretionary. OSA made contributions of approximately $83,000 to the Plan in
1996.
7. LOAN RECEIVABLE - OSA INVESTMENTS, P.A.
During 1996 OSA recorded a loan receivable from OSAI for $329,664. The loan
receivable is non-interest bearing and is expected to be repaid from the
proceeds of the future sale of the medical office building owned by OSAI and
leased to OSA. The loan has been discounted to reflect an imputed interest rate
of 8% per annum over the life of the lease, which is 20 years.
8. SUBSEQUENT EVENTS
In October 1997, OSA declared and distributed stockholders' distributions
of approximately $1,000,000.
F-94
[This page intentionally left blank]
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Broward Institute of Orthopaedic
Specialties, P.A.
We have audited the accompanying balance sheet of Broward Institute of
Orthopaedic Specialties, P.A. (BIOS) as of December 31, 1996, and the related
statements of income, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of BIOS' management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Broward Institute of
Orthopaedic Specialties, P.A. at December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG, LLP
West Palm Beach, Florida
September 5, 1997
F-95
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 428,530 $ 260,236
Accounts receivable, net.......................................................... 1,875,907 2,233,546
Prepaid expenses.................................................................. 41,845 7,822
------------ -------------
Total current assets................................................................ 2,346,282 2,501,604
Furniture, fixtures and equipment, net.............................................. 49,301 141,690
Other, net.......................................................................... 13,338 11,453
------------ -------------
Total assets........................................................................ $2,408,921 $ 2,654,747
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 187,555 $ 102,304
Due to stockholders............................................................... 80,000 --
Accrued liabilities............................................................... 619,197 131,412
Current portion of notes payable.................................................. 267,000 305,117
------------ -------------
Total current liabilities........................................................... 1,153,752 538,833
Notes payable, less current portion................................................. 249,871 --
Stockholders' equity:
Common stock, $0.01 par value--1,000 shares authorized,
80 shares issued and outstanding............................................. 1 1
Additional paid-in capital........................................................ 23,999 23,999
Retained earnings................................................................. 981,298 2,091,914
------------ -------------
Total stockholders' equity.......................................................... 1,005,298 2,115,914
------------ -------------
Total liabilities and stockholders' equity.......................................... $2,408,921 $ 2,654,747
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-96
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Practice revenues, net................................................. $8,325,413 $6,435,529 $6,538,068
Other income........................................................... 37,164 34,486 16,528
------------ ---------- ----------
Total revenue.......................................................... 8,362,577 6,470,015 6,554,596
Costs and expenses:
Physician and other provider services................................ 3,823,617 3,081,265 2,467,566
Medical support services............................................. 3,892,487 2,513,944 2,589,578
Depreciation and amortization........................................ 13,259 7,774 8,346
Interest............................................................. 68,129 52,001 24,958
Rent................................................................. 397,094 287,361 353,532
------------ ---------- ----------
Total costs and expenses............................................... 8,194,586 6,342,345 5,443,980
------------ ---------- ----------
Net income............................................................. $ 167,991 $ 127,670 $1,110,616
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
See accompanying notes.
F-97
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER PAID IN RETAINED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........................ 80 $1 $ 23,999 $ 813,307 $ 837,307
Net income.......................................... -- -- -- 167,991 167,991
-- --
---------- ---------- --------------
Balance at December 31, 1996........................ 80 $1 $ 23,999 $ 981,298 $1,005,298
Net income (Unaudited).............................. -- -- -- 1,110,616 1,110,616
-- --
---------- ---------- --------------
Balance at September 30, 1997 (Unaudited)........... 80 $1 $ 23,999 $2,091,914 $2,115,914
-- --
-- --
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
See accompanying notes.
F-98
<PAGE>
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------------------
1996 1996 1997
------------ ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 167,991 $ 127,670 $1,110,616
Adjustments to reconcile net income to net cash provided by operating
activites:
Depreciation......................................................... 9,297 4,803 5,377
Amortization......................................................... 3,962 2,971 2,969
Changes in operating assets and liabilities:
Accounts receivable............................................... (411,504) (437,792) (357,639)
Deposits.......................................................... (3,435) 3,057 30,588
Accounts payable.................................................. 114,599 78,271 (85,251)
Accrued expenses.................................................. 220,303 (170,751) (487,785)
------------ ---------- ------------
Net cash provided by (used in) operating activities.................... 101,213 (50,269) 218,875
INVESTING ACTIVITIES
Purchases of furniture, fixtures and equipment......................... (31,210) (31,210) (95,415)
------------ ---------- ------------
Net cash used in investing activities.................................. (31,210) (31,210) (95,415)
FINANCING ACTIVITIES
Payments on borrowings from stockholder debt........................... -- (80,000) --
Additional borrowings on notes payable................................. (167,139) 129,250 (291,754)
------------ ---------- ------------
Net cash provided by (used in) financing activities.................... (167,139) 49,250 (291,754)
------------ ---------- ------------
Net decrease in cash................................................... (97,136) (32,229) (168,294)
Cash at beginning of period............................................ 525,666 525,666 428,530
------------ ---------- ------------
Cash at end of period.................................................. $ 428,530 $ 493,437 $ 260,236
------------ ---------- ------------
------------ ---------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................. $ 68,127 $ 52,001 $ 24,958
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
See accompanying notes.
F-99
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF THE BUSINESS
Broward Institute of Orthopedic Specialties, P.A. (BIOS) was organized
under the laws of the State of Florida and specializes in providing orthopedic
medical and surgical services and related medical and ancillary services in
Broward County. BIOS receives payment for patient services primarily from
private insurers, health maintenance organizations, preferred provider
organizations, the federal government primarily under the Medicare program,
state governments under their respective Medicaid programs, and directly from
patients.
On October 31, 1997, certain assets and liabilities of BIOS were acquired
by BMJ Medical Management, Inc. (BMJ) in exchange for 182,312 shares of BMJ
common stock, cash of $119,311 and promissory notes for $3,396,252. In
connection therewith, BIOS entered into a 40-year management services agreement
with BMJ, whereby BMJ will provide substantially all nonmedical services to the
practice.
The financial statements of BIOS have been prepared as supplemental
information about the affiliated practices to which BMJ provides management
services. BIOS previously operated as a separate professional association.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
BIOS' accounting records are maintained on the basis of cash receipts and
cash disbursments for income-tax purposes. The accompanying financial statements
have been prepared on the accrual basis and thus reflect accounts receiveable,
prepaid expenses, and liabilities that are not recorded in the accounting
records.
Concentration of Credit Risk
BIOS grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. Management
believes credit risk associated with accounts receivable is minimal.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years.
Financial Instruments
The fair value of BIOS' financial instruments (primarily long and
short-term debt) are estimated using discounted cash flow analyses, based on
BIOS' current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts of financial instruments as reported in the
accompanying balance sheet approximate their fair value.
Revenue Recognition
Practice revenues, net are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
less than BIOS' customary charges, and the differences are recorded as
contractual adjustments or policy discounts at the time the related service is
rendered.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. Compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare
F-100
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and Medicaid programs. BIOS believes that it is in compliance with all
applicable laws and regulations. BIOS is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing.
Costs and Expenses
Physician and other provider services costs are comprised primarily of
compensation and fees paid to phyisicians and other health care providers.
Income Taxes
BIOS is taxed under the provisions of Subchapter S of the Internal Revenue
Code, which generally provides that in lieu of corporate taxes, the stockholders
shall be taxed on BIOS' taxable income in accordance with their ownership
interests. As a result, the accompanying financial statements include no
provision for income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from the estimates.
Interim Financial Statements
The interim financial statements as of September 30, 1997 and for the nine
months ended September 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 BIOS 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 nine months
ended September 30, 1997 are not necessarily indicative of the results of
operations that may be expected for the entire year ending December 31, 1997.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at December 31,
1996:
<TABLE>
<S> <C>
Furniture and fixtures............................................................. $25,203
Equipments......................................................................... 33,934
-------
Less accumulated depreciation...................................................... 59,137
(9,836)
-------
$49,301
-------
-------
</TABLE>
F-101
<PAGE>
BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
4. NOTES PAYABLE
Notes payable consits of the following at December 31, 1996:
<TABLE>
<S> <C>
$800,000 promissory note payable, bearing interest at a variable rate of prime
plus .25% (8.75% at December 31, 1996), principal payments of $267,000 during
each of the first two years and interest payable monthly through October 1999,
secured by substantially all of the assets of BIOS.............................. $516,871
Less current portion.............................................................. (267,000)
--------
$249,871
--------
--------
</TABLE>
On July 9, 1997, BIOS borrowed $25,740 under a promissory note with a bank,
at a variable interest rate of prime plus .25%, interest payable monthly,
principal due November 1, 1999, secured by substantially all of the assets of
BIOS.
5. DUE TO STOCKHOLDERS
The stockholders of BIOS, advanced $80,000 to BIOS prior to January 1,
1996, due on demand, unsecured and bearing interest at 8%. BIOS repaid $80,000
in 1997.
6. LEASE COMMITMENT
BIOS leases office space and equipment under non-cancelable operating
leases, two of which contain an escalation clause. Rent expense charged to
operation totaled approximately $397,000 during 1996.
Furniture minimum rental commitments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................................. $ 94,714
1998.............................................................................. 94,714
1999.............................................................................. 94,714
2000.............................................................................. 94,714
2001.............................................................................. 94,714
Thereafter........................................................................ 424,213
--------
$899,783
--------
--------
</TABLE>
7. BENEFIT PLANS
BIOS maintains a defined contribution plan under the provisions of Section
401(k) of the Internal Revenue Code. Employees who meet the minimum length of
service and age requirements are eligible for participation. BIOS is responsible
for the administration of the plan as the plan administrator and BIOS'
stockholders are trustees of the plan. Under the provision of the plan,
contributions by BIOS are discretionary. BIOS made no contributions to the plan
in 1996.
8. COMMITMENTS AND CONTINGENCIES
BIOS features 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 of
incurred but unreported claims is recorded based upon historical experience.
Management of BIOS intends to renew the existing claims made policy annually and
expects to be able to obtain such coverage. If coverage is not renewed, BIOS
intends to purchase extended reporting period endorsements to provide
professional liability coverage for losses incurred prior to, but reported
subsequent to, the termination of the claims made policies.
F-102
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS
OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information........................ 2
Prospectus Summary............................ 3
Risk Factors.................................. 6
The Company................................... 15
Use of Proceeds............................... 20
Dividend Policy............................... 20
Capitalization................................ 21
Dilution...................................... 22
Pro Forma Financial Information............... 23
Selected Financial Information................ 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 32
Business...................................... 37
Management.................................... 57
Certain Transactions.......................... 63
Principal Stockholders........................ 67
Description of Capital Stock.................. 69
Shares Eligible for Future Sale............... 72
Underwriting.................................. 73
Legal Matters................................. 75
Experts....................................... 75
Index to Financial Statements................. F-1
</TABLE>
------------------
UNTIL , 1998 (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.
4,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
RAYMOND JAMES &
ASSOCIATES, INC.
VOLPE BROWN WHELAN & COMPANY
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the National
Association of Security Dealers, Inc. filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC registration fee................................................................................... $15,682
NASD filing fee........................................................................................ 5,675
Nasdaq National Market listing fee..................................................................... *
Blue sky fees and expenses............................................................................. *
Printing and engraving expenses........................................................................ *
Legal fees and expenses................................................................................ *
Accounting fees and expenses........................................................................... *
Transfer agent and registrar fees...................................................................... *
Miscellaneous.......................................................................................... *
-------
Total............................................................................................. $ *
-------
-------
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
'DGCL'), Article VI of the BMJ Medical Management, Inc. (the 'Company' or the
'Registrant') Restated Certificate of Incorporation (the 'Certificate of
Incorporation') (filed as Exhibit 3.1 to this Registration Statement) eliminates
the liability of the Company's directors to the Company or its stockholders,
except for liabilities related to breach of duty of loyalty, actions not in good
faith and certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Company of its
directors and officers. In addition, Article IX, Section 1 of the Company's
By-laws (filed as Exhibit 3.2 to this Registration Statement) requires the
Company to indemnify any current or former director or officer to the fullest
extent permitted by the DGCL. In addition, the Company has entered into
indemnity agreements with its directors (a form of which is filed as Exhibit
10.1 to this Registration Statement) which obligate the Company to indemnify
such directors to the fullest extent permitted by the DGCL. The Company also
maintains officers' and directors' liability insurance, which insures against
liabilities that officers and directors of the Company may incur in such
capacities.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement, which provides for indemnification of the
directors and officers of the Company signing the Registration Statement and
certain controlling persons of the Company against certain liabilities,
including those arising under the Securities Act, in certain instances by the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1996 the Company has issued unregistered securities to investors
and to physicians and certain other individuals in connection with the
affiliation transactions with the medical practices (the 'Affiliation
Transactions'). Each such issuance was made in reliance upon the exemption from
the registration requirements of the Securities Act of 1933, as amended,
contained in Section 4(2) of the Securities Act or Rule 701 promulgated under
the Securities Act on the basis that such transactions did not involve a public
offering.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
1. On May 6, 1996, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 1,175,000 shares of Common Stock, $0.001 par value per
share (the 'Common Stock') and 999,999 shares of the Company's Series A
Convertible Preferred Stock, $0.01 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 35,715
shares of Common Stock, with an exercise price of $0.01 per share.
3. On June 10, 1996, pursuant to an Incentive Stock Option Agreement, the
Company granted Caridad LaPlace an option to purchase 3,570 shares of Common
Stock with an exercise price of $0.01 per share.
4. On July 1, 1996, the Company issued 321,430 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 21,430 shares of Common
Stock with an exercise price of $0.35 per share.
6. On November 1, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Deborah Flytuta an option to purchase 3,570 shares of Common
Stock with an exercise price of $0.35 per share.
7. On November 4, 1996, pursuant to an Incentive Stock Option Agreement,
the Company granted Sherry Pulliam an option to purchase 17,855 shares of Common
Stock with an exercise price of $0.35 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,
$0.01 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 2,857,140 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 28,570 shares of Common
Stock with an exercise price of $0.49 per share.
11. On December 23, 1996, the Company issued 768,929 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 107,145 shares of Common
Stock with an exercise price of $0.01 per share.
13. On January 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted G. Steven Ensinger an option to purchase 17,855 shares of
Common Stock with an exercise price of $0.49 per share.
14. On January 2, 1997, the Company issued 7,145 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 23,810 shares of Common Stock at an exercise price of $4.20 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, $0.01 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 15,715 shares of Common
Stock with an exercise price of $0.49 per share.
18. On January 30, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Cindy Lesonsky an option to purchase 5,715 shares of Common
Stock with an exercise price of $0.49 per share.
19. On February 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted David Fater an option to purchase 100,000 shares of Common
Stock with an exercise price of $0.49 per share.
20. On February 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Andrea Seratte an option to purchase 28,570 shares of Common
Stock with an exercise price of $0.49 per share.
21. On March 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Glenn Cozen an option to purchase 53,570 shares of Common Stock
with an exercise price of $0.49 per share.
22. On March 7, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Caridad LaPlace an option to purchase 1,430 shares of Common
Stock with an exercise price of $0.70 per share.
23. On March 12, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Robert Cox an option to purchase 28,570 shares of Common Stock
with an exercise price of $0.70 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 392,857 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 28,570 shares of Common
Stock with an exercise price of $0.70 per share.
27. On April 1, 1997, the Company issued 287,659 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 35,715 shares of Common Stock
with an exercise price of $0.70 per share.
29. On April 14, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Lee Bodendorfer an option to purchase 21,430 shares of Common
Stock with an exercise price of $0.70 per share.
30. On April 15, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Pamela Montgomery an option to purchase 14,285 shares of Common
Stock with an exercise price of $0.70 per share.
31. On April 30, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted M. Anthony Anderson an option to purchase 17,855 shares of
Common Stock with an exercise price of $0.70 per share.
32. On May 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Meg Finnegan an option to purchase 14,285 shares of Common Stock
with an exercise price of $0.70 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 28,570 shares of Common Stock
with an exercise price of $0.70 per share.
34. On May 6, 1997 pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued an aggregate of 352,394 shares
of Common Stock. Such stock was issued in accordance with the following: (a) an
aggregate of 329,259 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 19,725 shares to
LOS' broker and attorney and (c) 3,410 shares to LOS' accountant, Kenneth A.
Ortner, P.A.
35. On May 6, 1997, pursuant to Restricted Stock Agreements, the Company
issued 3,570 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 4,285 shares of Common
Stock with an exercise price of $0.70 per share.
37. On June 1, 1997, the Company issued 42,640 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 60,140 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 14,285 shares of
Common Stock with an exercise price of $0.35 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 7,145
shares of Common Stock with an exercise price of $0.35 per share.
41. On June 2, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Dana Reynolds an option to purchase 21,430 shares of Common
Stock with an exercise price of $0.70 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, $0.01 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, $0.01 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 53,570 shares of Common
Stock with an exercise price of $0.70 per share.
45. On June 30, 1997, the Company issued warrants to purchase 28,570 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 9,525
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 3,570 shares of Common Stock
with an exercise price of $0.70 per share.
47. On July 1, 1997, the Company issued 32,220 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 69,645 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 107,650 shares of Common
Stock to Randy C. Watson, M.D., Keith R. Swanson, M.D. and Stephen P. Abelow,
M.D., who are affiliated with Surgical Associates of Lake Tahoe, L.P. under the
terms of three Management Services Agreements and three Restricted Stock
Agreements.
50. On July 1, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
88,846 shares of Common Stock to the following physicians affiliated with
Stockdale Podiatry Group, Inc.: Michelle Kraft, D.P.M., Lee Marek, D.P.M., Mark
L. Hamilton, D.P.M. and Mark F. Miller, D.P.M.
51. On July 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Irene Skau an option to purchase 714 shares of Common Stock with
an exercise price of $1.68 per share.
52. On July 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Mary Valdez an option to purchase 714 shares of Common Stock
with an exercise price of $1.68 per share.
53. On July 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Tamara Adinolfi an option to purchase 714 shares of Common Stock
with an exercise price of $1.68 per share.
54. On July 3, 1997, pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued 189,805 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.
55. On July 8, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Nancy Strayer an option to purchase 7,145 shares of Common Stock
with an exercise price of $0.70 per share.
56. On July 14, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted David Ellwanger an option to purchase 89,285 shares of Common
Stock with an exercise price of $0.70 per share.
57. On July 21, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Beth Landel an option to purchase 25,000 shares of Common Stock
with an exercise price of $0.70 per share.
58. On July 21, 1997, pursuant to a Non-Qualified Stock Option Agreement,
the Company granted Scott Kazden, M.D. an option to purchase 14,285 shares of
Common Stock with an exercise price of $0.70 per share.
59. On July 22, 1997, pursuant to a Non-Qualified Stock Option Agreement,
the Company granted Scott Dunn an option to purchase 7,143 shares of Common
Stock with an exercise price of $0.70 per share.
60. On July 24, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted David Coffler an option to purchase 5,715 shares of Common Stock
with an exercise price of $0.70 per share.
61. On July 31, 1997, the Company issued 166,667 shares of Series E
Preferred Stock to Cedar Ventures, LLC (f/k/a HIS Ventures, LLC), an affiliate
of Galtney Corporate Services, Inc. ('Galtney'), for an aggregate purchase price
of $1,000,000.
62. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Randy Farber an option to purchase 21,430 shares of Common Stock
with an exercise price of $0.70 per share.
63. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Steven Ensinger an option to purchase 10,715 shares of Common
Stock with an exercise price of $0.84 per share.
64. On August 1, 1997, the Company issued 28,615 shares of Common Stock to
Robert Wilson, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
65. On August 1, 1997, the Company issued warrants to purchase an aggregate
of 92,855 shares of Series E Preferred Stock, to Comdisco, Inc. ('Comdisco') in
connection with the execution of a (i) Master Lease
II-5
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
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.
66. On August 1, 1997, the Company issued 112,719 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.
67. On August 4, 1997, pursuant to an Incentive Stock Option Agreement, the
Company granted Helen Arnzen an option to purchase 3,570 shares of Common Stock
with an exercise price of $0.70 per share.
68. On August 9, 1997, pursuant to an Amended and Restated Management
Services Agreement and Restricted Stock Agreements, the Company issued 48,595
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.
69. 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.
70. On August 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Lisa Arnold an option to purchase 3,570 shares of Common
Stock with an exercise price of $0.84 per share.
71. On August 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Marc Guthart an option to purchase 5,000 shares of Common
Stock with an exercise price of $0.84 per share.
72. 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.
73. On August 26, 1997, pursuant to a Management Services Agreement and
Restricted Stock Agreements, the Company issued 469,215 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.
74. On August 26, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Andrew Heeman an option to purchase 3,570 shares of Common
Stock with an exercise price of $2.80 per share.
75. On September 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Rick Pakan an option to purchase 7,143 shares of Common
Stock with an exercise price of $3.15 per share.
76. On September 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Sheldon Lutz an option to purchase 62,500 shares of Common
Stock with an exercise price of $4.69 per share.
77. On September 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Billie Remsa an option to purchase 4,285 shares of Common
Stock with an exercise price of $3.15 per share.
78. On September 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Jim Foley an option to purchase 5,714 shares of Common Stock
with an exercise price of $3.15 per share.
79. On September 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Melissa Reed an option to purchase 3,571 shares of Common
Stock with an exercise price of $2.80 per share.
80. On September 4, 1997, the Company issued 27,305 shares of Common Stock
to Eradio Arredondo, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
81. On September 5, 1997, the Company issued 51,855 shares of Common Stock
to Kramer & Maehrer, LLC under the terms of a Management Services Agreement and
Restricted Stock Agreement.
82. 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.
II-6
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
affiliates of Hambrecht & Quist, LLC. which are convertible into shares of
Common Stock at an initial conversion price equal to $10.08 per share.
83. On September 9, 1997, the Company issued 26,065 shares of Common Stock
to Jeffrey Beitler, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
84. On September 9, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Georges Daou, director, an option to purchase 35,714 shares
of Common Stock with an exercise price of $2.80 per share.
85. On September 9, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Greg Wood an option to purchase 3,571 shares of Common Stock
with an exercise price of $2.80 per share.
86. On September 12, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
90,659 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.
87. On September 17, 1997, the Company issued 68,130 shares of Common Stock
to Michael Abrahams, M.D. under the terms of a Management Services Agreement and
Restricted Stock Agreement.
88. On October 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Gary DiBlasio an option to purchase 3,571 shares of Common
Stock with an exercise price of $4.69 per share.
89. On October 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Debra Mills an option to purchase 1,429 shares of Common
Stock with an exercise price of $4.69 per share.
90. On October 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Mayra Ridder an option to purchase 7,143 shares of Common
Stock with an exercise price of $4.69 per share.
91. On October 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Roel Gonzalez an option to purchase 1,785 shares of Common
Stock with an exercise price of $4.69 per share.
92. On October 3, 1997, pursuant to the terms of a Restricted Stock
Agreement, the Company issued an aggregate of 359,464 shares of Common Stock to
the following physicians affiliated with Valley Sports and Arthritis Surgeons:
George Arangio, M.D., Thomas DiBenedetto, M.D., Neal Stansbury, M.D., David
Sussman, M.D. and Prodromos Ververeli, M.D.
93. On October 15, 1997, pursuant to the terms of a Note Agreement, as
amended, the Company issued warrants to purchase an aggregate of 48,215 shares
of the Company's Common Stock to the following: Dr. Nagpal, Delphi Ventures,
Delphi Bio Investments, Oak Partners, Oak VI and Dr. Fox.
94. On October 16, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
201,610 shares of Common Stock to the following physicians affiliated with OSA:
Dr. Eidelson, John VanHouten, M.D., Robert Zann, M.D., Eric Shapiro, M.D., Edgar
Handal, M.D. and Brandon Luskin, M.D.
95. On October 16, 1997, pursuant to a Non-Qualified Stock Option
Agreement, the Company granted Edgar Handal, M.D. an option to purchase 10,154
shares of Common Stock with an exercise price of $3.15 per share.
96. On October 16, 1997, pursuant to a Non-Qualified Stock Option
Agreement, the Company granted Brandon Luskin, M.D. an option to purchase 3,877
shares of Common Stock with an exercise price of $3.15 per share.
97. On October 26, 1997, pursuant to the terms of Restricted Stock
Agreements, the Company issued an aggregate of 40,740 shares of Common Stock to
the following physicians affiliated with Orthopaedic Management Network, Inc.:
Gustavo Armendariz, M.D., Philip Bowman, M.D., Roberto Carreon, M.D., Thomas
Carter, M.D., Richard Collins, M.D., Dennis Crandall, M.D., Jody Daggett, M.D.,
Richard Daley, J.D., Jack Davis, M.D., Sherwood Duhon, M.D., Thomas Erickson,
M.D., Norman Fee, M.D., Jonathan Fox, M.D., Charles Gauntt, M.D., Lawrence
Green, M.D., Mark Greenfield, M.D., Dan Heller, M.D., Peter Herwick, M.D.,
Robert Johnson, M.D., Robert Kasa, M.D., Douglas Kelly, M.D., Stuart Kozinn,
M.D., Richard Lane, M.D., John Mahon, M.D., Bruce Mallin, M.D., Bert McKinnon,
M.D., Stephen Milliner, M.D., Gerald Moczynski, M.D.,
II-7
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED)
Neil Motzkin, M.D., Paul Palmer, M.D., William Quinlan, M.D., Vincent Russo,
M.D., Ronald Sandler, M.D., Saul Schreiber, M.D., Irwin Shapiro, M.D., Victor
Tseng, M.D., Larry Verhulst, M.D., John Whisler, M.D., Robert White, M.D., Ralph
Wilson, M.D., Mark Zachary, M.D. and Jon Zoltan, M.D.
98. On October 27, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Rena Coady an option to purchase 5,714 shares of Common
Stock with an exercise price of $2.80 per share.
99. On October 28, 1997, pursuant to a Non-Qualified Stock Option
Agreement, the Company granted George Kolettis, M.D. an option to purchase
17,442 shares of Common Stock with an exercise price of $3.15 per share.
100. On October 28, 1997, pursuant to the terms of a Management Services
Agreement and Restricted Stock Agreements, the Company issued an aggregate of
37,837 shares of Common Stock to the following physician affiliated with LOAS:
Bruce Young, M.D., Dominic Kleinhenz, M.D., William McKay, M.D., George
Kolettis, M.D. and Thomas Goberville, M.D.
101. On October 31, 1997, pursuant to the terms of a Management Services
Agreement and Restricted stock Agreements, the Company issued an aggregate of
182,312 shares of Common Stock to the following physicians affiliated with BIOS:
David A. Krant, M.D., Jeffrey B. Worth, M.D., Jeffrey A. Crastnopol, M.D., Marc
Z. Hammerman, M.D., Gary B. Schwartz, M.D., Marshall E. Stauber, M.D., Thomas A.
Hoffeld, M.D. and Phillip E. Greenbarg, M.D.
102. On November 1, 1997, the Company issued warrants to purchase 10,000
shares of Series E Preferred Stock to Comdisco.
103. On November 10, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Stefanie Frank an option to purchase 4,285 shares of Common
Stock with an exercise price of $3.85 per share.
104. On November 14, 1997, the Company issued warrants to purchase 25,000
shares of Series E Preferred Stock to Comdisco.
105. On November 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Stewart Edelson, M.D., director, an option to purchase
35,714 shares of Common Stock with an exercise price of $4.69 per share.
106. On November 21, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Jim Douglas an option to purchase 7,143 shares of Common
Stock with an exercise price of $4.69 per share.
107. On November 21, 1997, the Company issued warrants to purchase 23,214
shares of Common Stock to Dr. Nagpal.
108. On November 26, 1997, pursuant to the terms of a Management Services
Agreement and a Restricted Stock Agreement, the Company issued an aggregate of
67,859 shares of Common Stock to the following physicians affiliated with NJOA:
Cary Skolnick, M.D., Manuael T. Banzon, M.D. and Gregg S. Berkowitz, M.D.
109. On December 1, 1997, pursuant to an Incentive Stock Option Agreement,
the Company granted Jim Foley an option to purchase 12,143 shares of Common
Stock with an exercise price of $4.90 per share.
110. On December 1, 1997, pursuant to a Non-Qualified Stock Option
Agreement, the Company granted Gabriel Nabil, consultant, an option to purchase
1,785 shares of Common Stock with an exercise price of $4.90 per share.
111. On December 1, 1997, pursuant to a Non-Qualified Stock Option
Agreement, the Company granted Zoltan Jan, consultant, an option to purchase
7,143 shares of Common Stock with an exercise price of $4.90 per share.
112. On January 2, 1998, pursuant to an Incentive Stock Option Agreement,
the Company granted Juan Vallarino an option to purchase 28,571 shares of Common
Stock with an exercise price of $4.90 per share.
113. On January 2, 1998, the Company issued warrants to purchase 14,286
shares of Common Stock to Dr. Nagpal.
II-8
<PAGE>
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 -- Form of Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 -- By-laws of the Registrant.
*4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan.
*5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) regarding
legality of securities being offered.
*10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures and Delphi BioInvestments.
*10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures, and Delphi BioInvestments.
*10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians affiliated
with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement Trust.
*10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR Health
Care, CGJR II and CGJR/MF.
*10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI, Oak
Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF.
*10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and Cedar Ventures, LLC (f/k/a
HIS Ventures, LLC).
*10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco.
*10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding.
*10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP Funding.
*10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended, between the
Company and Comdisco.
*10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company.
*10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the Company and
Galtney.
*10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the Company, Dr.
Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners, Health Care Services--BMJ,
LLC and HGQ Serv*is Ventures, L.P.
*10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company and
payable to the order of Dr. Nagpal, dated January 10, 1997.
*10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company and
payable to the order of Dr. Nagpal, dated January 10, 1997.
*10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996, among the
Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Scheer and the
stockholders named therein.
*10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996.
*10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among the
Company, LVBMJ amd certain physicians affiliated with LVBMJ.
*10.19 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and OAB.
*10.20 -- Amended and Restated Restricted Stock Agreement, dated as of September 9, 1997, among the
Company, LVBMJ and certain physicians affiliated with LVBMJ.
*10.21 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company
and STSC.
*10.22 -- Asset Purchase Agreement, dated as of November 1, 1996, between the Company and STSC.
</TABLE>
II-9
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.23 -- Restricted Stock Agreement, dated as of December 23, 1996, between the Company, STSC and certain
physicians affiliated with STSC.
*10.24 -- Stockholder Non-Competition Agreement, dated as of December 23, 1996, among the Company, STSC and
the STSC physicians.
*10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the Company,
Tri-City and the indemnifying persons identified therein.
*10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City.
*10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company, Tri-City
and certain physicians affiliated with Tri-City.
*10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company, Tri-City and
certain physicians affiliated with Tri-City.
*10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company
and SCOI.
*10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and SCOI.
**10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, as amended, among the Company,
SCOI, certain physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI and
Oak Partners.
*10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company, SCOI and
certain physicians affiliated with SCOI.
*10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company, LOS and
certain physicians affiliated with LOS.
*10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS.
*10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS and
certain physicians affiliated with LOS.
*10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company, LOS and
certain physicians affiliated with LOS.
*10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the Company, Sun
Valley and the indemnifying persons thereto.
*10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun Valley.
*10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain
physicians affiliated with Sun Valley.
*10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun Valley
and certain physicians affiliated with Sun Valley.
*10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the Company, Gold
Coast and the physicians affiliated with Gold Coast.
*10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company and Gold
Coast.
*10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and certain
physicians affiliated with Gold Coast.
*10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and certain
physicians affiliated with Gold Coast.
*10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast.
*10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal, Dr. Fox,
Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI.
*10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company and OSA.
*10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and OSA.
</TABLE>
II-10
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and certain
physicians affiliated with OSA.
*10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company and certain
physicians affiliated with OSA.
**10.51 -- Management Services Agreement, effective as of September 1, 1997, as amended, between the Company
and BIOS.
*10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and BIOS.
*10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and certain
physicians affiliated with BIOS.
*10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company and certain
physicians affiliated with BIOS.
*10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company and LOAS.
*10.56 -- Asset Purchase Agreements effective as of September 1, 1997, between the Company and certain
affiliates of LOAS.
*10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and certain
physicians affiliated with LOAS.
*10.58 -- Amended and Restated Practice Management Services Agreement dated as of September 26, 1997, among
the Company and certain physicians affiliated with Orthopaedic Management Network, Inc.
*10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and certain
physicians affiliated with Orthopaedic Management Network, Inc.
*10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the Company,
OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the shareholders'
representative named therein.
*10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI.
*10.62 -- Management Services Agreement effective as of September 1, 1997, among the Company, VSI and VSAS.
*10.63 -- Asset Purchase Agreement effective as of October 3, 1997, between the Company and VSI.
*10.64 -- Restricted Stock Agreement dated as of October 3, 1997, among the Company, VSI and certain
affiliated with VSI.
*10.65 -- Stockholder Non-Competition Agreement dated as of October 3, 1997, among the Company and certain
physicians affiliated with VSAS.
*10.66 -- Stock Purchase Agreement dated as of August 3, 1997, among the Company, VSI and the stockholders
listed therein.
*10.67 -- Registration Rights Agreement dated as of August 1, 1997, among the Company, Comdisco and
Galtney.
*10.68 -- Registration Rights Agreement dated as of September 9, 1997, among the Company, Health Care
Services-BMJ, LLC and H&Q Serv*is Ventures L.P.
*10.69 -- Registration Rights Agreement dated as of September 15, 1997, between the Company and Healthcare
Financial Partners, Inc.
*10.70 -- Third Amended and Restate Registration Rights Agreement dated as of September 30, 1997, among the
Company, Dr. Nagpal, Delphi Ventures III, L.P., Delphi Bioinvestments III, L.P., Oak Investment
Partners VI, Limited Partnership, Oak VI Affiliated Fund, Limited Partnership, L.P., CGJR Health
Care Services Private Equities, L.P., CGJR II, L.P., CGJR/MF III, L.P. and HIS Ventures, LLC.
**10.71 -- Management Services Agreement effective as of November 1, 1997, between the Company and NJOA.
**10.72 -- Asset Purchase Agreement effective November 1, 1997, between the Company and Orthopedic
Associates of New Jersey, an affiliate of NJOA.
</TABLE>
II-11
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
**10.73 -- Restricted Stock Agreement dated as of November 26, 1997, between the Company and certain
physicians affiliated with NJOA.
**10.74 -- Stockholder Non-Compeitition Agreement dated as of November 26, 1997, among the Company and
certain physicians affiliated with NJOA.
**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.
**27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements
or related notes.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws,
or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is 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-12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOCA
RATON, STATE OF FLORIDA ON THE 8TH DAY OF JANUARY, 1998.
BMJ MEDICAL MANAGEMENT, INC.
By: /s/ Naresh Nagpal
-----------------------
Name: Naresh Nagpal, M.D.
Title: President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 8TH DAY OF JANUARY,
1998, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------
<S> <C> <C>
/s/ NARESH NAGPAL President, Chief Executive Officer and
Naresh Nagpal, M.D. Director (Principal Executive Officer)
/s/ DAVID H. FATER Executive Vice President, Chief Financial
David H. Fater Officer and Director (Principal Financial
and Accounting Officer)
Director
Georges Daou
* Director
Stewart G. Eidelson, M.D.
* Director
Ann H. Lamont
* Director
Donald J. Lothrop
* Director
James M. Fox, M.D.
*By: /s/David H. Fater
David H. Fater, Attorney-in-Fact
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
**1.1 -- Form of Underwriting Agreement.
*3.1 -- Form of Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 -- By-laws of the Registrant.
*4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan.
*5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm)
regarding legality of securities being offered.
*10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures and Delphi BioInvestments.
*10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures, and Delphi BioInvestments.
*10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians
affiliated with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement
Trust.
*10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR
Health Care, CGJR II and CGJR/MF.
*10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and
CGJR/MF.
*10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures,
LLC.
*10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco.
*10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding.
*10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP
Funding.
*10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended,
between the Company and Comdisco.
*10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company.
*10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the
Company and Galtney.
*10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the
Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners,
Health Care Services--BMJ, LLC and HGQ Serv*is Ventures, L.P.
*10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997.
*10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997.
*10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996,
among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners,
Oak VI, Scheer and the stockholders named therein.
*10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996.
*10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among
the Company, LVBMJ and 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
*10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the
Company, Tri-City and the indemnifying persons identified therein.
*10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City.
*10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company,
Tri-City and certain physicians affiliated with Tri-City.
*10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company,
Tri-City and certain physicians affiliated with Tri-City.
*10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between
the Company and SCOI.
*10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and
SCOI.
**10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, as amended, among the
Company, SCOI, certain physicians affiliated with SCOI, Delphi Ventures, Delphi
BioInvestments, Oak VI and Oak Partners.
*10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company,
SCOI and certain physicians affiliated with SCOI.
*10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company,
LOS and certain physicians affiliated with LOS.
*10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS.
*10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS
and certain physicians affiliated with LOS.
*10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company,
LOS and certain physicians affiliated with LOS.
*10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the
Company, Sun Valley and the indemnifying persons thereto.
*10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun
Valley.
*10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and
certain physicians affiliated with Sun Valley.
*10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun
Valley and certain physicians affiliated with Sun Valley.
*10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the
Company, Gold Coast and the physicians affiliated with Gold Coast.
*10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company
and Gold Coast.
*10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and
certain physicians affiliated with Gold Coast.
*10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and
certain physicians affiliated with Gold Coast.
*10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast.
*10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal,
Dr. Fox, Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI.
*10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company
and OSA.
*10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and
OSA.
*10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and
certain physicians affiliated with OSA.
*10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company
and certain physicians affiliated with OSA.
**10.51 -- Management Services Agreement, effective as of September 1, 1997, as amended, between
the Company and BIOS.
*10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and
BIOS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
*10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and
certain physicians affiliated with BIOS.
*10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company
and certain physicians affiliated with BIOS.
*10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company
and LOAS.
*10.56 -- Asset Purchase Agreements effective as of September 1, 1997, between the Company and
certain affiliates of LOAS.
*10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and
certain physicians affiliated with LOAS.
*10.58 -- Form of Amended and Restated Practice Management Services Agreement dated as of
September 26, 1997, among the Company and certain physicians affiliated with
Orthopaedic Management Network, Inc.
*10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and
certain physicians affiliated with Orthopaedic Management Network, Inc.
*10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the
Company, OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the
shareholders' representative named therein.
*10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI.
*10.62 -- Management Services Agreement effective as of September 1, 1997, among the Company, VSI
and VSAS.
*10.63 -- Asset Purchase Agreement effective as of October 3, 1997, between the Company and VSI.
*10.64 -- Restricted Stock Agreement dated as of October 3, 1997, among the Company, VSI and
certain affiliated with VSI.
*10.65 -- Stockholder Non-Competition Agreement dated as of October 3, 1997, among the Company
and certain physicians affiliated with VSAS.
*10.66 -- Stock Purchase Agreement dated as of August 3, 1997, among the Company, VSI and the
stockholders listed therein.
*10.67 -- Registration Rights Agreement dated as of August 1, 1997, among the Company, Comdisco
and Galtney.
*10.68 -- Registration Rights Agreement dated as of September 9, 1997, among the Company, Health
Care Services-BMJ, LLC and H&Q Serv*is Ventures L.P.
*10.69 -- Registration Rights Agreement dated as of September 15, 1997, between the Company and
Healthcare Financial Partners, Inc.
*10.70 -- Third Amended and Restate Registration Rights Agreement dated as of September 30, 1997,
among the Company, Dr. Nagpal, Delphi Ventures III, L.P., Delphi Bioinvestments III,
L.P., Oak Investment Partners VI, Limited Partnership, Oak VI Affiliated Fund, Limited
Partnership, L.P., CGJR Health Care Services Private Equities, L.P., CGJR II, L.P.,
CGJR/MF III, L.P. and HIS Ventures, LLC.
**10.71 -- Management Services Agreement effective as of November 1, 1997, between the Company and
NJOA.
**10.72 -- Asset Purchase Agreement effective November 1, 1997, between the Company and Orthopedic
Associates of New Jersey, an affiliate of NJOA.
**10.73 -- Restricted Stock Agreement dated as of November 26, 1997, between the Company and
certain physicians affiliated with NJOA.
**10.74 -- Stockholder Non-Competition Agreement dated as of November 26, 1997, among the Company
and certain physicians affiliated with NJOA.
**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.
**27 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
<PAGE>
EXHIBIT 1.1
BMJ Medical Management, Inc.
4,000,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
_____ __, 1998
HAMBRECHT & QUIST LLC
RAYMOND JAMES & ASSOCIATES, INC.
VOLPE BROWN WHELAN & COMPANY, LLC
c/o Hambrecht & Quist LLC
230 Park Avenue, 21st Floor
New York, NY 10169
Ladies and Gentlemen:
BMJ Medical Management, Inc. a Delaware corporation (herein called the
Company), proposes to issue and sell 4,000,000 shares of its authorized but
unissued Common Stock, $.001 par value (herein called the Common Stock) (said
4,000,000 shares of Common Stock being herein called the Underwritten Stock).
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 600,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. Registration Statement. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration statement
on Form S-1 (No. 333-35759), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
- -------
(1) Plus an option to purchase from the Company up to 600,000 additional
shares to cover over-allotments.
<PAGE>
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and
the Prospectus and as being conducted, and is duly qualified as a
foreign corporation and in good standing in all jurisdictions in which
the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary, except where
the failure to be so qualified would not have a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business, business prospects, properties or results of
operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect").
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been
any material adverse change in the business, properties, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the
rules and regulations of the Commission thereunder; on the Effective
Date, the Registration Statement did not contain any untrue statement
of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the
Prospectus did not and, on the Closing Date and any later date on
which Option Stock is to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from,
the Registration Statement or the Prospectus made in reliance upon and
in conformity with information herein or otherwise furnished in
writing to the Company by or on behalf of the Underwriters for use in
the Registration Statement or the Prospectus.
(iv) The Company has the requisite corporate power and authority
to enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, except
(1) as such enforceability may be limited by nowor hereafter (A)
applicable bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance or similar laws in effect which affect the
enforcement of creditors' rights generally and (B) general principles
of equity, regardless of whether enforceability is considered in a
proceeding at law or in equity; and (2) as rights to indemnity and
contribution may be limited under applicable law; the performance of
this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, (i) any
material bond, debenture, note or other evidence of indebtedness, or
under any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other material agreement or
instrument to which the Company is a party or by which it or any of
its properties may
<PAGE>
3
be bound, (ii) the charter or bylaws of the Company, or (iii) any law,
order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its properties. No consent,
approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its properties is required for the
execution and delivery of this Agreement and the consummation by the
Company of the transactions herein contemplated, except as may be
required under the Securities Act or under state or other securities
or Blue Sky laws, all of which requirements have been satisfied in all
material respects.
(v) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the
Company or any of the Company's properties, assets or rights before
any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its officers or
properties or otherwise which (i) if adversely decided, would (x)
result in a material adverse change in the operations, business,
financial condition, results of operations or business prospects of
the Company and its subsidiaries, taken as a whole, or (y) would
materially and adversely affect the Company's properties, assets or
rights, (ii) if adversely decided, would prevent consummation of the
transactions contemplated hereby, or (iii) is required to be disclosed
in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the
Company required to be described or referred to in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement by the Securities Act or the Rules and Regulations which
have not been accurately described in all material respects or
referred to in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(vi) The Stock, when issued and sold to the Underwriters as
provided herein, will be duly and validly issued, fully paid and
nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or
the Board of Directors of the Company will be required for the
issuance and sale of the Stock as contemplated herein.
(vii) Ernst & Young, LLP, which has examined the financial
statements of the Company, together with the related schedules and
notes, as of September 30, 1997 and December 31, 1996 filed with the
Commission as a part of the Registration Statement, which are included
in the Prospectus, are independent accountants within the meaning of
the Securities Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related
schedules and notes, and the unaudited financial information, forming
part of the Registration Statement and Prospectus, fairly present in
all material respects the financial position and the results of
operations of the Company at the dates and for the periods to which
they apply; and all audited financial statements of the Company,
together with the related schedules and notes, and the unaudited
consolidated financial information, filed with the Commission as part
of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied
throughout the periods involved except as may be otherwise stated
therein. The selected and summary financial and statistical data
included in the Registration Statement present fairly in all material
respects the information shown therein and have been compiled on a
basis consistent with the audited financial statements presented
therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(viii) Except as set forth in the Registration Statement and
Prospectus, (A) the Company has valid title to all properties and
assets described in the Prospectus as owned by it, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a Material Adverse
Effect, (B) the agreements to which the Company is a party described
in the Prospectus are valid agreements, enforceable against the
Company (as applicable) and, to the Company's knowledge, by the
Company against the other parties thereto, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors'
<PAGE>
4
rights generally or by general equitable principles and, to their
knowledge, the other contracting party or parties thereto are not in
material breach or material default under any of such agreements, and
(C) the Company has valid and enforceable leases for all properties
described in the Prospectus as leased by it, except as the
enforcement, thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be
conducted, except where the failure to own or lease such properties
would not have a Material Adverse Effect.
(ix) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and have paid all taxes shown
thereon as due, except for such taxes or tax assessments, if any, as
are being contested in good faith and as to which adequate reserves,
to the extent required by GAAP, have been provided; and there is no
tax deficiency that has been or, to the best of the Company's
knowledge, is reasonably likely to be asserted against the Company
that would have a Material Adverse Effect; and all tax liabilities are
adequately provided for on the books of the Company.
(x) The Company and its subsidiaries maintain insurance with
recognized insurers of the types and in the amounts generally adequate
for their respective business and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or
leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect; the Company has not been
refused any insurance coverage sought or applied for; and the Company
has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse
Effect.
(xi) Neither the Company nor any of its subsidiaries is currently
involved in any material labor dispute, nor, to the knowledge of the
Company, is any material labor dispute threatened which, if such
dispute were to occur, would be reasonably likely to result in a
Material Adverse Effect. No collective bargaining agreement exists
with any of the Company's employees and, to the Company's knowledge,
no such agreement it imminent.
(xii) Neither the Company nor any of its subsidiaries is an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
(xiii) The Company has not distributed and will not distribute
prior to the later of (A) the Closing Date and (B) completion of the
distribution of the Stock any offering material in connection with the
offering and sale of the Stock other than any Preliminary
Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Securities Act.
(xiv) The Company has not, at any time, (A) made any unlawful
contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (B) made any payment to
any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
<PAGE>
5
(xv) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Stock.
(xvi) Each officer, director and beneficial owner of shares of
Common Stock has agreed in writing that such person will not, for a
period of one hundred eighty (180) days after the date of the
Propsectus, sell, offer, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, otherwise than (A) as a bona fide gift
or gifts, provided by the donee or donees thereof agree in writing to
be bound by this restriction, or (B) with the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters. Furthermore, such
person will also agree and consent to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
the securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters
a complete and accurate list of all security holders of the Company
and the number and type of securities held by each security holder.
The Company has delivered to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to
which its officers, directors and stockholders have agreed not to,
sell, offer, contract to sell, grant any option to purchase, or
otherwise transfer or dispose of, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common
Stock (herein called the Lock-Up Agreements) presently in effect.
(xvii) Except as set forth in the Registration Statement and
Prospectus, (A) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment (herein
called Environmental Laws) which are applicable to its business,
except to the extent that any failure to so comply would not have a
Material Adverse Effect, (B) the Company has received no notice from
any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement, and (C) no property which is owned, leased or
occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability
Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or
local law.
(xviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorizations, (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization, and
(D) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xix) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any
of the officers or directors of the Company or any of the members of
the families of any of them, which are required to be disclosed in the
Registration Statement or Prospectus and are not so disclosed.
(xx) Prior to the Closing Date the Stock to be issued and sold by
the Company will be authorized and approved for quotation on the
Nasdaq National Market upon official notice of issuance.
(xxi) Except as set forth in the Registration Statement and
Prospectus, the Company is in compliance with all laws, Federal, state
and local, applicable to its business and has received all necessary
licenses and approvals including but not limited to the staff leasing
laws of the State of Texas (Tex. Lab. Code Ann. Vernon 1997 Section
91.001 et. seq.).
<PAGE>
6
(xxii) Neither the Company nor any of its subsidiaries or the
Existing Practices or any of their respective officers and directors
has engaged in any activities that are prohibited under federal
Medicare and Medicaid statutes (which include but are not limited to
42 U.S.C. Sections 1320a-7, 1302a-7(a) and 1320a-7b), the federal
CHAMPUS statute, the Federal False Claims Act (31 U.S.C. Section
3729), or the regulations promulgated pursuant to such federal
statutes, or related state or local statutes or regulations or which
are prohibited by rules of professional conduct.
(xxiii) The activities and operations of the Company and its
subsidiaries and the Existing Practices comply with the federal
Medicare and Medicaid statutes regarding health professional
self-referrals, 42 U.S.C. Section 1395nn and 42 U.S.C. Section 1396b,
and the regulations promulgated pursuant to such statutes, and all
similar state or local self-referral statutes and regulations in
effect in each state in which each of the Existing Practices is
located.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
4,000,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares,
the number of shares of the Stock which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares which the
defaulting Underwriter or Underwriters agreed to purchase; provided, however,
that the non-defaulting Underwriters shall not be obligated to purchase the
shares which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the total number
of shares of the Stock which all Underwriters agreed to purchase hereunder. If
the total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in accordance
with the two preceding sentences, the Company shall have the right, within 24
hours next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase of such
shares and portion on the terms herein set forth. In any such case, either you
or the Company shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any
<PAGE>
7
default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 600,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or facsimile notice
by you to the Company setting forth the aggregate number of shares of the Option
Stock as to which the several Underwriters are exercising the option. Delivery
of certificates for the shares of Option Stock, and payment therefor, shall be
made as provided in Section 5 hereof. The number of shares of the Option Stock
to be purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Stock to be purchased by the several Underwriters
as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you
in such manner as you deem advisable to avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page, the last paragraph of page 2 of the Prospectus and under "Underwriting" in
the Registration Statement, any Preliminary Prospectus and the Prospectus
relating to the Stock filed by the Company (insofar as such information relates
to the Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 10:00 A.M., New York City time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York
l00l9, at 10:00 a.m., New York City time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 10:00 a.m., New York City time, on the date two business days preceding
the Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cravath, Swaine & Moore, 825
Eighth Avenue, New York, New York l0019 at 10:00 a.m., New York City time, on
the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company by wire transfer in immediately available funds. Such payment shall
be made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New
<PAGE>
8
York 10004 on the business day prior to the Closing Date or, in the case of the
Option Stock, by 3:00 p.m., New York time, on the business day preceding the
date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. Further Agreements of the Company. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing, [unless
the Company is otherwise advised by counsel that the Company is legally required
to file such amendment or supplement] or which is not in compliance with the
Securities Act or the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the
<PAGE>
9
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended prospectus
setting forth such variation. The Company authorizes the Underwriters and all
dealers to whom any of the Stock may be sold by the several Underwriters to use
the Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Stock in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified, or take any other action that
would subject it to general service of process or to taxation in respect of
doing business. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably request
for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. (the NASD)
of the Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus
and of the several documents required by paragraph (c) of this Section 6 to be
so furnished, (iii) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6,
(iv) the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (v) the printing and issuance
of stock certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters) paid
by or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and the filing fee of the NASD.
(k) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract
to sell, grant any option to purchase, or otherwise transfer or dispose of, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock. The foregoing sentence shall not apply to (A) the
Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of
Common Stock issued by the Company upon the exercise of options granted under
the stock option plan of the Company (the Option Plan) or upon the exercise of
warrants outstanding as of the date hereof, all as described in the footnote to
the table under the caption "Capitalization" in the Preliminary Prospectus, (C)
options to purchase Common Stock granted under the Option Plan, and (D) Common
Stock
<PAGE>
10
issued by the Company in connection with certain affiliation transactions,
provided that any such transferee agrees to be bound by the terms of the lock-up
agreement described in Section 9(j) herein.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph(a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who
<PAGE>
11
signs the Registration Statement on his own behalf or pursuant to a power of
attorney, each of its directors, each other Underwriter and each person
(including each partner or officer thereof) who controls the Company or any such
other Underwriter within the meaning of Section 15 of the Securities Act, from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise and
to reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in
<PAGE>
12
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear the
legal and other expenses incurred in connection with the conduct of the defense
as referred to in clause (i) of the proviso to the preceding sentence and (B)
the indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If, within a
reasonable time after receipt of the Notice, no Notice of Defense has been
given, the indemnifying party or parties shall be responsible for any legal or
other expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the total underwriting discount received by the Underwriters, as
set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
<PAGE>
13
(f) In addition to its other obligations under this Section 7, the
indemnifying parties, hereby agree to reimburse on a quarterly basis any
indemnified party for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (a) or
(b), as applicable, of this Section 7, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 7(f) and the possibility that such payments might later be held to
be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (3) (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued
and no proceedings therefor shall be pending or, to the Company's
knowledge, threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing
the Stock, all corporate proceedings and other legal matters incident
to the foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial statements contained therein),
shall have been approved at or prior to the Closing Date by Cravath,
Swaine & Moore,
<PAGE>
14
counsel for the Underwriters.
(c) You shall have received (i) from O'Sullivan Graev & Karabell,
LLP, counsel for the Company, addressed to the Underwriters and dated
the Closing Date, covering the matters set forth in Annex A hereto;
(ii) from Proskauer Rose & Goetz Mendelsohn, special health care
counsel for the Company, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex B hereto; and
(iii) if Option Stock is purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of
such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were
true and correct and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein,
respectively, not misleading, (ii) since the Effective Date, no event
has occurred which should have been set forth in a supplement or
amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the
business, properties, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of business, neither
the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained
therein, (iv) neither the Company nor any of its subsidiaries has any
material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any
pending or known threatened legal proceedings to which the Company or
any of its subsidiaries is a party or of which property of the Company
or any of its subsidiaries is the subject which are material and which
are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents
which are required to be filed as exhibits to the Registration
Statement which have not been filed as required, and (vii) the
representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the
President and the Chief Financial Officer of the Company, stating that
the respective signers of said certificate have carefully examined the
Registration Statement in the form in which it originally became
effective and the Prospectus contained therein and any supplements or
amendments thereto, and that the statements included in clauses (i)
through (vii) of paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Ernst & Young LLC, a letter or
letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within
the meaning of the Securities Act and the applicable published rules
and regulations thereunder and based upon the procedures described in
their letter delivered to you concurrently with the execution of this
Agreement (herein called the Original Letter), but carried out to a
date not more than five (5) business days prior to the Closing Date or
such later date on which Option Stock is purchased (i) confirming, to
the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date,
as the case may be, and (ii) setting forth any revisions and additions
to the statements and conclusions set forth in the Original Letter
<PAGE>
15
which are necessary to reflect any changes in the facts described in
the Original Letter since the date of the Original Letter or to reflect
the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any
development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which,
in your sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Stock or the purchase
of the Option Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized and approved for quotation
on the Nasdaq National Market.
(i) On or prior to the Closing Date, you shall have received from
all directors, officers, and beneficial holders of more than 5% of the
outstanding Common Stock stockholders agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i), sell, offer, contract to sell, grant any
option to purchase, or otherwise transfer or dispose of, any shares of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, otherwise than as a bona fide gift or
gifts, provided that the donee or donees thereof agree in writing to be
bound by this restriction.
(j) On or prior to the Closing Date, you share have received from
the Company a certificate substantially in the form attached hereto as
Exhibit A certifying as to the Company's compliance and continued
compliance with certain health care laws and regulations.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Cravath, Swaine & Moore, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
10. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company
<PAGE>
16
to the Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
11. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by Telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, 230 Park Avenue,
21st Floor, New York, NY 10169; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office 4800 North Federal Highway, Suite
1040, Boca Raton, Florida 33431, Attention: President. All notices given by
telegraph shall be promptly confirmed by letter.
13. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraph
(k) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
<PAGE>
17
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
BMJ MEDICAL MANAGEMENT, INC.
By __________________________
[Name]
[Title]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
RAYMOND JAMES & ASSOCIATES, INC.
VOLPE BROWN WHELAN & COMPANY, LLC
By Hambrecht & Quist LLC
By __________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE>
18
SCHEDULE I
UNDERWRITERS
Underwriters Number of
------------ Shares to be
Purchased
---------
Hambrecht & Quist LLC....................................
Raymond James & Associates Inc...........................
Volpe Brown Whelan & Company, LLC........................
-----------
Total........................................... 4,000,000
===========
<PAGE>
19
ANNEX A
Matters to be Covered in the Opinion of O'Sullivan, Graev & Karabell, LLP
Counsel for the Company
1. The Company (i) is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware, (ii) is qualified
to do business in the States of Florida, California, Texas and Pennsylvania and
(iii) has the corporate power and authority to own or lease its properties and
to conduct its business as described in the prospectus.
2. Each of the subsidiaries listed on Annex I hereto is (i) a
corporation validly existing and in good standing under the laws of the state
of its jurisdiction and (ii) is qualified to do business in the states set forth
on Annex I.
3. The Registration Statement has been declared effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued, and to our actual knowledge, no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
4. To our actual knowledge, there are no contracts or other documents
of a character required to be filed as exhibits to the Registration Statement or
required to be described in the Registration Statement or the Prospectus which
are not also filed or described.
5. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
6. Based solely on our review of the Restated Certificate, the
corporate minute books and the stock transfer books of the Company, the capital
stock of the Company (immediately prior to the transactions contemplated by the
Underwriting Agreement) consisted of (i) shares of Common Stock, of which shares
were issued and outstanding; and (ii) shares of Preferred Stock, of which shares
were issued and outstanding; all of such outstanding shares of capital stock
have been duly and validly issued and are fully paid and non-assessable.
7. The Shares have been duly authorized, and when delivered to and paid
for by the Underwriters in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and nonassessable and the issuance
of the Shares is not subject to any preemptive or, to our actual knowledge,
similar rights.
8. To our actual knowledge, all registration rights attached to any of
the Company's shares are inapplicable to, or have been duly waived with respect
to, the offering contemplated by the Prospectus.
9. The issue and sale of the Shares and the performance by the Company
of its obligations under the Underwriting Agreement will not to our actual
knowledge (A) result in a breach or violation of any of the terms or provisions
of any agreement or instrument filed as an exhibit to the Registration Statement
or (B) result in any violation of the Restated Certificate or by the by-laws of
the Company or the provisions of the General Corporation Law of the State of
Delaware or any applicable New York or Federal court or governmental agency or
body having jurisdiction over the Company or any of its properties (except that
we render no opinion herein with respect to the compliance of the
indemnification or contribution provisions of the Underwriting Agreement with
the Federal securities laws).
10. No consent, approval, authorization order, of any New York or
Federal court or governmental agency or body is required for the sale and
issuance of the Shares or the performance by the Company of its obligations
under the Underwriting Agreement except such consents, approvals and
authorizations, as have been obtained under the Securities Act and such as may
be required under state securities or Blue Sky laws or under the rules of
<PAGE>
20
the National Association of Securities Dealers, Inc. in connection with the
purchase and distribution of the Shares by the Underwriters.
11. To our actual knowledge, except as set forth in the Prospectus,
there are no legal or governmental proceedings pending or threatened to which
the Company is a party or to which any property of the Company is subject which
are required to be described in the Registration Statement and are not so
described.
12. The statements in the Prospectus under the caption "Management
Stock Option Plan," insofar as such statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information called for with
respect to such documents and matters.
13. The Registration Statement and the Prospectus (except for (A) the
financial statements, notes thereto and other financial information and
schedules included therein or omitted therefrom as to which we have not been
requested to express any opinion and (B) the matters described under the
captions "Risk-Factors-Government Regulation." "Business-Federal Law,"
"Business-State Law" and Business-Federal and State Initiatives" in the
Prospectus as to which we express no opinion and as to which you are receiving a
separate opinion dated the date hereof from Proskauer Rose LLP (the "Proskauer
Opinion")) appear on their face to have been appropriately responsive in all
material respects to the requirements of the Securities Act and the rules and
regulations promulgated thereunder.
14. The Shares to be issued and sold to the Underwriters in accordance
with the terms of the Underwriting Agreement have been approved for quotation on
the Nasdaq National Market subject to official notice of issuance.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or of the State of Delaware,
upon opinions of local counsel satisfactory in form and scope to counsel for
the Underwriters. Copies of any opinions so relied upon shall be delivered to
the Representatives and to counsel for the Underwriters and the foregoing
opinion shall also state that counsel knows of no reason the Underwriters
are not entitled to rely upon the opinions of such local counsel.
<PAGE>
21
ANNEX B
Matters to be Covered in the Opinion of Proskauer Rose Goetz & Mendelsohn
Special Health Care Counsel for the Company
10. We have acted as special health care regulatory counsel to BMJ Medical
Management, Inc., a Delaware corporation (the "Company"), in connection
with the issuance and sale by the Company of an aggregate of 4,000,000
shares of the Company's Common Stock, par value $.001 per share (the
"Shares"), including 600,000 Shares purchased pursuant to the
exercise of the over-allotment option set forth in Section 3 of the
Underwriting Agreement, dated [ ], 1998, among the Company,
Hambrecht & Quist LLC, Raymond James & Associates, Inc., and Volpe
Brown Whelan & Company, LLC (the "Underwriting Agreement"), by the
Underwriters named in Schedule 1 of the Underwriting Agreement. This
opinion is being delivered to you pursuant to Section 9(c)(ii) of the
Underwriting Agreement. Capitalized terms used but not defined herein
shall have the meanings ascribed thereto in the Underwriting Agreement.
Our opinion expressed below is limited to the law of the Commonwealth
of Pennsylvania, the States of California and Florida and the Federal
Law of the United States, and we do not express any opinion herein
concerning any other law.
Based upon our review of what we believe to be the relevant provisions
of federal and state statutes and regulations and, in the case of
Florida, the recent draft final order of the State of Florida Board of
Medicine (the "Draft Order"), in our opinion, the descriptions of those
provisions under the captions "Risk Factors--Government Regulation,"
"Business--Federal Law," "Business--State Law," and "Business--Federal
and State Initiatives" in the Prospectus, although not intended to be
complete summaries of such statutes or regulations or the Draft Order,
comply as to form in all material respects, with the requirements of
Form S-1 and Regulation C.
This opinion is given to you solely for your benefit and the benefit of
the Underwriters represented by you in connection with the issuance of
the Prospectus. This opinion may not be relied upon by you or such
Underwriters for any other purpose or furnished to, quoted or relied
upon by any other person, firm or corporation for any purpose without
our express written consent.:
<PAGE>
22
200 We have served only as special health care regulatory counsel to BMJ
Medical Management, Inc., a Delaware corporation (the "Company"), and
have advised the Company in that capacity in regard to health care
regulatory requirements related to certain of its transactions in
connection with the issuance and sale by the Company of an aggregate of
4,000,000 shares of the Company's Common Stock, par value $.001 per
share (the "Shares"), including 600,000 Shares purchased, pursuant to
the exercise of the over-allotment option set forth in Section 3 of the
Underwriting Agreement, dated [ ], 1998 among the Company,
Hambrecht & Quist, LLC, Raymond James & Associates, Inc., and Volpe
Brown Whelan & Company, LLC (the "Underwriting Agreement"), by the
Underwriters named in Schedule 1 of the Underwriting Agreement. This
opinion is being delivered to you pursuant to Section 9(c)(ii) of the
Underwriting Agreement. Capitalized terms used but not defined herein
shall have the meanings ascribed thereto in the Underwriting Agreement.
In our capacity as special health care regulatory counsel, we
participated in conferences with certain officers of the Company
concerning the preparation of those portions of the Registration
Statement and the Prospectus referred to in the next paragraph.
Although we have not independently verified the accuracy or
completeness of the statements contained in the Registration Statement
or the Prospectus, and in view of the limitations inherent in our
limited engagement we cannot and do not assume responsibility or pass
on the accuracy of such statements except to the extent set forth in
our opinion letter to you dated [ ], 1998, no facts have
come to our attention that lead us to believe that the statements set
forth in the Registration Statement under the captions "Risk Factors--
Government Regulation," "Business--Federal Law," "Business--State
Law," and "Business--Federal and State Initiatives," at the time the
Registration Statement was declared effective, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus, with
respect to the above-specified text captions, at the time the
Registration Statement was declared effective, or on the date hereof,
contained or contains any untrue statement of a material fact or
omitted or omits to state any fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE>
23
ANNEX C
Form of Company Certificate on Health Care Law Compliance
1. To the best knowledge of the Company, the Company is in
compliance with the federal and state laws regulating group
practices, the corporate practice of medicine, fee splitting
and kick backs (the "Health Care Laws");
2. The Company will use its best efforts to continue to comply
with the Health Care Laws and any similar laws that may come
into effect from time to time;
3. The Company, within a reasonable time from the date hereof,
will develop and implement a corporate compliance program,
which will be structured in light of the United States
Sentencing Commission's Federal Sentencing Guidelines Manual
and which will include policies substantially similar to the
listed policies attached hereto as Exhibit A.
BMJ Medical Management, Inc.
-------------------------------
Name:
Title:
<PAGE>
24
Exhibit A
PART 1: General Policies
Introduction (Corporate Compliance Policy Statement)
Code of Conduct
Acknowledgment and Disclosure Regarding the Corporate
Compliance Program and the Code of Conduct
Duties of Compliance Officers
Employee Training Policies and Procedures
Reporting of Potential Issues or Areas of Noncompliance
Federal and State Government Agency Audits, Interviews and
Searches
Records Management Policy
Drug Free Workplace Policy
Confidentiality Policy
Procurement Integrity Policy
Health Care Human Resources Policy
PART II. Specific Health Care Policies
Billing Policies
Billing and Reimbursement Policies and Procedures
Patient Co-insurance and Deductibles Policies and Procedures
Documentation and Preparation of CMNs, Written
Confirmation of Verbal Orders and Other Issues Related to
Physician Ordering Practices
Corporate Policy on Relationships with Billing Agents
Medicare reassignment and Waiver of
Liability Policies and Procedures
Corporate Policy on Billing for Dual Eligible Patients
Financial Relationships
Policy on Joint Ventures
Policy on Relationships with Vendors
Policy on Contractual and Other Financial Relationships/
Arrangements with Physicians, Other Health Care Providers
and Other Sources of patient Referrals
Corporate Policy on Participation in Managed Care Networks
Marketing Policies
Policy on Direct-to-Consumer Promotional Activities
Policy on Marketing Activities with Sources of patient
Referrals
Policy on Charitable Contributions and Grants
Policy on Compassionate Care
Operational Policies
<PAGE>
25
Hazardous and Medical Waste Disposal Policy
<PAGE>
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of
November 22, 1996, effective as of November 1, 1996, by and between BONE, MUSCLE
AND JOINT, INC., a Delaware corporation (the "Company"), and the individual
identified on the signature page hereof (the "Stockholder"), with reference to
the following facts. Certain capitalized terms used herein are defined in
paragraph 5 below.
A. This Agreement is entered into in connection with and concurrently with
that certain Management Services Agreement dated as of the date hereof (the
"Management Services Agreement") by and between the Company and Southern
California Orthopedic Institute Medical Group (the "Medical Group").
B. This Agreement also is entered into concurrently with substantially
identical Restricted Stock Agreements between the Company and the other partners
in or employees of the Medical Group identified in Schedule A attached hereto
(collectively, the "Stockholders").
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Purchase and Sale of Restricted Stock. (a) (i) Upon execution of this
Agreement, the Company shall issue to the Stockholder the number of shares
specified opposite the Stockholder's name in Schedule A attached hereto (the
"Restricted Stock") of the common stock of the Company, par value $0.001 per
share (the "Common Stock"), pursuant to Section 4 and Schedule III of the
Management Services Agreement.
(ii) The Company shall deliver, at the time of execution of this Agreement,
two (2) stock certificates, each dated the date hereof and issued in the name of
the Stockholder. One of the certificates shall represent seventy-five percent
(75%) of the Restricted Stock issued to the Stockholder on the date hereof, and
such certificate shall be delivered to the Stockholder. The other certificate
shall represent twenty-five percent (25%) of the Restricted Stock issued to the
Stockholder on the date hereof, and such certificate shall be delivered to the
Medical Group. Additionally, the Stockholder shall deliver to the Medical Group
an executed stock power relating to such certificate. The Medical Group shall
hold such share certificate and stock power until the recalculation required
under Schedule III of the Management Services Agreement has been completed, and
the Medical Group shall promptly thereafter deliver such certificate to the
Stockholder or to the Management Company, as applicable, in accordance with the
terms of such Schedule III. In the event of delivery of such certificate to the
Management Company, such certificate shall be accompanied by the stock power
previously executed by the Stockholder.
-1-
<PAGE>
(b) In connection with the issuance of the Restricted Stock hereunder, the
Stockholder represents and warrants to the Company that:
(i) the Restricted Stock to be issued to the Stockholder pursuant to
this Agreement shall be acquired for the Stockholder's own account, for
investment only and not with a view to, or intention of, distribution
thereof in violation of the 1933 Act, or any applicable state securities
laws, and the Restricted Stock will not be disposed of in contravention of
the 1933 Act or any applicable state securities laws;
(ii) the Stockholder has generally such knowledge and experience in
business and financial matters and with respect to investments in
securities of privately held companies so as to enable the Stockholder to
understand and evaluate the risks and benefits of his or her investment in
the Restricted Stock;
(iii) the Stockholder has no need for liquidity in his or her
investment in the Restricted Stock and is able to bear the economic risk of
his or her investment in the Restricted Stock for an indefinite period of
time and understands that the Restricted Stock has not been registered or
qualified under the 1933 Act or any applicable state securities laws, by
reason of the issuance of the Restricted Stock in a transaction exempt from
the registration and qualification requirements of the 1933 Act or such
state securities laws and, therefore, cannot be sold unless subsequently
registered or qualified under the 1933 Act or such state securities laws or
an exemption from such registration or qualification is available;
(iv) the Stockholder understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to the Stockholder)
promulgated under the 1933 Act, depends on satisfaction of various
conditions and that, if applicable, Rule 144 may only afford the basis for
sales under certain circumstances and only in limited amounts;
(v) the Stockholder is an individual (A) whose individual net worth,
or joint net worth with his or her spouse, presently exceeds $1,000,000 or
(B) who had an income in excess of $200,000 in each of the two most recent
years, or joint income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax exempt income
and the full amount of capital gains and losses but excluding any income of
other family members and any unrealized capital appreciation) and has a
reasonable expectation of reaching the same income level in the current
year; or the Stockholder otherwise meets the requirements to be considered
an accredited investor, as defined under the 1933 Act; and
(vi) the Stockholder has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Restricted Stock and has had full access to or been provided with such
other information concerning the Company as he or she has requested.
-2-
<PAGE>
(c) This Agreement constitutes the legal, valid and binding obligation of
the Stockholder, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by the Stockholder does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which the Stockholder is a party or any judgment, order or decree
to which the Stockholder is subject.
(d) As an inducement to the Company to issue the Restricted Stock to the
Stockholder and as a condition thereto, the Stockholder acknowledges and agrees
that:
(i) neither the issuance of the Restricted Stock to the Stockholder
nor any provision contained herein shall affect the right of the Company to
terminate the Management Services Agreement; and
(ii) the Company shall provide the Stockholder with substantially the
same information regarding the Company that the Company regularly discloses
to its other stockholders.
(e) Notwithstanding anything to the contrary set forth in this Agreement,
the total number of shares to be issued to the Stockholder hereunder is subject
to adjustment in connection with any adjustment made to the total number of
shares issued to all Stockholders pursuant to Schedule III of the Management
Services Agreement; provided, however, that the amount of such adjustment
allocated to the Stockholder shall be as provided in a written schedule
furnished to the Company by the Medical Group specifying the adjusted number of
shares for each of the Stockholders. In the event that the Stockholder is
entitled to receive additional shares pursuant to such adjustment, the Company
shall promptly deliver to the Stockholder without further consideration a stock
certificate representing such additional shares. If pursuant to such adjustment
the Stockholder is required to return any shares to the Company, the Medical
Group shall promptly return to the Company the share certificate representing
twenty-five percent (25%) of the Restricted Stock previously issued to the
Stockholder, accompanied by the stock power previously executed by the
Stockholder. If the Stockholder is required to return more shares than is
represented by such certificate, the Stockholder shall return to the Company the
share certificate representing seventy-five percent (75%) of the Restricted
Stock previously issued to the Stockholder, together with an executed stock
power, in lieu of or in addition to the above-referenced stock certificate
representing twenty-five percent (25%) of such stock, as necessary to comply
with the Stockholder's obligation to return to the Company the total number of
shares required to be returned to the Company in accordance with this paragraph
1(e). Thereafter the Company shall promptly deliver to the Stockholder a new
stock certificate or certificates representing the adjusted number of shares,
all without any further consideration.
2. Vesting of the Restricted Stock. (a) Except as otherwise provided in
paragraphs 2(b) and 2(c) hereof, the Restricted Stock shall become vested in
accordance with the following schedule, if, as of each such date, (i) the
Management Services Agreement has not been terminated, (ii) there has not been a
Cessation of Active Practice (as defined in paragraph 2(d) below) by the
Stockholder, or (iii) the Stockholder has not died or become permanently
disabled:
-3-
<PAGE>
Anniversary Date Cumulative Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 50%
Third 75%
Fourth 100%
For purposes of this Agreement, "Anniversary Date of this Agreement" means
November 1 of each year after 1996. Shares of the Restricted Stock which have
become vested are referred to herein as "Vested Shares" and all other shares of
the Restricted Stock are referred to herein as "Unvested Shares." The parties
acknowledge and agree that the number of shares issued to the Stockholder
hereunder may be increased or decreased in connection with the recalculation
described in Schedule III to the Management Services Agreement. Accordingly,
following such recalculation, the vesting schedule set forth above shall be
applicable retroactively and prospectively to the adjusted number of shares
issued to the Stockholder in connection with such recalculation.
(b) (i) The provisions of paragraph (ii) below shall be applicable only in
the event that the Company has not amended that certain Restricted Stock
Agreement entered into by and between the Company and Lehigh Valley Bone, Muscle
and Joint Group, L.L.C., a Pennsylvania limited liability company ("Lehigh
Valley"), in or about July, 1996, to delete that provision in such agreement
which is substantially similar to paragraph (ii) below. If such agreement is so
amended, paragraph (ii) below shall become null and void upon the Company's
provision of notice thereof to the Medical Group, and the Restricted Stock shall
become vested only in annual increments as provided in paragraph 2(a) above.
(ii) If the Management Services Agreement is terminated or there is a
Cessation of Active Practice by the Stockholder, or if the Stockholder dies or
becomes permanently disabled, on any date other than an anniversary date of the
issuance of the Restricted Stock, the cumulative percentage of the Restricted
Stock to become vested shall be determined on a pro rata basis according to the
number of days elapsed since the prior anniversary date or the date of this
Agreement (should such termination occur prior to the first anniversary date).
(c) Notwithstanding the foregoing, in the event of the death of the
Stockholder, in addition to any shares that have vested in accordance with
paragraphs 2(a) and 2(b) above, the number of Unvested Shares scheduled to
become Vested Shares pursuant to paragraph 2(a) above during the eighteen-month
period immediately following the date of death shall immediately become Vested
Shares.
(d) For purposes of this Agreement, "Cessation of Active Practice" means a
physician Stockholder's failure (other than by reason of death or permanent
disability),
-4-
<PAGE>
throughout any twelve-month period ending on the day before any of the vesting
dates described in paragraph 2(a) hereof, to engage in the practice of medicine
with the Medical Group on a regular basis, including the performance of
orthopedic surgical procedures on a regular basis (except in the case of any
Stockholder who did not practice surgery on a regular basis immediately prior to
the date hereof), such that (i) the Stockholder was engaged in patient care
activities for less than seventy-five percent (75%) of the time that the
Stockholder had been engaged in such activities during the twelve-month period
immediately preceding the date hereof, and (ii) the Stockholder generated
billings that were less than seventy-five percent (75%) of the amount of
billings generated by the Stockholder during the twelve-month period immediately
preceding the date hereof.
(e) If the Stockholder is insured under a disability insurance policy, the
determination under such policy as to whether the Stockholder's condition
constitutes a permanent disability shall be binding on the parties hereto for
purposes of this Agreement. If the Stockholder is not insured under a policy of
disability insurance, such determination shall be made by an independent
qualified physician proposed by the Medical Group, subject to the approval of
the Company, which approval shall not be unreasonably withheld.
(f) Notwithstanding anything to the contrary set forth in this Agreement,
including without limitation the provisions of paragraph 2(a) hereof relating to
vesting, if as of the date or dates on which any of the Restricted Stock is
scheduled to vest, Phase II under the Management Services Agreement has not yet
commenced and the Medical Group has not waived the Medical Group's right to
terminate the Management Services Agreement pursuant to Section 13.1(e) of the
Management Services Agreement (providing the Medical Group the right under
certain circumstances to terminate the Management Services Agreement prior to
the commencement of Phase II), such vesting shall be deferred until (i) the date
on which Phase II under the Management Services Agreement commences or (ii) the
date on which the Medical Group gives written notice to the Management Company
waiving its right to terminate the Management Services Agreement under Section
13.1(e), whichever first occurs. If the Management Services Agreement is
terminated by the Medical Group pursuant to Section 13.1(e) thereof, none of the
Restricted Stock shall be deemed to Vested Shares hereunder.
3. Repurchase of Restricted Stock. (a) Except as provided in paragraph
3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below,
the Company may elect to repurchase the Restricted Stock (whether vested or
unvested and whether held by the Stockholder or one or more of the Stockholder's
permitted transferees) pursuant to the terms and conditions set forth in this
paragraph 3 (the "Repurchase Option").
(b) Each of the following shall constitute a "Repurchase Event":
(i) Termination of the Management Services Agreement for any reason
whatsoever on or before the fourth anniversary of the date of this
Agreement;
(ii) Termination of the Management Services Agreement by the Medical
Group pursuant to Section 13.1(d) thereof (based on failure of the Company
to
-5-
<PAGE>
consummate an initial public offering of its Common Stock within
forty-eight (48) months after the Commencement Date under the Management
Services Agreement); or
(iii) The Stockholder's Cessation of Active Practice.
(c) The repurchase price for each Unvested Share shall be equal to the
Original Value of such share.
(d) The repurchase price for each Vested Share shall be the Fair Market
Value for such share.
(e) The Company may elect to repurchase all or a portion of the Restricted
Stock by delivering written notice (the "Repurchase Notice") to the Stockholder
within ninety (90) days after the Repurchase Event; provided, however, that if
the Company elects to repurchase less than all of the Restricted Stock, the
Company shall repurchase all of the Unvested Shares and may purchase that number
of Vested Shares as the Company may, in its discretion, determine. The
Repurchase Notice shall set forth the number of Unvested Shares and Vested
Shares to be acquired, the aggregate consideration to be paid for such shares,
and the time and place for the closing of the transaction. If the Repurchase
Event giving rise to the Company's election to repurchase consists of the
termination of the Management Services Agreement, and if the number of shares of
Restricted Stock that the Company has elected to repurchase is less than the
total number of shares of Restricted Stock held by all of the Stockholders, the
Company shall purchase the shares of Restricted Stock pro rata according to the
number of shares of Restricted Stock held by all of the Stockholders at the time
of delivery of such Repurchase Notice (determined as nearly as practicable to
the nearest share).
(f) The closing of the repurchase of Restricted Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice, which date shall not be more than sixty (60) days nor less
than five (5) days after the delivery of the Repurchase Notice. The Company
shall pay for Restricted Stock to be purchased pursuant to the Repurchase Option
by delivery of (i) the Company's check or wire transfer of funds, (ii) a
subordinated note or notes payable in up to five equal annual installments
beginning on the first anniversary of the closing of such purchase and bearing
interest (payable quarterly) at a rate per annum equal to the greater of either
the prime rate announced from time to time by The Chase Manhattan Bank (National
Association) plus 1/2% or the "applicable Federal rate" (as defined in Section
1274(d) of the Internal Revenue Code) in effect from time to time, or (iii) both
(i) and (ii), in the aggregate amount of the repurchase price for such shares;
provided, however, that in the event that the Medical Group is obligated to pay
to the Company any sums in connection with the repurchase of assets by the
Medical Group pursuant to the Management Services Agreement, the total of such
sums may be offset by the Company against any amounts owed by the Company to the
Stockholders pursuant to each of the Restricted Stock Agreements, such offset
amount to be allocated pro rata among all of the Stockholders. Any notes issued
by the Company pursuant to this paragraph 3(f) shall be subject to the
restrictive covenants, if any, to which the Company is subject at the time of
such repurchase. The Company shall be entitled to require the signature of the
Stockholder to be guaranteed and to receive representations and
-6-
<PAGE>
warranties from the Stockholder regarding (A) the Stockholder's power, authority
and legal capacity to enter into such sale and transfer valid right, title and
interest in such Restricted Stock, (B) the Stockholder's ownership of such
Restricted Stock and the absence of any liens, pledges, and other encumbrances
on such Restricted Stock and (C) the absence of any violation, default, or
acceleration of any agreement or instrument pursuant to which the Stockholder or
the Stockholder's assets are bound resulting from such sale.
(g) Notwithstanding anything to the contrary set forth in this paragraph 3,
in the event of a Repurchase Event consisting of the termination of the
Management Services Agreement by the Medical Group pursuant to Section 13.1 of
the Management Services Agreement, or in the event of termination of the
Management Services Agreement by either party in accordance with Section 27
thereof (pursuant to Section 13.3), the Company shall have the obligation
(rather than the option) to purchase all of the Restricted Stock acquired by the
Stockholder pursuant to this Agreement, and the repurchase price shall be paid
in full in cash not later than sixty (60) days after the date of termination of
the Management Services Agreement; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in connection with the
repurchase of assets by the Medical Group pursuant to the Management Services
Agreement, the total of such sums may be offset by the Company against any
amounts owed by the Company to the Stockholders pursuant to each of the
Restricted Stock Agreements, such offset amount to be allocated pro rata among
all of the Stockholders.
(h) In the event of the death or permanent disability of the Stockholder,
the Company shall repurchase all of the Unvested Shares (but not the Vested
Shares) of the Stockholder. The repurchase price for each Unvested Share shall
be equal to the Original Value of such share, and such repurchase price shall be
paid in full in cash not later than sixty (60) days after the date of death or
the date on which such disability is determined to be permanent.
(i) In the event that the Stockholder is required, prior to the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act or prior to the second anniversary of the date hereof,
whichever is later, to pay any state or federal taxes in connection with the
receipt of the Restricted Stock hereunder, the Stockholder shall have the right
to sell to the Company, and the Company shall be obligated to purchase from the
Stockholder, for the purchase price determined in accordance with this paragraph
3, such number of shares of Vested Stock as the Stockholder may tender to the
Company, provided that the purchase price therefor shall not exceed the total
amount of the Stockholder's tax liability incurred in connection with the
receipt of such stock. In the event that the Stockholder desires to exercise the
right conferred under this paragraph 3(i), the Stockholder shall give notice to
the Company not earlier than forty-five (45) days prior to, nor later than
forty-five (45) days after, the date on which such taxes are due and payable,
and the Stockholder shall furnish to the Company reasonable documentation
prepared by the Stockholder's certified public accountant establishing the
amount of such tax liability.
(j) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Restricted Stock by the Company shall be subject to
applicable restrictions, if
-7-
<PAGE>
any, contained in Federal law or in the Delaware General Corporation Law.
Notwithstanding anything to the contrary contained in this Agreement, if any
such restrictions prohibit or otherwise delay the repurchase of Restricted Stock
hereunder which the Company is otherwise entitled or required to make, the
Company may make such repurchases as soon as it is permitted to do so under such
restrictions.
(k) In the event that Restricted Stock is repurchased pursuant to this
paragraph 3, the Stockholder and his or her successors and assigns shall take
all reasonable steps to obtain all required third-party, governmental and
regulatory consents and approvals and take all other reasonable actions
necessary to facilitate consummation of such repurchase in a timely manner.
4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided
in paragraph 3, the Stockholder shall sell or transfer or agree to sell or
transfer ("Sale" or "Sell") Restricted Stock only in accordance with the
following procedures; provided, however, that with respect to this paragraph
4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares
and at no time shall the Stockholder have the right to sell Unvested Shares;
provided, further, that the restrictions on transfers of Vested Shares set forth
in this paragraph 4 shall expire, and shall be of no further force or effect,
upon the consummation of initial public offering of the Company's Common Stock
pursuant to the 1933 Act:
(b) In the event that the Stockholder receives a bona fide offer from
a third party (the "Prospective Stockholder") to purchase all or any
portion of the Restricted Stock owned by the Stockholder, the Stockholder
shall deliver to the Company a written notice (the "Offer Notice"), which
shall be irrevocable for a period of fifteen (15) business days after
delivery thereof (the "Offer Period"), offering (the "Offer") all of the
Restricted Stock proposed to be Sold by the Stockholder to the Prospective
Stockholder at the purchase price and on the terms of the proposed Sale to
the Prospective Stockholder (such Offer Notice shall include the foregoing
information, a copy of the Prospective Stockholder's bona fide offer and
all other relevant terms of the proposed Sale, including the identification
of the Prospective Stockholder). The Company shall have the right and
option, for a period of fifteen (15) business days after delivery of the
Offer Notice, to repurchase all of the Restricted Stock so offered at the
purchase price and on the terms stated in the Offer Notice. Such acceptance
shall be made by delivering a written notice to the Stockholder within said
fifteen (15) business-day period.
(c) Sales of Restricted Stock under the terms of paragraph 4(b) above
shall be made on a mutually satisfactory business day within fifteen (15)
business days after the expiration of the Offer Period. Delivery of
certificates or other instruments evidencing such Restricted Stock duly
endorsed for transfer shall be made on such date against payment of the
purchase price therefor.
(d) If the Company fails to purchase the Restricted Stock offered for
Sale pursuant to the Offer Notice, then at any time within sixty (60)
business days after the expiration of the Offer Period the Stockholder may
Sell all or any part of the Restricted Stock so offered for Sale on terms
no more favorable than the terms stated in the Offer Notice; provided,
however, that the Stockholder shall not, under any circumstances, Sell any
Restricted Stock to
-8-
<PAGE>
the Prospective Stockholder if the Board of Directors of the Company, in
its sole discretion, determines in good faith that the Prospective
Stockholder is a competitor, or an Affiliate of a competitor, of the
Company or that such Prospective Stockholder's ownership of Restricted
Stock would be contrary to the best interests of the Company. In the event
that the Restricted Stock is not Sold by the Stockholder to the Prospective
Stockholder during such period, the right of the Stockholder to Sell such
remaining Restricted Stock to the Prospective Stockholder shall expire and
the obligations of the Stockholder pursuant to this paragraph 4 shall be
reinstated.
(e) Any transferee of Restricted Stock (other than the Company) shall,
as a condition to such transfer, agree to be bound by all of the provisions
of this Agreement applicable to the Stockholder.
(f) The certificates representing the Restricted Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A
RESTRICTED STOCK AGREEMENT DATED AS OF NOVEMBER 1, 1996, BETWEEN THE
STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT
MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE
OF BUSINESS WITHOUT CHARGE."
(g) Naresh Nagpal, M.D. and any venture capital firm providing funds
to the Company ("Selling Shareholders") shall give to the Stockholder the
right to participate on a pro rata basis (based on the number of shares
owned, whether preferred or common, held by the Stockholders and by any
other shareholders who hold the same rights that are conferred by this
paragraph 4(g), including members of other physician groups), in any
proposed sale of stock (whether preferred or common) in the Company from
any of the Selling Shareholders to any unaffiliated third party, and the
Company shall require the Selling Shareholders to comply with the
obligations set forth in this paragraph 4(g); provided, however, that the
obligation under this paragraph 4(g) shall become null and void upon the
consummation of an initial public offering of the Company's Common Stock
pursuant to the 1933 Act.
(h) The Stockholder hereby agrees to the provisions of Section 9.12 of
the Management Services Agreement (relating to the right of Naresh Nagpal,
M.D. and any venture capital firm providing funds to the Company to
participate in certain sales of stock by the Stockholder).
5. Definitions.
(a) "Affiliate" means, with respect to any Person, any of (a) a director,
officer or partner of such Person and (b) any other Person that, directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, another Person. The term "control" includes,
without limitation, the possession, directly or indirectly,
-9-
<PAGE>
of the power to direct the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
(b) "Fair Market Value" of each share of Restricted Stock means the average
of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any given day, the average of the last bid
and asked prices on all such exchanges at the end of such day, or, if on any
given day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq Stock Market National Market System
("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common
Stock is not quoted in Nasdaq, the average of the bid and asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
the Fair Market Value is being determined and the 20 consecutive trading days
prior to such day. If at any time the Common Stock is not listed on any
securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair
Market Value shall be that value jointly determined by the Stockholder and the
Company, provided that if they cannot so agree, such value shall be determined
by a mutually acceptable investment banking or other qualified firm of national
or regional reputation, retained jointly by the Company and the Medical Group,
and all fees, expenses and other charges of such firm incurred in connection
with such determination of Fair Market Value shall be borne and shared equally
by the Company and the Medical Group. In the event that the parties are unable
to agree upon such an investment banking or other qualified firm within ten (10)
days after the date on which either party may initially propose such a firm, a
qualified firm shall be selected in the following manner:
First, the Stockholder shall send a list of names of four such firms,
arranged in order of the Stockholder's preference, by written notice to the
Company within seven (7) days after the expiration of the above referenced
10-day period. If the Stockholder does not furnish such a list to the
Company within such time period, the Company may, within the next seven (7)
days following expiration of such earlier seven-day period, submit a list
of names of four such firms to the Stockholder.
Second, the Company (or the Stockholder, as applicable) shall select,
within seven (7) days after receipt of the above-referenced list, one of
the firms identified on such list and shall give written notice thereof to
the other party. If the recipient of such list does not make any such
selection, the firm identified as the first choice on such list shall be
deemed agreed to by the parties.
(c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as
the same may be amended or supplemented from time to time, or any successor
statute, and the rules and regulations thereunder, as the same are from time to
time in effect.
-10-
<PAGE>
(d) "Original Value" of each share of Restricted Stock purchased hereunder
will be equal to Ten Cents $0.10 (as proportionately adjusted for all subsequent
stock splits, stock dividends and other recapitalizations).
(e) "Person" shall be construed broadly and shall include, without
limitation, an individual, a partnership, an investment fund, a limited
liability corporation or partnership, a corporation, an association, a joint
stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.
(f) "Public Sale" means any sale of Restricted Stock to the public pursuant
to an offering registered under the 1933 Act or to the public through a broker,
dealer or market maker pursuant to the provisions of Rule 144 adopted under the
1933 Act.
(g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The
Restricted Stock will continue to be Restricted Stock in the hands of any holder
other than the Stockholder (except for the Company and except for transferees in
a Public Sale), and except as otherwise provided herein, each such other holder
of the Restricted Stock will succeed to all rights and obligations attributable
to the Stockholder as the holder of the Restricted Stock hereunder. The
Restricted Stock will also include shares of the Company's capital stock issued
with respect to the Restricted Stock by way of a stock split, stock dividend or
other recapitalization.
(h) "1933 Act" means the Securities Act of 1933, as the same may be amended
or supplemented from time to time, or any successor statute, and the rules and
regulations thereunder, as the same are from time to time in effect.
6. Indemnification. (a) The Company shall indemnify, defend and hold
harmless the Stockholder against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of the representations, warranties or agreements of the Company
contained in this Agreement.
(b) The Stockholder shall indemnify and hold harmless the Company against
all liability, loss or damage, together with all reasonable costs and expenses
related thereto (including reasonable legal fees and expenses), relating to or
arising from the untruth, inaccuracy or breach of any of the representations,
warranties or agreements of the Stockholder contained in this Agreement.
7. General Provisions.
(a) Transfers in Violation of Agreement. Any sale, transfer, assignment or
other disposition (whether with or without consideration and whether voluntarily
or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of
any Restricted Stock in violation of any provision of this Agreement shall be
void, and the Company shall not record such
-11-
<PAGE>
Transfer on its books or treat any purported transferee of such Restricted Stock
as the owner of such stock for any purpose.
(b) Severability. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(c) Entire Agreement. This Agreement, those documents expressly referred to
herein and other documents of even date herewith embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(d) Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Stockholder, the Company and their respective successors, assigns, heirs,
representatives and estate, as the case may be (including subsequent holders of
Restricted Stock); provided that the rights and obligations of the Stockholder
under this Agreement shall not be assignable except in connection with a
permitted transfer of Restricted Stock hereunder.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
California, or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of California to be applied. In furtherance of
the foregoing, the internal law of the State of California will control the
interpretation and construction of this agreement, even if under such
jurisdiction's choice of law or conflict of law analysis, the substantive law of
some other jurisdiction would ordinarily apply.
(g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any California state court or Federal court of the United States
of America sitting in the State of California, and any appellate court thereof,
in any action or proceeding arising out of or relating
-12-
<PAGE>
to this Agreement or for recognition or enforcement of any judgment, and each of
the parties hereto hereby irrevocably and unconditionally agrees that all claims
in respect of any such action or proceeding may be heard and determined in any
such California state court or, to the extent permitted by law, in such Federal
court. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any other jurisdiction.
(ii) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any California state
or Federal court. Each of the parties hereto irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
(h) Remedies. Each of the parties to this Agreement shall be entitled to
enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that any party may
in its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or other injunctive relief (without
posting any bond or deposit) in order to enforce or prevent any violations of
the provisions of this Agreement.
(i) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company and the
Stockholder and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall be construed as a waiver of such provisions
or affect the validity, binding effect or enforceability of this Agreement or
any provision hereof.
(j) Notices. Any notice provided for in this Agreement must be in writing
and must be either personally delivered, transmitted via telecopier, mailed by
first class mail (postage prepaid and return receipt requested) or sent by
reputable overnight courier service (charges prepaid) to the recipient at the
address below indicated or at such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. Notices will be deemed to have been given hereunder and received
when delivered personally, when received if transmitted via telecopier, five
days after deposit in the U.S. mail and one business day after deposit with a
reputable overnight courier service.
-13-
<PAGE>
If to the Company, to:
Bone, Muscle and Joint, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telephone: (561) 989-0909
Telecopy: (561) 391-1389
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telephone: (212) 408-2416
Telecopy: (212) 408-2420
If to the Stockholder, to:
[Name of Stockholder]
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Telephone: (818) 901-6600
Telecopy: (818) 901-6680
with copies to:
Southern California Orthopedic
Institute Medical Group
6815 Noble Avenue
Van Nuys, California 91405
Attention: Managing Partner
Telephone: (818) 901-6600
Telecopy: (818) 901-6680
and to:
Saphier and Heller Law Corporation
1900 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Michael D. Saphier, Esq.
Telephone: (310) 201-7555
Telecopy: (310) 286-7821
-14-
<PAGE>
(k) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the State
of California, the time period for giving notice or taking action shall be
automatically extended to the business day immediately following such Saturday,
Sunday or holiday.
(l) Attorneys' Fees. In the event of any dispute or controversy arising out
of or relating to this Agreement, the prevailing party shall be entitled to
recover from the other party all costs and expenses, including attorneys' fees
and accountants' fees, incurred in connection with such dispute or controversy.
(m) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(n) Construction. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement shall be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction shall be applied against any party.
(o) Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of nouns and pronouns shall include the plural and vice-versa.
* * *
-15-
<PAGE>
AMENDMENT NO. 1 TO THE RESTRICTED
STOCK AGREEMENT dated September 11, 1997,
between BONE, MUSCLE AND JOINT, INC., a
Delaware corporation (the "Company"), and
each individual identified on the signature
page hereof (each a "Stockholder" and,
collectively, the "Stockholders").
Reference is made to the Restricted Stock Agreement entered into as of
November 22, 1996, effective as of November 1, 1996 (the "Restricted Stock
Agreement"), pursuant to which each Stockholder acquired shares (the "Restricted
Stock") of the common stock of the Company, par value $0.001 per share (the
"Common Stock"). The parties hereto desire to amend certain of the provisions of
the Restricted Stock Agreement relating to the vesting of the Restricted Stock
and the transferability thereof.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby, the
Company and each Stockholder (for himself or herself only) agree as follows:
SECTION 1. All capitalized terms used but not defined herein have the
meanings ascribed in the Restricted Stock Agreement.
SECTION 2. Section 2 to the Restricted Stock Agreement is hereby
amended in its entirety, to read as follows:
"2. Vesting of the Restricted Stock.
(a) Except as otherwise provided in paragraph 2(b) below, 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(c) below) by the
Stockholder, (iii) the Stockholder has not become permanently disabled
(as described in paragraph 3(d) below), and (iv) the Stockholder has
not died:
<PAGE>
Anniversary Date Percentage of
of this Agreement Restricted Stock Vested
----------------- -----------------------
First 25%
Second 25%
Third 25%
Fourth 25%
For purposes of this Agreement, "Anniversary Date of this
Agreement" means November 1 of each year after 1996. Shares of
the Restricted Stock which have become vested are referred to
herein as "Vested Shares" and all other shares of the
Restricted Stock are referred to herein as "Unvested Shares."
The parties acknowledge and agree that the number of shares
issued to the Stockholder hereunder may be increased or
decreased in connection with the recalculation described in
Schedule III to the Management Services Agreement.
Accordingly, following such recalculation, the vesting
schedule set forth above shall be applicable retroactively and
prospectively to the adjusted number of shares issued to the
Stockholder in connection with such recalculation.
(b) Notwithstanding the foregoing, in the event of
the death of the Stockholder, in addition to any shares that
have vested in accordance with paragraph 2(a) above, the
number of Unvested Shares scheduled to become Vested Shares
pursuant to paragraph 2(a) above during the eighteen-month
period immediately following the date of death shall
immediately become Vested Shares.
(c) For purposes of this Agreement, "Cessation of
Active Practice" means the Stockholder's resignation from or
termination of employment with the Medical Group (other than
by reason of death or permanent disability).
(d) For purposes of this Agreement, if the
Stockholder is insured under a disability insurance policy,
the determination under such policy as to whether such
Stockholder's condition constitutes a permanent disability
shall be binding on the parties hereto. If the Stockholder is
not insured under a policy of disability insurance, such
determination shall be made by an independent qualified
physician proposed by the Medical Group, subject to the
approval of the
-2-
<PAGE>
Company, which approval shall not be unreasonably withheld.
(e) Notwithstanding anything to the contrary set
forth in this Agreement, including without limitation the
provisions of paragraph 2(a) hereof relating to vesting, if as
of the date or dates on which any of the Restricted Stock is
scheduled to vest, Phase II under the Management Services
Agreement has not yet commenced and the Medical Group has not
waived the Medical Group's right to terminate the Management
Services Agreement pursuant to Section 13.1(e) of the
Management Services Agreement (providing the Medical Group the
right under certain circumstances to terminate the Management
Services Agreement prior to the commencement of Phase II),
such vesting shall be deferred until (i) the date on which
Phase II under the Management Services Agreement commences or
(ii) the date on which the Medical Group gives written notice
to the Management Company waiving its right to terminate the
Management Services Agreement under Section 13.1(e), whichever
first occurs. If the Management Services Agreement is
terminated by the Medical Group pursuant to Section 13.1(e)
thereof, none of the Restricted Stock shall be deemed to be
Vested Shares hereunder."
SECTION 3. Section 3 to the Restricted Stock Agreement is hereby
amended in its entirety, to read as follows:
"3. Forfeiture and Repurchase of Restricted Stock.
(a) In the event of the Cessation of Active Practice
by or the death or permanent disability of the Stockholder
(the "Forfeiture Event"), the following provisions shall
apply.
(i) The Stockholder or the estate (in the case of
death) of the Stockholder shall transfer to the Medical Group,
all of the Unvested Shares held by the Stockholder. Such
Unvested Shares shall be transferred for consideration equal
to an amount in cash (the "Forfeiture Payment") determined by
multiplying the number of such Unvested Shares by the Original
Value. The stock certificate(s) representing those shares
(duly endorsed for transfer in accordance with this Section
3(a)) shall be delivered to the Company, and the Forfeiture
Payment shall be paid by the Medical Group to the Stockholder
(or his or her
-3-
<PAGE>
estate, if applicable), no later than sixty (60) days after
the Forfeiture Event.
(ii) A portion of the shares of Restricted Stock
received by the Medical Group pursuant to Section 3(a)(i)
above shall immediately vest upon the transfer to the Medical
Group, and a portion shall be held by the Medical Group as
Unvested Shares. The number of such shares that will
immediately become Vested Shares shall be determined by
dividing the Forfeiture Payment by the Fair Market Value per
share of Restricted Stock as of the date of such Forfeiture
Event. The remainder of such shares shall be Unvested Shares
and shall continue to vest according to the schedule set forth
in Section 2(a) hereof. The Company shall, within thirty (30)
days after its receipt of such stock certificate(s), issue and
deliver to the Medical Group a certificate representing the
Unvested Shares and a certificate representing the Vested
Shares. Any such Vested Shares may at the discretion of the
Medical Group be retained by the Medical Group or transferred
or Sold to any Person, in accordance with the terms of this
Agreement.
(iii) 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 pursuant to the Management Services
Agreement between the Company and the Medical Group. As a
condition to any such Sale, the transferee shall execute and
deliver to the Company a Restricted Stock Agreement in
substantially the form of this Agreement, effective as of the
date of transfer of such shares. The Unvested Shares
distributed according to this Section 3(a) shall be subject to
a vesting schedule identical to the schedule set forth in
Section 2(a) hereof.
(b) 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
-4-
<PAGE>
Stock (whether vested or unvested and whether held by the
Stockholder or one or more of the Stockholder's Permitted
Transferees) pursuant to the terms and conditions set forth in
this Section 3(b).
(i) The Company may elect to exercise the Repurchase
Option and repurchase all or any 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 first repurchase all of the 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 for such
share and the purchase price payable for each Vested Share
shall equal the Fair Market Value for such share. If the
number of shares of Restricted Stock that the Company has
elected to repurchase is less than the total number of shares
of Restricted Stock held by all of the Stockholders, the
Company shall purchase the shares of Restricted Stock pro rata
according to the number of shares of Restricted Stock held by
all of the Stockholders at the time of delivery of such
Repurchase Notice (determined as nearly as practicable to the
nearest whole share).
(ii) 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 (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
-5-
<PAGE>
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;
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(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 the Stockholder to be guaranteed
and to receive representations and warranties from such
Stockholder regarding (x) the Stockholder's power, authority
and legal capacity to enter into such sale and to transfer
valid right, title and interest in such Restricted Stock, (y)
the Stockholder's ownership of such Restricted Stock and the
absence of any liens, pledges, and other encumbrances on such
Restricted Stock and (z) the absence of any violation,
default, or acceleration of any agreement or instrument
pursuant to which the Stockholder or such Stockholder's assets
are bound resulting from such sale.
(c) Notwithstanding anything to the contrary set
forth in this paragraph 3, in the event of a Repurchase Event
consisting of the termination of the Management Services
Agreement by the Medical Group pursuant to Section 13.1 of the
Management Services Agreement, or in the event of termination
of the Management Services Agreement by either party in
accordance with Section 27 thereof (pursuant to Section 13.3),
the Company shall have the obligation (rather than the option)
to purchase all of the Restricted Stock acquired by the
Stockholder pursuant to this Agreement, and the repurchase
price shall be paid in full in cash not later than sixty (60)
days after the date of termination of the Management Services
Agreement; provided, however, that in the event that the
Medical Group is obligated to pay to the Company any sums in
connection with the repurchase of assets by the Medical Group
pursuant to the
-6-
<PAGE>
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.
(d) 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, which shares shall have
been held (as Unvested Stock or Vested Stock) by the
Stockholder for at least six (6) months, as the Stockholder
may tender to the Company, provided that the purchase price
therefor shall not exceed the total amount of the
Stockholder's tax liability incurred in connection with the
receipt of such stock. In the event that the Stockholder
desires to exercise the right conferred under this paragraph
3(d), 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.
(e) 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, under Federal law or 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.
(f) In the event that Restricted Stock is repurchased
pursuant to this paragraph 3, the
-7-
<PAGE>
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."
SECTION 4. Section 4(a) of the Restricted Stock Agreement is hereby
amended by (a) adding the words "and except for Permitted Transfers" after the
words "paragraph 3" in the second line thereof and (b) adding the phrase "(other
than pursuant to paragraph 3 above)" after the words "Unvested Shares" in the
fifth line thereof.
SECTION 5. Section 4(e) of the Restricted Stock Agreement is hereby
amended in its entirety, to read as follows:
"(e) Any Permitted Transferee (other than the
Company) shall, as a condition to the transfer, (i) agree to
be bound by all of the provisions of this Agreement applicable
to the Stockholder and shall evidence such agreement by
executing and delivering to the Company a joinder to this
Agreement in form and substance satisfactory to the Company,
and (ii) if such transferee is a partner in or an equity owner
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)."
SECTION 6. Section 5 of the Restricted Stock Agreement is hereby
amended by adding the following new definitions:
"(f) "Permitted Transferee" means, as to the
Stockholder, any transferee who acquires the Restricted Stock
pursuant to a Permitted Transfer or any other transfer made in
accordance with the provisions of this Agreement.
(g) "Permitted Transfer" means, as to the
Stockholder, any sale or transfer of Vested Shares to (A) the
spouse or lineal descendants of the Stockholder or (B) a trust
for the benefit of any of the foregoing."
SECTION 7. Section 7(i) is hereby amended by adding the following at
the end thereof:
-8-
<PAGE>
"; provided, however, that the Company may, without the
Stockholder's consent, amend Schedule A hereto upon
consummation of a Permitted Transfer of Restricted Stock by
any Stockholder or upon the issuance of additional shares of
Common Stock by the Company to the Stockholders pursuant to
Schedule III of the Management Services Agreement, in either
case to reflect the then current ownership of the Restricted
Stock."
SECTION 8. This Amendment No. 1 shall be deemed effective as of
November 1, 1996. Except as expressly provided in this Amendment No. 1, the
Restricted Stock Agreement remains in full force and effect in accordance with
its terms.
SECTION 9. No Stockholder shall have any responsibility for any breach
of this Amendment No. 1 by any other Stockholder or for any representations,
warranties, acts or omissions of any other Stockholder. Each Stockholder is
entering into this Amendment No. 1 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 Amendment No. 1. 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 Amendment No. 1 may be
executed in separate counterparts and each such counterpart shall constitute an
original instrument.
SECTION 10. This Amendment No. 1 shall by governed by, construed and
interpreted in accordance with the laws of the State of California.
* * * *
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment No. 1 to the Restricted Stock Agreement as of the date first written
above.
COMPANY
BONE, MUSCLE AND JOINT, INC.
By:
-----------------------------
Name:
Title:
STOCKHOLDERS
--------------------------------
James M. Fox, M.D.
DEL PIZZO TRUST
By:
-----------------------------
Name:
Title:
FRIEDMAN FAMILY TRUST
By:
-----------------------------
Name:
Title:
STEPHEN J. SNYDER AND LEE ANN
SNYDER FAMILY TRUST
By:
-----------------------------
Stephen J. Snyder, M.D.,
co-trustee
By:
-----------------------------
Lee Ann Snyder, co-trustee
<PAGE>
THE RICHARD FERKEL AND MICHELLE
FERKEL REVOCABLE TRUST
By:
-----------------------------
Richard Ferkel, M.D.,
co-trustee
By:
-----------------------------
Michelle Ferkel, co-trustee
TODD A. MOLDAWER AND NANCY P.
MOLDAWER FAMILY TRUST
By:
-----------------------------
Todd A. Moldawer, M.D.,
co-trustee
By:
-----------------------------
Nancy P. Moldawer, co-trustee
THE HANKER LIVING TRUST
By:
-----------------------------
Gregory J. Hanker, M.D.,
co-trustee
By:
-----------------------------
Mary Pat Hanker, co-trustee
--------------------------------
Herbert D. Huddleston, M.D.
--------------------------------
Trevor P. Lynch, M.D.
--------------------------------
Saul M. Bernstein, M.D.
<PAGE>
KARZEL FAMILY TRUST
By:
-----------------------------
Name:
Title:
--------------------------------
A. Elizabeth Bloze, M.D.
--------------------------------
Todd J. Molnar, M.D.
--------------------------------
Steven A. Schopler, M.D.
--------------------------------
Jonathan S. Jaivan, M.D.
--------------------------------
Donald A. Wiss, M.D.
--------------------------------
Patricia C. McKeever, M.D.
--------------------------------
David M. Auerbach, M.D.
--------------------------------
Pamela Westlin
--------------------------------
Glenn Cozen
<PAGE>
ACCEPTED AND AGREED
AS TO SECTION 3:
SOUTHERN CALIFORNIA ORTHOPEDIC
INSTITUTE MEDICAL GROUP
By Its Partners:
JAMES M. FOX, M.D., INC.
By:
-----------------------------
James M. Fox, M.D., President
WILSON DEL PIZZO, M.D., INC.
By:
-----------------------------
Wilson Del Pizzo, M.D.,
President
MARC J. FRIEDMAN, M.D., INC.
By:
-----------------------------
Marc J. Friedman, M.D.,
President
- --------------------------------
Stephen J. Snyder, M.D.
- --------------------------------
Richard D. Ferkel, M.D.
<PAGE>
- --------------------------------
Todd D. Moldawer, M.D.
- --------------------------------
Gregory J. Hanker, M.D.
HERBERT DENNIS HUDDLESTON, M.D., INC.
By:
-----------------------------
Herbert Dennis Huddleston, M.D.,
President
- --------------------------------
A. Elizabeth Bloze, M.D.
- --------------------------------
Todd J. Molnar, M.D.
TREVOR P. LYNCH, M.D., A MEDICAL
CORPORATION
By:-----------------------------
Trevor P. Lynch, M.D.,
President
SAUL M. BERNSTEIN, M.D., INC.
By:-----------------------------
Saul M. Bernstein, M.D.,
<PAGE>
President
- --------------------------------
Steven A. Schopler, M.D.
- --------------------------------
Ronald P. Karzel, M.D.
- --------------------------------
Jonathan S. Jaivan, M.D.
- --------------------------------
Donald A. Wiss, M.D.
- --------------------------------
Patricia C. McKeever, M.D.
- --------------------------------
David M. Auerbach, M.D.
<PAGE>
[ELEVENTH DRAFT 11/3/97]
================================================================================
MANAGEMENT SERVICES AGREEMENT
BETWEEN
BMJ MEDICAL MANAGEMENT, INC.
AND
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
Effective as of September 1, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1 Retention of the Management Company ......................... 2
1.1. Retention ................................................. 2
1.2. Exclusivity ............................................... 2
1.3. Relationship of Parties ................................... 2
1.4. No Referral Obligation .................................... 3
SECTION 2 TERM ........................................................ 3
SECTION 3 MANAGEMENT SERVICES ......................................... 3
3.1. Management Services Generally ............................. 3
3.2. Premises .................................................. 5
3.3. Equipment ................................................. 7
3.4. New Ancillary Services .................................... 9
3.5. Administration, Finance and Accounting .................... 11
3.6. Billing and Collection .................................... 14
3.7. Administrative Personnel .................................. 19
3.8. Technical Personnel; Leased Employees ..................... 20
3.9. Medical Personnel Recruiting .............................. 22
3.10. Inventory and Supplies .................................... 23
3.11. Taxes ..................................................... 23
3.12. Information Systems Management ............................ 23
3.13. Use of New Technologies in the Practice of Medicine ....... 24
3.14. Public Relations; Marketing and Advertising ............... 25
3.15. Insurance ................................................. 25
3.16. Files and Records ......................................... 25
3.17. Managed Care Contracts .................................... 27
3.18. Budgets ................................................... 28
3.19. Force Majeure ............................................. 29
SECTION 4 CONSIDERATION ............................................... 29
SECTION 5 COSTS, COMPENSATION, AND OTHER PAYMENTS ..................... 29
5.1. Ownership of Accounts; Security ........................... 29
5.2. Bank Accounts ............................................. 30
5.3. Medical Group Compensation ................................ 31
5.4. Management Fee ............................................ 35
5.5. Management Company Costs .................................. 37
5.6. New Medical Office Start-Up Costs ......................... 40
5.7. Medical Group Costs ....................................... 46
-i-
<PAGE>
Page
----
5.8. New Ancillary Services Costs .............................. 47
5.9. Review and Audit of Books and Records ..................... 51
5.10. Start-Up Period ........................................... 51
5.11. New Physician Compensation Costs .......................... 52
SECTION 6 REPRESENTATIONS AND WARRANTIES OF THE MEDICAL GROUP ......... 54
6.1. Organization; Good Standing; Qualification and Power ...... 54
6.2. Equity Investments ........................................ 55
6.3. Authority ................................................. 55
6.4. Financial Information ..................................... 56
6.5. Absence of Undisclosed Liabilities ........................ 57
6.6. Absence of Changes ........................................ 57
6.7. Tax Matters ............................................... 59
6.8. Litigation, Etc ........................................... 61
6.9. Compliance; Governmental Authorizations ................... 62
6.10. Accounts Receivable; Accounts Payable ..................... 62
6.11. Labor Relations; Employees ................................ 63
6.12. Employee Benefit Plans .................................... 64
6.13. Insurance ................................................. 65
6.14. Real Property ............................................. 66
6.15. Burdensome Restrictions ................................... 66
6.16. Disclosure ................................................ 66
SECTION 7 REPRESENTATIONS AND WARRANTIES OF THE MANAGEMENT COMPANY .... 67
7.1. Organization, Good Standing and Power ..................... 67
7.2. Authority ................................................. 67
7.3. Capitalization ............................................ 68
7.4. Financial Information ..................................... 69
7.5. Absence of Undisclosed Liabilities ........................ 69
7.6. Absence of Changes ........................................ 70
7.7. Litigation, Etc ........................................... 71
7.8. Compliance; Governmental Authorizations ................... 71
7.9. Employees ................................................. 72
7.10. Insurance ................................................. 72
7.11. Burdensome Restrictions ................................... 72
7.12. Disclosure ................................................ 73
SECTION 8 OPERATIONS COMMITTEE ........................................ 73
-ii-
<PAGE>
Page
----
8.1. Formation and Operation of the Operations Committee ........ 73
8.2. Authoritative Functions of the Operations Committee ........ 73
8.3. Advisory Functions of the Operations Committee ............. 77
8.4. Committee Policies and Procedures .......................... 78
SECTION 9 OBLIGATIONS OF THE MEDICAL GROUP ............................. 79
9.1. Compliance with Laws ....................................... 79
9.2. Use of Facility ............................................ 80
9.3. Choice of Braces, Splints, Appliances,
Medical Supplies, and Allografts ........................... 80
9.4. Choice of Radiologists, Anesthesiologists,
Hospitals, Physical Therapy, MRI, and Other
Medical Professionals and Facilities ....................... 81
9.5. Insurability ............................................... 81
9.6. Medicare ................................................... 81
9.7. Accounts Receivable; Billing ............................... 81
9.8. Medical Personnel Hiring ................................... 82
9.9. Continuing Education ....................................... 82
9.10. Clinical Research .......................................... 82
SECTION 10 CERTAIN COVENANTS ............................................ 83
10.1. Change of Control .......................................... 83
10.2. Legend on Securities ....................................... 83
SECTION 11 RECORDS ...................................................... 84
11.1. Medical Records ............................................ 84
11.2. Management Business Records ................................ 84
11.3. Access to Records Following Termination .................... 84
SECTION 12 INSURANCE AND INDEMNITY ...................................... 85
12.1. Professional Liability Insurance ........................... 85
12.2. Life Insurance ............................................. 85
12.3. Indemnification by Medical Group ........................... 86
12.4. Indemnification by Management Company ...................... 86
SECTION 13 TERMINATION .................................................. 87
13.1. Termination by Medical Group ............................... 87
13.2. Termination by Management Company .......................... 88
13.3. Termination by Medical Group or Management Company ......... 89
13.4. Effect of Termination ...................................... 89
13.5. Repurchase of Assets ....................................... 91
-iii-
<PAGE>
Page
----
SECTION 14 RESCISSION ................................................... 92
14.1. Rescission By Medical Group ................................ 92
14.2. Disengagement of Individual Member ......................... 96
SECTION 15 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION ................... 97
15.1. Non-Disclosure ............................................. 97
SECTION 16 NON-COMPETITION .............................................. 98
SECTION 17 OBLIGATIONS OF THE MANAGEMENT COMPANY ........................ 98
17.1. No Practice of Medicine .................................... 98
17.2. No Interference with Professional Judgment ................. 98
17.3. Operational Evaluations .................................... 99
17.4. Physician Advisory Board ................................... 100
SECTION 18 ASSIGNMENT ................................................... 100
SECTION 19 NOTICES ...................................................... 101
SECTION 20 BENEFITS OF AGREEMENT ........................................ 102
SECTION 21 SEVERABILITY ................................................. 102
SECTION 22 GOVERNING LAW ................................................ 103
SECTION 23 HEADINGS ..................................................... 104
SECTION 24 ENTIRE AGREEMENT; AMENDMENTS ................................. 104
SECTION 25 ATTORNEYS' FEES .............................................. 104
SECTION 26 COUNTERPARTS ................................................. 104
SECTION 27 WAIVERS ...................................................... 104
SECTION 29 SURVIVAL OF TERMINATION ...................................... 104
SECTION 29 CONTRACT MODIFICATION FOR PROSPECTIVE LEGAL EVENTS ........... 105
-iv-
<PAGE>
INDEX OF DEFINED TERMS
Term Page
- ---- ----
Accounts.................................................................... 29
Addbacks.................................................................... 36
Additional Term............................................................. 3
Adjusted Operating Expenses................................................. 36
Administrative Personnel.................................................... 19
Ancillary Division.......................................................... 47
Ancillary Service Reimbursement Payment..................................... 49
Ancillary Service Start-Up Costs............................................ 50
Ancillary Service Start-Up Period........................................... 49
Annual CPI Adjustment....................................................... 74
Annual Draw Amount.......................................................... 32
Annual Medical Group Compensation Amount.................................... 32
Annual Overpayment.......................................................... 32
Annual Shortfall............................................................ 32
Applicable Percentage....................................................... 36
Articles of Incorporation................................................... 11
Asset Purchase Agreement.................................................... 1
Assignment of Lease......................................................... 5
Audit Compensation Amount................................................... 51
Authorized Management Company Operating Costs............................... 40
Authorized Signatories...................................................... 15
Average Profit.............................................................. 50
Balance Sheet............................................................... 56
Balance Sheet Date.......................................................... 56
Bankruptcy Event............................................................ 87
Base Collections Amount..................................................... 101
Base Compensation Amount.................................................... 101
Base Term................................................................... 3
Billable Medical Personnel.................................................. 47
Billings.................................................................... 33
Budgets..................................................................... 28
Bylaws...................................................................... 11
Closing Notice.............................................................. 42
Code........................................................................ 60
Collateral.................................................................. 30
Collections................................................................. 33
Commencement Date........................................................... 3
Comparison Year............................................................. 101
Confidential or Proprietary Information..................................... 97
Continuation Right.......................................................... 42
(i)
<PAGE>
Term Page
- ---- ----
Corporate Acquisition....................................................... 100
Corporate Overhead.......................................................... 39
CPIC........................................................................ 74
CPIP........................................................................ 74
Determination Period........................................................ 44
Disengaging Member.......................................................... 96
Documents................................................................... 15
Draw Percentage............................................................. 31
Eligible Parties............................................................ 29
Employee Plans.............................................................. 64
Employees................................................................... 63
Equipment................................................................... 8
ERISA....................................................................... 64
Estimated Expenses.......................................................... 52
Excluded Ancillary Employees................................................ 28
Excluded Ancillary Services................................................. 28
Excluded Costs.............................................................. 38
Facility.................................................................... 80
Fair Market Value........................................................... 94
FF&E........................................................................ 8
Financing Statement......................................................... 30
Internal Financial Statements............................................... 56
Lender...................................................................... 30
Management Business......................................................... 1
Management Company.......................................................... 1
Management Company Balance Sheet............................................ 69
Management Company Balance Sheet Date....................................... 69
Management Company Bank..................................................... 30
Management Company Costs.................................................... 37
Management Company Operating Costs.......................................... 38
Management Company Transaction Documents.................................... 67
Management Fee.............................................................. 35
Management Services......................................................... 2
Medical Business............................................................ 1
Medical Equipment........................................................... 7
Medical Group............................................................... 1
Medical Group Bank.......................................................... 15
Medical Group Collections Account........................................... 15
Medical Group Costs......................................................... 46
Medical Group Services...................................................... 33
(ii)
<PAGE>
Term Page
- ---- ----
Medical Group Transaction Documents......................................... 55
Medical Personnel........................................................... 22
Monthly Draw................................................................ 31
Nasdaq...................................................................... 94
Net Operating Income........................................................ 37
New Ancillary Employee Budget............................................... 28
New Ancillary Service Medical Equipment..................................... 48
New Ancillary Services...................................................... 9
New Medical Office.......................................................... 46
New Medical Office Start-Up Costs........................................... 46
New Medical Office Start-Up Period.......................................... 46
New Office Division......................................................... 40
New Office Net Profit Date.................................................. 45
New Office Payment.......................................................... 44
New Physician............................................................... 53
New Physician Compensation.................................................. 54
New Physician Net Collections............................................... 53
New Physician Personnel Expense............................................. 54
Note No. 1.................................................................. 1
Note No. 2.................................................................. 1
Note No. 3.................................................................. 52
Office Lease................................................................ 6
Opening Right............................................................... 43
Operating Account........................................................... 30
Operations Committee........................................................ 73
Physician Advisory Board.................................................... 100
Physician Breakeven Date.................................................... 54
Physician Start Date........................................................ 54
Prepaid Expenses............................................................ 52
Professional Management Cost Savings........................................ 37
Professional Medical Cost Savings........................................... 37
Professional Practice Cost Savings.......................................... 37
Provider Account Agreement.................................................. 31
Rescission Effective Date................................................... 93
Rescission Notice........................................................... 93
Rescission Option........................................................... 92
Rescission Period........................................................... 92
Restricted Stock Agreement.................................................. 86
Retained Accounts Receivable................................................ 29
Returns..................................................................... 59
(iii)
<PAGE>
Term Page
- ---- ----
Review Financial Statements................................................. 56
Secondary Period............................................................ 42
Signature Date.............................................................. 1
Special New Medical Office Start-Up Period.................................. 44
Specialty Care Network Profit............................................... 37
Tax......................................................................... 60
Taxes....................................................................... 60
Technical Personnel......................................................... 20
Tenant Improvements......................................................... 75
Term........................................................................ 3
Unaudited Financial Statements.............................................. 69
(iv)
<PAGE>
THIS MANAGEMENT SERVICES AGREEMENT (the
"Agreement") is entered into on October
31, 1997, (the "Signature Date"),
effective as of September 1, 1997, by
and between BROWARD INSTITUTE OF
ORTHOPAEDIC SPECIALTIES, P.A., a Florida
professional association (the "Medical
Group"), and BMJ MEDICAL MANAGEMENT,
INC., a Delaware corporation (the
"Management Company"), with reference to
the following facts:
A. The Medical Group is engaged in the business (the "Medical Business") of
providing orthopedic medical and surgical services and related medical and
ancillary services to the general public.
B. The Management Company is a corporation engaged in the business (the
"Management Business") of providing management, administrative, financial,
marketing, information technology, and related services to professional medical
organizations.
C. Concurrently herewith, the Management Company and the Medical Group are
entering into an Asset Purchase Agreement (the "Asset Purchase Agreement"), in
the form of Exhibit A attached hereto, pursuant to which the Management Company
is acquiring substantially all of the assets of the Medical Group. In connection
with the Asset Purchase Agreement, the Management Company is issuing two (2)
promissory notes to the Medical Group, one of which is in the aggregate
principal amount of $1,334,041.76 and is due on January 2, 1998 ("Note No. 1")
and the other of which is in the aggregate principal amount of $1,262,209.94 and
is due on the earlier of (i) the consummation of the Management Company's
initial public offering of its common stock or (ii) twelve (12) months from the
date thereof (but in no event earlier than January 2, 1998) ("Note No. 2").
D. The Management Company and the Medical Group desire to enter into this
Agreement, pursuant to which, among other
<PAGE>
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:
SECTION 1. Retention of the Management Company.
1.1. Retention.
The Medical Group hereby retains the Management Company to provide all of
the management and related services identified or referenced in Section 3 hereof
and as otherwise required by this Agreement (collectively, the "Management
Services"), and the Management Company hereby accepts such retention and agrees
to provide such services, upon the terms and subject to the conditions set forth
herein.
1.2. Exclusivity.
During the term of this Agreement, the Management Company shall be the
exclusive provider of all management and administrative services utilized by the
Medical Group; provided, however, that the Medical Group may contract directly
with or otherwise engage individuals or companies for the provision of
accounting, legal, consulting, or other professional or advisory services
(provided that such services shall be in addition to, and not in replacement of,
the services to be provided by the Management Company hereunder), all in the
sole discretion of the Medical Group and at the sole cost of the Medical Group.
1.3. Relationship of Parties.
Notwithstanding anything contained herein to the contrary, (a) the
Management Company and the Medical Group intend to act and perform as
independent contractors, and the provisions hereof are not intended to create
any partnership, joint venture, or employment relationship between the parties,
and (b) the Management Company is hereby engaged solely to provide management
and administrative services to the Medical Group and shall not interfere with,
control, direct, or supervise the Medical Group
-2-
<PAGE>
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.
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 September 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 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
-3-
<PAGE>
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 New Ancillary Services furnished by the Medical Group.
(c) Additionally, the full range of Management Services as described in
this Agreement shall be applicable with respect to the items identified as
Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs
shall be paid by the Medical Group rather than by the Management Company.
Accordingly, the Management Company shall provide accounting, bookkeeping, and
related services with respect to all such costs.
(d) The Management Company may enter into such contracts and agreements
with outside services and suppliers as the Management Company shall reasonably
deem necessary in connection with the provision of the Management Services, and,
to the extent permitted by applicable law, such contracts and agreements shall,
except as otherwise expressly provided in this Agreement, be in the name of the
Management Company; provided, however, that without the prior approval of the
Operations Committee (as hereinafter defined), the Management Company shall not
enter into any agreement pursuant to which an unaffiliated third party will
perform substantially all of the duties of the Management Company set forth in
Section 3.6(a) hereof. The Management Company shall have no authority, directly
or indirectly, to perform, and shall not perform or enter into any agreement to
perform, Medical Group Services or any other medical
-4-
<PAGE>
function required by law to be performed by a licensed physician or by any other
licensed health care professional.
(e) The Management Company shall comply in all material respects with all
applicable material Federal, state and local laws, regulation, and ordinances in
connection with the provision of the Management Services hereunder.
3.2. Premises.
(a) The Medical Group, as of the Commencement Date, leases premises and
provides Medical Group Services (as hereinafter defined) at the following
locations:
4440 Sheridan Street
Hollywood, Florida 33021
4310 Sheridan Street
Hollywood, Florida 33021
3475 Sheridan Street
Hollywood, Florida 33021
601 N. Flamingo Road - #101
Pembroke Pines, Florida 33028
1845 N. Corporate Lakes Blvd.
Ft. Lauderdale, Florida 33326
1150 N. 35th Avenue - #135
Hollywood, Florida 33021
Immediately prior to the Commencement Date, 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, each of the leases for such premises are to be
assigned from the Medical Group to the Management Company pursuant to an
assignment (each, an "Assignment of Lease") substantially in the form attached
hereto as Exhibit B. During the Term, the Medical Group shall, subject in all
instances to the terms of such leases, have the right to use such premises
solely for the provision of Medical Group Services in accordance with the terms
of this Agreement. In connection therewith, the Medical Group agrees in all
instances to abide by all of the
-5-
<PAGE>
terms and provisions of all such leases. Upon the expiration of any of the
leases assigned in accordance with this Section 3.2(a), the Management Company
shall use its best efforts to enter into a new lease, in the name of the
Management Company, with the landlord of such premises; provided, however, that
the approval of the Medical Group, which shall not be unreasonably withheld,
shall be required in the event of any substantial changes in the terms of such
lease, and if the Medical Group does not give such approval, the failure to
enter into such new lease shall not constitute a default of the Management
Company. Each assigned lease and each new lease entered into between the
Management Company and the landlord is referred to herein as an "Office Lease."
(b) A New Medical Office (as hereinafter defined) may be opened only upon
the agreement of the Operations Committee. The capital costs and start-up costs
reasonably required in connection with the opening of any New Medical Office
shall be borne as set forth in Section 5 hereof. The premises of any New Medical
Office shall be leased by the Management Company, in the Management Company's
name, and the Medical Group shall, subject in each instance to the terms of any
such lease, have the right to use the premises of any such New Medical Office
solely for the provision of Medical Group Services in accordance with the terms
of this Agreement. In connection therewith, the Medical Group agrees in all
instances to abide by all of the terms and provisions of all such leases.
Notwithstanding anything to the contrary contained in this Agreement, the
Management Company may, in its sole discretion, determine to permanently close
any New Medical Office if such office is not, after 12 months of operation,
profitable (as determined in the sole discretion of the Management Company)
(subject, however, to the right of the Medical Group pursuant to Section 5.6(c)
hereof to keep such New Medical Office open).
(c) Except as set forth in Sections 3.2(a) or (b) above, the closing or
relocation of any offices of the Medical
-6-
<PAGE>
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 connection with the provision of Medical Group Services
(collectively, the "Medical Equipment"). The Management Company shall acquire
(or lease), at its cost, all Medical Equipment, and the Management Company shall
retain ownership of (or the leasehold interest with respect to) all Medical
Equipment. As used herein, the term Medical Equipment shall not include medical
equipment used in connection with a New Ancillary Service or Excluded Ancillary
Service (each as hereinafter defined).
-7-
<PAGE>
(b) The Management Company also shall provide, or arrange for the provision
of, to the Medical Group all furniture, furnishings, trade fixtures, and office
equipment reasonably required in connection with the provision of Medical Group
Services pursuant to this Agreement (collectively, "FF&E"). The Management
Company shall acquire, at its cost, all FF&E, and the Management Company shall
retain ownership of all FF&E. As used herein, the term FF&E does not include
furniture, furnishings, trade fixtures, and office equipment used in connection
with a New Ancillary Service.
(c) The Medical Equipment and the FF&E are sometimes referred to
collectively as the "Equipment." The acquisition, replacement, relocation, or
other disposition of any Equipment shall require prior approval as provided in
Section 8.2 hereof.
(d) The Medical Group's right to use the Equipment shall be subordinate to
the rights of any unaffiliated third party to which the Management Company
elects, in its sole discretion, to grant any security interest, mortgage, lien
or other encumbrance in or on the Equipment. The Medical Group shall use the
Equipment only in connection with its provision of the Medical Group Services,
and the Medical Group shall not alter, repair, augment, or remove the Equipment
from the premises of the Medical Group without the prior written consent of the
Management Company and any lessor thereof, which approval may be granted or
withheld in the Management Company's or such lessor's sole discretion. To the
extent the Equipment is utilized by the Medical Group in the provision of
Medical Group Services, the Medical Group shall have the right to exercise
reasonable control over the use of such Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so
-8-
<PAGE>
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) SOLELY WITH RESPECT TO THE EQUIPMENT INITIALLY PROVIDED TO THE MEDICAL
GROUP UPON THE EXECUTION OF THIS AGREEMENT, THE MEDICAL GROUP ACKNOWLEDGES THAT
THE MANAGEMENT COMPANY IS HEREIN MAKING NO WARRANTIES OR REPRESENTATIONS,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT
PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO
THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE
FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. Nothing in this Agreement
shall be construed to affect or limit in any way the professional discretion of
the Medical Group to select and use any Equipment acquired by the Management
Company in accordance with the terms of this Agreement insofar as such selection
or use constitutes or might constitute the practice of medicine.
3.4. New Ancillary Services.
(a) For purposes of this Agreement, "New Ancillary Services" means the
technical component (but not the professional component) of the following,
except as set forth in Schedule I:
(i) Magnetic resonance imaging and/or other imaging services (except
diagnostic radiology);
(ii) Outpatient surgery; and
-9-
<PAGE>
(iii) Other revenue-producing services generally recognized as
ancillary services, but excluding the following:
(A) Any services provided on a regular basis by the Medical Group
immediately prior to the Commencement Date, including without
limitation (1) plain film and other diagnostic radiology (if
any), (2) ultrasound for pediatric patients, (3) physical
therapy; and (4) densitometry; 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
-10-
<PAGE>
5.8 of this Agreement, except as may otherwise be agreed upon by the parties.
3.5. Administration, Finance and Accounting.
The Management Company shall provide or arrange for the provision of all
administrative, financial, and accounting functions necessary for the operation
of the Medical Group, including, without limitation, the following (if
applicable):
(a) Creation and maintenance of bank accounts.
(b) Deposits of receipts.
(c) Preparing accounts receivable summary reports, including various
analyses of delinquent accounts.
(d) Receiving appropriate approvals as required by the Medical Group's
articles of incorporation (the "Articles of Incorporation") and its
bylaws (the "Bylaws") prior to distribution of payments to outside
parties; provided, however, that the Management Company shall not be
responsible for or liable with respect to interpretations of the
Articles of Incorporation or Bylaws.
(e) Disbursement of payables, including payables of the Medical Group;
provided, however, that payables of the Medical Group shall be paid
from an account of the Medical Group and not from any of the
Management Company's bank accounts, and all checks drawn on any
Medical Group account shall be signed by an authorized representative
of the Medical Group; provided, further, that the accounts payable
function shall be performed by personnel located at the offices where
the Medical Group performs Medical Group Services, under the
supervision
-11-
<PAGE>
of the Management Company personnel located at its principal offices.
(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.
(j) Preparing monthly financial and medical practice statistics reports by
satellite office and by physician, and the Management Company shall
use its reasonable efforts to have such reports available, with
respect to any given month, 20 days after the end of such month.
(k) Providing from the Medical Group's bank account(s) compensation
payments to physicians and professional corporations pursuant to
service agreements, monthly profit and loss distributions, and
quarterly bonus calculations; provided, however, that the Management
Company shall not be responsible for or liable with respect to
interpretations of the Articles of Incorporation or Bylaws; provided,
further, that all checks drawn on any Medical Group bank account shall
be signed by an authorized representative of the Medical Group.
-12-
<PAGE>
(l) Calculating physicians' annual earnings based on the Medical Group's
physician compensation formulas.
(m) Ongoing day-to-day communication with the managing partner, member or
stockholder (or other manager of the Medical Group) and assisting such
person in fulfilling his responsibilities.
(n) Preparing agendas and information packages for Medical Group meetings.
(o) Developing budgets and long-term strategies for the Medical Group,
including an initial long-term plan and capital expenditures budget
and the Management Company shall use its reasonable efforts to have
such plan and budget delivered to the Medical Group within 180 days
and 90 days, respectively, after the Commencement Date.
(p) Coordinating payroll processing and payroll tax payments.
(q) Providing ongoing personnel FTE analysis.
(r) Sponsoring employee benefit plans and providing administrative
services relating thereto for the Medical Personnel (as hereinafter
defined), 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).
-13-
<PAGE>
(s) Coordinating recruitment, interviewing, and hiring of new physicians
approved by the Medical Group, in its sole discretion.
(t) Implementing fee schedule increases and/or decreases established by
the Medical Group.
(u) Coordinating depositions and court appearances.
(v) Assisting in the coordination of call schedules.
(w) Assisting in the coordination of coverage of athletic team events.
(x) Acting as liaison to hospital administration, physical therapy,
surgery center, MRI, and other ancillary services entities.
(y) Cooperating with outside accountants in preparing various schedules
and providing other information.
(z) Interacting with legal counsel retained by the Management Company as
necessary in connection with matters directly impacting the Medical
Group, such as with respect to reviewing and negotiating new leases
and reviewing and negotiating managed care contracts.
3.6. Billing and Collection.
(a) The Medical Group acknowledges that ownership of all Accounts (as
hereinafter defined) is transferred by the Medical Group to the Management
Company as provided in greater detail in Section 5.1 of this Agreement. In order
to facilitate the collection of the Accounts, the Management Company shall (i)
bill patients and third party payors in the Medical Group's name; (ii) collect
accounts receivable resulting from such billing;
-14-
<PAGE>
(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. The Medical
Group shall promptly turn over to the Management Company for deposit into the
Medical Group Collections Account in accordance with this Agreement all checks
and other payments received by the Medical Group or by any of its partners,
equity owners or employees from any patient or third party payor for Medical
Group Services rendered during the Term.
(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
signatories (the "Authorized Signatories") 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 Signatory is not signing the Documents in a timely manner, the
Management Company shall not be liable for any failure to perform its duties
hereunder or for any failure to perform the Management Services to the extent
caused
-15-
<PAGE>
by the failure of an Authorized Signatory to sign the Documents in a timely
manner.
(c) The Management Company shall submit all bills and manage the billing
process on a timely basis in accordance with the terms of this Agreement and
applicable law.
(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 obtain all appropriate insurance and other information
required.
(ii) Submit claims utilizing electronic billing submission, whenever
appropriate.
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanics for delinquent accounts of all insurance
classifications, all in a timely fashion as determined by the Operations
Committee.
(iv) Turn over to outside collection agencies all delinquent accounts
satisfying the criteria established by the Operations Committee. The
Management Company shall also follow-up on the performance of the outside
collection agencies and make changes, if necessary, and shall reconcile
-16-
<PAGE>
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
those set forth in the Medical Group's then current fee schedule; provided,
however, that the Management Company may accept in payment thereof amounts
equal to those set forth on the most recently approved Florida workers'
compensation fee schedule.
(viii) Apply "insurance only" and other courtesy write-offs in
compliance with Operations Committee policy.
(ix) With respect to discounted fee-for-service contracts with
Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), 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:
(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 capitation payments are based on the proper
number of lives enrolled.
-17-
<PAGE>
(xi) With respect to lien accounts, the Management Company shall:
(A) Ensure that appropriate documents are signed and agreed to
initially as between the Medical Group, attorney and
patient;
(B) Follow-up on a regular basis as to the status of the
account; and
(C) Apply the policies of the Operations Committee in resolving
open account balances.
(xii) With respect to student athlete accounts, the Management Company
shall coordinate insurance and other information in compliance with the
policy of the Operations Committee.
(xiii) With respect to amounts withheld by payors in compliance with
contracts between the payor and the Medical Group, the Management Company
shall follow-up on a timely basis to ensure that withheld amounts are paid
to the Medical Group, if warranted, and to ensure that amounts not paid 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.
-18-
<PAGE>
3.7. Administrative Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of the following non-medical personnel necessary for the
conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration;
(ii) Accounting;
(iii) Billing and Collection;
(iv) Secretarial;
(v) Transcription;
(vi) Appointments;
(vii) Switchboard;
(viii) Medical Records;
(ix) Chart Preparation;
(x) Historians;
(xi) Clinic Support; and
(xii) Marketing.
(b) The Management Company shall determine and pay, or arrange for the
payment of, the salaries and fringe benefits of the Administrative Personnel,
and shall provide or arrange for other personnel services related to the
Administrative Personnel, including, but not limited to, scheduling, determining
personnel policies, administering continuing education benefits, and payroll
administration; provided, that the Medical Group shall have the right to approve
the rates of pay of the Administrative Personnel and any changes therein.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as
-19-
<PAGE>
reasonably necessary, verify, or arrange for the verification of, educational
and employment experience, licensure, insurability and compliance with those
drug-free workplace restrictions contained in the Management Company's employee
manual.
(d) The Management Company shall attempt, consistent with sound business
practices, to honor Medical Group requests with regard to the retention or
assignment of specific Administrative Personnel to the Medical Group. In the
event that the Management Company receives a complaint from the Medical Group
that any of the Administrative Personnel is interfering with or disrupting the
provision of Medical Group Services by the Medical Group, the Management Company
will use reasonable efforts to attempt to promptly remedy any such complaint. If
any such complaint is not remedied to the reasonable satisfaction of the Medical
Group, then the Management Company shall remove such Administrative Personnel,
if requested by the Medical Group, from the Medical Group's facilities, if and
to the extent such action by the Management Company will not violate any
applicable law.
(e) All of the services provided by the Management Company under this
Section 3.7, including the obligations set forth in Section 3.7(d), shall be
performed in compliance with all applicable laws.
3.8. Technical Personnel; Leased Employees.
(a) Subject to the conditions set forth in this Section 3.8, the Management
Company shall employ or contract with, or shall arrange for, and shall provide
to the Medical Group as leased employees, such Technical Personnel (as defined
below) as may reasonably be necessary for the conduct of the Medical Business.
(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
-20-
<PAGE>
third party payors when performed by an employee of a physician under the
physician's supervision.
(c) The Medical Group shall have the right to exercise, and shall exercise,
such supervision and control over the activities of the Technical Personnel and
Excluded Ancillary Employees (as hereinafter defined) as may be necessary for
the Technical Personnel and Excluded Ancillary Employees 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 and any Excluded
Ancillary Employees terminated from employment;
(ii) furnish the Technical Personnel and Excluded Ancillary Employees
with the equipment and supplies needed by the Technical Personnel for their
work;
(iii) provide the Technical Personnel and Excluded Ancillary Employees
with any necessary training;
(iv) instruct the Technical Personnel and Excluded Ancillary Employees
regarding their activities performed for the Medical Group;
(v) establish the hours of work for the Technical Personnel and
Excluded Ancillary Employees;
(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.
-21-
<PAGE>
(d) With respect to each of the Technical Personnel, the Management Company
shall verify or arrange for the verification of educational and employment
experience, licensure and insurability, and shall review and provide the Medical
Group with copies of any complaints contained in public files with applicable
state and Federal commissions.
3.9. Medical Personnel Recruiting.
(a) The Management Company shall, upon request by the Medical Group, assist
the Medical Group in recruiting Medical Personnel. The Medical Group shall be
solely responsible for the selection and retention of Medical Personnel,
provided that any such Medical Personnel shall possess all of the licensure
required under applicable Federal and state law for such individual to perform
his or her duties. "Medical Personnel" means:
(i) Physicians (including fellows and residents, if any) providing
professional medical services who are employees or independent contractors
of the Medical Group; and
(ii) Physician assistants, nurse practitioners, and other health care
professionals who provide services that are billable to patients or third
party payors under the name of such health care professional (as
distinguished from services that are billable under the name of the
supervising physician).
(b) With respect to each of the Medical Personnel, the Management Company
shall verify 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.
-22-
<PAGE>
3.10. Inventory and Supplies.
The Management Company shall order and purchase, or arrange for the order
and purchase of, inventory and supplies on behalf of the Medical Group, and such
other ordinary or appropriate materials the Medical Group reasonably deems to be
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 stationery supplies;
(f) Printer supplies; and
(g) Linen and laundry supplies.
3.11. Taxes.
The Management Company shall provide the Medical Group with access to all
information necessary for the Medical Group to prepare its tax returns. The
Management Company shall have no responsibility for:
(a) The payment of the Medical Group's taxes; or
(b) The preparation of any income tax returns for the Medical Group.
3.12. Information Systems Management.
(a) The Management Company shall provide or arrange for the provision of
management information systems services to be utilized by the Medical Group.
These services shall include, but not be limited to, ongoing maintenance and
enhancement of the existing information systems used by the
-23-
<PAGE>
Medical Group in connection with the provision of the following services:
(i) Accounts receivable - Billing/Insurance/Collections;
(ii) On-line appointment scheduling;
(iii) Internal e-mail;
(iv) On-line transcription;
(v) Faxing subsystem;
(vi) Electronic claims submission;
(vii) Patient flow monitoring system;
(viii) Authorization module;
(ix) Prescription module;
(x) X-ray tracking system;
(xi) Voice mail;
(xii) Paperless medical records; and
(xiii) Bar code chart tracking system.
(b) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical Group's payor agreements; provided, however, that in no event
shall a breach of such confidentiality be deemed a default under this Agreement
if the Management Company acted reasonably and in good faith to protect such
confidentiality.
3.13. Use of New Technologies in the Practice of Medicine.
The Management Company shall utilize reasonable efforts to promote the
integration of new technologies into the professional practice of the Medical
Group, including, without limitation, the use of satellite and other
telecommunications
-24-
<PAGE>
services that permit the provision of remote consultations, virtual operations,
and other professional services; provided, however, that the foregoing shall be
subject to the terms of Section 8.2(e) hereof.
3.14. Public Relations; Marketing and Advertising.
The Management Company shall develop and implement community outreach
programs and public relations programs designed to educate the patient
population regarding the Medical Group, the availability of its medical
services, and the availability in terms of any managed care programs in which
the Medical Group participates. The Management Company also shall develop and
implement marketing and advertising programs as reasonably required to promote
and expand the Medical Business, subject to any approved budgets. These programs
shall be developed in such manner as the Management Company deems practical, and
shall be conducted in compliance with applicable laws and regulations governing
advertising by the medical profession. Any promotional materials created
primarily for the purpose of marketing the services provided by the Medical
Group and the use of any individual physician's name in any promotional
materials shall require the consent of the Medical Group or such physician, as
the case may be.
3.15. Insurance.
The Management Company shall, to the extent permitted by applicable law,
provide the insurance coverage described in Section 12.1, and may obtain the
insurance described in Section 12.2 of this Agreement.
3.16. Files and Records.
(a) To the extent permitted by applicable law, the Management Company shall
supervise and maintain custody of all files and records relating to the
operation of the business of the Medical Group, including, without limitation,
accounting, billing, collection, and patient medical records. The management
-25-
<PAGE>
of all files and records shall be in compliance with applicable state and
Federal statutes. Patient medical records shall at all times be and remain the
property of the Medical Group and shall be located at a location that is readily
accessible for patient care. The Management Company shall preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purposes necessary to perform the Management
Services set forth herein; provided, however, that in no event shall a breach of
such confidentiality be deemed a default under this Agreement if the Management
Company acted reasonably and in good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of files and
records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the
Commencement Date. Any change in such policies shall be subject to the approval
of the Operations Committee.
(c) In the event of termination of this Agreement, the Management Company
shall deliver to the Medical Group at no charge a copy of the books and records
of the Medical Group in the Management Company's possession. In the event any
physician of the Medical Group terminates his affiliation with the Medical Group
during the Term, the Management Company shall, within 30 days after receipt of
written instructions from the Medical Group, deliver to such physician a copy of
the books and records pertaining to the Medical Group Services provided by such
physician during the five years prior to such physician's departure from the
Medical Group; provided that the Management Company shall not be obligated to
return any books and records pertaining to Medical Group Services provided prior
to the Commencement Date.
-26-
<PAGE>
3.17. Managed Care Contracts.
(a) 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.
(b) In the event that the Management Company, or the Management Company and
its affiliated medical practices acting together, shall enter into any contracts
with third-party payors to provide any of the services included within the
Excluded Ancillary Services (as hereinafter defined) within the geographic area
served by the Medical Group (which for purposes hereof is defined as the
geographic area within the following boundaries: (i) to the south by the Broward
County/Dade County line; (ii) to the north by route I 595; (iii) to the east by
the Atlantic Ocean; and (iv) to the west by the Collier County/Broward County
line)), then the Management Company agrees to provide the Medical Group with a
right of first refusal to provide such services within the applicable geographic
area; provided that the pricing offered by the Medical Group to perform such
services is competitive with rates generally charged by other service providers
in such area. In the event that at such time the Management Company is then
affiliated with a competing service provider that services the same geographic
area, then in order to exercise its right of first refusal the Medical Group
must provide such services at the same rate as such competing Management Company
affiliate. In the event that such right of first refusal becomes applicable, the
Management Company shall provide the Medical Group with written notice thereof
and the
-27-
<PAGE>
parties agree to negotiate in good faith in accordance with the provisions of
this Section 3.17(b).
3.18. Budgets.
(a) 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 and the Management Company hereby agree that the
budget(s) attached hereto as Schedule II is (are) the Budget(s) for the Medical
Group with respect to the time periods set forth thereon. 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
1 of the year immediately preceding the calendar year for which such Budget is
applicable.
(b) In addition to the foregoing budgets, the Management Company shall
prepare, for the review and approval of the Operations Committee, an annual
budget (the "Excluded Ancillary Employee Budget") of the compensation (wages and
otherwise) payable to all employees (the "Excluded Ancillary Employees")
dedicated (part-time or full-time) to the provision of physical therapy
services, bone densitometry services and services offered by the Medical Group's
certified outpatient rehabilitation facilities (the "Excluded Ancillary
Services"); provided, however, that the Medical Group and the Management Company
hereby agree that the Excluded Ancillary Employee Budget attached as Schedule
II-A is approved with respect to the time period set forth therein. The
Management Committee shall prepare and submit to the Operations Committee all
subsequent Excluded Ancillary Employee Budgets on or before December 1 of the
year immediately preceding the calendar year for which such budget is
applicable.
-28-
<PAGE>
3.19. Force Majeure.
The Management Company shall not be liable to the Medical Group for failure
to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, unavailability of supplies, changes in
applicable law or regulations or other extraordinary 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, the allocation of which has been determined
and apportioned by the Medical Group.
SECTION 5. Costs, Compensation, and Other Payments.
5.1. Ownership of Accounts; Security.
The Medical Group hereby transfers to the Management Company ownership of
all accounts receivable and other rights to payment arising from the provision
by the Medical Group of Medical Group 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 parties agree that all of the Medical
Group's accounts receivable existing as of the close of business on August 31,
1997 and any amounts owing to the Medical Group for services provided through
such date (collectively, the "Retained Accounts Receivable") shall remain the
property of the Medical Group. Notwithstanding anything to the contrary
contained herein, the collections relating to any Retained Accounts Receivable
shall not be included in the computations of Collections, the Annual Medical
Group Compensation Amount, or the Management Fee as described in Sections 5.3
and 5.4 hereof. The Management Company shall have
-29-
<PAGE>
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 (the "Financing Statement") for the benefit of the Management Company
evidencing the foregoing transfer of the Accounts and perfecting the Management
Company's ownership interests therein. The Medical Group hereby 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 by the Lender 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.
Except as otherwise provided in Section 13.4 hereof, 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"). The Medical Group shall
enter into a mutually acceptable Provider Account Agreement with the Medical
Group Bank, the Management Company, and the Management Company's lender (the
"Provider Account
-30-
<PAGE>
Agreement"), in order to satisfy the foregoing obligation. The parties hereto
agree and acknowledge that the Medical Group will not be obligated to transfer
to the Operating Account any funds in its separate bank accounts utilized in
connection with its operation of the Excluded Ancillary Services.
5.3. Annual Medical Group Compensation Amount.
(a) Monthly Draw.
(i) On each Draw Date (as hereinafter defined) during the Term hereof,
the Management Company shall distribute to the Medical Group an amount
equal to a percentage (the "Draw Percentage") of the Medical Group's total
Billings (as hereinafter defined) for Medical Group Services provided
during the previous month (the "Monthly Draw"). The Draw Date and the
initial Draw Percentage are as set forth on Schedule IV, and the Draw
Percentage shall be adjusted as provided in Section 5.3(a)(ii).
(ii) Commencing May 15, 1998, and effective May 15 of each year
thereafter, the Draw Percentage shall be 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. Additionally, the
Management Company may adjust the Draw Percentage from time to time based
on the actual Collections year-to-date in order to minimize the amount of
any annual settlement payment reasonably anticipated to be required under
Section 5.3(b).
(b) Annual Settlement.
(i) On or before April 30 of each year beginning 1998, the Management
Company shall determine the compensation (the "Annual Medical Group
Compensation
-31-
<PAGE>
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) actually paid by the Management Company
during such year.
(ii) If the Annual Medical Group Compensation Amount thus determined
exceeds (the "Annual Shortfall") the total of the twelve (12) Monthly Draws
paid by the Management Company to the Medical Group during the previous
calendar year (the "Annual Draw Amount"), the Management Company shall pay
to the Medical Group on or before May 15, an amount equal to the Annual
Shortfall, plus interest thereon at the rate of eight (8%) percent per
annum, commencing July 1 of the prior calendar year (or, with respect to
the first calendar year of this Agreement, if applicable, the Commencement
Date). If the Annual Medical Group Compensation Amount 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, plus interest thereon at the rate of
eight (8%)
-32-
<PAGE>
percent per annum, commencing July 1 of the prior calendar year (or, with
respect to the first calendar year of this Agreement, if applicable, the
Commencement Date).
(iii) With respect to this Section 5.3(b), for purposes of determining
the total Collections for all Medical Group Services provided during any
calendar year or portion thereof during the Term, all Collections during
January, February, and March of such year shall be deemed to be for Medical
Group Services rendered during the previous calendar year, and all
Collections during April through December shall be deemed to be for Medical
Group Services rendered during the calendar year in which such Collections
were received. The foregoing shall also apply with respect to determining
the Management Fee earned by the Management Company for the previous
calendar year, for purposes of this Section 5.3(b).
(iv) Notwithstanding anything to the contrary set forth herein, the
first period for which the annual settlement described in this Section
5.3(b) shall be applicable is the period commencing on the Commencement
Date and ending on December 31, 1997.
(c) For purposes of this Agreement:
(i) "Billings" means, for any applicable period, the gross charges of
the Medical Group for all Medical Group Services furnished during such
period.
(ii) "Collections" means, for any applicable period, all cash or cash
equivalents received during such period for Medical Group Services,
including any capitation payments, less any refunds paid during such
period.
(iii) "Medical Group Services" means the following services rendered
by, through, or on behalf of the
-33-
<PAGE>
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 or Excluded Ancillary Services
(excluding professional services rendered by Medical
Personnel in connection therewith, which professional
services are included under Section 5.3(c)(iii) above);
(B) interest income;
(C) royalties payable to any Medical Group physician for medical
inventions;
(D) fees payable under consulting agreements entered into by
Medical Group physicians;
-34-
<PAGE>
(E) revenues from presentations, publications, medical
directorships, service as the head of a hospital department,
service on hospital committees or hospital boards of
directors, and endorsements;
(F) revenues received by individual physicians from emergency
room calls where they are not seeing patients and the
physicians are paid directly by the subject hospital;
(G) proceeds from the sale of any capital assets of the Medical
Group; and
(H) 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 clauses (D) and (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
activities.
(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 retain from funds received by the Medical Group from time
to
-35-
<PAGE>
time at its discretion, shall be equal to (i) the sum of (A) an amount equal
to the Applicable Percentage (as hereinafter defined) of Net Operating Income,
(B) an amount equal to sixty six and two-thirds percent (66-2/3%) of the
Professional Management Cost Savings (as hereinafter defined) and (C) any
amounts owed to the Management Company pursuant to Section 5.11 hereof, if any,
less (ii) an amount equal to the Medical Group's pro rata portion of the
Specialty Care Network Profit (as hereinafter defined) for such period, if any,
based on the number of claims generated by the Medical Group through the
specialty care network owned or operated by the Management Company during the
applicable period. The Management Fee shall not include any Professional Medical
Cost Savings (as hereinafter defined), but all of such savings will accrue for
the benefit of the Medical Group. For illustrative purposes only, an example of
the computation of the Management Fee is set forth on Schedule VII attached
hereto.
(b) For purposes of this Section 5.4, the following terms have the meanings
set forth below:
(i) "Addbacks" means, for any applicable period, the aggregate amount
of expense incurred during such period for the benefit of the Medical Group
for each of the following line items in excess of the respective amounts
budgeted therefor in the Budget for such period: (A) entertainment and (B)
automobiles;
(ii) "Adjusted Operating Expenses" means, for any period, an amount
equal to (A) Professional Practice Cost Savings (as hereinafter defined),
plus (B) Authorized Management Company Operating Costs, minus (C) Addbacks;
(iii) "Applicable Percentage" has the meaning set forth on Schedule V;
-36-
<PAGE>
(iv) "Net Operating Income" means, for any period, an amount equal to
Collections minus Adjusted Operating Expenses;
(v) "Professional Management Cost Savings" means the Professional
Practice Cost Savings described in Section A.1 of Schedule VI;
(vi) "Professional Medical Cost Savings" means the Professional
Practice Cost Savings described in Section A.2 of Schedule VI;
(vii) "Professional Practice Cost Savings" means the cost savings
determined in the manner described on Schedule VI; and
(viii) "Specialty Care Network Profit" means the excess of the fee(s)
received by the Management Company over the costs incurred by the
Management Company, each in connection with its ownership and/or operation
of a specialty care network.
(c) In addition to all other payments to which the Management Company is
entitled under this Agreement, the Management Company shall be promptly
reimbursed by the Medical Group for all costs associated with employing the
Excluded Ancillary Employees, as set forth on the Excluded Ancillary Employee
Budget for the subject year. The Management Company shall be entitled to such
reimbursement in accordance with its normal payroll practices for employees
working with the Medical Group.
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
-37-
<PAGE>
Company, and not in the name of the Medical Group, except as specifically
approved by the Medical Group. Management Company Costs shall not include any
costs or expenses incurred prior to the Commencement Date.
(b) The Management Company shall provide to the Medical Group on a monthly
basis a schedule listing all Management Company Costs paid by the Management
Company during the preceding month; provided, that the parties acknowledge that
during the initial 180-day phase-in period of this Agreement, there may be some
delays in delivering such information, which delay will not be deemed a default
hereunder. In addition, 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) Ancillary Service Start-Up Costs (as hereinafter defined);
(ii) New Medical Office Start-Up Costs;
-38-
<PAGE>
(iii) the cost of any FF&E provided by the Management Company to the
Medical Group, including the capital costs associated with any information
systems technology implemented by the Management Company (subject to the
provisions of Section 8.2(e) hereof); provided that the costs associated
with the maintenance of such technology shall be an expense included in the
Budget and shall be deemed an Authorized Management Company Operating Cost
for purposes of this Agreement;
(iv) depreciation, amortization, and interest; and
(v) any amounts by which Management Company Operating Costs exceed
Authorized Management Company Operating Costs; and
(vi) corporate overhead of the Management Company ("Corporate
Overhead") except to the extent that all of the following conditions are
satisfied, as determined by the Operations Committee:
(A) The Corporate Overhead is incurred in lieu of a pre-existing
Management Company Operating Cost;
(B) The amount of such Corporate Overhead does not exceed the
amount of the Management Company Operating Costs being
eliminated; and
(C) The Corporate Overhead is allocated to the Medical Group and
to all other medical groups utilizing such Corporate
Overhead on a pro rata basis.
-39-
<PAGE>
Any Corporate Overhead with respect to which all of the above conditions are
satisfied shall be considered Management Company Operating Costs; provided that
notwithstanding the foregoing, Corporate Overhead relating to the provision of
legal, accounting, financing, purchasing or human resources services pursuant to
the provisions of Section 3 hereof, but in each case excluding any of such
services which are solely for the benefit of or performed at the request of the
Medical Group or its stockholders, shall constitute Excluded 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 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.
-40-
<PAGE>
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.
(b) At the end of the New Medical Office Start-Up Period (as hereinafter
defined), the funds allocated to the New Office Division will be retroactively
included in the general accounts of the Medical Group and the Management
Company, respectively, as contemplated in Sections 5.3, 5.4, 5.5 and 5.7 of this
Agreement in accordance with the following: (i) the Management Company shall be
reimbursed for all of the Management Company Operating Costs incurred by the
Management Company for each New Medical Office, (ii) the Management Company
shall be entitled to receive the aggregate Management Fee as described in
Section 5.4 and (iii) the Medical Group shall be entitled to receive the Annual
Medical Group Compensation Amount for such new Medical Office, in each case, as
if such New Medical Office had been any other office of the Medical Group during
the New Medical Office Start-Up Period; provided, however, that notwithstanding
the foregoing, if the aggregate Collections for such New Medical Office during
the New Medical Office Start-Up Period is equal to or less than sum of (x) the
New Medical Office Start-Up Costs associated with such New Medical Office and
(y) the Management Fee payable with respect to the Collections of such New
Medical Office, in each case during the New Medical Office Start-up Period, then
(A) the Management Company and the Medical Group shall not be entitled to
receive the Management Fee 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; provided that the aggregate
amount of Collections received during the New Medical Office Start-Up Period for
such New Medical Office shall belong solely to the Management Company.
-41-
<PAGE>
(c) In the event that the New Medical Office is not profitable (as
reasonably determined by the Management Company) as of the end of the New
Medical Office Start-Up Period, and the Management Company desires to close such
New Medical Office, it must provide the Medical Group with written notice (the
"Closing Notice") thereof within 15 days after the end of the New Medical Office
Start-Up Period. The Medical Group shall then have the right (the "Continuation
Right"), which it must exercise by delivering written notice to the Management
Company within five (5) days after receipt of the Closing Notice, to keep the
New Medical Office open. In the event that the Medical Group exercises its
Continuation Right, then the Medical Group shall be required to fund all costs
that fall within the definition of New Medical Office Start-Up Costs incurred
during the period from the expiration of the New Medical Office Start-Up Period
through and including the date that the New Medical Office becomes profitable
(as reasonably determined by the Management Company) (the "Secondary Period").
Upon the conclusion of the Secondary Period, the funds allocated to the New
Office Division during the Secondary Period shall be included in the general
accounts of the Medical Group and the Management Company, respectively, in the
manner set forth in 5.6(b) above; provided, however, that notwithstanding the
foregoing, if the aggregate Collections for such New Medical Office during the
Secondary Period are equal to or less than the sum of (x) the costs that fall
within the definition of New Medical Office Start-Up Costs associated with such
New Medical Office and (y) the Management Fee payable with respect to the
Collections of such New Medical Office, in each case during the Secondary
Period, then (A) the Management Company and the Medical Group shall not be
entitled to receive the Management Fee or the Annual Medical Group Compensation
Amount, as applicable and (B) the Medical Group shall be responsible for the
deficit, if any, associated with such New Medical Office; provided, however,
that the aggregate amount of Collections received during the Secondary Period
for such New Medical Office shall belong solely to the Medical Group.
Notwithstanding the
-42-
<PAGE>
foregoing, if the Medical Group elects to close such New Medical Office prior to
its becoming profitable, the aggregate amount of Collections received during the
Secondary Period for such New Medical Office shall belong solely to the Medical
Group.
(d) Notwithstanding anything contained herein to the contrary, in the event
that either (i) the Operations Committee determines not to open a potential New
Medical Office proposed by the Medical Group, or (ii) the Operations Committee
is deadlocked as to whether to open such New Medical Office proposed by the
Medical Group, or (iii) the Operations Committee is deadlocked as to whether to
open such New Medical Office proposed by the Medical Group, and the decision of
the arbitrator pursuant to Section 8.2 hereof is not to open such New Medical
Office, then in any such event the Medical Group shall have the right (the
"Opening Right"), upon delivery of written notice to the Management Company, to
open such New Medical Office. In the event that the Medical Group exercises its
Opening Right, the Medical Group shall be required to fund all costs within the
definition of New Medical Office Start-Up Costs incurred during the Special New
Medical Office Start-Up Period (as hereinafter defined). Upon the conclusion of
the Special New Medical Office Start-Up Period, the funds allocated to the New
Office Division during the Special New Medical Office Start-Up Period shall be
included in the general accounts of the Medical Group and the Management
Company, respectively, in the manner set forth in 5.6(b) above; provided,
however, that notwithstanding the foregoing, (i) no Management Fees shall be
payable to the Management Company during the Special New Office Start-Up Period
and (ii) if the aggregate Collections for such New Medical Office during the
Special New Medical Office Start-Up Period are equal to or less than the sum of
(x) the costs that fall within the definition of New Medical Office Start-Up
Costs associated with such New Medical Office, plus (y) interest at the rate of
ten (10%) percent per annum on such costs which shall be paid to the Medical
Group, then (A) the Management Company and the Medical
-43-
<PAGE>
Group shall not be entitled to receive the Management Fee or the Annual Medical
Group Compensation Amount, as applicable, and (B) the Medical Group shall be
responsible for the deficit, if any, associated with such New Medical Office;
provided that the aggregate amount of Collections received during the Special
New Medical Office Start-Up Period for such New Medical Office shall belong
solely to the Medical Group. Notwithstanding the foregoing, if the Medical Group
elects to close such New Medical Office prior to its becoming profitable, then
the aggregate amount of Collections received during the Special New Medical
Office Start-Up Period for such New Medical Office shall belong solely to the
Medical Group. As used herein, "Special New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of the subject New Medical Office and ending
on the date that the New Medical Office becomes profitable (i.e., generated
Collections sufficient to pay the applicable New Medical Office Start-Up Costs,
plus 10% per annum interest thereon, as reasonably determined by the Operations
Committee).
(e) In the event that the Medical Group elects to open a New Medical Office
in accordance with the provisions of Section 5.6(d) above, and does so open such
an office, the Management Company will pay the Medical Group an additional
amount of consideration (the "New Office Payment") if the following conditions
are satisfied: (i) the Net Operating Income for such New Medical Office for the
12-month period beginning on the New Office Net Profit Date (as hereinafter
defined) and ending on the first anniversary thereof (such period being referred
to herein as, the "Determination Period") is greater than zero, and (ii) the
Management Fee payable by the Medical Group pursuant to Section 5.4 hereof for
the Determination Period is at least equal to the Management Fee paid to the
Management Company by the Medical Group for the 12-month period ending on the
New Office Net Profit Date. The amount of the New Office Payment will be
determined by taking six times 15% of the Net
-44-
<PAGE>
Operating Income of such New Medical Office for the Determination Period, which
amount will be payable 65% in cash and 35% in shares of common stock of the
Management Company (at the Fair Market Value (as hereinafter defined) of such
common stock at such time). The Management Company shall, within 30 days after
the end of the Determination Period, notify the Medical Group if the conditions
set forth in clauses (i) and (ii) above have been satisfied and, if so, the
amount of the New Office Payment due to the Medical Group. The Management
Company shall deliver the New Office Payment to the Medical Group within 15 days
following delivery of such notice. In connection with the delivery of the New
Office Payment to the Medical Group, the Medical Group shall transfer to the
Management Company for no additional consideration all of its right, title and
interest in all of the Equipment used at such New Medical Office and, to
effectuate such transfer, the Medical Group shall execute and deliver to the
Management Company an assignment and assumption agreement and a bill of sale,
each of which shall be satisfactory to the Management Company. As used herein,
"New Office Net Profit Date" means, as to any New Medical Office, that day on
which the Operations Committee determines that the aggregate revenues of such
New Medical Office are greater than the sum of (a) those costs that fall within
the definition of New Medical Office Start-Up Costs associated with such New
Medical Office (including physician compensation), and (b) the accrued interest
payable to the Medical Group pursuant to Section 5.6(d) above with respect to
the amount of such costs.
(f) Except to the extent provided in Section 5.6(b), (c) and (d) above, the
billings, collections, costs and expenses relating to any New Medical Office
shall not, during the New Medical Office Start-Up Period or the Secondary
Period, be included in the computations of Annual Medical Group Compensation
Amount, the Management Fee, Management Company Costs, Ancillary Service Start-Up
Costs, or Medical Group Costs
-45-
<PAGE>
as described in Sections 5.3, 5.4, 5.5, 5.8, or 5.7, respectively.
(g) All Medical Equipment utilized at any New Medical Office shall be
acquired by the Management Company and provided to the Medical Group in
accordance with the terms of Section 3.3 hereof.
(h) 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.
(i) 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, but not including any
Corporate Overhead, provided that, the costs incurred in connection with any New
Physician (as hereinafter defined) shall be borne in accordance with the
provisions of Section 5.11 hereof.
(j) For purposes of this Agreement, "New Medical Office Start-Up Period"
means the period commencing on the date that any costs are incurred in
connection with the establishment of a New Medical Office and ending on the last
day of the calendar month in which a period of twelve (12) months has elapsed
from and after the date on which the New Medical Office first opened for the
treatment of patients.
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
-46-
<PAGE>
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; and
(c) the cost of any items which are not required to be provided by the
Management Company under this Agreement and/or which were ordered,
purchased, or incurred by the Medical Group directly, including but
not limited to the cost of accounting, legal, consulting, or other
professional or advisory services, business meetings, and business
taxes.
5.8. New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
(i) The Management Company shall create a separate division
("Ancillary Division") for purposes of accounting for the income, costs,
profits, and losses of any New Ancillary Service. The Management Company
shall utilize
-47-
<PAGE>
generally accepted accounting principles in determining and accounting for
the profits and losses related to the operations of each New Ancillary
Service. Notwithstanding anything to the contrary contained herein,
Corporate Overhead shall not be included in determining the costs and
expenses associated with any New Ancillary Service.
(ii) Profits and/or losses of any Ancillary Division arising from and
after the Ancillary Service Start-Up Period shall be divided equally
between the Medical Group and the Management Company, and all distributions
to the Medical Group and to the Management Company shall be made in equal
amounts to each from available cash (after payment of all currently due
obligations incurred in connection with such New Ancillary Division,
including, without limitation, any principal and interest amounts then due
and payable under Section 5.8(a)(iv) below, and after retention of
reasonable reserves) derived from the operation of such Ancillary Division.
(iii) All diagnostic and therapeutic equipment utilized in connection
with any New Ancillary Service ("New Ancillary Service Medical Equipment")
shall be acquired by the Management Company and shall be provided to the
Medical Group on terms substantially similar to those set forth in Section
3.3 hereof.
(iv) The Management Company shall pay all of the Ancillary Service
Start-Up Costs (as hereinafter defined). Beginning with the month
immediately 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
-48-
<PAGE>
prevailing prime rate as set forth in the Wall Street Journal or at the
actual rate paid by the Management Company with respect to any part of such
costs that have been financed by the Management Company, if applicable.
(v) The Management Company shall provide, in connection with any New
Ancillary Service, the full range of management services described in this
Agreement.
(vi) The billings, collections, costs and expenses relating to any New
Ancillary Service shall not be included in the computations of Annual
Medical Group Compensation Amount, 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 an Average Profit (as hereinafter defined) at least equal to the
amount of the Ancillary Service Reimbursement Payment (as hereinafter defined)
or (ii) the last day of the twelfth month after the establishment of such New
Ancillary Service.
(c) As used herein, "Ancillary Service Reimbursement Payment" means an
amount determined by (i) taking the total Ancillary Service Start-Up Costs for
the period ending on the date of determination, (ii) adding an amount equal to
the total of the projected interest payable on such amount during the repayment
term (which interest amount shall be a good faith
-49-
<PAGE>
estimate by the Management Company) and (iii) dividing the sum by 60.
(d) "Average Profit", at any point during the New Ancillary Start-Up
Period, means the average for any consecutive two month period of the remainder
(as determined in good faith by the Management Company) of the revenues less the
expenses for such New Ancillary Service.
(e) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs"
means the total of all of the following costs incurred in connection with the
establishment of a New Ancillary Service during the Ancillary Service Start-Up
Period (whether such costs would otherwise be considered Management Company
Costs or Medical Group Costs):
(i) Any lease payments for New Ancillary Service Medical Equipment;
(ii) All costs of acquiring furniture, fixtures, and office equipment;
(iii) All initial occupancy costs, if any, including but not limited
to prepaid rent, and tenant improvements;
(iv) All costs related to the acquisition of materials and supplies
related to the provision of such New Ancillary Service; and
(v) All ongoing costs of the New Ancillary Service, including but not
limited to personnel (other than the Billable Medical Personnel) and
related benefits, the cost of operating any equipment utilized in providing
the service, supplies, insurance, rent, repairs and maintenance, outside
services, telephone, taxes, utilities, storage and other ordinary ongoing
expenses of providing the New Ancillary Service.
-50-
<PAGE>
5.9. Review and Audit of Books and Records.
Each of the parties shall have the right, during ordinary business hours
and upon reasonable notice, to review and make copies of, or to audit through a
qualified certified public accountant approved by the other party (which
approval shall not be unreasonably withheld), the books and records of the other
party relating to the billing, collection, and disbursement of fees, and the
determination of costs, under this Agreement. Any such review or audit shall be
performed at the cost of the requesting party; provided, however, that in the
event that such review or audit requested by the Medical Group discloses a
discrepancy indicating that the Medical Group has actually been underpaid by an
amount in excess of three and one half (3.5%) percent, but not more than five
percent (5%) of the total amount of Annual Medical Group Compensation Amount
otherwise payable to the Medical Group for the period covered by the audit (the
"Audit Compensation Amount"), the Management Company shall pay up to $5,000 of
the cost of such audit, and if the audit reveals an underpayment in excess of
five (5%) percent of the Audit Compensation Amount, the entire 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.
(a) Consistent with the provisions of Section 2 of this Agreement, the
parties acknowledge and agree that, in order to facilitate the transition of
responsibilities hereunder, certain requirements and procedures agreed to under
this Agreement may be implemented, 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
-51-
<PAGE>
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.
(b) Supplementing the provisions of Section 5.10(a) above, the parties
agree that the Medical Group has heretofore funded certain costs and expenses
(collectively, the "Prepaid Expenses") incurred during the period from the
Commencement Date to the Signature Date. On the Signature Date, the Management
Company has paid to the Medical Group $800,000 (the "Estimated Expenses"), by
delivery of a promissory note to the Medical Group for such amount which is due
on January 2, 1998 ("Note No. 3"), which represents the parties' good faith
estimate of the Prepaid Expenses. The parties agree that within sixty (60) days
from the Signature Date, they will mutually determine the actual amount of the
Prepaid Expenses. If the actual amount of the Prepaid Expenses exceeds the
Estimated Expenses, the Management Company shall remit such excess amount to the
Medical Group within five (5) days of the date of determination. If the
Estimated Expenses exceed the actual amount of the Prepaid Expenses, the Medical
Group shall refund the difference to the Management Company within five (5) days
of the date of determination. The parties acknowledge that any payments for
Prepaid Expenses shall not be included in the computation of Collections and
may, subject to the reconciliation provided herein, be freely distributed by the
Medical Group to its shareholders.
5.11. New Physician Compensation Costs.
(a) Notwithstanding anything contained herein to the contrary, during the
period beginning on the New Physician Start Date (as hereinafter defined) and
ending on the Physician
-52-
<PAGE>
Breakeven Date (as hereinafter defined), the Management Company shall be
responsible for the payment of (or with respect to insurance benefits, for the
prompt reimbursement of the Medical Group for, to the extent applicable) all New
Physician Compensation (as hereinafter defined) and all New Physician Personnel
Expense (as hereinafter defined), and notwithstanding anything to the contrary
contained in this Agreement, shall receive, in consideration therefor, sixty six
and two-thirds percent (66-2/3%) (such amount being referred to herein as the
"New Physician Net Collections") of all Collections generated by such New
Physician for those Medical Group Services performed by such New Physician, and
such amounts shall not be included in determining Collections for purposes of
this Agreement. The remaining thirty three and one-third percent (33 1/3%) of
such Collections shall belong to the Medical Group, and such amounts shall not
be included in determining Collections for purposes of this Agreement. As of the
Physician Breakeven Date, the New Physician Compensation shall be payable by,
and become the responsibility of, the Medical Group in accordance with Section
5.7 hereof, and all of the Billings and Collections generated by such New
Physician thereafter shall be considered Billings and Collections for purposes
of this Agreement.
(b) "New Physician" means, any physician who, at any time after the
Commencement Date, becomes affiliated with or employed by the Medical Group;
provided that if such physician becomes affiliated with or employed by the
Medical Group pursuant to a transaction between the Management Company and such
physician or a medical group with which such physician is affiliated in which
the Management Company acquires any assets or accounts receivable from such
physician or such medical group or pays any other consideration to such
physician or such medical group in connection with such physician's affiliation
or employment with the Medical Group and/or the Management Company, then such
physician shall not be deemed to be a New Physician for purposes of this
Agreement.
-53-
<PAGE>
(c) "New Physician Breakeven Date" means, with respect to any New
Physician, the date on which the New Physician Net Collections for the period
beginning on the New Physician Start Date and ending on the date of
determination first equal or exceed (i) the aggregate amount of New Physician
Compensation paid to such New Physician for the foregoing period plus (ii) that
portion of the Medical Group Costs and Management Company Costs associated with
such New Physician and/or the Medical Group Services provided by such New
Physician.
(d) "New Physician Compensation" means, with respect to any New Physician
and for any period in question, the amount of compensation (wages and insurance
benefits) payable to or for the benefit of such New Physician by the Medical
Group.
(e) "New Physician Personnel Expense" means with respect to any New
Physician and for any period in question, the amount of compensation (wages and
otherwise) payable to any one (1) physician assistant who is retained by the
Management Company primarily to accommodate the increased patient flow generated
by such New Physician.
(f) "Physician Start Date" means, with respect to any New Physician, the
date such New Physician becomes affiliated with or employed by the Medical
Group.
SECTION 6. Representations and Warranties of the Medical Group
The Medical Group hereby represents and warrants to the Management Company,
as of the Signature Date, as follows:
6.1. Organization; Good Standing; Qualification and Power.
The Medical Group is a professional association duly organized, validly
existing, and in good standing under the laws of the State of Florida and has
all requisite power and authority to own, lease, and operate its properties, to
carry on its business as now being conducted and as proposed to be conducted, to
enter into this Agreement, the Asset Purchase Agreement, the
-54-
<PAGE>
Assignments of Lease, the Financing Statement, the Provider Account Agreement
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 Articles of Incorporation and
its Bylaws, each as in effect on the date hereof.
6.2. Equity Investments.
Except as set forth on Schedule 6.2, the Medical Group currently has no
subsidiaries, nor does the Medical Group currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.
6.3. Authority.
The execution, delivery and performance of this Agreement and the other
Medical Group Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of the Medical Group. This Agreement and the other
Medical Group Transaction Documents have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement or any other Medical Group Transaction Document by the Medical Group
nor the consummation by the Medical Group of the transactions contemplated
hereby or thereby, nor compliance by the Medical Group with any provision hereof
or thereof will conflict with or result in a breach of any provision of the
formation documents of
-55-
<PAGE>
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 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 statement of assets,
liabilities and stockholders' 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
-56-
<PAGE>
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;
(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;
-57-
<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
payers, 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) except for merit review increases in the ordinary course of
business, 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
-58-
<PAGE>
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 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
-59-
<PAGE>
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 Internal Revenue
Code of 1986, as amended the "Code").
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal, state and foreign Returns of the Medical Group
for the calendar years ending December 31, 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
-60-
<PAGE>
(including any tax on or based upon net income, or gross income, or income as
specially defined, or earnings, or profits, or selected items of income,
earnings or profits) and all Federal, state, local and foreign gross receipts,
sales, use, ad valorem, transfer, franchise, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property or windfall
profits taxes, alternative or add-on minimum taxes, customs duties or other
Federal, state, local and foreign taxes, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority (domestic or foreign) on
such person or entity and (ii) any liability for the payment of any amount of
the type described in the immediately preceding clause (i) as a result of being
a 'transferee' (within the meaning of Section 6901 of the Code or any other
applicable law) of another person or entity or a member of an affiliated or
combined group.
6.8. Litigation, Etc.
Except as set forth on Schedule 6.8, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Medical Group, threatened against the
Medical Group or any partner in or stockholder of the Medical Group, or in
connection with the Medical Business, whether at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions
or orders of any court, governmental department, commission, agency,
instrumentality or arbitrator against the Medical Group, its assets or affecting
the Medical Business. The Medical Group has delivered to the Management Company
all documents and correspondence relating to matters referred to in said
Schedule 6.8.
-61-
<PAGE>
6.9. Compliance: Governmental Authorizations.
The Medical Group and the Medical Business have complied in all material
respects with all applicable material Federal, state, local or foreign laws,
ordinances, regulations and orders. The Medical Group has all Federal, state,
local and foreign governmental licenses and permits necessary in the conduct of
the Medical Business, the lack of which would have a material adverse effect on
the Medical Group's ability to operate the Medical Business after the date
hereof on substantially the same basis as presently operated, such licenses and
permits are in full force and effect, the Medical Group has not received any
notice indicating that any violations are or have been recorded in respect of
any thereof, and no proceeding is pending or, to the best knowledge of the
Medical Group, threatened to revoke or limit any thereof. To the best knowledge
of the Medical Group, none of such licenses and permits shall be affected in any
material respect by the transactions contemplated hereby. To the best knowledge
of the Medical Group, neither the Medical Group nor any of the Medical Personnel
employed by the Medical Group is now or in the last four years has been the
subject of or involved in any investigation by any Federal, state or local
regulatory agency related to its or his Medicare, Medicaid or other third party
payor billing practices.
6.10. Accounts Receivable: Accounts Payable.
(a) Except as set forth on Schedule 6.10, all of the accounts receivable
owing to the Medical Group in connection with the Medical Business as of the
date hereof constitute valid and enforceable claims arising from bona fide
transactions in the ordinary course of the Medical Business, the amounts of
which are actually due and owing, and as of the date hereof, to the best
knowledge of the Medical Group, there are no claims, refusals to pay or other
rights of set-off against any thereof. Except as set forth on Schedule 6.10, as
of the date hereof, there is no account receivable or note receivable of the
Medical Business
-62-
<PAGE>
pledged to any third party. The Medical Group has provided the Management
Company with an accounts receivable aging report dated as of June 30, 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, 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
-63-
<PAGE>
between such person and any previous employer (private or governmental) or (ii)
agreement restricting or prohibiting the use of any information or materials
used or being used by such person in connection with such person's employment by
or association with the Medical Group or the Medical Business.
6.12. Employee Benefit Plans.
(a) Schedule 6.12 identifies each 'employee benefit plan', as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and all other written or oral plans, programs, policies or agreements
involving direct or indirect compensation (including any employment agreements
entered into between the Medical Group or the Medical Business and any Employee
of the Medical Group or in connection with the Medical Business, but excluding
workers' compensation, unemployment compensation and other government-mandated
programs) currently or previously maintained or entered into, within the six
years prior to the Closing Date, by the Medical Group or in connection with the
Medical Business for the benefit of any Employee or former employee of the
Medical Group or in connection with the Medical Business under which the Medical
Group, any affiliate thereof or the Medical Business has any present or future
obligation or liability (the "Employee Plans"). The Medical Group has provided
the Management Company with true and complete salary, service and related data
for Employees of the Medical Group and in connection with the Medical Business.
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement
-64-
<PAGE>
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) to the best knowledge of the
Medical Group, 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, disclosure and
bonding obligations imposed under ERISA and the Code have been satisfied, or
will have been satisfied when due, with respect to each Employee Plan and (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.
(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), if applicable, including attachments, for each Employee
Plan, and (iii) the most recently received IRS determination letter, if
applicable.
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
-65-
<PAGE>
assets, properties or operations of the Medical Group or the Medical Business.
6.14. Real Property.
The Medical Group has a valid leasehold interest in all real property
leased by the Medical Group. True and complete copies of all leases to which the
Medical Group is a party or by which the Medical Group leases space have been
delivered to the Management Company. The Medical Group does not own any real
property.
6.15. Burdensome Restrictions.
Except as set forth on Schedule 6.15, neither the Medical Group nor the
Medical Business is bound by any oral or written agreement or contract which by
its terms prohibits or restricts it from conducting the Medical Group or the
Medical Business (or any material part thereof).
6.16. Disclosure.
Neither the Medical Group Transaction Documents (including the Exhibits and
Schedules attached thereto) nor any other document, certificate or written
statement furnished to the Management Company by or on behalf of the Medical
Group in connection with the transactions contemplated hereby contains any
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.
-66-
<PAGE>
SECTION 7. Representations and Warranties of the Management Company.
The Management Company represents and warrants to the Medical Group, as of
the Signature Date, as follows:
7.1. Organization. Good Standing and Power.
The Management Company (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
has all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now being conducted, to execute and
deliver this Agreement and each of the Asset Purchase Agreement, the Restricted
Stock Agreements (as hereinafter defined), the Assignments of Lease, and the
Stockholder Non-Competition Agreements (collectively, the "Management Company
Transaction Documents"), to perform its obligations hereunder and thereunder,
and to consummate the transactions contemplated hereby and thereby.
7.2. Authority.
The execution, delivery and performance of this Agreement and the other
Management Company Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary 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
-67-
<PAGE>
thereby, nor compliance by the Management Company with any provision hereof or
thereof, will (a) conflict with or result in a breach of any provisions of the
Amended and Restated Certificate of Incorporation or the Bylaws of the
Management Company, (b) cause a default (with due notice, lapse of time or
both), or give rise to any right of termination, cancellation or acceleration,
under any of the terms, conditions or provisions of any material note, bond,
lease, mortgage, indenture, license or other instrument, obligation or agreement
to which the Management Company is a party or by which it or any of its
properties or assets is or may be bound (with respect to which defaults or other
rights all requisite waivers or consents shall have been obtained at or prior to
the date hereof) or (c) violate any law, statute, rule or regulation or order,
writ, judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Management Company or any of its properties
or assets. Except as set forth on Schedule 7.2, to the best of the Management
Company's knowledge, no permit, authorization, consent or approval of or by, or
any notification of or filing with, any person (governmental or private) is
required in connection with the execution, delivery or performance by the
Management Company of this Agreement or any other Management Transaction
Document or the consummation by the 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 10,105,518 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 issued and
outstanding. Each of
-68-
<PAGE>
the outstanding shares of capital stock has been duly and validly authorized and
issued, is fully paid for and non-assessable, and was issued in compliance with
all applicable Federal and state securities laws.
(b) The Management Company has taken all action necessary or appropriate to
duly authorize the creation, issuance and sale of the common stock to be issued
hereunder. Such shares of common stock, when issued, sold and delivered, as
provided for herein and in the Restricted Stock Agreements, will be validly
issued, fully paid and nonassessable, with no personal liability attaching to
the ownership of the shares. The issuance of such shares of common stock will
not violate any preemptive or similar right of any person.
7.4. Financial Information.
Schedule 7.4 contains (a) the unaudited statements of assets, liabilities
and stockholders' equity of the Management Business as of the date set forth
therein (the "Management Company Balance Sheet"; and the date thereof being
referred to as the "Management Company Balance Sheet Date"), and the related
unaudited statements of revenue and expenses for the periods then ended
(including the notes thereto and other financial information included therein)
(collectively, the "Unaudited Financial Statements"). The Unaudited Financial
Statements (i) were prepared in accordance with the books and records of the
Management Business, (ii) fairly present the financial position of the
Management Business as of the dates thereof, and (iii) are true, correct and
complete in all material respects as of the date thereof.
7.5. Absence of Undisclosed Liabilities.
Except as set forth on Schedule 7.5, as of the Management Company Balance
Sheet Date, (a) the Management Business did not have any material liability of
any nature required to be disclosed on a balance sheet (matured or unmatured,
fixed or contingent, known or unknown) which was not
-69-
<PAGE>
provided for or disclosed on the Management Company Balance Sheet, (b) all
liability reserves established by the Management Business on the Management
Company Balance Sheet were adequate and (c) there were no loss contingencies (as
such term is used in Statement of Financial Accounting Standards No. 5 issued by
the Financial Accounting Standards Board in March 1975) which were not
adequately provided for or disclosed on the Management Company Balance Sheet.
7.6. Absence of Changes.
Except as set forth on Schedule 7.6, since the Management Company Balance
Sheet Date, the Management Business has been operated in the ordinary course and
consistent with past practice and there has not been:
(a) any material adverse change in the condition (financial or
otherwise), assets, liabilities, operations, results of operations,
earnings, business or prospects of the Management Business;
(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
-70-
<PAGE>
of the Management Business except in the ordinary course of the Management
Business and consistent with past practice;
(f) any cancellation of any debts or claims of, or any amendment,
termination or waiver of any rights of material value to, the Management
Business;
(g) any change in the accounting methods or practices followed in
connection with the Management Business or any change in depreciation or
amortization policies or rates theretofore adopted;
(h) any other transaction relating to the Management Business other
than in the ordinary course of the Management Business and consistent with
past practice; or
(i) any agreement or understanding, whether in writing or otherwise,
for the Management Business to take any of the actions specified in items
(a) through (h) above.
7.7. Litigation, Etc.
Except as set forth on Schedule 7.7, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Management Company, threatened against
the Management Company or in connection with the Management Business, whether at
law or in equity, or before or by any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
which, if adversely determined, could have a material adverse effect on the
Management Company or (b) judgments, decrees, injunctions or orders of any
court, governmental department, commission, agency, instrumentality or
arbitrator against the Management Company its assets or affecting the Management
Business.
7.8. Compliance; Governmental Authorizations.
The Management Company and the Management Business shall have complied in
all material respects with all applicable material Federal, state, local or
foreign laws, ordinances,
-71-
<PAGE>
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 prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
-72-
<PAGE>
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 up to six (6) members. The Medical Group
shall designate up to three (3) members of the Operations Committee, each of
whom shall be a physician in the Medical Group, and the Management Company shall
designate an equal number of members of the Operations Committee, not to exceed
three (3). 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;
-73-
<PAGE>
(ii) Medical Group Costs;
(iii) Capital expenditures to be made by the Management Company
in fulfillment of its obligations hereunder;
(iv) Management Company Operating Costs (which, in the absence of
approval by the Operations Committee, shall be increased by
an amount equal to the lesser of (x) five percent (5.0%)
over the total amount approved for the preceding period) or
(y) a percentage equal to the "Annual CPI Adjustment" for
such period. The Annual CPI Adjustment shall be calculated
as follows:
Annual CPI Adjustment = (CPIC - CPIP)
-----------
CPIP
Where:
"CPIC" is the U.S. Consumer Price Index (All Cities)
for the most recent month-end which is then available;
and
"CPIP" is the U.S. Consumer Price Index (All Cities)
for the month-end which is twelve (12) months prior to
the date utilized in determining the CPIC).
(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
-74-
<PAGE>
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside collection
agencies
(vi) Write-off 5 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 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)
-75-
<PAGE>
the undertaking of any Tenant Improvements relating to patient
care facilities that cost more than $10,000 in the aggregate at
any one of the Medical Group's office locations in any calendar
year, or (iii) the undertaking of any other Tenant Improvements.
(f) Establish parameters and criteria for off-site storage of files
and records of the Medical Group.
(g) 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.
(h) Determine whether a New Medical Office should be opened based
upon a feasibility study performed at the direction of the
Operations Committee, which study should strictly relate to the
factors directly involved in determining whether to open such
proposed New Medical Office, including, without limitation, all
physician compensation attributable to such New Medical Office.
In the event of any deadlock in the vote of the Operations Committee, the
parties hereto shall jointly submit such dispute to binding arbitration in
Florida, pursuant to the arbitration rules of the National Health Lawyers
Association Alternative Dispute Resolution Service. Arbitration shall take place
before one arbitrator appointed in accordance with such rules. The governing law
of the arbitration shall be the law set forth in Section 22. Any decision
rendered by the arbitrator shall clearly set forth the factual and legal basis
for such decision. The decision rendered by the arbitrator shall be
-76-
<PAGE>
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 arbitrator.
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.
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
-77-
<PAGE>
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; provided that the Medical Group will be notified of the time and
place thereof at least three days prior to any meeting so that it may notify its
stockholders thereof. 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
-78-
<PAGE>
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. Any stockholder of the
Medical Group may attend Operations Committee meetings in an unofficial,
non-voting capacity.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of a majority of the members of the Operations Committee
present or represented by proxy at the applicable meeting. A quorum of the
Operations Committee shall be a majority of the members of the Operations
Committee, 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 of the 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 licensed by the State of Florida. The Medical Group shall
monitor the quality of medical care practiced by physicians and
-79-
<PAGE>
other health care personnel associated with the Medical Group. In the event that
any medical malpractice actions are filed or any disciplinary actions are
initiated against any such physician by any payor, patient, state or Federal
regulatory agency or any other person or entity which could have a material
adverse effect on the Medical Group in the Medical Business, the Medical Group
shall promptly inform the Management Company of such action and its underlying
facts and circumstances.
9.2. Use of Facility.
The Medical Group shall use and occupy any Facility (as defined below)
exclusively for the practice of medicine, and shall comply with all applicable
Federal, state and local rules, 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.
-80-
<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 thirty business days any Medical Personnel who is not so insurable or who
loses his or her malpractice insurance eligibility unless the Medical Group
makes (within such 30-day period) other arrangements reasonably appropriate
under the circumstances and reasonably acceptable to the Management Company. The
Medical Group shall notify the Management Company in writing of any change in
the insurance status of any Medical Personnel within two days after the Medical
Group receives notice of any such change. The Medical Group shall require all
Medical Personnel to participate in an on-going risk management program.
9.6. Medicare.
The Medical Group shall cause all physicians to be participating providers
and accept assignment under Medicare.
9.7. Accounts Receivable; Billing.
From the Commencement Date, the Medical Group acknowledges and agrees that
all Accounts of the Medical Group or its Medical Personnel shall be the property
of the Management
-81-
<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, the Retained Accounts Receivable and Accounts arising
from the provision of Excluded Ancillary Services shall each 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 cooperate with
and take direction from the Management Company in
-82-
<PAGE>
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 stockholders, the transfer of
ownership interests, or the 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 SEPTEMBER 1, 1997,
BETWEEN BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.,
A FLORIDA PROFESSIONAL ASSOCIATION, AND BONE, MUSCLE AND
JOINT, INC., A DELAWARE CORPORATION."
Nothing herein shall be construed as requiring the Medical Group to issue any
certificate or other evidence representing an equity interest in the Medical
Group, if such has not been issued prior to the date hereof.
-83-
<PAGE>
SECTION 11. Records.
11.1. Medical Records.
Upon termination of this Agreement, the Medical Group shall retain all
patient medical records maintained by the Medical Group or the Management
Company in the name of the Medical Group.
11.2. Management Business Records.
All books and records relating in any way to the operation of the
Management Business which are not patient medical records shall at all times be
the property of the Management Company. The Management Company shall maintain
custody of such records, and the Medical Group shall, upon its written request,
be entitled to copies of any such records relating to the Management Services
performed by the Management Company.
11.3. Access to Records Following Termination.
Following the termination of this Agreement, the Medical Group shall grant
(to the extent permitted by law) to the Management Company, for the purpose of
preparing for any actual or anticipated legal proceeding or for any other
reasonable purpose, reasonable access (which shall include making photocopies)
to the patient medical records described in Section 11.1 hereof and any other
pertinent information regarding the Medical Group during the Term. Prior to
accessing such patient medical records, the Management Company shall obtain any
required patient authorization.
Following the termination of this Agreement, the Management Company shall
provide to the Medical Group, promptly upon the Medical Group's written request,
photocopies of the Management Business records described in Section 11.2 hereof,
and shall grant to the Medical Group, for the purpose of preparing for any
actual or anticipated legal proceeding or for any other
-84-
<PAGE>
reasonable purpose, any other pertinent information regarding the Management
Company during the Term.
SECTION 12. Insurance and Indemnity.
12.1. Professional Liability Insurance.
During the Term, the Management Company shall, to the extent permitted by
applicable law, procure and maintain for the benefit of itself and the Medical
Group comprehensive professional liability insurance providing for (a) general
liability coverage and (b) medical malpractice coverage with limits of not less
than $250,000 per claim and with aggregate policy limits of not less than
$750,000 (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) covering the Medical Group and
each of the Medical Personnel of the Medical Group, 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,
which payments shall be considered Management Company Operating Costs under this
Agreement, subject to recoupment by the Management Company under Section 5
hereof. The Management Company shall be designated as an additional insured
under all such insurance policies.
12.2. Life Insurance.
The Management Company may, at its option, obtain a $500,000 life insurance
policy for each duly licensed physician partner in or equity owner of the
Medical Group. The Medical Group shall, and shall cause each such partner in or
equity owner of the Medical Group to, cooperate with the Management Company in
the procurement of such policies. The Management Company shall
-85-
<PAGE>
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, including without
limitation any such acts or omissions that occurred prior to the Commencement
Date, or (iii) any breach of or failure to perform any obligation under this
Agreement or the Medical Group Transaction Documents (which, for purposes
hereof, shall be deemed to include the Restricted Stock Agreement to be signed
by the Management Company and each partner, stockholder or employee of the
Medical Group receiving stock of the Management Company, in the form of Exhibit
C attached hereto (the "Restricted Stock Agreement")) by the Medical Group
and/or the Medical Personnel and/or their respective agents and/or
subcontractors (other than the Management Company) during the Term.
12.4. Indemnification by Management Company.
The Management Company shall indemnify, hold harmless and defend the
Medical Group, its officers, directors, shareholders, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused
-86-
<PAGE>
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. In
addition, the Management Company shall indemnify and hold harmless the Medical
Group, its officers, directors, shareholders, employees, agents and independent
contractors from and against any legal and related out of pocket costs actually
incurred in defending any violation or alleged violation of applicable law
arising as a direct result of the structure of this Agreement or the underlying
economic and financial arrangements thereof; provided, however, that in no event
shall the liability of the Management Company in connection with the
indemnification obligation set forth in this sentence exceed the aggregate
amount of $50,000.
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
-87-
<PAGE>
(30) days after written notice thereof has been given to the Management Company
by the Medical Group or the Management Company does not thereafter diligently
prosecute such action to completion; provided, however, that the Management
Company shall have only 10 days after written notice to cure a default arising
as a result of its failure to pay the Monthly Draw pursuant to Section 5.3(a) or
any other monetary obligation owed to the Medical Group hereunder, (c) in the
event that any of the representations and warranties made by the Management
Company in Section 7 is untrue or misleading in any material respect, provided
that the Medical Group shall have previously given written notice to the
Management Company describing in reasonable detail the nature of the item in
question and the Management Company shall not have cured such matter within
thirty (30) days of such notice, (d) in the event the Management Company shall
have been sanctioned in writing by the Health Care Finance Administration for
any violation of the Social Security Act, the Health Care Quality Improvement
Act or any similar Federal law in a final, nonappealable proceeding and such
sanction prevents the Management Company from fulfilling its obligations
hereunder in accordance with all applicable law or (e) in the event the
Management Company shall have failed to pay any amount due pursuant to the terms
of any of Note No. 1, Note No. 2 or Note No. 3 within 30 days after such payment
was due.
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
-88-
<PAGE>
action to completion; provided, however, that the Medical Group shall have only
10 days after written notice to cure a default arising as a result of its
failure to pay any monetary obligation owed to the Management Company hereunder,
(c) in the event that any of the representations and warranties made by the
Medical Group in Section 6 is untrue or misleading in any material respect,
provided that the Management Company shall have previously given written notice
to the Medical Group describing in reasonable detail the nature of the item in
question and the Medical Group shall not have cured such matter within thirty
(30) days of such notice, or (d) in the event the Medical Group is excluded from
the Medicaid or Medicare program for any reason and the Medical Group has not
successfully appealed such exclusion within 120 days after the effectiveness
thereof.
13.3. Termination by Medical Group or Management Company.
The Medical Group and the Management Company shall each have the right to
terminate this Agreement effective immediately by giving written notice of
termination to the other party pursuant to Section 27 of this Agreement.
13.4. Effect of Termination.
(a) Upon the termination of this Agreement in accordance with the terms
hereof, neither party hereto shall have any further obligation or liability to
the other party hereunder, except as provided in Sections 3.16(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
-89-
<PAGE>
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
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. Notwithstanding anything contained herein to the contrary, in the event
that this Agreement is terminated due to the Management Company's failure to pay
an amount due pursuant to any of Note No. 1, Note No. 2 or Note No. 3, then any
such amounts which the Management Company failed to so pay shall be
automatically set-off against any amounts due (whether presently or in the
future) to the Management Company pursuant to the terms of this Agreement,
including, without limitation, for Management Fees or Management Company Costs.
(c) Upon termination of this Agreement, the Management Company agrees to
deliver to the Medical Group upon request by the Medical Group, a Financing
Statement amending the terms of any Financing Statement filed with the Secretary
of State of the state in which the principal place of business of the Medical
Group is located, excluding from the collateral thereunder any accounts
receivable generated after the date of termination of this Agreement. In
addition, the Management Company shall, within 15 days after final resolution of
the settlement described in Section 5.3(b) of this Agreement, deliver to the
Medical Group an additional Financing Statement terminating any Financing
Statement previously filed with respect
-90-
<PAGE>
to the Medical Group's accounts receivable, whether relating to services
performed during or after the Term.
13.5. Repurchase of Assets.
Promptly following termination of this Agreement for any reason, the
Management Company shall sell, transfer, convey, and assign to the Medical
Group, and the Medical Group shall purchase, assume, and accept from the
Management Company, at such price and upon such terms as may be agreed upon by
the parties -- or, if the parties are unable to agree, at fair market value,
determined in the manner set forth below -- all of the following items which are
used in connection with the professional practice and related activities of the
Medical Group and which, in the case of items (a), (b), (c) and (d), are
physically located in any of the offices of the Medical Group, subject to any
required consent from any third party having an interest therein but otherwise
free and clear of any liens, claims or encumbrances; provided that any leased
equipment or property shall be assigned to the Medical Group subject to the
applicable lease agreement and any liens granted thereunder:
(a) the Medical Equipment owned by the Management Company;
(b) the furniture, furnishings, trade fixtures, and office equipment owned
by the Management Company;
(c) the Management Company's rights and interests in any equipment leased
by the Management Company, subject to the Medical Group's assumption
of the obligations accruing 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
-91-
<PAGE>
Medical Group's assumption of the obligations accruing thereunder
after the date of termination of this Agreement (provided that no
value shall be attributed to leasehold improvements); 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. In
making such appraisals, no value shall be included in respect of good will,
going concern value or other similar intangibles. Notwithstanding anything
contained herein to the contrary, the consideration payable by the Medical Group
to the Management Company under this Section 13.5 shall be reduced by the
aggregate amount, if any, payable by the Management Company to the Stockholders
(as such term is defined in the Restricted Stock Agreements).
SECTION 14. Rescission.
14.1. Rescission By Medical Group.
The Medical Group may, in its sole discretion at any time during the period
beginning August 1, 2004 and ending August 31, 2004 (such 30-day period being
referred to herein as the "Rescission Period"), rescind (the "Rescission
Option") this Agreement and disengage itself from its obligations under this
Agreement. The Medical Group may exercise its Rescission Option during the
Rescission Period by giving written notice (the
-92-
<PAGE>
"Rescission Notice") to the Management Company and by complying with the other
provisions contained in this Section 14.1. The effective date (the "Rescission
Effective Date") of the rescission shall be that date which is 30 days after the
date of the Rescission Notice; provided that such date shall not be prior to the
seventh anniversary of the Commencement Date. The Medical Group must comply with
the provisions set forth in this Section 14.1 in order to effectively exercise
its Rescission Option.
(a) Effect of Rescission. In the event that the Medical Group exercises its
Rescission Option pursuant to this Section 14.1, the procedures set forth in
Section 13.4 above shall apply.
(b) Repurchase of Assets. Within 30 days following the Rescission Effective
Date the Management Company shall, subject to the prior receipt of any required
landlord and third party consents, transfer, convey and assign to the Medical
Group, and the Medical Group shall purchase, assume and accept from the
Management Company, the property described in Section 13.5 above according to
the provisions set forth in such Section.
(c) Repayment of Consideration.
(i) In the event that the Medical Group elects to exercise its
Rescission Option, the Medical Group shall cause each physician receiving
capital stock of the Management Company as of the date hereof to, and each
such physician shall, deliver to the Management Company, on or before the
Rescission Effective Date, stock certificates representing an aggregate
230,004 shares of common stock of the Management Company, which shares were
issued to each such physician pursuant to a Restricted Stock Agreement.
Certificates delivered pursuant to this Section 14.1(c) shall be duly
endorsed for transfer to the Management Company. In the event that any
portion of the shares to be returned pursuant to this paragraph shall have
been previously transferred by any such physician, the Fair
-93-
<PAGE>
Market Value of those previously transferred shares required to be
returned, determined as of September 1, 2001, shall be payable by such
physician to the Management Company in cash, by cashier's or certified
check or by wire transfer of funds delivered to a depository institution
designated by the Management Company. Notwithstanding anything contained
herein to the contrary, the Medical Group will not be obligated to return
to the Management Company any of the cash consideration received by the
Medical Group pursuant to the Asset Purchase Agreement, except as set forth
in paragraph (b) above.
(ii) As used herein, "Fair Market Value" of each share of the common
stock of the Management Company 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 Medical Group and the Management Company,
provided that if they cannot so agree, such value shall be determined by a
mutually
-94-
<PAGE>
acceptable investment banking or other qualified firm of national or
regional reputation, retained jointly by the Management Company and the
Medical Group, and all fees, expenses and other charges of such firm
incurred in connection with such determination of Fair Market Value shall
be borne and shared equally by the Management 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 Medical Group shall send a list of four such firms,
arranged in order of the Medical Group's preference, by written notice to
the Management Company within seven (7) days after the expiration of the
above referenced 10-day period. If the Medical Group does not furnish such
list to the Management Company within the required time period, the
Management Company may, within seven (7) days following expiration of the
initial seven-day period, submit a list of four such firms to the Medical
Group.
Second, the Management Company (or the Medical Group, 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.
(d) Repayment of Management Fee. Notwithstanding anything contained herein
to the contrary, in the event that the Medical Group exercises its Rescission
Option under this Section 14.1, the Management Company shall not be required to
refund to
-95-
<PAGE>
the Medical Group any portion of the Management Fees paid, or due to be
paid, by the Medical Group under the terms of this Agreement for the period
prior to the Rescission Effective Date.
(e) Waiver of Rescission Option. Notwithstanding anything contained
herein to the contrary, the parties hereto expressly agree and acknowledge
that if the Medical Group shall fail to deliver the Rescission Notice prior
to the end of the Rescission Period, then the Medical Group shall be deemed
to have expressly and irrevocably waived its right to rescind this
Agreement and to disengage itself from its obligations hereunder.
14.2. Disengagement of Individual Member.
In the event that, during the Rescission Period, any Eligible Party
terminates his affiliation with the Medical Group (such person being referred to
herein as a "Disengaging Member"), such Disengaging Member shall return or remit
to the Management Company (a) stock certificate(s) representing that number of
shares of common stock of the Management Company as is set forth opposite such
Disengaging Member's name on Annex A attached hereto, which shares were issued
to such Disengaging Member pursuant to a Restricted Stock Agreement or (b) in
lieu of delivery of all or any portion of such stock certificates, cash,
cashier's or certified checks or a wire transfer of funds delivered to a
depository institution designated by the Management Company, in an amount equal
to the Fair Market Value, determined as of September 1, 2001, of all or such
portion, as the case may be, of shares of common stock of the Management
Company.
SECTION 15. Non-Disclosure of Confidential Information.
15.1. Non-Disclosure.
(a) Neither the Management Company nor the Medical Group, nor their
respective employees, stockholders, consultants or agents shall, at any time
after the execution and delivery hereof, directly or indirectly disclose any
Confidential or Proprietary Information relating to the other party hereto to
any
-96-
<PAGE>
person, firm, corporation, association or other entity, nor shall either party,
or their respective employees, stockholders, consultants or agents make use of
any of such Confidential or Proprietary Information for its or their own
purposes or for the benefit of any person, firm, corporation or other entity
except the parties hereto or any subsidiary or affiliate thereof. The foregoing
obligation shall not apply to any information which a party hereto can establish
to have (a) become publicly known without breach of this Agreement by it or
them, (b) to have been given to such party by a third party who is not obligated
to maintain the confidentiality of such information, or (c) is disclosed to a
third party with the prior written consent of the other party hereto. Nothing
contained herein shall be construed to prevent any party hereto from disclosing
any Confidential or Proprietary Information of any other party to its
professional advisers for purposes of evaluating, negotiating or otherwise
assisting such party in connection with the transactions contemplated by this
Agreement; provided that such party shall be liable to such other party for the
disclosure by any of its professional advisers of such other party's
Confidential or Proprietary Information, unless such information falls within
one of the categories set forth in clauses (a), (b) or (c) of the preceding
sentence.
(b) For purposes of this Section 14, the term "Confidential or Proprietary
Information" means all information known to a party hereto, or to any of its
employees, stockholders, officers, directors or consultants, which relates to
the Transaction Documents, patient medical and billing records, trade secrets,
books and records, supplies, pricing and cost information, marketing plans,
strategies and forecasts. Nothing contained herein shall prevent a party hereto
from furnishing Confidential or Proprietary Information pursuant to a direct
order of a court of competent jurisdiction.
-97-
<PAGE>
SECTION 16. Non-Competition.
In consideration of the premises contained herein and the consideration to
be received hereunder, and in consideration of and as an inducement to the
Management Company to consummate the transactions contemplated hereby, the
Medical Group hereby (a) agrees to the Non-Competition covenants attached hereto
as Schedule VIII and (b) agrees to require each of the physicians receiving
capital stock of the Management Company as of the date hereof, and each person
who after the date hereof becomes entitled to receive stock (or options to
receive stock) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute a Stockholder
Non-Competition Agreement substantially in the form attached hereto as Exhibit
D.
SECTION 17. Obligations of the Management Company.
17.1. No Practice of Medicine.
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 16.1 hereof, during the Term, the
Management Company shall not interfere with the exercise of professional
judgment by any physician or other licensed health care professional who is a
partner, employee, or contractor of the Medical Group, nor shall the Management
Company interfere with, control, direct, or supervise any physician or other
licensed health care professional in connection with the provision of Medical
Group Services. The foregoing shall not
-98-
<PAGE>
preclude the Management Company from assisting in the development of
professional protocols and monitoring compliance with policies and procedures
that have been instituted in accordance with this Agreement.
17.3. Operational Evaluations.
The Management Company shall, within 180 days after the Signature Date, at
no cost to the Medical Group:
(a) begin a feasibility study for the purchase or lease of a magnetic
resonance imaging unit to be used by the Medical Group;
(b) perform a code analysis and operational review of the Medical Business
to capture lost revenues and enhance revenue recovery for the Medical
Group;
(c) evaluate the practice management requirements of the Medical Group and
implement appropriate systems therefor; and
(d) implement a new information system which will create synergy among the
multiple offices of the Medical Group. At a minimum such information
system will include the use of the same software for each of the
Medical Group's offices and will link each of the offices together
through some electronic communications system which will enable the
offices to share information electronically.
17.4. Physician Advisory Board.
The Management Company is developing an advisory group (the "Physician
Advisory Board") to be comprised of physicians practicing in the State of
Florida. Upon the establishment of the Physician Advisory Board, and in
accordance with the governing documents thereof, the Management Company shall,
or
-99-
<PAGE>
shall cause the Physician Advisory Board to, appoint Marc Hammerman, M.D., to
serve on the Physician Advisory Board.
SECTION 18. Assignment.
(a) The Management Company shall have the right to assign its rights and
delegate its obligations hereunder for security purposes or as collateral to any
affiliate and to assign its rights hereunder to any lending institution from
which the Management Company or any affiliate obtains financing. Except as set
forth in the preceding sentence, neither the Management Company nor the Medical
Group shall have the right to assign their respective rights and delegate their
respective obligations hereunder without the prior written consent of the other
party; provided, however, that after the consummation of an initial public
offering of the Management Company's common stock, the Medical Group's consent
shall not be required in connection with any assignment by the Management
Company arising out of or in connection with a sale of all or substantially all
of the stock or assets of the Management Company or the merger, consolidation,
or reorganization of the Management Company.
(b) Notwithstanding anything contained herein to the contrary, in the event
that the Management Company is merged with or into, or any significant portion
of the Management Company's assets (being defined as at least fifty one (51%)
percent of the total book value thereof), is acquired by, Tenet Healthcare
Corp., Columbia HCA Healthcare Corp., or any of their respective affiliates (any
such case, a "Corporate Acquisition"), on or before the end of the Rescission
Period, the parties will determine (i) the aggregate Collections for the
12-month period ending immediately prior to the consummation of the Corporate
Acquisition (the "Base Collections Amount") and (ii) the aggregate Annual
Medical Group Compensation Amount payable for the 12-month period ending
immediately prior to the consummation of the Corporate Acquisition (the "Base
Compensation Amount"). Thereafter, in the event that for any subsequent 12-month
period
-100-
<PAGE>
commencing on the date of the consummation of the Corporate Acquisition through
and including the 12 month period which includes the Rescission Period (each, a
"Comparison Year"), the Collections for such Comparison Year is at least fifteen
(15%) percent less than the Base Collections Amount, the Management Company
shall, within 30 days after such determination, pay to the Medical Group the
entire difference between the Base Compensation Amount and the Annual Medical
Group Compensation Amount for such Comparison Year. This provision shall
automatically terminate, without the need for any further action, upon the
earlier of (a) the conclusion of the Rescission Period, if no Corporate
Acquisition has been consummated by the conclusion of the Rescission Period, and
(b) the conclusion of the Comparison Year that includes the Rescission Period,
if a Corporate Acquisition has been consummated by the conclusion of the
Rescission Period.
SECTION 19. Notices.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed sufficient if personally delivered, telecopied
(with original sent by mail), sent by nationally-recognized overnight courier,
or by registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:
If to the Management Company:
BMJ Medical Management, 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
-101-
<PAGE>
If to the Medical Group:
BROWARD INSTITUTE oF ORTHOPAEDIC
SPECIALTIES, P.A.
4440 Sheridan Street
Hollywood, Florida 33021
Attention: Administrator
Telecopier: (954) 483-4873
Telephone: (954) 962-3508
with a copy to:
Broad and Cassel
7777 Glades Road, Suite 300
Boca Raton, Florida 33434
Attention: David J. Powers, Esq.
Telecopier: (561) 483-7321;
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 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. 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
-102-
<PAGE>
remaining provisions of this Agreement or affecting the validity or
enforceability of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 22. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida without giving effect to the
laws and principles thereof, or of any other jurisdiction, which would direct
the application of the laws of another jurisdiction. The parties to this
Agreement agree that jurisdiction and venue in any action brought by any party
hereto pursuant to this Agreement shall lie exclusively in any Federal or state
court located in Broward County, Florida or the Southern District of Florida. By
execution and delivery of this Agreement, the parties hereto irrevocably submit
to the exclusive jurisdiction of such courts for themselves and in respect of
their property with respect to such action. The parties hereto irrevocably agree
that venue would be proper in such court, and hereby waive any objection that
such court is an improper or inconvenient forum for the resolution of such
action. The parties hereto shall act in good faith and shall refrain from taking
any actions to circumvent or frustrate the provisions of this Agreement.
SECTION 23. Headings.
Section headings are used for convenience only and shall in no way affect
the construction of this Agreement.
SECTION 24. Entire Agreement; Amendments.
This Agreement and the exhibits and schedules hereto contain
the entire understanding of the parties with respect to
-103-
<PAGE>
its subject matter, and neither this Agreement nor any part of it may in any way
be altered, amended, extended, waived, discharged or terminated except by a
written agreement signed by all of the parties against whom enforcement is
sought.
SECTION 25. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover from the other
party all reasonable costs and expenses, including attorneys' fees and
accountants' fees, incurred in connection with such dispute or controversy.
SECTION 26. Counterparts.
This Agreement may be executed in counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such counterparts together
shall constitute but one agreement.
SECTION 27. Waivers.
Any party to this Agreement may, by written notice to the other party,
waive any provision of this Agreement. The waiver by any party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
SECTION 28. Survival of Termination.
Notwithstanding anything contained herein to the contrary, Sections 3.3(f),
11, 12.3, 12.4, 13, 14, 15, 16, 19, 20, 21, 22, 24, 25 and this Section 28 shall
survive any expiration or termination of this Agreement.
SECTION 29. Contract Modification for Prospective Legal Events.
In the event any state or Federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or
-104-
<PAGE>
regulations, the Medical Group and the Management Company shall amend this
Agreement as necessary to avoid such violation. To the maximum extent possible,
any such amendment shall preserve the underlying economic and financial
arrangements between the Medical Group and the Management Company. If an
amendment is not possible, either party shall have the right to terminate this
Agreement. Any dispute between the parties hereto arising under this Section 29
with respect to whether this Agreement violates any state or Federal laws or
regulations shall be jointly submitted by the parties and finally settled by
binding arbitration in Florida, pursuant to the arbitration rules of the
National Health Lawyers Association Alternative Dispute Resolution Service.
Arbitration shall take place before one arbitrator appointed in accordance with
such rules. The governing law of the arbitration shall be the law set forth in
Section 22. Any decision rendered by the arbitrator shall clearly set forth the
factual and legal basis for such decision. The decision rendered by the
arbitrator shall be non-appealable and enforceable in any court having
jurisdiction thereof. The administrative costs of the arbitration and the
arbitrator fees shall be equally borne by the parties. Each party shall pay its
own legal costs and fees in connection with such arbitration.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
BROWARD INSTITUTE OF ORTHOPAEDIC
SPECIALTIES, P.A.
By:______________________________
Name:
Title:
BMJ MEDICAL MANAGEMENT, INC.
By:______________________________
Name:
Title:
Acknowledged and Agreed to
(as to Sections 4, 9.7, 12.2,
14, 15 and 16):
- ------------------------------
David A. Krant, M.D.
- ------------------------------
Jeffrey B. Worth, M.D.
- ------------------------------
Jeffrey A. Crantnopol, M.D.
- ------------------------------
Marc Z. Hammerman, M.D.
- ------------------------------
Gary B. Schwartz, M.D.
-105-
<PAGE>
- ------------------------------
Marshall E. Stauber, M.D.
- ------------------------------
Thomas A. Hoffeld, M.D.
- ------------------------------
Phillip E. Greenbarg, M.D.
<PAGE>
AMENDMENT NO. 1 TO MANAGEMENT
SERVICES AGREEMENT dated as of November 14,
1997 (the "Amendment"), between BMJ MEDICAL
MANAGEMENT, INC., a Delaware corporation
(the "Management Company"), and BROWARD
INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
(the "Medical Group").
Reference is made to the Management Services Agreement (the "Management
Services Agreement"), between the Management Company and the Medical Group,
effective as of September 1, 1997. Capitalized terms used but not defined herein
have the meanings ascribed thereto in the Management Services Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained
herein, in the Management Services Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Paragraph C of the Management Services Agreement is hereby amended
in its entirety to read as follows:
"C. Concurrently herewith, the Management Company and the
Medical Group are entering into an Asset Purchase Agreement
(the "Asset Purchase Agreement"), in the form of Exhibit A
attached hereto, pursuant to which the Management Company is
acquiring substantially all of the assets of the Medical
Group. In connection with the Asset Purchase Agreement, the
Management Company is issuing two (2) promissory notes to the
Medical Group, one of which is in the aggregate principal
amount of $1,334,041.76 and is due on January 2, 1998 ("Note
No. 1") and the other of which is in the aggregate principal
amount of $1,332,209.94 and is due on the earlier of (i) the
consummation of the Management Company's initial public
offering of its common stock or (ii) twelve (12) months from
the date thereof (but in no event earlier than January 2,
1998) ("Amended Note No. 2")."
<PAGE>
2. All references in the Management Services Agreement to "Note No. 2"
are hereby automatically changed to refer to "Amended Note No. 2".
3. Except as expressly provided in this Amendment, the Management
Services Agreement remains in full force and effect in accordance with its
terms.
4. This Amendment may be executed in more than one counterpart, and by
the parties hereto in separate counterparts, and each such counterpart shall
constitute an original instrument, but all such counterparts taken together
shall constitute one and the same Amendment.
5. This Amendment shall be governed by, construed and interpreted in
accordance with the laws of the State of Florida.
* * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1 to
the Management Services Agreement to be duly executed as of the date and year
first above written.
BMJ MEDICAL MANAGEMENT, INC.
By:
-----------------------------------------------
Name:
Title:
BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A.
By:
-----------------------------------------------
<PAGE>
EXECUTION COPY
================================================================================
MANAGEMENT SERVICES AGREEMENT
BETWEEN
BMJ MEDICAL MANAGEMENT, INC.
AND
NEW JERSEY ORTHOPEDIC ASSOCIATES, P.A.
Effective as of November 1, 1997
================================================================================
<PAGE>
THIS MANAGEMENT SERVICES AGREEMENT (the
"Agreement") is entered into on November
26, 1997 (the "Signature Date"),
effective as of November 1, 1997, by and
between NEW JERSEY ORTHOPEDIC
ASSOCIATES, P.A., a New Jersey
professional association (the "Medical
Group"), and BMJ MEDICAL MANAGEMENT,
INC., a Delaware corporation (the
"Management Company"), with reference to
the facts set forth below.
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. Prior to the Signature Date, the Medical Business was conducted
through Orthopedic Associates of New Jersey, P.A., a New Jersey professional
association whose stockholders also own all of the issued and outstanding
capital stock of the Medical Group ("OANJ").
D. Concurrently herewith, the Management Company and OANJ 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 OANJ that are used in the Medical
Business as conducted by the Medical Group, except for the accounts receivable
of OANJ or the Medical Group (all of which shall be retained by OANJ or the
Medical Group), as the case may be.
<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 hereby agree
as follows:
SECTION 1. Retention of the Management Company.
1.1. Retention.
The Medical Group hereby retains the Management Company to provide all of
the management and related services identified or referenced in Section 3 hereof
and as otherwise required by this Agreement (collectively, the "Management
Services"), and the Management Company hereby accepts such retention and agrees
to provide such services, upon the terms and subject to the conditions set forth
herein.
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.
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, 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 then-current
Term, written notice of such party's intention not to so extend the Term of this
Agreement.
-3-
<PAGE>
SECTION 3. Management Services.
3.1. Management Services Generally.
(a) The Management Company shall be the sole and exclusive manager and
administrator of all day-to-day business functions for the Medical Group,
subject to the provisions of Section 1.2 hereof. The Management Company shall
provide all of the management and administrative services reasonably required by
the Medical Group in connection with the provision of any and all of the Medical
Group Services (as hereinafter defined) and as otherwise provided in this
Agreement, including without limitation the services described in Sections 3.2
through 3.18 hereof.
(b) Without limiting the generality of the provisions of Section 3.1(a),
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 5.6 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
-4-
<PAGE>
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, leases premises and
provides Medical Group Services at the following locations:
Freehold Office Plaza
BLDG 1
4247 Route 9 North
Freehold, New Jersey 07727
(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 5.5 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 (each, an "Office
Sublease"), substantially in the form attached hereto as Exhibit B, in
consideration of the payments to be made by the Medical Group under such
sublease.
-5-
<PAGE>
(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 (subject
to the prior approval of the Medical Group) the negotiation and renegotiation of
leases, provision of ongoing liaison 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 connection with the provision of Medical Group Services
(collectively, the "Medical Equipment"). Except as set forth below, the
Management Company shall acquire (or lease), at its
-6-
<PAGE>
cost, all Medical Equipment, and the Management Company shall retain ownership
of (or the leasehold interest with respect to) all Medical Equipment; provided,
however, that if the Management Company fails or refuses to purchase an item of
Medical Equipment after request is made by the Medical Group and the Medical
Group thereafter purchases such item, then such item shall be the sole property
of the Medical Group and shall not be deemed "Medical Equipment" for purposes of
this Agreement. As used herein, the term Medical Equipment shall not include
medical equipment used in connection with a New Ancillary Service (as
hereinafter defined). Notwithstanding anything to the contrary contained in this
Agreement, the Medical Group acknowledges and agrees that the Management Company
shall charge back to the Medical Group the Management Company's depreciation
cost for Medical Equipment purchased pursuant to this Section 3.3(a); provided,
however, that there shall be no charge back of depreciation for Medical
Equipment purchased by the Management Company pursuant to the Asset Purchase
Agreement.
(b) The Management Company also shall provide or arrange for the
provision of 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"). Except as set forth below,
the Management Company shall acquire, at its cost, all FF&E, and the Management
Company shall retain ownership of all FF&E; provided, however, that if the
Management Company fails or refuses to purchase an item of FF&E; after request
is made by the Medical Group and the Medical Group thereafter purchases such
item, then such item shall be the sole property of the Medical Group and shall
not be deemed "FF&E" for purposes of this Agreement. 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
-7-
<PAGE>
New Ancillary Service. Notwithstanding anything to the contrary contained in
this Agreement, the Medical Group acknowledges and agrees that the Management
Company shall charge back to the Medical Group the Management Company's
depreciation cost for FF&E purchased pursuant to this Section 3.3(b); provided,
however, that there shall be no charge back of depreciation for FF&E purchased
by the Management Company pursuant to the Asset Purchase Agreement.
(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 by the Management Company 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 party to which the Management Company
elects, in its sole discretion, to grant any security interest, mortgage, lien
or other encumbrance in or on the Equipment. The Medical Group shall use the
Equipment only in connection with its provision of the Medical Group Services,
and the Medical Group shall not alter, repair, augment, or remove the Equipment
from the premises of the Medical Group without the prior written consent of the
Management Company and any lessor thereof, which approval may be granted or
withheld in the Management Company's or such lessor's sole discretion. To the
extent the Equipment is utilized by the Medical Group in the provision of
Medical Group Services, the Medical Group shall have the right to exercise
reasonable control over the use of such Equipment.
(e) From time to time, and as reasonably requested by the Medical Group,
the Management Company shall use reasonable efforts to cause the Equipment
manufacturer or its authorized agent to provide service and maintenance for the
Equipment as needed to maintain the Equipment in an operable condition, so
-8-
<PAGE>
that all such Equipment shall function continuously (subject to interruptions
not reasonably avoidable) in accordance with the manufacturer's specifications
and so that all conditions imposed by the manufacturer to maintaining the
continued effectiveness of any warranty on such Equipment shall be satisfied.
The Management Company shall take all reasonable steps to provide that all
necessary service and maintenance is obtained in a prompt and timely manner, so
as to minimize the amount of time that any of the Equipment is not available for
usage by or for patients of the Medical Group.
(f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER
RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT,
THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR
PURPOSE. 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);
-9-
<PAGE>
(iii) Outpatient surgery;
(iv) Densitometry; and
(v) Other revenue-producing services generally
recognized as ancillary services, but excluding
the following:
(A) Any services provided on a regular basis
by the Medical Group immediately prior
to the Commencement Date, including
without limitation (1) plain film and
other diagnostic radiology (if any) and
(2) ultrasound for pediatric patients;
and
(B) Any service performed in connection with
new Medical Equipment acquired to
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
-10-
<PAGE>
connection with such New Ancillary Service, and for which the Management Company
shall be compensated as described in Section 5.7 of this Agreement, except as
may otherwise be agreed upon by the parties.
3.5. Administration, Finance and Accounting.
The Management Company shall provide or arrange for the provision of all
administrative, financial, and accounting functions necessary for the operation
of the Medical Group, including, without limitation, the following (if
applicable):
(A) Creation and maintenance of bank
accounts.
(B) Deposits of receipts.
(C) Preparing accounts receivable summary
reports, including various analyses of
delinquent accounts.
(D) Receiving appropriate approvals as
required by the Medical Group's
Certificate of Incorporation and By-laws
(the "Governance Documents") prior to
distribution of payments to outside
parties; provided, however, that the
Management Company shall not be
responsible for or liable with respect
to interpretations of the Governance
Documents.
(E) Negotiation of vendor contracts.
(F) Performing monthly accounting functions,
including bank reconciliations,
maintenance of books
-11-
<PAGE>
and records, and preparation of
financial statements.
(G) Analyzing financial data as reasonably
requested by physicians.
(H) Analyzing potential New Medical Office
locations, and coordinating all
functions associated with opening New
Medical Office locations.
(I) Preparing monthly financial and medical
practice statistics reports by satellite
office and by physician.
(J) Ongoing day-to-day communication with
the managing stockholder (or other
manager of the Medical Group) and
assisting such person in fulfilling his
responsibilities.
(K) Preparing agendas and information
packages for Medical Group meetings.
(L) Developing budgets and long-term
strategies for the Medical Group.
(M) Coordinating payroll processing and
payroll tax payments.
(N) Providing ongoing personnel FTE
analysis.
(O) Sponsoring employee benefit plans and
providing administrative services
relating thereto for the Medical
Personnel (as hereinafter defined),
-12-
<PAGE>
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
(O).
(P) Coordinating (1) recruitment, (2)
interviewing, and (3) hiring of new
physicians.
(Q) Implementing fee schedule increases
and/or decreases established by the
Medical Group.
(R) Coordinating depositions and court
appearances.
(S) Assisting in the coordination of call
schedules; provided, however, that final
decisions on all call schedules shall be
made by the Medical Group.
(T) Assisting in the coordination of
coverage of athletic team events.
(U) Acting as liaison to hospital
administration, physical therapy,
surgery center, MRI, and other ancillary
services entities.
(V) Cooperating with outside accountants in
preparing various schedules and
providing other information.
-13-
<PAGE>
(W) Interacting with legal counsel as
necessary.
3.6. Billing and Collection.
(a) Ownership of all Accounts (as hereinafter defined) shall at all times
remain the sole and exclusive property of the Medical Group. In order to
facilitate the collection of the Accounts, the Management Company shall continue
to (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) 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. The Medical Group shall promptly turn
over to the Management Company for deposit into the Medical Group Collections
Account in accordance with this Agreement all checks and other payments received
by the Medical Group or by any of its stockholders or employees from any patient
or third party payor for Medical Group Services rendered during the Term.
-14-
<PAGE>
(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
signatories (the "Authorized Signatories") 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 Signatory is not signing the Documents in a timely manner, the
Management Company shall not be liable for any failure to perform its duties
hereunder or for any failure to perform the Management Services to the extent
caused by the failure of an Authorized Signatory to sign the Documents in a
timely manner.
(c) The Management Company shall submit all bills and manage the billing
process on a timely basis in accordance with the terms of this Agreement and
applicable law.
(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 obtain all appropriate insurance
and other information required.
-15-
<PAGE>
(ii) Submit claims utilizing electronic billing submission,
whenever appropriate.
(iii) Perform delinquent account collection calls and other
appropriate follow-up mechanics for delinquent accounts of all
insurance classifications, all in a timely fashion as determined by
the Operations Committee.
(iv) Turn over to outside collection agencies all delinquent
accounts satisfying the criteria established by the Operations
Committee. The Management Company shall also follow-up on the
performance of the outside collection agencies and make changes, if
necessary, and shall reconcile each account turned over to the summary
data provided by the collection agency.
(v) Write-off account balances according to criteria
approved by the Medical Group.
(vi) Prepare claim reviews in accordance with criteria
approved by the Medical Group.
(vii) Bill workers' compensation medical services at rates
equal to the most recently approved state workers' compensation fee
schedule.
(viii) Apply "insurance only" and other courtesy write-offs
in compliance with Medical Group policy.
(ix) With respect to discounted fee-for-service contracts
with Preferred Provider Organizations (PPOs) and Health Maintenance
Organizations (HMOs), determine that payments from such PPOs and HMOs
are in compliance with their respective contracts with the Medical
Group.
(x) With respect to capitation fee contracts with HMOs:
-16-
<PAGE>
(A) Follow-up to ensure that payments to the
Medical Group are made on a timely
basis; and
(B) Review and audit enrollment data
provided by the HMO to ensure that the
capitation payments are based on the
proper number of lives enrolled.
(xi) With respect to lien accounts, the Management Company
shall:
(A) Ensure that appropriate documents are
signed and agreed to initially as
between 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,
follow-up on a timely basis to ensure that withheld amounts are paid,
if warranted, and to ensure that amounts not paid are verified and
audited for appropriateness.
-17-
<PAGE>
(xiv) Coordinate the timely payment of refunds to patients
and third party payors when appropriate.
3.7. Administrative Personnel.
(a) The Management Company shall retain and provide or arrange for the
retention and provision of the following non-medical personnel necessary for the
conduct of the Medical Group's business operations (collectively,
"Administrative Personnel"):
(i) Administration;
(ii) Accounting;
(iii) Billing and Collection;
(iv) Secretarial;
(v) Transcription;
(vi) Appointments;
(vii) Switchboard;
(viii) Medical Records;
(ix) Chart Preparation;
(x) Historians;
(xi) Clinic Support; and
(xii) Marketing.
(b) The Management Company shall determine and pay, or arrange for the
payment of, the salaries and fringe benefits of the Administrative Personnel,
and shall provide or arrange for other personnel services related to the
Administrative Personnel, including, but not limited to, scheduling, determining
personnel policies, administering continuing education benefits, and payroll
administration. The salaries, fringe benefits and other costs associated with
-18-
<PAGE>
the Administrative Personnel shall be the sole and exclusive costs of the
Management Company and not the Medical Group.
(c) With respect to each applicable new employee in Administrative
Personnel, the Management Company shall, as reasonably necessary, verify, or
arrange for the verification of, educational and employment experience,
licensure, and insurability.
(d) The Management Company shall attempt, consistent with sound business
practices, to honor Medical Group requests with regard to the retention or
assignment of specific Administrative Personnel to the Medical Group. In the
event that the Management Company receives a complaint from the Medical Group
that any of the Administrative Personnel is interfering with or disrupting the
provision of Medical Group Services by the Medical Group, the Management Company
will use reasonable efforts to attempt to promptly remedy any such complaint. If
any such complaint is not remedied to the reasonable satisfaction of the Medical
Group, then the Management Company shall remove such Administrative Personnel,
if requested by the Medical Group, from the Medical Group's facilities, if and
to the extent such action by the Management Company will not violate any
applicable law.
3.8. Technical Personnel; Leased Employees.
(a) Subject to the conditions set forth in this Section 3.8, the
Management Company shall, to the extent permitted by applicable law, 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. The determination of
whether Technical Personnel is required shall be made by the Medical Group in
its reasonable discretion. The salaries, fringe benefits and other costs
associated with the Technical Personnel shall be the sole and exclusive costs of
the Management Company and not the Medical Group.
-19-
<PAGE>
(b) For purposes of this Agreement, "Technical Personnel" means nurses,
medical assistants, x-ray technicians, other technicians, and other personnel
who perform diagnostic tests or other services that are covered by Medicare or
by other third party payors when performed by an employee of a physician under
the physician's supervision; provided that such personnel may be employed by a
business corporation under the laws of the State of New Jersey.
(c) The Medical Group shall have the right to exercise, and shall
exercise, such supervision and control over the activities of the Technical
Personnel as may be necessary for the Technical Personnel to be considered
leased employees under the Medicare program and under applicable law. Without
limiting the generality of the foregoing, the Medical Group shall:
(i) have the right to have any Technical Personnel
terminated from employment;
(ii) furnish the Technical Personnel with the equipment and
supplies needed by the Technical Personnel for their work;
(iii) provide the Technical Personnel with any necessary
training;
(iv) instruct the Technical Personnel regarding their
activities performed for the Medical Group;
(v) establish the hours of work for the Technical Personnel;
(vi) approve vacation time and other time off from work; and
-20-
<PAGE>
(vii) provide that degree of supervision as is required by
Medicare and by other third party payors to satisfy applicable
conditions for coverage thereunder.
(d) With respect to each of the Technical Personnel, the Management
Company shall verify, or arrange for the verification of, educational and
employment experience, licensure and insurability, and shall review and provide
the Medical Group with copies of any complaints contained in public files with
applicable state and Federal commissions.
3.9. Medical Personnel 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 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.
-21-
<PAGE>
3.10. Inventory and Supplies.
The Management Company shall order and purchase, or arrange for the order
and purchase of, inventory and supplies on behalf of the Medical Group, and such
other ordinary or appropriate materials as the Medical Group reasonably deems to
be necessary for the Medical Group to carry out its Medical Group Services. Such
inventory and supplies shall be purchased and made available in a manner such
that the Medical Business is not materially impaired and, in any case, as soon
as commercially practicable after request by the Medical Group. Inventory and
supplies shall include, but not be limited, to:
(A) Medical supplies;
(B) Office supplies;
(C) Postage;
(D) Computer forms and supplies;
(E) Printing and stationery supplies;
(F) Printer supplies; 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
-22-
<PAGE>
(B) The preparation of any income tax
returns for the Medical Group.
3.12. Information Systems Management.
(a) The Management Company shall, within a reasonable period of time
after the Signature Date, 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 enhancement of the
existing information systems used by the Medical Group in connection with the
provision of the following services:
(i) Accounts receivable - Billing/Insurance/
Collections;
(ii) On-line appointment scheduling;
(iii) Internal e-mail;
(iv) On-line transcription;
(v) Faxing subsystem;
(vi) Electronic claims submission;
(vii) Patient flow monitoring system;
(viii) Authorization module;
(ix) Prescription module;
(x) X-ray tracking system;
(xi) Voice mail;
(xii) Paperless medical records; and
(xiii) Bar code chart tracking system.
(b) The services provided by the Management Company shall protect the
confidentiality of patient medical records to the extent required by applicable
law or the Medical
-23-
<PAGE>
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 without gross negligence or
willful misconduct, and in good faith to protect such confidentiality.
3.13. Use of New Technologies in the Practice of Medicine.
The Management Company shall utilize reasonable efforts to promote the
integration of new technologies into the professional practice of the Medical
Group, including, without 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 and the
approval of the Operations Committee. 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.
3.15. Insurance.
The Management Company shall, to the extent permitted by applicable law,
provide the insurance coverage described in
-24-
<PAGE>
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, and patient medical records. The management of
all files and records shall be in compliance with applicable state and Federal
statutes. Patient medical records shall 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 without gross negligence or willful misconduct,
and in good faith to protect such confidentiality.
(b) The Management Company shall provide all off-site storage of files
and records as required and in conjunction with policies established by the
Operations Committee. The Management Company shall provide the Medical Group
with all requested off-site files and records on a timely basis, consistent with
the policies of the Medical Group in effect immediately prior to the
Commencement Date. Any change in such policies shall be subject to the approval
of the Operations Committee.
(c) In the event of termination of this Agreement, the Management Company
shall deliver to the Medical Group at no charge a copy of the books and records
of the Medical Group in the Management Company's possession. In the event any
physician
-25-
<PAGE>
of the Medical Group terminates his affiliation with the Medical Group during
the Term, the Management Company shall, within 30 days after receipt of written
instructions from the Medical Group, deliver to such physician a copy of the
books and records pertaining to the Medical Group Services provided by such
physician during the five years prior to such physician's departure from the
Medical Group; provided; however that the Management Company shall not be
obligated to return any books and records pertaining to Medical Group Services
provided prior to the Commencement Date, if any such books and records are not
in the Management Company's possessions.
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 and the Management Company hereby agree that the
budget(s) attached hereto as Schedule II is (are) the Budget(s) for the Medical
Group with respect to the time periods set forth thereon. All other budgets
shall be on a
-26-
<PAGE>
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 such Budget is applicable.
3.19. Force Majeure.
The Management Company shall not be liable to the Medical Group for
failure to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, unavailability of supplies, changes in
applicable law or regulations or other events over which the Management Company
has no control for so long as such events continue and for a reasonable time
thereafter.
SECTION 4. Consideration.
In consideration of the Medical Group's entering into this Agreement, the
Management Company shall provide to the Medical Group and to each person
identified on Schedule III attached hereto (the "Eligible Parties") the
consideration set forth on Schedule III, the allocation of which has been
determined and apportioned by the Medical Group.
SECTION 5. Costs, Compensation, and Other Payments.
5.1. Ownership of Accounts.
The Medical Group shall at all times retain ownership of all accounts
receivable and other rights to payment arising from the provision by the Medical
Group of Medical Group Services (as hereinafter defined) to the general public
during the Term (the "Accounts").
5.2. Definitions.
For purposes of this Agreement, the following terms have the meanings set
forth below:
-27-
<PAGE>
(a) "Billings" means, for any applicable period, the gross charges of the
Medical Group for all Medical Group Services furnished during such period.
(b) "Collections" means, for any applicable period (regardless of when
Billings are made or Medical Group Services are rendered), all cash or cash
equivalents received during such period for Medical Group Services, including
any capitation payments, less any refunds paid during such period.
(c) "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;
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).
(d) It is the intent of the parties that Billings, Collections, and
Medical Group Services not include any of the following:
(i) New Ancillary Services (excluding professional services
rendered by Medical Personnel in connection therewith, which
professional services are included under Section 5.2(c) above);
(ii) interest income;
-28-
<PAGE>
(iii) royalties payable to any Medical Group physician for
medical inventions;
(iv) fees payable under consulting agreements entered into
by Medical Group physicians;
(v) revenues from presentations, publications, medical
directorships, service as the head of a hospital department, and
endorsements;
(vi) proceeds from the sale of any capital assets of the
Medical Group;
(vii) any income from investments; and
(viii) any fees earned in connection with records, reports
and testimony prepared or performed for any legal action.
Notwithstanding anything to the contrary contained therein, any revenues
received by any Billable Medical Personnel (as hereinafter defined) from any
source set forth in clauses (iv) and (v) 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
activities.
5.3. Management Fee.
(a) Calculation of Management Fee. The compensation payable to the
Management Company for the provision of Management Services under this Agreement
(the "Management Fee"), shall be equal to the sum of (i) an amount equal to the
Applicable Percentage (as hereinafter defined) of Collections plus (ii) the
total amount of the Authorized Management Company Operating Costs plus (iii) an
amount equal to sixty six and
-29-
<PAGE>
two-thirds percent (66-2/3%) of the Professional Practice Cost Savings (as
hereinafter defined) plus (iv) any amounts owed to the Management Company
pursuant to Section 5.10 hereof, if any; provided, however, that in the event
the Applicable Percentage of Collections shall equal an amount that is less than
$240,840 for any calendar year ending on or before December 31, 2002 (excluding
the year ending on December 31, 1997), the Management Fee for such period shall,
notwithstanding anything to the contrary contained herein, equal $240,840 plus
the amounts described in clauses (ii), (iii) and (iv) above (the "Guaranteed
Minimum Fee"); provided further, however, that, for so long as the Medical Group
consists solely of three (3) physicians (collectively, the "Initial Group"), in
the event that the Applicable Percentage of Collections of the Initial Group (on
a collective basis) shall equal an amount in excess of $325,842 for any calendar
year ending on or before December 31, 2002, the Management Fee for such period
shall, notwithstanding any potential calculation to the contrary, equal a
maximum of $325,842 plus the amounts described in clauses (ii), (iii) and (iv)
above (the "Initial Group Maximum Fee"). The Medical Group hereby acknowledges
and agrees that in the event the Medical Group, as of the end of any calendar
year ending on or before December 31, 2002, includes the medical practices of a
total of four or more physicians, then the maximum Management Fee payable for
such calendar year shall equal the Initial Group Maximum Fee plus the Applicable
Percentage of the Collections of those physicians not part of the Initial Group
plus the amounts described in clauses (ii), (iii), and (iv) above. For purposes
of determining those physicians comprising the Initial Group, the parties hereto
agree that those three physicians who first commenced practicing medicine with
the Medical Group (based on the date each such physician became employed by or
began practicing with the Medical Group) shall make up the Initial Group. For
illustrative purposes only, an example of the computation of the Management Fee
is set forth on Schedule VI attached hereto.
-30-
<PAGE>
(b) Payment of Management Fee. The Management Fee shall be payable by the
Medical Group to the Management Company every two (2) weeks during the Term. The
Management Company shall deliver to the Medical Group an invoice (the "Fee
Invoice") showing the amount of the Management Fee accrued for each two-week
period. The Medical Group shall pay the total amount of such Fee Invoice on the
business day immediately following that day on which the Management Company
delivers the Fee Invoice to the Medical Group by wire transfer of immediately
available funds to an account of the Management Company at a depository
institution designated by the Management Company.
(c) Reconciliation of Management Fee.
(i) On or before July 15 and January 15 of each calendar
year occurring during the Term, the Management Company shall, at its
cost and expense, prepare a statement (the "Semi-Annual Fee
Statement") reflecting the calculation of each component of the
Management Fee (as described in Sections 5.3(a)(i), (ii), (iii), and
(iv) above) earned for the six-month period ending on the last day of
the prior month; provided that, notwithstanding the foregoing, the
parties hereby agree that the Management Company shall not be
required to deliver a Semi-Annual Fee Statement until July 15, 1998.
Upon completion of the Semi-Annual Fee Statement, the Management
Company shall promptly deliver the same to the Medical Group, together
with supporting documentation therefor. After delivery of the
Semi-Annual Fee Statement and until the Final Determination Date (as
hereinafter defined), the Management Company shall provide the Medical
Group and its advisors with timely access to the employees and records
of the Management Company and the work papers used in connection with
the preparation of the Semi-Annual Fee Statement.
-31-
<PAGE>
(ii) Following receipt of the Semi-Annual Fee Statement from
the Management Company, the Medical Group will be afforded a period of
10 business days (the "First 10-Day Period") to review the Semi-Annual
Fee Statement. At or before the end of the First 10-Day Period, the
Medical Group will either (A) accept the aggregate Management Fee (as
set forth in the Semi-Annual Fee Statement) in its entirety, in which
case the aggregate Management Fee for such six-month period will be as
set forth in the Semi-Annual Fee Statement or (B) deliver to the
Management Company a written notice (the "Objection Notice")
containing a sufficiently detailed written explanation of those items
in the calculation of the aggregate Management Fee for such six-month
period (as set forth in the Semi-Annual Fee Statement) which the
Medical Group disputes, in which case the items identified by the
Medical Group shall be deemed to be in dispute. The failure by the
Medical Group to deliver the Objection Notice within the First 10-Day
Period shall constitute the Medial Group's acceptance of the aggregate
Management Fee for the applicable six-month period as set forth in the
Semi-Annual Fee Statement. If the Medical Group delivers the Objection
Notice in a timely manner, then, within a further period of 10
business days from the end of the First 10-Day Period the parties will
attempt to resolve in good faith any disputed items and reach a
written agreement (the "Settlement Agreement") with respect thereto.
Failing such resolution, the unresolved disputed items will be
referred for final binding resolution to an independent
nationally-recognized firm of certified public accountants mutually
acceptable to the Management Company and the Medical Group (the
"Arbitrating Accountants"), the fees and expenses of which shall be
borne equally by the Management Company and the Medical Group. The
actual Management Fee with respect to such six-month period will be
deemed to be as determined by the Arbitrating Accountants. Such
determination (the "Accountants' Determination") shall be
-32-
<PAGE>
(A) in writing, (B) furnished to the Management Company and the
Medical Group as soon as practicable after the items in dispute have
been referred to the Arbitrating Accountants and (C) nonappealable and
incontestable by the Management Company, the Medical Group or any
physician stockholder or employee thereof and not subject to
collateral attack for any reason.
(iii) For purposes of this Section 5.3(c), the "Final
Determination Date" shall mean the earliest to occur of (A) the 11th
day following the receipt by the Medical Group of the Semi-Annual Fee
Statement if the Medical Group shall have failed to deliver the
Objection Notice to the Management Company within the First 10-Day
Period, (B) the date on which either the Medical Group or the
Management Company gives the other a written notice to the effect that
such party has no objection to the other party's determination of the
Management Fee for the applicable six-month period, (C) the date on
which the Medical Group and the Management Company execute and deliver
a Settlement Agreement and (D) the date as of which the Medical Group
and the Management Company shall have received the Accountants'
Determination.
(iv) If the Management Fee payable with respect to any
six-month period (as determined in accordance with the provisions of
this Section 5.3(c), (the "Decided Management Fee")) is less (the
"Overpayment Amount") than the sum of the Fee Invoices that were
actually paid by the Medical Group for such period, then the
Management Company shall, within ten (10) business days after the
Final Determination Date, refund to the Medical Group the full
Overpayment Amount. If the Decided Management Fee is more (the
"Underpayment Amount") than the sum of the Fee Invoices that were
actually paid by the Medical Group for such period, then the Medical
Group shall, within ten (10)
-33-
<PAGE>
business days after the Final Determination Date, pay the Management
Company the full Underpayment Amount. Notwithstanding anything to the
contrary contained in this Section 5.3(c)(iv), for each calendar year
ending on or before December 31, 2002, if either the Guaranteed
Minimum Fee or the Initial Group Maximum Fee (as described in
paragraph (a) above) shall be applicable, the foregoing amounts shall
be adjusted in accordance therewith.
(d) For purposes of this Section 5.3, the following terms
have the meanings set forth below:
(i) "Applicable Percentage" has the meaning set
forth on Schedule IV; and
(ii) "Professional Practice Cost Savings" means
the cost savings determined in the manner described on
Schedule V.
5.4. Management Company Costs.
(a) The Management Company shall pay all Management Company Operating
Costs and all Excluded Costs (collectively, the "Management Company Costs"). All
Management Company Costs shall be incurred in the name of the Management
Company, and not in the name of the Medical Group, except as specifically
approved by the Medical Group. Management Company Costs shall not include any
costs or expenses incurred prior to the Commencement Date.
(b) The Management Company shall provide to the Medical Group, upon
reasonable request by the Medical Group from time to time, supporting
documentation and other backup detail relating to any or all of the Management
Company Costs.
(c) For purposes of this Agreement, "Management Company Operating Costs"
means all costs and expenses incurred in
-34-
<PAGE>
connection with the provision of the Management Services, including, without
limitation, the salaries and benefits payable to Administrative Personnel and
Technical Personnel and those other costs and expenses set forth in the Budget,
except that any costs and expenses defined as Medical Group Costs in Section 5.6
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 (excluding
depreciation);
(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 (excluding
depreciation);
(iv) the cost of any FF&E provided by the Management Company
to the Medical Group (excluding depreciation);
(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:
-35-
<PAGE>
(A) The Corporate Overhead is incurred in
lieu of a pre-existing Management
Company Operating Cost;
(B) The amount of such Corporate Overhead
does not exceed the amount of the
Management Company Operating Costs being
eliminated; and
(C) The Corporate Overhead is allocated to
the Medical Group and to all other
medical groups utilizing such Corporate
Overhead on a pro rata basis.
Any Corporate Overhead with respect to which all of the above conditions are
satisfied shall be considered Management Company Operating Costs.
(d) For purposes of this Agreement, "Authorized Management Company
Operating Costs" means all Management Company Operating Costs incurred in any
year reduced by any or all of the following, as applicable:
(i) any costs that exceed the applicable Management Company
Operating Costs Budget which are not approved by the Operations
Committee;
(ii) any costs with respect to which the Medical Group has
reasonably requested supporting documentation or other backup detail
which has not been furnished by the Management Company or which does
not reasonably establish the appropriateness of such costs; and
(iii) any costs that have been determined pursuant to an
audit under Section 5.8 not to have been
-36-
<PAGE>
reasonably incurred in connection with the Management Services
required to be provided under this Agreement.
5.5. 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.
(b) For each New Medical Office, the Medical Group shall open a bank
account (the "New Medical Office Bank Account") separate from the Medical Group
Collections Account, which bank account shall be used to deposit all Collections
received for Medical Group Services rendered at such New Medical Office. The
Medical Group shall instruct the bank at which the New Medical Office Bank
Account is maintained to transfer, on a daily basis during the New Medical
Office Start-Up Period (as hereinafter defined), all funds in the New Medical
Office Bank 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 New
Medical Office Bank Account) to a bank designated by the Management Company, for
credit to an account in the Management Company's name.
(c) If the aggregate Collections for such New Medical Office during the
New Medical Office Start-Up Period are equal to or greater than the sum of (x)
the New Medical Office
-37-
<PAGE>
Start-Up Costs associated with such New Medical Office and (y) the Management
Fee payable with respect to the Collections of such New Medical Office, in each
case during the New Medical Office Start-up Period, the Management Company shall
pay to the Medical Group the excess of such Collections, if any, and all
Collections received beginning on the day after the end of the New Medical
Office Start-Up Period for such New Medical Office shall be deposited into the
Medical Group Collections Account and shall no longer be deposited into the New
Medical Office Bank Account. Such New Medical Office shall thereafter, for all
purposes of this Agreement, be treated as any other office of the Medical Group.
If the aggregate Collections for such New Medical Office during the New Medical
Office Start-Up Period are less than the sum of (A) the New Medical Office
Start-Up Costs associated with such New Medical Office and (B) the Management
Fee payable with respect to the Collections of such New Medical Office, in each
case during the New Medical Office Start-Up Period, (1) the Management Company
shall be responsible for the deficit, if any, associated with such New Medical
Office; provided that the aggregate amount of Collections received during the
New Medical Office Start-Up Period for such New Medical Office shall belong
solely to the Management Company and (2) the Operations Committee shall
determine whether to maintain such office for the provision of Medical Group
Services, and if such decision is in the affirmative, then the Medical Group
shall be required to fund all costs that fall within the definition of New
Medical Office Start-Up Costs incurred during the period beginning on the day
after the end of the New Medical Office Start-Up Period and, for all purposes of
this Agreement, such New Medical Office shall be treated as any other office of
the Medical Group.
(d) Except to the extent provided in Section 5.5(d) 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
-38-
<PAGE>
of the Management Fee, Management Company Costs, or Ancillary Services as
described in Sections 5.3, 5.4, or 5.7, respectively.
(e) 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.
(f) For purposes of this Agreement, "New Medical Office" means any office
of the Medical Group other than those offices identified in Section 3.2(a)
hereof.
(g) 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.
(h) 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 to occur of (i) 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 and (ii) the date on which the
Management Company first determines that the aggregate Collections of such New
Medical Office exceed the sum of the New Medical Office Start-Up Costs and the
Management Fee payable with respect to such office (excluding any Authorized
Management Company Costs, which costs shall be included in the New Medical
Office Start-Up Costs).
5.6. Medical Group Costs.
Except as otherwise provided in this Agreement, the Medical Group shall
pay all of the costs specified in this
-39-
<PAGE>
Section 5.6 (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;
(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) all amounts payable for all Medical Equipment under the
Medical Equipment Master Lease Agreement;
(e) any lease payments for New Ancillary Service Medical
Equipment;
(f) all rent amounts payable under the Office Subleases; 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
-40-
<PAGE>
other professional or advisory services, business meetings, and
business taxes.
Notwithstanding the foregoing, the Management Company shall pay all bills or
other invoices for Medical Group Costs that are submitted to the Management
Company by the Medical Group unless any such bill or invoice is disallowed
according to the decision of a majority of the members of the Operations
Committee; provided, however, that under no circumstances shall the Management
Company pay, or be required to pay, any costs or expenses associated with
compensation or health, life or retirement benefits payable to or for the
benefit of Billable Medical Personnel. In the event the Management Company
receives any bills or other invoices for payment pursuant to the previous
sentence, the Medical Group shall be required to reimburse the Management
Company for the full amount thereof. The Management Company shall include any
such amounts being paid by the Management Company on behalf of the Medical Group
in a Fee Invoice delivered to the Medical Group and the Medical Group shall pay
such additional amount in accordance with the provisions of Section 5.3(a)
hereof.
5.7. New Ancillary Services Costs.
(a) Any agreement by the parties to establish a New Ancillary Service as
described in Section 3.4 of this Agreement shall (unless otherwise agreed by the
parties) incorporate the following:
(i) The Management Company shall create a separate division
("Ancillary Division") for purposes of accounting for the income,
costs, profits, and losses of any New Ancillary Service. The
Management Company shall utilize generally accepted accounting
principles in determining and accounting for the profits and losses
related to the operations of each New Ancillary Service.
Notwithstanding anything to the contrary contained herein, Corporate
-41-
<PAGE>
Overhead shall not be included in determining the costs and expenses
associated with any New Ancillary Service.
(ii) The Management Company shall pay all of the Ancillary
Service Start-Up Costs (as hereinafter defined) during the Ancillary
Service Start-Up Period (as hereinafter defined). Beginning with the
month immediately following the expiration of the Ancillary Service
Start-Up Period the Management Company shall be entitled to recoup all
of the Ancillary Service Start-Up Costs previously paid by the
Management Company in sixty (60) equal monthly installments of
principal, plus interest on the unrecouped portion of such costs at
the prevailing prime rate as set forth in the Wall Street Journal 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.
(iii) For each New Ancillary Service, the Medical Group
shall open a bank account (an "Ancillary Service Bank Account")
separate from the Medical Group Collections Account, which bank
account shall be used to deposit all payments received for the
technical component of such Ancillary Service. The Medical Group shall
instruct the bank at which the Ancillary Service Bank Account is
maintained to transfer, on a daily basis, all funds in the Ancillary
Service Bank 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 Ancillary Service Bank Account) to a bank designated by
the Management Company, for credit to an account in the Management
Company's name. The Management Company shall use the funds so
transferred to reduce the balance of the Ancillary Service Start-Up
Costs paid by the Management Company.
-42-
<PAGE>
(iv) Profits and/or losses of any Ancillary Division
accruing after the end of the Ancillary Service Start-Up Period 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 5.7(a)(ii) above), and after retention of
reasonable reserves) derived from the operation of such Ancillary
Division. As of the end of the Ancillary Service Start-Up Period, the
Management Company shall, on a quarterly basis, review the books and
records of the Ancillary Division and shall make distributions, if
any, to the Medical Group and the Management Company in accordance
with the foregoing.
(v) 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.
(vi) The Management Company shall provide, in connection
with any New Ancillary Service, the full range of management services
described in this Agreement.
(vii) The billings, collections, costs and expenses relating
to any New Ancillary Service shall not be included in the computations
of the Management Fee, Management Company Costs, or New Medical Office
Start-Up Costs, as described in Sections 5.3, 5.4, or 5.5,
respectively.
-43-
<PAGE>
(b) As used herein, "Ancillary Service Reimbursement Payment" means an
amount determined by (i) taking the total Ancillary Service Start-Up Costs for
the period ending on the date of determination, (ii) adding an amount equal to
the total of the projected interest payable on such amount during the repayment
term (which interest amount shall be a good faith estimate by the Management
Company) and (iii) dividing the sum by 60.
(c) For purposes of this Section 5.7, "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:
(i) Any lease payments for New Ancillary Service Medical
Equipment;
(ii) All costs of acquiring furniture, fixtures, and office
equipment;
(iii) All initial occupancy costs, if any, including but not
limited to prepaid rent, and tenant improvements;
(iv) All costs related to the acquisition of materials and
supplies related to the provision of such New Ancillary Service; and
(v) All ongoing costs of the New Ancillary Service,
including but not limited to personnel (other than the Billable
Medical Personnel) and related benefits, the cost of operating any
equipment utilized in providing the service, supplies, insurance,
rent, repairs and maintenance, outside services, telephone, taxes,
utilities, storage and other ordinary ongoing expenses of providing
the New Ancillary Service.
-44-
<PAGE>
(d) For purposes of this Section 5.7, "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
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 an Average Profit (as
hereinafter defined) at least equal to the amount of the Ancillary Service
Reimbursement Payment (as hereinafter defined) or (ii) the last day of the
twelfth month after the establishment of such New Ancillary Service.
(e) "Average Profit", at any point during the New Ancillary Start-Up
Period, means the average for any consecutive two month period of the remainder
(as determined in good faith by the Management Company) of the revenues less the
expenses for such New Ancillary Service.
5.8. 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. All documents and other
information obtained in the course of such review or audit shall be held in
strict confidence.
5.9. 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
-45-
<PAGE>
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.
5.10. New Physician Compensation Costs.
(a) Notwithstanding anything contained herein to the contrary, during the
period beginning on the New Physician Start Date (as hereinafter defined) and
ending on the Physician Breakeven Date (as hereinafter defined), the Management
Company shall reimburse the Medical Group on a monthly basis for all New
Physician Compensation (as hereinafter defined) and notwithstanding anything to
the contrary contained in this Agreement, shall receive, in consideration
therefor, sixty six and two-thirds percent (66-2/3%) (such amount being referred
to herein as the "New Physician Net Collections") of all Collections generated
by such New Physician for those Medical Group Services performed by such New
Physician, and such amounts shall not be included in determining Collections for
purposes of this Agreement. The remaining thirty three and one-third percent (33
1/3%) of such Collections shall belong to the Medical Group, and such amounts
shall not be included in determining Collections for purposes of this Agreement.
As of the Physician Breakeven Date, the New Physician Compensation shall become
the sole responsibility of, the Medical Group in accordance with Section 5.6
hereof, and all of the Billings and Collections generated by such New Physician
thereafter shall be considered Billings and Collections for purposes of this
Agreement.
(b) In order to accomplish the foregoing, on the date that the Medical
Group hires the first New Physician, the Medical Group shall open a bank account
(the "New Physician Account") separate from the Medical Group Collections
Account, which bank account shall be used to deposit all Collections
-46-
<PAGE>
received for Medical Group Services performed by any New Physician during the
period beginning on the applicable New Physician Start Date and ending on the
applicable New Physician Breakeven Date. The Medical Group shall instruct the
bank at which the New Physician Account is maintained to transfer, on a daily
basis, all funds in the New Physician 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 New Physician Account) to a bank designated by the
Management Company, for credit to an account in the Management Company's name.
The Management Company shall, pursuant to Section 5.10(a) above, return to the
Medical Group by wire transfer of funds on the second business day of each month
an amount equal to thirty three and one-third percent (33 1/3%) of the
Collections of each New Physician for the prior month. As of the Physician
Breakeven Date with respect to any New Physician, the Medical Group shall no
longer be required to deposit any Collections of such New Physician into the New
Physician Account, but shall deposit such Collections into the Medical Group
Collections Account.
(c) "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.
(d) "Physician Breakeven Date" means, with respect to any New Physician,
the date on which the New Physician Net
-47-
<PAGE>
Collections for the period beginning on the New Physician Start Date and ending
on the date of determination first equal or exceed (i) the aggregate amount of
New Physician Compensation paid to such New Physician for the foregoing period
plus (ii) that portion of the Medical Group Costs and Management Company Costs
associated with such New Physician and/or the Medical Group Services provided by
such New Physician.
(e) "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.
(f) "Physician Start Date" means, with respect to any New Physician, the
date such New Physician becomes affiliated with or employed by the Medical
Group.
SECTION 6. Representations and Warranties of the Medical Group
The Medical Group hereby represents and warrants to the Management
Company, as of the Signature Date, as follows:
6.1. Organization; Good Standing; Qualification and Power.
The Medical Group is a professional association duly organized, validly
existing, and in good standing under the laws of the State of New Jersey 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, 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
-48-
<PAGE>
Management Company true and correct copies of its Governance Documents, in
effect on the date hereof.
6.2. Equity Investments.
Except as set forth on Schedule 6.2, the Medical Group currently has no
subsidiaries, nor does the Medical Group currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.
6.3. Authority.
The execution, delivery and performance of this Agreement and the other
Medical Group Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of the Medical Group. This Agreement and the other
Medical Group Transaction Documents have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement or any other Medical Group Transaction Document by the Medical Group
nor the consummation by the Medical Group of the transactions contemplated
hereby or thereby, nor compliance by the Medical Group with any provision hereof
or thereof will conflict with or result in a breach of any provision of the
formation documents of the Medical Group, cause a default (with due notice,
lapse of time or both), or give rise to any right of termination, cancellation
or acceleration, under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument, obligation or
agreement to which the
-49-
<PAGE>
Medical Group is a party or by which the Medical Group or any of its properties
or assets may be bound (with respect to which defaults or other rights all
requisite waivers or consents shall have been obtained at or prior to the date
hereof) or violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Medical Group or any of its properties or
assets or the Medical Business. Except as provided on Schedule 6.3, to the best
of the Medical Group's knowledge, no permit, authorization, consent or approval
of or by, or any notification of or filing with, any person (governmental or
private) is required in connection with the execution, delivery or performance
by the Medical Group of this Agreement or any other Medical Group Transaction
Document or the consummation of the transactions contemplated hereby and
thereby.
6.4. Financial Information.
Schedule 6.4 contains OANJ's internal statement of assets, liabilities
and stockholders' 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 [nine]-month
period then ended (including the notes thereto and other financial information
included therein) (collectively, the "Internal Financial Statements"), and (b)
the internal financial statements of the Medical Business for the periods ended
December 31, 1996 and December 31, 1995 (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
and (iii) have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods covered thereby.
-50-
<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;
-51-
<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
-52-
<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 OANJ or 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 OANJ or 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 OANJ or 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,
-53-
<PAGE>
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 OANJ or 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) OANJ has made provision on the Balance Sheet for all Taxes payable
by OANJ 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 OANJ or 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 OANJ or
the Medical Group for any Taxes relating to the operation of the Medical
Business has been proposed, asserted or assessed in writing (or any member of
any affiliated or combined group of which the Medical Group or any previous
operator of the Medical Business was a member for which the Medical Group could
be liable).
(b) The Medical Group is not a foreign person within the meaning of
ss.1.1445-2(b) of the Regulations under Section 1445 of the Internal Revenue
Code of 1986, as amended (the "Code").
-54-
<PAGE>
(c) The Medical Group has provided the Management Company with true and
complete copies of all Federal and state 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 OANJ
or the Medical Group, stockholder of the Medical Group, or in connection with
the Medical Business, whether at law or in equity, or before or by any Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality or (b)
-55-
<PAGE>
judgments, decrees, injunctions or orders of any court, governmental department,
commission, agency, instrumentality or arbitrator against OANJ or the Medical
Group, their respective 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, OANJ 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 OANJ or the Medical Group in
-56-
<PAGE>
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.
(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 OANJ or the Medical Group as of the date hereof (the "Employees"). Except as
set forth on Schedule 6.11, (a) neither OANJ, the Medical Group nor the Medical
Business is 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 OANJ or the Medical Group or in connection with the Medical
Business pending before the National Labor Relations Board or any comparable
state, local or foreign agency; (d) there is no labor strike, dispute, slowdown
or stoppage actually pending or, to the best knowledge of the Medical Group,
threatened against or involving OANJ or the Medical Group or the 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,
-57-
<PAGE>
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 salary, service and related data for
Employees of the Medical Group and in connection with the Medical Business.
(b) Schedule 6.12 lists each employment, severance or other similar
contract, arrangement or policy and each plan or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation or
-58-
<PAGE>
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) 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 of the Medical Group or 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
-59-
<PAGE>
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 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
-60-
<PAGE>
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.
6.17. Medical Practice.
The Medical Business includes the complete medical practices of Cary
Skolnick, M.D., Manuel Banzon, M.D., and Gregg Berkowitz, M.D., and, except for
those services described in Section 5.2(d), none of such physicians maintains
any medical practice or performs Medical Group Services independently of the
Medical Group.
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 Medical Equipment Master Lease
Agreement and the Stockholder
-61-
<PAGE>
Non-Competition Agreements (collectively, the "Management Company Transaction
Documents"), to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby.
7.2. Authority.
The execution, delivery and performance of this Agreement and the other
Management Company Transaction Documents, and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Management
Company. This Agreement and each Management Company Transaction Document has
been duly and validly executed and delivered by the Management Company, and this
Agreement and each such Management Company Transaction Document is the valid and
binding obligation of the Management Company, enforceable in accordance with its
respective terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement or any other Management Company Transaction Document, nor the
consummation by the Management Company of the transactions contemplated hereby
or thereby, nor compliance by the Management Company with any provision hereof
or thereof, will (a) conflict with or result in a breach of any provisions of
the Amended and Restated Certificate of Incorporation or the Bylaws of the
Management Company, (b) cause a default (with due notice, lapse of time or
both), or give rise to any right of termination, cancellation or acceleration,
under any of the terms, conditions or provisions of any material note, bond,
lease, mortgage, indenture, license or other instrument, obligation or agreement
to which the Management Company is a party or by which it or any of its
properties or assets is or may be bound (with respect to which defaults or other
rights all requisite waivers or consents shall have been obtained at or prior to
the date hereof) or (c) violate any law,
-62-
<PAGE>
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
25,000,000 shares of common stock, of which 11,462,459 shares are issued and
outstanding, and 9,233,049 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) 741,667 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 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
-63-
<PAGE>
shares of common stock will not violate any preemptive or similar right of any
person.
7.4. Financial Information.
Schedule 7.4 contains (a) the unaudited statements of assets, liabilities
and stockholders' equity of the Management Business as of the date set forth
therein (the "Management Company Balance Sheet"; and the date thereof being
referred to as the "Management Company Balance Sheet Date"), and the related
unaudited statements of revenue and expenses for the periods then ended
(including the notes thereto and other financial information included therein)
(collectively, the "Unaudited Financial Statements"). The Unaudited Financial
Statements (i) were prepared in accordance with the books and records of the
Management Business, and (ii) fairly present the financial position of the
Management Business as of the dates thereof.
7.5. Absence of Undisclosed Liabilities.
Except as set forth on Schedule 7.5, as of the Management Company Balance
Sheet Date, (a) the Management Business did not have any material liability of
any nature required to be disclosed on a balance sheet (matured or unmatured,
fixed or contingent, known or unknown) which was not provided for or disclosed
on the Management Company Balance Sheet, (b) all liability reserves established
by the Management Business on the Management Company Balance Sheet were adequate
and (c) there were no loss contingencies (as such term is used in Statement of
Financial Accounting Standards No. 5 issued by the Financial Accounting
Standards Board in March 1975) which were not adequately provided for or
disclosed on the Management Company Balance Sheet.
-64-
<PAGE>
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;
(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;
-65-
<PAGE>
(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 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
-66-
<PAGE>
which would have a material adverse effect on the Management Company's ability
to operate the Management Business after the date hereof on substantially the
same basis as presently operated, and such licenses and permits are in full
force and effect. To the best knowledge of the Management Company, none of such
licenses and permits shall be affected in any material respect by the
transactions contemplated hereby.
7.9. Employees.
Except as set forth on Schedule 7.9, the Management Company is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other compensation for any services performed by them
through the date hereof.
7.10. Insurance.
The Management Company has obtained such policies of insurance as are
usual and customary for businesses of the type conducted by the Management
Company. All such policies of insurance are valid and enforceable policies, and
all premiums with respect thereto are currently paid.
7.11. Burdensome Restrictions.
Except as set forth on Schedule 7.11, neither the Management Company nor
the Management Business is bound by any oral or written agreement or contract
which by its terms prohibits it from conducting the Management Company or the
Management Business (or any material part thereof).
7.12. Disclosure.
Neither the Management Company Transaction Documents (including the
Exhibits and Schedules attached thereto) nor any other document, certificate or
written statement furnished to the Medical Group by or on behalf of the
Management Company in
-67-
<PAGE>
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 all of the management and administrative policies for the
overall operation of the Medical Group. The Management Company shall take its
directions from the Operations Committee and not from any officer, employee or
internal committee of the Management Company. The Operations Committee shall
consist of up to six (6) members. The Medical Group shall designate up to three
(3) members of the Operations Committee, each of whom shall be a physician in
the Medical Group, and the Management Company shall designate an equal number of
members of the Operations Committee, not to exceed three (3). 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;
-68-
<PAGE>
(iii) Capital expenditures to be made by the Management
Company in fulfillment of its obligations
hereunder;
(iv) Management Company Operating Costs (which, in the
absence of approval by the Operations Committee,
shall be increased by five percent (5.0%) over the
total amount approved for the preceding period)
(b) Approve costs and expenses that exceed the Management Company
Operating Costs Budget.
(c) Establish parameters and criteria with respect to the establishment
and maintenance of relationships with institutional providers and payors and
managed care contracts (except with respect to the establishment of professional
fees).
(d) Establish parameters and criteria with respect to:
(i) Billings
(ii) Claims submission
(iii) Collections of fees
(iv) Delinquent account collection policies
(v) Turnover of delinquent accounts to outside
collection agencies
(vi) Write-offs of account balances
(vii) Claim review requests
(viii) "Insurance only" and other courtesy write-off
policies
(ix) Lien account collection policies
(x) Student Athlete account policies
-69-
<PAGE>
(e) Approve the acquisition, replacement, relocation, or other
disposition of Medical Equipment and FF&E, approve the integration of new
technologies into the professional practice of the Medical Group as contemplated
by Section 3.13 hereof, and approve the renovation and expansion of any offices
of the Medical Group ("Tenant Improvements"); provided, however, that the
approval of the Management Company also shall be required prior to (i) the
acquisition of any Equipment (including any Medical Equipment, FF&E or other
items relating to or necessary in connection with the integration of new
technologies into the professional practice of the Medical Group) if and to the
extent that the aggregate cost of such items in any calendar year exceeds five
percent (5%) of the Management Fee for the prior year (or, with respect to the
first year of the Term, the projected Management Fee for such year), (ii) the
undertaking of any Tenant Improvements relating to patient care facilities that
cost more than $10,000 in the aggregate at any one of the Medical Group's office
locations in any calendar year, or (iii) the undertaking of any other Tenant
Improvements.
(f) Establish parameters and criteria for off-site storage of files and
records of the Medical Group.
8.3. Advisory Functions of the Operations Committee.
The Operations Committee shall review, evaluate and make recommendations
to the Medical Group 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.
-70-
<PAGE>
(c) Public relations, advertising, and other marketing of Medical Group
Services, including design of exterior signs.
(d) The establishment of fees for professional services and ancillary
services rendered by the Medical Group.
(e) Access and quality issues pertaining to ancillary services.
(f) Insurance limits and insurance coverage of the Medical Group and the
Management Company, as such coverage may relate to Medical Group operations and
activities.
(g) Any matters arising in connection with the operations of the Medical
Group that are not specifically addressed in this Agreement and as to which the
Management Company or the Medical Group requests consideration by the Operations
Committee.
The recommendations of the Operations Committee with respect to the matters
described in this Section 8.3 are intended for the advice and guidance of the
Medical Group, and except as provided herein, the Operations Committee does not
have the power to bind the Medical Group. Where discretion with respect to any
matters is vested in the Medical Group under the terms of this Agreement, the
Medical Group shall have ultimate responsibility for the exercise of such
discretion, notwithstanding any recommendation of the Operations Committee. The
Medical Group shall, however, take such recommendations of the Operations
Committee into account in good faith in the exercise of such discretion.
Notwithstanding anything to the contrary in this Agreement, the Medical Group
shall have principal authority with respect to the establishment of policies and
procedures for professionally licensed personnel with respect to the following:
-71-
<PAGE>
(i) review and approval of hiring of professional staff;
(ii) medical policies at the offices where Medical Group
Services shall be rendered;
(iii) cleanliness of premises;
(iv) maintenance, registration and inspection of
professional equipment;
(v) recordkeeping as to patient medical records, billing
records, and such other records as may be required by law;
(vi) security, including drug storage, prescriptions pad
control, and confidentiality of patient records;
(vii) periodic audit of patient records and of professional
services to assure quality professional care on premises;
(viii) professional propriety of billing and advertising or
other representations; and
(ix) preparation and maintenance of written list of current
fees for standard services.
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
-72-
<PAGE>
party, and any Operations Committee member may designate his or her own
substitute at any meeting without notice. Each member shall have one vote and
shall have the right to grant his or her proxy to another member of the
Operations Committee. The Chairman, if present, shall preside at all meetings of
the Operations Committee. In the absence of the designated Chairman, the Vice
Chairman shall preside. The only powers of the Chairman and the Vice Chairman
that differ from those of the other members of the Operations Committee shall be
to call and preside over meetings in accordance with this Section 8.4.
(b) The Operations Committee may hold meetings without call or formal
notice at such times and places as a quorum of its members may from time to time
determine. A meeting of the Operations Committee also may be called by at least
two (2) members of the Operations Committee or by the Chairman or Vice Chairman
thereof upon at least three (3) days' written notice to the other members of the
Operations Committee. Such notice requirement shall be deemed waived with
respect to any member of the Operations Committee who attends such meeting.
Meetings may be held in person or by telephone. The Operations Committee also
may act by written consent as provided in Section 8.4(c). Minutes shall be kept
of all formal actions taken by the Operations Committee.
(c) No action of the Operations Committee shall be effective unless
authorized by the vote of a majority of the members of the entire Operations
Committee. A quorum of the Operations Committee shall be a majority of the
members of the Operations Committee, 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 of the members
(in person or by proxy) must sign any written consent. In the event a majority
of the entire Operations Committee does not agree with
-73-
<PAGE>
respect to a particular issue presented to, or request made of, the Operations
Committee, then no action shall be taken with respect to such issue or question
and the status quo shall be maintained.
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 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 appropriately licensed. The Medical Group shall monitor the
quality of medical care practiced by physicians and other health care personnel
associated with the Medical Group. In the event that any disciplinary actions or
medical malpractice actions are initiated against any such physician by any
payor, patient, state or Federal regulatory agency or any other person or
entity, the Medical Group shall immediately inform the Management Company of
such action and its underlying facts and circumstances.
9.2. 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
-74-
<PAGE>
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.
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
-75-
<PAGE>
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. Billing.
The Medical Group's Medical Personnel shall be responsible for providing
the appropriate current CPT4 coding with respect to the fee tickets prepared by
such Medical Personnel.
9.8. Medical Personnel Hiring.
The Medical Group shall have the ultimate control over and responsibility
for the hiring, compensation, supervision, evaluation and termination of its
Medical Personnel; provided, however, that at the request of the Medical Group,
the Management Company shall consult with the Medical Group regarding such
matters.
9.9. Continuing Education.
The Medical Group and its Medical Personnel shall be solely responsible
for ongoing membership in professional associations and continuing professional
education. The Medical Group shall ensure that its Medical Personnel participate
in such continuing professional education as is necessary for such
-76-
<PAGE>
physician or professional to remain current in his or her field of medical
practice.
9.10. Clinical Research.
The Medical Group shall have the ultimate control over and responsibility
for any clinical research program pertaining to patients of the Medical Group.
This shall include but not be limited to research personnel interviewing,
hiring, termination, compensation, day-to-day supervision, and assignment of
responsibilities and projects. However, the Medical Group will cooperate with
and take direction from the Management Company in its nationwide efforts to
provide an effective disease management information system and outcome studies
programs.
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 or stockholders, the
transfer of ownership interests, or the 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 to any physician not actively
practicing medicine, without the prior written consent of the Management
Company, which consent shall not be unreasonably withheld.
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:
-77-
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT
SERVICES AGREEMENT EFFECTIVE AS OF NOVEMBER 1, 1997, BETWEEN
NEW JERSEY ORTHOPEDIC ASSOCIATES, P.A., A NEW JERSEY
PROFESSIONAL ASSOCIATION, AND BMJ MEDICAL MANAGEMENT, INC., A
DELAWARE CORPORATION."
Nothing herein shall be construed as requiring the Medical Group to issue any
certificate or other evidence representing an equity interest in the Medical
Group, if such has not been issued prior to the date hereof.
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
-78-
<PAGE>
purpose, reasonable access (which shall include making photocopies) to the
patient medical records described in Section 11.1 hereof and any other pertinent
information regarding the Medical Group during the Term. Prior to accessing such
patient medical records, the Management Company shall obtain any required
patient authorization.
Following the termination of this Agreement, the Management Company shall
provide to the Medical Group, promptly upon the Medical Group's written request,
photocopies of the Management Business records described in Section 11.2 hereof,
and 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 $5,000,000 per claim and with aggregate policy limits of not less than
$7,000,000 (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) covering the Medical Group and
each of the Medical Personnel of the Medical Group, 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.
-79-
<PAGE>
The Management Company shall pay the premiums for such general and medical
malpractice liability coverage, which payments shall be considered Management
Company Operating Costs under this Agreement, subject to recoupment by the
Management Company under Section 5 hereof. The Management Company shall be
designated as an additional insured under all such insurance policies.
12.2. Life Insurance.
The Management Company may, at its option, obtain a $500,000 life
insurance policy for each duly licensed physician partner in or equity owner of
the Medical Group. The Medical Group shall, and shall cause each such partner in
or equity owner of the Medical Group to, cooperate with the Management Company
in the procurement of such policies. 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 by the Medical Group or OANJ, prior to the
Commencement Date, (ii) any other acts or omissions of the Medical Group, OANJ
or their respective 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
-80-
<PAGE>
any obligation under this Agreement or the Medical Group Transaction Documents
(which, for purposes hereof, shall be deemed to include the Restricted Stock
Agreement to be signed by the Management Company and each partner, stockholder
or employee of the Medical Group receiving stock of the Management Company, in
the form of Exhibit C attached hereto (the "Restricted Stock Agreement")) by the
Medical Group and/or the Medical Personnel and/or their respective agents and/or
subcontractors (other than the Management Company) during the Term.
12.4. Indemnification by Management Company.
The Management Company shall indemnify, hold harmless and defend the
Medical Group, its partners, members, officers, directors, stockholders,
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
-81-
<PAGE>
state law for the benefit of debtors by the Management Company, except for the
filing of a petition in involuntary bankruptcy against the Management Company
which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"),
(b) in the event the Management Company shall default in any material respect in
the performance of any duty or obligation imposed upon it by this Agreement and
the Management Company shall not have taken reasonable action commencing curing
of such default within thirty (30) days after written notice thereof has been
given to the Management Company by the Medical Group or the Management Company
does not thereafter diligently prosecute such action to completion, or (c) in
the event that any of the representations and warranties made by the Management
Company in Section 7 is untrue or misleading in any material respect, provided
that the Medical Group shall have previously given written notice to the
Management Company describing in reasonable detail the nature of the item in
question and the Management Company shall not have cured such matter within
thirty (30) days of such notice.
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
-82-
<PAGE>
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. The Management Company hereby acknowledges and agrees that neither the
death nor the permanent disability of any of the Medical Group's physicians
shall constitute grounds for termination of this Agreement by 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 29 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 Sections 3.16(c), 13.5, 28 and
this Section 13.4, and except to pay in full and satisfy any and all outstanding
obligations of the parties accruing through the effective date of termination,
including, without limitation, payment by the Medical Group of any amounts owed
to the Management Company pursuant to Section 5.3 hereof.
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
-83-
<PAGE>
items which are used in connection with the professional practice and related
activities of the Medical Group and which, in the case of items (i), (ii), (iii)
and (iv), 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
and any lease agreement and lien granted thereunder:
(i) the Medical Equipment owned by the Management Company;
(ii) the furniture, furnishings, trade fixtures, and office
equipment owned by the Management Company;
(iii) 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;
(iv) the supplies owned by the Management Company;
(v) 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
(vi) the deposits of the Management Company relating to the
Medical Group.
The items described in clauses (i), (ii), and (iv) above shall be transferred
pursuant to this Section 13.5 free and clear of any liens. 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
-84-
<PAGE>
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).
13.6. Medical Group's Rescission Option
(a) The Medical Group may, in its sole discretion at any time during the
period beginning October 1, 2004 and ending November 1, 2004 (such 31-day period
being referred to herein as the "Rescission Period"), rescind (the "Rescission
Option") this Agreement and disengage itself from its obligations under this
Agreement. The Medical Group may exercise its Rescission Option during the
Rescission Period by giving written notice (the "Rescission Notice") to the
Management Company and by complying with the other provisions contained in this
Section 13.6. The effective date (the "Rescission Effective Date") of the
rescission shall be that date which is 30 days after the date of the Rescission
Notice; provided that such date shall not be prior to the seventh anniversary of
the Commencement Date. The Medical Group must comply with the provisions set
forth in this Section 13.6 in order to effectively exercise its Rescission
Option.
(b) Effect of Rescission. In the event that the Medical Group exercises
its Rescission Option pursuant to this Section 13.6, the procedures set forth in
Section 13.4 above shall apply.
(c) Repurchase of Assets. Within 30 days following the Rescission
Effective Date the Management Company
-85-
<PAGE>
shall, subject to the prior receipt of any required landlord and third party
consents, transfer, convey and assign to the Medical Group, and the Medical
Group shall purchase, assume and accept from the Management Company, the
property described in Section 13.5 above according to the provisions set forth
in such Section.
(d) Repayment of Consideration. In the event that the Medical Group
elects to exercise its Rescission Option, the Medical Group shall cause each
physician receiving capital stock of the Management Company as of the date
hereof to, and each such physician shall, deliver to the Management Company, on
or before the Rescission Effective Date, stock certificates representing that
number of shares of common stock of the Management Company as is set forth
opposite such physician's name on Annex A attached hereto, which shares were
issued to each such physician pursuant to a Restricted Stock Agreement.
Certificates delivered pursuant to this Section 13.6(d) shall be duly endorsed
for transfer to the Management Company. In the event that any portion of the
shares to be returned pursuant to this paragraph shall have been previously
disposed of by any such physician, the Fair Market Value (as defined in the
Restricted Stock Agreement) of such portion, determined as of the Rescission
Effective Date, shall be payable by each such physician to the Management
Company in cash, by cashier's or certified check or by wire transfer of funds
delivered to a depository institution designated by the Management Company.
Notwithstanding anything contained herein to the contrary, the Medical Group
will not be obligated to return to the Management Company any of the cash
consideration received by the Medical Group pursuant to the Asset Purchase
Agreement, except as set forth in paragraph (c) above.
(e) Repayment of Management Fee. Notwithstanding anything contained
herein to the contrary, in the event that the Medical Group exercises its
Rescission Option under this Section 13.6, the Management Company shall not be
required to refund to the Medical Group any portion of the Management Fees paid,
or due
-86-
<PAGE>
to be paid, by the Medical Group under the terms of this Agreement for the
period ending on the Rescission Effective Date.
(f) Waiver of Rescission Option. Notwithstanding anything contained
herein to the contrary, the parties hereto expressly agree and acknowledge that
if the Medical Group shall fail to deliver the Rescission Notice prior to the
end of the Rescission Period, then the Medical Group shall be deemed to have
expressly and irrevocably waived its right to rescind this Agreement and to
disengage itself from its obligations hereunder.
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 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,
-87-
<PAGE>
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 VII and (b) agrees to require each of the physicians receiving
capital stock of the Management Company as of the date hereof, and each person
who after the date hereof becomes entitled to receive stock (or options to
receive stock) in the Management Company in connection with his or her
performance of services for the Medical Group, to execute a Stockholder
Non-Competition Agreement substantially in the form attached hereto as Exhibit
D. Notwithstanding the foregoing, the noncompetition covenants attached hereto
as Schedule VII shall have no further force or effect following the termination
or rescission of this Agreement by the Medical Group pursuant to Section 13.1,
13.3 or 13.6, respectively.
SECTION 16. Transfer of Management Services.
Each of the stockholders of the Medical Group acknowledges that in the
event such physician elects to practice medicine separately from the Medical
Group, such physician shall enter into a management services agreement with the
Management Company pursuant to which the Management Company will provide
services substantially similar to those set forth in this Agreement for such
physician's new medical practice, and such
-88-
<PAGE>
physician shall pay the Management Company a fee equal to ten percent of the
Collections of such new medical practice as compensation therefor.
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
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.
17.3. Covenant to Repurchase Common Stock.
In the event the Management Company has not consummated a public offering
of its common stock under the Securities Act of 1933, as amended, by May 1,
1998, the Management Company shall
-89-
<PAGE>
purchase from each physician receiving shares of common stock of the Management
Company pursuant to Section 4 hereof, and each such physician shall sell to the
Management Company, all of such shares of common stock owned by such physician
on such date. The purchase price payable by the Management Company shall equal
$6.50 per share, which amount shall be payable to each such physician on May 4,
1998, by certified or cashier's check or wire transfer of funds upon receipt of
the certificate(s) representing such purchased shares, duly endorsed for
transfer to the Management Company.
17.4. Market Development Limitation.
(a) The Management Company shall not at any time during the period
beginning on the Commencement Date and ending on November 1, 1998 (the
"Exclusivity Period"), without the prior written consent of the Medical Group
(which consent shall not be unreasonably withheld), enter into a management
services agreement substantially similar to this Agreement with any orthopedic
surgeon or group of orthopedic surgeons that practices in the Medical Group
Service Area (as hereinafter defined); provided, however, that notwithstanding
the foregoing restrictions, the Management Company may, without the consent of
the Medical Group, provide contract management services to an independent
physician association. In the event that the Medical Group has assisted the
Management Company to enter into management services agreements pursuant to
which the Management Company provides management services to at least 12
physicians practicing in the Medical Group Service Area (not including any
physician stockholders or employees of the Medical Group) by November 1, 2001,
and in connection therewith the Medical Group does earn 30,000 shares of common
stock of the Management Company pursuant to Schedule III hereof, then the
Exclusivity Period shall extend throughout the Term; provided that if at any
time during the Term the total number of physicians to which the Management
Company provides management services in the Medical
-90-
<PAGE>
Group Service Area decreases to less than fifteen (15), the Exclusivity Period
shall terminate as of such date. As used herein, the "Medical Group Service
Area" means and includes the physical land area within a 25-mile radius of the
Medical Group's office set forth in Section 3.2(a) hereof.
(b) Notwithstanding the foregoing, in the event that the Management
Company acquires (the "Acquisition") a company (the "Acquired Company") that
provides management services to orthopedic surgeons (the "Acquired Physicians")
practicing medicine in the Exclusivity Area, the Management Company may enter
into management services agreements or amendments to such existing agreements
with any Acquired Physician, and the Management Company may provide to such
Acquired Physicians management services substantially similar to those provided
to the Medical Group hereunder; provided, however, that the Management Company
shall not, and shall not permit the Acquired Company to, at any time during the
Exclusivity Period solicit any additional orthopedic surgeons in the Medical
Group Service Area after consummation of such Acquisition.
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 for security purposes or as collateral to any lending institution from
which the Management Company or any affiliate obtains financing. Except as set
forth in the preceding sentence, neither the Management Company nor the Medical
Group shall have the right to assign their respective rights and delegate their
respective obligations hereunder without the prior written consent of the other
party; provided, however, that after the consummation of an initial public
offering of the Management Company's common stock, the Medical Group's consent
shall not be required in connection with any assignment by the Management
Company arising out of or in connection with a sale of all or substantially all
of the
-91-
<PAGE>
stock or assets of the Management Company or the merger, consolidation, or
reorganization of the Management Company.
SECTION 19. Notices.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed sufficient if personally delivered, telecopied
(with original sent by mail), sent by nationally-recognized overnight courier,
or by registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:
If to the Management Company:
BMJ Medical Management, 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:
New Jersey Orthopedic Associates, P.A.
Freehold Office Plaza
BLDG 1
4247 Route 9 North
Freehold, New Jersey 07727
Attention: Cary Skolnick, M.D.
Telecopier: (908) 780-7404;
with a copy to:
Brach, Eichler, Rosenberg, Silver, Bernstein,
Hammer & Gladstone
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Todd Brower, Esq.
Telecopier: (973) 228-7852;
-92-
<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 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. 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.
-93-
<PAGE>
SECTION 22. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New Jersey 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.
SECTION 23. Headings.
Section headings are used for convenience only and shall in no way affect
the construction of this Agreement.
SECTION 24. Entire Agreement; Amendments.
This Agreement and the exhibits and schedules hereto contain the entire
understanding of the parties with respect to its subject matter, and neither
this Agreement nor any part of it may in any way be altered, amended, extended,
waived, discharged or terminated except by a written agreement signed by all of
the parties against whom enforcement is sought.
SECTION 25. Attorneys' Fees.
In the event of any dispute or controversy arising out of or relating to
this Agreement, the prevailing party shall be entitled to recover from the other
party all reasonable costs and expenses, including attorneys' fees and
accountants' fees, incurred in connection with such dispute or controversy.
SECTION 26. Counterparts.
This Agreement may be executed in counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such counterparts together
shall constitute but one agreement.
-94-
<PAGE>
SECTION 27. Waivers.
Any party to this Agreement may, by written notice to the other party,
waive any provision of this Agreement. The waiver by any party of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
SECTION 28. Survival of Termination.
Notwithstanding anything contained herein to the contrary, Sections
3.3(f), 11, 12.3, 12.4, 13, 14, 15, 19, 20, 21, 22, 24, 25 and this Section 28
shall survive any expiration or termination of this Agreement.
SECTION 29. Contract Modification for Prospective Legal Events.
In the event any state or Federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel of both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Medical Group and the Management Company shall amend
this Agreement as necessary to avoid such violation. To the maximum extent
possible, any such amendment shall preserve the underlying economic and
financial arrangements between the Medical Group and the Management Company. If
an amendment is not possible, either party shall have the right to terminate
this Agreement. Any dispute between the parties hereto arising under this
Section 29 with respect to whether this Agreement violates any state or Federal
laws or regulations shall be jointly submitted by the parties and finally
settled by binding arbitration in New Jersey, 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
-95-
<PAGE>
Section 22. Any decision rendered by the arbitrator shall clearly set forth the
factual and legal basis for such decision. The decision rendered by the
arbitrator shall be non-appealable and enforceable in any court having
jurisdiction thereof. The administrative costs of the arbitration and the
arbitrator fees shall be equally borne by the parties. Each party shall pay its
own legal costs and fees in connection with such arbitration.
* * * *
-96-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Management
Services Agreement as of the date first above written.
NEW JERSEY ORTHOPEDIC ASSOCIATES, P.A.
By:
-----------------------------------
Name:
Title:
BMJ MEDICAL MANAGEMENT, INC.
By:
-----------------------------------
Name:
Title:
Acknowledged and Agreed to
(as to Sections 4, 6.17, 9.7, 12.2,
13.4(b), 13.6, 14, 15 and 16):
- ------------------------------
Cary Skolnick, M.D.
- ------------------------------
Manuel Banzon, M.D.
- ------------------------------
Gregg Berkowitz, M.D.
<PAGE>
EXECUTION COPY
================================================================================
ASSET PURCHASE AGREEMENT
BETWEEN
BMJ MEDICAL MANAGEMENT, INC.
AND
ORTHOPEDIC ASSOCIATES OF NEW JERSEY, P.A.
Effective as of November 1, 1997
================================================================================
<PAGE>
THIS ASSET PURCHASE AGREEMENT
is entered into as of November 26, 1997
(the "Signature Date"), and effective as
of November 1, 1997, between BMJ MEDICAL
MANAGEMENT, INC., a Delaware corporation
(the "Buyer"), and ORTHOPEDIC ASSOCIATES
OF NEW JERSEY, P.A., a New Jersey
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. 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 deposits identified on Schedule 1.1(e); and
(f) 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. 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.
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 Seventy Five Thousand Dollars ($75,000).
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.
-4-
<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, 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 New Jersey 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 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 Certificate of Incorporation and By-laws (collectively the "Governance
Documents") 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 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
-5-
<PAGE>
in a breach of any provision of the Governance Documents 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 or the Bill of Sale 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 (A) those Claims set forth on Schedule 3.1(c) and (B)
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
-6-
<PAGE>
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 and the Bill of Sale 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
(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
-7-
<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. The Seller has
complied in all material respects with all applicable Federal, state, local or
foreign laws, ordinances, regulations and orders. 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 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, 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.
(b) Authority. The execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby, have
been duly and validly
-8-
<PAGE>
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
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 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. 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 consummation by the Buyer of the transactions contemplated
hereby.
-9-
<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. 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.
(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:
-10-
<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 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 and the Bill of Sale 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 Schedules 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 and the Bill of Sale and the
consummation by the Seller of the transactions contemplated hereby and thereby
shall have been obtained or made.
-11-
<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 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 by the Buyer and the
consummation of the transactions contemplated hereby 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 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
Bill of Sale executed by the Seller.
-12-
<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, 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) 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;
(c) The Seller shall deliver to the Buyer a copy of the
resolutions of the Seller authorizing the transactions contemplated hereby,
accompanied by a certificate of the Seller stating that such resolution has been
duly adopted in accordance with the Seller's Governance Documents; and
(d) The Buyer shall deliver to the Seller a copy of the
resolutions of the Buyer authorizing the transactions contemplated hereby,
accompanied by a certificate of the Buyer
<PAGE>
-13-
stating that such resolutions have been duly adopted in accordance with the
Buyers governance documents.
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 the Bill of Sale 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 or the Bill of
Sale.
(ii) the assertion against 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 any Buyer Indemnified Person of
any liability or obligation arising from,
-14-
<PAGE>
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 New Jersey 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 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 shareholders, directors, officers, and employees.
-15-
<PAGE>
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) In no event shall the Seller's or the Buyer's aggregate
liability for Buyer Indemnification Events or Seller Indemnification Events, as
the case may be, exceed the amount of the Purchase Price set forth in Section
2.1.
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
-16-
<PAGE>
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 such action, suit or proceeding at all stages
thereof whether or
-17-
<PAGE>
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
second anniversary of the Signature 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).
-18-
<PAGE>
ARTICLE VII
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.
ARTICLE VIII
MISCELLANEOUS
8.1. 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.
8.2. 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.
-19-
<PAGE>
8.3. Descriptive Headings.
Descriptive headings are for convenience only and shall not control or
affect the meaning or construction of any provisions of this Agreement.
8.4. 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:
BMJ Medical Management, 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:
Orthopedic Associates of New Jersey, P.A.
Freehold Office Plaza
BLDG 1
4247 Route 9 North
Freehold, New Jersey 07727
Attention: Cary Skolnick, M.D.
Telecopier: (908) 780-7404;
with a copy to:
Brach, Eichler, Rosenberg, Silver, Bernstein,
Hammer & Gladstone
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Todd Brower, Esq.
Telecopier: (973) 228-7852;
-20-
<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
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 New Jersey are not required to be open.
8.5. 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.
8.6. Confidentiality.
Each party hereto will hold and will cause its consultants and
advisors to hold in strict confidence, unless compelled to disclose by judicial
or administrative process or, in the opinion of its counsel, by other
requirements of law, all documents and information concerning the other party
furnished it by such other party or its representatives in connection with the
transactions contemplated by this Agreement (except to the extent that such
information can be shown to have been (i) in the public domain through no fault
of such party, or (ii) lawfully acquired from other sources by the party to
which it was furnished), and each party will not release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, bankers and other consultants and advisors in connection with this
Agreement. If the transactions contemplated by this Agreement are not
consummated, such confidence shall be maintained except to the extent such
information comes into the
-21-
<PAGE>
public domain through no fault of the party required to hold it in confidence,
and such information shall not be used to the detriment of, or in relation to
any investment in, the other party and all such documents (including copies
thereof) shall be returned to the other party immediately upon the written
request of such other party.
8.7. 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.
8.8. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New Jersey 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.
8.9. 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.
8.10. 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
-22-
<PAGE>
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.
8.11. 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.
BMJ MEDICAL MANAGEMENT, INC.
By:
----------------------------
Name:
Title:
ORTHOPEDIC ASSOCIATES OF NEW JERSEY, P.A.
By:
------------------------------
Name:
Title:
<PAGE>
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") dated as of November
26, 1997, between BMJ MEDICAL MANAGEMENT, INC., a Delaware corporation (the
"Company"), and each of the individuals identified on the signature page hereto
(each, a "Stockholder" and collectively, the "Stockholders"). This Agreement is
entered into in connection with and concurrently with that certain Management
Services Agreement effective as of November 1, 1997 (the "Management Services
Agreement") between the Company and New Jersey Orthopedic Associates, P.A., a
New Jersey professional association (the "Medical Group"). Certain capitalized
terms used herein are defined in Section 4 below.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby, the
Company and each Stockholder (for himself or herself only) hereby agrees as
follows:
1. Purchase and Sale of Restricted Shares; Representations and
Warranties of Stockholder.
(a) Upon execution of this Agreement, the Company shall, pursuant
to Section 4 and Schedule III of the Management Services Agreement, issue to
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 (as to himself or herself
only) 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
<PAGE>
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;
(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;
(vi) and 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
-2-
<PAGE>
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;
(ii) and 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.
2. Repurchase of Restricted Shares. 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 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 2.
(a) 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. The Repurchase Notice shall set forth the number of
Restricted 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 Restricted 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 2, then the Company must purchase that
number of Restricted Shares which it has elected to repurchase from all of the
Stockholders pro rata according to the number of shares of Restricted Stock held
by all of the Stockholders at the time of delivery of such Repurchase Notice
(determined as nearly as practicable to the nearest whole share).
(b) 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
-3-
Company shall pay for Restricted Shares to be purchased pursuant to the
Repurchase Option by delivery of a check or wire transfer of funds, in the
aggregate amount of the repurchase price for such shares; provided, however,
that in the event the Medical Group is obligated to pay to the Company any sums
in connection with the repurchase of assets by the Medical Group pursuant to
Section 13.5 of the Management Services Agreement, the total amount of such sums
may be offset by the Company against any amounts owed by the Company to the
Stockholders pursuant to this Agreement (if any such Stockholder is, at such
time, an equity owner of or partner in the Medical Group), such offset amount to
be allocated pro rata among all of the Stockholders who at such time hold equity
of or are partners in the Medical Group. The Company 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.
(c) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Restricted Shares by the Company under this
Section 2 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; provided
that in no event shall the Company be permitted to make any such repurchases
more than 180 days after the fourth anniversary of the Commencement Date.
(d) In the event that any Restricted Shares are repurchased pursuant
to this Section 2, 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.
3. Transfer Restriction; Legend.
(a) 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 a Stockholder and shall evidence such agreement by
executing and
-4-
<PAGE>
delivering to the Company a joinder to this Agreement in form and substance
satisfactory to the Company, and (ii) if such transferee is a shareholder 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).
(b) The certificate(s) representing the Restricted Shares will bear
the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR
LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS,
TRANSFER RESTRICTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH
IN A RESTRICTED STOCK AGREEMENT DATED AS OF NOVEMBER 26,
1997, BETWEEN THE STOCKHOLDER AND BMJ MEDICAL MANAGEMENT,
INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE."
(c) The restrictions on transfers of Restricted
Shares set forth in this Section 3 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.
4. Registration Rights.
(a) Piggyback Registration. If the Company, at any time after that
date which is six months after the consummation of the initial public offering
of the Common Stock, proposes for any reason to register Primary Shares or Other
Shares under the Securities Act (other than on Form S-4 or Form S-8 promulgated
under the Securities Act or any successor forms thereto), it shall promptly give
written notice to the Stockholders of its intention so to register the Primary
Shares or Other Shares and, upon the written request, given within 15 days after
delivery of any such notice by the Company, of any Stockholder to include in
such registration Registrable Shares held by such Stockholder (which request
shall specify the number of Registrable Shares proposed to be included in such
registration), the Company shall use its best efforts to cause all such
Registrable Shares to be included in such registration on the same terms and
conditions as the securities otherwise being sold in such registration;
provided, however, that if the managing underwriter advises the
-5-
<PAGE>
Company in writing that the inclusion of all Registrable Shares requested by the
Stockholders to be included in such registration, together with the inclusion of
all Other Shares, would interfere with the successful marketing (including
pricing) of Primary Shares proposed to be registered by the Company, then the
number of Primary Shares, Registrable Shares and Other Shares proposed to be
included in such registration shall be included in the following order:
(i) first, the Primary Shares;
(ii) second, the Venture Capital Shares requested to be
included in such registration by the Venture Capitalists;
(iii) third, the Lender Securities requested to be included in
such registration by the Lenders; and
(iv) fourth, the Other Shares and the Registrable Shares
requested to be included in such registration by the Stockholders and
the holders of Other Shares (pro rata based on the number of Other
Shares and Registrable Shares held by such holders of Other Shares and
Registrable Shares).
(b) Condition to Registration Obligations. The Corporation shall not
be obligated to effect the registration of the Registrable Shares pursuant to
Section 4(a) above unless the Stockholder executes a power of attorney, custody
arrangement and other documents customary in such transactions and reasonably
required by the managing underwriter thereof prior to the filing of the
registration statement.
(c) Holdback Agreement. If the Company at any time shall register
shares of Common Stock under the Securities Act for sale to the public and
includes in such registration any Registrable Shares beneficially owned by the
Stockholder, the Stockholder shall not sell publicly, make any short sale of,
grant any option for the purchase of, or otherwise dispose publicly of, any
Restricted Shares (other than those Registrable Shares included in such
registration) without the prior written consent of the Company for a period
designated in writing by the underwriters managing such offering to the Company
(and the Company will so notify the holders of Registrable Shares), which period
shall not begin more than 10 days prior to the effectiveness of the registration
statement pursuant to which such public offering shall be made and shall not
last more than 180 days after the effective date of such registration statement.
-6-
<PAGE>
(d) Indemnification.
(i) In connection with any registration of Registrable Shares
under the Securities Act pursuant to this Agreement, the Stockholder
shall indemnify and hold harmless the Company, each director of the
Company, each officer of the Company who shall sign such registration
statement, each underwriter, broker or other person acting on behalf of
the holders of Registrable Shares and each person who controls any of
the foregoing persons within the meaning of the Securities Act with
respect to any statement or omission from such registration statement,
any preliminary prospectus or final prospectus contained therein or
otherwise filed with the Commission, any amendment or supplement thereto
or any document incident to registration or qualification of any
Registrable Shares, if such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company
or such underwriter through an instrument duly executed by such holder
of Registrable Shares specifically for use in connection with the
preparation of such registration statement, preliminary prospectus,
final prospectus, amendment, supplement or document.
(ii) In connection with any registration of any Registrable
Shares under the Securities Act pursuant to this Agreement, the Company
shall indemnify and hold harmless the Stockholder against any losses,
claims, damages or liabilities (or actions in respect thereof), to which
the Stockholder may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in
the registration statement under which such Registrable Shares were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein or otherwise filed with the Commission, any
amendment or supplement thereto or any document incident to registration
or qualification of any Registrable Shares, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the
Securities Act or state securities or "blue sky" laws applicable to the
Company and relating to action or inaction required of the Company in
connection with such registration or qualification under such state
securities or blue sky laws; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission
made in said registration statement, preliminary prospectus,
-7-
<PAGE>
final prospectus, amendment, supplement or document incident to
registration or qualification of any Registrable Shares in reliance upon
and in conformity with written information furnished to the Company
through an instrument duly executed by the Stockholder.
(e) Information by Stockholder. In the event the Stockholder elects
to sell Registrable Shares pursuant to Section 4(a) above, the Stockholder shall
furnish to the Company such written information regarding the Stockholder and
the distribution proposed by the Stockholder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Section 4.
(f) Expenses. All expenses incurred by the Company in complying with
this Section 4, including, without limitation, all registration and filing fees
(including all expenses incident to filing with the NASD), fees and expenses of
complying with securities and "blue sky" laws, printing expenses, fees and
expenses of the Company's counsel and accountants, shall be paid by the Company;
provided, however, that all underwriting discounts and selling commissions
applicable to the Registrable Shares shall not be borne by the Company but shall
be borne by the holders of Registrable Shares in proportion to the number of
Registrable Shares sold by each of them.
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 Restricted Share 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
-8-
<PAGE>
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:
(i) 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.
(ii) Second, the Company (or the Stockholder, as applicable)
shall select, within seven (7) days after receipt of the
above-referenced list, one of the firms identified on such list and
shall give written notice thereof to the other party. If the recipient
of such list does not make any such selection, the firm identified as
the first choice on such list shall be deemed acceptable and agreeable
to each of the parties.
(c) "Internal Revenue Code" means the Internal Revenue Code of 1986,
as the same may be amended or supplemented from time to time, or any successor
statute, and the rules and regulations thereunder, as the same are from time to
time in effect.
(d) "Lender" means any Person that has loaned (prior to the date
hereof) or may lend (at any time hereafter) funds to the Company and in
connection with such lending has obtained or may obtain registration rights.
(e) "Lender Securities" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock
-9-
<PAGE>
and securities received in respect thereof, which are held by a Lender and which
have not theretofore been sold to the public pursuant to a registration under
the Securities Act or pursuant to Rule 144.
(f) "Other Shares" means at any time those issued and outstanding
shares of Common Stock that do not constitute Primary Shares or Registrable
Shares.
(g) "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.
(h) "Permitted Transferee" means, as to any 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.
(i) "Permitted Transfer" means, as to any Stockholder, any sale or
transfer of Restricted Shares to (A) the spouse or lineal descendants of such
Stockholder or (B) a trust for the benefit of any of the foregoing.
(j) "Primary Shares" means at any time the authorized but unissued
shares of Common Stock or shares of Common Stock held by the Company in its
treasury.
(k) "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.
(l) "Registrable Shares" means the shares of Common Stock or any other
securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by the Stockholders and which have not theretofore been sold to
the public pursuant to a registration statement under the Securities Act or
pursuant to Rule 144.
(m) "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
-10-
<PAGE>
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.
(n) "Venture Capitalists" means Naresh Nagpal and those venture
capital firms that have acquired, prior to the date hereof, and may acquire, at
any time hereafter, securities of the Company and in connection with such
acquisition have obtained or may obtain registration rights.
(o) "Venture Capital Shares" means the shares of Common Stock or any
other securities which by their terms are exercisable or exchangeable for or
convertible into Common Stock and any securities received in respect thereof,
which are held by a Venture Capitalist and which have not theretofore been sold
to the public pursuant to a registration statement under the Securities Act
pursuant to Rule 144.
(p) "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 transferee of such Restricted
Shares as the owner of such stock for any purpose.
-11-
<PAGE>
(b) Binding Effect of Management Services Agreement. The Stockholder
hereby agrees to be bound by the provisions of Sections 13.4(b) and 13.6 of the
Management Services Agreement, which provisions such Stockholder has reviewed.
(c) Severability. It is the desire and intent of the parties hereto
that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
(d) Entire Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(e) 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.
(f) 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.
-12-
<PAGE>
(g) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the 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.
(h) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without giving effect to
any choice of law or conflicting provision or rule (whether of the State of
Delaware or any other jurisdiction), that would cause the laws of any
jurisdiction other than the State of Delaware to be applied. In furtherance of
the foregoing, the internal law of the State of Delaware 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.
(i) Remedies. Each of the parties to this Agreement shall be entitled
to enforce its rights under this Agreement specifically to recover damages and
costs (including reasonable attorneys' fees) for any breach of any provision of
this Agreement and to exercise all other rights existing in its favor. The
parties hereto agree and acknowledge that money damages may not be an adequate
remedy for the Company in the event of a breach of the provisions of this
Agreement by any Stockholder and that the Company may, in its sole discretion,
apply to any court of law or equity of competent jurisdiction for specific
performance and/or other injunctive relief (without posting any bond or deposit)
in order to enforce or prevent any violations of the provisions of this
Agreement.
(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 Shareholder 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
-13-
<PAGE>
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:
BMJ Medical Management, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Naresh Nagpal, M.D., President
Telephone: (561) 391-1311
Telecopier: (561) 391-1389;
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Attention: Jeffrey S. Held, Esq.
Telephone: (212) 408-2417
Telecopier: (212) 408-2420; and
(ii) If to any Stockholder, to his or her address set forth on
the signature page hereto beneath his or her name;
with copies to:
New Jersey Orthopedic Associates, P.A.
Freehold Office Plaza
BLDG 1
14247 Route 9 North
Freehold, New Jersey 07727
Attention: Cary Skolnick, M.D.
Telecopier: (908) 780-7404; and
Brach, Eichler, Rosenberg, Silver, Bernstein,
Hammer & Gladstone
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Todd Brower, Esq.
Telecopier: (973) 228-7852.
(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 New Jersey, the time period for giving notice or taking action shall be
automatically
-14-
<PAGE>
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 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
Restricted Stock Agreement as of the date first written above.
COMPANY
BMJ MEDICAL MANAGEMENT, INC.
By:
--------------------------
Name:
Title:
STOCKHOLDERS
-----------------------------
Cary Skolnick, M.D.
Address for notices:
-----------------------------
-----------------------------
-----------------------------
Manuel T. Banzon, M.D.
Address for notices:
-----------------------------
-----------------------------
-----------------------------
Gregg S. Berkowitz, M.D.
Address for notices:
-----------------------------
-----------------------------
MEDICAL GROUP
ACCEPTED AND AGREED AS TO PARAGRAPH 3
NEW JERSEY ORTHOPEDIC ASSOCIATES, P.A.
By:
------------------------------
Name:
Title:
<PAGE>
STOCKHOLDER NON-COMPETITION AGREEMENT
THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") dated as of
November 26, 1997, among NEW JERSEY ORTHOPEDIC ASSOCIATES, P.A., a New Jersey
professional association (the "Medical Group"), each of the individuals
identified on the signature page hereof (each, a "Stockholder" and collectively,
the "Stockholders"), and BMJ MEDICAL MANAGEMENT, 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 and employee of the Medical Group.
C. BMJ is engaged in the business of providing management,
administrative, financial, marketing, information technology and related
services to professional medical organizations.
D. The Medical Group and BMJ have entered into a Management Services
Agreement effective as of November 1, 1997 (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 and pursuant to a Restricted
Stock Agreement entered into as of the date hereof among the Stockholders and
BMJ (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 such
Stockholder's status as a shareholder or employee of the Medical Group, each
Stockholder (for himself or herself only) 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
<PAGE>
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.
2. Agreement Not to Compete or Interfere with Business.
(a) Each Stockholder acknowledges that (i) he or she is receiving
benefits from the consideration being paid by BMJ hereunder and the acquisition
of securities from BMJ pursuant to the Restricted Stock Agreement, (ii) the
Medical Group and its affiliates conduct their business primarily in Monmouth
County, New Jersey, 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 such 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 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 such
Stockholder's resignation or termination of equity owner 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);
(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 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, or any affiliate
or subsidiary of the Medical Group or BMJ
-2-
<PAGE>
to terminate or materially diminish its relationship with
the Medical Group, BMJ, or any affiliate or subsidiary of
the Medical Group or BMJ; or
(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 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 no Stockholder
shall have any 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 rescinds the Management Services Agreement pursuant to Section 13.6
thereof.
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 and its affiliates constitutes the confidential and proprietary trade
secrets of the Medical Group or of BMJ, as the case may be, and that such
Stockholder's non-disclosure thereof is essential to this Agreement and a
condition to such Stockholder's use and possession thereof. Each 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 such Stockholder distribute or in any way
disseminate Confidential Information, directly or indirectly, to any third party
or use Confidential Information for such 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, no Stockholder shall have any 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
-3-
<PAGE>
generally known and available in the public domain through no fault of
such Stockholder;
(ii) is disclosed with the prior written consent of the
Medical Group or BMJ, as the case may be;
(iii) becomes known to such Stockholder from a source other
than the Medical Group or its affiliates or BMJ or its affiliates
without breach of this Agreement by such 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 such 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)Each 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 such Stockholder's or his or her agents' failure to abide by the
provisions of this Section 3.
4. Acknowledgment.
Each Stockholder acknowledges that the provisions of this Agreement are
not designed to prevent such 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 such 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. Each
Stockholder further acknowledges receiving sufficient consideration under this
Agreement and 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. Consideration.
As consideration for each Stockholder's covenants in favor of the Medical
Group, the Medical Group is providing each such Stockholder with continued
employment, and as consideration for each Stockholder's covenants in favor of
BMJ under this
-4-
<PAGE>
Agreement, BMJ is paying to each such Stockholder that amount set forth opposite
such Stockholder's name on Annex I attached hereto, which amount shall be
payable simultaneously with the execution and delivery of this Agreement by
certified or cashier's check or wire transfer of funds.
6. Survival; Remedies.
Each Stockholder's covenants under this Agreement shall survive
termination of his or her equity owner status or employment with the Medical
Group. Each Stockholder acknowledges that a breach or threatened breach by such
Stockholder of this Agreement will cause irreparable damage and material loss to
BMJ and the Medical Group and that a remedy at law for any breach or threatened
breach of the provisions of this Agreement would be inadequate and therefore
agrees that each of 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.
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
-5-
be in writing and sufficient if (a)
<PAGE>
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:
New Jersey Orthopedic Associates, P.A.
Freehold Office Plaza
Building 1
4247 Route 9 North
Freehold, NJ 07727
Attention: Cary Skolnick, M.D.
Telecopier: (908) 780-7404;
with a copy to:
Brach, Eichler, Rosenberg, Silver, Bernstein,
Hammer & Gladstone
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Todd Brower, Esq.
Telecopier: (973) 228-7852;
(ii) If to any Stockholder, to his or her address set forth on
the signature page hereto beneath his or her name; and
(iii) If to BMJ, to:
BMJ MEDICAL MANAGEMENT, 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;
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.
-6-
<PAGE>
10. 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, BMJ and each of the respective Stockholders
for all purposes. This Agreement may be executed in separate counterparts.
11. 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 the parties hereto. This
Agreement supersedes any and all prior agreements among all of the parties
hereto with respect to the matters covered hereby.
12. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey without regard to the laws and principles
thereof or of any other jurisdiction which would direct the application of the
laws of another jurisdiction.
13. 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.
14. 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 Signature Date.
NEW JERSEY ORTHOPEDIC
ASSOCIATES, P.A.
By:
---------------------------
Name:
Title:
BMJ MEDICAL MANAGEMENT, INC.
By:
---------------------------
Name:
Title:
STOCKHOLDERS:
------------------------------
Cary Skolnick, M.D.
Address for notices:
------------------------------
------------------------------
------------------------------
Manuel T. Banzon, M.D.
Address for notices:
------------------------------
------------------------------
------------------------------
Gregg S. Berkowitz, M.D.
Address for notices:
------------------------------
------------------------------
<PAGE>
Exhibit 11
BMJ Medical Management, Inc.
Computation of Per Share Earnings
Year Ended Nine Months Ended
December 31, September 30,
1996 1996 1997
------------------------------------
(Unaudited)
Net loss ($1,742,000) ($757,000) ($8,860,000)
------------------------------------
Weighted average common shares
outstanding 711,944 258,242 1,160,715
Shares related to Staff Accounting
Bulletin 83 (1):
Common stock 5,576,201 5,576,201 5,576,201
Common stock options 860,788 860,788 860,788
Common stock warrants 70,955 70,995 70,995
Convertible preferred stock 1,053,338 1,053,338 1,053,338
------------------------------------
8,273,266 7,819,564 8,722,037
====================================
Net loss per common share $ (0.21) $ (0.10) $ (1.02)
====================================
- ------------------------
(1) Common share equivalents (stock options, warrants and convertible preferred
stock) are excluded from the computation 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 using the treasury stock method and the assumed initial public
offering price of $10 per share.
<PAGE>
Exhibit 21
Subsidiaries
Jurisdiction of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
1. BMJ of Lake Tahoe, Inc. Delaware
2. BMJ of Bethlehem, Inc. Delaware
3. BMJ of North Broward, Inc. Delaware
4. BMJ Capital Corp. Delaware
5. BMJ of Bakersfield, Inc. Delaware
6. Surgical Associates of Lake Tahoe Nevada
7. BMJ Surgical Associates of Bethlehem, L.P. Pennsylvania
8. Orthopaedic Management Network, Inc. Arizona
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports as follows in Amendment
No. 3 to the Registration Statement on Form S-1 (File No. 333-35759) and
related Prospectus of BMJ Medical Management, Inc. dated January 8, 1998.
Report on Finacial Statements Date of Report
- --------------------------------------------------------------------------------
BMJ Medical Management, Inc. November 11, 1997,
except for the 5th
paragraph of Note 1,
as to which the date
is December 23, 1997
Orthopaedic Associates of Bethlehem, Inc. May 28, 1997, except
for Note 13, as to
which the date is
August 14, 1997
Southern California Orthopedic Institute Medical May 23, 1997
Group, a California General Partnership
South Texas Spinal Clinic, P.A. June 5, 1997
Tri-City Orthopedic Surgery Medical Group, Inc. May 17, 1997
Lauderdale Orthopaedic Surgeons May 21, 1997
Fishman and Stashak, M.D.'s, P.A. d/b/a/ Gold Coast July 9, 1997
Orthopedics
Sun Valley Orthopaedic Surgeons, an Arizona General July 18, 1997
Partnerahip
Orthopaedic Surgery Associates, P.A. October 10, 1997
Broward Institute of Orthopaedic Specialties, P.A. September 5, 1997
/s/ Ernst & Young LLP
West Palm Beach, Florida
January 2, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY PERSON 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 BMJ Medical Management, Inc.'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.
This Power of Attorney has been signed by the following persons in the
capacities stated as of the 30th day of November 1997.
Signature Title
- --------- -----
- ------------------------------------ Director
Georges Daou
/s/ Stewart G. Eidelson, M.D. Director
- ------------------------------------
Stewart G. Eidelson, M.D.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,404,000
<SECURITIES> 0
<RECEIVABLES> 34,435,000
<ALLOWANCES> 15,110,000
<INVENTORY> 0
<CURRENT-ASSETS> 21,771,000
<PP&E> 4,365,000
<DEPRECIATION> 488,000
<TOTAL-ASSETS> 61,367,000
<CURRENT-LIABILITIES> 11,193,000
<BONDS> 0
0
42,000
<COMMON> 7,000
<OTHER-SE> 33,645,000
<TOTAL-LIABILITY-AND-EQUITY> 61,367,000
<SALES> 0
<TOTAL-REVENUES> 20,447,000
<CGS> 0
<TOTAL-COSTS> 28,385,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 922,000
<INCOME-PRETAX> (8,860,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,860,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,860,000)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
