-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IzoatkJ9NA3hsstuGuogQdH1VTBiN+nfPUA9msqinzNvk00HnjL8sQL3z5CTPb4J iBrKzijIagSpSMrJE7+gWw== 0000889812-97-002332.txt : 19971110 0000889812-97-002332.hdr.sgml : 19971110 ACCESSION NUMBER: 0000889812-97-002332 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19971106 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BMJ MEDICAL MANAGEMENT INC CENTRAL INDEX KEY: 0001036296 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 650676079 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-35759 FILM NUMBER: 97709523 BUSINESS ADDRESS: STREET 1: 4800 N FEDERAL HWY STREET 2: SUITE 104 D CITY: BOCA RATON STATE: FL ZIP: 33431 BUSINESS PHONE: 5613911311 MAIL ADDRESS: STREET 1: 4800 N FEDERAL HWY STREET 2: SUITE 104 D CITY: BOCA RATON STATE: FL ZIP: 33431 S-1/A 1 AMENDMENT NO. 1 TO REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997 REGISTRATION NO. 333-35759 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BMJ MEDICAL MANAGEMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 8099 65-0676079 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ 4800 NORTH FEDERAL HIGHWAY, SUITE 104D BOCA RATON, FLORIDA 33431 (561) 391-1311 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ NARESH NAGPAL, M.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER 4800 NORTH FEDERAL HIGHWAY, SUITE 104D BOCA RATON, FLORIDA 33431 (561) 391-1311 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ With copies to: LAWRENCE G. GRAEV, ESQ. ROBERT ROSENMAN, ESQ. O'SULLIVAN GRAEV & KARABELL, LLP JOHN W. WHITE, ESQ. 30 ROCKEFELLER PLAZA CRAVATH, SWAINE & MOORE NEW YORK, NEW YORK 10112 825 EIGHTH AVENUE (212) 408-2400 NEW YORK, NEW YORK 10019 (212) 474-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM OFFERING PROPOSED TITLE OF EACH CLASS AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3) Common Stock (par value $.001 per share).. 5,750,000 shares $9.00 $51,750,000 $15,682
(1) Includes 750,000 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee. (3) $10,455 of the registration fee has previously been paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997 PROSPECTUS 5,000,000 SHARES BMJ MEDICAL MANAGEMENT, INC. COMMON STOCK All of the 5,000,000 shares of Common Stock offered hereby are being issued and sold by the Company. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $7.00 and $9.00 per share. See 'Underwriting' for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied for the Common Stock to be quoted and traded on the Nasdaq National Market ('Nasdaq') under the symbol BONS. ------------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK FACTORS' COMMENCING ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share............................................. $ $ $ Total(3).............................................. $ $ $
(1) Does not include a $ non-accountable expense allowance to be received by the Underwriters. See 'Underwriting' for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters a 30-day option to purchase up to 750,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See 'Underwriting.' ---------------------------- The shares of Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT& QUIST RAYMOND JAMES & ASSOCIATES, INC. VOLPE BROWN WHELAN & COMPANY , 1997 ADDITIONAL INFORMATION A Registration Statement on Form S-1 under the Securities Act, including amendments thereto, relating to the Common Stock offered hereby has been filed by the Company with the Commission. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and exhibits and schedules filed as a part thereof. A copy of the Registration Statement may be inspected by anyone without charge at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Commission maintains a WorldWide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such reports, proxy and information statements and other information may be found on the Commission's site address, http: //www.sec.gov. Copies of such material also can be obtained from the Company upon request. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. ------------------------ Forward-Looking Statements. Certain statements contained in this Prospectus, including statements regarding the anticipated development and expansion of the Company's business, the intent, belief or current expectations of the Company, its directors or its officers, primarily with respect to the future operating performance of the Company and other statements contained herein regarding matters that are not historical facts are 'forward-looking' statements. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the potential inability to affiliate with physician practices, the potential termination of contractual relationships, fluctuations in the volume of procedures performed by the practices' physicians, changes in the reimbursement rates for those services, uncertainty about the ability to collect the appropriate fees for services provided or ordered by the practices' physicians, as well as other risks detailed in 'Risk Factors,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business.' ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS AND PENALTY BIDS. SEE 'UNDERWRITING.' 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements including the notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading 'Risk Factors.' As used herein, the term the 'Company' refers to BMJ Medical Management, Inc., a Delaware corporation; the term 'Existing Practices' collectively refers to the 24 Practices that have affiliated with the Company via management services agreements as of the date of this Prospectus; and the term 'Practices' includes the Existing Practices and other practices with which the Company may affiliate in the future. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is principally a physician practice management company (a 'PPM') that provides management services to physician practices that focus on musculoskeletal care, which involves the medical and surgical treatment of conditions relating to bones, muscles, joints and related connective tissues. The broad spectrum of musculoskeletal care offered by the physician practices ranges from acute procedures, such as spine or other complex surgeries, to the treatment of chronic conditions, such as arthritis and back pain. The management services provided by the Company include physician practice and network development, marketing, payor contracting and financial, administrative and clinical information management. In addition, the Company, through its wholly owned subsidiary, OMNI Acquisition Corporation ('OMNI'), operates an Independent Physician Association (the 'IPA') that negotiates and administers payor contracts for the delivery of health care services by physicians and physician practices that focus on musculoskeletal care on behalf of a specified patient population. Since its formation in January 1996, the Company has affiliated (the 'Affiliation Transactions') by entering into management services agreements (the 'Management Services Agreements') with 24 Existing Practices comprising 112 doctors practicing in Arizona, California, Florida, Pennsylvania and Texas and operates an IPA with 42 physicians in Arizona. The market for musculoskeletal care in the United States is significant and growing. According to the American Academy of Orthopaedic Surgeons (the 'AAOS'), total direct costs associated with the delivery of musculoskeletal care exceeded $60 billion in 1988 and increased to approximately $72 billion in 1992. The increase in expenditures can be attributed to various factors, including improvements in medical technology, more active lifestyles which have resulted in the growth of sports medicine and the overall aging of the population. In 1992, the 65-and-over age group represented approximately 12% of the U.S. population, but accounted for more than half of all musculoskeletal care expenditures. Historically, surgical and non-surgical orthopaedic specialists have maintained separate practices; recently, however, musculoskeletal physicians have begun to follow the consolidation trend seen elsewhere in the health care industry. The Company's goal is to develop the leading musculoskeletal network in each of its markets by aligning the Company's interests with those of the Practices' physicians. The Company has divided the United States into three geographic regions, and selects specific markets based primarily on population size, which must be large enough to support a viable musculoskeletal physician network. The Company's strategy consists of (i) expanding into targeted new markets by affiliating with leading musculoskeletal practices; (ii) continuing to develop its existing markets by strengthening and expanding the Practices in order to achieve significant local market presence; (iii) introducing ancillary services to expand the breadth of care directly offered by the Practices' physicians; and (iv) developing and implementing a disease management information system to foster curative and palliative regimens, improve provider and patient access to resources and technology and deliver cost-effective, quality care. The Company's long-term strategy includes developing and implementing a musculoskeletal disease management program. Under the Management Services Agreements, the Company provides management, administrative and development services to the Existing Practices, while the Existing Practices retain, among other things, sole responsibility for all aspects of the practice of medicine. The Company's revenues under the Management Services Agreements are typically based on a specified percentage of Practice revenues, generally 10% to 15%, rather than on a percentage of net operating income. In addition, the Company typically assumes the Practices' clinic overhead expenses and charges them back to the Practices at actual cost, and receives two-thirds of savings 3 realized through the Company's purchasing power. The Company seeks to develop and maintain long-term relationships with the Practices by providing physician performance incentives through equity ownership in the Company, ensuring physician clinical autonomy and participation in Practice governance and delivering national support services on a regional basis. The Company believes that its affiliation model, versus other existing models, provides less financial risk to the Company while enhancing its relationships with the Practices' physicians. In addition to a Management Services Agreement, the Company typically enters into an asset purchase agreement (the 'Asset Purchase Agreement'), a restricted stock agreement (the 'Restricted Stock Agreement') and a stockholder noncompetition agreement (the 'Stockholder Noncompetition Agreement') with a Practice that affiliates with the Company. Under the Asset Purchase Agreement, the Company purchases from the Practice all of those assets used by the Practice in the operation of the Practice. The Restricted Stock Agreement governs the Common Stock issued by the Company to the physician owners of the Practice as partial consideration for affiliating with the Company. Under the Stockholder Noncompetition Agreement, the Practice's physicians agree not to compete with or disclose confidential information about the Company. See 'Business--Contractual Agreements with Practices.' The Company will use approximately $11.2 million of the proceeds to repay outstanding notes issued to four Practices in Affiliation Transactions. See 'Use of Proceeds' and 'Certain Transactions--Affiliation Transactions'. THE OFFERING Common Stock offered by the Company............................ 5,000,000 shares Common Stock to be outstanding after the offering.............. 20,630,000 shares(1) Use of proceeds................................................ Repayment of debt and general corporate purposes. See 'Use of Proceeds.' Proposed Nasdaq National Market symbol......................... BONS
- ------------------ (1) Excludes 1,228,000 shares of Common Stock issuable upon exercise of outstanding options to purchase Common Stock with a weighted average exercise price of $0.39 per share and 321,665 shares of Common Stock issuable upon exercise of outstanding warrants to purchase Common Stock with a weighted average exercise price of $3.44 per share. See 'Management' and 'Certain Transactions.' 4 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
SIX MONTHS ENDED PRO FORMA YEAR ENDED PRO FORMA AS DECEMBER 31, AS ADJUSTED(1)(2) JUNE 30, ADJUSTED(2)(3) ------------ YEAR ENDED ------------------------ SIX MONTHS ENDED 1996 DECEMBER 31, 1996 1996 1997 JUNE 30, 1997 ------------ ----------------- ---------- ---------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Practice revenue, net................... $ 6,029 $91,218 $ -- $ 19,907 $ 48,437 Less: physician and other provider services.............................. (2,912) (31,987) -- (9,509) (15,019) ------------ ------- ---------- ---------- ------- Management fee revenue.................. 3,117 59,231 -- 10,398 33,418 Costs and expenses: Medical support services.............. 2,844 49,342 -- 9,541 26,816 General and administrative............ 1,278 1,278 51 2,139 2,139 Depreciation and amortization......... 104 1,705 1 300 1,024 Interest expense (income), net........ -- 40 -- 294 20 ------------ ------- ---------- ---------- ------- Total costs and expenses............ 4,226 52,365 52 12,274 29,999 ------------ ------- ---------- ---------- ------- Income (loss) before income taxes....... (1,109) 6,866 (52) (1,876) 3,419 Income taxes(4)......................... -- 2,609 -- -- 1,300 ------------ ------- ---------- ---------- ------- Net income (loss)....................... $ (1,109) $ 4,257 $ (52) $ (1,876) $ 2,119 ------------ ------- ---------- ---------- ------- ------------ ------- ---------- ---------- ------- Net income (loss) per common share: Primary............................... $ (0.09) $ 0.19 $ 0.00 $ (0.15) $ 0.10 Diluted............................... $ (0.09) $ 0.19 $ 0.00 $ (0.15) $ 0.09 Weighted average common shares outstanding: Primary............................... 11,852 21,914 11,217 12,480 21,914 Diluted............................... 11,852 22,470 11,217 12,480 22,470
JUNE 30, 1997 ------------------------------------------------ PRO FORMA ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5) ------- --------------- ------------------ (IN THOUSANDS, EXCEPT OPERATING DATA) BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 6,915 $ 7,094 $ 10,910 Working capital..................................................... 7,490 1,799 24,955 Total assets........................................................ 27,899 61,855 65,671 Long-term debt, less current portion................................ 6,540 16,305 4,061 Total stockholders' equity.......................................... 11,546 20,452 55,852 OTHER OPERATING DATA: Number of Practices................................................. 8 24 24 Number of physicians................................................ 57 112 112
- ------------------ The unaudited pro forma financial information presented does not purport to (i) represent what the results of operations or financial condition of the Company would actually have been if the transactions reflected therein had in fact occurred on the assumed dates or (ii) project the future results of operations or financial condition of the Company. (1) Gives effect to the Affiliation Transactions as if they had occurred on January 1, 1996. See 'The Company,' 'Pro Forma Financial Information' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (2) Gives effect to this offering (the 'Offering') as if it had occurred at January 1, 1996 at an assumed initial public offering price of $8.00 per share and the receipt and application of the estimated net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.' (3) Gives effect to the Affiliation Transactions completed in 1997 (the '1997 Affiliation Transactions') as if they had occurred on January 1, 1997. See 'The Company,' 'Pro Forma Financial Information' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (4) Gives effect to the 1997 Affiliation Transactions completed after June 30, 1997 as if such transactions had occurred on June 30, 1997. See 'The Company,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' 'Pro Forma Financial Information' and 'Capitalization.' (5) Gives effect to the completion of this Offering at an assumed initial public offering price of $8.00 per share and the receipt and application of the estimated net proceeds therefrom as if such transactions had occurred on June 30, 1997. See 'Use of Proceeds' and 'Capitalization.' 5 RISK FACTORS An investment in the Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, before purchasing the securities offered hereby. This Prospectus contains forward-looking statements. Discussions containing such forward-looking statements may be found in the material set forth below and under 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business,' as well as in the Prospectus generally. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth below and the matters set forth in this Prospectus generally. Lack of Significant Combined Operating History. The Company was incorporated in January 1996 and, prior to its affiliation with the first Existing Practice in July 1996, had no history of operations or earnings. Before affiliating with the Company, the Existing Practices operated as independent entities, and there can be no assurance that the Company will be able to integrate and manage profitably the assets and personnel of the Existing Practices or of any other Practices. In addition, there can be no assurance that the Company's affiliation with any Practice will not result in a loss of patients or other unanticipated adverse consequences, any of these events could have a material adverse effect on the Company. Prior to the Company's acquisition of the IPA in October 1997, the Company had no history of operating an IPA. There can be no assurance that the Company will be able to successfully and profitably manage payor contracting on behalf of the IPA. Additionally, there can be no assurance that the Company's affiliation with the IPA will not result in the termination of the agreements pursuant to which the physicians affiliated with the IPA provide services to enrollees of health care plans and other specified patient populations (the 'IPA Provider Agreements') or other unanticipated adverse consequences, any of which could have a material adverse effect on the Company. The Company's strategy is predicated on its ability to achieve significant consolidation of Practices and to sustain and enhance the profitability of such Practices. There can be no assurance that the Company's personnel, systems and infrastructure will be sufficient to achieve effective and profitable management of the Practices under the Management Services Agreements or to implement effectively the Company's strategies. See 'Business--Strategy' and 'Management.' Dependence on the Practices and Physicians. The Company's revenues are dependent on its affiliation through Management Services Agreements with the Practices and on the success of the Practices, including the IPA. There can be no assurance that the Practices will maintain successful operations, that they will not terminate their Management Services Agreements or that key physicians in a particular Practice will continue to affiliate with such Practice. On a pro forma basis for the year ended December 31, 1996 and the six months ended June 30, 1997, the Company received approximately 18% and 17%, respectively, of its total revenue from management fees paid by the Southern California Orthopedic Institute Medical Group ('SCOI'). The termination of the SCOI Management Services Agreement would have a material adverse effect on the Company. For a further description of the Management Services Agreements, including a description of their termination provisions and noncompetition arrangements with the Practices' physicians, see 'Business--Contractual Agreements with the Practices.' For a discussion of circumstances under which a Management Services Agreement may be rendered unenforceable, see '--Government Regulation.' Some of the Existing Practices derive a significant portion of their revenue from a limited number of physicians. The physicians are employees of the Practices, not of the Company, and there can be no assurance that the Company or the Existing Practices will maintain cooperative relationships with key members of any such Practice. In addition, key members of a Practice could retire, become disabled or otherwise become unable or unwilling to continue generating revenues at the current level or practicing medicine with such Practice. The loss by a Practice of one or more key members would have a material adverse effect on the revenue of such Practice and on the Company. The Company has the right under the Management Services Agreements to obtain and maintain life insurance in the amount of $500,000 on the life of each licensed physician employed by each Practice for the benefit of the Company. Nonetheless, the loss of revenue by any Practice as a result of a physician's death could have a material adverse effect on the Company. Additionally, although the Company has entered into noncompetition agreements with each Practice and its respective physicians, there can be no assurance as to the enforceability of such noncompetition agreements. 6 Rescission Rights. The Company has entered into a Management Services Agreement with South Texas Spinal Clinic, P.A. ('STSC') which permits STSC and the individual physicians to rescind the Affiliation Transaction on (i) November 1, 1998 if the Company has not affiliated with an aggregate of 16 physicians in San Antonio, Texas by such date and (ii) November 1, 2003. In addition, the Management Services Agreements for five other Existing Practices comprising eight physicians contain provisions that permit such Existing Practices to rescind their Affiliation Transactions on their respective seventh anniversaries. Risk of Termination. The Management Services Agreement may be terminated by either party if the other party (a) files a petition in bankruptcy or other similar events occur, or (b) defaults in any material respect in the performance of any duty or obligation under the Management Services Agreement, which default is not cured within a specified period after receipt of notice thereof or (c) any of the representations and warranties made by such party in the Management Services Agreement is materially untrue or misleading and such party fails to correct such matter after receipt of written notice thereof. The Company also has the right to terminate the Management Services Agreement in the event that the Practice is excluded from participation in the Medicaid or Medicare program for any reason. Either party may also terminate the Management Services Agreement if such party determines that the structure of the Management Services Agreement violates any state or federal laws or regulations existing at such time and that an amendment to the Management Services Agreement will be unable to correct such defect. Risks Related to the IPA Provider Agreements. There can be no assurance that the IPA will maintain successful operations, that agreements between the IPA and payors ('IPA Payor Agreements') will not be terminated, that the IPA will successfully enter into additional IPA Payor Agreements or that the IPA Provider Agreements will not be terminated. Each IPA Provider Agreement now in effect permits the physician member to terminate the agreement without cause upon 90 days' written notice to the IPA. Because the IPA contracts with payors to arrange for specialty provider services sufficient to furnish care as needed to a specified patient population, termination of IPA Provider Agreements could jeopardize the IPA's ability to satisfy its obligations under IPA Payor Agreements, and may result in termination of those agreements. Any termination of IPA Provider Agreements or IPA Payor Agreements could have a material adverse effect on the Company. Risks Related to New Affiliations and Expansion. The Company is exposed to significant growth-related risks because an essential element of its strategy is to affiliate with and/or to merge affiliated musculoskeletal practices and to expand the business of such practices. The Company's strategy also involves assisting the Practices in recruiting physicians, expansion and development of the IPA and, to the extent permitted by applicable law, contracting with or establishing ancillary musculoskeletal facilities (the 'Ancillary Service Facilities'), such as ambulatory surgery, physical therapy and magnetic resonance imaging ('MRI') centers and mobile units, and contracting with associated providers. Identifying appropriate physician group practices, individual physicians and ancillary providers and facilities, and proposing, negotiating and implementing economically attractive affiliations with such practices, physicians and providers, as well as merging such practices, can be a lengthy, complex and costly process. The failure of the Company to affiliate with additional musculoskeletal practices or merge practices would have a material adverse effect on the Company's ability to execute its expansion strategy. Moreover, future affiliations or mergers, if any, may not contribute to the Company's profitability or otherwise facilitate the successful implementation of the Company's overall strategy. See 'Business--Strategy.' The Company's expansion is also dependent upon factors such as the ability of the Company and the Practices to (i) adapt the Company's arrangements with the Practices to comply with current and future legal requirements, including state prohibitions on fee-splitting and corporate practice of medicine, state and federal limitations on physicians ordering ancillary services from, or referring patients to, facilities with which such physicians have a financial relationship, state and federal anti-kickback provisions and state regulation of the business of insurance; (ii) obtain regulatory approval and certificates of need, where necessary; and (iii) comply with licensing requirements applicable to physicians and to facilities operated, and services offered, by physicians. No assurance can be given that the application of current laws or changes in legal requirements would not have a material adverse effect on the Company. Moreover, the Company and the Practices may not be able to obtain and maintain all necessary regulatory approvals or comply with all applicable laws, regulations and licensing requirements. See '--Government Regulation' and 'Business--Government Regulation and Supervision.' 7 Since its inception, the Company's business has grown rapidly. Continued rapid growth through affiliation and expansion could impair the Company's ability to efficiently provide its management services to the Practices to adequately manage and supervise its employees and to effectively operate the IPA. There can be no assurance that the Company will be able to expand its infrastructure and management to achieve planned growth. In addition, the Company may be unable to retain personnel or acquire other resources necessary to service growth adequately. Moreover, the Company is still in the process of integrating the Practices that have affiliated with the Company to date and no assurance can be given that the Company will be successful in integrating all of such Practices or any Practices that affiliate with the Company in the future. Risks Associated with Ancillary Service Facilities. To date, the Company has not opened any Ancillary Service Facilities. The Company is unable to predict whether it will be able to obtain the critical mass in any particular market needed to establish Ancillary Service Facilities and, if so, whether the Company and/or the Practices will be able to consistently minimize costs and maintain a sufficient volume of patient visits to the Ancillary Service Facilities for such facilities to be profitable. Moreover, such facilities must be structured and operated to comply with various federal and state laws. Future judicial or regulatory interpretation could adversely affect such operations. See '--Government Regulation.' Dependence on Information Systems. No assurance can be given that the Company will be able to enhance existing and/or implement new information systems that can be integrated with the Practices' existing operational, financial and clinical information gathering systems. In addition to their integral role in helping the Practices realize operating efficiencies, such new systems are critical to developing and implementing a disease management information database. See 'Business--Strategy.' To develop its network, the Company must continue to invest in and administer sophisticated management information systems. The Company may experience unanticipated delays, complications and expenses in implementing, integrating and operating such systems. Furthermore, such systems may require modifications, improvements or replacements as the Company expands and as new technologies become available. Such modifications, improvements or replacements may require substantial expenditures and may require interruptions in operations during periods of implementation. Moreover, implementation of such systems is subject to the availability of information technology and skilled personnel to assist the Company in creating and implementing the system. The failure to successfully implement and maintain operational, financial and clinical information systems would have a material adverse effect on the Company. See 'Business--BMJ Operations.' Reductions in Third Party Reimbursements. The health care industry is experiencing a trend toward cost containment as third party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, seek to impose lower reimbursement and utilization rates and to negotiate reduced capitated payment schedules with service providers. Further reductions in payments to health care providers or other changes in reimbursement for health care services could have a material adverse effect on the Practices and/or the IPA and, as a result, on the Company. These reductions could result from changes in current reimbursement rates or from a shift in clinical protocols to non-surgical solutions for orthopaedic conditions. The Company may not be able to successfully offset any or all of the payment reductions that may occur. The federal government has implemented, through the Medicare program, a resource-based relative value scale ('RBRVS') payment methodology for heath care provider services. RBRVS is a fee schedule that, except for certain geographical and other adjustments, pays similarly situated health care providers the same amount for the same services. The RBRVS is subject to annual increases or decreases at the discretion of Congress or the federal Health Care Financing Administration ('HCFA'). To date, the implementation of RBRVS has reduced payment rates for certain of the procedures historically provided by the Existing Practices. Furthermore, HCFA is required by law to recalibrate the practice expense component of the RBRVS over the next four years in a way that will have positive effects on payments to primary care providers but will decrease payments for most services provided by specialists, including many services provided by the Existing Practices. For the six months ended June 30, 1997, the net practice revenue from Medicare constituted approximately 12% of the aggregate net practice revenue of the Existing Practices. RBRVS types of payment systems have also been adopted by certain private third party payors and may become a predominant payment methodology. Wider implementation of such programs would reduce payments from private third party payors, and could indirectly reduce revenue to the Company. 8 Rates paid by private third party payors are based on established health care provider and hospital charges and are generally higher than Medicare payment rates. A change in the patient mix of any of the Practices that results in a decrease in patients covered by private insurance could have a material adverse effect on the Practices and, as a result, on the Company. Government Regulation. Existing and future federal and state regulation of health care, including the relationships among health care providers such as physicians and other clinicians, could have a material adverse effect on the Company's financial condition and results of operations. While the Company believes that its operations are conducted in material compliance with applicable laws, it has not received or applied for a legal opinion from counsel or from any federal or state judicial or regulatory authority to this effect, and many aspects of the Company's business operations have not been the subject of state or federal regulatory interpretation. The laws applicable to the Company are subject to evolving interpretations, and therefore there can be no assurance that a review of the Company's operations by federal or state judicial or regulatory authorities would not result in a determination that the Company, or one of the Practices has violated one or more provisions of federal or state law. Any such determination could have a material adverse effect on the Company. Expansion of the operations of the Company to certain jurisdictions may require modification of the Company's form of relationship with the Practices, which could have a material adverse effect on the Company. Furthermore, the Company's ability to expand into, or to continue to operate within, certain jurisdictions may depend on the Company's ability to modify its or the Practices' operational structure to conform to such jurisdictions' regulatory framework or to obtain necessary approvals, licenses and/or permits. Any limitation on the Company's ability to expand could have a material adverse effect on the Company. See 'Business-- Government Regulation and Supervision.' Physician Self-Referral Laws. The federal Self-Referral Law (also known as the 'Stark Law') imposes restrictions on physicians' referrals for designated health services reimbursable by Medicare or Medicaid to entities with which any such physician (or an immediate family member of such physician) has a financial relationship, whether through an ownership, debt or compensation arrangement. Many states, including several of the states in which the Company conducts business, also have adopted self-referral laws. Unlike the Stark Law, however, many state self-referral laws are not limited to Medicare or Medicaid reimbursed services. In addition, state self-referral laws may apply to all health care services, not just certain designated health services, and state self-referral laws may apply only to ownership relationships and not to compensation relationships. State workers' compensation laws also may contain self-referral prohibitions. Unless a statutory exception applies, if a physician has a financial relationship in or with the Company, then that physician is prohibited from referring patients to any Ancillary Service Facilities owned (or possibly managed) by the Company for the furnishing of designated health services or other health care services as defined by federal or state law. In addition, neither the Company nor the physician is authorized to bill for services furnished to such physician's patients by the Company or at such Ancillary Service Facilities where there is no exception available for the physician's financial relationship with the Company. Penalties for violating these restrictions usually are limited to civil penalties. State laws also may require a physician to disclose to patients the nature of the physician's financial relationship with the Company and any Ancillary Service Facilities prior to recommending the Company and any Ancillary Service Facilities to that patient. In the preamble to the adoption of certain regulations regarding the Stark Law, adopted when such law only regulated clinical laboratory services, HCFA stated that it would not recognize any group in which the physicians were in multiple corporate entities as a 'group practice' under the Stark Law. In November 1996, the Company affiliated with SCOI, a partnership comprised of individual physician members as well as single member professional corporations ('P.C.s'). The use of P.C.s as partners at SCOI was historical and designed to accommodate practice structures that existed prior to the creation of SCOI. Recently, at the Eighteenth Annual Institute on Medicare and Medicaid Payment Issues, co-sponsored by the American Academy of Healthcare Attorneys and National Health Lawyer's Association, an HCFA representative stated that HCFA will recognize a 'group practice' consisting of multiple physician entities, such as P.C.s, provided that each P.C. or other physician entity is limited to one physician member. Nevertheless, given HCFA's prior written statement and HCFA's position that its written comments on the Stark Law as applied to clinical laboratories reflect its view on the Stark Law in its current expanded form, it may be necessary to restructure SCOI before any Stark-designated health services are provided. Failure to do so would result in the risk of the penalties described above, or the 9 inability of SCOI to provide Stark-designated health services, either of which could have a material adverse effect on the Company. See 'Business--Government Regulation and Supervision.' Fraud and Abuse. The anti-kickback provisions of the Social Security Act, as well as anti-kickback laws adopted by many states, including the states in which the Company conducts business, prohibit the solicitation, payment, receipt or offering of any direct or indirect remuneration in return for, or as an inducement for, certain referrals of patients for items or services covered by health benefits programs. State laws governing workers' compensation may also contain anti-kickback prohibitions. In addition, federal law and some state laws impose significant penalties for false or improper billings. These anti-kickback and false claims laws are commonly referred to as the fraud and abuse laws. Violations of any of these laws may result in substantial civil or criminal penalties, and, in the case of violations of federal laws, exclusion from participation in the Medicare and Medicaid programs. Such exclusion and penalties, if applied to the Company, its Ancillary Service Facilities or the Practices, would have a material adverse effect on the Company. Further, the application of these laws is subject to modification by statutory amendment or promulgation of regulations and any such change could have a material adverse effect on the Company. State Regulation of the Practices. The laws of many states, including one or more of the states in which the Company conducts business: (i) prohibit business corporations, such as the Company, from practicing medicine or exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements involving the division of professional fees earned by physicians (commonly referred to as 'fee-splitting'); (ii) require entities seeking to provide certain ancillary services (including ambulatory surgery) to be licensed and/or to have obtained a certificate of need related to the service; and (iii) require licensure or certification of, and regulate provider networks that agree to provide or arrange for the provision of certain health services to members of health care plans. These laws and their interpretations vary from state to state and are enforced by both the courts and regulatory authorities, each of which has broad discretion. In particular, with regard to the corporate practice of medicine, Texas and California have taken the position that control by a management company over certain business aspects of a medical practice is effectively the prohibited practice of medicine by the management company. In addition, recent developments in Florida's fee-splitting law have changed how management arrangements may be structured there. The Company has obtained a draft of an order of the State of Florida Board of Medicine that takes the position that a management services fee based on a percentage of revenues violates Florida's prohibition on fee splitting by licensed professionals. The Company has included such percentage fees in all of its Management Services Agreements with physicians in Florida. Counsel to the Board of Medicine has informed the Company that on October 19, 1997, the Board adopted the position in the draft order and will soon issue a final order with only minor revisions. Thus, no assurance can be given that the Company's Management Services Agreements based on such percentage fees will be enforceable. To avoid this risk, the Company will seek to restructure such agreements in Florida to comply with the order, but such modifications, or the failure to obtain agreement on such modifications, could have a material adverse effect on the Company's business, financial condition and results of operations. Violations of state laws regulating the Practices could result in censure or loss of license for the physician, civil or criminal penalties, or other sanctions. The licensure or certificate of need laws of applicable states could also preclude the Company from expanding its operated or managed services to include certain ancillary services, which could have a material adverse effect on the Company. In addition, a determination in any state that the Company is engaged in the corporate practice of medicine or any unlawful fee-splitting arrangement could render any Management Services Agreement or IPA Provider Agreement between the Company and a Practice located in such state unenforceable or subject to modification, which could have a material adverse effect on the Company. There can be no assurance that regulatory authorities or other parties will not assert that the Company or a Practice is engaged in the business of insurance or the corporate practice of medicine in such states or that the management and administrative fees paid to the Company by the Practices constitute unlawful fee-splitting or the corporate practice of medicine. If such a claim were asserted successfully, the Company could be subject to civil and criminal penalties and the Company or the Practices could be required to restructure their contractual arrangements. Such results or the inability of the Company or the Practices to restructure their relationships to comply with such prohibitions could have a material adverse effect on the Company's financial condition and results of operations. See 'Business--Government Regulation and Supervision--State Law.' 10 In Texas, it is unlawful to provide 'staff leasing services' without a license issued by the State. The Company believes that the provision of non-physician personnel to STSC in connection with the Management Services Agreement between the Company and STSC constitutes staff leasing services subject to licensure under Texas law. The Company filed an application on October 14, 1997 for such license, but there can be no guaranty that the State of Texas will approve the Company's application. Failure to obtain a license to provide staff leasing services may result in criminal penalties, may prevent the Company from providing personnel to STSC and may, therefore, have a material adverse effect on the Company. Antitrust Issues. Because the Practices remain separate legal entities, they may be deemed competitors subject to a range of antitrust laws that prohibit anti-competitive conduct, including price fixing, concerted refusals to deal and division of market. The Company intends to comply with such state and federal laws as may affect its development of integrated health care delivery networks, but there can be no assurance that a review of the Company's business by courts or regulatory authorities would not result in a determination that could adversely affect the operation of the Company and the Practices. Numerous Reform Initiatives. In addition to extensive existing government health care regulation, there are numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, and availability of, health care services. These initiatives include reductions in Medicare and Medicaid payments, trends in adopting managed care for Medicare, Medicaid and workers' compensation patients, regulation of entities that provide managed care, and additional prohibitions related to financial relationships between health care providers that are in a position to generate business for each other. Certain of these health care proposals, if adopted, could have a material adverse effect on the Company. In the recently enacted Balanced Budget Act of 1997 (the '1997 Budget Bill') and Health Insurance Portability and Accountability Act of 1996 ('HIPAA'), Congress has responded to perceived fraud and abuse in the Medicare and Medicaid programs. This legislation has fortified the government's enforcement authority with increased resources and greater civil and criminal penalties for offenses. It is anticipated that there will be further restrictive legislative and regulatory measures to reduce fraud, waste and abuse in the Medicare and Medicaid programs. There can be no assurance that any such legislation will not have a material impact on the Company. See '--Reliance on Affiliation and Expansion,' '--Reductions in Third Party Reimbursements' and 'Business--Government Regulation and Supervision.' Changes in Workers' Compensation Market. Legislative reforms in some states permit employers to designate health plans such as HMOs to cover workers' compensation claimants. Because many health plans have the capacity to manage health care for workers' compensation claimants, such legislation may intensify competition in the market served by the Company. Within the past few years, several states have experienced decreases in the number of workers' compensation claims and the average cost per claim, both of which have been reflected in workers' compensation insurance premium rate reductions in those states. The Company believes that declines in workers' compensation costs in these states are due principally to intensified efforts by payors to manage and control claim costs, improved risk management by employers and legislative reforms. In Florida (a state in which the Company does business), all workers' compensation services must be provided under a managed care arrangement approved by Florida's Agency for Health Care Administration. If declines in workers' compensation costs occur in many states and persist over the long-term, they may have an adverse impact on the Company's business and results of operations. A number of states, including California and Pennsylvania (states in which the Company does business), have regulations such as anti-kickback and self-referral laws that are specific to the workers' compensation program. See 'Business--Payor Contracting-- Workers' Compensation' and 'Business--Government Regulation and Supervision.' Potential Risks of Managed Care Contracts. As more patients enter into health care coverage arrangements with managed care payors, no assurance can be given that the Company will be able to negotiate contracts on behalf of the Practices with health maintenance organizations ('HMOs'), employer groups and other private third party payors. The inability of the Company to enter into such arrangements on behalf of the Practices, or unfavorable terms that may be contained in such arrangements, could have a material adverse effect on the Company. The Company may seek to negotiate with third party payors on behalf of the Practices and other physicians or group practices willing to permit the Company to negotiate on their behalf. The Company anticipates that, in 11 the future, the payor contracts entered into on behalf of the Practices and any related network physicians may include contracts based on capitated fee arrangements. Under some of these types of contracts, a health care provider agrees either to accept a predetermined dollar amount per member per month in exchange for undertaking to provide all covered services to patients or to provide treatment on an episode of care basis. Such health care providers bear the risk, generally subject to certain loss limits, that the aggregate costs of providing medical services will not exceed the predetermined amounts. Some agreements may also contain 'shared risk' provisions under which the Practices may earn additional compensation based on utilization control of institutional, ancillary and other services to patients, and the Practices may be required to bear a portion of any loss in connection with such 'shared risk' provisions. If patients or enrollees covered by such contracts require more frequent or, in certain instances, more extensive care than anticipated, there could be a material adverse effect on a Practice and, therefore, on the Company. Revenue negotiated under risk-sharing or capitated contracts could be insufficient to cover the costs of the health care services provided. Any such reduction or elimination of earnings to the Practices under such fee arrangements could have a material adverse effect on the Company. No assurance can be given that the Company, the Practices or the IPA will be able to establish or maintain satisfactory relationships with managed care and other third party payors, many of which already have existing provider structures in place and may not be able or willing to change their provider networks. In addition, any significant loss of revenue by the Practices as a result of the termination of third party payor contracts or otherwise would have a material adverse effect on the Company. See 'Business--Government Regulation and Supervision.' Need for Additional Funds. The Company's expansion and acquisition strategy will require substantial capital, and no assurance can be given that the Company will be able to raise additional funds through debt financing or the issuance of equity or debt securities. Sufficient funds may not be available on terms acceptable to the Company, if at all. If equity securities are issued, either to raise funds or in connection with future affiliations, dilution to the Company's stockholders may result, and if additional funds are raised through the incurrence of debt, the Company may become subject to restrictions on its operation and finances. Such restrictions may have a material adverse effect on, among other things, the Company's ability to pursue its affiliation and expansion strategy. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources.' Risks Related to Intangible Assets. The Company has a significant amount of intangible assets. As a result of the Affiliation Transactions, intangible assets (net of accumulated amortization) of approximately $7.3 million have been recorded on the Company's balance sheet as of June 30, 1997. Affiliations that result in the recognition of intangible assets will cause amortization expense to increase further. Although the Company's net unamortized balance of intangible assets acquired and anticipated to be acquired was not considered to be impaired as of June 30, 1997, any future determination that a significant impairment has occurred would require the write-off of the impaired portion of unamortized intangible assets, which could have a material adverse effect on the Company's results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' Intense Competition. Competition for affiliation with additional musculoskeletal physician practices is intense and may limit the availability of suitable practices with which the Company may be able to affiliate. Several companies with established operating histories and greater resources than the Company, including multi-specialty companies, companies that specialize in orthopedics, some hospitals, IPAs, clinics and HMOs, are pursuing activities similar to those of the Company. The Company may not be able to compete effectively with such competitors, additional competitors could enter the market and such competition could make it more difficult and costly to affiliate with, and provide management services to, musculoskeletal physician practices on terms beneficial to the Company. The Company also believes that changes in governmental and private reimbursement policies, among other factors, have resulted in increased competition among providers of medical services. The Practices face competition from several sources, including sole practitioners, single and multi-specialty groups, hospitals and managed care organizations. The Company's strategy includes the development of Ancillary Service Facilities. Pursuit of this strategy will subject the Company to competition with other providers of such facilities, some of which will have greater financial resources and experience than the Company. There can be no assurance that the Company or the Practices will be able to compete effectively in the markets they serve. See 'Business--Competition.' 12 Dependence on Key Personnel. The Company is dependent upon the ability and experience of its executive officers and key personnel, including Dr. Naresh Nagpal, the Company's President and Chief Executive Officer, for the management of the Company and the implementation of its business strategy. The Company currently has an employment contract with Dr. Nagpal. Because of the difficulty in finding an adequate replacement for Dr. Nagpal, the loss of his services, regardless of whether he may choose to compete with the Company, or the Company's inability in the future to attract and retain management and other key personnel could have a material adverse effect on the Company. See 'Management--Employment Agreements.' Exposure to Professional Liability. Due to the nature of its business, the Company from time to time may become a defendant in medical malpractice lawsuits, and may become subject to the attendant risk of substantial damage awards. Direct claims, suits or complaints could be asserted against the Company relating to services delivered by the Practices (including claims with regard to services rendered by the Existing Practices prior to the Affiliation Transactions). While the Company has attempted to address these risks by maintaining malpractice and other types of insurance, with coverage limits of $1,000,000 per individual claim and $3,000,000 in the aggregate, on behalf of itself and the Existing Practices, there can be no assurance that any claim asserted against the Company, any of the Existing Practices, or any other Practice will be covered by, or will not exceed the coverage limits of, applicable insurance. However, the Company may not be able to maintain insurance in the future at a cost that is acceptable to the Company, or at all. A successful malpractice claim against any of the Practices, even if covered by insurance, or any claim made against the Company that is not fully covered by insurance, could have a material adverse effect on the Company. See 'Business--Corporate Liability and Insurance.' No Prior Market; Possible Volatility of Stock Price. Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or continue after the Offering. The initial public offering price will be determined by negotiations among the Company and Hambrecht & Quist LLC, Raymond James & Associates, Inc. and Volpe Brown Whelan & Company, LLC and may not be indicative of the market price for the Common Stock after the Offering. See 'Underwriting' for factors to be considered in determining the initial public offering price. From time to time after the Offering, there may be significant volatility in the market price of the Common Stock. Deviations in results of operations from estimates of securities analysts, changes in general conditions in the economy or the health care industry or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies' securities and have often been unrelated to the operating performance of these companies. Concern about the potential effects of health care reform measures has contributed to the volatility of stock prices of companies in health care and related industries and may similarly affect the price of the Common Stock following the Offering. Any such fluctuations that occur following completion of the Offering may adversely affect the market price of the Common Stock. Shares Eligible for Future Sale. The market price of the Common Stock of the Company could be materially adversely affected by the sale of substantial amounts of the Common Stock in the public market following the Offering. After giving effect to the shares of Common Stock offered hereby, the Company will have outstanding 20,630,000 shares of Common Stock. Of these shares, all of the shares of Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act of 1933, as amended (the 'Securities Act'), except for any shares purchased by 'affiliates,' as that term is defined under the Securities Act, of the Company. The remaining 15,630,000 shares are 'restricted securities' within the meaning of Rule 144 promulgated under the Securities Act. Of these restricted shares, 5,526,501 shares will be eligible for sale pursuant to Rule 144 in December 1997 and the balance will be eligible for sale at various times in 1998. See 'Shares Eligible for Future Sale.' The Company and the officers, directors and certain other stockholders of the Company, who upon completion of the Offering will own in the aggregate shares of Common Stock, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, issue, sell, offer, contract to sell, make any short sale, pledge, issue or sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock, or securities exchangeable for or convertible into or exercisable for any rights to purchase or acquire any shares of Common Stock during the 180-day period following the date of this Prospectus, except that such stockholders 13 may transfer securities pursuant to bona fide gifts and the Company may issue, and grant options to purchase, shares of Common Stock under its current stock option plan and may issue shares of Common Stock in connection with affiliation transactions, provided such shares are subject to the 180-day lock-up agreement. Certain holders of shares of Common Stock outstanding on the date of this Prospectus have certain registration rights with respect to such shares and additional shares that may be issued to such persons upon exercise of options and warrants (subject to certain limitations on the number of shares such holders are entitled to have registered under any registration statement), although all such holders have agreed to refrain from selling their shares during the lock-up period. In addition, the Company intends to register approximately 2,000,000 shares of Common Stock reserved for issuance under the BMJ Medical Management, Inc. 1996 Stock Option Plan (the 'Option Plan') as soon as practicable after completion of the Offering. See 'Management' and 'Underwriting.' Control by Existing Stockholders. Following the completion of the Offering, the officers and directors of the Company and the physician owners of the Existing Practices will beneficially own approximately 81% of the outstanding shares of Common Stock. Following the Offering, such persons may effectively be able to control the affairs of the Company, including the ability to delay or prevent a change of control of the Company. See 'Principal Stockholders.' Potential Anti-Takeover Effects of Charter and By-laws Provisions; Possible Issuances of Preferred Stock. Certain provisions of the Restated Certificate of Incorporation (the 'Certificate of Incorporation') and by-laws (the 'By-laws') of the Company that will become operative upon the closing of this Offering may be deemed to have anti-takeover effects and may delay, deter or prevent a change in control of the Company that a stockholder might consider in his/her best interest. These provisions (i) classify the Company's Board of Directors into three classes, each of which will serve for different three-year periods; (ii) provide that only the Board of Directors or certain members thereof or officers of the Company may call special meetings of the stockholders; and (iii) authorize the issuance of 'blank check' preferred stock having such designations, rights and preferences as may be determined from time to time by the Board of Directors. See 'Description of Capital Stock.' Immediate and Substantial Dilution. Purchasers of the Common Stock in this Offering will incur immediate and substantial dilution in the net tangible book value per share of Common Stock of $5.29 per share. See 'Dilution.' 14 THE COMPANY The Company was founded by Dr. Nagpal in January 1996. Since its inception, the Company has expanded its network through Affiliation Transactions and through the addition of physicians to its Existing Practices to reach a total of 24 Existing Practices comprising 112 physicians in five states as of the date of this Prospectus. In July 1996, the Company affiliated with its first Practice, Lehigh Valley Bone, Muscle and Joint Group, LLC ('LVBMJ'), comprising five physicians. In November 1996, the Company affiliated with STSC and SCOI, resulting in the addition of a total of 29 physicians located in Texas and California. The Company affiliated with Lauderdale Orthopaedic Surgeons ('LOS') and Tri-City Orthopedic Surgery Medical Group, Inc. ('Tri-City') in April 1997, Fishman & Stashak, M.D.'s, P.A. (d/b/a Gold Coast Orthopaedics) ('Gold Coast') in June 1997 and Sun Valley Orthopaedic Surgeons ('Sun Valley') in July 1997, resulting in the addition of a total of 23 physicians. In September 1997, the Company affiliated with Broward Institute of Orthopaedic Specialties, P.A. ('BIOS') and Orthopaedic Surgery Associates, P.A. ('OSA'), resulting in the addition of a total of 15 physicians. In addition to the foregoing Affiliation Transactions, the Company has affiliated with 15 other Practices comprising 40 additional physicians. In order to finance the Affiliation Transactions and provide for its working capital needs, the Company has raised approximately $49.9 million through a series of equity and debt financings. See 'Risk Factors--Lack of Significant Combined Operating History' and 'Certain Transactions--Equity and Debt Financings.' The Company was incorporated under the laws of Delaware in January 1996. The Company's principal executive offices are located at 4800 North Federal Highway, Suite 104D, Boca Raton, Florida 33431 and its telephone number is (561) 391-1311. 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,000,000 shares of Common Stock offered hereby are estimated to be $35.7 million ($41.3 million if the Underwriters' over-allotment option is exercised in full), based on an assumed initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and expenses of the Offering. The Company intends to use approximately $33.0 million of the net proceeds to repay certain indebtedness and the remaining net proceeds for general corporate purposes, including possible future affiliations. The indebtedness being repaid consists of (i) approximately $11.1 million (the 'HCFP Debt') outstanding under several loan and security agreements (collectively, the 'HCFP Loan Agreements') between the Company and HCFP Funding, Inc. ('HCFP Funding'), an affiliate of Health Care Financial Partners; (ii) approximately $5.0 million of subordinated debt (the 'Comdisco Loan') outstanding under a Subordinated Loan and Security Agreement (the 'Comdisco Loan Agreement') between the Company and Comdisco, Inc. ('Comdisco'); (iii) approximately $1.5 million of subordinated debt (the 'Galtney Loan') outstanding under a Subordinated Loan and Security Agreement (the 'Galtney Loan Agreement') between the Company and Galtney Corporate Services, Inc. ('Galtney'); (iv) approximately $3.4 million of subordinated debt due to certain stockholders ('the Stockholder Debt'); (v) approximately $11.2 million of notes payable to physician groups issued in connection with Affiliation Transactions (the 'Physician Notes'); and (vi) approximately $800,000 of subordinated debt owed to Dr. Nagpal (the 'Nagpal Debt'). See 'Certain Transactions--Equity and Debt Financings.' The HCFP Debt was incurred for working capital purposes and to finance Affiliation Transactions, bears interest at rates ranging from 10 1/4% to 12% per annum and matures from 1998 to 2000. The indebtedness under the Comdisco Loan and the Galtney Loan was incurred to finance Affiliation Transactions, bears interest at 14% per annum and matures on December 31, 2000. The Stockholder Debt was incurred to finance Affiliation Transactions, bears interest at the prime rate plus 3.5% (12% at October 31, 1997) and matures on January 10, 1998. The Physician Notes were issued in connection with Affiliation Transactions, bear interest at rates ranging from 6% to 11% and mature between December 1997 and March 1998. The Nagpal Debt was also incurred to finance Affiliation Transactions, bears interest at 8% per annum and is payable on demand. Pending use of the remaining net proceeds for general corporate purposes, the Company intends to invest such net proceeds in short-term, investment grade, interest-bearing securities. The Company continues to review and evaluate additional Practices for purposes of future Affiliation Transactions, but as of the date of this Prospectus has not entered into agreements with any such Practices. DIVIDEND POLICY The Company has never paid or declared dividends on the Common Stock and does not anticipate paying any dividends on the Common Stock in the foreseeable future. The Company is prohibited from paying dividends on the Common Stock under the terms of the HCFP Loan Agreements and the Debenture Purchase Agreement (as defined). See 'Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources' and 'Certain Transactions--Equity and Debt Financings.' 16 CAPITALIZATION The following table sets forth the actual capitalization of the Company at June 30, 1997, the pro forma capitalization of the Company at June 30, 1997 after giving effect to the Affiliation Transactions and the pro forma capitalization as adjusted to give effect to the sale of the 5,000,000 shares of Common Stock offered hereby (based on an assumed initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and expenses of the Offering), the application of the net proceeds therefrom and the automatic conversion of all outstanding shares of preferred stock into shares of Common Stock. See 'Use of Proceeds' and 'Description of Capital Stock.' The table should be read in conjunction with the Pro Forma Financial Information and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the historical financial statements of the Company and the Existing Practices appearing elsewhere in this Prospectus.
JUNE 30, 1997 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Short-term debt, including current portion of long-term debt and capital lease obligations.......................................................... $ 1,418 $19,355 $ 15 ------- --------- ----------- ------- --------- ----------- Long-term debt and capital lease obligations, less current portion........... $ 6,540 $16,305 $ 4,061 Stockholders' equity: Convertible preferred stock--3,976,406 shares authorized, issued and outstanding; 4,184,740 shares authorized, issued and outstanding pro forma; and no shares issued and outstanding pro forma as adjusted....... 40 42 -- Common stock, $.001 par value--25,000,000 shares authorized; 8,311,462 shares issued and outstanding; 11,445,331 shares issued and outstanding pro forma; and 20,630,071 shares issued and outstanding pro forma as adjusted(1)............................................................. 9 12 21 Additional paid-in capital................................................. 14,482 23,383 59,116 Accumulated deficit........................................................ (2,985) (2,985) (3,285) ------- --------- ----------- Total stockholders' equity.............................................. 11,546 20,452 55,852 ------- --------- ----------- Total capitalization............................................... $18,086 $36,757 $59,913 ------- --------- ----------- ------- --------- -----------
- ------------------ (1) The shares issued and outstanding pro forma gives effect to the net cancellation of 145,139 shares in September 1997. Excludes 1,228,000 shares issuable upon exercise of outstanding options with a weighted average exercise price of $0.39 per share and 321,665 shares of Common Stock issuable upon exercise of outstanding warrants to purchase Common Stock with a weighted average exercise price of $3.44 per share. See 'Management' and 'Certain Transactions.' 17 DILUTION As of June 30, 1997, the pro forma net tangible book value of the Company was approximately $20,452,000, or approximately $1.31 per share. Pro forma 'net tangible book value per share' represents the amount of the Company's total pro forma tangible assets less the Company's total pro forma liabilities divided by the number of shares of Common Stock outstanding, after giving effect to the conversion of all outstanding shares of Preferred Stock (including accrued dividends) into shares of Common Stock. After giving effect to the sale of 5,000,000 shares of Common Stock offered by the Company hereby based on an assumed initial public offering price of $8.00 per share and after deducting estimated underwriting discounts and expenses of the Offering, the pro forma net tangible book value of the Company at June 30, 1997 would have been approximately $55,852,000 or approximately $2.71 per share of Common Stock, representing an immediate increase in pro forma net tangible book value of $1.40 per share to existing stockholders and an immediate, substantial dilution of $5.29 per share to persons purchasing shares of Common Stock offered hereby. The following table illustrates this dilution: Assumed initial public offering price per share........................................ $8.00 Pro forma net tangible book value per share at June 30, 1997......................... $1.31 Increase attributable to price paid by new investors per share....................... 1.40 ----- Pro forma net tangible book value per share after the Offering......................... 2.71 ----- Dilution per share to new investors.................................................... $5.29 ----- -----
The following table sets forth, as of June 30, 1997, the pro forma number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing stockholders and purchasers of shares of Common Stock offered hereby, after giving effect to (i) the sale of 5,000,000 shares of Common Stock offered hereby based on an assumed initial public offering price of $8.00 per share and before deducting estimated underwriting discounts and expenses of the Offering and (ii) the conversion of all outstanding shares of Preferred Stock of the Company into shares of Common Stock.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- --------- Existing stockholders........................ 15,630,071 75.8% $23,132,000 36.6% $1.48 New investors................................ 5,000,000 24.2 40,000,000 63.4 8.00 ---------- ------- ----------- ------- Total................................. 20,630,071 100.0% $63,132,000 100.0% ---------- ------- ----------- ------- ---------- ------- ----------- -------
The foregoing computations do not include the effect of the issuance of 1,228,000 shares of Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $0.39 per share and 321,665 shares of Common Stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $3.44 per share. To the extent such options and warrants are exercised, there will be further dilution to the new investors. See 'Management' and 'Certain Transactions.' 18 PRO FORMA FINANCIAL INFORMATION The pro forma statement of operations for the six months ended June 30, 1997 gives effect to (i) the 1997 Affiliation Transactions and (ii) receipt and application of the estimated net proceeds from this Offering at an assumed initial public offering price of $8.00 per share as if such transactions had occurred on January 1, 1996. The pro forma statement of operations for the year ended December 31, 1996 gives effect to (i) the Affiliation Transactions and (ii) the receipt and application of the estimated net proceeds from this Offering as if such transactions had occurred on January 1, 1996. The pro forma balance sheet as of June 30, 1997 gives effect to (i) the 1997 Affiliation Transactions, (ii) the receipt and application of the estimated net proceeds from this Offering, (iii) the conversion of all outstanding Preferred Stock and other outstanding equity securities into Common Stock concurrently with the Offering as if all of such transactions had occurred on June 30, 1997. The pro forma financial information is based on the financial statements of the Company, after giving effect to the assumptions and adjustments in the accompanying notes to the pro forma financial information. Although such information is based on preliminary allocations of the consideration paid in connection with the 1997 Affiliation Transactions, the Company does not expect that the final allocations will be materially different from such preliminary allocations. The pro forma financial information has been prepared by management based on the historical financial statements of the Company and the Existing Practices at and for the year ended December 31, 1996 and the six months ended June 30, 1997, adjusted where necessary to reflect the Affiliation Transactions as if the related Management Service Agreements had been in effect during the entire periods presented. The pro forma financial information is presented for illustrative purposes and does not purport to represent what the results of operations or financial condition of the Company for the periods or at the dates presented would have been if such transactions had been consummated as of such dates and is not indicative of the results that may be obtained in the future. BMJ MEDICAL MANAGEMENT, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997
1997 AFFILIATIONS (A) ------------------------------------------------------------------------ THE GOLD SUN COMPANY(B) TRI-CITY LOS COAST VALLEY BIOS OSA ---------- ----------- ----------- ----------- ------ ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Patient revenues, net..................... $ 19,907 $ 1,240 $ 1,600 $ 1,609 $1,358 $3,555 $ 3,497 Less: physician and other provider services................................. (9,509) (702) (813) (1,005) (782) (1,098 ) (1,097) ----- --- --- --- ------ ------- --- Management fee revenue.................... 10,398 538 787 604 576 2,457 2,400 Costs and expenses: Medical support services................. 9,541 538 787 604 576 2,457 2,400 General and administrative............... 2,139 -- -- -- -- -- -- Depreciation and amortization............ 300 -- -- -- -- -- -- Interest expense (income), net........... 294 -- -- -- -- -- -- ----- --- --- --- ------ ------- --- Total costs and expenses................ 12,274 538 787 604 576 2,457 2,400 ----- --- --- --- ------ ------- --- (Loss) income before income taxes......... (1,876) -- -- -- -- -- -- ----- --- --- --- ------ ------- --- Income taxes.............................. -- -- -- -- -- -- -- ----- --- --- --- ------ ------- --- Net (loss) income......................... $ (1,876) $ -- $ -- $ -- $ -- $ -- $ -- ----- --- --- --- ------ ------- --- ----- --- --- --- ------ ------- --- Net (loss) income per common share: Primary.................................. $ (0.15) Diluted.................................. $ (0.15) Weighted average common shares outstanding: Primary.................................. 12,480 Diluted.................................. 12,480 PRO FORMA OTHER PRO FORMA OFFERING AS AFFILIATIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED ------------ ----------- --------- ----------- --------- Patient revenues, net..................... $ 15,671 $ -- $ 48,437 $ -- $ 48,437 Less: physician and other provider (4,805)(d) services................................. (5,758) (940)(c) (15,019 ) -- (15,019 ) ----- ----- --------- ----- --------- Management fee revenue.................... 9,913 (5,745) 33,418 -- 33,418 Costs and expenses: Medical support services................. 9,913 -- 26,816 -- 26,816 General and administrative............... -- -- 2,139 -- 2,139 Depreciation and amortization............ -- 724(e) 1,024 -- 1,024 Interest expense (income), net........... -- 1,912(f) 2,206 (2,186)(h) 20 ----- ----- --------- ----- --------- Total costs and expenses................ 9,913 2,636 32,185 (2,186) 30,185 ----- ----- --------- ----- --------- (Loss) income before income taxes......... -- (3,109) 1,233 2,186 3,419 ----- ----- --------- ----- --------- Income taxes.............................. -- 469(g) 469 831(h) 1,300 ----- ----- --------- ----- --------- Net (loss) income......................... $ -- $(3,578) $ 764 $ 1,355 $ 2,119 ----- ----- --------- ----- --------- ----- ----- --------- ----- --------- Net (loss) income per common share: Primary.................................. $ 0.10 Diluted.................................. $ 0.09 Weighted average common shares outstanding: Primary.................................. 21,914 Diluted.................................. 22,470
19 BMJ MEDICAL MANAGEMENT, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
1997 AFFILIATIONS (a) 1996 AFFILIATIONS (a) ----------------------------------------------------------- THE ---------------------------------- SUN COMPANY(b) LVBMJ SCOI STSC TRI-CITY LOS GOLD COAST VALLEY BIOS ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Patient revenues, net................ $ 6,029 $ 1,540 $17,907 $6,027 $ 3,478 $ 6,365 $ 3,434 $ 2,468 $7,615 Less: physician and other provider services........... (2,912) (716) (9,141) (4,399) (1,658) (4,055) (2,050) (1,384) (2,353) ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- Management fee revenue............ 3,117 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 Costs and expenses: Medical support services.......... 2,844 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 General and administrative.... 1,278 -- -- -- -- -- -- -- -- Depreciation and amortization...... 104 -- -- -- -- -- -- -- -- Interest expense (income), net..... -- -- -- -- -- -- -- -- -- ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- Total costs and expenses........ 4,226 824 8,766 1,628 1,820 2,310 1,384 1,084 5,262 ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- (Loss) income before income taxes....... (1,109) -- -- -- -- -- -- -- -- Income taxes........ -- -- -- -- -- -- -- -- -- ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- Net (loss) income... $ (1,109) $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- ---------- ----------- ----------- ------ ----------- ----------- ----------- ------- ------- Net (loss) income per common share: Primary............ $ (0.09) Diluted............ $ (0.09) Weighted average shares outstanding: Primary............ 11,852 Diluted............ 11,852 PRO FORMA OTHER PRO FORMA OFFERING AS OSA AFFILIATIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED ----------- ------------ ----------- --------- ----------- --------- Patient revenues, net................ $ 5,470 $ 27,885 $ -- $ 91,218 $ -- $ 91,218 Less: physician and other provider (8,079)(d) services........... (2,658) (10,279) (1,537)(c) (31,987) -- (31,987) ----------- ------------ ----------- --------- ----------- --------- Management fee revenue............ 5,814 17,606 9,616 59,231 -- 59,231 Costs and expenses: Medical support services.......... 5,814 17,606 -- 49,342 -- 49,342 General and administrative.... -- -- -- 1,278 -- 1,278 Depreciation and amortization...... -- -- 1,601(e) 1,705 -- 1,705 Interest expense (income), net..... -- -- 4,262(f) 4,262 (4,222)(h) 40 ----------- ------------ ----------- --------- ----------- --------- Total costs and expenses........ 5,814 17,606 5,863 56,787 (4,222) 52,365 ----------- ------------ ----------- --------- ----------- --------- (Loss) income before income taxes....... -- -- 3,753 2,644 4,222 6,866 Income taxes........ -- -- 1,005(f) 1,005 1,604 (h) 2,609 ----------- ------------ ----------- --------- ----------- --------- Net (loss) income... $ -- $ -- $ 2,748 $ 1,639 $ 2,618 $ 4,257 ----------- ------------ ----------- --------- ----------- --------- ----------- ------------ ----------- --------- ----------- --------- Net (loss) income per common share: Primary............ $ 0.19 Diluted............ $ 0.19 Weighted average shares outstanding Primary............ 21,914 Diluted............ 22,470
20 NOTES TO PRO FORMA STATEMENTS OF OPERATIONS Practice revenue represents the revenue of the Existing Practices and the ambulatory surgery center reported at the estimated realizable amounts from patients, third party payors and others for services rendered, net of contractual and other adjustments. Management fee revenue represents practice revenue less amounts retained by the Existing Practices (consisting of physician and other provider services costs, principally compensation and fees paid to physicians pursuant to the Management Services Agreements). Under each Management Services Agreement, the Company assumes responsibility for the management of the non-medical operations of the Practice, employs substantially all of the non-professional personnel utilized by the Practice and may provide the Practice with the facilities and equipment used in its medical practice. The Company's operating expenses consist of the expenses incurred in fulfilling its obligations under the Management Services Agreements. These expenses include medical support services (principally clinic overhead expenses that would have been incurred by the Existing Practices, including non-professional employee salaries, employee benefits, medical supplies, malpractice insurance premiums, rent and other expenses related to clinic operations) and general and administrative expenses (personnel and administrative expenses in connection with maintaining a corporate office that provides management, contracting, administrative, marketing and development services to the Existing Practices). The Practices' operating expenses prior to affiliation with the Company consist of the clinic overhead expenses, including non-professional employee salaries, employee benefits, medical supplies, malpractice insurance premiums, rent, depreciation and amortization and general and administrative expenses related to clinic operations which have been presented as medical support services. (a) The 1996 Affiliations column presents historical information for the portion of the year preceding the Practices' affiliation with the Company recognizing that the Practices typically distribute any net income to the physicians as compensation which is included in physician and other provider services. In the pro forma statement of operations for the year ended December 31, 1996, the 1997 Affiliations columns present historical information of the 1997 Affiliation Transactions for the year ended December 31, 1996, recognizing that the Practices typically distribute any net income to the physicians as compensation which is included in physician and other provider services. In the pro forma statement of operations for the six months ended June 30, 1997, the 1997 Affiliations column presents historical information of the 1997 Affiliation Transactions for the portion of the year preceding the Practices' affiliation with the Company recognizing that the Practices typically distribute any net income to the physicians as compensation which is included in physician and other provider services. The Other Affiliations column presents the information from the following practices: SIX MONTHS ENDED JUNE 30, 1997
PHYSICIAN PATIENT AND OTHER MANAGEMENT MEDICAL REVENUES, PROVIDER FEE SUPPORT PRACTICE NET SERVICES REVENUE SERVICES - ------------------------------------------------------------------ --------- ---------- ---------- -------- (IN THOUSANDS) Tower Orthopedics................................................. $ 376 $ 150 $ 226 $ 226 Clive Segil, M.D.................................................. 285 100 185 185 R.C. Watson, M.D.................................................. 441 169 272 272 Swnson Orthopedics................................................ 316 126 190 190 Lake Tahoe Sports................................................. 270 89 181 181 San Antonio Bone & Joint.......................................... 196 71 125 125 Stockdale Podiatry 1,008 397 611 611 John Zimmerman, M.D............................................... 338 141 197 197 Broward Orthpedic Specialists..................................... 3,651 1,165 2,486 2,486 Jeffrey Beitler, M.D.............................................. 252 69 183 183 Michael Abrahams, M.D............................................. 633 266 367 367 Physical Medicine and Rehabilitation.............................. 953 321 632 632 Kramer & Maehrer, LLC............................................. 412 261 151 151 Lighthouse Orthopaedics........................................... 3,774 1,145 2,629 2,629 Valley Sports & Arthritis Surgeons................................ 2,227 790 1,437 1,437 Orthopaedic Management Network, Inc. (OMNI IPA)................... 539 498 41 41 --------- ---------- ---------- -------- Totals.......................................................... $15,671 $5,758 $9,913 $9,913 --------- ---------- ---------- -------- --------- ---------- ---------- --------
21 YEAR ENDED DECEMBER 31, 1996
PHYSICIAN AND PATIENT OTHER MANAGEMENT MEDICAL REVENUES, PROVIDER FEE SUPPORT PRACTICE NET SERVICES REVENUE SERVICES - ------------------------------------------------------------------- --------- --------- ---------- ------- (IN THOUSANDS) Tower Orthopedics.................................................. $ 536 $ 214 $ 322 $ 322 Clive Segil, M.D................................................... 535 187 348 348 R.C. Watson, M.D................................................... 610 244 366 366 Swanson Orthopedics................................................ 550 180 370 370 Lake Tahoe Sports.................................................. 618 236 382 382 San Antonio Bone & Joint........................................... 464 167 297 297 Stockdale Podiatry................................................. 1,856 731 1,125 1,125 John Zimmerman, M.D................................................ 676 283 393 393 Broward Orthopedic Specialists..................................... 6,407 2,044 4,363 4,363 Jeffrey Beitler, M.D............................................... 501 138 363 363 Michael Abrahams, M.D.............................................. 1,398 587 811 811 Physical Medicine and Rehabilitation............................... 1,600 539 1,061 1,061 Kramer & Maehrer, LLC.............................................. 749 474 275 275 Lighthouse Orthopaedics............................................ 5,747 1,743 4,004 4,004 Valley Sports & Arthritis Surgeons................................. 4,687 1,663 3,024 3,024 Orthopaedic Management Network, Inc. (OMNI IPA).................... 951 849 102 102 --------- --------- ---------- ------- Totals........................................................... $27,885 $10,279 $ 17,606 $17,606 --------- --------- ---------- ------- --------- --------- ---------- -------
(b) In the pro forma statement of operations for the year ended December 31, 1996, the Company column includes the operations of the Existing Practices that affiliated with the Company in 1996 from the date of affiliation and all actual expenses related to corporate infrastructure, which were primarily general and administrative expenses. In the pro forma statement of operations for the six months ended June 30, 1997, the Company column includes all operations of the Existing Practices that affiliated with the Company in 1996 and the operations of the Existing Practices that affiliated with the Company in the first six months of 1997 from the date of affiliation and all actual expenses related to corporate infrastructure, which were primarily general and administrative expenses. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (c) Reflects the impact of applying the provisions of the SCOI Management Services Agreement and the amended and restated LVBMJ Management Services Agreement relating to management fees payable to the Company retroactively to January 1, 1996 and 1997 whereby the management fees are adjusted to 10% of net collected revenue. (d) Reflects the impact of applying the provisions of the Management Services Agreements relating to the portion of the management fees payable to the Company that are based on a percentage of revenue.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, PRACTICE 1996 1997 - --------------------------------------------------------------------------------------- ------------ ---------- (IN THOUSANDS) -------------------------- LVBMJ/Orthopaedic Associates of Bethlehem.............................................. $ 154 $ 939 Southern California Orthopedic Institute............................................... 596 353 COSI................................................................................... -- 68 South Texas Spinal Clinic.............................................................. 633 210 Tri-City Orthopedics................................................................... 348 124 Lauderdale Orthopaedic Surgeons........................................................ 637 160 Gold Cost Orthopedics.................................................................. 515 241 Sun Valley Orthopaedics................................................................ 247 136 Tower Orthopedics...................................................................... 53 37 Clive Segil, M.D....................................................................... 53 29 R.C. Watson, M.D....................................................................... 61 45 Swanson Orthopedics.................................................................... 55 31 Lake Tahoe Sports...................................................................... 62 27 San Antonio Bone & Joint............................................................... 53 23 Stockdale Podiatry..................................................................... 185 101 John Zimmerman, M.D.................................................................... 68 34 Broward Orthopedic Specialists......................................................... 961 548
22
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, PRACTICE 1996 1997 - --------------------------------------------------------------------------------------- ------------ ---------- (IN THOUSANDS) -------------------------- Jeffrey Beitler, M.D................................................................... 50 25 Michael Abrahams, M.D.................................................................. 210 95 Physical Medicine and Rehabilitation................................................... 160 95 Kramer & Maehrer, LLC.................................................................. 75 41 Broward Institute of Orthopaedic Specialties (b)....................................... 609 284 Lighthouse Orthopaedics................................................................ 718 472 Orthopaedic Surgery Associates......................................................... 1,059 437 Valley Sports & Arthritis Surgeons..................................................... 469 223 Orthopaedic Management Network, Inc. (Omni IPA)........................................ 48 27 ------------ ---------- Totals............................................................................... $8,079 $4,805 ------------ ---------- ------------ ----------
(e) Reflects increase in depreciation and amortization expense for intangible assets and furniture, fixtures and equipment based upon the Affiliation Transactions as if they had all occurred on January 1, 1996 and January 1, 1997. The intangible assets related to all the affiliations total approximately $29.4 million at June 30, 1997 and are being amortized over periods ranging from 7 to 25 years. The adjustment by Practice is as follows (see Note 2 to the financial statements for the allocation of consideration in the Affiliation Transactions):
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE PRACTICE 1996 30, 1997 - -------------------------------------------------------------------------------------- ------------ ---------- (IN THOUSANDS) -------------------------- LVBMJ/Orthopaedic Associates of Bethlehem............................................. $ 7 $ -- Southern California Orthopedic Institute.............................................. 52 -- COSI.................................................................................. 9 2 South Texas Spinal Clinic............................................................. 45 -- Tri-City Orthopedics.................................................................. 19 5 Lauderdale Orthopaedic Surgeons....................................................... 39 10 Gold Cost Orthopedics................................................................. 97 41 Sun Valley Orthopaedics............................................................... 42 21 Tower Orthopedics..................................................................... 6 2 Clive Segil, M.D...................................................................... 17 7 R.C. Watson, M.D...................................................................... 11 6 Swanson Orthopedics................................................................... 10 5 Lake Tahoe Sports..................................................................... 12 6 San Antonio Bone & Joint.............................................................. 40 20 Stockdale Podiatry.................................................................... 29 15 John Zimmerman, M.D................................................................... 14 7 Broward Orthpedic Specialists......................................................... 238 119 Jeffrey Beitler, M.D.................................................................. 13 6 Michael Abrahams, M.D................................................................. 30 15 Physical Medicine and Rehabilitation.................................................. 56 28 Kramer & Maehrer, LLC................................................................. 13 6 Broward Institute of Orthopaedic Specialties.......................................... 185 92 Lighthouse Orthopaedics............................................................... 189 95 Orthopaedic Surgery Associates........................................................ 315 158 Valley Sports & Arthritis Surgeons.................................................... 96 48 Orthopaedic Management Network, Inc. (Omni IPA)....................................... 17 10 ------------ ----- Totals.............................................................................. $1,601 $724 ------------ ----- ------------ -----
(f) To record interest expense on debt issued in connection with the Affiliation Transactions as if such transactions had occurred on January 1, 1996 and January 1, 1997. (g) To reflect the estimated income tax effect at an effective rate of approximately 38%. (h) To eliminate interest expense assuming repayment of all outstanding senior and subordinated indebtedness (other than the Debentures) with a portion of the net proceeds of the Offering, net of estimated federal and state income taxes at a rate of approximately 38%. See 'Use of Proceeds.' 23 BMJ MEDICAL MANAGEMENT, INC. UNAUDITED PRO FORMA BALANCE SHEET JUNE 30, 1997
AFFILIATION PRO FORMA AND OTHER OFFERING AS THE COMPANY ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED(a) ----------- ----------- --------- ----------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.............. $ 6,915 $17,801(c) $ 7,094 $ 3,816(a) $ 10,910 (17,622)(b) Accounts receivable, net............... 10,319 8,778(b) 19,097 -- 19,097 Due from physician groups.............. 21 -- 21 -- 21 Prepaid expenses and other current assets............................... 48 637(b) 685 -- 685 ----------- ----------- --------- ----------- ------------ Total current assets................. 17,303 9,594 26,897 3,816 30,713 Furniture, fixtures and equipment, net... 2,546 2,282(b) 4,828 -- 4,828 Management Services Agreements, net...... 7,310 22,080(b) 29,390 -- 29,390 Other assets............................. 740 740 740 ----------- ----------- --------- ----------- ------------ Total assets......................... $27,899 $33,956 $61,855 $ 3,816 $ 65,671 ----------- ----------- --------- ----------- ------------ ----------- ----------- --------- ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................... $ 353 $ -- $ 353 $ -- $ 353 Accrued expenses....................... 826 630(b) 1,456 -- 1,456 Accrued salaries and benefits.......... 841 -- 841 -- 841 Due to physician groups................ 6,375 (3,282)(b) 3,093 -- 3,093 Shareholder note payable............... 753 118(c) 871 (871)(a) -- Current portion of long-term debt and capital lease obligations............ 665 11,151(b) 18,484 (18,469)(a) 15 -- 6,668(c) -- -- -- ----------- ----------- --------- ----------- ------------ Total current liabilities............ 9,813 15,285 25,098 (19,340) 5,758 Long-term debt........................... 6,540 9,765(c) 16,305 (12,244)(a) 4,061 Stockholders' equity: Convertible preferred stock............ 40 2(c) 42 (42)(a) -- Common stock........................... 9 3(b) 12 9(a) 21 Additional paid-in capital............. 14,482 1,248(c) 23,383 35,733(a) 59,116 7,653(b) Deficit................................ (2,985) -- (2,985) (300)(a) (3,285) ----------- ----------- --------- ----------- ------------ Total stockholders' equity........... 11,546 8,906 20,452 35,400 55,852 ----------- ----------- --------- ----------- ------------ Total liabilities and stockholders' equity.......... $27,899 $33,956 $61,855 $ 3,816 $ 65,671 ----------- ----------- --------- ----------- ------------ ----------- ----------- --------- ----------- ------------
NOTES TO PRO FORMA BALANCE SHEET (a) To reflect (i) the net proceeds from the sale of shares of Common Stock in the Offering estimated to be approximately $35.7 million (after deducting underwriting discounts and estimated Offering expenses) and the repayment of $33.0 million of indebtedness consisting of (A) approximately $11.1 million of HCFP Debt including the $300,000 success fee due at the completion of the Offering; (B) approximately $5.0 million of the Comdisco Loan; (C) approximately $1.5 million of the Galtney Loan; (D) approximately $800,000 of the Nagpal Debt; (E) approximately $3.4 million of the Stockholder Debt; and (F) approximately $11.2 million of the Physician Notes and (ii) the conversion of the Preferred Stock and all other outstanding equity securities into Common Stock upon the closing of the Offering. (b) To record the historical basis of the assets acquired and liabilities assumed by the Company in the Affiliation Transactions. In connection with the Affiliation Transactions, the Company issued 3,279,008 shares of common stock, paid cash of approximately $17.6 million and issued $11.2 million of the Physician Notes. The accounts receivable were recorded at net realizable value and the furniture, fixtures and equipment was recorded at fair market value. In connection with the recording of intangible assets, primarily Management Services 24 Agreements, the Company analyzed the nature of each Practice with which a Management Services Agreement was entered into, including the number of physicians in each Practice, number of offices and ability to recruit additional physicians, the Practice's relative market position, the length of time each Practice had been in existence and the term and enforceability of the Management Services Agreement. The Management Services Agreements are for a term of 40 years and typically cannot be terminated by the Practice without cause, consisting primarily of bankruptcy or material default. See Notes 1 and 2 to the financial statements. The breakdown of the Affiliation Transactions in the aggregate resulted in total consideration of $36.4 million, consisting of cash of $17.6 million, notes payable to physician groups of $11.2 million and Common Stock of $7.6 million. Of such total consideration, $22.1 million was allocated to Management Services Agreements, $8.8 million was allocated to accounts receivable, $.6 million was allocated to other current assets, $2.3 million was allocated to furniture, fixtures and equipment and $(2.6) million was allocated to accrued liability. The Company believes that there is no material value allocable to the employment and noncompete agreements entered into between the Existing Practices and the individual physicians, because the primary economic beneficiaries of these agreements are the Existing Practices, which are entities that the Company does not legally control. The Company believes that the Existing Practices are long-lived entities with an indeterminable life and that the physicians, patient demographics and various contracts will be continuously replaced. The amounts allocated to the Management Services Agreement are being amortized over periods varying from 7 to 25 years. The Emerging Issues Task Force of the Financial Accounting Standards Board is currently evaluating certain matters relating to the PPM industry, which the Company expects will include a review of the consolidation of professional corporation revenues and the accounting for business combinations. The Company is unable to predict the impact, if any, that this review may have on the Company's affiliation strategy, allocation of consideration related to affiliations and amortization life assigned to intangible assets. (c) To record $17.8 million raised after June 30, 1997. Of such amount, $1.3 million was provided from the issuance of 208,333 shares of Series E Preferred Stock and $16.5 million was provided from the Comdisco Loan, additional HCFP Debt, Stockholder Debt, the Nagpal Debt, the Galtney Loan and the Debentures. The Debentures are convertible into 555,556 shares of Common Stock. 25 SELECTED FINANCIAL INFORMATION The following selected financial data with respect to the Company's statements of operations for the year ended December 31, 1996 and the balance sheet data at December 31, 1996 have been derived from the financial statements of the Company which have been audited by Ernst & Young LLP, independent certified public accountants. The selected financial data presented below for the six months ended June 30, 1996 and 1997 and the balance sheet data at June 30, 1997 are unaudited and were prepared by management of the Company on the same basis as the audited financial statements appearing elsewhere in this Prospectus and, in the opinion of management of the Company, include all adjustments necessary to present fairly the information set forth therein. The results for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the year ending December 31, 1997 or future periods. The following data should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED ------------------ DECEMBER 31, 1996 1996 1997 ----------------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Practice revenue, net................................................... $ 6,029 $ -- $19,907 Less: physician and other provider services............................. (2,912) -- (9,509) -------- ------- ------- Management fee revenue.................................................. 3,117 -- 10,398 Costs and expenses: Medical support services............................................. 2,844 -- 9,541 General and administrative........................................... 1,278 51 2,139 Depreciation and amortization........................................ 104 1 300 Interest expense (income), net....................................... -- -- 294 -------- ------- ------- Total costs and expenses........................................... 4,226 52 12,274 Loss before income taxes................................................ (1,109) (52) (1,876) Income taxes............................................................ -- -- -- -------- ------- ------- Net loss................................................................ $(1,109) $(52) $(1,876) -------- ------- ------- -------- ------- ------- Net loss per common share............................................... $ (0.09) $0.00 $ (0.15) -------- ------- ------- -------- ------- ------- Weighted average common shares outstanding.............................. 11,852 11,217 12,480
DECEMBER 31, JUNE 30, 1996 1997 ------------ -------- (IN THOUSANDS, EXCEPT OPERATING DATA) BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 1,439 $ 6,915 Working capital........................................................................ 1,819 7,490 Total assets........................................................................... 13,675 27,899 Long-term debt, less current portion................................................... 59 6,540 Total stockholders' equity............................................................. 7,724 11,546 OTHER OPERATING DATA: Number of Practices.................................................................... 3 8 Number of physicians................................................................... 34 57
26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and notes thereto of the Company included elsewhere in this Prospectus. This Prospectus contains forward-looking statements. Discussions containing such forward-looking statements may be found in the material set forth below and under 'Business,' as well as in this Prospectus generally. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth under 'Risk Factors' and the matters set forth in this Prospectus generally. OVERVIEW The Company is a PPM that provides management services to physician practices that focus on musculoskeletal care, which involves the medical and surgical treatment of conditions relating to bones, muscles, joints and related connective tissues. The broad spectrum of musculoskeletal care offered by the physician practices ranges from acute procedures, such as spine or other complex surgeries, to the treatment of chronic conditions, such as arthritis and back pain. As of the date of this Prospectus, the Company has affiliated (the 'Affiliation Transactions') with 24 Existing Practices comprising 112 doctors practicing in Arizona, California, Florida, Pennsylvania and Texas by entering into Management Services Agreements. The Company was incorporated in Delaware in January 1996 and affiliated with the first Existing Practice in July 1996. At December 31, 1996, the Company had entered into Management Services Agreements with three Existing Practices comprising 34 physicians at that time and 37 physicians as of the date of this Prospectus. During the first ten months of 1997, the Company entered into additional Management Services Agreements with 21 Existing Practices, comprising 75 physicians and acquired the IPA with 42 physicians in Phoenix, Arizona. The total consideration paid to a Practice's physicians, once the Practice has agreed to affiliate with the Company, is based on a multiple of the Company's management fee plus the fair market value of the Practice's furniture, fixtures and equipment and, subject to legal limitations regarding Medicare and Medicaid receivables, the estimated net realizable value of its accounts receivable. The consideration paid by the Company consists of Common Stock, cash and the assumption of certain liabilities (principally notes payable to financial institutions secured by receivables of the Practice, which notes are repaid at the time the Affiliation Transaction is consummated). In exchange for this consideration, the Practice enters into a 40-year Management Services Agreement with the Company. Practice revenue represents the revenue of the Existing Practices and the COSI ambulatory surgery center reported at the estimated realizable amounts from patients, third party payors and others for services rendered, net of contractual and other adjustments. Management fee revenue represents Practice revenue less amounts retained by the Existing Practices (consisting of physician and other provider services costs, principally compensation and fees paid to physicians and other health care providers) which are paid to the physicians pursuant to the Management Services Agreements. Under each Management Services Agreement, the Company assumes responsibility for the management of the non-medical operations of the Practice, employs substantially all of the non-professional personnel utilized by the Practice and may provide the Practice with the facilities and equipment used in its medical practice. For a more detailed discussion of the rights and obligations of the parties to the Management Services Agreements, see 'Business--Contractual Agreements With the Practices--Management Services Agreement.' The Company's management fee revenue constitutes a stated percentage of each Practice's net collected revenue, except that under one Management Services Agreement the Company's management fee is based on the Existing Practice's net operating income. See 'Certain Transactions--Affiliation Transactions.' Accordingly, the Company's revenues are dependent on the Existing Practices' revenues, which must be billed and collected. The percentage of revenue paid to the Company as a management fee is generally 10% to 15% of the net collected revenue of the Practice. The management fees and an amount equal to 100% of the clinic expenses are reflected as management fee revenue earned by the Company. 27 The Company's operating expenses consist primarily of the expenses incurred in fulfilling its obligations under the Management Services Agreements. These expenses include medical support services (principally clinic overhead expenses that would have been incurred by the Existing Practices, including non-professional employee salaries, employee benefits, medical supplies, malpractice insurance premiums, building and equipment rental and other expenses related to clinic operations) and general and administrative expenses (personnel and administrative expenses in connection with maintaining a corporate office function that provides management, contracting, administrative, marketing and development services to the Existing Practices). As a result of the Company's rapid growth, costs and expenses exceeded management fee revenue due to the start-up nature of the Company. The level of these costs and expenses are expected to continue to increase as affiliations with additional Practices are achieved and the Company adds to its management infrastructure. RESULTS OF OPERATIONS The following table sets forth the percentages of the Existing Practices' revenue represented by certain items reflected in the Company's consolidated statements of operations. As a result of the Company's limited period of existence and affiliation with the Existing Practices, the Company does not believe that comparisons between periods and percentage relationships within the periods set forth below are meaningful.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------- Practice revenue, net........................................................... 100.0% 100.0% Less: physician and other provider services..................................... 48.3 47.8 ------ ------ Management fee revenue.......................................................... 51.7 52.2 Costs and expenses: Medical support services...................................................... 47.2 47.9 General and administrative.................................................... 21.2 12.2 Depreciation and amortization................................................. 1.7 1.5 ------ ------ Total costs and expenses................................................... 70.1 61.6 ------ ------ Loss before income taxes........................................................ (18.4) (9.4) Income taxes.................................................................... -- -- ------ ------ Net loss........................................................................ (18.4)% (9.4)% ------ ------ ------ ------
Practice Revenue, Net. For the year ended December 31, 1996, net practice revenue was $6.0 million arising from Affiliation Transactions with LVBMJ on July 1, 1996 and SCOI and STSC on November 1, 1996 ('the 1996 Affiliations'). For the six months ended June 30, 1997, net practice revenue was $19.9 million arising from the 1996 Affiliations and affiliations with five additional Practices comprising 21 physicians at April 1, 1997 (LOS and Tri-City) and June 1, 1997 (Gold Coast and two additional Practices in Los Angeles, CA). Physician and Other Provider Services. Physician and other provider services for the year ended December 31, 1996 was $2.9 million consisting of compensation and fees paid to physicians and other health care providers pursuant to Management Services Agreements entered into on July 1, 1996 and November 1, 1996. For the six months ended June 30, 1997, physician and other provider services was $9.5 million, reflecting the effect of the 1996 Affiliations and affiliations with five additional Practices pursuant to Management Services Agreements executed in the first six months of 1997. Management Fee Revenue. Management fee revenue for the year ended December 31, 1996 was $3.1 million as a result of the factors set forth above. For the six months ended June 30, 1997, management fee revenue was $10.4 million as a result of the factors set forth above. Medical Support Services. Medical support services, principally clinic overhead expenses, was $2.8 million for the year ended December 31, 1996, resulting from the 1996 Affiliations. For the six months ended June 30, 1997, medical support services was $9.5 million, reflecting the 1996 Affiliations, plus the effect of five additional Management Services Agreements executed in the first six months of 1997. General and Administrative. General and administrative expenses for the year ended December 31, 1996 was $1.3 million, reflecting the expenses incurred in establishing a corporate office. These expenses consisted of 28 labor costs, group benefits, accounting, legal, rent and other expenses, substantially all of which were incurred after July 1, 1996 (the date of the first Affiliation Transaction). For the six months ended June 30, 1997, general and administrative expenses were $2.4 million, of which $1.8 million were incurred in the three months ended June 30, 1997, reflecting the Company's increased development of corporate infrastructure to support the additional affiliations as they occur. While the Company expects that general and administrative expenses will continue to increase as more Practices affiliate with the Company, it also expects them to continue to decline as a percentage of both practice revenue and management fee revenue. Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 1996 was $104,000, substantially all of which was incurred after July 1, 1996. The depreciation expense relates to acquired furniture, fixtures and equipment and the amortization relates to Management Services Agreements. For the six months ended June 30, 1997, depreciation and amortization was $300,000, reflecting the additional Affiliation Transactions entered into in the first six months of 1997. The Company expects that depreciation and amortization expenses will continue to increase significantly as additional Practices affiliate with the Company, but may remain relatively constant as a percentage of both practice revenue and management fee revenue. Although the Company's net unamortized balance of intangible assets acquired ($7.3 million at June 30, 1997) is not considered to be impaired, any future determination that a significant impairment has occurred would require the write-off of the impaired portion of unamortized intangible assets, which could have a material adverse effect on the Company's results of operations. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996 and June 30, 1997, the Company had $1.8 million and $7.5 million, respectively, in working capital and $1.4 million and $6.9 million, respectively, in cash and cash equivalents. The Company's principal sources of liquidity as of December 31, 1996 and June 30, 1997 consisted of the cash and cash equivalents and net accounts receivable of $5.8 million and $10.3 million, respectively. The Company has financed its Affiliation Transactions, capital expenditures and working capital needs since its inception through a combination of (i) private placements of capital stock; (ii) borrowings from institutional lenders; and (iii) short-term borrowings from stockholders. For the year ended December 31, 1996 and the six months ended June 30, 1997, cash used in operations was $1.0 million and $1.2 million, respectively, resulting primarily from net operating losses adjusted for non-cash expenses. Cash used in investing activities for the year ended December 31, 1996 and the six months ended June 30, 1997 was $4.6 million and $8.0 million, respectively, relating primarily to Affiliation Transactions resulting in increases in accounts receivable, intangible assets and furniture, fixtures and equipment. Cash provided by financing activities for the year ended December 31, 1996 and the six months ended June 30, 1997 was $7.1 million and $14.7 million, respectively. For the year ended December 31, 1996, substantially all of the cash provided resulted from proceeds from the issuance by the Company of two series of Preferred Stock. For the six months ended June 30, 1997, cash provided by financing activities resulted primarily from $7.8 million in net borrowings and $5.0 million in proceeds from the issuance of three series of preferred stock. Beginning in March 1997, the Company entered into the HCFP Loan Agreements with HCFP Funding, secured by the accounts receivable acquired from Existing Practices. The Company may borrow up to an aggregate of $17.0 million under HCFP Loan Agreements, subject to a borrowing base of 85% of eligible accounts receivable. In connection with the Offering, the Company will repay all outstanding amounts under the HCFP Loan Agreements. See 'Use of Proceeds.' Borrowings under the HCFP Loan Agreements bear interest at the prime rate plus 1.75% per annum. The HCFP Loan Agreements require the Company to maintain a prescribed level of tangible net worth, place limitations on indebtedness, liens, and investments and prohibit the payment of dividends. On June 30, 1997, the Company entered into an additional HCFP Loan Agreement secured by a pledge of all of the assets of the Company. The Company may borrow up to $3.3 million under such agreement for Practice affiliations. Borrowings under such agreement bear interest at the prime rate plus 3.5%. Interest only is payable 29 through December 31, 1997, at which time the loan converts to a term loan repayable in 36 monthly installments. In addition, in connection with such agreement the Company issued warrants to HCFP to purchase 40,000 shares of the Common Stock. In August 1997, the Company borrowed an aggregate of $6.5 million under the Comdisco Loan Agreement and the Galtney Loan Agreement to fund Practice affiliations. The Comdisco Loan and the Galtney Loan both have three year terms, bear interest at 14% per annum and are secured by a second lien on all of the Company's tangible and intangible personal property. On September 9, 1997, the Company issued $4.0 million principal amount of its 6% convertible debentures due 2000 (the 'Debentures') to fund Practice affiliations. The Debentures are convertible into Common Stock. See 'Certain Transactions.' On October 14, 1997, the Company obtained short-term financing in the form of a secured term note for $2.5 million payable to HCFP Funding to fund Practice affiliations, secured by a lien on substantially all of the assets of the Company. The loan bears interest at the prime rate plus 3.5% (12% at October 31, 1997). Interest only is payable through December 31, 1997 and the entire principal sum is due and payable on January 10, 1998. In connection with this loan agreement, the Company will pay HCFP Funding a fee in the amount of $300,000 on the maturity date. On October 15, 1997, the Company obtained short-term bridge financing in the aggregate amount of $3.4 million from certain stockholders, including Dr. Nagpal, to fund Practice affiliations. In connection with these loans, the Company issued warrants to such stockholders to purchase an aggreagte of 67,500 shares of Common Stock at an exercise price of $0.01 per share. Outstanding loans bear interest at the prime rate plus 3.5% (12% at October 31, 1997). The principal of and accrued interest on such loans are due and payable January 10, 1998. During October 1997, in connection with several Practice affiliations, the Company issued promissory notes to the physicians in the aggregate amount of approximately $11.2 million. These outstanding promissory notes bear interest at rates ranging from 6% to 11%. Substantially all of these promissory notes are due and payable either on the date of the completion of the Offering or at various maturity dates ranging from December 31, 1997 to March 31, 1998. The Company's affiliation and expansion programs will require substantial capital resources. In addition, the operations and expansion of the Practices, including the addition of Ancillary Service Facilities, and of the IPA will require ongoing capital expenditures. The financing of future affiliations and business expansion is anticipated to be provided by a combination of the proceeds of the Offering, borrowings under the HCFP Loan Agreements and cash flows from operations. The Company believes that the combination of these sources will be sufficient to meet its currently anticipated operating and capital expenditure requirements and working capital needs through 1998. In order to meet its affiliation and expansion goals as well as its long-term liquidity needs, the Company expects to incur, from time to time, additional short-term and long-term indebtedness and to issue additional debt and equity securities, the availability and terms of which will depend upon market and other conditions. See 'Risk Factors--Risks Related to Intangible Assets.' REIMBURSEMENT RATES The health care industry is experiencing a trend toward cost containment as payors seek to improve lower reimbursement and utilization rates with providers. Further reductions in payments to health care providers or other changes in reimbursement for health care services could adversely affect the Practices with which the Company is affiliated and adversely affect the Company's results of operations. 30 BUSINESS GENERAL The Company is principally a PPM that provides management services to physician practices that focus on musculoskeletal care, which involves the medical and surgical treatment of conditions relating to bones, muscles, joints and related connective tissues. The broad spectrum of musculoskeletal care offered by the physician practices ranges from acute procedures, such as spine or other complex surgeries, to the treatment of chronic conditions, such as arthritis and back pain. The management services provided by the Company include physician practice and network development, marketing, payor contracting and financial, administrative and clinical information management. As of the date of this Prospectus, the Company has entered into Affiliation Transactions by entering into Management Services Agreements with 24 Managed Practices comprising 112 physicians practicing in Arizona, California, Florida, Pennsylvania and Texas and owns and operates one IPA with 42 physicians in Phoenix, Arizona. INDUSTRY OVERVIEW The market for muscoloskeletal care in the United States is significant and growing. According to the AAOS, total direct costs associated with the delivery of musculoskeletal care exceeded $60 billion in 1988 and increased to approximately $72 billion in 1992. The increase in expenditures can be attributed to various factors, including improvements in medical technology, more active lifestyles which have resulted in the growth of sports medicine and the overall aging of the population. In 1992, the 65-and-over age group represented approximately 12% of the U.S. population, but accounted for more than half of all musculoskeletal care expenditures. Musculoskeletal care is provided by a variety of medical and surgical specialists. Although the orthopaedic surgeon is the primary musculoskeletal provider, musculoskeletal care is also provided by physiatrists, rheumatologists, podiatrists, occupational medicine physicians, rehabilitative therapists, neurosurgeons and neurologists. In addition, there are a number of subspecialties of orthopaedics, including adult reconstructive (joint replacement) surgery, spinal care, sports medicine, foot and ankle care, hand and upper extremity care, pediatrics and trauma care. The AAOS estimates that in 1995 there were approximately 23,000 orthopaedic surgeons, as well as approximately 5,500 physiatrists, 3,500 rheumatologists, 3,000 occupational medicine physicians, 4,900 neurosurgeons and 11,400 neurologists in the United States. Historically, most orthopaedic procedures have been performed on an inpatient basis. Recently, however, there has been a trend towards handling these procedures on an outpatient basis. The Company believes this trend may be attributable to a number of factors: less invasive surgery with the arthroscope and new anaesthetic techniques have significantly reduced post-operation trauma; outpatient procedures are less costly and thus more desirable to both patients and payors; outpatient settings represent a 'health environment' which promotes wellness and improved patient attitudes; and outpatient settings foster preventive team situations which minimize waste and improve efficiency. For these reasons, the Company believes that the trend toward treatment in the outpatient setting will continue to increase in the foreseeable future. According to AAOS, in 1996, the principal payors for musculoskeletal care were Medicare and Medicaid at 27% (combined), managed care, including discounted fee-for-service and capitation, at 26%, private pay (indemnity insurers) at 23% and workers' compensation at 17%. Reflecting the emergence of managed care, the percentage of payments by private payors declined from 39% in 1988 to 23% in 1996, while payments from managed care sources increased from 12% to 26%. This shift from private pay to managed care reimbursement has added the complexity of managing the clinical and administrative aspects of the physicians' practices and increased the emphasis on managing practices more efficiently. Historically, surgical and non-surgical orthopaedic specialists have maintained separate practices; recently, however, musculoskeletal physicians have begun to follow the consolidation trend seen elsewhere in the health care industry. The AAOS estimates that approximately 3-5% of all orthopaedic practices have affiliated with PPMs as of February 1997. Consolidated practices increasingly are utilizing a separate professional management company to handle practice management functions such as staffing, information systems, managed care contracting, leasing, purchasing and marketing, thereby enabling the physicians to focus on providing high quality medical services. Several factors have contributed to the trend toward affiliation with PPMs by 31 musculoskeletal physicians. These factors include the increasing complexity of managing a practice due, in part, to the increase in managed care contracting, the need for cost-effective management of patient care, the economies of scale achievable in such areas as administration, purchasing and marketing, the desire to capture revenues from ancillary services and in-network referrals and the growing importance of capital resources to acquire and maintain state-of-the-art equipment, clinical facilities and management information systems. STRATEGY The Company's goal is to develop the leading musculoskeletal network in each of its markets by aligning the Company's interests with those of the Practices' physicians. Key components of the Company's strategy are: Expand Into New Markets. The Company intends to expand into targeted new markets by establishing relationships and affiliations with the most qualified practices in such markets. The Company targets markets that have a large enough population to support a viable musculoskeletal physician network. The Company generally seeks to affiliate initially with platform practices in new markets. Platform practices generally consist of at least five physicians who have the demonstrated ability to grow in their market. Potential affiliation candidates are evaluated on a variety of factors, including, but not limited to, physician credentials and reputation, the practice's competitive market position, specialty and subspecialty mix of physicians, historical financial performance, growth potential, the local demographics potential and potential for development of Ancillary Service Facilities. Continue to Develop Existing Markets. The Company strengthens its market positions by (i) providing uniform financial reporting systems to the Practices; (ii) implementing uniform practice management systems to facilitate the collection of financial and clinical data; (iii) investing in new clinical equipment such as EMGs and bone densitometers; (iv) increasing the number of physicians and diversifying the subspecialties in a Managed Practice; (v) developing satellite offices to accommodate increased patient flow; (vi) committing capital to develop or acquire Ancillary Service Facilities; and (vii) expanding revenues through additional payor contracting and focused marketing on a regional basis. The Company believes these services will enable the physicians to devote more time to the practice of medicine and the strategic development of their practice, thereby increasing revenues and creating greater efficiencies in the operation of each Practice. Introduce Ancillary Service Facilities. Ancillary Service Facilities will provide such services as ambulatory surgery, physical therapy and MRI services. Once the Practices or a network in a particular market have achieved a significant local presence, the Company plans to introduce Ancillary Service Facilities by assisting the Practices in developing such facilities. The first Ancillary Service Facility is planned to open in late 1997 (a mobile MRI unit in San Antonio, Texas) and additional Ancillary Service Facilities are planned to be opened in 1998 in other markets. In addition, the Company currently manages one physician-owned ambulatory surgery center which was under development by the physicians prior to their involvement with the Company and for which the Company receives a 10% management fee. For a discussion of the applicability of the Stark Law to the operation of the Ancillary Service Facilities, see 'Business--Governmental Regulation and Supervision--The Stark Self-Referral Laws.' Develop Disease Management and Clinical Information System. Following the implementation of a uniform practice management system, the Company has a two-step strategy for creating a disease management and clinical information system. The Company is in the process of developing standard procedures for gathering clinical and financial information, such as personal patient data, physician and procedure identifier codes, payor class and amounts charged and reimbursed. The Company's goal is to establish a non-patient identifiable information database across all Practices pursuant to which efficiencies may be achieved by gathering, interpreting and sharing clinical information, standardizing referral patterns and treatment protocols within a physician network and coordinating the needs of the patient population in any geographic market. Utilization of the database is expected to result in an increased ability to control and predict the cost of care for various patient diagnoses. The Company believes that its network of musculoskeletal physicians with access to reliable clinical outcome information will make the Company more attractive to payors because the Company will be able to demonstrate cost-effective quality care. 32 BMJ OPERATIONS Existing Practices. Since commencing operations in January 1996 until October 31, 1997, the Company has affiliated with 24 Existing Practices, comprising 112 physicians, in Arizona, California, Florida, Pennsylvania and Texas, and owns and operates one IPA, comprising 42 physicians, in Phoenix, Arizona. Approximately 83% of the physicians at the Managed Practices are orthopaedic surgeons. The following table sets forth certain information concerning the Existing Practices.
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 - -------- ----------- --------------------- ---------- ------------------- --------- --------- --------- Eastern LVBMJ Bethlehem, PA 7/1/96 6 Orthopaedics 0 2 7 1 Physiatry 1 Spine surgery LOS Ft. Lauderdale, FL 4/1/97 6 Orthopaedics 2 5 23 1 Podiatry Gold Coast Palm Beach 6/1/97 5 Orthopaedics 0 2 11 County, FL Central STSC San Antonio, TX 11/1/96 6 Orthopaedics 9 1 1 1 Physiatry Western SCOI Los Angeles, CA 11/1/96 20 Orthopaedics 4 7 10* 2 Physiatry Tri-City Oceanside, CA 4/1/97 7 Orthopaedics 0 0 0 Sun Valley Sun City, AZ 7/1/97 4 Orthopaedics 0 0 0**
- ------------------ * Includes three doctors and three separate practices in South Lake Tahoe, California. ** Does not include the IPA with 42 physicians in Phoenix, Arizona. Regional Business Model. While health care has become an increasingly significant national issue, it is still delivered on a local level. Therefore, in order to execute its growth and operating strategies, the Company has divided the United States into the eastern, central, and western regions. The Company believes that its regional business model benefits both the Company and the Practices. Local management teams allow the Company to better understand the specific characteristics of a region, such as the demographics, the payor mix, the competitive landscape and the managed care environment, thus enabling the Company to be more effective in marketing to patients and negotiating with third party payors and suppliers. In addition, the regional management team is able to develop and maintain long-term relationships with both the Practices' physicians and local entities such as hospitals, managed care networks, suppliers and non-musculoskeletal physician groups. The Company believes that due to its regional business model, it is better equipped to develop relationships with such local entities than PPMs with centralized business models. A regional vice president is responsible for a management team that supervises the development of each market within a region. The regional management team coordinates market expansion initiatives and integration of administrative services within the region. The regional team provides management and network services related to the following: (i) integration and transition; (ii) physician services including cost containment and operating efficiencies; (iii) ancillary services development and management; (iv) physician recruitment and professional development; (v) workers' compensation; and (vi) payor contracting. Affiliation Structure. The Company believes its affiliation model aligns the interests of the Company and the Practices' physicians by (i) providing equity ownership in the Company to the physicians; (ii) assuring that the physicians and the Company share in the profits from the Ancillary Service Facilities and Practice cost savings; (iii) focusing on revenue enhancement; and (iv) reducing the amount of time the physicians must spend on administrative matters, thereby enabling them to dedicate more of their efforts to the delivery of health care services. Additionally, each Practice retains professional autonomy and control over its medical practice through continued ownership and participation in Practice governance. The total consideration paid to a Practice's physicians, once the Practice has agreed to affiliate with the Company, is based on a multiple of the Company's management fee plus the fair market value of the Practice's 33 assets, including furniture, fixtures and equipment and, subject to legal limitations regarding Medicare and Medicaid receivables, the estimated net realizable value of its accounts receivable. See 'Business--Contractual Agreements with the Practices--Asset Purchase Agreement.' The multiple of the Company's management fee is determined by reference to a number of factors, including the geographic location of the Practice, the size and specialty mix of the Practice, the Practice's competitive market position, the Practice's historical financial performance and the potential for the development of Ancillary Service Facilities. See '--Strategy--Expand into New Markets.' The total consideration paid by the Company consists of Common Stock, cash and the assumption of certain liabilities (principally notes payable to financial institutions secured by receivables of the Practice, which notes are repaid at the time the Affiliation Transaction is consummated). In exchange for this consideration, the Practice enters into a 40-year Management Services Agreement with the Company. The revenue to the Company from a Practice is typically based on a specified percentage (typically 10% to 15%) of the Practice's revenues (rather than on a percentage of the net operating income of the Practice) plus reimbursement of the Practice's overhead expenses and two-thirds of the cost savings the Company is able to achieve through its purchasing power. See 'Certain Transactions--Affiliation Transactions.' In addition, the Company will be responsible for arranging the funding of Ancillary Service Facilities when appropriate and will, subject to applicable laws, share appropriately in the profits from such facilities. Upon affiliating with a Practice, the Company assumes the management of substantially all aspects of the Practice's operations other than the provision of medical services. Pursuant to the Management Services Agreements, the Company assists the Practices in the preparation of operating budgets and capital project analyses, the coordination of group purchases of medical supplies and insurance and the introduction of physician candidates. The Company provides the full range of administrative services required for a Practice's day-to-day non-medical operations, including management and monitoring of the Practice's billing and collection, accounting, payroll, legal services, recordkeeping, cash flow activity, physician recruiting, payor contracting and marketing. Comprehensive administrative support should facilitate more effective billing and collections, and, as the Company grows, economies of scale in effecting purchases. In addition, the Company plans to integrate the Practices' management information systems into a single system that will expand the financial and clinical reporting capabilities of each of the Practices and facilitate the analysis of data collected. The Company believes that through its affiliation with Practices across multiple markets it can achieve benefits in the aggregate purchasing of products and services for the Practices. The Company believes that, in particular, it can assist the Practices in reducing its purchasing expenses such as insurance, medical equipment and clinical and administrative supplies. Pursuant to the Management Services Agreements, the Company receives two-thirds of any such cost savings. Financial and Practice Management Systems. To date, the Company has implemented an interconnected financial accounting system in the Practices. This system allows the Company to analyze the financial aspects of the Practices from a centralized location and ensure uniformity with respect to financial classifications at the Practice level. The Company receives daily cash receipts related to the collection of patient accounts receivable and revenues. The Company utilizes these funds to pay the clinic overhead expenses (medical support services) as they are incurred and pays to the Practice a physician draw based upon a predetermined percentage of estimated net collected revenue. Annually, the cash actually collected and paid as physician draw, medical support services or management fee is reconciled with the Practice and any over/under payments are settled. The Company believes that the implementation of a uniform practice management system will enable it to monitor the operations of the Practices in a cost-effective manner, enhance utilization of the Practices, develop practice protocols and provide the Company with a competitive advantage in negotiating contracts with third party payors. The Company is currently reviewing various practice management software programs and expects to select and implement such a program within 12 to 18 months following completion of the Offering. The Company believes that the implementation of the practice management system, together with the integrated financial accounting system, will enable it to gather data that will be the foundation for a disease management and clinical information system. The Company intends to capture, retain and use such information in accordance with applicable legal and ethical requirements regarding the confidentiality of medical records. The 34 Company further believes that such a system will facilitate the collection of clinical information such as type of injuries reported, patient characteristics and diagnoses of injuries, that will improve provider and patient access to resources and technology, facilitate quantitative analysis of outcome quality and cost and eventually allow for the development of curative and palliative regimens based on such information. The Company intends to obtain the informed, written consent of each patient for whom information will be included in the database. Staffing and Facilities. The Company employs most of the Practices' non-professional personnel. These non-professional personnel, along with additional personnel at the Company's headquarters, manage the day-to-day non-medical operations of each of the Practices, including, among other things, secretarial, bookkeeping, scheduling and other routine services. Under the Management Services Agreements, the Company must provide facilities and equipment to the Practices and, to this end, the Company assumes the Practice's existing leases for the facilities and equipment and purchases the assets, or a leasehold interest in the assets, utilized by the Practice. DEVELOPMENT OF ANCILLARY SERVICE FACILITIES Within each market, the Company plans to establish Ancillary Service Facilities including, ambulatory surgery centers, physical therapy facilities and MRI centers and mobile units. In order to establish such facilities, the Company has designated professionals within each market to locate sites, identify acquisition opportunities and otherwise arrange for the provision of the ancillary services. Additionally, the Company's regional management teams are responsible for marketing the Ancillary Service Facilities to payors and referral sources and staffing, operating and financial management of the facilities. For risks associated with the establishment of Ancillary Service Facilities, see 'Risk Factors--Reliance on New Affiliations and Expansion.' For a discussion of the applicability of the Stark Law to the operation of the Ancillary Service Facilities, see 'Business--Governmental Regulation and Supervision--The Stark Self-Referral Laws.' PAYOR MIX OF EXISTING PRACTICES The Company's Practices derive revenue from a broad mix of third party payors. This payor mix is a result of a number of underlying trends in the patient base of musculoskeletal specialists. A significant portion of reimbursement to physicians in musculoskeletal practices is derived from workers' compensation insurance programs, which generally pay higher reimbursements per procedure than health insurance payors and are generally not subject to co-payments and deductibles. The Company believes that reimbursement from workers' compensation payors will continue to represent a substantial portion of practice revenues because of broader definitions of work-related injuries, the shift of medical costs from health insurance payors to workers' compensation payors, aging of the work force, and the requirement that employers pay the total cost of medical treatment for work-related injuries. The following table sets forth the payor mix of the Existing Practices for the six months ended June 30, 1997:
SIX MONTHS ENDED JUNE 30, 1997 ------------- Workers' compensation................................................ 27% Medicare(1).......................................................... 17 Private payors and managed care(2)................................... 56
- ------------------ (1) Includes 2% attributable to Medicaid. (2) Includes managed care, substantially all of which is on a fee-for-service basis. Workers' Compensation. Workers' compensation is a state-mandated, comprehensive insurance program that requires employers to fund medical expenses, lost wages and other costs resulting from work-related injuries and illnesses. Provider reimbursement methods vary on a state-by-state basis. A majority of states have adopted fee schedules pursuant to which all health care providers are uniformly reimbursed. The fee schedules are set by each state and generally prescribe the maximum amounts that may be reimbursed for a designated procedure. In most states without fee schedules, health care providers are reimbursed based on usual, customary and reasonable fees charged in the state in which the services are provided. In Florida (a state in which the Company does 35 business), state law mandates that all workers' compensation services be provided under a managed care arrangement approved by Florida's Agency for Healthcare Administration. Medicare. The federal government has implemented, through the Medicare program, the RBRVS payment methodology for health care provider services. RBRVS is a fee schedule that, except for certain geographical and other adjustments, pays similarly situated health care providers the same amount for the same services. The RBRVS is subject to annual increases or decreases at the discretion of Congress or HCFA. To date, the implementation of RBRVS has reduced payment rates for certain of the procedures historically provided by the Existing Practices. Furthermore, it is expected that, within the next year, HCFA will be required by law to recalibrate the practice expense component of the RBRVS over the next four years in a way that will have positive effects on payments to primary care providers, but will decrease payments for most services provided by specialists, including many services provided by the Existing Practices. Managed Care Payors. An increasing portion of the net revenue of the Existing Practices is derived from managed care payors which make payments under discounted fee-for-service and capitation arrangements. Although rates paid by managed care payors are generally lower than commercial indemnity rates, managed care payors can provide access to large patient volumes. To date, the Company has not entered into any contracts on behalf of the Managed Practices with managed care payors; however, the Company intends to seek to negotiate both discounted fee-for-service and capitated contracts on behalf of the Practices. Discounted fee-for-service contracts involve negotiated rates for specified procedures and services. Under capitated arrangements, providers deliver health care services to managed care enrollees and typically bear all or a portion of the risk that the cost of such services may exceed capitated payments. Private Payors. Rates paid by private third party payors are based on established health care provider and hospital charges and are generally higher than Medicare payment rates. Recently, RBRVS types of payment systems have been adopted by certain private third party payors and may become a predominant payment methodology. Wider implementation of such programs would reduce payments from private third party payors, and could indirectly reduce revenue to the Company. CONTRACTUAL AGREEMENTS WITH THE PRACTICES The Company has entered into Management Services Agreements and, in most cases, Asset Purchase Agreements, Restricted Stock Agreements and Stockholder Noncompetition Agreements (collectively, the 'Affiliation Agreements'), with each of the Existing Practices, and intends to enter into Affiliation Agreements with each additional Practice, to provide management, administrative and development services. The following summary of the Affiliation Agreements is intended to be a general summary of the form of the Affiliation Agreements. The actual terms of the individual Affiliation Agreements, and other service agreements into which the Company may enter in the future, may vary in certain respects from the description below as a result of negotiations with the individual Practices and the requirements of local regulations. The Management Services Agreements and certain related agreements are filed as exhibits to the registration statement of which this Prospectus forms a part. The following summary is qualified in its entirety by reference to such exhibits. For a discussion of circumstances under which a Management Services Agreement may be rendered unenforceable, see 'Risk Factors--Government Regulation.' Management Services Agreement. Under the Management Services Agreement, the Practices are solely responsible for all aspects of the practice of medicine and the Company has the primary responsibility for the business and administrative aspects of the Practices. Pursuant to the Management Services Agreements, the Company provides or arranges for various management, administrative and development services relating to the day-to-day non-medical operations of the Practices. Pursuant to the Management Services Agreements, the Company acts as the exclusive manager and administrator of non-medical services relating to the operation of the Practices. Subject to matters for which the Practices maintain responsibility or which are governed by the Operations Committee (as defined herein) of the Practices, the Company (i) bills patients, insurance companies and other third party payors and collects, on behalf of the Practices, the fees for medical and other services rendered, including goods and supplies sold by the Practices; (ii) provides or arranges for, as necessary, clerical, accounting, purchasing, payroll, legal, bookkeeping and computer services, personnel, information management, preparation of certain tax returns, printing, postage and duplication services and medical transcribing services; 36 (iii) supervises and maintains custody of substantially all files and records (medical records of the Practices remain the property of the Practices); (iv) provides facilities and equipment for the Practices; (v) prepares, in consultation with the Operations Committee and the Practices, all operating and capital expenditure budgets; (vi) orders and purchases inventory and medical supplies as reasonably requested by the Practices; (vii) implements, in consultation with the Operations Committee and the Practices, national and local public relations or advertising programs; (viii) provides financial and business assistance in the negotiation, establishment, supervision and maintenance of contracts and relationships with managed care and other similar providers and payors; (ix) recruits on behalf of the Practices' physician employees and other medical professionals; and (x) ensures that all medical and technical personnel have the licenses, credentials, approvals and other certifications needed to perform their respective duties. Under the Management Services Agreements, the Practices retain the responsibility for, among other things providing professional services to patients in compliance with the ethical standards, laws and regulations to which they are subject. In addition, the Practices maintain exclusive control of all aspects of the practice of medicine and the delivery of medical services. The revenue to the Company from a Practice is typically based on a specified percentage (typically 10-15%) of the Practice's revenues (rather than on a percentage of the net operating income of the Practice) plus reimbursement of the Practice's overhead expenses and two-thirds of cost savings that the Company is able to achieve through its purchasing power. See 'Certain Transactions--Affiliation Transactions.' In addition, the Company will be responsible for arranging the funding of Ancillary Service Facilities when appropriate and will, subject to applicable laws, share appropriately in the profits from such facilities. Each Management Services Agreement has an initial term of 40 years, with automatic extensions (unless at least six months' notice is given) of additional five-year terms. The Management Services Agreement may be terminated by either party if the other party (a) files a petition in bankruptcy or other similar events occur, or (b) defaults in any material respect in the performance of any duty or obligation under the Management Services Agreement, which default is not cured within a specified period after receipt of notice thereof or (c) any of the representations and warranties made by such party in the Management Services Agreement is materially untrue or misleading and such party fails to correct such matter after receipt of written notice thereof. The Company also has the right to terminate the Management Services Agreement in the event that the Practice is excluded from participation in the Medicaid or Medicare program for any reason. Either party may also terminate the Management Services Agreement if such party determines that the structure of the Management Services Agreement violates any state or federal laws or regulations existing at such time and that an amendment to the Management Services Agreement will be unable to correct such defect. Upon termination of the Management Services Agreement, neither party is obligated to the other party except as set forth below. In the event of such termination, the Company is required to complete, within four months after the termination date, the annual settlement of the respective obligations of the Company and Practice for the period prior to the termination date. Furthermore, following any such termination, the Company must sell to the Practice all of the Company's interest in the assets that are located in the offices of the Practice and used in connection with the medical practice. The purchase price for all of such assets will be agreed upon by the parties; however, if an agreement is not reached, the purchase price will be determined by an independent appraisal. Under the Management Services Agreement, the Company is entitled to receive all of the revenues collected by the Practice during the 90-day period following termination of the agreement. The Company has entered into a Management Services Agreement with STSC that permits STSC and the individual physicians to rescind the Affiliation Transaction on (i) November 1, 1998 if the Company has not affiliated with an aggregate of 16 physicians in San Antonio, Texas by such date and (ii) November 1, 2003. In the event of a rescission of the Affiliation Transaction, the transaction will be unwound, with the assets (other than the accounts receivable) acquired by the Company being returned to the Existing Practice and the purchase price paid therefor being returned to the Company. The physician owners and the employed physicians, if any, who received Common Stock of the Company in connection with the Affiliation Transaction (including any transferees of such persons) will be required to return such capital stock to the Company. In addition, the Management Services Agreements for five other Existing Practices comprising eight physicians contain 37 provisions that permit such Existing Practices to rescind their Affiliation Transactions on their respective seventh anniversaries. See 'Risk Factors--Rescission Rights.' Under the Management Services Agreement, the Practice agrees generally not to, at any time prior to the second anniversary of the termination of the Management Services Agreement, compete with the Company by providing services to other medical groups similar to those provided by the Company under the Management Services Agreement or by entering into a management relationship with another provider of non-professional management services that provides such services to multiple physician groups. The Company and the Practice agree not to disclose to third parties any confidential information relating to the other party. Asset Purchase Agreement. Subject to the terms and conditions of an asset purchase agreement (the 'Asset Purchase Agreement'), the Company purchases from the Practice all of those assets used by the Practice in the operation of the medical practice, including medical equipment, furniture, trade fixtures, office equipment, supplies, and, subject to legal limitations regarding Medicare and Medicaid receivables, outstanding accounts receivable. Pursuant to an assignment and assumption agreement entered into as a condition to the Asset Purchase Agreement, the Company also acquires a leasehold interest in certain assets leased by the Practice, including offices and equipment. The Company also assumes certain liabilities related to any leased equipment and leased offices. The purchase price paid by the Company under the Asset Purchase Agreement is customarily determined by the parties after an appraisal of the assets being acquired. Under the Asset Purchase Agreement, the Practice agrees to indemnify the Company for any losses resulting from the operation of such medical practice prior to the effectiveness of the affiliation of such Practice with the Company. Restricted Stock Agreement. The Company issues Common Stock to the physician owners of the Practice as partial consideration for affiliating with the Company. Such Common Stock is issued pursuant to the terms and conditions set forth in a restricted stock agreement (the 'Restricted Stock Agreement'), which terms include annual vesting of 25% of the Common Stock each year in a four year period, a right of first refusal for the Company in the event the physician decides to sell such Common Stock and the authority of the Company's Board of Directors to prevent a physician's sale of such Common Stock to a competitor of the Company. The Restricted Stock Agreement further provides that the shares of Common Stock issued by the Company to the physicians remain issued and outstanding regardless of whether such physicians remain with the Practice, but the rights of the individual physicians to such shares (as opposed to the right of the Practice) will vest equally over four years, with the Practice retaining the right to utilize unvested shares to recruit new physicians. Under certain circumstances, including termination of the Management Services Agreement or a physician's death, permanent disability or cessation of active practice, the Company has the right to repurchase all or any part of the unvested shares of Common Stock held by such physician. If the Company elects to repurchase such unvested shares, the price per share is the original value of such Common Stock as set forth in the Restricted Stock Agreement. The Company may also issue Common Stock to employed physicians and other key personnel of the Practice pursuant to a Restricted Stock Agreement containing substantially similar terms. Stockholder Noncompetition Agreement. Under a non-competition agreement (the 'Stockholder Non-competition Agreement'), each physician owner and employed physician of the Practice agrees not to (i) compete directly or indirectly with the Practice in the provision of medical services or with the Company in the provision of practice management services for a period of two years after termination of his affiliation with the Practice and within a 25 mile radius of any of the Practice's offices; or (ii) disclose any confidential information of the Company or the Practice. Each physician further agrees to indemnify the Company and the Practice for any damages they may suffer as a result of the physician's failure to abide by the foregoing covenants. There can be no assurance as to the enforceability of the Noncompetition Agreements. COMPETITION The Company competes with many other entities to affiliate with musculoskeletal practices. Several companies that have established operating histories and greater resources than the Company are pursuing the acquisition of the assets of both general and specialty practices and the management of such practices. Other PPMs and some hospitals, clinics, HMOs and provider networks engage in activities similar to those of the Company. There can be no assurance that the Company will be able to compete effectively with such competitors, that additional competitors will not enter the market, or that such competition will not make it more 38 difficult to affiliate with, and to enter into agreements to provide management services to, medical practices on terms beneficial to the Company. The Practices and the IPA will compete with local musculoskeletal care service providers as well as some managed care organizations. The Company believes that changes in governmental and private reimbursement policies and other factors have resulted in increased competition for consumers of medical services. The Company believes that the cost, accessibility and quality of services provided are the principal factors that affect competition. There can be no assurance that the Practices or the IPA will be able to compete effectively in the markets that they serve. The inability of the Practices or the IPA to compete effectively would have a material adverse effect on the Company. Further, the Practices and the IPA compete with other providers for musculoskeletal managed care contracts. The Company believes that trends toward managed care have resulted in increased competition for such contracts. Other practices and management service organizations may have more experience than the Practices, the IPA and the Company in obtaining such contracts. There can be no assurance that the Company and the Practices will be able to successfully obtain sufficient managed care contracts to compete effectively in the markets they serve. The inability of the Practices to compete effectively for and obtain such contracts could materially adversely affect the Company. See 'Risk Factors--Intense Competition.' GOVERNMENT REGULATION AND SUPERVISION The delivery of health care services is regulated at both the federal and state level. The laws applicable to the Company are subject to evolving interpretations, and therefore there can be no assurance that a review of the Company's operations by federal or state judicial or regulatory authorities would not result in a determination that the Company, the IPA or one of the Practices has violated one or more provisions of federal or state law. Any such determination could have a material adverse effect on the Company. Federal Law Among the significant federal laws that apply to the Company's activities are those that prohibit: (a) the filing of false or improper claims with a federally funded health program; (b) unlawful inducements for the referral of business reimbursable under most federally funded health programs; (c) fraud in regard to payment or service in any health program; and (d) the billing for the provision of certain Medicare or Medicaid covered items or services where such items or services were provided based upon a referral to the providing entity by a physician who has, or whose immediate family member has, a financial relationship with that entity that does not fall within an applicable exception. False and Other Improper Claims. Under numerous federal laws, including the Federal False Claims Act (the 'False Claims Act'), the federal government is authorized to impose criminal, civil and administrative penalties on any health care provider that files a false claim for reimbursement from a federally funded health program (such as Medicare or Medicaid). The False Claims Act provides for a civil penalty of not less than $5,000 and not more than $10,000 per false claim and between two to three times the amount of damages depending on the facts and circumstances. The Medicare civil monetary penalty is now ten thousand dollars ($10,000) per false item or service claimed. Recently enacted federal legislation also imposes federal criminal penalties on persons who file false or fraudulent claims with private insurers. While the criminal statutes are generally reserved for instances of fraud, the civil and administrative penalty statutes are being applied by the government in an increasingly broad range of circumstances. Civil sanctions may be imposed if the claimant knew or should have known that billing was improper. The government also has taken the position that claiming reimbursement for services that are substandard is a violation of these false claims statutes if the claimant knew or should have known that the care was substandard or rendered under improper circumstances. Private persons may bring civil actions to enforce the False Claims Act. Under certain lower court decisions, claims derived from a violation of the Anti-Kickback Statute (as defined herein) or the Stark Law have been deemed to be, or may under certain circumstances be construed to be, false claims. The Stark Self-Referral Law. The Stark Law prohibits a physician from referring a patient for certain designated health services reimbursable by Medicare or Medicaid to an entity with which the physician (or the physician's immediate family member) has a financial relationship, whether through ownership, debt or 39 compensation arrangements. Designated health services means clinical laboratory services, physical therapy services, occupational therapy services, radiology (including magnetic resonance imaging, computerized axial tomography scans and ultrasound services), radiation therapy services and supplies, durable medical equipment and supplies, parenteral and enteral nutrients, equipment, and supplies, prosthetics, orthotics, and prosthetic devices, home health services and supplies, outpatient prescription drugs, and inpatient and outpatient hospital services. Referrals for services other than designated health services and the furnishing of physicians' services that do not involve any designated health services are not subject to the Stark Law. The term 'referral' under the Stark Law means more than merely recommending a vendor for designated health services to a patient; referrals are defined to include the request or establishment of a plan of care by a physician which includes the provision of designated health services. Consequently, the ordering of designated health services within a physician's medical group can constitute a referral within the meaning of the Stark Law. Further, unless an exception is met, both the health care entity that furnishes the services and the physician who makes the referral are prohibited from billing Medicare or Medicaid for services rendered to Medicare or Medicaid beneficiaries in violation of the Stark Law. The Stark Law is a civil statute which does not include criminal penalties. Violations of the Stark Law could result in significant civil sanctions, including denial of payment, refunds of amounts collected in violation of the statute and civil money penalties of up to fifteen thousand dollars ($15,000) for each bill or claim for a service a person knows or should know is a service for which payment may not be made. The Stark Law also includes civil money penalties of up to one hundred thousand dollars ($100,000) for each arrangement or scheme which the physician or entity knows or should know has a principal purpose of assuring referrals which, if directly made, would violate the Stark Law proscription. Both penalty provisions also provide for exclusion from the Medicare and Medicaid programs. The Company currently does not directly provide any designated health services as that term currently is defined under the Stark Law; however, one or more of the Practices may provide designated health services within their offices. Because the Company provides management services and managed care contracting services to the Practices for a fee, there can be no assurance that the Company will not be deemed to be providing designated health services within each Practice. If the Company is held to be the provider of such designated health services within each Practice, the Stark Law will require that the arrangements between the Company and the physicians in each Practice that provide designated health services be structured to meet a Stark Law exception. Under this scenario, the physicians' ability to order designated health services within the Practices and the ability of the Practices to bill Medicare or Medicaid for such designated health services will be permissible only if the financial arrangements under the Management Services Agreements or IPA Provider Agreements entered into by the Company and the Practices meet certain exceptions set forth in the Stark Law. The Company believes that the financial arrangements under the Management Services Agreements or IPA Provider Agreements qualify for applicable exceptions under the Stark Law; however, there can be no assurance that a review by the courts or regulatory authorities would not result in a contrary determination. Also, to the extent that the Company in the future owns, manages or operates Ancillary Service Facilities that provide designated health services, the Stark Law may require the arrangements for the Company's acquisition of certain non-clinical assets of the Practices and its Management Services Agreements or IPA Provider Agreements with each Practice to be structured to meet Stark Law exceptions in order for the physicians within each Practice to refer patients to the Ancillary Service Facilities for designated health services. It is also possible that, as a result of the Company's Management Services Agreements and IPA Provider Agreements with the Practices, the physicians in the Practices will be deemed to have indirect financial interests in Practices by virtue of the physicians' ownership interests in the Company. Under such interpretation of the Stark Law, the physicians' ability to order and bill for designated health services provided within the Practices and the ability of the Practices to bill Medicare or Medicaid for such designated health services will be permissible only if an exception under the Stark Law is applicable. The current Stark Law exception related to physicians' ownership interests in entities to which they refer patients may be relevant to the physicians' ability to make referrals for designated health services to any Ancillary Service Facilities owned or managed by the Company in the future. The Company will not be in a position to meet that exception related to investment interests until the Company's stockholders' equity exceeds $75 million. The Stark Law also governs the physicians' ability to refer patients for designated health services within the Practices in light of the physicians' ongoing compensation and ownership arrangements with such Practices. An 40 exception for in-office ancillary services requires that the Practices meet certain structural and operational requirements on an ongoing basis in order to bill for in-office ancillary designated health services rendered by employed or contracted physicians. A key feature of the in-office ancillary services exception is the Stark Laws definition of a 'group practice.' HCFA has announced its intention to publish proposed regulations in the near future which, among other things, are expected to focus on the definition of 'group practice.' Any adverse changes to the group practice definition may have a material adverse effect on the Company by severely limiting the Practices' ability to bill the Medicare and Medicaid Programs for certain ancillary services furnished by the Practices. In the preamble to the adoption of certain regulations regarding the Stark Law, adopted when such law regulated only clinical laboratory services, HCFA stated that it would not recognize any group in which the physicians were in multiple corporate entities as a 'group practice' under the Stark Law. SCOI is a partnership comprised of individual physician members as well as P.C.s. The use of P.C.s as partners at SCOI was historical and designed to accommodate practice structures that existed prior to the creation of SCOI. Recently, at the Eighteenth Annual Institute on Medicare and Medicaid Payment Issues, co-sponsored by the American Academy of Healthcare Attorneys and the National Health Lawyers Association, an HCFA representative stated that HCFA will recognize a group practice consisting of multiple physician entities, such as P.C.s, provided that each such P.C. or other physician entity is limited to one physician member. Nevertheless, given HCFA's prior written statement and HCFA's position that its written comments on the Stark Law as applied to clinical laboratories reflect its view on the Stark Law in its current expanded form, it may be necessary to restructure SCOI before any Stark-designated health services are provided. Failure to do so would result in the risk of the penalties described above, or the inability of SCOI to provide Stark-designated health services, either of which would have a material adverse effect on the Company. In the recently enacted 1997 Budget Bill, Congress directed the Secretary of the U.S. Department of Health and Human Services ('HHS') to issue advisory opinions as to whether a referral relating to designated health services (other than clinical laboratory services) is prohibited under the Stark Law. The advisory opinion mechanism is authorized beginning on or about November 3, 1997. An advisory opinion issued by the Secretary will be binding as to the Secretary and the party or parties requesting the opinion. The Company has no present intention to seek an advisory opinion from HHS, HCFA or any other governmental authority regarding its current operations, arrangements with physicians or the referral activities of physicians in the Practices. Federal Anti-Kickback Statute. A federal law commonly known as the 'Anti-Kickback Statute' prohibits the offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce business for which payment may be made under a federal health care program. A 'federal health care program' is any plan or program that provides health benefits, whether directly, through insurance, or otherwise, which is funded directly, in whole or in part, by the United States Government (e.g., Medicare, Medicaid, and CHAMPUS). Excluded from the definition of federal health care program is the Federal Employee Health Benefits Program. The type of remuneration covered by the Anti-Kickback Statute is very broad. It includes not only kickbacks, bribes and rebates, but also proscribes any such remuneration, whether made directly or indirectly, overtly or covertly, in cash or in kind. Moreover, prohibited conduct includes not only remuneration intended to induce referrals, but also remuneration intended to induce the purchasing, leasing, arranging or ordering of any goods, facilities, services, or items paid for by a federal health care program. The Anti-Kickback Statute has been interpreted broadly by a number of courts to prohibit remuneration that is offered or paid for otherwise legitimate purposes if one purpose of the payment is to induce referrals. Even bona fide investment interests in a health care provider may be questioned under the Anti-Kickback Statute if the government concludes that the opportunity to invest was offered as an inducement for referrals. In part to address concerns regarding the implementation of the Anti-Kickback Statute, in 1991 the federal government published regulations that provide exceptions or 'safe harbors' for certain transactions that are deemed not to violate the Anti-Kickback Statute. Among the safe harbors included in the regulations are transactions involving the sale of physician practices, management and personal services agreements and employee relationships. Congress recently added a significant new statutory exception related to 'remuneration between an organization and an individual or entity' if the organization is a Medicare risk contracting organization or if the remuneration is provided pursuant to a written agreement that places the individual or entity at substantial financial risk for the cost or utilization of services. Regulations implementing the foregoing statute 41 have not yet been adopted, but are expected to be enacted soon. The failure of an activity to qualify under a safe harbor provision, while potentially leading to greater regulatory scrutiny, does not render the activity automatically illegal under the Anti-Kickback Statute. Conduct falling outside the safe harbors will be judged by government regulators on a case-by-case basis based on the specific facts and circumstances. Each offense under the Anti-Kickback Statute is classified as a felony and is punishable by a criminal fine of up to twenty-five thousand dollars ($25,000) and/or imprisonment of up to five (5) years; a civil money penalty of fifty thousand dollars ($50,000) for each violation and/or civil damages of not more than three times the total amount of remuneration offered, paid, solicited or received may be imposed without regard to whether any portion of such remuneration was for a lawful purpose. Both the offeror and the recipient of the illegal remuneration are potentially liable. In addition, violators are subject to civil exclusion from participation in the federal health care programs, regardless of whether they also have been convicted under the criminal penalty provisions or have been found liable under the civil monetary penalty provisions of the Anti-Kickback Statute. Also, there is a risk that, in a civil lawsuit to enforce a contract that contains a structure in violation of the Anti-Kickback law, a court might conclude that the contract is unenforceable as against public policy. There are several aspects of the Company's relationships with the physicians and the Practices to which the Anti-Kickback Statute may be relevant. In some instances, for example, the government may construe some of the Company's marketing and managed care contracting activities as arranging for the referral of patients to the physicians with whom the Company has a Management Services Agreement or IPA Provider Agreement. Further, any referral of patients between physicians within the Practices and between the Practices could be construed as a referral to which the Anti-Kickback Statute applies. Although neither the investments in the Company by physicians nor the Management Services Agreements or the IPA Provider Agreements between the Company and the Practices qualify for protection under the statutory exception or the safe harbor regulations described above, the Company does not believe that these activities fall within the type of activities the Anti-Kickback Statute were intended to prohibit. The Company also does not believe that referral activities within the Practices violate the Anti-Kickback Statute. A determination that the Company has violated the Anti-Kickback Statute would have a material adverse effect on the Company. As a component of the recently enacted HIPAA, Congress directed the Secretary of the U.S. Department of Health and Human Services to issue advisory opinions regarding compliance with the Anti-Kickback Statute. The advisory opinion mechanism is authorized for a trial period, beginning six months after the date of enactment, August 21, 1996. Advisory opinions are available concerning what constitutes prohibited remuneration within the meaning of the Anti-Kickback Statute, whether an arrangement satisfies the statutory exceptions to the Anti-Kickback Statute, whether an arrangement meets a safe harbor, what constitutes an illegal inducement to reduce or limit services to individuals entitled to benefits covered by the Anti-Kickback Statute, and whether an activity constitutes grounds for the imposition of a civil or criminal penalty under the applicable exclusion, civil money penalty and criminal provisions. Advisory opinions, however, will not assess fair market value for any goods, services or property or determine whether an individual is a bona fide employee within the meaning of the Internal Revenue Code. The statutory language makes clear that advisory opinions are available for both proposed and existing arrangements. The failure of a party to seek an advisory opinion, however, may not be introduced into evidence to prove that the party intended to violate the Anti-Kickback Statute. The Company has not sought, and has no present intention to seek an advisory opinion regarding any aspect of its current operations or arrangements with physicians. PIP Regulations. HCFA has issued final regulations (the 'PIP regulations') covering the use of physician incentive plans ('PIPs') by HMOs and other managed care contractors and subcontractors that contract to arrange for services to Medicare or Medicaid beneficiaries ('Organizations'), potentially including the Company. Any Organization that contracts with a physician group that places the individual physician members of the group at substantial financial risk for the provision of services that the group does not directly provide (e.g., a primary care group takes risk but subcontracts with a specialty group to provide certain services), must satisfy certain disclosure, survey and stop-loss requirements. Under the PIP regulations, payments of any kind, direct or indirect, to induce providers to reduce or limit covered or medically necessary services are prohibited ('Prohibited Payments'). Further, where there are no Prohibited Payments, but there is risk sharing among participating providers related to utilization of services by their patients, the regulations contain three groups of requirements: (i) requirements for physician incentive plans that place physicians at 'substantial financial risk'; 42 (ii) disclosure requirements for all Organizations with PIPs; and (iii) requirements related to subcontracting arrangements. In the case of substantial financial risk (defined in the regulations according to several methods, but essentially risk in excess of 25% of the maximum payments anticipated under a plan with less than 25,000 covered lives), Organizations must conduct enrollee surveys and ensure that all providers have specified stop-loss protection. The violation of the requirements of the PIP regulations may result in a variety of sanctions, including suspension of enrollment of new Medicaid or Medicare members, or a civil monetary penalty of $25,000 for each determination of noncompliance. In addition, because of the increasing public concerns regarding PIPs, the PIP regulations may become the model for the industry as a whole. Although the Company currently has no contracts that require compliance with the PIP regulations, the new regulations, by limiting the amount of risk that may be imposed upon physicians in certain arrangements, could affect the ability of the Company to meaningfully reduce the costs of providing services. Antitrust. Because the Practices that affiliate with the Company remain separate legal entities, they may be deemed competitors subject to a range of antitrust laws that prohibit anti-competitive conduct, including price fixing, concerted refusals to deal and divisions of markets. In particular, the antitrust laws have been interpreted by the Federal Trade Commission ('FTC') and the United States Department of Justice ('DOJ') to prohibit joint negotiation by competitors of price terms in the absence of financial risk that is shared among the competitors, other financial integration or substantial clinical integration among the competitors. The Company intends to comply with such state and federal laws as may affect its development of, and contracting for, integrated health care delivery networks (and in particular its IPA) and will utilize the DOJ and FTC approved 'messenger model'--which avoids joint price negotiations--for those agreements that do not involve sufficient financial or clinical integration. Nevertheless, there can be no assurance that a review of the Company's business by courts or regulatory authorities will not result in a determination that could adversely affect the operation of the Company and the Practices. State Law State Self-Referral Laws. A number of states have enacted self-referral laws that are similar in purpose to the Stark Law but which impose different restrictions on referrals than the Stark Law. These various state self-referral laws have different requirements. Some states, for example, only prohibit referrals when the physician's financial relationship with a health care provider is based upon an investment interest. Other state laws apply only to a limited number of designated health services or, alternatively, to all health care services furnished by a provider. Some states do not prohibit referrals at all, but require only that a patient be informed of the financial relationship before the referral is made. The following provides a brief review of the self-referral laws in each of the states in which the Company does business: Arizona law requires that physicians, when making referrals to an entity they own that is not part of their group practice, disclose to patients (i) that the physician has a direct financial interest in the separate diagnostic or treatment agency or non-routine goods or services that such patient is being prescribed, and (ii) that the prescribed treatment, goods or services are available on a competitive basis from other agencies. California's self-referral law is very similar to the Stark Law, covering similar designated health services and with similar exceptions. In addition, California requires physicians to make a disclosure in the event of a referral to a provider in which the physician or his or her family has a significant beneficial interest. In the context of a group practice, this requirement may be met by providing a written disclosure to each patient or posting a notice in a common area that advises patients of the shared interests of the members of the group in any services referred within the group and of the availability of other providers to provide any such services. California has a separate self-referral law with respect to care that is covered under worker's compensation insurance. The covered services are identical with the services covered under its general anti-self-referral law, and many of the exceptions are similar. Pennsylvania's worker's compensation statute also prohibits the referral of patients from a provider to a person or an entity with which the provider has a financial relationship. Other than this provision of the worker's compensation statute and Pennsylvania's requirement that providers make certain disclosures to patients where a financial interest exists in the entity or with the person to which a referral is made, Pennsylvania does not have a specific self-referral law. The Pennsylvania worker's compensation self-referral law applies all of the exceptions, including the group practice exception, applicable under the federal Stark Law. Florida's Patient Self-Referral Act of 1992 prohibits health care providers, including physicians, from referring a patient for the provision of designated health care services, and in some circumstances any health care services, to an entity in which the health care provider has an investment interest, unless an exception, such as for 43 referrals within a group practice, applies. Texas law does not have a specific self-referral law. Failure to comply with the foregoing laws may result in loss of licensure, which would be imposed against the physicians in the Practices, or other civil or criminal penalties, which may be imposed against the physicians in the Practices and, where the Company is deemed to make or receive referrals, against the Company. In addition, any determination that any Management Services Agreement violates any of the foregoing laws may result in such agreement being unenforceable. Additional risks under state self-referral laws could arise, however, to the extent that the Company or the Practices undertake to own, manage or operate any Ancillary Service Facilities to which the physicians within the Practices may wish to refer patients. State Anti-Kickback Laws. Many states have laws that prohibit payment of kickbacks in return for the referral of patients. Some of these laws apply only to services reimbursable under state Medicaid programs. However, a number of these laws apply to all health care services in the state, regardless of the source of payment for the service. Some state laws governing workers' compensation and other insurance also include an anti-kickback prohibition. The following provides a brief review of the anti-kickback laws of the states in which the Company does business: Arizona law considers it unprofessional conduct for a physician to divide fees for professional services with another health care provider in return for a patient referral. Florida's Patient Brokering Law prohibits any person, including health care providers, from offering or paying, soliciting or receiving, any commission, bonus, rebate, kickback, or bribe, or from engaging in any split-fee arrangement, in return for referring patients. Exceptions include payment arrangements that are not prohibited by the federal Anti-Kickback law, and financial arrangements within a group practice. The California anti-kickback statute prohibits the offer or acceptance of any compensation by a licensed provider as compensation or inducement for referring patients, clients or customers. The Texas anti-kickback law applies to remuneration or compensation for referrals made between a licensed provider and an unlicensed person or entity, but permits any activity that complies with the federal anti-Kickback Statute or any regulations promulgated thereunder. In addition, the medical practice standards in Texas prohibit physicians from paying any person 'for securing, soliciting, or drumming patients on patronage.' The Pennsylvania insurance law prohibits insurance fraud, which is defined to include a health care provider's giving of anything of value in consideration of a referral with respect to services subject to insurance benefits or claims. Because one of the goals of the Company is to grow the Practices, a court could find that the percentage payments received by the Company are in fact unlawful payments for referrals (even under California law, notwithstanding the explicit provision in the law permitting percentages of gross revenue payments for services other than the referral of patients). Failure to comply with the foregoing laws may result in loss of licensure, which would be imposed against the physicians in the Practices, or other civil or criminal penalties, which may be imposed against the physicians in the Practices and, where the Company is deemed to make or receive referrals, against the Company. In addition, any determination that any Management Services Agreement violates any of the foregoing laws may result in such Agreement being unenforceable.The laws in most states regarding kickbacks have been subjected to limited judicial and regulatory interpretation and therefore, no assurances can be given that the Company's activities will be found to be in compliance. Noncompliance with such laws could have a material adverse effect upon the Company and subject it and the Practices' physicians to penalties and sanctions. Fee-Splitting Laws. Many states prohibit a physician from splitting with a referral source the fees generated from physician services. Other states have a broader prohibition against any division of a physician's fees, regardless of whether the other party is a referral source. Some states have laws that specifically address payments for services rendered to physicians based on a percentage of revenues from the physician's practice. The following provides a brief review of the fee-splitting laws in each of the states where the Company does business: Arizona and Pennsylvania do not explicitly prohibit the sharing of fees between physicians and non-professionals, but such fee-sharing may be a factor in the determination as to whether Pennsylvania's corporate practice of medicine doctrine has been violated. The Company has obtained a draft of an order of the State of Florida Board of Medicine that takes the position that such a percentage-based management services fee violates Florida's prohibition on fee splitting by licensed professionals. The Company has included such percentage fees in all of its Management Services Agreements with physicians in Florida. Counsel to the Board of Medicine has informed the Company that on October 19, 1997, the Board adopted the position in the draft order and will soon issue a final order with only minor revisions. Thus, no assurance can be given that the Company's Management Services Agreements based on such percentage fees will be enforceable. To avoid this risk, the Company will seek to restructure such agreements in Florida to comply with the order, but such modifications, or the failure to 44 obtain agreement on such modifications, could have a material adverse effect on the Company. California explicitly permits payment for services (other than the referral of patients) based on a 'percentage of gross revenue or similar type of contractual arrangement' if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payor. However, even if a contractual arrangement is not unlawful fee splitting, it may still be deemed to constitute an arrangement to pay for referrals, as analyzed above. Judicial interpretation of the corporate practice of medicine doctrine in Texas has suggested that payments of a percentage of profits from a physician's medical practice to a management company is a factor indicative of the corporate practice of medicine. The Company is reimbursed by physicians in the Practices on whose behalf the Company provides management services. There can be no certainty that, if challenged, the Company and the Practices will be found to be in compliance with each state's fee-splitting (or related corporate practice) laws. A determination in any state that the Company is engaged in any unlawful fee-splitting arrangement could render any Management Services Agreement or IPA Provider Agreement between the Company and a Practice located in such state unenforceable or subject to modification in a manner materially adverse to the Company. Corporate Practice of Medicine. The laws of many states prohibit business corporations, including the Company, from employing physicians, exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as fee-splitting with physicians. These laws and their interpretations vary from state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. Some states interpret the 'practice of medicine' broadly to include activities of corporations such as the Company that have an indirect impact on the practice of medicine, even where the physician rendering the medical services is not an employee of the corporation and the corporation exercises no discretion with respect to the diagnosis or treatment of a particular patient. For example, judicial interpretation of the corporate practice of medicine doctrine in Texas has suggested that payments of a percentage of profits from a physician's medical practice to a management company is a factor indicative of the corporate practice of medicine. The Company's practice management structure, which the Company believes is consistent with standard practices for PPMs, uses an operations committee (the 'Operations Committee') of six members, three of whom are designated by each of the Company and the Practice. Among other things, the Operations Committee approves a budget, medical group costs, costs and expenses that exceed the budget, the acquisition and replacement of equipment and the integration of new technologies. In addition, the Company's explicit approval is required for implementation or acquisition of new technologies or medical equipment if the costs of such equipment or technology exceeds 5% of the management fee. Company approval is also required for all new offices and new ancillary services. If a new medical office is not profitable, the Company may, in its sole discretion, close the new office. Finally, a change in control of the Practice requires the consent of the Company (not to be unreasonably withheld). While these provisions in the Company's Management Services Agreements are designed to give the Company control over certain business transactions by the Practices, which explicitly retain their professional independence, case law in Texas and California (particularly the latter) has suggested that control of business operations (such as the provisions discussed above) may so severely impact the professional practice as to amount to the corporate practice of medicine. Other states, including states in which the Company does business, could take a similar position. The Company's intent is not to exercise any responsibility on behalf of the Practices' physicians that interferes with the physicians' independent patient care and professional judgments. However, as noted, the laws and legal doctrines relating to the corporate practice of medicine have been subjected to only limited judicial and regulatory interpretation and there can be no assurance that, if challenged, the Company would be considered to be in compliance with all such laws and doctrines. A determination in any state that the Company is engaged in the corporate practice of medicine could render any Management Services Agreement or IPA Provider Agreement between the Company and a Practice located in such state unenforceable or subject to modification in a manner materially adverse to the Company. The Company hires certain ancillary health personnel (nurses and technicians) and leases their services back to the Practices in a manner that it believes accords with applicable Medicare billing requirements. The Company's ability to hire such ancillary personnel is subject to various state regulations. The Company believes 45 that its structure in this area is common among PPMs. Should such state corporate practice laws be interpreted to prohibit such hiring by the Company, the Company will be required to revise its relationship with such ancillary personnel, and the relationship of the ancillary personnel to the Practice would also have to be modified. Such modification in the forgoing relationships could have a material adverse effect on the Company. Texas Staff Leasing Services Law. Texas law requires any person offering 'staff leasing services' to obtain a license from the Texas Department of Licensing and Regulation. The Company leases certain non-physician personnel to STSC as part of the management services provided by the Company to STSC. The Company believes that it must obtain a license to provide such services in Texas, and filed the application on October 14, 1997 for such license. The Company has no reason to believe that it does not comply with the license criteria which require, among other things, that the Company demonstrate a certain net worth (dependent upon the number of assigned employees that the Company has) and that the contract between the Company and STSC contains certain provisions. Licensure and Certificate of Need Laws. Certain of the ancillary services that the Company anticipates providing or managing on behalf of the Practices are now or may in the future be subject to licensure or certificate of need laws in various states. There can be no assurance that the Company or the Practices will be able to obtain such licenses or certificates of need approval to the extent required for the particular ancillary service. Failure to obtain such licenses or certificates of need could have a material adverse effect on the Company. Insurance Laws. Laws in all states regulate the business of insurance and the operation of HMOs. Many states also regulate the establishment and operation of networks of health care providers. While these laws do not generally apply to companies that provide management services to networks of physicians, they have been construed in some states to apply to such companies and there can be no assurance that regulatory authorities of the states in which the Company operates would not apply these laws to require licensure of the Company's operations as an insurer, as an HMO or as a provider network. The Company believes that its proposed operations are in compliance with these laws in the states in which it currently does business, but there can be no assurance that future interpretations of insurance and health care network laws by regulatory authorities in these states or in the states into which the Company may expand will not require licensure or a restructuring of some or all of the Company's operations. See 'Risk Factors--Government Regulation.' The National Association of Insurance Commissioners ('NAIC') in 1995 endorsed a policy proposing the state regulation of risk assumption by physicians. The policy proposes prohibiting physicians from entering into capitated payment or other risk sharing contracts except through HMOs or insurance companies. Several states have adopted regulations implementing the NAIC policy in some form. In states where such regulations have been adopted, practices are precluded from entering into capitated contracts directly with employers, individuals and benefit plans unless they qualify to do business as HMOs or insurance companies. The Existing Practices currently provide services under very few capitated payment contracts. The Company intends to limit the number of capitated payments or other risk-sharing arrangements into which it enters on its own behalf or on behalf of the Practices. The Company expects to make such arrangements only with HMOs or insurance companies. In addition, in December 1996, the NAIC issued a white paper entitled 'Regulation of Health Risk Bearing Entities,' which sets forth issues to be considered by state insurance regulators when considering new regulations, and encourages that a uniform body of regulation be adopted by the states. Certain states have enacted statutes or adopted regulations affecting risk assumption in the health care industry. In some states, including California, these statutes and regulations subject any physician or physician network engaged in risk-based contracting, even if through HMOs and insurance companies, to applicable insurance laws and regulations, which may include, among other things, laws and regulations providing for minimum capital requirements and other safety and soundness requirements. The Company believes that additional regulation at the state level will be forthcoming in response to the NAIC initiatives. The IPA that is owned by the Company operates as a specialty physician network in Arizona, and contracts directly or indirectly with licensed HMOs or insurance companies to arrange for the provision of specialty orthopedic physician services on behalf of enrollees of the HMOs or insurance companies. In return, the IPA accepts a fee from the relevant payor, which fee the IPA passes along to the participating physician provider, less the IPA's fee (generally 13%) to compensate the IPA for its services. The two IPA Payor Agreements currently 46 in place with the IPA involve 'capitation' fees--a fixed per month per enrollee for all designated orthopedic services. Arizona law does not permit a provider network to enter into such agreement directly with enrollees, unions, employers or other patient group on behalf of their members or employees, as applicable; the direct acceptance of risk by such a network, under Arizona law, would constitute the 'business of insurance' subject to licensure and regulation by the Arizona Department of Insurance. However, where the capitation or other risk-based payment is accepted by a provider network as a 'downstream' risk from a licensed HMO or insurance company, the Arizona Department of Insurance has indicated that such risk contracting would not subject the Company to licensure or regulation by the Department. However, there can be no assurance that the laws governing the business of insurance in Arizona will not be revised or interpreted in a manner that would prohibit operation of the IPA under either the IPA Payor Agreements or the IPA Provider Agreements, and in such event, the Company would be required to modify or terminate its relationships with payors or providers in Arizona. Such modification or termination could have a material adverse effect on the Company. FEDERAL AND STATE INITIATIVES Fraud and Abuse. In the recently enacted 1997 Budget Bill and HIPAA, Congress has responded to perceived fraud and abuse in the Medicare and Medicaid programs. This legislation has fortified the government's enforcement authority with increased resources and greater civil and criminal penalties for offenses. It is anticipated that there will be further restrictive legislative and regulatory measures to reduce fraud, waste and abuse in the Medicare and Medicaid programs. There can be no assurance that any such legislation will not have a material impact on the Company. Health Care Reform. As a result of the continued escalation of health care costs and the inability of many individuals to obtain insurance, numerous proposals have been or may be introduced in Congress and state legislatures relating to health care reform. There can be no assurance as to the ultimate content, timing or effect of any health care reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company. Confidentiality of Patient Records. The confidentiality of patient records and the circumstances under which such records may be released is subject to substantial regulation under state and federal laws and regulations. To protect patient confidentiality, data entries to the Company's databases delete any patient identifiers, including name, address, hospital and physician. Further, the Company obtains the informed, written consent of the patient to use or disclose patient information where the Company believes that such consent is necessary or appropriate. The Company believes that its procedures comply with the laws and regulations regarding the collection of patient data in substantially all jurisdictions, but regulations governing patient confidentiality rights are evolving rapidly and are often difficult to apply. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. Furthermore, the Health Insurance Portability and Accountability Act of 1996 requires the Secretary of Health and Human Services to recommend legislation or promulgate regulations governing privacy standards for individually identifiable health information and creates a federal criminal offense for knowing disclosure or misuse of such information. These statutes and regulations may require holders of such information to implement security measures that may be of substantial cost to the Company. There can be no assurance that changes to state or federal laws would not materially restrict the ability of the Company to obtain patient information originating from records. EMPLOYEES As of October 31, 1997, the Company had approximately 804 employees, of whom 20 are located at the Company's headquarters, 9 are located in the regional offices and 775 are located at the Existing Practices. The Company believes that its relations with its employees are satisfactory. PROPERTIES The Company has a five-year lease for its headquarters in Boca Raton, Florida, which provides for annual lease payments of approximately $63,000. In addition, in connection with the Affiliation Transactions, the Company assumed leases for the facilities utilized by the respective Existing Practices for aggregate annual lease 47 payments of approximately $2.0 million as of December 31, 1997. For additional information, see 'Certain Transactions.' LEGAL PROCEEDINGS The Company is subject to legal proceedings in the ordinary course of its business. The Company does not believe that any such legal proceedings will have a material adverse effect on the Company, although there can be no assurance to this effect. In addition, the Company may become subject to certain pending claims as the result of successor liability in connection with the assumption of certain liabilities of the Practices; nevertheless, the Company believes that the ultimate resolution of such additional claims will not have a material adverse effect on the Company. See 'Risk Factors--Exposure to Professional Liability.' CORPORATE LIABILITY AND INSURANCE The provision of medical services entails an inherent risk of professional malpractice and other similar claims. However, the Company does not influence or control the practice of medicine by physicians or have responsibility for compliance with certain regulatory and other requirements directly applicable to physicians and physician groups. As a result of the relationship between the Company and the Practices, the Company may become subject to some medical malpractice actions under various theories. There can be no assurance that claims, suits or complaints relating to services and products provided by the Practices will not be asserted against the Company in the future. The Company maintains medical professional liability insurance and general liability insurance and believes that such insurance will extend to professional liability claims that may be asserted against employees of the Company that work on-site at Practice locations. In addition, pursuant to the Management Services Agreements, the Practices are required to maintain comprehensive professional liability insurance. The availability and cost of such insurance has been affected by various factors, many of which are beyond the control of the Company and the Practices. The cost of such insurance to the Company and the Practices may have a material adverse effect on the Company. In addition, successful malpractice or other claims asserted against the Practices or the Company that exceed applicable policy limits would have a material adverse effect on the Company. See 'Risk Factors--Exposure to Professional Liability.' 48 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:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Naresh Nagpal, M.D. ................................. 47 President, Chief Executive Officer and Director David H. Fater....................................... 50 Executive Vice President, Chief Financial Officer and Director David K. Ellwanger................................... 40 Senior Vice President of Operations Sheldon Lutz......................................... 54 Senior Vice President of Corporate Development Tony Anderson........................................ 39 Treasurer Ronald Garey......................................... 42 Controller Sherry Pulliam....................................... 42 Director of Financial Operations and Assistant Treasurer Glenn Cozen.......................................... 43 Vice President of Development, Western Region Joanna Robben........................................ 37 Vice President of Development, Central Region Keith Bolton......................................... 35 Vice President of Ancillary Services Beth Landel.......................................... 33 Vice President of Ancillary Services Lee Bodendorfer...................................... 47 Vice President of Operations, Eastern Region Randolph Farber...................................... 38 Vice President of Operations, Western Region Randal J. Farwell.................................... 37 Vice President of Development, Eastern Region Brent E. Mellecker................................... 35 Vice President of Development, Central Region Andrea Serrate....................................... 43 Vice President of Operations, Southwest Region Georges Daou......................................... 36 Director Stewart G. Eidelson, M.D............................. 47 Director James M. Fox, M.D.(1)................................ 55 Director Ann H. Lamont(1)..................................... 40 Director Donald J. Lothrop.................................... 38 Director
- ------------------ (1) Member of the Compensation Committee. Naresh Nagpal, M.D. became President and Chief Executive Officer and a director in March 1996. From September 1993 to August 1996, Dr. Nagpal served on the board of directors of InPhyNet Medical Management Inc. ('IMMI'), a PPM. From September 1993 to August 1995, Dr. Nagpal was the Senior Executive Vice President and Chief Operating Officer of IMMI. From January 1985 to August 1993, Dr. Nagpal was President of Acute Care Specialists, Inc. and its related companies which are PPMs that provide services to several hospitals and physicians. Dr. Nagpal was the Chairman of the Department of Emergency Medicine at Barberton Citizens Hospital in Barberton, Ohio from January to June of 1992 and Chairman of the Department of Emergency Medicine at Audobon Regional Medical Center in Louisville, Kentucky from July to December of 1992. David H. Fater became Executive Vice President and Chief Financial Officer in February 1997 and a director in April 1997. From June 1995 to January 1997, Mr. Fater was the Executive Vice President and Chief Financial Officer of Community Care of America, Inc. From January 1993 to April 1995, Mr. Fater was the Executive Vice President and Chief Financial Officer of Coastal Physician Group, Inc. ('Coastal'). Prior to that, Mr. Fater was a partner at Ernst & Young, LLP. In connection with Mr. Fater's position at Coastal, in May 1995 he was named as one of several defendants in a stockholder class-action lawsuit filed in the United States District Court for the Middle District of North Carolina, Friedland v. Coastal Healthcare. The complaint, as amended, alleges that the defendants violated federal securities laws through misrepresentations and omissions of material facts concerning the Company's 49 operations and financial condition. The defendants have filed an answer to the complaint, denying the principal allegations contained therein. David 'Deke' K. Ellwanger became Senior Vice President of Operations in July 1997. From July 1994 to July 1997, Mr. Ellwanger was the Vice President of Managed Care for MedPartners/InPhyNet Medical Management Inc. From August 1985 to June 1994, Mr. Ellwanger worked for Aetna Health Plans/PARTNERS National Health Plans managing various HMO's and HMO acquisitions. Sheldon Lutz became Senior Vice President of Corporate Development in November 1997. From February 1992 until 1997, Mr. Lutz was the Vice President of Development for Columbia/HCA Healthcare Corporation responsible for acquisitions and joint ventures and development of a marketwide joint venture model. Tony Anderson became Treasurer in May 1997. From May 1995 to April 1997, Mr. Anderson was the Vice President and Chief Financial Officer of Florida Physician Services. From September 1993 to April 1995, he was Vice President and Director of Internal Audit for Coastal. From February 1989 to August 1993, Mr. Anderson was Controller for AKZO Coatings, Inc. Ronald Garey became Controller in August 1996. Mr. Garey was the International Finance Manager for Whirlpool Corporation from August 1995 to July 1996. From June 1993 to July 1995, he was the Corporate Controller of Innovet, Inc. From July 1985 to May 1993, Mr. Garey was the Assistant Controller for Dole Fresh Fruit International. Sherry Pulliam became Director of Financial Operations and Assistant Treasurer in November 1996. From February 1985 to December 1995, Ms. Pulliam functioned in several different positions for Coastal such as, Financial Operations Manager (from June 1994 to December 1995), Assistant Treasurer (from July 1993 to May 1994), Vice President of Mergers and Acquisitions (from April 1992 to June 1993) and Vice President and Controller for Coastal Emergency Services, Inc., the largest subsidiary of Coastal (from May 1988 to March 1992). From March 1996 to October 1996 Ms. Pulliam was engaged as a Consultant in Corporate Development for Community Care of America, Inc. Glenn Cozen joined the Company in March 1997 and is the Vice President of Development in the Western Region. Since November 1986, Mr. Cozen has been the Chief Financial Officer at SCOI. Joanna Robben joined the Company in June 1997 and is the Vice President of Development in the Central Region. From 1995 to May 1997, Ms. Robben was Vice President of Network Strategy & Management and Executive Director of Government Programs for CIGNA Healthcare. From 1990 to 1995 Ms. Robben worked with First Health Strategies, Inc. (formerly ALTA Health Strategies, Inc.), most recently as Vice President, Provider Networks. From 1985 to 1990, Ms. Robben was Director, Network Marketing for Partners National Health Plans. Ms. Robben is also a registered physical therapist in private practice from 1982 to 1994. Keith Bolton became Vice President of Ancillary Services in April 1997. Mr. Bolton was the Vice President of Corporate Development from April 1995 to March 1997, for Onecare Health Industries, Inc. From July 1993 to March 1995, he was the Regional Vice President for Surgical Health Corporation. From March 1992 to June 1993, Mr. Bolton was the President and Chief Executive Officer of Southern California Surgery Centers, a small consulting firm. Beth A. Landel became Vice President of Ancillary Services in July 1997. From June 1995 to July 1997, Ms. Landel was with HealthSouth Corporation where she was a Regional Director of Corporate Development for the State of Florida and Maryland through Maine. From May 1994 to June 1995, Ms. Landel was with Surgical Health Corporation and Physicians Health Corporation, a PPM, as Regional Marketing and Managed Care Manager for the State of Florida. From August 1992 to May 1994, Ms. Landel was Director of Managed Care for Wellington Regional Medical Center, an acute hospital in the Universal Health Services system. Lee Bodendorfer joined the Company in April 1997 and is the Vice President of Operations in the Eastern Region. Mr. Bodendorfer was the Executive Vice President of Intellex Medical Management Systems, Inc. from February 1995 to April 1997. From October 1993 to February 1995, he acted as Regional Practice Administrator for Columbia/HCA. From June 1989 to October 1993, Mr. Bodendorfer was the Managing Director for Melbourne Neurologic, P.A., a neurosurgical and neurological group medical practice ('Melbourne'). During 50 this period he also served as President and Board Chairman for Partners in Rehabilitation, Inc., an industrial rehabilitation and chronic pain management company and an affiliate of Melbourne. During this time he also served as General Manager of South Brevard Imaging, Ltd., a limited partnership MRI. Randolph Farber joined the Company in September 1997 and is the Vice President of Operations in the Western Region. From 1994 to 1997, Mr. Farber was an Executive Director for American Oncology Resources. From 1993 to 1994, Mr. Farber was Assistant Vice President, Provider Relations for Lifeguard Group Health Care. From 1982 to 1993, Mr. Farber was the Assistant Director, Provider Relations for CIGNA Healthplans of California. Randal J. Farwell joined the Company in December 1996 and is the Vice President of Development for the Eastern Region. From February 1996 to December 1996, Mr. Farwell was the Vice President of Marketing for PhyMatrix Corporation. He was Vice President of Development for MedPartners from March 1995 to February 1996. From August 1993 to March 1995, Mr. Farwell was the Executive Director of Marketing and Network Development for Florida Specialty Care Network, Ltd. Prior to that, Mr. Farwell was the Director of Advertising and Promotions for Industry Publishers Inc., a southern Florida medical business publication. Brent E. Mellecker joined the Company in April 1997 and is the Vice President of Development for the Central Region. From June 1995 to March 1997, Mr. Mellecker was Vice President of Sales and Marketing for Combined Orthopaedic Specialists. He was a Practice Consultant at Health Directions from December 1993 to June 1995. Prior to that, Mr. Mellecker was the Director of Business Development at Same Day Surgery. Andrea Seratte joined the Company in February 1997 and is the Vice President of Operations for the Southwest Region. From February 1995 to March 1997, Ms. Seratte was the sole proprietor of SHARP Consulting, a healthcare consulting firm. From September 1993 to February 1995, Ms. Seratte was the Vice president of Operations for the Rehab Managed Care division of NovaCare, a managed care company. From March 1993 to September 1993, she was the Vice President of Finance for the Hospital Division of NovaCare. Georges Daou became a director in September 1997. Mr. Daou is a founder of DAOU Systems, Inc. and has served as Chairman of the Board and Chief Executive Officer of such company since 1987. Mr. Daou sits on the boards of various healthcare and community organizations, including the College of Healthcare Management Executives and the Healthcare Information Managers Association. Stewart G. Eidelson, M.D. became a director in October 1997. Dr. Eidelson is a shareholder of, and since 1990 has been an orthopaedic surgeon at, OSA. James M. Fox, M.D. became a director in November 1996. Dr. Fox was a founding partner of, and since 1992 has been an orthopaedic surgeon at, SCOI. Ann H. Lamont became a director in May 1996. Ms. Lamont is a managing member of each of the general partner of Oak Investment Partners VI, Limited Partnership ('Oak Partners') and Oak VI Affiliates Fund, Limited Partnership ('Oak VI'). Since September 1983, Ms. Lamont has been a general partner or managing member of the general partner of four other venture capital partnerships affiliated with Oak Partners and Oak VI. Ms. Lamont currently serves as a director on the board of ViroPharma, Incorporated. Donald J. Lothrop became a director in May 1996. Since July 1994, Mr. Lothrop has been a General Partner of Delphi Ventures, a privately held venture capital firm. From January 1991 to July 1994, Mr. Lothrop was a Partner at Marquette Venture Partners, Inc., a privately held venture capital partnership. Mr. Lothrop currently serves as a director on the boards of Accordant Health Services, Inc., Affiliated Research Centers, Inc., EXOGEN, Inc., Kelson Physician Partners, Inc., Pacific Dental Benefits, Presidium Inc. and PriCare, Inc. NATIONAL PHYSICIAN ADVISORY BOARD The Company has established a National Physician Advisory Board (the 'Advisory Board') which will provide oversight of certain matters including responsibility for all patient care and clinical issues. The Advisory Board will also have responsibility for providing guidance to the Company regarding the development of its disease management system and protocols as well as all professional issues. The Advisory Board will consist of seven to nine musculoskeletal physicians from various parts of the country, including physicians who are not affiliated with the Company. 51 The initial members of the Advisory Board are:
PHYSICIAN PRACTICE ----------------------------------------------------------------------------------- -------- 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
DIRECTOR COMPENSATION AND COMMITTEES The directors do not currently receive compensation for their service on the Board of Directors or any committee thereof but are reimbursed for their out-of-pocket expenses. Under the Company's Option Plan, non-employee directors are eligible to receive option grants. See '--Stock Option Plan.' The Board of Directors currently includes a Compensation Committee composed of two directors, Ms. Lamont and Dr. Fox. The Board of Directors intends to establish an Audit Committee prior to the Offering which will be composed of three independent directors. The Compensation Committee determines compensation for executive officers of the Company and administers the Company's Option Plan. The Audit Committee will review the scope and results of audits and internal accounting controls and all other tasks performed by the independent public accountants of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to the establishment of the Compensation Committee in February 1997, the Board of Directors determined the compensation payable to the Company's executive officers. Stock options have been granted to employees of the Company and, at the end of fiscal 1996, the Board of Directors approved an incentive bonus for Dr. Nagpal. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company to the President and Chief Executive Officer of the Company during the fiscal year ending December 31, 1996 (the only executive officer of the Company during such year). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ---------------------------------- ------------ OTHER SECURITIES FISCAL ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION - --------------------------------- ----------- ------- -------- ------------ ------------ --------------- ($) ($) ($) (#) ($) Naresh Nagpal, M.D. ............. 1996 225,000 67,500 -- -- -- President and Chief Executive Officer
OPTION GRANTS IN 1996 There were no options granted to the President and Chief Executive Officer during the fiscal year ended December 31, 1996. STOCK OPTION PLAN In order to attract and motivate employees, consultants and directors to use their best efforts on behalf of the Company, the Company may, pursuant to its Option Plan, grant to its employees, consultants, and directors options to purchase an aggregate of 2,000,000 shares of Common Stock (subject to adjustment in certain circumstances). If any options expire or are canceled or terminated without being exercised, the Company may, in accordance with the terms of the Option Plan, grant additional options with respect to those shares of Common Stock underlying the unexercised portion of such expired, canceled or terminated options. The Option Plan may be administered by the Board of Directors or by a committee of the Board of the Directors (the 'Committee,' and references to the Committee shall mean the Board of Directors, if a committee is not appointed). Grants of Common Stock may consist of (i) options intended to qualify as incentive stock 52 options ('ISOs') or (ii) nonqualified stock options that are not intended so to qualify ('NSOs'). Except as set forth below, the term of any such option is ten years. Options may be granted to any employees (including officers and directors) of the Company, members of the Board of Directors who are not employees, and consultants and advisers who perform services to the Company or any of its subsidiaries. The option price of any ISO granted under the Option Plan will not be less than the fair market value of the underlying shares of Common Stock on the date of grant; provided that the price of an ISO granted to a person who owns more than 10% of the total combined voting power of all classes of stock of the Company must be at least equal to 110% of the fair market value of Common Stock on the date of grant and, in such case, the ISO's term may not exceed five years. The option price of an NSO will be determined by the Committee in its sole discretion, and may be greater than, equal to or less than the fair market value of the underlying shares of Common Stock on the date of grant; provided that, subsequent to the initial public offering of the Company's Common Stock, the price of the underlying shares may not be less than fair market value. A grantee may pay the option price (i) in cash, (ii) by delivering shares of Common Stock already owned by the grantee or vested options held by the grantee, which, in either case, have a fair market value on the date of exercise equal to the option price or (iii) by any combination of (i) and (ii) above. With respect to any options, the Committee may impose such vesting and other conditions as the Committee may deem appropriate, all of which terms and conditions must be set forth in an option agreement between the Company and the grantee. Options may be exercised by the grantee at any time during his employment or retention by the Company or any subsidiary thereof and within a specified period after termination of the grantee's employment or retention. In the event of a change of control (as defined in the Option Plan), all grantees will be afforded an opportunity to exercise the portion of their respective options that are then vested and exercisable. Thereafter, any unexercised and any unvested portion of all outstanding options will be automatically terminated. All options issued under the Option Plan will be granted subject to any applicable federal, state and local withholding requirements. At the time of exercise, the grantee must remit to the Company an amount sufficient to satisfy the total amount of any such taxes required to be withheld by the Company with respect to such exercised options. The Board of Directors may amend or terminate the Option Plan at any time; provided that, under certain circumstances the approval of the stockholders of the Company may be required. As of August 31, 1997, the Company has granted options under the Option Plan to purchase an aggregate of 1,303,000 shares of Common Stock, of which 10,000 have been exercised, 90,000 have been canceled and 50,000 were issued to physicians. The Option Plan will terminate on May 6, 2006, unless earlier terminated by the Board of Directors or extended by the Board of Directors with the approval of the stockholders. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement dated as of May 6, 1996, as amended, with Dr. Nagpal (the 'Nagpal Employment Agreement'). Base compensation under the Nagpal Employment Agreement is $225,000 per year, subject to increase by the Board of Directors. In addition, the Board of Directors may award an annual bonus to Dr. Nagpal in an amount of up to 30% of his base salary based on the attainment of certain benchmarks. The Company may terminate Dr. Nagpal's employment at any time and for any reason; provided that, if his employment is terminated without cause (as defined in such agreement) or as a result of his becoming permanently disabled, the Company must pay Dr. Nagpal a severance amount determined in accordance with a formula contained in the agreement. Under the Nagpal Employment Agreement, Dr. Nagpal is prohibited from directly or indirectly competing with the Company during the term of his employment with the Company and for an additional year thereafter or as long as the Company is making severance payments to him, however, there can be no assurance as to the enforceability of such Agreement. The restraint on competition by Dr. Nagpal is geographically limited to any state in the United States in which the Company or any of its subsidiaries conducts business or specifically plans to conduct business at the time of the termination of his employment with the Company. Under the terms of the Nagpal Employment Agreement, Dr. Nagpal acknowledges that any proprietary information (as defined in such agreement) that he may develop is the sole property of the Company and agrees not to disclose to, or use for the benefit of, any person or entity (other than the Company) any of such proprietary information whether or not developed by him. 53 CERTAIN TRANSACTIONS EQUITY AND DEBT FINANCINGS In connection with its initial capitalization, the Company sold shares of Common Stock and Series A Convertible Preferred Stock (the 'Series A Preferred Stock') to each of the following persons and entities at a per share purchase price of $.01 and $1.00, respectively: (a) Oak Partners purchased 146,580 and 325,733 shares of Common Stock and Series A Preferred Stock, respectively; (b) Oak VI purchased 3,420 and 7,600 shares of Common Stock and Series A Preferred Stock, respectively; (c) Delphi Ventures purchased 147,347 and 327,438 shares of Common Stock and Series A Preferred Stock, respectively; (d) Delphi BioInvestments III, L.P. ('Delphi BioInvestments') purchased 2,653 and 5,895 shares of Common Stock and Series A Preferred Stock, respectively; (e) Dr. Nagpal purchased 850,000 and 333,333 shares of Common Stock and Series A Preferred Stock, respectively and (f) Scheer & Co. purchased 25,000 shares of Common Stock. Upon consummation of the Offering, all outstanding shares of Series A Preferred Stock will automatically convert into an equal number of shares of Common Stock. During the period beginning November 1996 and ending in March 1997, the Company raised additional working capital funds by issuing additional shares of preferred stock. On November 12, 1996, the Company issued an aggregate of 2,000,001 shares of Series B Convertible Preferred Stock, $.01 par value (the 'Series B Preferred Stock'), to the following persons and entities in the following amounts: Oak Partners, 651,467 shares; Oak VI, 15,200 shares; Delphi Ventures, 654,877 shares; Delphi BioInvestments, 11,790 shares; and Dr. Nagpal, 666,667 shares. The investors paid an aggregate purchase price of $6,000,003 for the Series B Preferred Stock. An additional $764,997 was raised by the Company from the issuance of an aggregate of 254,999 shares of Series C Convertible Preferred Stock, $.01 par value (the 'Series C Preferred Stock'), on January 22, 1997 and March 12, 1997 to certain of the SCOI physicians (including Dr. Fox, one of the Company's directors), key employees and legal counsel of SCOI, an employee of the Company, CGJR Health Care Private Equities, L.P., CGJR II, L.P. and CGJR/MF III, L.P. Upon consummation of the Offering, all outstanding shares of Series B Preferred Stock will automatically convert into Common Stock. On January 14, 1997, the Company obtained short-term loans in the aggregate amount of $999,999 from Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI and Dr. Nagpal. In connection with such loans, the Company issued warrants to the lenders to purchase an aggregate of 33,333 shares of Common Stock, which warrants may be exercised at any time, in whole or in part, prior to January 14, 2002 at an exercise price of $3.00 per share. The Company borrowed an additional $866,667 (of which $141,000 has been repaid) from Dr. Nagpal on January 10, 1997 and January 14, 1997. Each of the foregoing loans bears interest at 8% per annum. Upon consummation of the Offering, all outstanding shares of Series C Preferred Stock will automatically convert into Common Stock. On June 19, 1997, pursuant to a letter agreement, the Company issued an aggregate of 188,072 shares of Series D Convertible Preferred Stock, $.01 par value (the 'Series D Preferred Stock'), to Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, and Dr. Nagpal in exchange for the cancellation of promissory notes in the aggregate principal amount of $999,999, plus accrued interest, previously issued by the Company to secure loans made by such investors to the Company. Upon consummation of the Offering, all outstanding shares of Series D Preferred Stock will automatically convert into Common Stock. On June 19, 1997, pursuant to a letter agreement, the Company issued an aggregate of 533,335 shares of Series E Convertible Preferred Stock, $.01 par value (the 'Series E Preferred Stock'), to Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, Dr. Nagpal, CGJR Health Care, CGJR II, and CGJR/MF. The investors paid an aggregate purchase price of $3,200,010 for the Series E Preferred Stock. Upon consummation of the Offering, all outstanding shares of Series E Preferred Stock will automatically convert into Common Stock. From March 1997 to November 1997, the Company entered into the HCFP Loan Agreements with HCFP Funding. Each of the HCFP Loan Agreements is in the nature of a revolving line of credit, with each such loan to be made against a borrowing base equal to 85% of the qualified accounts receivable generated by the subject Practice. Each HCFP Loan had an initial term of two years, subject to renewals of one-year periods upon the mutual agreement of the parties, and bears interest at the Base Rate (defined as 1.75% above the prime rate designated by Fleet National Bank of Connecticut, N.A.), subject to increase upon the occurrence of an event of default. In addition, upon the occurrence and during the continuance of an event of default, the Company is prohibited from declaring or paying cash dividends on its Common Stock. As security for repayment of the 54 HCFP Loans, the Company granted HCFP Funding a first priority lien and security interest in its accounts receivable. On June 30, 1997, the Company issued a secured term note in the aggregate principal amount of $3,250,000 to HCFP Funding (the 'June HCFP Note'), which bears interest at the Base Rate (defined as the prime rate designated by Fleet National Bank of Connecticut plus 3.5%) (the 'Fleet Base Rate'), subject to increase upon the occurrence of an event of default, with interest payable on the last business day of each month for the first six months commencing July 31, 1997 through December 31, 1997. Commencing on January 31, 1998, the Company is required to make 36 equal monthly installments of principal, plus accrued interest at the Base Rate. The June HCFP Note is secured by a lien on substantially all of the assets of the Company and $1.5 million of the Company's obligations under the June HCFP Note are guaranteed by Dr. Nagpal, Delphi Ventures III, L.P., Delphi BioInvestments III, L.P., Oak Investment Partners VI, L.P. and Oak VI Affiliates Fund, L.P. In connection with such guarantees, the Company issued warrants to purchase an aggregate of 13,332 shares of Common Stock to such guarantors. In connection with the HCFP Note, the Company issued warrants to purchase 40,000 shares (subject to increase) of Common Stock to HCFP Funding at an exercise price of $.01 per share. On August 1, 1997, the Company entered into the Comdisco Loan Agreement pursuant to which Comdisco made the Comdisco Loan to the Company in the principal amount of $5,000,000. To secure its obligations to Comdisco under the Comdisco Loan Agreement, the Company granted to Comdisco a lien on all of the Company's tangible and intangible personal property. The Comdisco Loan and the liens granted to Comdisco (the 'Comdisco Liens') are subordinated in all respects to the current and future indebtedness of the Company owing to HCFP Funding. The Comdisco Liens rank pari passu with the liens granted to Galtney. The Comdisco Loan initially bears interest at 14% per annum; provided, however, that if an initial public offering of the Company's capital stock is not consummated on or prior to December 31, 1997, the Comdisco Loan will, commencing January 1, 1998, bear interest at 15% per annum. The Comdisco Loan may be prepaid, in whole or in part, at any time, by the Company without penalty or premium. Within 45 days of the effective date of an initial public offering of the capital stock of the Company, the Company is obligated to prepay the Comdisco Loan in full. The Comdisco Loan matures December 31, 2000. The Comdisco Loan Agreement prohibits the Company from making or declaring any cash dividends or making any distributions of any class of capital stock of the Company, except pursuant to an employee repurchase plan or with the consent of Comdisco. Further, in connection with the Comdisco Loan, the Company issued to Comdisco a warrant to purchase up to 125,000 shares of the Company's Series E Preferred Stock at a price per share equal to $6.00; provided, however, that if an initial public offering of the Company's capital stock is not consummated on or prior to December 31, 1997, then the number of shares of Series E Preferred Stock issuable upon exercise of the warrant increases to 133,333. Upon the completion of the Company's initial public offering, such warrant becomes exercisable for a like number of shares of Common Stock. In addition, pursuant to a Stock Purchase Agreement dated as of August 18, 1997, the Company issued 41,667 shares of Series E Preferred Stock to Comdisco for an aggregate purchase price of $250,000. On August 1, 1997, the Company entered into an agreement (the 'Master Lease Agreement') with Comdisco pursuant to which Comdisco agreed to purchase and lease certain equipment to the Company on the terms and conditions contained in the Master Lease Agreement. In connection with the Master Lease Agreement, the Company issued to Comdisco a warrant to purchase up to 5,000 shares of the Company's Series E Preferred Stock at a price per share equal to $6.00. Upon the completion of the Company's initial public offering, such warrant becomes exercisable for a like number of shares of Common Stock. On August 21, 1997, the Company entered into the Galtney Loan Agreement with Galtney pursuant to which Galtney made the Galtney Loan to the Company in the principal amount of $1,500,000. To secure its obligations to Galtney under the Galtney Loan Agreement, the Company granted to Galtney a lien on all of the Company's tangible and intangible personal property. The Galtney Loan and the liens granted to Galtney ('Galtney Liens') are subordinated in all respects to the current and future indebtedness of the Company owing to HCFP Funding. The Galtney Liens rank pari passu with the liens granted to Comdisco. The Galtney Loan initially bears interest at 14% per annum; provided, however, that if an initial public offering of the Company's capital stock is not consummated on or prior to December 31, 1997, the Galtney Loan will, commencing January 1, 1998, bear interest at 15% per annum. The Galtney Loan may be prepaid, in whole or in part, at any time, by the Company without penalty or premium. Within 45 days of the effective date of an initial public offering of the 55 capital stock of the Company, the Company is obligated to prepay the Galtney Loan in full. The Galtney Loan matures December 31, 2000. The Galtney Loan Agreement prohibits the Company from making or declaring any cash dividends or making any distributions of any class of capital stock of the Company, except pursuant to an employee dividends repurchase plan or with the consent of Galtney. Pursuant to the terms of the Galtney Loan Agreement, the outstanding amount of the Galtney Loan is convertible into shares of Preferred Stock of the Company at the option of Galtney after the Company completes a sale and issuance of any shares of its Preferred Stock in connection with an equity financing (an 'Equity Financing') at any time after the earlier to occur of (i) a payment default under the Galtney Loan Agreement or (ii) the failure of the Company to consummate an initial public offering of its capital stock prior to December 31, 1997. Further, in connection with the Galtney Loan, the Company issued to Galtney a warrant to purchase up to 37,500 shares of the Company's Series E Preferred Stock at a price per share equal to $6.00; provided, however, that if an initial public offering of the Company's capital stock is not consummated on or prior to December 31, 1997, then the number of shares of Series E Preferred Stock issuable upon exercise of the warrant increases to 40,000. In addition, pursuant to a Stock Purchase Agreement dated as of July 31, 1997, the Company issued 166,667 shares of Series E Preferred Stock to HIS Ventures, LLC, an affiliate of Galtney, for an aggregate purchase price of $1,000,000. Upon the completion of the Company's initial public offering, such warrant becomes exercisable for a like number of shares of Common Stock. On September 9, 1997, the Company issued and sold $4,000,000 in aggregate principal amount of its subordinated convertible debentures due August 31, 2000 (the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement, dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The Debentures were purchased by Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI and Health Care Services-BMJ, LLC and H&Q Serv*is Ventures, L.P., affiliates of Hambrecht & Quist, LLC. Pursuant to the terms of the Debenture Purchase Agreement, the Debentures are subordinated in right of payment to all indebtedness owing by the Company to HCFP Funding, the Comdisco Loan and the Galtney Loan. The Debentures bear interest at 6% per annum and are payable semi-annually on each December 31 and June 30. The unpaid principal amount of the Debentures is due on August 31, 2000. Except in very limited instances, the Company may not prepay the Debentures prior to September 9, 1999. The Debentures are subject to prepayment at the option of the holders of the Debentures upon the consummation of (i) a sale of all or substantially all of the assets of the Company; (ii) a sale or transfer of all or a majority of the outstanding Common Stock of the Company in any one transaction or series of related transactions; or (iii) a merger or consolidation of the Company with or into another entity. The Debentures are convertible at any time at the option of the holders thereof into shares of Common Stock at an initial conversion price equal to $7.20 per share. Pursuant to the terms of the Debenture Purchase Agreement, the holders of the Debentures have rights of first offer on future issuances of capital stock of the Company or other securities convertible into capital stock of the Company. The Debenture Purchase Agreement places limitations on indebtedness and liens and prohibits the payment of dividends. On October 14, 1997, the Company issued a secured term note in the principal amount of $2,500,000 to HCFP Funding (the 'October HCFP Note'), which bears interest at the Fleet Base Rate, subject to increase upon the occurrence of an event of default, with interest payable on the last business day of each month commencing October 31, 1997 through December 31, 1997. The entire principal sum is due and payable on January 10, 1998. Pursuant to the terms of the October HCFP Note, the Company is also obligated to pay a fee in the amount of $300,000 to HCFP Funding on the maturity date. The October HCFP Note is secured by a lien on substantially all of the assets of the Company. On October 15, 1997, the Company issued promissory notes (the 'October Notes') in the aggregate principal amount of $3,375,000 to Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak IV and Dr. Fox (collectively, the 'October Note Holders'). The October Notes bear interest at the Fleet Base Rate, subject to increase upon the occurrence of an event of default. The entire principal sum is due and payable on January 13, 1998. In connection with the October Notes, the Company issued warrants to purchase 67,500 shares of Common Stock to the October Note Holders at an exercise price of $.01 per share. 56 AFFILIATION TRANSACTIONS Eastern Region Effective July 1, 1996, the Company entered into a Management Services Agreement with LVBMJ in the State of Pennsylvania. Under the terms of the initial Management Services Agreement between LVBMJ and the Company, the Company received a fee equal to 50% of the net collected revenues of LVBMJ and became responsible for all the clinic overhead expenses (medical support services). Effective July 1, 1997, the Company and LVBMJ entered into an amended and restated Management Services Agreement (the 'LVBMJ Agreement'), (the 'LVBMJ Management Services Agreement'), under the terms of the LVBMJ Agreement the Company is entitled to receive a fee equal to 10% of all cash and cash equivalents received for professional services by the Practice during the period in question net of refunds paid during such period ('Collections') plus reimbursement of clinic overhead expenses and 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. As consideration to LVBMJ for entering into the LVBMJ Management Services Agreement, the Company issued an aggregate of 518,031 shares of Common Stock and options to purchase an aggregate of 30,000 shares of Common Stock to the physician owners of LVBMJ physicians and LVBMJ. The Company may be required to issue more shares of Common Stock to the Practice in 1998 based on the Practice's actual Collections for a specified twelve month period. Effective April 1, 1997, the Company entered into a Management Services Agreement (the 'LOS Management Services Agreement') with LOS. As consideration to LOS for entering into the agreement, the Company issued an aggregate of 466,417 shares of its Common Stock and paid additional consideration of $389,709 to the LOS physicians. The Company may be required to issue more shares of Common Stock to the Practice in 1998 based on the Practice's actual Collections for a specified twelve month period. Under the terms of the LOS Management Services Agreement, the Company is entitled to receive a fee equal to (i) the aggregate of (A) 20% of net operating income (as defined in the LOS Management Services Agreement) of the Practice, plus (B) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. Notwithstanding the foregoing, the Company is entitled to receive a guaranteed minimum annual management fee of $400,000. The Company also purchased certain assets from LOS, including the assumption of two leases, for an aggregate purchase price of $2,250,000 (subject to adjustment based upon the Company's actual collection of the purchased accounts receivable). Effective June 1, 1997, the Company entered into a Management Services Agreement (the 'Gold Coast Management Services Agreement') with Gold Coast located in West Palm Beach, Florida, pursuant to which the Company issued 250,614 shares of Common Stock and paid no additional consideration to the physician owners of Gold Coast. The Company may be required to issue more shares of Common Stock to the Practice in 1998 based on the Practice's actual Collections for a specified twelve month period. Under the terms of the Gold Coast Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 15% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the Gold Coast Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of July 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from Gold Coast for an aggregate purchase price of $2,976,577. Effective August 1, 1997, the Company entered into a Management Services Agreement (the 'BOS Management Services Agreement') with Broward Orthopedic Specialists, Inc. ('BOS'), Terrence Matthews, M.D., P.A., Wylie Scott, M.D., P.A., and Mitchell Seavey, M.D. located in Ft. Lauderdale, Florida, pursuant to which the Company issued 625,768 shares of Common Stock and paid additional consideration of $2,215,338 to the physician owners of BOS. The Company may be required to issue more shares of Common Stock to the Practice in 1998 based on the Practice's actual Collections for a specified twelve month period. Under the terms of the BOS Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 15% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the BOS Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of August 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from BOS, Matthews, Scott and Seavey for an aggregate purchase price of $2,020,000. 57 Effective August 1, 1997, the Company entered into a Management Services Agreement (the 'PM&R Management Services Agreement') with Physical Medicine and Rehabilitation Associates, Inc. ('PM&R'), located in Delray Beach, Florida, pursuant to which the Company issued 126,923 shares of Common Stock and paid no additional consideration to the physician owners of PM&R. Under the terms of the PM&R Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 10% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the PM&R Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of August 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from PM&R, for an aggregate purchase price of $830,700. In October 1997, the Company entered into a Management Services Agreement (the 'OSA Management Services Agreement') with OSA located in Boca Raton, Florida, pursuant to which the Company issued 62,110 shares of Common Stock and paid no additional consideration to the physician owners of OSA. The Company may be required to issue more shares of Common Stock to OSA in 1998 and 1999. Under the terms of the OSA Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 12.5% of Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the OSA Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of September 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from OSA for an aggregate purchase price of $6,773,951 and issued 284,436 shares of Common Stock to the physician owners of OSA. In October 1997, the Company entered into a Management Services Agreement (the 'BIOS Management Services Agreement') with BIOS located in Hollywood, Florida. As consideration to BIOS for entering into the agreement, the Company issued an aggregate of 255,237 shares of its Common Stock and no additional consideration to the BIOS physicians. The Company may be required to issue more shares of Common Stock to BIOS in 1998 based on BIOS's actual Collections for a twelve month period. Under the terms of the BIOS Management Services Agreement, the Company is entitled to receive a fee equal to (i) the aggregate of (A) 15% of net operating income (as defined in the BIOS Management Services Agreement) of the Practice, plus (B) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. The Company also purchased certain assets from BIOS for an aggregate purchase price of $2,691,563. In October 1997, the Company entered into a Management Services Agreement (the 'LOAS Management Services Agreement') with Lighthouse Orthopaedic Associates, P.A. ('LOAS') located in Lighthouse Point, Florida. As consideration to LOAS for entering into the agreement, the Company issued an aggregate of 52,972 shares of its Common Stock and paid no additional consideration to the LOAS physicians. The Company may be required to issue more shares of Common Stock to the Practice in 1998 based on the Practice's actual Collections for a twelve month period. Under the terms of the LOAS Management Services Agreement, the Company is entitled to receive a fee of (i) 12.5% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. Notwithstanding the foregoing, the Company is entitled to receive a guaranteed minimum annual management fee of $535,000. In connection with the LOAS Affiliation Transaction, the Company also entered into Asset Purchase Agreements, effective as of September 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from each of LOAS, certain affiliates of LOAS and each of the physicians of LOAS, for an aggregate purchase price of $3,949,970, and and issued an aggregate of 218,936 shares of Common Stock to the physician owners of LOAS. In October 1997, the Company entered into a Management Services Agreement (the 'Valley Management Services Agreement') with Valley Sports and Arthritis Surgeons ('Valley') located in Pennsylvania, pursuant to which the Company issued 503,250 shares of Common Stock and paid no additional consideration to the physician owners of Valley. The Company may be required to issue more shares of Common Stock to Valley in 1998 based on Valley's actual Collections for a twelve month period. Under the terms of the Valley Management Services Agreement, the Company is entitled to receive a fee of (i) 10% of Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the Valley Affiliation Transaction, the Company also entered 58 into an Asset Purchase Agreement, pursuant to which the Company purchased certain assets (including accounts receivable) from Valley for an aggregate purchase price of $897,727. Other Eastern Region Affiliations Effective July 1, 1997, the Company entered into a Management Services Agreement with Kramer & Maehrer, LLC, located in Bethlehem, Pennsylvania. In order to enhance the Company's presence in the Ft. Lauderdale market, the Company entered into Management Services Agreements with Jeffrey Beitler, M.D., located in Adventura, Florida, and Michael Abrahams, M.D., located in Plantation, Florida, effective as of September 1, 1997 and August 1, 1997, respectively. Under the terms of these Management Services Agreements, the Company is entitled to receive a fee equal to the aggregate of (i) 10% (15% in the case of Dr. Abrahams) of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. Central Region The Company's initial Affiliation Transaction in the central region was with STSC. The Company entered into a Management Services Agreement with STSC effective as of November 1, 1996, pursuant to which the Company issued 1,076,501 shares of Common Stock and deferred consideration of $915,835. Pursuant to the STSC Management Services Agreement, the Company is entitled to receive a management fee equal to an aggregate of (i) 11-1/2% of Collections of the Practice (less certain lease payments) plus reimbursement of clinic overhead expenses, plus (B) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. The Company also entered into an asset purchase agreement with STSC, pursuant to which the Company agreed to purchase certain assets (including accounts receivable) and assume certain liabilities for a purchase price of (i) $1,703,828 (subject to adjustment based upon the Company's actual collection of the purchased accounts receivable) plus (ii) a future payment of $446,327. Other Central Region Affiliations Effective July 1, 1997, the Company entered into a Management Services Agreement with Eradio Arrendondo, M.D. located in San Antonio, Texas. Western Region Effective November 1, 1996, the Company entered into a Management Services Agreement (the 'SCOI Management Services Agreement') with SCOI and, in connection therewith, the Company issued 4,000,000 shares of Common Stock to the physician owners and certain key employees of SCOI. Under the SCOI Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 10% of the Collections of the Practice (if certain conditions are met) less certain equipment lease payments plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. Simultaneously with the execution and delivery of the SCOI Management Services Agreement and pursuant to an Asset Purchase Agreement, the Company acquired certain assets (including the outstanding accounts receivable), and assumed certain liabilities, of SCOI for an aggregate purchase price of $5,930,897 (which included $2,224,000 of value of accounts receivable purchased). In a subsequent transaction with the Center for Orthopedic Surgery, Inc. ('COSI'), an outpatient surgery center in Van Nuys, California owned by the SCOI physicians, the Company issued 550,000 shares of Common Stock to the physician owners of COSI as consideration for the execution of the Management Services Agreement entered into between COSI and the Company (the 'COSI Management Services Agreement'). The number of shares issued to the physicians in connection with each of the SCOI and COSI Affiliation Transactions is subject to recalculation on the earlier to occur of the filing by the Company of a registration statement containing a preliminary prospectus with the Commission or November 1, 1997. The number of shares will be increased or decreased based upon the respective revenue contribution of the SCOI and COSI practices at such date as compared to the aggregate revenues of the entire musculoskeletal practice network of the Company at such date. 59 To expand its network in the western region, effective April 1, 1997, the Company entered into a Management Services Agreement (the 'Tri-City Management Services Agreement') with Tri-City, located in Oceanside, California, pursuant to which the Company issued 402,723 shares of Common Stock and paid $202,900 to the physician owners of Tri-City. Under the terms of the Tri-City Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 10% of Collections of the Practice (less certain lease payments) plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the Tri-City Affiliation Transaction, the Company also entered into three Asset Purchase Agreements with Tri-City or affiliates thereof, all effective as of April 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from such parties for an aggregate purchase price of $745,300 ($519,000 of which is subject to refund, based upon the Company's actual collection of the purchased accounts receivable). Effective July 1, 1997, the Company entered into a Management Services Agreement (the 'Sun Valley Management Services Agreement') with Sun Valley Orthopaedic Surgeons, an Arizona general partnership ('Sun Valley'), located in Sun City, Arizona, pursuant to which the Company issued 157,807 shares of Common Stock and paid no additional consideration to the physician owners of Sun Valley. The Sun Valley Management Services Agreement requires the Company to pay additional cash consideration to the physician owners of Sun Valley if the current market value of the Company's Common Stock is not at least equal to a specified price on the first anniversary of such agreement. Under the terms of the Sun Valley Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 10% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the Sun Valley Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of July 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from Sun Valley for an aggregate purchase price of $355,750. Effective August 1, 1997, the Company entered into a Management Services Agreement (the 'Stockdale Management Services Agreement') with Stockdale Podiatry Group, Inc. ('Stockdale'), located in Bakersfield, California, pursuant to which the Company issued 124,385 shares of Common Stock and paid additional consideration of $300,435 to the physician owners of Stockdale. Under the terms of the Stockdale Management Services Agreement, the Company is entitled to receive a fee equal to the aggregate of (i) 10% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In connection with the Stockdale Affiliation Transaction, the Company also entered into an Asset Purchase Agreement, effective as of August 1, 1997, pursuant to which the Company purchased certain assets (including accounts receivable) from Stockdale for an aggregate purchase price of $516,065. Other Western Region Affiliations Effective June 1, 1997 in order to enhance the Company's presence in the Los Angeles market area, the Company entered into separate Management Services Agreements with H. Leon Brooks, M.D. and Clive Segil, M.D., both located in Los Angeles, California. In addition, effective July 1, 1997, in order to establish a presence in the Lake Tahoe area, the Company entered into separate Management Services Agreements with R.C. Watson, M.D., Inc., Swanson Orthopedic Medical Corporation and Lake Tahoe Sports Medicine Center, all located in South Lake Tahoe, California. In addition, effective July 1, 1997, the Company entered into a Management Services Agreement with Robert O. Wilson, M.D. located in Sun City, Arizona. Effective August 1, 1997 the Company entered into a Management Services Agreement with John Zimmerman, M.D. located in Bakersfield, California. Under the terms of each of these Management Services Agreements, the Company is entitled to receive a fee equal to the aggregate of (ii) 10% of the Collections plus reimbursement of clinic overhead expenses, plus (ii) 66-2/3% of the cost savings the Company is able to achieve through its purchasing power. In October 1997, the Company acquired its IPA, Orthopaedic Management Network, Inc., an Arizona corporation, in exchange for $63,000 in cash, the assumption of $809,332 in accounts payable and accrued liabilities and the issuance of 57,036 shares of Common Stock. 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of the date of this Prospectus and as adjusted to reflect the sale of the shares of Common Stock offered hereby with respect to (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; and (iii) all directors and officers as a group. Unless otherwise indicated, the address for each stockholder is c/o BMJ Medical Management, Inc., 4800 North Federal Highway, Suite 104D, Boca Raton, Florida 33431.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING(1) AFTER OFFERING(1) ---------------------- ------------------------ NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT - ------------------------------------------------------------------ --------- ------- --------- ------- Delphi Ventures III, L.P.(2) ..................................... 185,555 1.4% 1,414,912(3) 6.8% 3000 Sand Hill Road, Building One, Suite 135, Menlo Park, California 94025 Oak Investment Partners VI, L.P.(4) .............................. 185,555 1.4 1,414,913(5) 6.8 One Gorham Island Westport, Connecticut 06880 Naresh Nagpal, M.D................................................ 1,001,805(6) 8.6 2,231,163(6)(7) 10.7 David H. Fater.................................................... 0 -- 15,000(8) -- Georges Daou...................................................... 0 -- 0 -- Stewart G. Eidelson, M.D.......................................... 14,030 * 14,030 * James M. Fox, M.D................................................. 403,208(9) 3.5 419,583(10) 2.0 Ann H. Lamont(4).................................................. 185,555(11) 1.4 1,414,913(5) 6.8 Donald J. Lothrop(2).............................................. 185,555(12) 1.4 1,414,912(3) 6.8 All officers and directors as a group (6 persons) (13)............ 1,790,153 14.9 5,509,601 26.7
- ------------------ * Less than one percent. (1) Applicable percentage of ownership is based on 11,445,331 shares of Common Stock outstanding as of November 3, 1997 and 20,630,071 shares of Common Stock outstanding upon consummation of the Offering. Beneficial ownership is determined in accordance with the rules of the Commission and includes voting and investment power with respect to securities. Securities subject to options or warrants currently exercisable or exercisable within 60 days of November 3, 1997 are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. Except for shares held jointly with a person's spouse or subject to applicable community property laws, or as indicated in the footnotes to this table, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder. (2) Includes (i) 2,653 shares of Common Stock owned by Delphi BioInvestments and (ii) warrants to purchase 34,925.8 shares of Common Stock owned by the stockholder and warrants to purchase 629.2 shares of Common Stock owned by Delphi BioInvestments. (3) Includes 1,207,616 shares of Preferred Stock owned by the stockholder and 21,741 shares of Preferred Stock owned by Delphi BioInvestments which automatically convert into the same number of shares of Common Stock upon completion of the Offering. (4) Includes (i) 3,420 shares of Common Stock owned by Oak VI and (ii) warrants to purchase 34,744.67 shares of Common Stock owned by the stockholder and warrants to purchase 810.33 shares of Common Stock owned by Oak VI. (5) Includes 1,201,329 shares of Preferred Stock owned by the stockholder and 28,029 shares of Preferred Stock owned by Oak VI all of which automatically convert into the same number of shares of Common Stock upon completion of the Offering. 61 (6) Includes (i) 18,750 shares of Common Stock reserved for issuance upon exercise of presently-exercisable stock options and (ii) warrants to purchase 35,555 shares of Common Stock. Dr. Nagpal's shares are held in two trusts for his children, the Prianker Nagpal Family Trust and the Zubin Nagpal Family Trust. Dr. Nagpal is the grantor of each trust and Dr. Nagpal's wife is the sole trustee of each trust. (7) Includes 1,229,358 shares of Preferred Stock owned by the stockholder which automatically convert into the same number of shares of Common Stock upon completion of the Offering. (8) Consists of 15,000 shares of Common Stock that vest automatically upon completion of the Offering. (9) Includes warrants to purchase 7,500 shares of Common Stock owned by the stockholder. (10) Includes 16,375 shares of Preferred Stock owned by the stockholder which automatically convert into the same number of shares of Common Stock upon completion of the Offering. (11) Ms. Lamont, a director of the Company, is a managing member of each of the general partner of Oak Investment and Oak VI. As such, Ms. Lamont may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act), in an indeterminate portion of the shares beneficially owned by Oak Investment and Oak VI. All of the shares indicated as owned by Ms. Lamont are owned beneficially by Oak Investment and Oak VI and are included because of the affiliation of Ms. Lamont with each of the partnerships. Ms. Lamont disclaims beneficial ownership of these shares to the extent permitted under Rule 13d-3 under the Exchange Act. (12) Mr. Lothrop, a director of the Company, is a General Partner of Delphi Ventures. As such, Mr. Lothrop may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act), in an indeterminate portion of the shares beneficially owned by Delphi Ventures and Delphi BioInvestments. All of the shares indicated as owned by Mr. Lothrop are owned beneficially by Delphi Ventures and Delphi BioInvestments and are included because of the affiliation of Mr. Lothrop with each of the partnerships. Mr. Lothrop disclaims beneficial ownership of these shares to the extent permitted under Rule 13d-3 under the Exchange Act. (13) Includes beneficial ownership of an aggregate of 371,110 shares of Common Stock and warrants to purchase Common Stock prior to the Offering and an aggregate of 2,829,826 shares of Common Stock and warrants to purchase Common Stock after the Offering attributable to the affiliation of Ms. Lamont and Mr. Lothrop with the entities described in footnotes (11) and (12) above. 62 DESCRIPTION OF CAPITAL STOCK Upon the consummation of the Offering, the authorized capital stock of the Company will consist of (i) shares of Common Stock and (ii) shares of preferred stock, par value $.01 per share (the 'Preferred Stock'), which are subject to future issuance as determined by the Board of Directors of the Corporation. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote and do not have any cumulative voting rights. Holders of Common Stock are entitled to receive such dividends as may from time to time be declared by the Board of Directors of the Company out of funds legally available therefor. Holders of Common Stock have no preemptive, conversion, redemption or sinking fund rights. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company and the liquidation preference of any outstanding class or series of preferred stock. The outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company hereby when issued will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the Preferred Stock currently outstanding and any series of Preferred Stock which the Company may issue in the future. Prior to the Offering, there has been no public market for the Common Stock. The Company has applied for inclusion on Nasdaq under the symbol BONS. The transfer agent and registrar for the Common Stock is Chemical Mellon Shareholder Services. PREFERRED STOCK As of September 1, 1997, the Company had five classes of authorized Preferred Stock: (i) the Series A Preferred Stock; (ii) the Series B Preferred Stock; (iii) the Series C Preferred Stock; (iv) the Series D Preferred Stock, and (v) the Series E Preferred Stock. Each holder of Preferred Stock has the right, at such holder's option, to convert any of his Preferred Stock into Common Stock at the conversion price set forth in the Certificate of Incorporation. Upon the consummation of the Offering, all outstanding shares of Preferred Stock automatically convert into an equal number of shares of Common Stock without any action on the part of the holders of such stock. Upon such conversion, the holders of Preferred Stock are not entitled to payment of any accrued but unpaid dividends. The Board of Directors is authorized to provide for the issuance of Preferred Stock in one or more series and to fix the number of shares constituting any such series, the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights, redemption privileges, conversion rights and liquidation preferences of the shares constituting any series, without any further vote or action by the stockholders of the Company. The issuance of Preferred Stock by the Board of Directors could adversely affect the rights of holders of Common Stock. For example, the issuance of Preferred Stock could result in a series of securities outstanding that would have preferences over the Common Stock with respect to dividends and in liquidation and that could (upon conversion or otherwise) enjoy all of the rights appurtenant to Common Stock. The authority possessed by the Board of Directors to issue Preferred Stock could potentially be used to discourage attempts by others to obtain control of the Company through merger, tender offer, proxy, consent or otherwise by making such attempts more difficult to achieve or more costly. The Board of Directors may issue Preferred Stock without stockholder approval and with voting and conversion rights which could adversely affect the voting power of holders of Common Stock. There are no agreements or understandings for the issuance of Preferred Stock, and the Board of Directors has no present intent to issue Preferred Stock. 63 CLASSIFIED BOARD OF DIRECTORS The Certificate of Incorporation provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Moreover, under Delaware Law, in the case of a corporation having a classified board, stockholders may remove a director only for cause. This provision, when coupled with the provision of the By-laws authorizing only the Board of Directors to fill vacant directorships, will preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. SPECIAL MEETING OF STOCKHOLDERS The Certificate of Incorporation provides that special meetings of stockholders of the Company may be called only by the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer. This provision will make it more difficult for stockholders to take actions opposed by the Board of Directors. STOCKHOLDERS AGREEMENT The Company entered into a Second Amended and Restated Stockholders Agreement dated as of November 22, 1996 (the 'Stockholders Agreement'), with certain of its stockholders, including Oak Partners, Oak VI, Delphi Ventures, Delphi BioInvestments, Dr. Nagpal and the SCOI physicians. Under the Stockholders Agreement, the stockholders party thereto agreed to vote their shares to appoint to the Company's Board of Directors certain designees of such stockholders. The stockholders (other than the SCOI physicians) also have the following rights and obligations under the Stockholders Agreement: (i) a right of first refusal with respect to issuances of the Company's capital stock or securities convertible into capital stock; and (ii) transfer restrictions. Under the terms of the Stockholders Agreement, 700,000 shares of Common Stock Dr. Nagpal received on May 6, 1996 are subject to vesting over a 40-month period; however, the vesting schedule is subject to acceleration in the following circumstances: (i) termination of Dr. Nagpal's employment without cause prior to December 31, 1996 but prior to January 1, 1998, 157,500 additional shares vest; (ii) termination of Dr. Nagpal's employment without cause prior to December 31, 1997 but prior to January 1, 1999, 105,000 additional shares vest; (iii) termination of Dr. Nagpal's employment as a result of his death or permanent disability, 210,000 additional shares vest; (iv) simultaneously with the effectiveness of a registration statement filed under the Securities Act, 50% of the remaining unvested stock vests; and (v) simultaneously with any sale of a majority of the capital stock or at least 50% of the assets of the Company, all of the remaining unvested stock vests. In the event of the termination of Dr. Nagpal's employment with the Company for any reason, the Company has the right to repurchase from Dr. Nagpal all of the shares of unvested stock at a purchase price equal to $.01 per share. The Stockholders Agreement terminates upon consummation of the Offering. REGISTRATION RIGHTS The beneficial owners of 5,227,241 shares of Common Stock have the right to request that the Company effect the registration of any or all of such shares or to include any or all of such shares in any registration statement to be filed by the Company relating to the registration of Common Stock under the Securities Act (other than registration statements on Form S-4 or Form S-8). Upon such request, the Company is required to file a registration statement covering such shares or to include such shares in such registration statement, as applicable, except that, in the case of a requested registration, the Company is not obligated to file any registration statement initiated pursuant to a request by any such owner within 180 days of a prior registration by the Company and the Company's obligations to effect any such registration is subject to other limitations. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Section 203 ('Section 203') of the Delaware General Corporation Law (the 'DGCL') prevents an 'interested stockholder' (defined in Section 203, generally, as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a 'business combination' (as defined in Section 203) with a publicly-held Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the 64 corporation approved either the business combination or the transaction in which the interested stockholder became an interested stockholder; (ii) upon consummation of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the rights to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. DIRECTORS' LIABILITY The Certificate of Incorporation contains provisions that eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty other than liability for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the DGCL or any transaction from which the director derived an improper personal benefit. The Company's By-laws contain provisions requiring the indemnification of the Company's directors and officers to the fullest extent permitted by Section 145 of the DGCL, including circumstances in which indemnification is otherwise discretionary. The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. 65 SHARES ELIGIBLE FOR FUTURE SALE After giving effect to the shares of Common Stock offered hereby, the Company will have outstanding 20,630,000 shares of Common Stock. Of these shares, all of the shares of Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act, except for any shares purchased by 'affiliates,' as that term is defined under the Securities Act, of the Company. The remaining 15,630,000 shares are 'restricted securities' within the meaning of Rule 144 promulgated under the Securities Act. Of these restricted shares, 5,526,501 shares will be eligible for the sale pursuant to Rule 144 in 1997 and the balance of the restricted shares will be eligible for sale at various times in 1998. The Company, its directors and officers and certain other stockholders of the Company, who upon completion of the Offering will own in the aggregate shares of Common Stock, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, issue, sell, offer, contract to sell, make any short sale, pledge, issue or sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock, or securities exhangeable for or convertible into or exercisable for any rights to purchase or acquire any shares of Common Stock during the 180-day period following the date of this Prospectus, except that such stockholders may transfer securities pursuant to bona fide gifts and the Company may issue, and grant options to purchase, shares of Common Stock under its current stock option plan and may issue shares of Common Stock, in connection with certain affiliation transactions, provided such shares are subject to the 180-day lock-up agreement. See 'Underwriting.' In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including any person who may be deemed to be an 'affiliate' of the Company, is entitled to sell within any three month period 'restricted' shares beneficially owned by him or her in an amount that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in shares of Common Stock during the four calendar weeks preceding such sale, provided that at least one year has elapsed since such shares were acquired from the Company or an affiliate of the Company. Sales are also subject to certain requirements as to the manner of sale, notice and the availability of current public information regarding the Company. However, a person who has not been an 'affiliate' of the Company at any time within three months prior to the sale is entitled to sell his or her shares without regard to the volume limitations or other requirements of Rule 144, provided that at least two years have elapsed since such shares were acquired from the Company or an affiliate of the Company. In general, under Rule 701 as currently in effect, any employee, officer, director, consultant or advisor of the Company who purchased shares from the Company pursuant to a written compensatory benefit plan or written contract relating to compensation is eligible to resell such shares 90 days after the effective date of the Offering in reliance upon Rule 144, but without the requirement to comply with certain restrictions contained in such rule. Shares of Common Stock obtained pursuant to Rule 701 may be sold by non-affiliates without regard to the holding period, volume limitations, or information or notice requirements of Rule 144, and by affiliates without regard to the holding period requirements. The Company intends to file a registration statement on Form S-8 under the Securities Act to register all shares of Common Stock issuable under its Option Plan, as well as certain of the shares of Common Stock previously issued under its Option Plan. This registration statement is expected to be filed as soon as practicable after the date of this Prospectus and is expected to become effective immediately upon filing. Shares of Common Stock covered by this registration statement will be eligible for sale in the pubic market after the effective date of such registration statement, subject to Rule 144 limitations applicable to affiliates of the Company. See 'Management Stock Option Plan.' The Company has granted registration rights to certain of its stockholders. See 'Description of Capital Stock Registration Rights.' Prior to the Offering, there has been no public market for the Common Stock and it is impossible to predict with certainty the effect, if any, that market sales of shares or the availability of such shares for sale will have on the market price of the Common Stock. Nevertheless, sales of substantial amounts of Common Stock in the public market may have an adverse impact on such market price and could impair the Company's ability to raise capital through the sale of its equity securities. 66 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:
NUMBER UNDERWRITER OF SHARES - ------------------------------------------------------------------------------------------- --------- Hambrecht & Quist LLC...................................................................... Raymond James & Associates, Inc............................................................ Volpe Brown Whelan & Company, LLC.......................................................... --------- Total................................................................................. 5,000,000 --------- ---------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Representatives have informed the Company that the Underwriters do not intend to conform sales to accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 750,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Company has agreed to pay the Underwriters a non-accountable expense allowance of $ upon completion of the Offering. Certain stockholders of the Company, including the executive officers and directors, who will own in the aggregate shares of Common Stock after the Offering, have agreed that they will not, without prior written consent of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire 67 Common Stock beneficially owned by them during the 180-day period following the date of this Prospectus other than transfers pursuant to bona fide gifts. In addition, the Company has agreed that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not, directly or indirectly, sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock, or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, during the 180-day period following the date of this Prospectus, except that the Company may issue, and grant options to purchase, shares of Common Stock under its current stock option plan and may issue shares of Common Stock in connection with certain affiliation transactions, provided such shares are subject to the 180-day lock-up agreement. Sales of such shares in the future could adversely affect the market price of the Common Stock. Hambrecht & Quist LLC may, in its sole discretion, release any of the shares subject to the lock-up agreements at any time without notice. At the request of the Company, the Underwriters have reserved up to shares of Common Stock for sale at the initial public offering price to directors, officers, employees and persons with business relationships with the Company, as well as others associated with such persons. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as all other shares offered hereby. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock was determined by negotiation between the Company and the Representatives. Among the factors considered in determining the initial public offering price were prevailing market and economic conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transaction may be effected on the Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. On September 9, 1997, Health Care Services-BMJ, LLC and H&Q Serv*is Ventures, L.P., affiliates of Hambrecht & Quist LLC, purchased $2.5 million aggregate principal amount of the Company's Debentures as part of a financing in which the Company sold $4.0 million aggregate principal amount of Debentures to seven investors. See 'Certain Transactions--Equity and Debt Financings.' 68 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon by O'Sullivan Graev & Karabell, LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New York. EXPERTS The financial statements of the following entities appearing in this Prospectus have been audited by Ernst & Young LLP, independent certified public accountants, as set forth in their reports thereon also appearing elsewhere in this Prospectus: BMJ Medical Management, Inc. Orthopaedic Associates of Bethlehem, Inc. Southern California Orthopedic Institute Medical Group South Texas Spinal Clinic, P.A. Tri-City Orthopedic Surgery Medical Group, Inc. Lauderdale Orthopaedic Surgeons Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics Sun Valley Orthopaedic Surgeons Orthopaedic Surgery Associates, P.A. Broward Institute of Orthopedic Specialties, P.A. Such financial statements have been included herein in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 69 INDEX TO FINANCIAL STATEMENTS CONTENTS FINANCIAL STATEMENTS OF BMJ MEDICAL MANAGEMENT, INC. Report of Independent Certified Public Accountants......................................................... F-3 Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited).......................................... F-4 Statements of Operations for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)....................................................................... F-5 Statements of Stockholders' Equity for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1997 (Unaudited)......................................................................................... F-6 Statements of Cash Flows for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)......................................................................................... F-7 Notes to Financial Statements.............................................................................. F-8 FINANCIAL STATEMENTS OF ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. Report of Independent Auditors............................................................................. F-25 Balance Sheets at December 31, 1994 and 1995 and June 30, 1996............................................. F-26 Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30, 1996..................................................................................................... F-27 Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30, 1996....................................................................... F-28 Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Six Months Ended June 30, 1996..................................................................................................... F-29 Notes to Financial Statements.............................................................................. F-30 FINANCIAL STATEMENTS OF SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP Report of Independent Auditors............................................................................. F-34 Balance Sheets at December 31, 1995 and October 31, 1996................................................... F-35 Statements of Operations and Changes in Partners' Capital for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October 31, 1996................................................................ F-36 Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October 31, 1996................................................................................................. F-37 Notes to Financial Statements.............................................................................. F-38 FINANCIAL STATEMENTS OF SOUTH TEXAS SPINAL CLINIC, P.A. Report of Independent Auditors............................................................................. F-43 Balance Sheets at December 31, 1994 and 1995 and October 31, 1996.......................................... F-44 Statements of Operations for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October 31, 1996................................................................................................. F-45 Statements of Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October 31, 1996.................................................................... F-46 Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Ten Months Ended October 31, 1996................................................................................................. F-47 Notes to Financial Statements.............................................................................. F-48 FINANCIAL STATEMENTS OF TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. Report of Independent Certified Public Accountants......................................................... F-51 Balance Sheets at December 31, 1995 and 1996............................................................... F-52 Statements of Operations for the Years Ended December 31, 1995 and 1996.................................... F-53 Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996.......................... F-54 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-55 Notes to Financial Statements.............................................................................. F-56
F-1 INDEX TO FINANCIAL STATEMENTS--(CONTINUED) FINANCIAL STATEMENTS OF LAUDERDALE ORTHOPAEDIC SURGEONS Report of Independent Certified Public Accountants......................................................... F-60 Balance Sheets at December 31, 1995 and 1996............................................................... F-61 Statements of Income and Change in Partners' Capital for the Years Ended December 31, 1995 and 1996........ F-62 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.................................... F-63 Notes to Financial Statements.............................................................................. F-64 FINANCIAL STATEMENTS OF FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS Report of Independent Certified Public Accountants......................................................... F-68 Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (Unaudited)................................. F-69 Statements of Income for the Years Ended December 31, 1995 and 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)..................................................................................... F-70 Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and the Six Months Ended June 30, 1997 (Unaudited)................................................................................ F-71 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)................................................................................ F-72 Notes to Financial Statements.............................................................................. F-73 FINANCIAL STATEMENTS OF SUN VALLEY ORTHOPAEDIC SURGEONS Report of Independent Certified Public Accountants......................................................... F-77 Balance Sheets at December 31, 1996 and June 30, 1997 (Unaudited).......................................... F-78 Statements of Operations and Changes in Partners' Capital for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited)............................ F-79 Statements of Cash Flows for the Year Ended December 31, 1996 and the Six Months Ended June 30, 1996 and 1997 (Unaudited).................................................. F-80 Notes to Financial Statements.............................................................................. F-81 FINANCIAL STATEMENTS OF ORTHOPAEDIC SURGERY ASSOCIATES, P.A. Report of Independent Certified Public Accountants......................................................... F-84 Balance Sheet at December 31, 1996......................................................................... F-85 Statement of Income for the Year Ended December 31, 1996................................................... F-86 Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-87 Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-88 Notes to Financial Statements.............................................................................. F-89 FINANCIAL STATEMENTS OF BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A. Report of Independent Certified Public Accountants......................................................... F-93 Balance Sheet at December 31, 1996......................................................................... F-94 Statement of Income for the Year Ended December 31, 1996................................................... F-95 Statement of Stockholders' Equity for the Year Ended December 31, 1996..................................... F-96 Statement of Cash Flows for the Year Ended December 31, 1996............................................... F-97 Notes to Financial Statements.............................................................................. F-98
F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors BMJ Medical Management, Inc. We have audited the accompanying balance sheet of BMJ Medical Management Inc., (the Company) as of December 31, 1996, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BMJ Medical Management, Inc. at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP West Palm Beach, Florida June 4, 1997 F-3 BMJ MEDICAL MANAGEMENT, INC. BALANCE SHEETS
DECEMBER 31, JUNE 30, 1996 1997 ------------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................ $ 1,439,000 $ 6,915,000 Accounts receivable.............................................................. 5,817,000 10,319,000 Due from physician groups........................................................ 426,000 21,000 Prepaid expenses and other current assets........................................ 29,000 48,000 ------------ ----------- Total current assets........................................................ 7,711,000 17,303,000 Furniture, fixtures and equipment, net............................................. 2,142,000 2,546,000 Management services agreements, net of accumulated amortization of $23,000 at December 31, 1996 and $80,000 at June 30, 1997................................... 3,790,000 7,310,000 Other assets....................................................................... 32,000 740,000 ------------ ----------- Total assets....................................................................... $ 13,675,000 $27,899,000 ------------ ----------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 149,000 $ 353,000 Accrued expenses................................................................. 366,000 826,000 Accrued salaries and benefits.................................................... 383,000 841,000 Due to physician groups.......................................................... 4,936,000 6,375,000 Due to related party............................................................. 40,000 -- Shareholder note payable......................................................... -- 753,000 Current portion of long-term debt and capital lease obligations.................. 18,000 665,000 ------------ ----------- Total current liabilities................................................... 5,892,000 9,813,000 Long-term debt and capital lease obligations, less current portion................. 59,000 6,540,000 commitments and contingencies...................................................... Stockholders' equity: Convertible preferred stock--Series A, $.01 par value--999,999 shares authorized, issued and outstanding........................................................ 10,000 10,000 Convertible preferred stock--Series B, $.01 par value--2,000,001 shares authorized, issued and outstanding............................................ 20,000 20,000 Convertible preferred stock--Series C, $.01 par value--254,999 shares authorized, issued and outstanding........................................................ -- 3,000 Convertible preferred stock--Series D, $.01 par value--188,072 shares authorized, issued and outstanding........................................................ -- 2,000 Convertible preferred stock--Series E, $.01 par value--533,335 shares authorized, issued and outstanding........................................................ -- 5,000 Preferred stock, $.01 par value--2,000,000 shares authorized, none issued and outstanding................................................................... -- -- Common stock, $.001 par value--10,000,000 shares authorized and 6,701,501 shares issued and outstanding at December 31, 1996; 25,000,000 shares authorized and 8,311,462 shares issued and outstanding at June 30, 1997...................... 7,000 9,000 Additional paid-in capital....................................................... 8,796,000 14,482,000 Accumulated deficit.............................................................. (1,109,000) (2,985,000) ------------ ----------- Total stockholders' equity......................................................... 7,724,000 11,546,000 ------------ ----------- Total liabilities and stockholders' equity......................................... $ 13,675,000 $27,899,000 ------------ ----------- ------------ -----------
See accompanying notes. F-4 BMJ MEDICAL MANAGEMENT, INC. STATEMENTS OF OPERATIONS
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ------------------------------ 1996 1996 1997 ----------- ------------ ------------ (UNAUDITED) Practice revenue, net.................................... $ 6,029,000 $ -- $ 19,907,000 Less: physician and other provider services.............. 2,912,000 -- 9,509,000 ----------- ------------ ------------ Management fee revenue................................... 3,117,000 -- 10,398,000 Costs and expenses: Medical support services............................... 2,844,000 -- 9,541,000 General and administrative............................. 1,278,000 51,000 2,139,000 Depreciation and amortization 104,000 1,000 300,000 Interest expense (income), net......................... -- -- 294,000 ----------- ------------ ------------ Total costs and expenses............................ 4,226,000 52,000 12,274,000 ----------- ------------ ------------ Net loss................................................. $(1,109,000) $ (52,000) $ (1,876,000) ----------- ------------ ------------ ----------- ------------ ------------ Net loss per share....................................... $ (0.09) $ 0.00 $ (0.15) ----------- ------------ ------------ ----------- ------------ ------------ Weighted average number of common shares outstanding..... 11,852,000 11,217,000 12,480,000 ----------- ------------ ------------ ----------- ------------ ------------
See accompanying notes. F-5 BMJ MEDICAL MANAGEMENT, INC. STATEMENT OF STOCKHOLDERS' EQUITY
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 ---------- --------- --------- --------- --------- --------- ------ ----------- Balance at inception......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Initial issuance of convertible preferred stock...................... 3,000,000 10,000 20,000 -- -- -- -- 6,970,000 Issuance of common stock..... 1,175,000 -- -- -- -- -- 1,000 11,000 Issuance of common stock in connection with management services agreements................. 5,526,501 -- -- -- -- -- 6,000 1,815,000 Net loss..................... -- -- -- -- -- -- -- --------- --------- --------- --------- --------- ------ ----------- Balance at December 31, 1996....................... 10,000 20,000 7,000 8,796,000 Issuance of convertible preferred stock (unaudited)................ 976,406 -- -- 3,000 2,000 5,000 -- 4,990,000 Issuance of common stock in connection with management services agreements (unaudited)................ 1,604,961 -- -- -- -- -- 2,000 696,000 Net loss (unaudited)......... -- -- -- -- -- -- -- --------- --------- --------- --------- --------- ------ ----------- Balance at June 30, 1997 (unaudited)................ $10,000 $20,000 $ 3,000 $ 2,000 $ 5,000 $9,000 $14,482,000 --------- --------- --------- --------- --------- ------ ----------- --------- --------- --------- --------- --------- ------ ----------- ACCUMULATED DEFICIT TOTAL ----------- ----------- Balance at inception......... $ -- $ -- Initial issuance of convertible preferred stock...................... -- 7,000,000 Issuance of common stock..... -- 12,000 Issuance of common stock in connection with management services agreements................. -- 1,821,000 Net loss..................... (1,109,000 ) (1,109,000) ----------- ----------- Balance at December 31, 1996....................... (1,109,000 ) 7,724,000 Issuance of convertible preferred stock (unaudited)................ -- 5,000,000 Issuance of common stock in connection with management services agreements (unaudited)................ -- 698,000 Net loss (unaudited)......... (1,876,000 ) (1,876,000) ----------- ----------- Balance at June 30, 1997 (unaudited)................ $(2,985,000) $11,546,000 ----------- ----------- ----------- -----------
See accompanying notes. F-6 BMJ MEDICAL MANAGEMENT, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ------------------------- 1996 1996 1997 ----------- ---------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net loss............................................................... $(1,109,000) $ (52,000) $(1,876,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation......................................................... 74,000 1,000 228,000 Amortization......................................................... 30,000 -- 72,000 Interest expense converted to preferred stock........................ -- -- 34,000 Changes in operating assets and liabilities: Accounts receivable............................................... 366,000 -- (458,000) Due from physician groups......................................... (1,241,000) -- (337,000) Prepaid expenses and other current assets......................... 2,000 -- (6,000) Accounts payable.................................................. 149,000 -- 204,000 Accrued expenses.................................................. 366,000 -- 460,000 Accrued salaries and benefits..................................... 383,000 -- 458,000 ----------- ---------- ----------- Net cash used in operating activities.................................. (980,000) (51,000) (1,221,000) INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment......................... (697,000) (12,000) (92,000) Payments for management services agreements............................ (206,000) -- (547,000) Payments for deferred offering costs................................... -- -- (708,000) Cash used for practice affiliations.................................... (3,707,000) -- (6,628,000) Payments for deposits.................................................. (22,000) -- -- ----------- ---------- ----------- Net cash used in investing activities.................................. (4,632,000) (12,000) (7,975,000) FINANCING ACTIVITIES Proceeds from issuance of preferred stock.............................. 7,000,000 1,000,000 4,966,000 Proceeds from debt issuance............................................ -- -- 7,128,000 Deferred consideration for management services agreements.............. -- -- (268,000) Payments to related party.............................................. -- -- (154,000) Proceeds from related party............................................ 40,000 -- 867,000 Proceeds from issuance of common stock................................. 11,000 8,000 220,000 Amounts due to physician groups........................................ -- -- 1,913,000 ----------- ---------- ----------- Net cash provided by financing activities.............................. 7,051,000 1,008,000 14,672,000 ----------- ---------- ----------- Net increase in cash and cash equivalents.............................. 1,439,000 945,000 5,476,000 Cash and cash equivalents at beginning of period....................... -- -- 1,439,000 ----------- ---------- ----------- Cash and cash equivalents at end of period............................. $ 1,439,000 $ 945,000 $ 6,915,000 ----------- ---------- ----------- ----------- ---------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid.......................................................... $ 9,000 $ -- $ 108,000 ----------- ---------- ----------- ----------- ---------- ----------- Stock issued upon execution of management services agreements.......... $ 1,822,000 $ -- $ 478,000 ----------- ---------- ----------- ----------- ---------- ----------- Noncash transactions from practice affiliations including accounts receivable, management services agreements and due to/from physicians........................................................... $ 5,720,000 $ -- $ 536,000 ----------- ---------- ----------- ----------- ---------- ----------- Equipment under capital lease obligations.............................. $ 77,000 $ -- $ -- ----------- ---------- ----------- ----------- ---------- -----------
See accompanying notes. F-7 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (INFORMATION PERTAINING TO JUNE 30, 1997 AND TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL BMJ Medical Management, Inc. (the Company), a Delaware corporation, is engaged in operating and managing physician groups focusing exclusively on musculoskeletal disease management. The Company manages physician groups under long-term management services agreements (the Agreements) with affiliated physician groups located in various states. The Company may also acquire certain assets under Asset Purchase Agreements, primarily accounts receivable, and furniture, fixtures and equipment of these groups. The cost of these assets is determined based on their appraised or net realizable value. The Company was incorporated in Delaware in January 1996 and entered into its first agreement in July 1996 and two additional agreements in November 1996. Under the Agreements, the Company provides a full range of administrative services required for a physician group's day-to-day nonmedical operations and employs substantially all of the nonmedical personnel utilized by the group. The nonclinical services provided include, but are not limited to, practice administration, practice support, data processing, business office management including billing and collecting, marketing, accounting and the provision of office space and equipment and the arrangement of group purchasing discounts for medical and nonmedical supplies. The Company also assists the physician group in the recruitment of additional physicians and negotiates managed care contracts which must be approved by the group. The terms of the Agreements are 40 years and automatically renew for successive 5-year periods thereafter unless terminated by one of the parties. As compensation for services provided by the Company, the Company generally receives a percentage of the group's net collected revenue, reimbursement of all nonmedical expenses of the practice incurred by the Company in supporting the group, 66 2/3% of the cost savings the Company is able to achieve through its purchasing power and a percentage of the profits from new ancillary services. The laws of many states, including the states in which the Company presently has agreements, prohibit business corporations from practicing medicine or exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements with physicians. The Company intends that, pursuant to the Agreements, it will not exercise any responsibility on behalf of affiliated physicians that could be construed as affecting the practice of medicine. Accordingly, the Company believes that its operations do not violate applicable state laws relating to the corporate practice of medicine. BASIS OF PRESENTATION The Company does not consolidate the operating results and accounts of the physician groups since it does not own or control the groups it manages. The Company believes that the Agreements provide it with the preponderance of the net profits of the medical services furnished by the groups. Consequently, the Company presents physician groups' revenue less amounts retained by the physician groups as management fee revenue in the accompanying statements of operations. PRACTICE REVENUE, NET Practice revenue, net, represents the gross revenue of the physician groups and ambulatory surgery center from patients, third-party payors and others for services rendered, net of contractual and other adjustments. Contractual adjustments typically result from differences between the physician groups' established rates for services and the amounts allowed by government sponsored health care programs and other insurers. F-8 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Provisions for estimated third-party payor settlements and adjustments are estimated in the period the related services are rendered and adjusted in future periods as final settlements are determined. There are no material claims, disputes, or other unsettled matters that exist to management's knowledge concerning third-party reimbursements. In addition, management believes there are no retroactive adjustments that would be material to the financial statements. The Company estimates that approximately 15% and 12% of practice revenue, net, was received under government sponsored health care programs (principally, the Medicare and Medicaid programs) during the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. The physician groups have numerous agreements with managed care and other organizations to provide physician services based on negotiated fee schedules. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. MANAGEMENT FEE REVENUE Management fee revenue represents practice and ambulatory surgery center revenue, net less amounts retained by the physician groups. The Company's management fee revenue is comprised of three components: (i) percentage of the physician groups' net collected revenue (generally ranging from 10%-15%), plus (ii) 100% of the non-physician affiliated practice expenses (generally ranging from 45%-55% of the physician groups' net collected revenue), plus (iii) 66 2/3% of the cost savings the Company is able to achieve through its purchasing power (generally related to medical malpractice insurance, property and liability insurance, group benefits and certain major medical supplies). The portion of the management fee revenue that represents a percentage of net collected revenue is dependent upon the physician groups' revenue which must be billed and collected. Management fee revenue included in the accompanying statements of operations is comprised of the following:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, 1996 1997 ------------ -------------- (UNAUDITED) Component based upon percentage of physician groups' net collected revenues........................................... $1,079,000 $ 1,842,000 Reimbursement of non-physician affiliated practice expenses.... 2,038,000 8,556,000 ------------ -------------- Management fee revenue......................................... $3,117,000 $ 10,398,000 ------------ -------------- ------------ --------------
For the year ended December 31, 1996, 100% of the management fee revenue was earned from three affiliated practices. Southern California Orthopedics Institute Medical Group (SCOI); South Texas Spinal Clinic, P.A. (STSC); and Lehigh Valley Bone, Muscle and Joint Group, LLC (LVBMJ) comprised approximately 52%, 23%, and 25% of management fee revenue, respectively. For the six months ended June 30, 1997, these three groups comprised approximately 54%, 17%, and 9% of management fee revenue, respectively. F-9 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) COSTS AND EXPENSES Medical support services represent costs incurred by the Company relative to the operations of the physician groups including non-physician personnel salaries and benefits, medical supplies, malpractice insurance premiums, building and equipment rental expense, general and administrative expenses, supplies, maintenance and repairs, insurance, utilities and other indirect expenses. General and administrative expenses represent primarily the salaries of corporate headquarters personnel, rent, travel, and other administrative expenses. CASH AND CASH EQUIVALENTS Cash in excess of daily requirements invested in short-term investments with maturities of three months or less is considered to be cash equivalents for financial statement purposes. Deposits in banks may exceed the amount of insurance provided on such deposits. The Company performs reviews of the credit worthiness of its depository banks. The Company has not experienced any losses on its deposits of cash. ACCOUNTS RECEIVABLE Accounts receivable principally represent receivables purchased from the medical groups for medical services provided by the physician groups. Risk of collection is borne by the physician groups and any amounts paid by the Company for accounts receivable that are ultimately uncollectible are reimbursed to the Company by the physician groups. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets which range from three to seven years. Routine maintenance and repairs are charged to expense as incurred and major renovations or improvements are capitalized. MANAGEMENT SERVICES AGREEMENTS Management services agreements include consideration (cash, common stock or other consideration) paid to the physician groups for entering into Agreements, legal and accounting fees and other similar transaction costs. The Agreements are for a term of 40 years and one agreement is subject to rescission by a physician group on the seventh anniversary. The Company amortizes the costs of entering into Agreements over periods ranging from seven to 25 years. Shares issued to physician practices that are subject to performance criteria are accounted for as compensation. The Company periodically reviews its intangible assets to assess recoverability and a charge will be recognized in the statement of operations if a permanent impairment is determined to have occurred. Recoverability of intangibles is determined based on undiscounted future operating cash flows from the related business unit or activity. The amount of impairment, if any, would be measured based on discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangible assets will be affected if estimated future operating cash flows are not achieved. The Company does not believe that any impairment has occurred at December 31, 1996 or June 30, 1997. DUE TO/FROM PHYSICIAN GROUPS Due from physician groups represents amounts due to the Company for collections made by the physician groups on behalf of the Company related to purchased accounts receivable collections, unpaid management fees and other short-term advances. F-10 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Due to physician groups represents cash consideration related to the Agreements that is payable at the earlier of the consummation of an Initial Public Offering of the Company's common stock or the one year anniversary of the execution of the Agreement as well as amounts due to the physician groups related to the ongoing monthly purchases of accounts receivable. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INTERIM FINANCIAL STATEMENTS The interim financial statements as of June 30, 1997 and for the six months ended June 30, 1997 and 1996 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all normal and recurring adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The interim data disclosed in these notes to the financial statements is also unaudited. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 1997. ACCOUNTING FOR STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees primarily with an exercise price equal to the fair value of the shares on the date of grant. The Company accounts for these stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, generally recognizes no compensation expense for stock options granted. Under the Company's stock option plans, the Company may grant stock options for a fixed number of shares to independent consultants and contractors primarily with an exercise price equal to the fair value of the shares on the date of grant. The Company accounts for these stock option grants using the fair value method of FASB Statement No. 123 'Accounting for Stock-Based Compensation.' The fair value for these options is estimated at the date of grant using a stock option pricing model and recognized as compensation cost. NET LOSS PER SHARE For the year ended December 31, 1996, pursuant to the Securities and Exchange Commission's Staff Accounting Bulletins, common shares and common equivalent shares issued at prices below the estimated public offering price during the 12 months immediately preceding the date of the proposed initial filing of the registration statement, using the treasury stock method, have been included in the calculation of common shares and common share equivalents as if they were outstanding for all periods presented even when the effect is antidilutive. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128, which applies to entities with publicly held common stock, simplifies the standards for computing earnings per share previously required in APB Opinion No. 15, Earnings per Share, and makes them comparable to international earnings per share standards. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier adoption is not permitted. Management is currently reviewing the provisions of SFAS No. 128; however, it does not believe that adoption of this new accounting pronouncement will have a material impact on the calculation and presentation of earnings per share. F-11 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) FINANCIAL INSTRUMENTS The carrying amounts of financial instruments as reported in the accompanying balance sheet approximate their fair value primarily due to the short-term nature of such financial instruments. 2. PRACTICE AFFILIATIONS Effective July 1, 1996, the Company entered into an Affiliation Transaction with Lehigh Valley Bone, Muscle and Joint Group, L.L.C. a Pennsylvania limited liability company (LVBMJ), under which the Company would receive as a management fee 50% of the net collected revenues of LVBMJ and would be responsible for all the clinic overhead expenses (medical support services). Under the terms of the Amended and Restated Management Services Agreement between LVBMJ and the Company, effective July 1, 1997 (the LVBMJ Management Services Agreement), the Company paid $324,582 in cash, issued 450,000 shares of Common Stock recorded at $0.10 per share and 68,031 shares of Common Stock recorded at $1.20 per share, based on independent valuations, and options to purchase 30,000 shares of Common Stock representing consideration of $126,637 in connection with this transaction. Effective July 1, 1997, the Company and LVBMJ amended and restated their agreement to adjust the management fee to 10% of net collected revenues plus reimbursement of clinic overhead expenses. The aggregate consideration of $465,768, including transaction costs, has been allocated to the assets acquired or expensed as follows: furniture, fixtures and equipment--$50,000, interest expense--$4,582, and Management Services Agreement--$411,186. The Management Services Agreement is being amortized over 25 years. The LVBMJ Management Services Agreement provides that the Company may be required to issue more shares of Common Stock as a additional consideration during 1998. The total number of shares to be issued will depend on actual collections of the practice during a specified twelve month period. The value of any subsequently issued shares will be allocated to the LVBMJ Management Services Agreement. On November 22, 1996, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (SCOI Management Services Agreement) with Southern California Orthopedic Institute Medical Group, California general partnership (SCOI), in exchange for $5,930,897 in cash and the issuance of 4,000,000 shares of Common Stock recorded at $0.35 per share, based on an independent valuation, representing consideration of $1,400,000. The SCOI Management Services Agreement calls for management fees to be earned by the Company equal to 3 1/3% of the net collected revenues until certain conditions are met at which time the management fee will increase to 6 2/3% of net collected revenues until the filing of a preliminary prospectus for the initial public offering of the Company's Common Stock with the Securities and Exchange Commission at which time the management fee will increase to 10% of the net collected revenues. For the period from November 1 through June 30, 1997, the Company recognized management fees for SCOI of 3 1/3% of net collected revenues. The number of shares issued in connection with this transaction, which exceed 3,000,000, are subject to recalculation at the earlier of the filing by the Company of a preliminary prospectus with the Commission or November 1, 1997. On April 1, 1997, the Company entered into a transaction with the Center for Orthopedic Surgery, Inc., a California corporation (COSI), owned by SCOI physicians, in exchange for 550,000 shares of Common Stock recorded at $0.40 per share, based on an independent valuation, representing consideration or $220,000. The number of shares issued in connection with this transaction are also subject to recalculation at the later of the SCOI recalculation or January 1, 1998. The aggregate consideration of $7,671,999, including transaction costs has been allocated to the assets acquired as follows: net accounts receivable--$4,448,000, furniture, fixtures and equipment--$1,441,920, supplies--$30,897, deposits--$10,080 and Management Services Agreements--$1,741,102. The Management Services Agreements are being amortized over 25 years. In accordance with the recalculation provisions, the Company expects to issue approximately 900,000 additional shares of Common Stock to SCOI physicians for both the SCOI and COSI recalculations, the exact amount of which will be determined in the fourth quarter of 1997. These shares and 1,000,000 of the original 4,000,000 shares issued in November 1996 in connection with the SCOI transaction represent consideration based upon performance and will be accounted for as compensation expense. Accordingly, the Company will F-12 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PRACTICE AFFILIATIONS--(CONTINUED) incur a charge of earnings in the fourth quarter of 1997 amounting to approximately $9,500,000 relating to the resolution of this contingency and the final settlement of the recalculation provisions. On December 23, 1996, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (STSC Management Services Agreement) with South Texas Spinal Clinic, P.A., a Texas professional association (STSC), in exchange for the issuance of 1,076,501 shares of Common Stock recorded at $0.35 per share, based on an independent valuation, representing consideration of $376,775 and cash of $3,065,990. The aggregate consideration of $3,484,231, including transaction costs has been allocated to the assets acquired as follows: net accounts receivable--$1,703,826, furniture, fixtures and equipment--$425,000, supplies--$21,328 and Management Services Agreement--$1,334,077. The STSC Management Services Agreement permits STSC and individual physicians to rescind the Affiliation Transaction on (i) November 1, 1998 if the Company has not affiliated with an aggregate of sixteen physicians in San Antonio, Texas by such date and (ii) November 1, 2003. In the event of a rescission of the transaction, the transaction will be unwound, with the assets (other than the accounts receivable) acquired by the Company being returned to STSC and the purchase price paid therefore being returned to the Company. In addition, the physician owners and the employed physicians, if any, who received Common Stock of the Company in connection with the transaction will be required to return such capital stock to the Company. The STSC Management Services Agreement is being amortized over 7 years. Effective April 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (Tri-City Management Services Agreement) with Tri-City Orthopedic Surgery Medical Group, Inc., a California corporation (Tri-City), and two of its affiliates in exchange for $948,200 in cash, the issuance of 402,723 shares of Common Stock recorded at $0.40 per share, based on an independent valuation, representing consideration of $161,089. The aggregate consideration of $1,162,598, including transaction costs has been allocated to the assets acquired or expensed as follows: net accounts receivable--$519,000, furniture, fixtures and equipment--$167,590, Management Services Agreement--$476,008. The Tri-City Management Services Agreement is being amortized over 25 years. Effective April 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (LOS Management Services Agreement) with Lauderdale Orthopaedic Surgeons, a Florida partnership, in exchange for $2,750,334 in cash and the issuance of 498,348 shares of Common Stock recorded at $0.40 per share, based on an independent valuation, representing consideration of $199,339. The aggregate consideration of $3,020,124, including transaction costs has been allocated to the assets acquired or expensed as follows: accounts receivable-- $2,000,000, furniture, fixtures and equipment--$103,915 Management Services Agreement--$916,209. The LOS Management Services Agreement is being amortized over 25 years. Effective June 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (GCO Management Services Agreement) with Fishman and Stashak, M.D.'s, P.A. (GCO), a Florida professional association, (d/b/a Gold Coast Orthopedics), Clive Segil, M.D. (Segil), a California professional corporation, and H. Leon Brooks, M.D. (Brooks), a California professional corporation, in exchange for an aggregate amount of $3,885, 589 in cash, the issuance of 409,615 shares of Common Stock recorded at $1.15 per share, based on an independent valuation, representing consideration of $471,057. The aggregate consideration of $4,535,479, including transaction costs has been allocated to the assets acquired or expensed as follows: accounts receivable--$1,759,000, furniture, fixtures and equipment--$194,150, supplies--$3,650 and Management Services Agreement--$2,578,679. The GCO Management Services Agreement is being amortized over 25 years and the Management Services Agreements for Segil and Brooks over 15 years. The GCO agreement provides that the Company may be required to issue more shares of Common Stock as additional consideration during 1998. The total number of shares to be issued will depend on actual collections of the practice during a specified twelve month period. The value of any subsequently issued shares will be allocated to the Management Service Agreements. F-13 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PRACTICE AFFILIATIONS--(CONTINUED) Effective July 1, 1997, the Company entered into three separate Asset Purchase Agreements and Management Services Agreement with Swanson Orthopedic Medical Corporation, a professional corporation, Randy C. Watson, M.D., a professional corporation and Lake Tahoe Sports Medicine Center, a medical corporation, all located in South Lake Tahoe, California, in exchange for an aggregate amount of $986,000 in cash and the issuance of 150,708 shares of Common Stock recorded at $1.20 per share, based on an independent valuation, representing consideration of $180,850. The aggregate consideration of $1,281,234, including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$726,000, furniture, fixtures and equipment--$67,200, supplies--$10,000, and Management Services Agreement--$478,034. The Management Services Agreements are being amortized over 25 years. Effective July 1, 1997, the Company entered into two separate Asset Purchase Agreements and Management Services Agreements with Sun Valley Orthopaedic Surgeons, an Arizona general partnership and Robert O. Wilson, M.D.P.C., an Arizona professional corporation, both located in Sun City, Arizona, in exchange for an aggregate amount of $616,125 in cash and the issuance of 197,865 shares of Common Stock recorded at $1.20 per share, based on an independent valuation, representing consideration of $237,438. Sun Valley Orthopaedic Surgeons has the right to receive additional consideration if the fair market value of the Company's Common Stock, as determined on July 1, 1998, is less than $6.50. The additional consideration would be determined by multiplying the per share dollar amount below $6.50 by 50,845 shares and would be payable in full in cash no later than July 31, 1998. The Company has recorded this liability at September 30, 1997. The aggregate consideration of $1,244,520, including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$457,000, furniture, fixtures and equipment--$67,500, supplies--$7,000, deposits-- $4,564, and Management Services Agreement--$708,456. The Management Services Agreements are being amortized over 25 years. Effective July 1, 1997, the Company entered into two separate Asset Purchase Agreements and Management Services Agreements with Stockdale Podiatry Group, Inc., a California professinal corporation and John C. Zimmerman, D.P.M., both located in Bakersfield, California, in exchange for an aggregate amount of $1,032,842 in cash, a contractual obligation to pay John C. Zimmerman, M.D. $78,858 in cash at a future specified date and the issuance of 169,493 shares of Common Stock recorded at $1.20 per share, based on an independent valuation, representing consideration of $203,392. The aggregate consideration of $1,399,466, including transaction costs has been allocated to the assets acquired or expensed as follows: accounts receivable--$637,200, furniture, fixtures and equipment--$85,207, supplies--$10,000, and Management Services Agreement--$667,059. The Management Services Agreements are being amortized over 25 years. Effective July 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (Kramer Management Services Agreement) with Kramer & Maehrer, L.L.C., a Pennsylvania limited liability company, in exchange for $45,981 in cash and the issuance of 72,600 shares of Common Stock recorded at $1.20 per share, based on an independent valuation, representing consideration of $87,120. The aggregate consideration of $136,127, including transaction costs has been allocated to the assets acquired as follows: furniture, fixtures and equipment--$45,981, Management Services Agreement--$90,146. The Kramer Management Services Agreement is being amortized over 25 years. Effective July 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (SAB Management Services Agreement) with San Antonio Bone and Joint Clinic, P.A., a Texas professional association, in exchange for an aggregate amount of $288,978 in cash and the issuance of 38,229 shares of Common Stock recorded at $1.20 per share, based on an independent valuation, representing consideration of $45,875. The aggregate consideration of $396,674, including transaction costs has been allocated to the assets as follows: accounts receivable--$92,289, furniture, fixtures and equipment--$175,801, supplies--$649, and Management Services Agreement--$127,935. The SAB Management Services Agreement is being amortized over 25 years. F-14 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PRACTICE AFFILIATIONS--(CONTINUED) Effective August 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (PM & R Management Services Agreement) with Physical Medicine and Rehabilitation Associates, Inc., a Florida corporation, in exchange for $830,697 in cash and the issuance of 130,730 shares of Common Stock recorded at $2.00 per share, based on an independent valuation, representing consideration of $261,460. The aggregate consideration of $1,207,112, including transaction costs has been allocated to the assets acquired or expensed as follows: accounts receivable--$465,000, furniture, fixtures and equipment--$165,000, deposits--$5,166, interest expense--$531 and Management Services Agreement--$571,415. The PM & R Management Services Agreement is being amortized over 25 years. Effective August 1, 1997, the Company entered into separate Asset Purchase Agreements with Broward Orthopaedic Specialists, Inc., a Florida corporation (Broward), Terence Matthews, M.D. P.A., Wylie Scott, M.D. P.A. and Mitchell S. Seavey, M.D. and a Management Services Agreement with Broward (Broward Management Services Agreement), in exchange for $4,154,881 in cash, a promissory note issued to Dr. Seavey for $283,502 and the issuance of 656,902 shares of Common Stock recorded at $2.00 per share, based on an independent valuation, representing consideration of $1,313,804. The aggregate consideration of $5,795,213, including transaction costs has been allocated to the assets acquired and expensed as follows: accounts receivable-- $1,635,000, furniture, fixtures and equipment--$385,000, Management Services Agreement--$3,761,707, and interest expense--$13,506. The Broward Management Services Agreement is being amortized over 25 years. Effective August 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (Abrahams Management Services Agreement) with Michael A. Abrahams, M.D. P.A., a Florida professional association, in exchange for $620,004 in cash and the issuance of 95,384 shares of Common Stock recorded at $2.00 per share, based on an independent valuation, representing consideration of $190,768. The aggregate consideration of $857,388, including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$285,000, furniture, fixtures and equipment--$47,500, and Management Services Agreement--$524,888. The Abrahams Management Services Agreement is being amortized over 25 years. Effective September 1, 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (Beitler Management Services Agreement) with Jeffrey Beitler, M.D. P.A., a Florida professional corporation, in exchange for $275,000 in cash and the issuance of 36,492 shares of Common Stock recorded at $2.25 per share, based on an independent valuation, representing consideration of $82,107. The aggregate consideration of $377,107, including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$200,000, furniture, fixtures and equipment--$35,000, and Management Services Agreement--$142,107. The Beitler Management Services Agreement is being amortized over 25 years. In October 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (OSA Management Services Agreement) with Orthopaedic Surgery Associates, P.A., a Florida professional corporation (OSA) in exchange for $4,496,250 in cash, issuance of a promissory note for $2,450,465, bearing interest at 8.5%, and the issuance of 282,254 shares of Common Stock recorded at $3.35 per share, based on an independent valuation, representing consideration of $945,551. The aggregate consideration of $7,892,266 including transaction costs has been allocated to the assets acquired as follows: accounts receivable-- $2,000,000, furniture, fixtures and equipment--$500,000, and Management Services Agreement--$5,392,266. The OSA Management Services Agreement is being amortized over 25 years. In October 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (LOM Management Services Agreement) with Lighthouse Orthopaedic Management Group, Inc (LOM), a Florida corporation, in exchange for the issuance of promissory notes for $4,043,989, bearing interest at 8.5% and the issuance of 294,072 shares of Common Stock recorded at $3.35 per share, based on the independent valuation, representing consideration of $985,141. The aggregate consideration of $5,029,130, including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$1,300,000 F-15 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PRACTICE AFFILIATIONS--(CONTINUED) furniture, fixtures, and equipment--$250,000, and Management Services Agreement--$3,479,130. The LOM Management Services Agreement is being amortized over 25 years. In October 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (BIOS Management Services Agreement) with Broward Institute of Orthopaedic Specialties, P.A., a Florida professional association (BIOS), in exchange for $119,311 in cash, the issuance of promissory notes for $3,396,252, bearing interest at 8%, and the issuance of 260,237 shares of Common Stock recorded at $3.35 per share, based on an independent valuation, representing consideration of $871,794. The aggregate consideration of $4,387,357 including transaction costs has been allocated to the assets acquired as follows: advances--$800,000, furniture, fixtures, and equipment--$281,197, supplies--$56,851, deposits--$37,966 and Managements Services Agreement--$3,211,343. The BIOS Management Services Agreement is being amortized over 25 years. In October 1997, the Company entered into an Asset Purchase Agreement and a Management Services Agreement (Valley Management Services Agreement) with Valley Sports and Arthritis Surgeons (Valley), in exchange for a promissory note of $897,727, bearing interest at 8.5% and the issuance of 503,250 shares of Common Stock recorded at $3.35 per share, based on an independent valuation, representing consideration of $1,685,888. The aggregate consideration of $2,583,615 including transaction costs has been allocated to the assets acquired as follows: accounts receivable--$630,000, furniture, fixtures, and equipment--$120,833, supplies--$35,000, and Managements Services Agreement--$1,797,782. The Valley Management Services Agreement is being amortized over 25 years. In October 1997, the Company acquired Orthopaedic Management Network, Inc., an Arizona corporation, in exchange for $63,000 in cash, the assumption of $809,332 in accounts payable and accrued liabilities and the issuance of 57,036 shares of Common Stock recorded at $3.35 per share, based on independent valuation, representing consideration of $191,071. The aggregate purchase price of $1,063,403 including transaction costs, has been allocated to a Management Services Agreement which is being amortized over 25 years. The Agreements are subject to termination in the event of (i) bankruptcy of the Company or the medical practice; (ii) default in any material respect in the performance of either parties' obligations under the Agreement; (iii) representations and warranties made by either party are untrue or misleading in any material respect; (iv) the medical practice is excluded from the Medicare or Medicaid programs; or (v) either party determines that the structure of the Agreement violates any state or federal laws or regulations existing at such time and that an amendment to the Agreement will be unable to correct such defect. Upon termination of the Agreement, the transaction will be unwound with the assets (other than accounts receivable) acquired by the Company being returned to the physician group and the purchase price paid, therefore, being returned to the Company. 3. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consists of the following:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, 1996 1997 ------------ -------------- (UNAUDITED) Office, computer, and telephone equipment...................... $ 999,000 $1,293,000 Medical equipment.............................................. 659,000 920,000 Furniture and fixtures......................................... 558,000 635,000 Less: accumulated depreciation................................. 74,000 302,000 ------------ -------------- Furniture, fixtures and equipment, net......................... $2,142,000 $2,546,000 ------------ -------------- ------------ --------------
F-16 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. AMOUNTS DUE TO/FROM PHYSICIAN GROUPS Amounts due from physician groups at December 31, 1996 and June 30, 1997 consists of practice collections and short-term advances. Amounts due to physician groups at December 31, 1996 and June 30, 1997 consists of the following:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, 1996 1997 ------------ -------------- (UNAUDITED) Amounts due for purchased receivables.......................... $1,064,000 $2,235,000 Amounts due as consideration for management services agreements, excluding promissory notes....................... 3,872,000 4,140,000 ------------ -------------- $4,936,000 $6,375,000 ------------ -------------- ------------ --------------
5. PROFESSIONAL LIABILITY The Company and the physician groups are insured with respect to medical malpractice risks on a claims made basis, except for OAB which is on an occurrence basis. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. Management of the Company intends to renew the existing claims made policies annually and expects to be able to obtain such coverage. When coverage is not renewed, the Company and the physician groups purchase and record the cost of an extended reporting period endorsement to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. Management believes that any claims asserted against the Company would not, after consideration of professional liability coverage and amounts provided in the financial statements, have a material adverse effect on the Company's financial position or results of operations. Management is not aware of any claims against the Company or the physician groups which might have a material impact on the Company's financial position or results of operations. 6. LEASES The Company is obligated under operating and capital lease agreements for offices and certain equipment, which have terms ranging from three to ten years and are considered reimbursable to the Company under the terms of the Agreements. In some circumstances, these lease arrangements are with entities owned or controlled F-17 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. LEASES--(CONTINUED) by physician stockholders. Future minimum payments under noncancelable capital and operating leases with lease terms in excess of one year are summarized as follows for the years ending December 31:
CAPITAL OPERATING EQUIPMENT LEASES LEASES ----------- --------- 1997.............................................................. $ 2,331,000 $ 26,500 1998.............................................................. 2,296,000 22,000 1999.............................................................. 2,200,000 22,000 2000.............................................................. 2,045,000 22,000 2001.............................................................. 2,003,000 19,000 Thereafter........................................................ 7,997,000 -- ----------- --------- Total minimum lease obligations................................... $18,872,000 111,500 ----------- ----------- Less amount representing interest................................. 35,000 --------- Present value of minimum lease obligations........................ $ 76,500 --------- ---------
Rent expense for the year ended December 31, 1996 and the six months ended June 30, 1997 under all operating leases was approximately $602,000 and $1,696,000, respectively. The Company has assumed leases between the affiliated medical practices and entities controlled by equity owners in the related practices. Amounts charged to expense for these leases was $193,000 in 1996 and $369,000 in 1997. The commitments under these leases are included above. On August 1, 1997, the Company entered into an agreement (the Master Lease Agreement) with the lender of the $5 million loan pursuant to which the lender agreed to purchase and lease certain equipment (up to $500,000) to the Company on the terms and conditions contained in the Master Lease Agreement. In connection with the Master Lease Agreement, the Company issued to the lender a warrant to purchase up to 5,000 shares of the Company's Series E Preferred Stock at a price per share equal to $6.00. Upon the completion of the Company's initial public offering, such warrant becomes exercisable for a like number of s hares of Common Stock. 7. STOCK OPTION PLAN On May 6, 1996, and subsequently amended on May 30, 1997, the Company's Board of Directors approved the 1996 Stock Option Plan (the Option Plan), which provides for the granting of options to purchase up to 2,000,000 shares of the Company's common stock. Both incentive stock options and nonqualified stock options may be issued under the provisions of the Option Plan. Employees of the Company and any future subsidiaries, members of the Board of Directors, independent consultants and contractors and the physicians employed by the medical groups with which the Company is affiliated through the Agreements are eligible to participate in the Option Plan, which will terminate no later than May 6, 2006. The granting and vesting of options under the Option Plan are authorized by the Company's Board of Directors or a committee of the Board of Directors. Under the terms of the Option Plan incentive stock options vest pro rata over four years, except for options covering 475,000 shares which vest immediately or at the completion of an initial public offering of the Company's common stock, and expire ten years from the date of grant. The exercise price of the options granted is generally the fair market value at the date of grant. None of the incentive stock options were exercisable as of December 31, 1996. Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of FASB Statement No. 123, F-18 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. STOCK OPTION PLAN--(CONTINUED) Accounting for Stock-Based Compensation. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996: risk-free interest rate of 6%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .68; and a weighted-average expected option life of four years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Information regarding these option plans is as follows:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE --------- -------- Options outstanding at inception...................................... -- $ -- Granted............................................................. 155,000 .19 Exercised........................................................... -- -- Canceled............................................................ -- -- --------- Options outstanding at December 31, 1996.............................. 155,000 .19 Granted............................................................. 878,000 .37 Exercised........................................................... (10,000) .01 Canceled............................................................ (40,000) .01 --------- Options outstanding at June 30, 1997.................................. 983,000 $.36 --------- -------- --------- -------- Exercisable at December 31, 1996...................................... -- --------- --------- Reserved for future option grants at December 31, 1996................ 1,845,000 --------- --------- Weighted average fair value of options granted during 1996............ $.14 -------- --------
At December 31, 1996, the weighted average remaining contractual life of stock options granted under the Option Plan is 9.7 years. The pro forma effects of adopting SFAS No. 123's fair value based method for the year ended December 31, 1996 were not materially different from the corresponding APB Opinion No. 25 (APB No. 25) intrinsic value methodology because the options granted in 1996 were primarily issued near year end and the fair value of the Company's stock, as determined by an independent valuation, was $0.35 as of December 31, 1996. Accordingly, pro forma stock-based compensation in 1996 is substantially less than would result from a full year's compensation expense amortization and a higher valuation of the common stock. The effects of applying SFAS No. 123 during 1996 are not likely to be representative of the effects on pro forma net income for future years because the vesting of options will cause additional incremental expense to be recognized in future periods. F-19 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. STOCK OPTION PLAN--(CONTINUED) Effects of applying SFAS No. 123 during the six months ended June 30, 1997 is not materially different from the APB No. 25 methodology. Additionally, the FASB has added to its agenda a project regarding certain APB No. 25 issues, including such things as incorporating the SFAS No. 123 grant date definition into APB No. 25, readdressing the criteria under broad-based plans qualifying for noncompensatory accounting and defining what constitutes employees. The resolution of these issues could result in modification in the Company's accounting for stock-based compensation arrangements. Shares of common stock reserved for future issuance at December 31, 1996 is as follows: Options..................................................... 2,000,000 Convertible preferred stock................................. 3,000,000 ---------- 5,000,000 ---------- ----------
8. STOCKHOLDERS' EQUITY On May 6, 1996, the Company issued 1,175,000 shares of $.001 par value common stock for cash consideration of $.01 per share, which resulted in proceeds to the Company of $12,000. On May 6, 1996, the Company issued 999,999 shares of Series A convertible preferred stock with a par value of $.01 for $1 per share, which resulted in proceeds to the Company of $999,999. On November 12, 1996, the Company issued 2,000,001 shares of Series B convertible preferred stock with a par value of $.01 for $3 per share, which resulted in proceeds to the Company of $6,000,003. On January 29, 1997 and March 12, 1997, the Company raised approximately $765,000 in connection with the issuance of an aggregate of 254,999 shares of Series C convertible preferred stock, with a par value of $.01 per share. On June 19, 1997, the Company issued 188,072 shares of Series D convertible preferred stock with a par value of $.01 for $5.50 per share as repayment of a $1,000,000 loan plus accrued interest that had been made to the Company by certain stockholders on January 14, 1997. In connection with the original loan, the stockholders received warrants to purchase 33,333 shares of the Company's common stock at a price of $3.00 per share. On June 19, July 31 and August 18, 1997, the Company issued an aggregate of 741,669 Shares of Series E convertible preferred stock with a par value of $.01 for $6.00 per share in exchange for $4,450,000. All classes of convertible preferred stock have the right to share in any dividends declared and paid or set aside for the common stock of the Company, pro rata, in accordance with the number of shares of common stock into which such shares of preferred stock are then convertible; liquidation preference of the original issuance price per share; and voting rights equal to the number of shares of common stock into which the preferred stock is then convertible. All classes of preferred shares are convertible into common shares at a ratio of 1:1 and are automatically convertible upon the occurrence of a fully underwritten public offering of shares of the Company's common stock. Upon such automatic conversion, the holders of the convertible preferred stock are not entitled to payment of any accrued but unpaid dividends. The Company is a party to a Stockholders Agreement dated as of November 22, 1996 (the Stockholders Agreement), with certain of its stockholders, including Oak Partners, Oak VI, Delphi Ventures, Delphi BioInvestments, Dr. Nagpal and the SCOI physicians. Under the Stockholders Agreement, the stockholders agreed to vote their shares to appoint to the Company's board of directors certain designees of such stockholders. The stockholders (other than the SCOI physicians) also have the right of first refusal with respect to issuances of the Company's capital stock or securities convertible into capital stock and are subject to various restrictions on transfers of the Company's securities. Under the terms of the Stockholders Agreement, the 700,000 shares of F-20 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. STOCKHOLDERS' EQUITY--(CONTINUED) Common Stock that Dr. Nagpal acquired for cash on May 6, 1996, are subject to vesting over a 40-month period subject to acceleration in certain circumstances. In the event of the termination of Dr. Nagpal's employment with the Company for any reason, the Company has the right to repurchase from Dr. Nagpal all of the shares of unvested stock at a purchase price equal to $.01 per share. The Stockholders Agreement terminates at the completion of an initial public offering. 9. INCOME TAXES The Company accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, 1996 1997 ------------ -------------- (UNAUDITED) Deferred tax assets: Accrued compensation......................................... $ 174,000 $ 264,000 Net operating loss carryforwards............................. 284,000 780,000 ------------ -------------- Deferred tax assets............................................ 458,000 1,044,000 Less valuation allowance....................................... 432,000 1,007,000 ------------ -------------- Total deferred tax assets...................................... 26,000 37,000 Deferred tax liabilities: Tax over book depreciation................................... (11,000) (15,000) Amortization of intangible assets............................ (15,000) (22,000) ------------ -------------- Total deferred tax liabilities................................. (26,000) (37,000) ------------ -------------- Net deferred taxes............................................. $ -- $ -- ------------ -------------- ------------ --------------
SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a $432,000 and $1,007,000 valuation allowance at December 31, 1996 and June 30, 1997, respectively, is necessary to reduce the deferred tax assets to the amount that will more than likely not be realized. The change in the valuation allowance for the current year is $432,000. On November 11, 1996, the Company had an ownership change as defined by Internal Revenue code section 382 which caused the utilization of the net operating loss and tax credits, at that time, to be limited to approximately $100,000 per year relating to approximately $600,000 of the net operating losses at December 31, 1996. At December 31, 1996 and June 30, 1997, the Company has available net operating loss carryforwards of $734,000 and $2,020,000, which expire in the years 2011 and 2012, respectively. F-21 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES--(CONTINUED) The reconciliation of income tax computed at the U.S. federal statutory rate is as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, 1996 1997 ------------ -------------- Federal tax at statutory rate.................................. $ (377,000) $ (505,000) State income tax, net of federal benefit....................... (52,000) (69,000) Nondeductible items............................................ (3,000) (1,000) Increase in valuation allowance................................ 432,000 575,000 ------------ -------------- Income tax expense............................................. $ -- $ -- ------------ -------------- ------------ --------------
10. BORROWINGS Borrowings consisted of the following:
DECEMBER 31, JUNE 30, 1996 1997 ------------ ---------- Borrowings under revolving lines of credit........................................... $ $4,128,000 Senior secured term note payable in monthly installments through December, 2000, plus interest at prime plus 3.5%, 12% at June 30, 1997.................................. 3,000,000 Shareholder note payable............................................................. 753,000 Obligation under capital lease....................................................... 77,000 77,000 ------------ ---------- 77,000 7,958,000 Less current portion................................................................. 18,000 1,418,000 ------------ ---------- $ 59,000 $6,540,000 ------------ ---------- ------------ ----------
In January 1997, the Company obtained short-term loans in the aggregate amount of $999,999 from its stockholders, including its President. In connection with such loans, the Company issued warrants to such stockholders to purchase an aggregate of 33,333 shares of Common Stock at an exercise price of $3.00 per share. In June 1997, such loans were converted into 188,072 shares of Series D Preferred Stock. Also, in January 1997, the Company issued a series of promissory notes to the Company's President. The notes bear interest at a rate of 8% and the outstanding loans are due on December 31, 1997. At June 30, 1997, the balance outstanding was $753,000, which included $27,000 of accrued and unpaid interest. From March 1997 to October 1997, the Company entered into a series of credit agreements with its senior lender secured by the accounts receivable acquired from each of the affiliated physician groups. The Company may borrow up to an aggregate limit of $17,000,000,subject to a borrowing base of 85% of eligible accounts receivable. Outstanding loans bear interest at the prime rate plus 1.75% (10-1/4% at June 30, 1997) and mature at various dates ranging from March 1999 to October 1999. The credit agreements require the Company to maintain a prescribed level of tangible net worth, place limitations on indebtedness, liens and investments, and prohibit the payment of dividends. At June 30, 1997, $4,128,000 was outstanding under these agreements. On June 30, 1997, the Company obtained a credit facility to fund practice affiliations with its senior lender secured by a lien on substantially all of the assets of the Company. The Company may borrow up to $3,250,000 for Practice Affiliations, of which $3,000,000 was outstanding as of June 30, 1997. The loan bears interest at the prime rate plus 3.5% (12% at June 30, 1997). Interest only is payable through December 31, 1997, at which time the loan converts to a term loan repayable in 36 monthly installments. In addition, in September 1997 the Company issued the senior lender warrants to purchase 40,000 shares of the Company's common stock for nominal cash consideration. $1.5 million of the Company's obligations under this facility are guaranteed by the F-22 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. BORROWINGS--(CONTINUED) Company's President and other stockholders, and in connection therewith the Company issued warrants to purchase an aggregate of 13,332 shares of common stock for nominal cash consideration. On August 1, 1997 and August 22, 1997, the Company entered into subordinated loan agreements, with two different lenders, in the principal amounts of $5 million (the $5 million loan) and $1.5 million (the $1.5 million loan). The loans are secured by liens on all of the Company's tangible and intangible personal property. The loans mature on December 31, 2000, however, within 45 days of the effective date of an initial public offering of the Company's common stock, the Company is obligated to prepay the loans in full. These loans and the liens granted to the respective lenders are subordinated in all respects to the current and future indebtedness of the Company under the affiliation credit facility described above. The loans initially bear interest at 14% per annum, provided, however, that if an initial public offering of the Company's capital stock is not consummated on or prior to December 31, 1997, the loans will, commencing January 1, 1998, bear interest at 15% of per annum. The loan agreements prohibit the Company from making or declaring any cash dividends or making any distributions of any class of capital stock of the Company, except pursuant to an employee repurchase plan or with the consent of the lender. In connection with the $5 million and $1.5 million loans the Company issued warrants to purchase up to 125,000 and 37,500 shares, respectively, of the Company's Series E Preferred Stock at a price per share equal to $6.00; provided, however, if an initial public offering of the Company's stock is not consummated on or prior to December 31, 1997, the number of shares of Series E Preferred Stock issuable upon exercise of the warrants increases to 133,333 and 40,000, respectively. Upon the completion of the Company's initial public offering, such warrants become exercisable for a like number of shares of common stock. In addition, pursuant to stock purchase agreements dated as of July 31, 1997 and August 18, 1997, the Company issued 166,667 and 41,667 shares, respectively, of Series E Preferred Stock to the lenders for an aggregate purchase price of $1,250,000. The $1.5 million loan is convertible into shares of preferred stock of the Company at the option of the lender after the Company completes a sale and issuance of any shares of its preferred stock in connection with an equity financing at any time after the earlier to occur of (i) a payment default under the loan agreement or (ii) the failure of the Company to consummate an initial public offering of its capital stock prior to December 31, 1997. The conversion price will be equal to the purchase price per share paid by the purchasers in such equity financings. On September 9, 1997, the Company issued and sold $4,000,000 in aggregate principal amount of its subordinated convertible debentures due August 31, 2000 (the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement, dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The Debentures were purchased by Dr. Nagpal, Delphi Ventures III, L.P., Delphi BioInvestments, Oak Investment Partners VI, L.P., Oak VI Affiliates Fund, Limited, and Health Care Services-BMJ, LLC and H&Q Serv(Registered) is Ventures, L.P., affiliates of Hambrecht & Quist, LLC. Pursuant to the terms of the Debenture Purchase Agreement, the Debentures are subordinated in right of payment to all indebtedness of the Company under the loans described above. The Debentures bear interest at 6% per annum and are payable semi-annually on each December 31 and June 30. The unpaid principal amount of the Debentures is due on August 31, 2000. Except in very limited instances, the Company may not prepay the Debentures prior to September 9, 1999. The Debentures are subject to prepayment at the option of the holders of the Debentures upon the consummation of (i) a sale of all or substantially all of the assets of the Company; (ii) a sale or transfer of all or a majority of the outstanding Common Stock of the Company in any one transaction or series of related transactions: or (iii) a merger or consolidation of the Company with or into another entity. The Debentures are convertible at any time at the option of the holders thereof into shares of Common Stock at an initial conversion price equal to $7.20 per share. Pursuant to the terms of the Debenture Purchase Agreement, the holders of the Debentures have rights of first offer on future issuances of capital stock of the Company or other securities convertible into capital stock of the Company (except with respect to a public offering of shares of the Company's common stock). The Debenture Purchase Agreement places limitations on indebtedness and liens and prohibits the payment of dividends. F-23 BMJ MEDICAL MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. BORROWINGS--(CONTINUED) On October 14, 1997, the Company obtained short-term financing in the form of a secured term note to fund practice affiliations with its senior lender, secured by a lien on substantially all of the assets of the Company. The Company may borrow up to $2,500,000 for practice affiliations. Outstanding loans bear interest at the prime rate plus 3.5% (12% at October 31, 1997). Interest only is payable through December 31, 1997 and the entire principal sum is due and payable on January 10, 1998. In connection with this loan agreement, the Company will pay to the lender a fee in the amount of $300,000 on the maturity date. At October 31, 1997, $2,514,167, including accrued interest, was outstanding under this agreement. On October 15, 1997, the Company obtained short-term bridge financing in the aggregate amount of $3,375,000 from certain stockholders, including its President, to fund practice affiliations. In connection with these loans, the Company issued warrants to such stockholders to purchase an aggregate of 67,500 shares of Common Stock at an exercise price of $.01 per share. Outstanding loans bear interest at the prime rate plus 3.5%. (12% at October 31, 1997). The principal amounts and accrued interest are due and payable on January 10, 1998. At October 31, 1997, $3,391,875, including accrued interest, was outstanding under these agreements. During October, 1997, in connection with several practice affiliations, the Company issued promissory notes to the physicians that in the aggregate totaled $11,147,832. These outstanding promissory notes bear interest ranging from 6% to 11%. Substantially all of these promissory notes are due and payable either on the date of the Company's completion of an initial public offering or at various maturity dates ranging from December 31, 1997 to March 31, 1998. At October 31, 1997, $11,156,840, including accrued interest, was outstanding under these promissory notes. 11. COMMITMENTS The Company has an employment agreement dated as of May 6, 1996, as amended, with its President (the Employment Agreement). Base compensation under the Employment Agreement is $225,000 per year, subject to increase by the Board of Directors. In addition, the Board of Directors may award an annual bonus to the President in an amount of up to 30% of his base salary based on the attainment of certain benchmarks. The Company may terminate the President's employment at any time and for any reason; provided that, if his employment is terminated without cause (as defined in such agreement) or as a result of his becoming permanently disabled, the Company must pay the President a severance amount determined in accordance with a formula contained in the agreement. F-24 REPORT OF INDEPENDENT AUDITORS The Board of Directors Orthopaedic Associates of Bethlehem, Inc. We have audited the accompanying balance sheets of Orthopaedic Associates of Bethlehem, Inc. (OAB) as of December 31, 1994 and 1995 and June 30, 1996 and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1994 and 1995 and for the six months ended June 30, 1996. These financial statements are the responsibility of OAB's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of OAB at December 31, 1994 and 1995 and June 30, 1996 and the results of its operations and cash flows for the years ended December 31, 1994 and 1995, and the six months ended June 30, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Philadelphia, Pennsylvania May 28, 1997, except for Note 13, as to which the date is August 14, 1997 F-25 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. BALANCE SHEETS
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
See accompanying notes. F-26 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------ ENDED 1994 1995 JUNE 30, 1996 ---------- ---------- ------------- Net patient service revenue............................................ $2,527,957 $2,992,950 $ 1,540,205 Other income........................................................... 34,342 47,372 87,779 ---------- ---------- ------------- Total revenues......................................................... 2,562,299 3,040,322 1,627,984 Costs and expenses: Physician and other provider services................................ 1,553,725 1,639,675 720,358 Medical support services............................................. 893,595 1,012,713 577,503 Depreciation and amortization........................................ 42,183 42,049 20,945 Interest............................................................. 11,122 11,848 11,767 Rent................................................................. 28,575 39,353 66,602 Rent-related party................................................... 291,852 291,852 145,926 ---------- ---------- ------------- Total costs and expenses............................................... 2,821,052 3,037,490 1,543,101 ---------- ---------- ------------- (Loss) income before income taxes...................................... (258,753) 2,832 84,883 Income tax benefit (expense)........................................... 100,900 2,900 (35,100) ---------- ---------- ------------- Net (loss) income...................................................... $ (157,853) $ 5,732 $ 49,783 ---------- ---------- ------------- ---------- ---------- -------------
See accompanying notes. F-27 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL ------ ---------- --------- --------- --------- 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 ------ ---------- --------- --------- --------- ------ ---------- --------- --------- ---------
See accompanying notes. F-28 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED ---------------------- JUNE 30, 1994 1995 1996 --------- --------- ---------- 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.......................................................... $ -- $ -- $ --
See accompanying notes. F-29 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996 1. DESCRIPTION OF THE BUSINESS Orthopaedic Associates of Bethlehem, Inc. (OAB) is an orthopedic physician practice which serves the Bethlehem, Pennsylvania area. OAB was organized as a professional corporation under the laws of the Commonwealth of Pennsylvania (See Note 13). All of OAB's issued and outstanding stock are owned by its practicing orthopedic physicians. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Patient Service Revenue Net patient service revenue is recorded as services are rendered at established rates net of provision for bad debts and contractual adjustments. Contractual adjustments arise due to the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between charges at established rates and estimated amounts to be reimbursed to OAB and are recognized when the services are rendered. Revenues from the Medicare and Medicaid programs accounted for approximately 35% and 5%, respectively, of OAB's net operating revenues. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. OAB believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Furniture and Equipment Furniture and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 7 years. Equipment under capital lease obligations is amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the financial statements. Concentration of Credit Risk OAB grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Management believes credit risk associated with accounts receivable is minimal. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Costs and Expenses Physician and other provider services costs are comprised primarily of compensation and fees paid to physician and other health care providers. Medical support services costs include all indirect costs associated with the management and operations of the practice and all direct costs associated with medical supplies and pharmaceuticals expenses. F-30 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. ACCOUNTS RECEIVABLE, NET Accounts receivable, net consist of the following:
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
4. FURNITURE AND EQUIPMENT Furniture and equipment consist of the following:
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- 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 -------- -------- -------- -------- -------- --------
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: 1996........................................................................................ $21,024 1997........................................................................................ 42,048 1998........................................................................................ 42,048 --------- 105,120 Less amount representing interest........................................................... (8,428) --------- $96,692 --------- ---------
F-31 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: 1996........................................................................................ $145,926 1997........................................................................................ 291,852 1998........................................................................................ 291,852 1999........................................................................................ 145,926 --------- $875,556 --------- ---------
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:
DECEMBER 31, ---------------------- JUNE 30, 1994 1995 1996 --------- --------- --------- 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) --------- --------- --------- --------- --------- ---------
Significant components of income tax (expense) benefit attributable to continuing operations are as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------ ENDED 1994 1995 JUNE 30, 1996 -------- ------ ------------- Current............................................................ $ -- $ -- $ -- Deferred........................................................... 100,900 2,900 (35,100) -------- ------ ------------- Income tax (expense) benefit....................................... $100,900 $2,900 $ (35,100) -------- ------ ------------- -------- ------ -------------
OAB's tax rate differs from the expected tax rate due principally to state income taxes. State income tax (expense) benefits were $11,000, $4,400 and $(5,400) for the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, respectively. F-32 ORTHOPAEDIC ASSOCIATES OF BETHLEHEM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. INCOME TAXES--(CONTINUED) For the six months ended June 30, 1996 OAB has estimated income tax (expense) benefit and net deferred taxes assuming that they have utilized $78,000 and $65,000 in operating loss carryforwards for federal and state income reporting purposes. At June 30, 1996 OAB has available federal and state operating loss carryforwards of $73,000 and $60,000, respectively, which expire in 2010 and 1998, respectively. 10. BENEFIT PLANS OAB sponsors a defined contribution profit-sharing plan covering all employees who meet prescribed eligibility requirements. Expenses amounted to $165,000 and $129,000 in 1995 and 1994, respectively. This plan was terminated effective December 31, 1995. Effective January 1, 1996, OAB established a 401(k) plan for which OAB matches a percentage of employee contributions. Expenses for the 401(k) plan amounted to $25,818 for the six months ended June 30, 1996. 11. CONTINGENCIES OAB is involved in various legal proceedings in the ordinary course of business. OAB does not believe that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position and results of operation of OAB. 12. MALPRACTICE INSURANCE OAB maintains professional liability coverage on behalf of its physicians on an occurrence basis. 13. SUBSEQUENT EVENTS Effective July 1, 1996, the physician stockholders of OAB transferred substantially all operations of OAB to Lehigh Valley Bone, Muscle and Joint Group, LLC (LVBMJ). LVBMJ is a limited liability company owned by the physician stockholders of OAB, formed specifically to operate the transferred medical practice. Additionally, on July 1, 1996, OAB changed its legal structure from a professional corporation to a general purpose corporation and continues to perform limited medical advisory services. Effective July 1, 1996, the Company entered into an Affiliation Transaction with LVBMJ. Under the terms of the Amended and Restated Management Services Agreement between LVBMJ and the Company effective July 1, 1997 (the LVBMJ Management Services Agreement), BMJ Medical Management, Inc. (BMJ) issued an aggregate of 518,031 shares of common stock, recorded at $0.10 per share, representing consideration of $51,803 and options to purchase 30,000 shares of common stock at an exercise price of $0.25 per share. On September 5, 1997, OAB sold to BMJ (a related party) its furniture and equipment and transferred its rights and interest under equipment and office space leases for $254,000. Proceeds of the sale were used to repay OAB's line of credit. Based on the collection of accounts receivable balances and the realization of other assets available, OAB has discharged substantially all its other remaining liabilities. OAB has distributed substantially all of its remaining stockholders' equity in the form of dividends and compensation. F-33 REPORT OF INDEPENDENT AUDITORS The Board of Directors Southern California Orthopedic Institute Medical Group, a California General Partnership We have audited the accompanying balance sheets of Southern California Orthopedic Institute Medical Group, a California General Partnership (SCOI) as of December 31, 1995 and October 31, 1996, and the related statements of operations and changes in partners' capital, and cash flows for each of the two years in the period ended December 31, 1995 and for the ten months ended October 31, 1996. These financial statements are the responsibility of SCOI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SCOI at December 31, 1995 and October 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995 and for the ten months ended October 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Los Angeles, California May 23, 1997 F-34 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP BALANCE SHEETS
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ----------- 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 ------------ ----------- ------------ -----------
See accompanying notes. F-35 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
TEN MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- OCTOBER 31, 1994 1995 1996 ----------- ----------- ----------- Net patient service revenue......................................... $19,230,632 $20,025,718 $17,907,084 Other income........................................................ 149,318 153,923 162,512 ----------- ----------- ----------- Total revenues...................................................... 19,379,950 20,179,641 18,069,596 Costs and expenses: Physician and other provider services............................. 10,008,410 11,307,996 9,069,544 Medical support services.......................................... 7,406,706 7,621,997 6,846,899 Depreciation...................................................... 313,595 308,826 253,500 Interest.......................................................... 70,511 39,126 8,462 Rent.............................................................. 275,077 261,906 204,511 Rent--related party............................................... 1,615,678 1,666,243 1,451,891 ----------- ----------- ----------- Total costs and expenses............................................ 19,689,977 21,206,094 17,834,807 ----------- ----------- ----------- Net (loss) income................................................... (310,027) (1,026,453) 234,789 Beginning partners' capital......................................... 4,739,090 4,429,063 3,597,250 Capital contributions............................................... -- 194,640 -- ----------- ----------- ----------- Ending partners' capital............................................ $ 4,429,063 $ 3,597,250 $ 3,832,039 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-36 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP STATEMENTS OF CASH FLOWS
TEN MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- OCTOBER 31, 1994 1995 1996 ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-37 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 1. DESCRIPTION OF THE BUSINESS Southern California Orthopedic Institute Medical Group, a California General Partnership (SCOI), is an orthopedic physician practice which serves patients in Southern California. SCOI is organized as a general partnership comprising individuals and professional corporations under the laws of the State of California. On November 1, 1996, SCOI agreed in principle to sell substantially all of its assets (primarily patient accounts receivable and furniture, fixtures and equipment) to BMJ Medical Management, Inc. (BMJ) and concurrent therewith entered into a management services agreement (see Note 12 'Subsequent Event'). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Net patient service revenue consists of fees for services provided by the medical group under contracts with health maintenance organizations and for services rendered to patients covered under Medicare, Medi-Cal and private insurance. Revenue is reported on the accrual basis in the period in which services are provided at the amounts expected to be realized from Medicare, Medi-Cal, managed care and other insurance programs. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. SCOI believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medi-Cal programs. Costs and Expenses Physician and other provider services costs primarily comprise compensation and fees paid to physicians and other health care providers and include medical supplies and pharmaceutical expenses. Medical support services costs include all indirect costs associated with the management and operations of the practice. Furniture, Fixtures and Equipment Furniture, fixtures and equipment, including leasehold improvements, are stated at cost, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from five to seven years. Health and Dental Insurance SCOI maintains a self-insured medical and dental plan for its employees. Unpaid claims accruals, including claims incurred but not reported, are based on the estimated ultimate cost of settlement, including claim settlement expense, in accordance with SCOI's past experience. SCOI has a stop-loss insurance contract to cover employee health claims in excess of an annual aggregate limit based on monthly aggregate factors determined by the insurance company and the number of employees covered ($430,062; $349,894, and $250,304 for the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996, respectively). Effective October 1, 1996, SCOI purchased commercial coverage for employee health claims. At December 31, 1995 and October 31, 1996, SCOI did not have significant claims outstanding. F-38 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:
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ----------- 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 ------------ ----------- ------------ -----------
F-39 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:
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ----------- Furniture, fixtures and equipment.......................................... $2,193,237 $ 2,137,488 Less accumulated depreciation.............................................. 1,483,423 1,550,491 ------------ ----------- $ 709,814 $ 586,997 ------------ ----------- ------------ -----------
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: 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 ------------ ------------
7. INCOME TAXES SCOI is organized as a partnership under the Internal Revenue Code and applicable California Franchise Tax Code. As a result, in lieu of corporate income tax, SCOI's taxable income is passed through to the partners and taxed at the partner level. Accordingly, no provision or liability for income tax has been reflected in the financial statements. 8. BENEFIT PLANS SCOI sponsors a defined contribution plan (the Plan) for employees who meet the minimum length of service and age requirements. The Plan was adopted on January 1, 1996. Eligible employees may contribute up to 19% of their compensation in the Plan year. SCOI may, at its discretion, match a portion of employee contributions up to 4% of an employee's compensation. SCOI is responsible for the administration of the Plan as the Plan administrator and trustee. SCOI's contributions totaled $9,831 for the ten months ended October 1996. F-40 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. CONTINGENCIES SCOI is involved in various legal proceedings in the ordinary course of business. SCOI does not believe that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position and results of operations of SCOI. SCOI procures professional liability coverage on behalf of its physicians on a claims made basis up to $1,000,000 per claim and $3,000,000 annual aggregate per physician. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses for incurred but unreported claims is recorded based upon historical experience. Management of SCOI intends to renew the existing claims made policy annually and expects to be able to obtain such coverage. If coverage is not renewed, SCOI intends to purchase extended reporting period endorsements to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. SCOI's policy has been renewed through December 31, 1997. 10. DEFERRED INCOME In July 1992, SCOI sold its rehabilitation and therapy business to HealthSouth Rehabilitation Center of Van Nuys Limited Partnership (HealthSouth) for cash. In connection with the sale, the Partnership and its physicians entered into a covenant-not-to-compete for seven years ending July 31, 1999 for $700,000, payable in 84 equal monthly installments. Consideration received is recorded as revenue over the term of the agreement. On January 20, 1995, HealthSouth elected to prepay its remaining obligations under the covenant totaling $390,000. This amount has been recorded as deferred income on SCOI's balance sheets and is amortized over the remaining term of the covenant. 11. RELATED PARTIES Due to partners and affiliates includes undistributed guaranteed payments totaling $162,699 and $475,000 at December 31, 1995 and October 31, 1996, respectively. SCOI has notes receivable from several partners for capital contributions. Such notes bear interest at prime rate plus one percent and totaled $191,618 and $102,810, at December 31, 1995 and October 31, 1996, respectively. SCOI also made advances to the Center for Orthopedic Surgery, Inc. (COSI), an affiliated organization owned by certain physician partners. COSI is an outpatient surgery center due to begin operations in May 1997. Amounts outstanding at December 31, 1995 and October 31, 1996 were $12,312 and $87,417, respectively. SCOI leases its main facility and office space under a non-cancelable operating lease from FDP Development, Inc. (FDP), an affiliate owned by the partners of SCOI. The lease expires in July 2006 and provides for annual adjustments based on the increases in the Consumer Price Index. Rental costs paid to FDP totaled $1,615,678, $1,666,243, and $1,451,891, for the years ended December 31, 1994 and 1995, and the ten months ended October 31, 1996, respectively. SCOI maintains a security deposit with FDP in the amount of $300,000 at December 31, 1995 and October 31, 1996. 12. SUBSEQUENT EVENTS On November 1, 1996, SCOI sold its patient accounts receivable balances, furniture, fixtures and equipment, and other minor assets to BMJ, a Delaware corporation engaged in operating and financing physician groups focused exclusively on musculoskeletal disease management. The carrying value of the patient accounts receivable balances and property and equipment was $4,778,825 and $583,755, respectively. BMJ also assumed certain equipment and office lease obligations with total future minimum lease payments of $553,460 at November 1, 1996, which are in turn subleased to SCOI. Total consideration for the sale was $5,930,897 based on a preliminary estimate of the carrying values of the assets sold at October 31, 1996, and is subject to purchase F-41 SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 12. SUBSEQUENT EVENTS--(CONTINUED) price adjustments. $3,706,897 (the sales price of property and equipment and 50% of the estimated carrying value of the receivable balances) was received in cash. The balance of the consideration is based on actual collections of the receivable balances and is due upon the earlier of an initial offering of BMJ's common stock or November 1, 1997. SCOI realized a gain of $858,165 on the sale of property and equipment. Concurrent with the sale, SCOI entered into a 40 year management services agreement (the Agreement) with BMJ on November 1, 1996. After the initial term, the Agreement renews automatically for successive additional five year terms, unless terminated by either party with 6 months written notice. As an incentive for entering into the Agreement, the physician owners of the Company received 4,000,000 common shares in BMJ with an estimated fair value of $1,400,000. At the earlier of an initial public offering of BMJ's common shares or November 1, 1998, the number of shares will be adjusted in accordance with a prescribed formula based in part on SCOI's net cash collections in relation to other medical groups managed by BMJ. Under the Agreement, BMJ will provide financial management, information systems, marketing and public relations, risk management, and administrative support for claims processing, utilization review and quality control services. As compensation for these services, SCOI will reimburse BMJ for the costs of such services in addition to a management fee based on a percentage of collections of patient revenues generated after November 1, 1996 (reduced by the medical equipment master lease payments) and 66-2/3% of professional practice cost savings as defined in the Agreement. F-42 REPORT OF INDEPENDENT AUDITORS The Board of Directors South Texas Spinal Clinic, P.A. We have audited the accompanying balance sheets of South Texas Spinal Clinic, P.A. (STSC) as of December 31, 1994 and 1995 and October 31, 1996, and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996. These financial statements are the responsibility of STSC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STSC at December 31, 1994 and 1995 and the ten months ended October 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP San Antonio, Texas June 5, 1997 F-43 SOUTH TEXAS SPINAL CLINIC, P.A. BALANCE SHEETS
DECEMBER 31, -------------------------- OCTOBER 31, 1994 1995 1996 ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. F-44 SOUTH TEXAS SPINAL CLINIC, P.A. STATEMENTS OF OPERATIONS
TEN MONTHS YEAR ENDED ENDED DECEMBER 31, OCTOBER 31, ------------------------ ------------ 1994 1995 1996 ---------- ---------- ------------ Operating revenue, net..................................... $6,973,761 $7,748,203 $6,027,164 Costs and expenses: Physician and other provider services.................... 4,681,361 5,578,510 5,257,398 Medical support services................................. 971,812 1,060,037 1,073,446 Depreciation............................................. 88,065 90,012 74,914 Interest................................................. 36,956 27,529 13,375 Rent..................................................... 125,770 150,168 118,491 Rent-related party....................................... 711,892 718,104 347,503 ---------- ---------- ------------ Total costs and expenses................................... 6,615,856 7,624,360 6,885,127 ---------- ---------- ------------ Net income (loss).......................................... $ 357,905 $ 123,843 $ (857,963) ---------- ---------- ------------ ---------- ---------- ------------
See accompanying notes. F-45 SOUTH TEXAS SPINAL CLINIC, P.A. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- NUMBER ADDITIONAL RETAINED OF SHARES AMOUNT PAID-IN EARNINGS TOTAL --------- ------ ---------- ---------- ---------- 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 --------- ------ ---------- ---------- ---------- --------- ------ ---------- ---------- ----------
See accompanying notes. F-46 SOUTH TEXAS SPINAL CLINIC, P.A. STATEMENTS OF CASH FLOWS
TEN MONTHS YEAR ENDED ENDED DECEMBER 31, OCTOBER 31, ---------------------- ------------ 1994 1995 1996 --------- --------- ------------ 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 --------- --------- ------------ --------- --------- ------------
See accompanying notes. F-47 SOUTH TEXAS SPINAL CLINIC, P.A. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994 AND 1995 AND TEN MONTHS ENDED OCTOBER 31, 1996 1. DESCRIPTION OF THE BUSINESS South Texas Spinal Clinic, P.A. (STSC) is an orthopedic physician practice which services San Antonio, Texas, and the surrounding communities. STSC is organized as a professional corporation (S corporation) under the laws of the state of Texas. Effective November 1, 1996, STSC entered into an agreement to sell substantially all of the assets of STSC and enter into a management services agreement with BMJ Medical Management, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recorded at estimated net amounts to be received from third-party payors and others for services rendered. Laws and regulations governing the Medicare program are complex and subject to interpretation. STSC believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. Furniture, Fixtures, and Equipment Furniture, fixtures, and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from five (5) to twenty (20) years. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Presentation of Expenses Physician and other provider services costs are composed primarily of compensation and fees paid to physician and other health care providers and include medical supplies and pharmaceutical expenses. Medical support services costs include all indirect costs associated with the management and operations of the practice. F-48 SOUTH TEXAS SPINAL CLINIC, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. ACCOUNTS RECEIVABLE AND NET REVENUE Accounts receivable consists of the following:
DECEMBER 31, OCTOBER 31, ------------------------ ----------- 1994 1995 1996 ---------- ---------- ----------- Gross patient accounts receivable........................... $3,122,491 $3,169,931 $ 2,711,718 Less allowances for contractual adjustments and uncollectibles............................................ 624,498 633,986 1,022,738 ---------- ---------- ----------- $2,497,993 $2,535,945 $ 1,688,980 ---------- ---------- ----------- ---------- ---------- ----------- Net revenue consists of the following: DECEMBER 31, OCTOBER 31, ------------------------ ----------- 1994 1995 1996 ---------- ---------- ----------- Gross patient revenue....................................... $8,717,201 $9,685,260 $10,045,273 Less contractual adjustments and uncollectibles............. 1,743,440 1,937,052 4,018,109 ---------- ---------- ----------- $6,973,761 $7,748,208 $ 6,027,164 ---------- ---------- ----------- ---------- ---------- -----------
4. FURNITURE, FIXTURES, AND EQUIPMENT Furniture, fixtures, and equipment consist of the following:
DECEMBER 31, OCTOBER 31, -------------------- ----------- 1994 1995 1996 -------- -------- ----------- 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 -------- -------- ----------- -------- -------- -----------
5. NOTES PAYABLE Notes payable consists of the following:
DECEMBER 31, OCTOBER 31, -------------------- ----------- 1994 1995 1996 -------- -------- ----------- 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 $ -- -------- -------- ----------- -------- -------- -----------
The note payable to the bank is collateralized by the assets of STSC. The note payable requires STSC to comply with certain covenants. Actual interest payments were $36,956, $27,246, and $12,583 during the years ended December 31, 1994, 1995, and the ten months ended October 31, 1996, respectively. 6. LEASE COMMITMENTS STSC leases various equipment, clinic and office space, and office buildings under operating leases and certain computer and medical equipment under capital leases. Rent expenses charged to operations totaled approximately $837,662, $868,272, and $460,623 during the years ended December 31, 1994, 1995, and the ten months ended October 31, 1996, respectively. F-49 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:
OPERATING CAPITAL LEASES CAPITAL LEASES LEASES PRINCIPAL INTEREST --------- -------------- -------------- 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 -- --
7. INCOME TAXES STSC has historically not incurred significant tax liabilities for federal income taxes. STSC has been organized as an S corporation and, accordingly, income tax liabilities are the responsibility of the respective owners. 8. BENEFIT PLANS STSC maintains a defined contribution plan for employees who meet the minimum length of service and age requirements. Under the plan, STSC makes contributions equal to 50% up to a maximum of 5% of the employee's contribution. STSC is responsible for the administration of the plan as the plan administrator and trustee. STSC's contributions totaled $216,660, $21,329, and $15,177 in the years ended December 31, 1994, 1995, and the ten-month period ended October 31, 1996, respectively. 9. CONTINGENCIES STSC is involved in various legal proceedings in the ordinary course of business. STSC does not believe that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position and results of operations of STSC. STSC procures professional liability coverage on behalf of its physicians on a claims-made basis. The insurance contracts specify that coverage is available only during the term of each insurance contract. Management of STSC intends to renew the existing claims-made policy annually and expects to be able to obtain such coverage. Whenever coverage is not renewed, STSC purchases an extended reporting period endorsement to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims-made policies. 10. RELATED PARTY TRANSACTIONS STSC leases office space from Meadows Enterprises, an entity under common ownership. Monthly rental expense is $29,498. Rental expenses for the periods ending December 31, 1994, December 31, 1995, and October 31, 1996 were $294,842, $361,104, and $311,653, respectively. Meadows, Dennis, Denno, G.P., an entity under common ownership, provides certain furniture, fixtures, and equipment for use in STSC's operations. STSC pays rents to Meadows, Dennis, Denno, G.P. in excess of fair market value. Total payments made during the years ended December 31, 1994, 1995, and the ten-month period ended October 31, 1996 were $417,050, $357,000, and $35,850, respectively. F-50 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Tri-City Orthopedic Surgery Medical Group, Inc. We have audited the accompanying balance sheets of Tri-City Orthopedic Surgery Medical Group, Inc. (Tri-City) as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of Tri-City's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tri-City at December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP West Palm Beach, Florida May 17, 1997 F-51 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. BALANCE SHEETS
DECEMBER 31, -------------------- 1995 1996 -------- -------- 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 -------- -------- -------- --------
See accompanying notes F-52 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 ----------- ----------- Net patient service revenue................................................... $ 3,643,823 $ 3,477,532 Costs and expenses: Physician and other provider services....................................... 2,084,397 1,701,682 Medical support services.................................................... 1,546,366 1,460,504 Depreciation................................................................ 39,604 31,867 Interest.................................................................... 4,827 2,884 Rent--related party......................................................... 323,959 324,065 ----------- ----------- Total costs and expenses...................................................... 3,999,153 3,521,002 ----------- ----------- Loss before income taxes.................................................... (355,330) (43,470) Income tax benefit.......................................................... 150,005 15,222 ----------- ----------- Net loss...................................................................... $ (205,325) $ (28,248) ----------- ----------- ----------- -----------
See accompanying notes. F-53 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK -------------------- TOTAL NUMBER RETAINED STOCKHOLDERS' OF SHARES AMOUNT EARNINGS EQUITY ---------- ------ --------- ------------- 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 --- ------ --------- ------------- --- ------ --------- -------------
See accompanying notes. F-54 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- -------- OPERATING ACTIVITIES: Net loss................................................................................... $(205,325) $(28,248) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation............................................................................. 39,604 31,867 Income tax benefit....................................................................... (150,005) (15,222) Changes in operating assets and liabilities: Accounts receivable................................................................... 351,843 5,553 Prepaid expenses and other current assets............................................. (5,921) 544 Accounts payable...................................................................... 1,664 6,264 Accrued expenses and other current liabilities........................................ 43,761 (23,683) --------- -------- Net cash provided by (used in) operating activities........................................ 75,621 (22,925) INVESTING ACTIVITY: Purchases of furniture, fixtures and equipment............................................. (11,288) (10,275) --------- -------- Net cash used in investing activity........................................................ (11,288) (10,275) FINANCING ACTIVITIES: Proceeds from issuance of notes payable.................................................... -- -- Payments on notes payable.................................................................. (30,178) (32,369) --------- -------- Net cash used in financing activities...................................................... (30,178) (32,369) --------- -------- Net increase (decrease) in cash and cash equivalents......................................................................... 34,155 (65,569) Cash and cash equivalents at beginning of year............................................. 31,414 65,569 --------- -------- Cash and cash equivalents at end of year................................................... $ 65,569 $ -- --------- -------- --------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest..................................................................... $ 4,827 $ 2,884 --------- -------- --------- --------
See accompanying notes. F-55 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 1. DESCRIPTION OF THE BUSINESS Tri-City Orthopedic Surgery Medical Group, Inc. (Tri-City) was incorporated as a C corporation on October 26, 1972 under the laws of the State of California. Tri-City specializes in providing orthopedic medical and surgical services and related medical and ancillary services in San Diego County. Tri-City receives payment for patient services from the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, health maintenance organizations, preferred provider organizations and other private insurers, and directly from patients. On April 1, 1997, Tri-City entered into a management services agreement with BMJ Medical Management, Inc. and agreed to sell substantially all of its assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recorded at estimated net amounts to be received from third party payors and others for services rendered. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. Tri-City believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medi-Cal programs. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from five to ten years. Income Taxes Tri-City accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax losses of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Costs and Expenses Physician and other provider services costs are comprised primarily of compensation and fees paid to physicians and other health care providers. Medical support services costs include all indirect costs associated with the management and operations of the practice and all direct costs associated with medical supplies and pharmaceutical expenses. F-56 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 -------- -------- Gross patient accounts receivable............................................... $942,225 $889,189 Less allowances for contractual adjustments and uncollectibles.................. 398,169 350,686 -------- -------- $544,056 $538,503 -------- -------- -------- --------
4. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following:
DECEMBER 31, -------------------- 1995 1996 -------- -------- 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 -------- -------- -------- --------
5. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, ------------------ 1995 1996 ------- ------- 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 ------- ------- ------- -------
At December 31, 1996, annual principal payments on notes payable are as follows: 1997............................................................................... $19,150 1998............................................................................... 2,908 ------- $22,058 ------- -------
On December 23, 1996, Tri-City entered into an unsecured line of credit arrangement with a bank which matures on March 30, 1998. The line of credit permits borrowings up to $150,000 and is guaranteed by the F-57 TRI-CITY ORTHOPEDIC SURGERY MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. NOTES PAYABLE--(CONTINUED) shareholders of Tri-City. Interest on the line of credit is payable monthly at prime plus 1%, with the entire principal due at maturity. As of December 31, 1996, Tri-City had not drawn against the line of credit. On January 3, 1997 and January 17, 1997, Tri-City drew $100,000 and $50,000, respectively, on the line of credit. 6. LEASE COMMITMENTS Tri-City leases various equipment, clinic and office space under operating leases with a related party, Tri-City Orthopedic Building Partners (TCOBP), on a month to month basis. Rent expense charged to operations totaled approximately $324,000 during both 1995 and 1996. Tri-City also leases an office building under a noncancelable lease with TCOBP with future minimum rental commitments at December 31, 1996 as follows: 1997............................................................................ $ 228,936 1998............................................................................ 228,000 1999............................................................................ 228,000 2000............................................................................ 228,000 2001............................................................................ 228,000 Thereafter...................................................................... 3,021,000 ---------- $4,161,936 ---------- ----------
7. INCOME TAXES The components of the income tax provision (benefit) are as follows:
DECEMBER 31, --------------------- 1995 1996 --------- -------- Current........................................................................ $ -- $ -- Deferred....................................................................... (150,005) (15,222) --------- -------- Total.......................................................................... $(150,005) $(15,222) --------- -------- --------- --------
F-58 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:
DECEMBER 31, --------------------- 1995 1996 --------- -------- 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) --------- -------- --------- --------
At December 31, 1996, Tri-City has available net operating loss carryforwards of $8,212, which expire in the years 2009 and 2011. 8. BENEFIT PLANS Tri-City maintains a defined contribution plan under the provisions of Section 401(k) of the Internal Revenue Code. Employees who meet the minimum length of service and age requirements are eligible for participation. Tri-City is responsible for the administration of the plan as the plan administrator and trustee. Under the provisions of the plan, contributions by Tri-City are discretionary. Tri-City did not make any contributions to the plan in 1995 or 1996. 9. CONTINGENCIES Tri-City procures professional liability coverage on behalf of its physicians on a claims made basis. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses for incurred but unreported claims is recorded based upon historical experience. Management of Tri-City intends to renew the existing claims made policy annually and expects to be able to obtain such coverage. If coverage is not renewed, Tri-City intends to purchase extended reporting period endorsements to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. 10. SUBSEQUENT EVENT In March 1997, Tri-City issued 60 shares of common stock to an orthopedic physician who joined the practice. F-59 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Partners Lauderdale Orthopaedic Surgeons We have audited the accompanying balance sheets of Lauderdale Orthopaedic Surgeons (LOS) as of December 31, 1995 and 1996, and the related statements of income and changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of LOS' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LOS at December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP West Palm Beach, Florida May 21, 1997 F-60 LAUDERDALE ORTHOPAEDIC SURGEONS BALANCE SHEETS
DECEMBER 31, ------------------------ 1995 1996 ---------- ---------- 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 ---------- ---------- ---------- ----------
See accompanying notes. F-61 LAUDERDALE ORTHOPAEDIC SURGEONS STATEMENTS OF INCOME AND CHANGES IN PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 ---------- ---------- Net patient service revenue..................................................... $5,980,594 $6,365,320 Other income.................................................................... 11,610 39,555 ---------- ---------- Total revenue................................................................... 5,992,204 6,404,875 Costs and expenses: Physician and other provider services......................................... 3,458,807 3,696,522 Medical support services...................................................... 1,606,300 1,771,864 Medical support services--related party....................................... 100,015 96,761 Depreciation.................................................................. 68,279 58,930 Interest...................................................................... 30,666 18,253 Rent.......................................................................... 135,042 151,053 Rent--related party........................................................... 206,000 212,867 ---------- ---------- Total costs and expenses........................................................ 5,605,109 6,006,250 ---------- ---------- Net income...................................................................... 387,095 398,625 ---------- ---------- Partners' capital, beginning of year............................................ 894,995 1,299,136 Increase in unrealized gain on available for sale investments................... 17,046 17,638 ---------- ---------- Partners' capital, end of year.................................................. $1,299,136 $1,715,399 ---------- ---------- ---------- ----------
See accompanying notes. F-62 LAUDERDALE ORTHOPAEDIC SURGEONS STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------- 1995 1996 --------- --------- OPERATING ACTIVITIES: Net income................................................................................ $ 387,095 $ 398,625 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................................................ 68,279 58,930 Gain on sale of assets.................................................................. -- -- Changes in operating assets and liabilities: Accounts receivable.................................................................. (794,618) (220,259) Physician and other provider costs receivable........................................ -- -- Prepaid expenses and other current assets............................................ (2,557) 4,564 Patients refunds..................................................................... 402,073 69,255 Accounts payable..................................................................... 35,895 (59,683) Accrued expenses and other current liabilities........................................................................ 45,950 (48,452) --------- --------- Net cash provided by operating activities................................................. 142,117 202,980 INVESTING ACTIVITIES: Proceeds from sale of assets.............................................................. -- -- Purchases of furniture, fixtures and equipment............................................ (7,174) (25,274) Purchases of investments available for sale............................................... (7,605) (4,232) --------- --------- Net cash used in investing activities..................................................... (14,779) (29,506) FINANCING ACTIVITIES Payments on note payable to bank.......................................................... (100,000) (100,000) Partner distributions..................................................................... -- -- --------- --------- Net cash used in financing activities..................................................... (100,000) (100,000) --------- --------- Net increase in cash...................................................................... 27,338 73,474 Cash at beginning of year................................................................. 8,088 35,426 --------- --------- Cash at end of year....................................................................... $ 35,426 $ 108,900 --------- --------- --------- ---------
See accompanying notes. F-63 LAUDERDALE ORTHOPAEDIC SURGEONS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 1. DESCRIPTION OF THE BUSINESS Lauderdale Orthopaedic Surgeons (LOS) is an orthopedic physician practice which serves patients in Broward County, Florida. LOS is organized as a partnership under the laws of the state of Florida. On April 1, 1997, LOS agreed in principle to a management services agreement with BMJ Medical Management, Inc. and agreed to sell substantially all of its assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recorded at estimated net amounts to be received from third party payors and others for services rendered. Laws and regulations governing the Medicare program are complex and subject to interpretation. LOS believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. Investments Available for Sale Investments available for sale are carried at fair market value, with resulting unrealized holding gains and losses reported as a separate component of partners' capital. Realized gains and losses and declines in value judged to be other-than-temporary on investments available for sale are included in other income. The cost of securities sold is based on the specific identification method. Interest and dividends on investments classified as available-for-sale are included in other income. Concentration of Credit Risk LOS grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Management believes credit risk associated with accounts receivable is minimal. Furniture, Fixtures and Equipment Furniture, fixtures and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation, and are depreciated using the straight line method over the estimated useful lives of the assets, ranging from 5 to 20 years. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-64 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:
GROSS UNREALIZED FAIR COST GAINS VALUE ------- ---------- ------- December 31, 1995: Corporate equities.................................................. $31,273 $ 24,656 $55,929 ------- ---------- ------- ------- ---------- ------- December 31, 1996: Corporate equities.................................................. $35,505 $ 42,291 $77,796 ------- ---------- ------- ------- ---------- -------
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:
DECEMBER 31, -------------------------- 1995 1996 ----------- ----------- 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 ----------- ----------- ----------- -----------
F-65 LAUDERDALE ORTHOPAEDIC SURGEONS NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following:
DECEMBER 31, ---------------------- 1995 1996 --------- --------- 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 --------- --------- --------- ---------
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):
YEARS ENDING DECEMBER 31, - ------------------------------------------------------------ 1997........................................................ $ 335,000 1998........................................................ 296,000 1999........................................................ 218,000 2000........................................................ 218,000 2001........................................................ 145,000 ------------ $1,212,000 ------------ ------------
8. INCOME TAXES LOS was formed as a partnership under the Federal Internal Revenue Code. As a result, in lieu of corporate income tax, LOS' taxable income is passed through to the partners and taxed at the partner level. Accordingly, no provision or liability for income tax has been reflected in the financial statements. 9. CONTINGENCIES LOS procures professional liability coverage on behalf of its physicians on a claims made basis. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses for incurred but unreported claims is recorded based upon historical experience. Management of LOS intends to renew the existing claims made policy annually and expects to be able to obtain such coverage. If coverage is not renewed, LOS intends to purchase extended reporting period endorsements to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. F-66 LAUDERDALE ORTHOPAEDIC SURGEONS NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 10. RELATED PARTY TRANSACTIONS LOS leases medical office space from an entity controlled by one of the partners. The lease expires in 2001 and contains renewal options. Rent expense incurred under the lease was approximately $206,000 and $213,000 for the years ended December 31, 1995 and 1996, respectively. Under the terms of a management agreement, LOS incurs expenses to an entity controlled by the partners for diagnostic equipment rental and other overhead charges. Expenses incurred under this contract were approximately $100,000 and $97,000 for the years ended December 31, 1995 and 1996, respectively. F-67 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics We have audited the accompanying balance sheets of Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics (Gold Coast) as of December 31, 1995 and 1996, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of Gold Coast's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gold Coast at December 31, 1995 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP West Palm Beach, Florida July 9, 1997 F-68 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS BALANCE SHEETS
DECEMBER 31, ------------------------ JUNE 30, 1995 1996 1997 ---------- ---------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................................. $ -- $ -- $ 10,172 Accounts receivable, net.............................................. 1,586,752 1,756,545 1,870,853 Advance to stockholder................................................ 4,606 -- -- Prepaid expenses...................................................... 43,606 74,748 25,055 ---------- ---------- ----------- Total current assets.................................................... 1,634,964 1,831,293 1,906,080 Furniture, fixtures and equipment, net.................................. 171,194 141,298 125,594 ---------- ---------- ----------- Total assets............................................................ $1,806,158 $1,972,591 $ 2,031,674 ---------- ---------- ----------- ---------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 24,935 $ 33,605 $ 29,595 Accrued consulting fee................................................ -- -- 45,943 Due to BMJ Medical Management, Inc.................................... -- -- 41,666 Due to stockholder.................................................... 18,893 -- -- Accrued compensation.................................................. 130,732 101,209 83,592 Accrued professional liability insurance.............................. 130,271 166,131 167,122 Accrued profit sharing plan contribution.............................. 50,000 -- -- Current portion of long-term debt..................................... 141,118 146,080 140,428 ---------- ---------- ----------- Total current liabilities............................................... 495,949 447,025 508,346 Long-term debt.......................................................... 279,232 230,357 172,128 Stockholders' equity: Common stock, $1 par value--1,000 shares authorized, 600 shares issued and outstanding in 1995, 1996 and 1997............................. 600 600 600 Retained earnings..................................................... 1,030,377 1,294,609 1,350,600 ---------- ---------- ----------- Total stockholders' equity.............................................. 1,030,977 1,295,209 1,351,200 ---------- ---------- ----------- Total liabilities and stockholders' equity.............................. $1,806,158 $1,972,591 $ 2,031,674 ---------- ---------- ----------- ---------- ---------- -----------
See accompanying notes. F-69 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30, ------------------------ ------------------------ 1995 1996 1996 1997 ---------- ---------- ---------- ---------- (UNAUDITED) Net patient service revenue.............................. $3,236,573 $3,433,831 $1,780,618 $1,889,635 Costs and expenses: Physician and other provider services.................. 1,414,343 1,785,478 971,234 631,395 Medical support services............................... 1,290,412 1,204,912 511,132 698,654 Management service fee................................. -- -- -- 41,666 Depreciation........................................... 40,823 33,163 16,582 16,003 Interest............................................... 44,821 30,940 16,872 14,355 Rent................................................... 121,454 115,106 57,553 56,571 ---------- ---------- ---------- ---------- Total costs and expenses................................. 2,911,853 3,169,599 1,573,373 1,458,644 ---------- ---------- ---------- ---------- Net income............................................... $ 324,720 $ 264,232 $ 207,245 $ 430,991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. F-70 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- TOTAL NUMBER RETAINED STOCKHOLDERS' OF SHARES AMOUNT EARNINGS EQUITY --------- ------ ---------- ------------- Balance at January 1, 1995...................................... 600 $600 $ 705,657 $ 706,257 Net income.................................................... -- -- 324,720 324,720 --- ------ ---------- ------------- Balance at December 31, 1995.................................... 600 600 1,030,377 1,030,977 Net income.................................................... -- -- 264,232 264,232 --- ------ ---------- ------------- Balance at December 31, 1996.................................... 600 600 1,294,609 1,295,209 Net income (unaudited)........................................ -- -- 430,991 430,991 Stockholder distributions (unaudited)......................... -- -- (375,000) (375,000) --- ------ ---------- ------------- Balance at June 30, 1997 (unaudited)............................ 600 $600 $1,350,600 $ 1,351,200 --- ------ ---------- ------------- --- ------ ---------- -------------
See accompanying notes. F-71 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, --------------------- ----------------------- 1995 1996 1996 1997 --------- --------- --------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income........................................................ $ 324,720 $ 264,232 $ 207,245 $ 430,991 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................................... 40,823 33,163 16,582 16,003 Bonus paid with note payable.................................... 200,000 -- -- -- Changes in operating assets and liabilities: Accounts receivable.......................................... (179,258) (169,793) (152,229) (114,308) Prepaid expenses............................................. (38,835) (31,142) 11,542 49,693 Accounts payable............................................. (32,127) 8,670 77,444 (4,010) Accrued consulting fee....................................... -- -- -- 45,943 Due to BMJ Medical Management, Inc. ......................... -- -- -- 41,666 Accrued compensation......................................... 119,270 (29,523) (36,011) (17,617) Accrued professional liability insurance..................... (157,201) 35,860 17,930 991 Accrued profit sharing plan contribution..................... 50,000 (50,000) (50,000) -- --------- --------- --------- ----------- Net cash provided by operating activities......................... 327,392 61,467 92,503 449,352 INVESTING ACTIVITIES Advance to stockholder............................................ (8,000) -- -- (85,000) Payments received on advance to stockholder....................... 3,394 4,606 4,606 85,000 Purchases of furniture, fixtures and equipment.................... (73,269) (3,267) -- (299) --------- --------- --------- ----------- Net cash (used in) provided by investing activities............... (77,875) 1,339 4,606 (299) FINANCING ACTIVITIES Distributions to stockholders..................................... -- -- -- (375,000) Payments on due to stockholder.................................... (75,000) (100,893) (50,893) -- Proceeds of loan from stockholder................................. 82,000 32,000 -- Proceeds of related party advance................................. 55,000 55,000 -- Payments on related party advance................................. (55,000) (55,000) -- Proceeds from long-term debt...................................... 100,000 157,500 -- 99,000 Payments on long-term debt........................................ (274,517) (201,413) (78,216) (162,881) --------- --------- --------- ----------- Net cash used in financing activities............................. (249,517) (62,806) (97,109) (438,881) --------- --------- --------- ----------- Net change in cash and cash equivalents........................... -- -- -- 10,172 Cash and cash equivalents at beginning of period.................. -- -- -- -- --------- --------- --------- ----------- Cash and cash equivalents at end of period........................ $ -- $ -- $ -- $ 10,172 --------- --------- --------- ----------- --------- --------- --------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest............................................ $ 46,932 $ 30,940 $ 16,782 $ 13,273 --------- --------- --------- ----------- --------- --------- --------- -----------
See accompanying notes. F-72 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED) 1. DESCRIPTION OF THE BUSINESS Fishman and Stashak, M.D.'s, P.A. d/b/a Gold Coast Orthopedics (Gold Coast) was organized on April 16, 1990 under the laws of the State of Florida. Gold Coast specializes in providing orthopedic medical and surgical services and related medical and ancillary services in Palm Beach County. Gold Coast receives payment for patient services primarily from private insurers, health maintenance organizations, preferred provider organizations, the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, and directly from patients. Effective June 1, 1997, Gold Coast and BMJ Medical Management, Inc. (BMJ) executed a Management Services Agreement (the Agreement). The Agreement provides that BMJ will be the exclusive provider of all management and administrative services utilized by Gold Coast through June 1, 2037, in exchange for a management fee based on 15% of Gold Coast's net collected revenue. In connection with the Agreement, Gold Coast accrued management fees payable to BMJ of $41,666 at June 30, 1997. In July 1997, Gold Coast entered into an Asset Purchase Agreement with BMJ whereby Gold Coast sold all of its accounts receivable, diagnostic and therapeutic medical equipment, and office equipment to BMJ for approximately $2.9 million. Furthermore, BMJ will pay Gold Coast for amounts received in excess of $950,000 on Gold Coast's June 1, 1997 accounts receivable through June 30, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Gold Coast considers highly liquid investments with original maturities of three months or less to be cash equivalents. Concentration of Credit Risk Gold Coast grants credit without collateral to its patients, most of whom are local residents that are insured under third-party payor agreements. Management believes the credit risk associated with accounts receivable is minimal. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from four to fifteen years. Financial Instruments The fair value of Gold Coast's financial instruments (primarily long-term debt) are estimated using discounted cash flow analyses, based on Gold Coast's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of financial instruments as reported in the accompanying balance sheets approximate their fair value. Revenue Recognition Revenue is recorded at estimated net amounts to be received from third-party payors and others for services rendered. Revenues from the Medicare program accounted for approximately 10% of Gold Coast's net patient service revenues for the years ended December 31, 1995 and 1996. Laws and regulations governing the Medicare program are complex and subject to interpretation. Gold Coast believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. F-73 FISHMAN AND STASHAK, M.D.'S, P.A. D/B/A GOLD COAST ORTHOPEDICS NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Costs and Expenses Physician and other provider services costs are comprised primarily of compensation and fees paid to physicians and other health care providers. Medical support services costs include all indirect costs associated with the management and operations of the practice and all direct costs associated with medical supplies and pharmaceutical expenses. Income Taxes Gold Coast is taxed under the provisions of Subchapter S of the Internal Revenue Code, which generally provides that in lieu of corporate taxes, the stockholders shall be taxed on Gold Coast's taxable income in accordance with their ownership interests. As a result, the accompanying financial statements include no provision for income taxes. Interim Financial Statements The interim financial statements as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all normal and recurring adjustments necessary for a fair presentation of Gold Coast's financial position, results of operations and cash flows. The interim data disclosed in these notes to the financial statements is also unaudited. The results of operations for the six months ended June 30, 1997 is not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, ------------------------ 1995 1996 ---------- ---------- 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 ---------- ---------- ---------- ----------
4. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following:
DECEMBER 31, -------------------- 1995 1996 -------- -------- 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 -------- -------- -------- --------
F-74 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:
DECEMBER 31, ------------------------ 1995 1996 ----------- ----------- $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 ----------- ----------- ----------- -----------
At December 31, 1996, annual principal payments on long-term debt are as follows: 1997.......................................................... $146,080 1998.......................................................... 133,152 Thereafter.................................................... 97,205 -------- $376,437 -------- --------
In July 1997, Gold Coast repaid the outstanding balance on the revolving line-of-credit arrangement. 6. DUE TO STOCKHOLDER The President of Gold Coast, who is also a 50% stockholder, advanced approximately $94,000 to Gold Coast prior to January 1, 1994. The amount was payable to the stockholder on demand, was unsecured and bore interest at 8%. Gold Coast repaid approximately $75,000 and $19,000 in 1995 and 1996, respectively. The Treasurer of Gold Coast, who is also a 50% stockholder, made unsecured advances totaling approximately $82,000 to Gold Coast during 1996 which bore interest at 6.25% and were due on demand. Gold Coast repaid these advances during 1996. 7. LEASE COMMITMENTS Gold Coast leases office space under a noncancelable operating lease, which contains an escalation clause. Rent expense charged to operations totalled approximately $95,000 during both 1995 and 1996. F-75 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: 1997.......................................................... $ 94,714 1998.......................................................... 94,714 1999.......................................................... 94,714 2000.......................................................... 94,714 2001.......................................................... 94,714 Thereafter.................................................... 426,213 -------- $899,783 -------- --------
8. RELATED PARTY TRANSACTIONS In February 1995, a physician employee and then stockholder of Gold Coast terminated his employment with Gold Coast. In connection with this termination, Gold Coast agreed to pay the physician a final bonus of $200,000, pursuant to the physician's employment agreement. This bonus is included in physician and other provider services expense in the 1995 statement of income and was paid over an eleven-month period pursuant to a noninterest bearing promissory note. At December 31, 1995, approximately $18,000 of this note was outstanding and the balance was repaid in full during 1996. 9. BENEFIT PLANS Gold Coast maintains a defined contribution plan under the provisions of Section 401(k) of the Internal Revenue Code. Employees who meet the minimum length of service and age requirements are eligible for participation. Gold Coast is responsible for the administration of the plan as the plan administrator and trustee. Under the provisions of the plan, contributions by Gold Coast are discretionary. Gold Coast made contributions of $50,000 and $45,000 to the plan in 1995 and 1996, respectively. 10. CONTINGENCIES Gold Coast is involved in various legal proceedings in the ordinary course of business. Gold Coast does not believe that the disposition of such legal proceedings and disputes will have a material adverse effect on the financial position or results of operations of Gold Coast. Gold Coast procures professional liability coverage on behalf of its physicians on a claims-made basis. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses for incurred but unreported claims is recorded based upon historical experience. Management of Gold Coast intends to renew the existing claims-made policy annually and expects to be able to obtain such coverage. 11. SUBSEQUENT EVENTS In 1997, Gold Coast declared and distributed stockholders' distributions of approximately $375,000 through June 30, 1997 and approximately $1.9 million subsequent to June 30, 1997. F-76 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Partners Sun Valley Orthopaedic Surgeons, an Arizona General Partnership We have audited the accompanying balance sheet of Sun Valley Orthopaedic Surgeons, an Arizona General Partnership (Sun Valley) as of December 31, 1996, and the related statements of operations and changes in partners' capital and cash flows for the year then ended. These financial statements are the responsibility of Sun Valley's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun Valley at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ERNST & YOUNG, LLP Orlando, Florida July 18, 1997 F-77 SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP BALANCE SHEETS
DECEMBER 31, JUNE 30, 1996 1997 ------------ --------- (UNAUDITED) ASSETS Current assets: Cash................................................................................ $137,982 $ 142,279 Accounts receivable, net............................................................ 512,267 539,654 Due from related parties............................................................ 183,062 186,663 Inventories......................................................................... 9,500 10,000 Prepaid expenses and other current assets........................................... 24,949 15,973 ------------ ----------- Total current assets.................................................................. 867,760 894,569 Furniture, fixtures and equipment, net................................................ 34,935 20,931 Other assets.......................................................................... 7,515 7,464 Due from related parties.............................................................. 48,781 -- ------------ ----------- Total assets.......................................................................... $958,991 $ 922,964 ------------ ----------- ------------ ----------- LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable.................................................................... $ 23,665 $ 22,887 Accrued expenses and other current liabilities...................................... 14,273 15,561 Due to bank under line of credit.................................................... 100,000 100,000 ------------ ----------- Total current liabilities............................................................. 137,938 138,448 Due to related parties................................................................ 31,174 -- Commitments and contingencies......................................................... Partners' capital..................................................................... 789,879 784,516 ------------ ----------- Total liabilities and partners' capital............................................... $958,991 $ 922,964 ------------ ----------- ------------ -----------
See accompanying notes. F-78 SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
SIX MONTHS ENDED JUNE YEAR ENDED 30, DECEMBER 31, ------------------------ 1996 1996 1997 ------------ ---------- ---------- (UNAUDITED) Net patient service revenue............................................ $2,467,989 $1,289,637 $1,357,617 Other revenue.......................................................... 22,798 11,400 11,600 Other revenue from related party....................................... 12,005 5,500 5,500 ------------ ---------- ---------- Total revenue.......................................................... 2,502,792 1,306,537 1,374,717 Costs and expenses: Physician and other provider services................................ 1,456,127 821,604 786,913 Medical support services............................................. 1,044,879 528,110 569,164 Depreciation......................................................... 26,912 13,456 19,102 Interest............................................................. 10,873 4,470 4,901 Other................................................................ 1,452 -- -- ------------ ---------- ---------- Total costs and expenses............................................... 2,540,243 1,367,640 1,380,080 ------------ ---------- ---------- Net loss............................................................... (37,451) (61,103) (5,363) Beginning partners' capital............................................ 827,330 827,330 789,879 ------------ ---------- ---------- Ending partners' capital............................................... $ 789,879 $ 766,227 $ 784,516 ------------ ---------- ---------- ------------ ---------- ----------
See accompanying notes. F-79 SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------- 1996 1996 1997 ------------ -------- -------- (UNAUDITED) OPERATING ACTIVITIES Net loss................................................................... $ (37,451) $(61,103) $ (5,363) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation............................................................. 26,912 13,456 19,102 Changes in operating assets and liabilities: Accounts receivable, net.............................................. 14,298 61,152 (27,387) Due from related parties.............................................. 18,518 19,606 (3,601) Inventories........................................................... (500) (250) (500) Prepaid expenses and other current assets............................. (8,658) 5,179 8,976 Accounts payable...................................................... 2,393 (3,651) (778) Accrued expenses and other current liabilities........................ 819 933 1,288 ------------ -------- -------- Net cash provided by (used in) operating activities........................ 16,331 35,322 (8,263) INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment............................. (7,404) (7,309) (5,098) Repayments of amounts due from partners and affiliates..................... 48,492 40,598 48,781 ------------ -------- -------- Net cash provided by investing activities.................................. 41,088 33,289 43,683 FINANCING ACTIVITIES Amounts received on line of credit......................................... 25,000 -- -- Repayments of line of credit............................................... (44,000) (44,000) -- Repayments of amounts due to related parties............................... (39,500) (32,495) (31,174) Other...................................................................... -- 51 51 ------------ -------- -------- Net cash (used in) provided by financing activities........................ (58,500) (76,444) (31,123) ------------ -------- -------- (Decrease) increase in cash................................................ (1,081) (7,833) 4,297 Cash, beginning of period.................................................. 139,063 139,063 137,982 ------------ -------- -------- Cash, end of period........................................................ $ 137,982 $131,230 $142,279 ------------ -------- -------- ------------ -------- -------- SUPPLEMENTAL CASH FLOWS INFORMATION Interest paid.............................................................. $ 10,873 $ -- $ -- ------------ -------- -------- ------------ -------- --------
See accompanying notes. F-80 SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED) 1. DESCRIPTION OF THE BUSINESS Sun Valley Orthopaedic Surgeons, an Arizona General Partnership, (Sun Valley) is a general partnership of individual physicians and an Arizona professional corporation, and is engaged in the business of providing orthopedic medical and surgical services and related medical and ancillary services to patients in Maricopa County, Arizona. Sun Valley is organized as a general partnership under the laws of the State of Arizona. On July 1, 1997, Sun Valley agreed in principle to sell substantially all of its assets to and enter into a management services agreement with BMJ Medical Management, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Patient Service Revenue Net patient service revenue is reported at the estimated realizable amounts due from patients, third-party payors and others for medical services rendered. During 1996, approximately 60% of net patient service revenue was received under Medicare and Medicare-related programs. Laws and regulations governing the Medicare program are complex and subject to interpretation. Sun Valley believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subjecct to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. Inventories Inventories, which consist of medical and office supplies are stated at current cost, which approximates market value, utilizing the first-in, first-out method. Concentration of Credit Risk Sun Valley grants credit without collateral to its patients, most of whom are local residents, who are insured under third-party payor agreements. Management believes the credit risk associated with accounts receivable is minimal. Furniture, Fixtures and Equipment Furniture, fixtures and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 10 years. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Statements The interim financial statements as of and for the six months ended June 30, 1997 and 1996 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all normal and recurring adjustments necessary for a fair presentation of Sun Valley's financial position, results of operations and cash flows. The interim data disclosed in these notes to the financial statements is also unaudited. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 1997. F-81 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: Gross patient accounts receivable.......................................................... $ 613,880 Less allowances for contractual adjustments and uncollectibles............................. 101,613 --------- $ 512,267 --------- ---------
4. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consists of the following as of December 31, 1996: Furniture, fixtures and equipment.......................................................... $ 176,784 Leasehold improvements..................................................................... 40,025 Less accumulated depreciation.............................................................. 181,874 --------- $ 34,935 --------- ---------
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: Year ending December 31, 1997...................................................................................... $152,961 1998...................................................................................... 153,626 1999...................................................................................... 70,364 2000...................................................................................... 41,296 -------- $418,247 -------- --------
F-82 SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES Sun Valley is organized as a partnership pursuant to Subchapter K of the Internal Revenue Code. As a result, in lieu of corporate income tax, Sun Valley's taxable income is passed through to the partners and taxed at the partner level. Accordingly, no provision or liability for income tax has been reflected in the financial statements. 8. CONTINGENCIES Sun Valley is a general partnership organized under the laws of the State of Arizona. Each of the individual physicians in Sun Valley is personally responsible for and has obtained insurance coverage for professional liability. Accordingly, no provision or liability for incurred but not reported claims has been reflected in the financial statements of Sun Valley. 9. RELATED PARTY TRANSACTIONS As of December 31, 1996, one physician partner had been paid $135,743 in excess of the amounts due to him for the physician services provided. This amount is included in due from related parties as of December 31, 1996. Sun Valley has advanced amounts to a professional corporation that specializes in osteoporosis and epidurals that is wholly-owned by a physician partner. Interest on the advance accrues at 8%. As of December 31, 1996, the amount due Sun Valley, including accrued interest, is $43,485. Sun Valley recorded interest income for the year ended December 31, 1996 in the amount of $12,000. F-83 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Orthopaedic Surgery Associates, P.A. We have audited the accompanying balance sheet of Orthopaedic Surgery Associates, P.A. (OSA) as of December 31, 1996, and the related statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of OSA's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Orthopaedic Surgery Associates, P.A. at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. October 10, 1997 F-84 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets: Cash.............................................................................................. $ 26,590 Accounts receivable, net.......................................................................... 1,382,082 Prepaid expenses.................................................................................. 34,216 ---------- Total current assets................................................................................ 1,442,888 Furniture, fixtures and equipment, net.............................................................. 1,792,079 Loan receivable--OSA Investments, PA, net of discount of $265,176................................. 64,488 Other............................................................................................... 5,000 ---------- Total assets........................................................................................ $3,304,455 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued liabilities............................................................................... $ 150,427 Note payable...................................................................................... 500,000 Current portion of capital lease obligations...................................................... 66,901 ---------- Total current liabilities........................................................................... 717,328 Long-term capital lease obligations, less current portion........................................... 1,318,957 Stockholders' equity: Common stock, $1 par value--500 shares authorized, issued and outstanding......................... 500 Additional paid-in capital........................................................................ 1,090,450 Retained earnings................................................................................. 177,220 ---------- Total stockholders' equity.......................................................................... 1,268,170 ---------- Total liabilities and stockholders' equity.......................................................... $3,304,455 ---------- ----------
See accompanying notes. F-85 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. STATEMENT OF INCOME YEAR ENDED DECEMBER 21, 1996 Net patient service revenue......................................................................... $ 7,520,949 Other income........................................................................................ 12,107 ------------ Total revenue....................................................................................... 7,533,056 Costs and expenses: Physician and other provider services............................................................. 3,175,685 Medical support services.......................................................................... 3,489,020 Depreciation...................................................................................... 90,369 Interest.......................................................................................... 91,458 Rent.............................................................................................. 244,128 Discount on loan receivable....................................................................... 265,176 ------------ Total costs and expenses............................................................................ 7,355,836 ------------ Net income.......................................................................................... $ 177,220 ------------ ------------
See accompanying notes. F-86 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- ADDITIONAL TOTAL NUMBER PAID-IN RETAINED STOCKHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- ------ ---------- ---------- -------------- Balance at January 1, 1996....................... 500 $500 $ -- $ -- $ 500 Contribution of capital........................ -- -- 1,090,450 -- 1,090,450 Net income..................................... -- -- -- 177,220 177,220 --- ------ ---------- ---------- -------------- Balance at December 31, 1996..................... 500 $500 $ 177,220 $1,268,170 --- ------ ---------- ---------- -------------- --- ------ ---------- ---------- --------------
See accompanying notes. F-87 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 OPERATING ACTIVITIES Net income........................................................................................ $ 177,220 Adjustments to reconcile net income to net cash provided by operating activities: Discount on loan receivable..................................................................... 265,176 Depreciation.................................................................................... 87,552 Changes in operating assets and liabilities: Accounts receivable.......................................................................... (1,382,082) Prepaids and deposits........................................................................ (39,216) Accounts payable............................................................................. 150,427 Accrued expenses............................................................................. 848,437 ------------ Net cash provided by operating activities......................................................... 107,514 INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment.................................................... (274,832) Loan receivable................................................................................... (306,592) ------------ Net cash used in investing activities............................................................. (581,424) FINANCING ACTIVITIES Contribution of capital........................................................................... 500 Proceeds from borrowing under notes payable....................................................... 500,000 ------------ Net cash provided by financing activities......................................................... 500,500 ------------ Net increase in cash.............................................................................. 26,590 Cash at beginning of year......................................................................... -- ------------ Cash at end of year............................................................................... $ 26,590 ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest............................................................................ $ 91,458 ------------ ------------ Noncash transactions: Equipment under capital lease obligations......................................................... $ 1,331,000 ------------ ------------ Equipment financed by loan payable-related party.................................................. $ 250,650 ------------ ------------ Conversion of debt to equity...................................................................... $ 1,090,450 ------------ ------------
See accompanying notes. F-88 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. DESCRIPTION OF THE BUSINESS Orthopaedic Surgery Associates, P.A. (OSA) was organized on December 27, 1995 and commenced operations on January 1, 1996, under the laws of the State of Florida. OSA specializes in providing orthopedic medical and surgical services and related medical and ancillary services in Palm Beach County, Florida. OSA receives payment for patient services primarily from private insurers, health maintenance organizations, preferred provider organizations, the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, and directly from patients. On October 16, 1997, certain assets and liabilities of OSA were acquired by BMJ Medical Management, Inc. (BMJ) in exchange for 282,254 shares of BMJ common stock, cash of $4,496,250 and a promissory note for $2,450,465. In connection therewith, the Company entered into a 40-year service agreement with BMJ, whereby BMJ will provide substantially all nonmedical services to the practice. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation OSA's accounting records are maintained on the basis of cash receipts and cash disbursements for income-tax purposes. The accompanying financial statements have been prepared on the accrual basis and thus reflect accounts receivable, prepaid expenses, and liabilities that are not recorded in the accounting records. Concentration of Credit Risk OSA grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Management believes credit risk associated with accounts receivable is minimal. Furniture,Fixtures and Equipment Furniture, fixtures and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 39.5 years. Amortization expense for assets under capital leases is included in accumulated depreciation. Financial Instruments The fair value of OSA's financial instruments (primarily long and short-term capital lease obligations and debt) are estimated using discount cash flow analyses, based on OSA's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of financial instruments as reported in the accompanying balance sheet approximate their fair value. Revenue Recognition Net patient service revenues are based on established billing rates, less allowances for contractual adjustments for patients covered by Medicare, Medicaid and various other discount arrangements. Payments received under these programs and arrangements, which generally are based on predetermined rates, are generally less than OSA's customary charges, and the differences are recorded as contractual adjustments or policy discounts at the time the related service is rendered. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and exclusion from the Medicare and Medicaid programs. OSA believes that it is in compliance with all applicable laws and regulations. OSA is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. F-89 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Costs and Expenses Physician and other provider services costs are comprised primarily of compensation and fees paid to physicians and other health care providers. Income Taxes OSA is taxed under the provisions of Subchapter S of the Internal Revenue Code, which generally provides that in lieu of corporate taxes, the stockholders shall be taxed on OSA's taxable income in accordance with their ownership interests. As a result, the accompanying financial statements include no provision for income taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following at December 31, 1996: 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 ---------- ----------
4. NOTE PAYABLE The note payable is a $500,000 line of credit due on August 22, 1997 bearing interest at the prime rate, 8.5% at December 31, 1996. The line of credit is secured by substantially all of the assets of OSA. Effective August 22, 1997, OSA extended the $500,000 line of credit maturity date to November 22, 1997. F-90 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. COMMITMENTS AND CONTINGENCIES OSA has employment agreements with four physician-stockholders which provide for, among other things, various insurance coverages and base pay for one physician-stockholder. Future payments required to be made to physicians approximate $360,000 in 1997 and $100,000 in 1998, subject to certain adjustments. Management cannot estimate future adjustments under these provisions. OSA leases office space and equipment under noncancelable operating leases, two of which contain an escalation clause. Rent expense charged to operations totaled approximately $244,000 during 1996. Future minimum rental commitments under noncancelable operating leases at December 31, 1996 are as follows: 1997............................................................................ $ 215,839 1998............................................................................ 218,890 1999............................................................................ 229,835 2000............................................................................ 241,327 2001............................................................................ 223,833 ---------- $1,129,724 ---------- ----------
Future minimum capital lease obligations at December 31, 1996 are as follows: 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 ---------- ----------
Effective June 1996, OSA entered into a medical office building capital lease with OSA Investments, PA, (OSAI), a related party. The lease payment is equal to OSAI's mortgage payment for the building and the term of the lease is concurrent with the mortgage term. OSA procures professional liability coverage on behalf of its physicians on a claims made basis. The insurance contracts specify that coverage is available only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses for incurred but unreported claims is recorded based upon historical experience. Management of OSA intends to renew the existing claims made policy annually and expects to be able to obtain such coverage. If coverage is not renewed, OSA intends to purchase extended reporting period endorsements to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. 6. PROFIT SHARING PLAN OSA maintains a profit sharing plan under the provisions of Section 401(k) of the Internal Revenue Code. Employees who meet the minimum length of service and age requirements are eligible for participation. OSA is responsible for the administration of the Plan as the plan administrator and OSA's stockholders are trustees. Under the provisions of the Plan, contributions by OSA are discretionary. OSA made contributions of approximately $83,000 to the Plan in 1996. F-91 ORTHOPAEDIC SURGERY ASSOCIATES, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. LOAN RECEIVABLE - OSA INVESTMENTS, P.A. During 1996 OSA recorded a loan receivable from OSAI for $329,664. The loan receivable is non-interest bearing and is expected to be repaid from the proceeds of the future sale of the medical office building owned by OSAI and leased to OSA. The loan has been discounted to reflect an imputed interest rate of 8% per annum over the life of the lease, which is 20 years. 8. SUBSEQUENT EVENTS Effective July 1, 1997, OSA entered into an employment agreement with a physician for the payment of a base salary. Future payments required to be made to the physician approximate $80,000 in 1997, $160,000 in 1998, $160,000 in 1999 and $80,000 in 2000, subject to certain adjustments. Management cannot estimate future adjustments under these provisions. Effective August 1, 1997, OSA entered into a 12-month physician employment agreement for the payment of $200 for each documented hour of service performed on behalf of OSA. Management cannot estimate future adjustments under these provisions. These contracts are for various time periods and may be terminated by mutual agreement or upon the occurrence of other specified events such as death and disability. Effective August 1, 1997, OSA entered into an equipment lease for $228,000 for a 12-month period. F-92 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Broward Institute of Orthopaedic Specialties, P.A. We have audited the accompanying balance sheet of Broward Institute of Orthopaedic Specialties, P.A. (BIOS) as of December 31, 1996, and the related statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the BIOS' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Broward Institute of Orthopaedic Specialties, P.A. at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. September 5, 1997 F-93 BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A. BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets: Cash.............................................................................................. $ 428,530 Accounts receivable, net.......................................................................... 1,875,907 Prepaid expenses.................................................................................. 41,845 ---------- Total current assets................................................................................ 2,346,282 Furniture, fixtures and equipment, net.............................................................. 49,301 Other, net.......................................................................................... 13,338 ---------- Total assets........................................................................................ $2,408,921 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................................. $ 187,555 Due to stockholders............................................................................... 80,000 Accrued liabilities............................................................................... 619,197 Current portion of notes payable.................................................................. 267,000 ---------- Total current liabilities........................................................................... 1,153,752 Notes payable, less current portion................................................................. 249,871 Stockholders' equity: Common stock, $.01 par value--1,000 shares authorized, 80 shares issued and outstanding............................................................. 1 Additional paid-in capital........................................................................ 23,999 Retained earnings................................................................................. 981,298 ---------- Total stockholders' equity.......................................................................... 1,005,298 ---------- Total liabilities and stockholders' equity.......................................................... $2,408,921 ---------- ----------
See accompanying notes. F-94 BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A. STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 Net patient service revenue......................................................................... $8,325,413 Other income........................................................................................ 37,164 ---------- Total revenue....................................................................................... 8,362,577 Costs and expenses: Physician and other provider services............................................................. 3,823,617 Medical support services.......................................................................... 3,892,487 Depreciation and amortization..................................................................... 13,259 Interest.......................................................................................... 68,129 Rent.............................................................................................. 397,094 ---------- Total costs and expenses............................................................................ 8,194,586 ---------- Net income.......................................................................................... $ 167,991 ---------- ----------
See accompanying notes. F-95 BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- ADDITIONAL TOTAL NUMBER PAID IN RETAINED STOCKHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- ------ ---------- -------- -------------- 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 -- -- -- -- ---------- -------- -------------- ---------- -------- --------------
See accompanying notes F-96 BROWARD INSTITUTE OF ORTHOPAEDIC SPECIALTIES, P.A. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 OPERATING ACTIVITIES Net income........................................................................................... $ 167,991 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................................................................... 9,297 Amortization....................................................................................... 3,962 Bad debt........................................................................................... 102,642 Changes in operating assets and liabilities: Accounts receivable............................................................................. (514,146) Deposits........................................................................................ (3,435) Accounts payable................................................................................ 114,599 Accrued expenses................................................................................ 220,303 --------- Net cash provided by operating activities............................................................ 101,213 INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment....................................................... (31,210) --------- Net cash used in investing activities................................................................ (31,210) FINANCING ACTIVITIES Payments on notes payable............................................................................ (167,139) --------- Net cash used in financing activities................................................................ (167,139) --------- Net decrease in cash................................................................................. (97,136) Cash at beginning of year............................................................................ 525,666 --------- Cash at end of year.................................................................................. $ 428,530 --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest............................................................................... $ 68,127 --------- ---------
See accompanying notes. F-97 BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. DESCRIPTION OF THE BUSINESS Broward Institute of Orthopedic Specialties, P.A. (BIOS) was organized on November 4, 1993 and commenced operations on August 1, 1995, under the laws of the State of Florida. BIOS specializes in providing orthopedic medical and surgical services and related medical and ancillary services in Broward County. BIOS receives payment services primarily from private insurers, health maintenance organizations, preferred provider organizations, the federal government primarily under the Medicare program, state governments under their respective Medicaid programs, and directly from patients. On October 31, 1997, certain assets and liabilities of BIOS were acquired by BMJ Medical Management, Inc. (BMJ) in exchange for 260,237 shares of BMJ common stock, cash of $119,311 and promissory notes for 3,396,252. In connection therewith, BIOS entered into a 40-year management services agreement with BMJ, whereby BMJ will provide substantially all nonmedical services to the practice. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation BIOS' accounting records are maintained on the basis of cash receipts and cash disbursments for income-tax purposes. The accompanying financial statements have been prepared on the accrual basis and thus reflect accounts receiveable, prepaid expenses, and liabilities that are not recorded in the accounting records. Concentration of Credit Risk BIOS grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. Management believes credit risk associated with accounts receivable is minimal. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from five to seven years. Financial Instruments The fair value of BIOS' financial instruments (primarily long and short-term debt) are estimated using discounted cash flow analyses, based on BIOS' current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of financial instruments as reported in the accompanying balance sheet approximate their fair value. Revenue Recognition Net patient service revenues are base on established billing rates, less allowances for contractual adjustments for patients covered by Medicare, Medicaid and various other discount arrangements. Payments received under these programs and arrangements, which generally are based on predetermined rates, are less than BIOS' customary charges, and the differences are recorded as contractual adjustments or policy discounts at the time the related service is rendered. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. BIOS believes that it is in compliance with all applicable laws and regulations. BIOS is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. F-98 BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Costs and Expenses Physician and other provider services costs are comprised primarily of compensation and fees paid to phyisicians and other health care providers. Income Taxes BIOS is taxed under the provisions of Subchapter S of the Internal Revenue Code, which generally provides that in lieu of corporate taxes, the stockholders shall be taxed on BIOS' taxable income in accordance with their ownership interests. As a result, the accompanying financial statements include no provision for income taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from the estimates. 3. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following: Furniture and fixtures............................................................. $25,203 Equipments......................................................................... 33,934 ------- Less accumulated depreciation...................................................... 59,137 (9,836) ------- $49,301 ------- -------
4. NOTES PAYABLE Notes payable consits of the following: $800,000 promissory note payable, bearing interest at a variable rate of prime plus .25% (8.75% at December 31, 1996), principal payments of $267,000 during each of the first two years and interest payable monthly through October 1999, secured by substantially all of the assets of BIOS. Less current portion.............................................................. $516,871 (267,000) -------- $249,871 -------- --------
5. DUE TO STOCKHOLDERS The stockholders of BIOS, advanced $80,000 to BIOS prior to January 1, 1996, due on demand, unaccured and bearing interest at 8%. BIOS repaid $80,000 in 1997. 6. LEASE COMMITMENT BIOS leases office space and equipment under non-cancelable operating leases, two of which contain an escalation clause. Rent expense charged to operation totaled approximately $397,000 during 1996. F-99 BROWARD INSTITUTE OF ORTHOPEDIC SPECIALTIES, P.A. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 6. LEASE COMMITMENT--(CONTINUED) Furniture minimum rental commitments at December 31, 1996 are as follows: 1997.............................................................................. $ 94,714 1998.............................................................................. 94,714 1999.............................................................................. 94,714 2000.............................................................................. 94,714 2001.............................................................................. 94,714 Thereafter........................................................................ 426,213 -------- $899,783 -------- --------
7. BENEFIT PLANS BIOS maintains a defined contribution plan under the provisions of Section 401(k) of the Internal Revenue Code. Employees who meet the minimum length of service and age requirements are eligible for participation. BIOS is responsible for the administration of the plan as the plan administrator and BIOS' stockholders are trustees of the plan. Under the provision of the plan, contributions by BIOS are discretionary. BIOS made no contributions to the plan in 1996. 8. COMMITMENTS AND CONTINGENCIES BIOS procures professional liability coverage on behalf of its physicians on a claims made basis. The insurance contracts specify that coverage is availble only during the term of each insurance contract and cover only those claims reported while the policies are in force. An estimate of losses of incurred but unreported claims is recorded base upon historical experience. Management of BIOS to renew the existing claims made policy annually and expects to be able to obtain such coverage. If coverage is not renewed, BIOS intends to purchase extended reporting period endorsements to provide professional liability coverage for losses incurred prior to, but reported subsequent to, the termination of the claims made policies. 9. SUBSEQUENT EVENT On July 9, 1997, BIOS borrowed $25,740 under a promissory not with a bank, at a variable interest rate of prime plus .25%, interest payable monthly, principal due November 1, 1999, secured by substantially all of the assets of BIOS. F-100 ------------------------------------------------------------ ------------------------------------------------------------ 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
PAGE ---- Additional Information........................ 2 Prospectus Summary............................ 3 Risk Factors.................................. 6 The Company................................... 15 Use of Proceeds............................... 16 Dividend Policy............................... 16 Capitalization................................ 17 Dilution...................................... 18 Pro Forma Financial Information............... 19 Selected Financial Information................ 26 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 27 Business...................................... 31 Management.................................... 49 Certain Transactions.......................... 54 Principal Stockholders........................ 61 Description of Capital Stock.................. 63 Shares Eligible for Future Sale............... 66 Underwriting.................................. 67 Legal Matters................................. 69 Experts....................................... 69 Index to Financial Statements................. F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ 5,000,000 SHARES BMJ MEDICAL MANAGEMENT, INC. COMMON STOCK ----------------------- PROSPECTUS ----------------------- HAMBRECHT & QUIST RAYMOND JAMES & ASSOCIATES, INC. VOLPE BROWN WHELAN & COMPANY , 1997 ------------------------------------------------------------ ------------------------------------------------------------ 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. 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............................................................................................. $ * ------- -------
- ------------------ * 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 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) 1. On May 6, 1996, pursuant to a Stock Purchase Agreement, the Company issued an aggregate of 1,175,000 shares of Common Stock, $.001 par value per share (the 'Common Stock') and 999,999 shares of the Company's Series A Convertible Preferred Stock, $.01 par value (the 'Series A Preferred Stock'), for an aggregate purchase price of $1,011,749 to Naresh Nagpal, M.D. ('Dr. Nagpal'), Oak VI Affiliates Fund, Limited Partnership ('Oak VI'), Oak Investment Partners VI, Limited Partnership ('Oak Partners'), Delphi Ventures III, L.P. ('Delphi Ventures'), Delphi BioInvestments III, L.P. ('Delphi BioInvestments') and Scheer & Company, Inc. ('Scheer'). 2. On June 1, 1996, pursuant to the terms of an Incentive Stock Option Agreement, the Company granted Scott Cielewich an option to purchase 50,000 shares of Common Stock, with an exercise price of $.01 per share. 3. On June 10, 1996, pursuant to an Incentive Stock Option Agreement, the Company granted Caridad LaPlace an option to purchase 5,000 shares of Common Stock with an exercise price of $.01 per share. 4. On July 1, 1996, the Company issued 450,000 shares of Common Stock pursuant to a Management Services Agreement and Restricted Stock Agreements to Lehigh Valley Bone, Muscle and Joint ('LVBMJ') and the following physicians affiliated with LVBMJ: Thomas Sauer, M.D., Ranjan Sachdev, M.D., Joseph Garbarino, M.D., John Williams, M.D. and Peter W. Kozicky, M.D. 5. On September 23, 1996, pursuant to an Incentive Stock Option Agreement, the Company granted Ronald Garey an option to purchase 30,000 shares of Common Stock with an exercise price of $.25 per share. 6. On November 1, 1996, pursuant to an Incentive Stock Option Agreement, the Company granted Deborah Flytuta an option to purchase 5,000 shares of Common Stock with an exercise price of $.25 per share. 7. On November 4, 1996, pursuant to an Incentive Stock Option Agreement, the Company granted Sherry Pulliam an option to purchase 25,000 shares of Common Stock with an exercise price of $.25 per share. 8. On November 12, 1996, pursuant to a Stock Purchase Agreement, the Company issued 2,000,001 shares of its Series B Convertible Preferred Stock, $.01 par value (the 'Series B Preferred Stock'), for an aggregate purchase price of $6,000,003 to Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, and Delphi BioInvestments. 9. On November 22, 1996, pursuant to a Management Services Agreement and Restricted Stock Agreements, the Company issued 4,000,000 shares of Common Stock to the following physicians (or their respective corporations) and employees affiliated with Southern California Orthopedic Institute Medical Group ('SCOI'): Pamela Westlin, Glenn Cozen, James M. Fox, M.D., Inc., the Friedman Family Trust, Wilson Del Pizzo, M.D., Inc., Stephen Snyder, M.D., Richard Ferkel, M.D., Todd Moldawer, M.D., Gregory Hanker, M.D., Herbert Dennis Huddleston, M.D., Inc., A. Elizabeth Bloze, M.D., Todd Molnar, M.D., Trevor P. Lynch, M.D., a medical corporation, Saul M. Bernstein, M.D., Inc., Steven Schopler, M.D., Ronald Karzel, M.D., Hrair Darakjian, M.D., Jonathan Jaivan, M.D., Donald Wiss, M.D., Patricia McKeever, M.D., and David Auerbach, M.D. 10. On December 2, 1996, pursuant to an Incentive Stock Option Agreement, the Company granted Randal Farwell an option to purchase 40,000 shares of Common Stock with an exercise price of $.35 per share. 11. On December 23, 1996, the Company issued 1,076,501 shares of Common Stock to physicians affiliated with South Texas Spinal Clinic ('STSC') in accordance with the terms of a Management Services Agreement and Restricted Stock Agreements. 12. On January 1, 1997, pursuant to a Non-qualified Stock Option Agreement, the Company granted Dr. Nagpal an option to purchase 150,000 shares of Common Stock with an exercise price of $.01 per share. 13. On January 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted G. Steven Ensinger an option to purchase 25,000 shares of Common Stock with an exercise price of $.35 per share. 14. On January 2, 1997, the Company issued 10,000 shares of Common Stock to Scott Cielewich upon exercise of the vested portion of his option (which was granted on June 1, 1996). II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) 15. On January 14, 1997, the Company issued warrants to purchase an aggregate of 33,333 shares of Common Stock at an exercise price of $3.00 per share to Dr. Nagpal, Delphi BioInvestments, Delphi Ventures, Oak VI and Oak Partners in connection with a bridge loan from such persons to the Company. 16. On January 29, 1997, pursuant to a Stock Purchase Agreement, the Company issued 183,332 shares of Series C Convertible Preferred Stock, $.01 par value (the 'Series C Preferred Stock'), for an aggregate purchase price of $549,996 to certain of the SCOI physicians, Glenn Cozen and the Saphier and Heller Retirement Trust. 17. On January 30, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Pamela Westlin an option to purchase 22,000 shares of Common Stock with an exercise price of $.35 per share. 18. On January 30, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Cindy Lesonsky an option to purchase 8,000 shares of Common Stock with an exercise price of $.35 per share. 19. On February 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted David Fater an option to purchase 140,000 shares of Common Stock with an exercise price of $.35 per share. 20. On February 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Andrea Seratte an option to purchase 40,000 shares of Common Stock with an exercise price of $.35 per share. 21. On March 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Glenn Cozen an option to purchase 75,000 shares of Common Stock with an exercise price of $.35 per share. 22. On March 7, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Caridad LaPlace an option to purchase 2,000 shares of Common Stock with an exercise price of $.50 per share. 23. On March 12, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Robert Cox an option to purchase 40,000 shares of Common Stock with an exercise price of $.50 per share. 24. On March 12, 1997, pursuant to a Stock Purchase Agreement, the Company issued an aggregate of 71,667 shares of Series C Preferred Stock for an aggregate purchase price of $215,001 to the following persons and entities: Andrea Seratte, CGJR Health Care Services Private Equities, L.P. ('CGJR Health Care'), CGJR II, L.P. ('CGJR II'), and CGJR MF/III, L.P. ('CGJR/MF'). 25. On April 1, 1997, the Company issued 550,000 shares of Common Stock to the SCOI physicians who collectively own Center for Orthopedic Surgery, Inc. ('COSI'). 26. On April 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Brent Mellecker an option to purchase 40,000 shares of Common Stock with an exercise price of $.50 per share. 27. On April 1, 1997, the Company issued 402,723 shares of Common Stock to the following physicians affiliated with Tri-City Orthopaedic Surgery Medical Group, Inc. ('Tri-City'): Neville Alleyne, M.D., James Esch, M.D., James Helgager, M.D., Norman Kane, M.D., Richard Muir, M.D., Leonard Ozerkis, M.D., and Jacob Sharp, M.D. 28. On April 14, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Keith Bolton an option to purchase 50,000 shares of Common Stock with an exercise price of $.50 per share. 29. On April 14, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Lee Bodendorfer an option to purchase 30,000 shares of Common Stock with an exercise price of $.50 per share. 30. On April 15, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Pamela Montgomery an option to purchase 20,000 shares of Common Stock with an exercise price of $.50 per share. 31. On April 30, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted M. Anthony Anderson an option to purchase 25,000 shares of Common Stock with an exercise price of $.50 per share. 32. On May 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Meg Finnegan an option to purchase 20,000 shares of Common Stock with an exercise price of $.50 per share. II-3 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) 33. On May 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Norman Lapin an option to purchase 40,000 shares of Common Stock with an exercise price of $.50 per share. 34. On May 6, 1997 pursuant to a Management Services Agreement and Restricted Stock Agreements, the Company issued an aggregate of 478,348 shares of Common Stock. Such stock was issued in accordance with the following: (a) an aggregate of 445,962 shares to the following physicians affiliated with Lauderdale Orthopaedic Surgeons ('LOS'): Martin Silverstein, M.D., Michael Weiss, M.D., Michael Ruddy, M.D., Raul Aparicio, M.D., Verano Hermida, M.D. and Paul Greenman, D.P.M., Practice Solutions, (b) an aggregate of 27,613 shares to LOS' broker and attorney and (c) 4,773 shares to LOS' accountant, Kenneth A. Ortner, P.A. 35. On May 6, 1997, pursuant to Restricted Stock Agreements, the Company issued 5,000 shares of Common Stock to each of the following physicians affiliated with LOS: Martin Silverstein, M.D., Michael Weiss, M.D., Michael Ruddy, M.D., and Raul Aparicio, M.D. 36. On June 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Sandra Britton an option to purchase 6,000 shares of Common Stock with an exercise price of $.50 per share. 37. On June 1, 1997, the Company issued 59,693 shares of Common Stock to Clive Segil, M.D., under the terms of a Management Services Agreement and Restricted Stock Agreement. 38. On June 1, 1997, pursuant to a Management Services Agreement and Restricted Stock Agreement, the Company issued 84,197 shares of Common Stock to H. Leon Brooks, M.D, a sole practitioner. 39. On June 1, 1997, pursuant to a Non-qualified Stock Option Agreement, the Company granted James Hofmann, M.D. an option to purchase 20,000 shares of Common Stock with an exercise price of $.25 per share. 40. On June 1, 1997, pursuant to a Non-qualified Stock Option Agreement, the Company granted Christopher Dankmeyer, M.D. an option to purchase 10,000 shares of Common Stock with an exercise price of $.25 per share. 41. On June 2, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Dana Reynolds an option to purchase 30,000 shares of Common Stock with an exercise price of $.50 per share. 42. On June 19, 1997, pursuant to a Stock Purchase Agreement, the Company issued 188,072 shares of Series D Convertible Preferred Stock, $.01 par value (the 'Series D Preferred Stock') to Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments and Dr. Nagpal in exchange for promissory notes in the principal amount of $999,999 plus accrued interest previously delivered by the Company to the foregoing. 43. On June 19, 1997, the Company issued an aggregate of 533,335 shares of its Series E Convertible Preferred Stock, $.01 par value (the 'Series E Preferred Stock'), for an aggregate purchase price of $3,200,010 to Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF. 44. On June 23, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Joanna Robben an option to purchase 75,000 shares of Common Stock with an exercise price of $.50 per share. 45. On June 30, 1997, the Company issued warrants to purchase 40,000 shares of Common Stock to HCFP Funding, Inc. ('HCFP Funding') in connection with a senior secured loan in the aggregate principal amount of $3,250,000 from HCFP Funding to the Company and issued warrants to purchase an aggregate of 13,332 shares of Common Stock to the following persons in connection with the guarantee of the loan by such persons: Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners and Oak VI. 46. On July 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Denise Truese an option to purchase 5,000 shares of Common Stock with an exercise price of $.50 per share. 47. On July 1, 1997, the Company issued 45,108 shares of Common Stock to John Zimmerman, D.P.M. under the terms of a Management Services Agreement and Restricted Stock Agreement. II-4 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) 48. On July 1, 1997, the Company issued 97,500 shares of Common Stock to Dr. Nagpal upon conversion of his 1996 accrued compensation and cash bonus for the fiscal year ended December 31, 1996, payable by the Company to him. 49. On July 1, 1997, the Company issued a total of 150,708 shares of Common Stock to Randy C. Watson, M.D., Keith R. Swanson, M.D. and Stephen P. Abelow, M.D., who are affiliated with Surgical Associates of Lake Tahoe, L.P. under the terms of three Management Services Agreements and three Restricted Stock Agreements. 50. On July 1, 1997, pursuant to the terms of a Management Services Agreement and Restricted Stock Agreements, the Company issued an aggregate of 124,385 shares of Common Stock to the following physicians affiliated with Stockdale Podiatry Group, Inc.: Michelle Kraft, D.P.M., Lee Marek, D.P.M., Mark L. Hamilton, D.P.M. and Mark F. Miller, D.P.M. 51. On July 3, 1997, pursuant to a Management Services Agreement and Restricted Stock Agreements, the Company issued 265,725 shares of Common Stock to the following physicians, one broker and one attorney affiliated with Fishman & Stashak, M.D.'s, P.A. (dba Gold Coast Orthopedics), Eric S. Fishman, M.D., Gerald T. Stashak, M.D., Mark A. Rubenstein, M.D., Chaim Arlosoroff, M.D., David J. Menkhaus and Les S. Alt. 52. On July 8, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Nancy Strayer an option to purchase 10,000 shares of Common Stock with an exercise price of $.50 per share. 53. On July 14, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted David Ellwanger an option to purchase 125,000 shares of Common Stock with an exercise price of $.50 per share. 54. On July 21, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Beth Landel an option to purchase 35,000 shares of Common Stock with an exercise price of $.50 per share. 55. On July 24, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted David Coffler an option to purchase 8,000 shares of Common Stock with an exercise price of $.50 per share. 56. On July 31, 1997, the Company issued 166,667 shares of Series E Preferred Stock to HIS Ventures, LLC, an affiliate of Galtney Corporate Services, Inc. ('Galtney'), for an aggregate purchase price of $1,000,000. 57. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Randy Farber an option to purchase 30,000 shares of Common Stock with an exercise price of $.50 per share. 58. On August 1, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Steven Ensinger an option to purchase 15,000 shares of Common Stock with an exercise price of $.60 per share. 59. On August 1, 1997, the Company issued 40,058 shares of Common Stock to Robert Wilson, M.D. under the terms of a Management Services Agreement and Restricted Stock Agreement. 60. On August 1, 1997, the Company issued warrants to purchase an aggregate of 130,000 shares of Series E Preferred Stock, to Comdisco, Inc. ('Comdisco') in connection with the execution of a (i) Master Lease Agreement and (ii) Subordinated Loan and Security Agreement pursuant to which Comdisco made a subordinated loan to the Company in the aggregate principal amount of $5,000,000. 61. On August 1, 1997, the Company issued 157,807 shares of Common Stock to the following physicians affiliated with Sun Valley Orthopaedic Surgeons under the terms of a Management Services Agreement and Restricted Stock Agreements: Jon Gelsey, M.D., Martin Sterusky, M.D. and Robert Waldrip, M.D. 62. On August 1, 1997, the Company issued 95,384 shares of Common Stock to Michael Abrahams, M.D. under the terms of a Management Services Agreement and Restricted Stock Agreement. 63. On August 4, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Helen Arnzen an option to purchase 5,000 shares of Common Stock with an exercise price of $.50 per share. II-5 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) 64. On August 9, 1997, pursuant to an Amended and Restated Management Services Agreement and Restricted Stock Agreements, the Company issued 68,031 shares of Common Stock to the following physicians affiliated with LVBMJ: Thomas Sauer, M.D., Ranjan Sachdev, M.D., Joseph Garbarino, M.D., John Williams, M.D. and Peter W. Kozicky, M.D. 65. On August 18, 1997, pursuant to a Stock Purchase Agreement, the Company issued 41,667 shares of Series E Preferred Stock to Comdisco for an aggregate purchase price of $250,000. 66. On August 21, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Lisa Arnold an option to purchase 5,000 shares of Common Stock with an exercise price of $.60 per share. 67. On August 21, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Marc Guthart an option to purchase 7,000 shares of Common Stock with an exercise price of $.60 per share. 68. On August 22, 1997, the Company issued warrants to purchase an aggregate of 37,500 shares of Series E Preferred Stock to Galtney in connection with a Subordinated Loan from Galtney to the Company. 69. On August 26, 1997, pursuant to a Management Services Agreement and Restricted Stock Agreements, the Company issued 656,902 shares of Common Stock to the following physicians, one attorney and one broker affiliated with Broward Orthopedic Specialties, Inc.: Kalman Blomberg, M.D., Michael Reilly, M.D., Alan Rootman, M.D., Jeffrey Cantor, M.D., John Fernandez, M.D., Terence Matthews, M.D., Steven Naide, M.D., Mitchell Seavey, M.D., David Menkhaus and Les Alt. 70. On August 26, 1997, pursuant to an Incentive Stock Option Agreement, the Company granted Andrew Heeman an option to purchase 5,000 shares of Common Stock with an exercise price of $2.00 per share. 71. On September 4, 1997, the Company issued 38,229 shares of Common Stock to Eradio Arredondo, M.D. under the terms of a Management Services Agreement and Restricted Stock Agreement. 72. On September 5, 1997, the Company issued 72,600 shares of Common Stock to Kramer & Maehrer, LLC under the terms of a Management Services Agreement and Restricted Stock Agreement. 73. On September 9, 1997, the Company issued 36,492 shares of Common Stock to Jeffrey Beitler, M.D. under the terms of a Management Services Agreement and Restricted Stock Agreement. 74. On September 9, 1997, the Company issued and sold $4,000,000 in aggregate principal amount of its subordinated convertible debentures due 2000 to the following: Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, and Health Care Services-BMJ, LLC and HGQ Serv*is Ventures, L.P. affiliates of Hambrecht & Quist, LLC. which are convertible into shares of Common Stock at an initial conversion price equal to $7.20 per share. 75. On September 12, 1997, pursuant to the terms of a Management Services Agreement and Restricted Stock Agreements, the Company issued an aggregate of 126,923 shares of Common Stock to the following physicians affiliated with Physical Medicine and Rehabilitation Associates, Inc.: Marc Levinson, M.D., Joseph Alshon, M.D., Daniel Picard, M.D., Jonathan Tarrash, M.D. and Max Gilbert, M.D. 76. On October 15, 1997, pursuant to the terms of a Note Agreement, the Company issued warrants to purchase an aggregate of 67,500 shares of the Company's Common Stock to the following: Dr. Nagpal, Delphi Ventures, Delphi Bio Investments, Oak Partners, Oak VI and Dr. Fox. 77. On October 16, 1997, pursuant to the terms of a Management Services Agreement and Restricted Stock Agreements, the Company issued an aggregate of 282,254 shares of Common Stock to the following physicians affiliated with OSA: Dr. Eidelson, John VanHouten, M.D., Robert Zann, M.D., Eric Shapiro, M.D., Edgar Handal, M.D. and Brandon Luskin, M.D. 78. On October 26, 1997, pursuant to the terms of Restricted Stock Agreements, the Company issued an aggregate of 57,036 shares of Common Stock to the following physicians affiliated with Orthopaedic Management Network, Inc.: Gustavo Armendariz, M.D., Philip Bowman, M.D., Roberto Carreon, M.D., Thomas Carter, M.D., Richard Collins, M.D., Dennis Crandall, M.D., Jody Daggett, M.D., Richard Daley, J.D., Jack II-6 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.--(CONTINUED) Davis, M.D., Sherwood Duhon, M.D., Thomas Erickson, M.D., Norman Fee, M.D., Jonathan Fox, M.D., Charles Gauntt, M.D., Lawrence Green, M.D., Mark Greenfield, M.D., Dan Heller, M.D., Peter Herwick, M.D., Robert Johnson, M.D., Robert Kasa, M.D., Douglas Kelly, M.D., Stuart Kozinn, M.D., Richard Lane, M.D., John Mahon, M.D., Bruce Mallin, M.D., Bert McKinnon, M.D., Stephen Milliner, M.D., Gerald Moczynski, M.D., Neil Motzkin, M.D., Paul Palmer, M.D., William Quinlan, M.D., Vincent Russo, M.D., Ronald Sandler, M.D., Saul Schreiber, M.D., Irwin Shapiro, M.D., Victor Tseng, M.D., Larry Verhulst, M.D., John Whisler, M.D., Robert White, M.D., Ralph Wilson, M.D., Mark Zachary, M.D. and Jon Zoltan, M.D. 79. On October 28, 1997, pursuant to the terms of a Management Services Agreement and Restricted Stock Agreements, the Company issued an aggregate of 52,972 shares of Common Stock to the following physician affiliated with LOAS: Bruce Young, M.D., Dominic Kleinhenz, M.D., William McKay, M.D., George Kolettis, M.D. and Thomas Goberville, M.D. 80. On October 31, 1997, pursuant to the terms of a Management Services Agreement and Restricted stock Agreements, the Company issued an aggregate of 260,237 shares of Common Stock to the following physicians affiliated with BIOS: David A. Krant, M.D., Jeffrey B. Worth, M.D., Jeffrey A. Crastnopol, M.D., Marc Z. Hammerman, M.D., Gary B. Schwartz, M.D., Marshall E. Stauber, M.D., Thomas A. Hoffeld, M.D. and Phillip E. Greenbarg, M.D. II-7 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ------------------------------------------------------------------------------------------------- *1.1 -- Form of Underwriting Agreement. *3.1 -- Restated Certificate of Incorporation of the Registrant. ***3.2 -- By-laws of the Registrant. ***4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan. *5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) regarding legality of securities being offered. **10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures and Delphi BioInvestments. ***10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, and Delphi BioInvestments. ***10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians affiliated with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement Trust. ***10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR Health Care, CGJR II and CGJR/MF. *10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF. *10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures, LLC. *10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco. *10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding. ***10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP Funding. *10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended, between the Company and Comdisco. *10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company. *10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the Company and Galtney. *10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners, Health Care Services--BMJ, LLC and HGQ Serv*is Ventures, L.P. ***10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company and payable to the order of Dr. Nagpal, dated January 10, 1997. ***10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company and payable to the order of Dr. Nagpal, dated January 10, 1997. ***10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996, among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Scheer and the stockholders named therein. **10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996. ***10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among the Company, LVBMJ amd certain physicians affiliated with LVBMJ. ***10.19 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and OAB. 10.20 -- Amended and Restated Restricted Stock Agreement, dated as of September 9, 1997, among the Company, LVBMJ and certain physicians affiliated with LVBMJ. ***10.21 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company and STSC. ***10.22 -- Asset Purchase Agreement, dated as of November 1, 1996, between the Company and STSC.
II-8 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ------------------------------------------------------------------------------------------------- ***10.23 -- Restricted Stock Agreement, dated as of December 23, 1996, between the Company, STSC and certain physicians affiliated with STSC. ***10.24 -- Stockholder Non-Competition Agreement, dated as of December 23, 1996, among the Company, STSC and the STSC physicians. **10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the Company, Tri-City and the indemnifying persons identified therein. ***10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City. **10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company, Tri-City and certain physicians affiliated with Tri-City. ***10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company, Tri-City and certain physicians affiliated with Tri-City. **10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company and SCOI. ***10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and SCOI. **10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, among the Company, SCOI, certain physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI and Oak Partners. ***10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company, SCOI and certain physicians affiliated with SCOI. **10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company, LOS and certain physicians affiliated with LOS. ***10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS. **10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS and certain physicians affiliated with LOS. ***10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company, LOS and certain physicians affiliated with LOS. **10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the Company, Sun Valley and the indemnifying persons thereto. **10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun Valley. **10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain physicians affiliated with Sun Valley. **10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain physicians affiliated with Sun Valley. **10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the Company, Gold Coast and the physicians affiliated with Gold Coast. **10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company and Gold Coast. **10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and certain physicians affiliated with Gold Coast. ***10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and certain physicians affiliated with Gold Coast. **10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast. ***10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal, Dr. Fox, Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI. *10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company and OSA. *10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and OSA.
II-9 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.--(CONTINUED)
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ------------------------------------------------------------------------------------------------- *10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and certain physicians affiliated with OSA. *10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company and certain physicians affiliated with OSA. *10.51 -- Management Services Agreement, effective as of September 1, 1997, between the Company and BIOS. *10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and BIOS. *10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and certain physicians affiliated with BIOS. *10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company and certain physicians affiliated with BIOS. *10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company and LOAS. *10.56 -- Asset Purchase Agreement effective as of September 1, 1997, between the Company and certain affiliates of LOAS. *10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and certain physicians affiliated with LOAS. *10.58 -- Amended and Restated Practice Management Services Agreement dated as of September 26, 1997, among the Company and certain physicians affiliated with Orthopaedic Management Network, Inc. *10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and certain physicians affiliated with Orthopaedic Management Network, Inc. *10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the Company, OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the shareholders' representative named therein. **10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI. ***11.1 -- Schedule of Calculation of Earnings Per Share. ***21 -- List of Subsidiaries. *23.1 -- Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its opinion to be filed as Exhibit 5 hereto). **23.2 -- Consent of Ernst & Young LLP, independent certified public accountants. ***24 -- Powers of Attorney (included on page II-10). ***27 -- Financial Data Schedule.
- ------------------------ * To be filed by amendment. ** Filed herewith. *** Previously filed. (b) Financial Statement Schedules All schedules are omitted because they are inapplicable or the requested information is shown in the consolidated financial statements or related notes. ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the DGCL, the Certificate of Incorporation and By-laws, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is II-10 ITEM 17. UNDERTAKINGS.--(CONTINUED) against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-11 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOCA RATON, STATE OF FLORIDA ON THE 6TH DAY OF NOVEMBER, 1997. BMJ MEDICAL MANAGEMENT, INC. By: /s/ Naresh Nagpal ---------------------------------- Name: Naresh Nagpal, M.D. Title: President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON THE 6TH DAY OF NOVEMBER, 1997, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURE TITLE - ------------------------------------------ ------------------------------------------- /s/ NARESH NAGPAL President, Chief Executive Officer and - ------------------------------------------ Director (Principal Executive Officer) Naresh Nagpal, M.D. /s/ DAVID H. FATER Executive Vice President, Chief Financial - ------------------------------------------ Officer and Director (Principal Financial David H. Fater and Accounting Officer) Director - ------------------------------------------ Georges Daou Director - ------------------------------------------ Stewart G. Eidelson, M.D. * Director - ------------------------------------------ Ann H. Lamont * Director - ------------------------------------------ Donald J. Lothrop * Director - ------------------------------------------ James M. Fox, M.D. /s/ DAVID H. FATER *By -------------------------------------- David H. Fater, Attorney-in-Fact
II-12 EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- --------------------------------------------------------------------------------------------- ----------- *1.1 -- Form of Underwriting Agreement. *3.1 -- Restated Certificate of Incorporation of the Registrant. ***3.2 -- By-laws of the Registrant. ***4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan. *5 -- Opinion of O'Sullivan Graev & Karabell, LLP (including the consent of such firm) regarding legality of securities being offered. **10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures and Delphi BioInvestments. ***10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, and Delphi BioInvestments. ***10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians affiliated with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement Trust. ***10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR Health Care, CGJR II and CGJR/MF. *10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI, Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF. *10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures, LLC. *10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco. *10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding. ***10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP Funding. *10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended, between the Company and Comdisco. *10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company. *10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the Company and Galtney. *10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners, Health Care Services--BMJ, LLC and HGQ Serv*is Ventures, L.P. ***10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company and payable to the order of Dr. Nagpal, dated January 10, 1997. ***10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company and payable to the order of Dr. Nagpal, dated January 10, 1997. ***10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996, among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Scheer and the stockholders named therein. **10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996. ***10.18 -- Amended and Restated Management Services Agreement, effective as of July 1, 1997, among the Company, LVBMJ amd certain physicians affiliated with LVBMJ. ***10.19 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and OAB. 10.20 -- Amended and Restated Restricted Stock Agreement, dated as of September 9, 1997, among the Company, LVBMJ and certain physicians affiliated with LVBMJ. ***10.21 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company and STSC. ***10.22 -- Asset Purchase Agreement, dated as of November 1, 1996, between the Company and STSC.
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- --------------------------------------------------------------------------------------------- ----------- ***10.23 -- Restricted Stock Agreement, dated as of December 23, 1996, between the Company, STSC and certain physicians affiliated with STSC. ***10.24 -- Stockholder Non-Competition Agreement, dated as of December 23, 1996, among the Company, STSC and the STSC physicians. **10.25 -- Management Services Agreement, effective as of April 1, 1997, as amended, among the Company, Tri-City and the indemnifying persons identified therein. ***10.26 -- Asset Purchase Agreement, dated as of April 1, 1997, between the Company and Tri-City. **10.27 -- Restricted Stock Agreement, dated as of April 1, 1997, as amended, among the Company, Tri-City and certain physicians affiliated with Tri-City. ***10.28 -- Stockholder Non-Competition Agreement, dated as of April 1, 1997, among the Company, Tri-City and certain physicians affiliated with Tri-City. **10.29 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company and SCOI. ***10.30 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and SCOI. **10.31 -- Restricted Stock Agreement, effective as of November 1, 1996, among the Company, SCOI, certain physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI and Oak Partners. ***10.32 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company, SCOI and certain physicians affiliated with SCOI. **10.33 -- Management Services Agreement, effective April 1, 1997, as amended, among the Company, LOS and certain physicians affiliated with LOS. ***10.34 -- Asset Purchase Agreement, effective as of April 1, 1997, between the Company and LOS. **10.35 -- Restricted Stock Agreement, dated as of May 6, 1997, as amended, among the Company, LOS and certain physicians affiliated with LOS. ***10.36 -- Stockholder Non-Competition Agreement effective as of April 1, 1997, among the Company, LOS and certain physicians affiliated with LOS. **10.37 -- Management Services Agreement, effective as of July 1, 1997, as amended, among the Company, Sun Valley and the indemnifying persons thereto. **10.38 -- Asset Purchase Agreement, effective as of July 1, 1997, between the Company and Sun Valley. **10.39 -- Restricted Stock Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain physicians affiliated with Sun Valley. **10.40 -- Stockholder Non-Competition Agreement, dated as of July 1, 1997, among the Company, Sun Valley and certain physicians affiliated with Sun Valley. **10.41 -- Management Services Agreement, effective as of June 1, 1997, as amended, among the Company, Gold Coast and the physicians affiliated with Gold Coast. **10.42 -- Asset Purchase Agreement, effective as of June 1, 1997, as amended, between the Company and Gold Coast. **10.43 -- Restricted Stock Agreement, effective June 1, 1997, as amended, among the Company and certain physicians affiliated with Gold Coast. ***10.44 -- Stockholder Non-Competition Agreement, dated August 8, 1997, among the Company and certain physicians affiliated with Gold Coast. **10.45 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast. ***10.46 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal, Dr. Fox, Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI. *10.47 -- Management Services Agreement, effective as of September 1, 1997, between the Company and OSA. *10.48 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and OSA. *10.49 -- Restricted Stock Agreement,dated as of October 16, 1997, among the Company, OSA and certain physicians affiliated with OSA.
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE NO. - ----------- --------------------------------------------------------------------------------------------- ----------- *10.50 -- Stockholder Non-Competition Agreement dated as of October 16, 1997, among the Company and certain physicians affiliated with OSA. *10.51 -- Management Services Agreement, effective as of September 1, 1997, between the Company and BIOS. *10.52 -- Asset Purchase Agreement, effective as of September 1, 1997, between the Company and BIOS. *10.53 -- Restricted Stock Agreement dated as of October 31, 1997, among the Company, BIOS and certain physicians affiliated with BIOS. *10.54 -- Stockholder Non-Competition Agreement dated as of October 31, 1997, among the Company and certain physicians affiliated with BIOS. *10.55 -- Management Services Agreement effective as of September 1, 1997, between the Company and LOAS. *10.56 -- Asset Purchase Agreement effective as of September 1, 1997, between the Company and certain affiliates of LOAS. *10.57 -- Restricted Stock Agreement dated as of October 28, 1997, among the Company, LOAS and certain physicians affiliated with LOAS. *10.58 -- Amended and Restated Practice Management Services Agreement dated as of September 26, 1997, among the Company and certain physicians affiliated with Orthopaedic Management Network, Inc. *10.59 -- Restricted Stock Agreement dated as of September 26, 1997, among the Company and certain physicians affiliated with Orthopaedic Management Network, Inc. *10.60 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the Company, OMNI Acquisition Corporation, Orthopaedic Management Network, Inc. and the shareholders' representative named therein. **10.61 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI. ***11.1 -- Schedule of Calculation of Earnings Per Share. ***21 -- List of Subsidiaries. *23.1 -- Consent of O'Sullivan Graev & Karabell, LLP (to be included as part of its opinion to be filed as Exhibit 5 hereto). **23.2 -- Consent of Ernst & Young LLP, independent certified public accountants. ***24 -- Powers of Attorney (included on page II-10). ***27 -- Financial Data Schedule.
- ------------------ * To be filed by amendment. ** Filed herewith. *** Previously filed. EX-10.1 2 STOCK PURCHASE AGREEMENT Exhibit 10.1 ================================================================================ STOCK PURCHASE AGREEMENT DATED AS OF MAY 6, 1996 AMONG BONE, MUSCLE AND JOINT, INC. AND THE INVESTORS IDENTIFIED HEREIN ================================================================================ BONE, MUSCLE AND JOINT, INC. As of May 6, 1996 To Each of the Parties Named on Schedule I Attached Hereto: Stock Purchase Agreement Ladies and Gentlemen: The undersigned, BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Corporation"), hereby agrees with each of the parties listed on Schedule I hereto (each, an "Investor," and, collectively, the "Investors") as follows: SECTION 1. Issuance and Sale of Common Stock and Series A Preferred Stock; Closing. 1.1 Authorization of Shares. On the terms and subject to the conditions hereof, the Corporation has authorized the issuance and sale at the Closing (as hereinafter defined) of an aggregate of (a) 1,175,000 shares (the "Common Shares") of common stock, $.001 par value (the "Common Stock"), of the Corporation and (b) 999,999 shares (the "Series A Preferred Shares;" and together with the Common Shares, the "Shares") of Series A Convertible Preferred Stock, $.01 par value (the "Series A Preferred Stock"), of the Corporation. 1.2 Agreement to Purchase and Sell the Shares. At the Closing, the Corporation is selling to each Investor, and each Investor is severally purchasing from the Corporation, upon the terms and subject to the conditions hereinafter set forth, that number of Common Shares and Series A Preferred Shares set forth opposite the name of such Investor on Schedule I hereto, at a purchase price of $.01 per Common Share and $1.00 per Series A Preferred Share. 1.3 The Closing. The closing (the "Closing") hereunder with respect to the Shares is taking place on the date hereof at the offices of O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, New York, New York 10112, simultaneously with the execution and delivery of this Agreement (the date hereof being sometimes referred to herein as the "Closing Date"). 1.4 Delivery of Shares to the Investors. At the Closing, the Corporation shall deliver to each Investor certificates representing that number of Common Shares and Series A Preferred Shares set forth opposite such Investor's name on Schedule I, in each case registered in the name of such Investor and dated the Closing Date. Delivery to each Investor of the Common Shares and Series A Preferred Shares to be purchased by such Investor hereunder shall be made against receipt by the Corporation of a check payable to the Corporation, or a wire transfer to an account designated by the Corporation, in either case in an amount equal to the full amount of the purchase price for such Common Shares and Series A Preferred Shares being purchased by such Investor. SECTION 2. Representations and Warranties of the Corporation. The Corporation hereby represents and warrants to the Investors as follows: 2.1 Organization. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Corporation has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated hereby. The Corporation will be qualified to do business as a foreign corporation in the State of Florida and is not qualified to do business as a foreign corporation in any other jurisdiction and the failure to be so qualified in any such other jurisdiction will not have a material adverse effect on the Corporation's business or financial condition. 2.2 Capitalization. The authorized capital stock of the Corporation immediately upon consummation of the transactions contemplated hereby shall consist of: (a) 10,000,000 shares of Common Stock, of which (i) 1,175,000 shares will be validly issued and outstanding, fully paid and nonassessable; (ii) 225,000 shares will be reserved for issuance to Naresh Nagpal, M.D. ("Dr. Nagpal") pursuant to that certain letter of employment dated as of the date hereof (the "Employment Letter") between the Corporation and Dr. Nagpal in the form of Exhibit A attached hereto; and (iii) 1,250,000 shares (including those shares referred to in Section 2.2(a)(ii) hereof) will be reserved for issuance to senior management employees pursuant to the Corporation's 1996 Stock Option Plan (the "Stock Option Plan"); and (b) 5,000,000 shares of preferred stock, $.01 par value (the "Preferred Stock"), of the Corporation, of which (i) 999,999 shares will be designated Series A Preferred Stock and all of such shares will be validly issued and outstanding, fully paid and nonassessable and (ii) 999,999 shares will be designated Series A-1 Preferred Stock and all of such shares will be reserved for issuance upon conversion of the Series A Preferred Stock pursuant to Section 6 of Article IV of the Certificate of Designation. 2 Except for Common Stock issuable upon conversion of the Series A Preferred Shares and pursuant to the Stock Option Plan and the Employment Letter and upon the consummation of the transactions contemplated hereby, there will be no (i) outstanding warrants, options, agreements, convertible securities or other commitments or instruments pursuant to which the Corporation is or may become obligated to issue or sell any shares of capital stock or other securities of the Corporation or (ii) preemptive or similar rights to purchase or otherwise acquire shares of capital stock of the Corporation pursuant to any provision of law, the Certificate of Incorporation or By-laws of the Corporation or any agreement to which the Corporation is party or otherwise. 2.3 Authorization. The execution, delivery and performance by the Corporation of this Agreement and the agreements referred to herein or contemplated hereby to which the Corporation is a party (collectively, the "Related Agreements") and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of the Corporation, and this Agreement and each of the Related Agreements has been duly executed and delivered by the Corporation and constitutes the valid and binding obligation of the Corporation, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws relating to or affecting the rights and remedies of creditors and debtors, and equitable principles generally, regardless of whether such principles are considered in a proceeding at equity or at law. The execution, delivery and performance of this Agreement and each of the Related Agreements and compliance with the provisions hereof and thereof by the Corporation will not (a) violate in any material respect any law or statute or order, judgment or decree of any court, administrative agency or other governmental body applicable to the Corporation or its properties or assets or (b) conflict in any material respect with or result in any material breach of any of the terms or provisions or constitute (with due notice or lapse of time, or both) a default under the Certificate of Incorporation or By-laws of the Corporation or any note, indenture, mortgage, lease agreement or other material agreement, contract or instrument to which the Corporation is a party or by which it or any of its properties or assets may be bound or affected. 2.4 No Consent or Approval Required. No authorization, consent, approval or other order of, or declaration to or filing with, any governmental agency or body or other person or entity is required for the valid authorization, execution, delivery and performance by the Corporation of this Agreement or any of the Related Agreements. 2.5 Authorization of Shares. The issuance, sale and delivery of the Shares have been duly authorized by all requisite corporate action of the Corporation and when issued, sold and delivered in accordance with the terms of this Agreement, the 3 Shares will be validly issued and outstanding, fully paid and nonassessable and will not be subject to preemptive or other similar rights of the stockholders of the Corporation or others. 2.6 Commencement of Business. Since its inception, the Corporation has operated as a development stage company and the Corporation (i) is not a party to any written or oral contract, agreement or understanding, other than as contemplated by this Agreement or any Related Agreement; (ii) does not have any liabilities of any nature whatsoever (matured or unmatured, fixed or contingent), except the expenses that it has incurred in connection with its incorporation and organization, legal expenses and other miscellaneous expenses incident to its operations prior to the date hereof or in connection with or in preparation for the transactions contemplated hereby; and (iii) is not a party to or directly or indirectly bound by any indenture, mortgage, deed of trust or other agreement or instrument relating to the borrowing of money (written or oral). 2.7 Litigation. There are no actions, suits, proceedings or investigations pending against the Corporation before any court or governmental agency, nor to the best of the Corporation's knowledge, is there any action, suit, proceeding or investigation pending or threatened affecting the Corporation's properties, assets or operations or its right to employ or retain any of its employees or consultants. 2.8 Use of Proceeds. The net proceeds received by the Corporation from the sale of the Shares shall be used by the Corporation for general working capital purposes as determined by the Board of Directors from time to time. SECTION 3. Representations and Warranties of the Investors. Each Investor hereby severally represents and warrants to the Corporation as follows: 3.1 Authorization. The execution, delivery and performance by such Investor of this Agreement and the Related Agreements to which such Investor is a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of such Investor, and this Agreement and each of the Related Agreements has been duly executed and delivered by such Investor and constitute the valid and binding obligations of such Investor, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws relating to or affecting the rights and remedies of creditors and debtors and equitable principles generally, regardless of whether such principles are considered in a proceeding at equity or at law. The execution, delivery and performance of this Agreement and each of the Related Agreements and compliance with the provisions hereof and thereof by such Investor will not (a) violate in any material respect any law or statute or order, judgment or decree of any court, administrative agency or other governmental body 4 applicable to such Investor or its properties or assets or (b) conflict in any material respect with or result in any material breach of any of the terms or provisions or constitute (with due notice or lapse of time, or both) a default under the charter or by-laws or agreement of partnership or any similar organizational document of such Investor or any note, indenture, mortgage, lease agreement or other material agreement, contract or instrument to which such Investor is a party or by which it or any of its properties or assets may be bound or affected. 3.2 Accredited Investor. Such Investor is an "accredited investor" (as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")). 3.3 Investor Intent. Such Investor is acquiring the Shares for its own account, for investment and not with a view to, or for resale in connection with, any distribution thereof, nor with any present intention of distributing or reselling the same or any part thereof in any transactions that would be in violation of the Securities Act or any state securities or "blue-sky" laws. 3.4 Restricted Securities. Such Investor understands (i) that the Shares will not be registered under the Securities Act or any state securities or "blue-sky" laws by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act or any state securities or "blue-sky" laws, (ii) that the Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or any state securities or "blue-sky" laws or is exempt from such registration, (iii) that the Corporation is under no obligation to so register any shares of Common Stock, except as provided in the Registration Rights Agreement (as hereinafter defined) and (iv) that the certificate(s) evidencing the shares of Common Stock and Series A Preferred Stock will be imprinted with a legend that prohibits the transfer substantially as set forth in Section 6.2(b) hereof unless they are registered or such registration is not required. 3.5 Rule 144. Such Investor understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to such Investor) promulgated under the Securities Act ("Rule 144") depends on the satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances only in limited amounts. 3.6 Access to Information; Experience. Such Investor has been furnished with or has had access during the course of this transaction to all information necessary to enable such Investor to evaluate the merits and risks of an investment in the Corporation and such Investor has had an opportunity to discuss with representatives of the Corporation the business and financial affairs of the Corporation. Such Investor has conducted its own investigation and analysis of the business and its investment in the Shares and is not relying on the Corporation's business plan or any information or opinions contained therein in making its decision to purchase the Shares. Such Investor has 5 substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Corporation such that the Investor is capable of evaluating the merits and the risks of its investment in the Corporation and has the capacity to protect such Investor's own interests in making this investment in the Corporation. Such Investor can afford to suffer a complete loss of its investment in the Shares. SECTION 4. Conditions Precedent to Obligations of Investors. The respective several obligations of the Investors to purchase and pay for the Shares on the Closing Date, are subject to the following conditions precedent: 4.1 Corporate Proceedings; Consents; Etc. All corporate and/or other proceedings to be taken by the Corporation, its officers, directors and stockholders and all waivers and consents to be obtained by the Corporation in connection with the transactions contemplated by this Agreement and each of the Related Agreements shall have been taken or obtained. 4.2 Representations and Warranties. The representations and warranties of the Corporation contained in Section 2 shall be true and correct in all material respects. 4.3 Blue Sky Matters. All consents, approvals, qualifications and/or registrations required to be obtained or effected under any applicable state securities or "blue-sky" laws in connection with the execution and delivery of the Shares shall have been obtained or effected. 4.4 Election of Directors. Effective upon the Closing, the authorized number of directors of the Corporation shall be initially fixed at three and the following persons shall have been duly elected to serve as the directors of the Corporation: Ann H. Lamont, Donald I. Lothrop and Naresh Nagpal, M.D. 4.5 Filing of Certificate of Designation. A Certificate of Designation in the form of Exhibit B attached hereto setting forth the designations and preferences of the Series A Preferred Stock and the Common Stock shall have been filed with, and accepted by, the Secretary of State of the State of Delaware, and evidence of such filing and acceptance, in form satisfactory to the Investors, shall have been made available to the Investors. 4.6 Stockholders Agreement. The Corporation and each of the other Investors shall have executed and delivered a 6 stockholders agreement (the "Stockholders Agreement") substantially in the form of Exhibit C attached hereto. 4.7 Registration Rights Agreement. The Corporation and each of the other Investors shall have executed and delivered a registration rights agreement (the "Registration Rights Agreement") substantially in the form of Exhibit D attached hereto. 4.8 Stock Option Plan. The Board of Directors and the stockholders of the Corporation shall have adopted the Stock Option Plan substantially in the form of Exhibit E attached hereto, including the forms of stock option agreements annexed thereto as Attachments 1, 2 and 3. SECTION 5. Conditions Precedent to Obligations of Corporation. The obligation of the Corporation to issue and sell the Shares on the Closing Date is subject to the following conditions precedent: 5.1 Representations and Warranties. The representations and warranties of the Investors contained in Section 3 shall be true and correct in all material respects. 5.2 Blue Sky Matters. All consents, approvals, qualifications and/or registrations required to be obtained or effected under any applicable state securities or "blue-sky" laws in connection with the execution and delivery of the Shares shall have been obtained or effected. 5.3 Stockholders Agreement. The Stockholders Agreement shall have been executed and delivered by the Corporation and each of the Investors. 5.4 Registration Rights Agreement. The Registration Rights Agreement shall have been executed and delivered by the Corporation and each of the Investors. 5.5 Payment of Purchase Price. Each Investor shall have delivered the full purchase price payable by such Investor hereunder as specified in Section 1.2 hereof. SECTION 6. Affirmative Covenants. 6.1 Information Rights. The Corporation agrees to provide each of the Investors with the following: (a) General. The Corporation will permit such persons on reasonable notice to visit and inspect during normal business hours any of the properties of the Corporation, to examine its books and records, to make copies thereof and to take extracts therefrom and to discuss its affairs, finances and accounts with, and to be advised as to the same by, its officers, consultants, counsel and accountants, at such reasonable times as 7 such persons may desire. In addition, the Corporation will provide to such persons such other information as from time to time may reasonably be requested. (b) Monthly Statements. Within 30 days after the end of each monthly accounting period, an unaudited consolidated financial report of the Corporation, prepared in accordance with generally accepted accounting principles consistently applied, except that such financial statements shall not include footnotes and shall be subject to normal year-end audit adjustments, including, with respect to such monthly accounting period, the following: (i) a profit and loss statement for such monthly accounting period, together with a cumulative profit and loss statement from the first day of the current year to the last day of such monthly accounting period; (ii) a balance sheet as at the last day of such monthly accounting period; (iii) a statement of cash flow for such monthly accounting period on a cumulative basis for the fiscal year to date; and (iv) a comparison between the actual figures for such monthly accounting period, the comparable figures (with respect to clauses (i) and (ii) only) for the prior year (if any) and the comparable figures included in the Budget (as hereinafter defined) for such monthly accounting period. (c) Quarterly Reports. As soon as available, but not later than 45 days after the end of each quarterly accounting period, an unaudited consolidated financial report of the Corporation, prepared in accordance with generally accepted accounting principles consistently applied, except that such financial statements shall not include footnotes and shall be subject to normal year-end audit adjustments, containing the information contemplated by Sections 6.1(b)(i)-(iv) with respect to such quarterly accounting period. (d) Annual Reports. As soon as available, but not later than 120 days after the end of each fiscal year of the Corporation, audited financial statements of the Corporation, which shall include a statement of cash flows and statement of operations for such fiscal year and a balance sheet as at the last day thereof, each prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by the report of a firm of independent certified public accountants of recognized standing selected by the Board of Directors of the Corporation (the "Accountants"). (e) Budget. With respect to each calendar year commencing with the calendar year ending December 31, 1997, the Corporation shall, not later than March 31 of each such calendar 8 year, prepare a budget (the "Budget") of the Corporation (containing monthly and quarterly breakdowns of income (loss), balance sheet items and cash flow). The Budget shall be accepted as the Budget for such fiscal year when it has been approved by the Board of Directors of the Corporation. The Budget shall be reviewed by the Corporation periodically and all changes therein and all material deviations therefrom shall be resubmitted to the Board of Directors in advance and shall be accepted when approved by the Board of Directors (including at least one director designated pursuant to Sections 2(a)(ii) and (iii) of the Stockholders Agreement.) (f) Termination of Information Rights. Notwithstanding the foregoing provisions of this Section 6.1, the rights of the Investors and the obligations of the Corporation under said Section 6.1 shall terminate upon the consummation of the initial underwritten public offering of the Common Stock of the Corporation. 6.2 Transfer of Securities. (a) Restrictions on Transfer. Each Investor acknowledges that the Shares have not been registered under the Securities Act, that such shares are being issued pursuant to an exemption from registration under the Securities Act and that such shares constitute "restricted securities" under Rule 144. Accordingly, the Shares held by the Investors shall not be sold, transferred, assigned, pledged, encumbered or otherwise disposed of (each, a "Transfer") except upon the conditions specified in this Section 6.2, which conditions are intended to ensure compliance with the provisions of the Securities Act and this Agreement. (b) Restrictive Legend. Each certificate for shares of Common Stock held by the Investors and each certificate for any such securities issued to subsequent transferees of any such certificate shall (unless otherwise permitted by the provisions of Sections 6.2(c) and 6.2(d)) be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 6.2 OF THE STOCK PURCHASE AGREEMENT DATED AS OF MAY 6, 1996, AMONG BONE, MUSCLE AND JOINT, INC. AND THE OTHER PARTIES THERETO, AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN 9 REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF BONE, MUSCLE AND JOINT, INC." (c) Notice of Transfer. Each Investor agrees, prior to any Transfer of the Shares, to give written notice to the Corporation of such Investor's intention to effect such Transfer and to comply in all other respects with the provisions of this Section 6.2. Each such notice shall describe the manner and circumstances of the proposed Transfer and shall be accompanied by the written opinion, addressed to the Corporation, of counsel for the holder of such shares, stating that in the opinion of such counsel (which opinion and counsel shall be reasonably satisfactory to the Corporation), such proposed Transfer does not involve any transaction requiring registration or qualification of such shares under the Securities Act or the securities or "blue-sky" laws of any relevant state of the United States; provided, however, that no such opinion of counsel shall be necessary for a Transfer pursuant to Rule 144. Such Investor shall thereupon be entitled to Transfer such shares in accordance with the terms of the notice delivered by it to the Corporation. Each certificate or other instrument evidencing the securities issued upon the Transfer of any such shares (and each certificate or other instrument evidencing any untransferred balance of such shares) shall bear the legend set forth in Section 6.2(b) unless (a) in such opinion of counsel, registration of any future Transfer is not required by the applicable provisions of the Securities Act and applicable state securities or "blue-sky" laws or (b) the Corporation shall have waived the requirement of such legends; provided, however, that such legend shall not be required on any certificate or other instrument evidencing the securities issued upon such Transfer in the event such Transfer shall be made in compliance with the requirements of Rule 144. No Investor shall Transfer any shares of Common Stock until such opinion of counsel has been given (unless waived by the Corporation or unless such opinion is not required in accordance with the provisions of this Section 6.2). (d) Removal of Legends, Etc. Notwithstanding the foregoing provisions of this Section 6.2, the restrictions imposed by this Section 6.2 upon the transferability of any shares of the capital stock of the Corporation held by the Investors shall cease and terminate when (a) any such shares are sold or otherwise disposed of pursuant to an effective registration statement under the Securities Act or as otherwise contemplated by Section 6.2(c) and, pursuant to Section 6.2(c), the securities so transferred are not required to bear the legend set forth in Section 6.2(b) or (b) the holder of such shares has met the requirements for Transfer of such shares pursuant to subparagraph (k) of Rule 144. Whenever the restrictions imposed by this Section 6.2 shall terminate, as herein provided, each Investor holding shares as to which such restrictions have terminated shall be entitled to receive from the Corporation, without expense, a new certificate not bearing the restrictive 10 legend set forth in Section 6.2(b) and not containing any other reference to the restrictions imposed by this Section 6.2. SECTION 7. Expenses. The Corporation shall pay its expenses and the expenses of each of the Investors in connection with the preparation for and consummation of the transactions contemplated by this Agreement; provided, however, that in the event the transactions contemplated hereby are not consummated, the Corporation and each of the Investors shall bear their respective expenses. SECTION 8. Key-Person Insurance. Within 120 days after the date hereof, the Corporation shall obtain, and thereafter maintain in full force and effect, for so long as Dr. Nagpal is employed as an executive officer of the Corporation, key-person term life insurance coverage on Dr. Nagpal in an amount equal to $1,000,000. SECTION 9. Notices. All notices, advices and communications to be given or otherwise made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument delivered in person or by telecopier or duly sent by first class registered or certified mail, return receipt requested, postage prepaid, or by overnight courier, addressed to such party at the address set forth below or at such other address as may hereafter be designated in writing by the addressee to the addresser listing all parties: (a) if to the Corporation, to: Bone, Muscle and Joint, Inc. 2378 N.W. 60th Street Boca Raton, Florida 33496 Attention: Naresh Nagpal, M.D. President Telecopier: 407-998-4649 with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Lawrence G. Graev, Esq. Telecopier: (212) 408-2420; and (b) if to the Investors, to their respective addresses set forth on Schedule I; or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance herewith. Any such notice or communication shall be deemed to have been delivered and received (i) in the case of personal delivery or delivery by telecopier, on the date of such delivery, (ii) in the case of nationally-recognized overnight courier, on the next business day after the date when sent and 11 (iii) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted. As used in this Section 9, "business day" shall mean any day other than a day on which banking institutions in the State of New York are legally closed for business. SECTION 10. Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall bind and inure to the benefit of the parties hereto and the respective successors and permitted assigns of the parties hereto. SECTION 11. Amendments. The terms and provisions of this Agreement may only be amended or waived with the written consent of the Corporation and Investors holding at least 80% of the Common Shares and the Series A Preferred Shares. SECTION 12. Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. SECTION 13. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 14. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. SECTION 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein (without reference to any principles of conflicts of laws). * * * * 12 IN WITNESS WHEREOF, each of the undersigned has caused this Stock Purchase Agreement to be executed as of the date first written above. BONE, MUSCLE AND JOINT, INC. By:__________________________________________ Naresh Nagpal, M.D. President and Chief Executive Officer INVESTORS: OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: OAK ASSOCIATES VI, LIMITED PARTNERSHIP, its General Partner By:__________________________________________ Name: Ann H. Lamont Title: General Partner OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: OAK VI AFFILIATES, LLC, its General Partner By:__________________________________________ Name: Ann H. Lamont Title: Managing Member DELPHI VENTURES III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By:__________________________________________ Name: Title: DELPHI INVESTMENTS III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By:___________________________________________ Name: Title: SCHEER & COMPANY, INC. By:___________________________________________ Name: Title: ------------------------------------------- Naresh Nagpal, M.D. EX-10.17 3 EMPLOYMENT AGREEMENT BONE, MUSCLE AND JOINT, INC. 2378 N.W. 60th Street Boca Raton, Florida 33496 May 6, 1996 Naresh Nagpal, M.D. 2378 N.W. 60th Street Boca Raton, Florida 33496 Employment Letter Dear Naresh: The following terms summarize the agreement between you and Bone, Muscle and Joint, Inc. (the "Corporation") with respect to your employment with the Corporation. 1. You shall be employed by the Corporation as Chairman of the Board, President and Chief Executive Officer commencing on January 2, 1996, and shall perform duties and services consistent with such positions as may reasonably be assigned to you by the Board of Directors of the Corporation. During your employment with the Corporation, you shall devote your best efforts and your full business time and attention to the business and affairs of the Corporation; provided, however, that you may serve as director on the boards of directors of up to three other business entities. 2. The Corporation shall pay you an annual base salary (the "Base Salary") of not less than $225,000, payable in such installments as is the Corporation's practice with respect to its executive employees. The Base Salary may be increased in the sole discretion of the Board of Directors of the Corporation based upon your performance of your duties and the range of salaries paid to chief executive officers of companies at a similar stage of development in the field of physician practice management as the Corporation. The Corporation shall pay to you, in one lump sum on the date hereof, that portion of the Base Salary in arrears as of the date hereof. 3. In addition to the Base Salary, the Board of Directors may, in its sole discretion, award you an annual bonus (the "Bonus") in an amount up to thirty percent (30%) of your then current Base Salary. The amount of the Bonus, if any, will be determined by the Board of Directors based upon your obtaining certain benchmarks (the "Benchmarks") that are specified on Annex 1 attached hereto. The Bonus, if any, will be payable following the end of each fiscal year during your employment with the Corporation. 4. You shall be eligible to participate in the Naresh Nagpal, M.D. May 6, 1996 Page 2 Corporation's benefit plans, 401(k) plan, life insurance, hospitalization and surgical and major medical coverages, sick leave, holidays, long-term disability and other fringe benefits, if any. In addition, you shall be entitled to four weeks of vacation per year. 5. During your employment with the Corporation, the Corporation shall reimburse you for all reasonable and necessary traveling expenses and other disbursements incurred by you for or on behalf of the Corporation in the performance of your duties upon presentation of appropriate receipts or other documentation therefor. In connection therewith, the Corporation shall reimburse you, in one lump sum on the date hereof or as soon hereafter as reasonably practicable, for all of the expenses incurred by you on behalf of the Corporation prior to the date hereof, including, without limitation, expenses incurred beginning December 1995 related to business travel, consulting services and administrative support, which expenses are estimated at approximately $100,000. 6. The Corporation will deduct from any payments to be made to you any amounts required to be withheld in respect of any Federal, state or local income or other taxes. 7. The Corporation may, for its own benefit, maintain "keyperson" life and disability insurance policies covering you. You shall cooperate with the Corporation and provide such information or other assistance as the Corporation may reasonably request in connection with the Corporation obtaining and maintaining such policies. 8. The Corporation shall grant you the option to purchase seventy five thousand (75,000) shares of common stock, $.001 par value, of the Corporation at each of the following times: (a) on the earlier to occur of (i) July 1, 1996, and (ii) the date upon which the Corporation consummates the first acquisition of a medical practice; (b) on January 1, 1997; and (c) on January 1, 1998. The grants specified in clauses (b) and (c) are subject to your attaining the Benchmarks intended to have been satisfied on each such date. The options granted pursuant to this paragraph 9 shall be granted pursuant to the Corporation's 1996 Stock Option Plan (the "Plan") and shall vest and become exercisable in accordance with the provisions of a Nonqualified Stock Option Agreement between you and the Corporation, the form of which is annexed to the Plan as Attachment 3. 9. The Corporation may terminate your employment hereunder for any reason; provided, however, that if the Corporation terminates your employment without Cause (as hereinafter defined) or as a result of your becoming permanently disabled (a) prior to January 1, 1997, you shall receive a severance amount equal to 100% (being one year's severance) of Naresh Nagpal, M.D. May 6, 1996 Page 3 the Base Salary; (b) after December 31, 1996 but prior to January 1, 1998, you shall receive a severance amount equal to 75% (being nine months' severance) of the sum of the then current Base Salary plus the Bonus paid with respect to the previous year (such sum being referred to herein as the "Compensation Amount"); (c) after December 31, 1997 but prior to January 1, 1999, you shall receive a severance amount equal to 50% (being six months' severance) of the Compensation Amount; and (d) on or after January 1, 1999, you shall receive a severance amount equal to 25% (being three months' severance) of the Compensation Amount. Such severance amount shall be paid in a lump sum within ten business days following the date of termination of your employment. As used herein "Cause" means (i) the repeated failure to perform such duties as are reasonably requested of you by the Board of Directors of the Corporation; (ii) gross negligence or willful misconduct in the performance of your duties; or (iii) the commission of any act of fraud or financial dishonesty with respect to the Corporation, or any felony or act involving moral turpitude. 10. During the period of your employment with the Corporation and for the Additional Period (as hereinafter defined), you shall not directly or indirectly engage in any business activity, either as an individual proprietor, partner, stockholder, officer, employee, director, or consultant (otherwise than as the holder of not more than five percent (5%) of the total outstanding capital stock of a publicly-held company), which competes with the Corporation or any of its subsidiaries in the Restricted Territory (as hereinafter defined) and in the field of musculoskeletal physician management. As used herein, (a) "Restricted Territory" means any state of the United States in which the Corporation or any of its subsidiaries conducted business at any time during the period of your employment with the Corporation, or specifically planned to conduct business at the time of the termination of your employment with the Corporation; and (b) "Additional Period" means (i) in the event that you are terminated without Cause or as a result of your becoming permanently disabled, the period in which you receive severance payments from the Corporation in accordance with paragraph 9 hereof (being either 3, 6, 9 or 12 months) and (ii) in the event that you are terminated with Cause or you voluntarily resign, a period of one year following the date of termination. You and the Corporation agree that the restrictions set forth in this paragraph 10 are reasonable for the purposes of protecting the business of the Corporation. However, if any such restriction is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 11. You recognize that your relationship with the Naresh Nagpal, M.D. May 6, 1996 Page 4 Corporation is and will continue to be one of high trust and confidence by reason of your access to and contact with the trade secrets and confidential and proprietary information of the Corporation. Therefore, you agree that you will not at any time, either during your employment with the Corporation or thereafter, disclose to others, or use for your own benefit or the benefit of others, any confidential, proprietary or secret information owned, possessed or used by the Corporation ("Proprietary Information"). By way of illustration, but not limitation, Proprietary Information includes trade secrets, processes, data, know-how, marketing plans, forecasts, unpublished financial statements, budgets, licenses, prices, costs and employee, customer and supplier lists. Notwithstanding anything to the contrary contained herein, this paragraph 11 shall not apply to any Proprietary Information which: (a) is or becomes in the public domain through no action on your part, (b) is generally disclosed to third parties by the Corporation or a person entitled to disclose such information to third parties without an obligation of confidentiality to the Corporation, or (c) is approved for release by written authorization of the Board of Directors of the Corporation or its designees. Upon termination of your employment with the Corporation or at any other time upon request, you will promptly deliver to the Corporation all notes, memoranda, notebooks, drawings, records, reports, files and other documents (and all copies or reproductions of such materials) in your possession or under your control, whether prepared by you or others, which contain Proprietary Information. You hereby acknowledge that this material is the sole property of the Corporation. 12. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contacts made and performed wholly therein. 13. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by you and the Corporation. Naresh Nagpal, M.D. May 6, 1996 Page 5 If the above terms are satisfactory to you, please acknowledge our agreement by signing the enclosed copy of this letter in the space indicated below and returning it to the undersigned. Sincerely, BONE, MUSCLE AND JOINT, INC. BY: ------------------------------ Name: Title: Accepted and agreed to: - ----------------------------- Naresh Nagpal, M.D. EX-10.25 4 MANAGEMENT SERVICE AGREEMENT MANAGEMENT SERVICES AGREEMENT AMONG TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC. AND BONE, MUSCLE AND JOINT, INC. AND THE INDEMNIFYING PERSONS Effective as of April 1, 1997 TABLE OF CONTENTS ----------------- Page ---- SECTION 1. Retention of the Management Company..............................2 1.1 Retention........................................................2 1.2 Exclusivity......................................................2 1.3 Relationship of Parties..........................................2 1.4 No Referral Obligation...........................................2 SECTION 2. Term.............................................................3 SECTION 3. Management Services..............................................3 3.1 Management Services Generally....................................3 3.2 Premises.........................................................4 3.3 Equipment........................................................6 3.4 New Ancillary Services...........................................8 3.5 Administration, Finance and Accounting...........................9 3.6 Billing and Collection..........................................11 3.7 Personnel.......................................................15 3.8 Inventory and Supplies..........................................16 3.9 Taxes...........................................................16 3.10 Information Systems Management..................................16 3.11 Use of New Technologies in the Practice of Medicine.............17 3.12 Public Relations; Marketing and Advertising.....................18 3.13 Medical Personnel Recruiting....................................18 3.14 Insurance.......................................................18 3.15 Files and Records...............................................19 3.16 Managed Care Contracts..........................................19 3.17 Budgets.........................................................20 3.18 Force Majeure...................................................20 SECTION 4. Equity Participation and Other Consideration....................20 SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments..20 5.1 Ownership of Accounts; Security.................................20 5.2 Bank Accounts and Payments......................................21 5.3 Medical Group Compensation......................................22 5.4 Management Fee..................................................25 5.5 Management Company Costs........................................26 5.6 New Medical Office Start-Up Costs...............................28 5.7 New Physician Start-Up Costs....................................29 5.8 Medical Group Costs.............................................31 5.9 New Ancillary Services Costs....................................32 -i- 5.10 Review and Audit of Books and Records...........................34 5.11 Start-Up Period.................................................35 SECTION 6. Representations and Warranties of the Medical Group.............35 6.1 Organization; Good Standing; Qualification and Power............35 6.2 Equity Investments..............................................36 6.3 Authority.......................................................36 6.4 Financial Information...........................................37 6.5 Absence of Undisclosed Liabilities..............................37 6.6 Absence of Changes..............................................37 6.7 Tax Matters.....................................................39 6.8 Litigation, Etc.................................................41 6.9 Compliance; Governmental Authorizations.........................41 6.10 Accounts Receivable; Accounts Payable...........................42 6.11 Labor Relations; Employees......................................42 6.12 Employee Benefit Plans..........................................43 6.13 Insurance.......................................................44 6.14 Real Property...................................................44 6.15 Burdensome Restrictions.........................................44 6.16 Disclosure......................................................45 SECTION 7. Representations and Warranties of the Management Company........45 7.1 Organization, Good Standing and Power...........................45 7.2 Authority.......................................................45 7.3 Issuance of Common Stock........................................46 7.4 Issued and Outstanding Stock....................................46 7.5 Permits, Authorizations, Consents, Approvals, Notifications, and Filings......................................47 7.6 Financial Information...........................................47 7.7 Absence of Undisclosed Liabilities..............................47 7.8 Absence of Changes..............................................47 7.9 Tax Matters.....................................................50 7.10 Litigation, Etc.................................................51 7.11 Compliance; Governmental Authorizations.........................51 7.12 Accounts and Notes Payable......................................51 7.13 Employees.......................................................52 7.14 Employee Benefit Plans..........................................52 7.15 Insurance.......................................................52 7.16 Real Property...................................................52 7.17 Burdensome Restrictions.........................................52 7.18 Disclosure......................................................52 SECTION 8. Operations Committee............................................53 8.1 Formation and Operation of the Operations Committee.............53 8.2 Authoritative Functions of the Operations Committee.............53 8.3 Advisory Functions of the Operations Committee..................55 8.4 Committee Policies and Procedures...............................56 -ii- SECTION 9. Obligations of the Medical Group................................57 9.1 Compliance with Laws............................................57 9.2 Use of Facility.................................................58 9.3 Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts..................................................58 9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities....58 9.5 Insurability....................................................58 9.6 Medicare........................................................59 9.7 Billing.........................................................59 9.8 Medical Personnel Hiring........................................59 9.9 Continuing Education............................................59 9.10 Sales of Stock..................................................59 SECTION 10. Certain Covenants...............................................60 10.1 Change of Control...............................................60 10.2 Legend on Securities............................................60 SECTION 11. Records........................................................61 11.1 Medical Records................................................61 11.2 Management Business Records....................................61 11.3 Access to Records Following Termination........................61 SECTION 12. Insurance and Indemnity........................................61 12.1 Professional Liability Insurance...............................61 12.2 Life Insurance.................................................62 12.3 Indemnification by Medical Group...............................62 12.4 Indemnification by Certain Individuals.........................63 12.5 Indemnification by Management Company..........................63 SECTION 13. Termination....................................................63 13.1 Termination by Medical Group...................................63 13.2 Termination by Management Company..............................64 13.3 Termination by Medical Group or Management Company.............65 13.4 Effect of Termination..........................................65 13.5 Repurchase of Assets...........................................66 13.6 Phase II.......................................................67 SECTION 14. Non-Disclosure of Confidential Information.....................68 14.1 Non-Disclosure.................................................68 14.2 Confidential or Proprietary Information........................69 SECTION 15. Non-Competition................................................69 SECTION 16. Obligations of the Management Company..........................69 16.1 No Practice of Medicine........................................69 16.2 No Interference with Professional Judgment.....................70 -iii- 16.3 Compensation Committee.........................................70 16.4 Budgets........................................................70 16.5 Contracts with Venture Capital Firms...........................71 16.6 Stock Held by Certain Individuals or Entities..................71 16.7 Convertible Preferred Stock....................................71 16.8 Initial Public Offering........................................71 16.9 Attendance at Board Meetings...................................72 SECTION 17. Assignment.....................................................72 SECTION 18. Notices........................................................72 SECTION 19. Benefits of Agreement..........................................73 SECTION 20. Governing Law; Jurisdiction....................................74 SECTION 21. Headings.......................................................74 SECTION 22. Entire Agreement; Amendments...................................74 SECTION 23. Severability...................................................75 SECTION 24. Counterparts...................................................75 SECTION 25. Waivers........................................................75 SECTION 26. Survival of Termination........................................75 SECTION 27. Contract Modification for Prospective Legal Events.............75 -iv- ATTACHMENTS SCHEDULES SCHEDULE I -- New Ancillary Services -- Exceptions SCHEDULE II -- Management Company Operating Cost Budget SCHEDULE III -- Equity Participation and Other Consideration SCHEDULE IV -- Draw Date and Draw Percentage SCHEDULE V -- Management Fee -- Applicable Percentage SCHEDULE VI -- Professional Practice Cost Savings SCHEDULE VII -- Computation Example SCHEDULE VIII -- Non-Competition SCHEDULE 6.4 -- Financial Information SCHEDULE 6.5 -- Absence of Undisclosed Liabilities SCHEDULE 6.6 -- Absence of Changes SCHEDULE 6.7 -- Tax Matters SCHEDULE 6.8 -- Litigation, Etc. SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable SCHEDULE 6.11 -- Labor Relations; Employees SCHEDULE 6.12 -- Employee Benefit Plans SCHEDULE 6.13 -- Insurance SCHEDULE 6.14 -- Real Property SCHEDULE 6.15 -- Burdensome Restrictions SCHEDULE 6.16 -- Disclosure SCHEDULE 7.4 -- Issued and Outstanding Stock SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals, Notifications, and Filings SCHEDULE 7.6 -- Financial Information -v- SCHEDULE 7.7 -- Absence of Undisclosed Liabilities SCHEDULE 7.8 -- Absence of Changes SCHEDULE 7.9 -- Tax Matters SCHEDULE 7.10 -- Litigation, Etc. ANNEX ANNEX A -- Medical Group Key Personnel ANNEX B -- Management Company Key Employees -vi- INDEX OF DEFINED TERMS ---------------------- Term Page - ---- ---- Accounts....................................................................20 Additional Terms.............................................................3 Administrative Personnel....................................................15 AGC .....................................................................67 Agreement....................................................................1 Ancillary Service Start-Up Costs............................................33 Ancillary Service Start-Up Period...........................................33 Annual Draw Amount..........................................................23 Annual Medical Group Compensation Amount....................................22 Applicable Percentage.......................................................26 Asset Purchase Agreements....................................................1 Authorized Management Company Operating Costs...............................28 Authorized Officers.........................................................12 Balance Sheet...............................................................37 Balance Sheet Date..........................................................37 Bankruptcy Event............................................................64 Base Term....................................................................3 Billable Items..............................................................32 Billings....................................................................24 Budgets.....................................................................20 Code .....................................................................40 Collateral..................................................................21 Collections.................................................................24 Commencement Date............................................................3 Compensation Committee......................................................70 Competitive Business........................................................89 Confidential or Proprietary Information.....................................69 Corporate Overhead..........................................................27 -vii- Cost Savings................................................................85 Documents...................................................................12 Draw Date...................................................................83 Draw Percentage.............................................................22 Eligible Parties............................................................20 Employee Plans..............................................................43 Employees...................................................................42 Equipment....................................................................7 ERISA .....................................................................43 Excess Net Collections......................................................31 Excluded Costs..............................................................27 Facility....................................................................58 FF&E ......................................................................6 Historical Collections Information..........................................37 Incentive Based Costs.......................................................85 Indemnifying Person.........................................................63 Internal Financial Statements...............................................37 Lender .....................................................................20 Loan Agreement..............................................................21 Management Business..........................................................1 Management Company...........................................................1 Management Company Balance Sheet............................................47 Management Company Balance Sheet Date.......................................47 Management Company Bank.....................................................21 Management Company Costs....................................................26 Management Company Key Employee.............................................49 Management Company Operating Costs..........................................27 Management Company Returns..................................................50 Management Company Transaction Documents....................................45 Management Fee..............................................................25 Management Services..........................................................2 -viii- Medical Business.............................................................1 Medical Equipment............................................................6 Medical Equipment Master Lease...............................................6 Medical Equipment Master Lease Payments.....................................26 Medical Group................................................................1 Medical Group Bank..........................................................12 Medical Group Collections Account...........................................12 Medical Group Costs.........................................................31 Medical Group Governance Documents..........................................35 Medical Group Key Personnel.................................................39 Medical Group Services......................................................24 Medical Group Transaction Documents.........................................35 Medical Personnel...........................................................18 Monthly Draw................................................................22 MSAs .....................................................................67 Net Collections.............................................................31 New Ancillary Service Medical Equipment.....................................33 New Ancillary Services.......................................................8 New Medical Office..........................................................29 New Medical Office Start-Up Costs...........................................29 New Medical Office Start-Up Period..........................................29 New Physician...............................................................31 New Physician Start-Up Costs................................................30 New Physician Start-Up Period...............................................30 Non-Compete Period..........................................................89 Office Lease.................................................................5 Office Sublease..............................................................5 Operating Account...........................................................21 Phase II....................................................................67 Professional Practice Cost Savings..........................................26 Real Property...............................................................44 -ix- Returns.....................................................................40 Review Financial Statements.................................................37 Selling Shareholders........................................................71 Stock.......................................................................79 Stockholder Non-Competition Agreement.......................................69 Tax.........................................................................41 Taxes.......................................................................41 Tenant Improvements.........................................................54 Term.........................................................................3 Transaction Documents.......................................................79 Unaudited Financial Statements..............................................47 -x- MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of April 1, 1997, by and among TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC., a California professional corporation (the "Medical Group"), the INDEMNIFYING PERSONS referred to in Section 12.4 whose signatures appear on the signature page hereto, those persons who hereafter sign a written agreement agreeing to be bound by the terms of Section 12.4 hereof, and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with reference to the following facts: A. The Medical Group is engaged in the business (the "Medical Business") of providing orthopedic medical and surgical services and related medical and ancillary services to the general public. B. The Management Company is a corporation engaged in the business (the "Management Business") of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Management Company has entered into Asset Purchase Agreements with the Medical Group, with Tri-City Orthopaedic Building Partners, and with Richard K. Muir, M.D., Inc. (collectively, the "Asset Purchase Agreements"), pursuant to which the Management Company has acquired substantially all of the assets owned or used by the Medical Group. D. The Management Company and the Medical Group now desire to enter into this Management Services Agreement, pursuant to which, among other things, the Management Company will render certain management and administrative services to the Medical Group. NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: -1- SECTION 1. Retention of the Management Company. 1.1 Retention. The Medical Group hereby retains the Management Company to provide all of the management and related services identified or referenced in Section 3 hereof and as otherwise required by this Agreement (collectively, the "Management Services"), and the Management Company hereby accepts such retention and agrees to provide such services, upon the terms and subject to the conditions set forth herein. 1.2 Exclusivity. During the term of this Agreement, the Management Company shall be the exclusive provider of all management and administrative services utilized by the Medical Group; provided, however, that the Medical Group may contract directly with or otherwise engage individuals or companies for the provision of accounting, legal, consulting, or other professional or advisory services (provided that such services shall be in addition to, and not in replacement of, the services to be provided by the Management Company hereunder), all in the sole discretion of the Medical Group and at the sole cost of the Medical Group. 1.3 Relationship of Parties. Notwithstanding anything contained herein to the contrary, (a) the Management Company and the Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, or employment relationship between the parties, and (b) the Management Company is hereby engaged solely to provide management and administrative services to the Medical Group and shall not interfere with, control, direct, or supervise the Medical Group or any medical professional employed by the Medical Group in connection with the provision of professional medical services. 1.4 No Referral Obligation. The parties agree that the benefits to the Medical Group hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral, purchase, or any other arrangement for the provision of any item or service to or for any of the Medical Group's patients in or from any medical facility or laboratory or from any other entity owned, operated, controlled, or managed by the Management Company. The Management Company shall provide prior written notice to the Medical Group before acquiring any ownership, investment interest, or control in, or entering into any agreement or -2- arrangement pursuant to which the Management Company would become responsible for all or any part of the operations or management of, any medical facility, laboratory, or any provider or supplier of ancillary services, diagnostic or therapeutic equipment, prosthetic or orthotic devices, medical supplies, or other items or services furnished to or for use by patients, but only if any of the foregoing is located in California or serves the geographic area served by the Medical Group. SECTION 2. Term. Provided that the Closing under the Asset Purchase Agreement shall have occurred as provided therein, and subject to such start-up procedures as the parties may agree upon for purposes of facilitating the transition of responsibilities required by this Agreement, the performance of services under this Agreement shall commence as of April 1, 1997 (the "Commencement Date") and shall expire on the fortieth anniversary of the Commencement Date unless terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement shall be automatically extended for additional terms ("Additional Terms" and together with the Base Term, the "Term") of five years each, unless either party delivers to the other party, not less than six (6) months nor more than nine (9) months prior to the expiration of the then-current Term, written notice of such party's intention not to extend the Term of this Agreement. SECTION 3. Management Services. 3.1 Management Services Generally. (a) The Management Company shall be the sole and exclusive manager and administrator of all day-to-day business functions for the Medical Group, subject to the provisions of Section 1.2 hereof. The Management Company shall provide all of the management and administrative services reasonably required by the Medical Group in connection with the provision of any and all of the Medical Group Services and as otherwise provided in this Agreement, including without limitation the services described in Sections 3.2 through 3.17 hereof. (b) Without limiting the generality of the provisions of Section 3.1(a), the Management Services shall include such management and administrative services as may be -3- reasonably required in connection with (i) all of the offices (including New Medical Offices) of the Medical Group, and (ii) all professional services and all ancillary services furnished by the Medical Group. (c) Additionally, the full range of Management Services as described in this Agreement shall be applicable with respect to the items identified as Medical Group Costs in Section 5.8 hereof, except that such Medical Group Costs shall be paid by the Medical Group rather than by the Management Company. Accordingly, the Management Company shall provide accounting, bookkeeping, and related services with respect to all such costs. (d) The Management Company may enter into such contracts and agreements with outside services and suppliers as the Management Company shall reasonably deem necessary in connection with the provision of the Management Services, and, to the extent permitted by applicable law, such contracts and agreements shall, except as otherwise expressly provided in this Agreement, be in the name of the Management Company. The Management Company shall have no authority, directly or indirectly, to perform, and shall not perform or enter into any agreement to perform, professional medical services or any other medical function required by law to be performed by a licensed physician or by any other licensed health care professional. (e) The Management Company shall comply in all material respects with all applicable material Federal, state and local laws, regulation, and ordinances in connection with the provision of the Management Services hereunder. 3.2 Premises. (a) The Medical Group, as of the Commencement Date of this Agreement, leases premises and provides professional medical services at the following location: 3905 Waring Road Oceanside, California 92056 -4- Immediately prior to the Commencement Date of this Agreement, the premises were leased to the Medical Group, in the Medical Group's name. Effective from and after the Commencement Date of this Agreement, the lease of such premises is to be assigned from the Medical Group to the Management Company pursuant to an Assignment of Lease entered into as of the date hereof. Additionally, the Management Company shall sublease the premises to the Medical Group pursuant to a sublease (the "Office Sublease") entered into as of the date hereof, in consideration of the payments to be made by the Medical Group under such Office Sublease. Upon the expiration of the premises lease assigned in accordance with this Section 3.2(a), the Management Company shall use its best efforts to enter into a new lease, in the name of the Management Company, with the landlord of such premises, and the parties shall amend the applicable Office Sublease or enter into a new sublease relating to such new premises lease; provided, however, that the approval of the Medical Group, which shall not be unreasonably withheld, shall be required in the event of any substantial changes in the terms of the premises lease, and if the Medical Group does not give such approval, the failure to enter into such new premises lease shall not constitute a default of the Management Company. Each assigned lease and each new lease entered into between the Management Company and the landlord is referred to herein as an "Office Lease." (b) A New Medical Office (as hereinafter defined) may be opened only upon the agreement of the Medical Group and the Management Company. The capital costs and start-up costs reasonably required in connection with the opening of any New Medical Office shall be borne as set forth in Section 5 hereof. The premises of any New Medical Office shall be leased to the Management Company, in the Management Company's name, and the Medical Group shall not be required to lease any such premises. Additionally, the Management Company shall sublease such premises to the Medical Group pursuant to a sublease substantially in the form of the Office Sublease, in consideration of the payments to be made by the Medical Group under such sublease. (c) The closing or relocation of any offices of the Medical Group shall be subject to agreement by the Medical Group and the Management Company. -5- (d) The premises services to be provided by the Management Company shall include, without limitation, the negotiation and renegotiation of leases, provision of ongoing liaison with the landlords of the respective office premises of the Medical Group, identification of potential new locations for Medical Group offices, financial analysis relating to the opening, closing, and relocation of offices, arranging for necessary repairs, maintenance and improvements, procurement of property insurance, arranging for telephone and other utility services, arranging for hazardous waste disposal, and all other reasonably necessary or appropriate services related to all of the office premises of the Medical Group. (e) The Management Company also shall provide all necessary or appropriate leasehold improvements to each of the premises, subject to prior approval as provided in Section 8.2 hereof. (f) The Medical Group acknowledges that the Management Company makes no warranties or representations, expressed or implied, regarding the condition of any of the leased premises. 3.3 Equipment. (a) The Management Company shall provide to the Medical Group all of the diagnostic and therapeutic medical equipment reasonably required by the Medical Group in connection with the provision of Medical Group Services (the "Medical Equipment"). All Medical Equipment shall be provided by the Management Company to the Medical Group in consideration of the rental payments to be made by the Medical Group to the Management Company pursuant to an equipment lease entered into as of the date hereof (the "Medical Equipment Master Lease"). As used herein, the term Medical Equipment shall not include medical equipment used in connection with a New Ancillary Service (as hereinafter defined). (b) The Management Company also shall provide to the Medical Group all furniture, furnishings, trade fixtures, and office equipment (including computer hardware and software) reasonably required in connection with the provision of Medical Group Services pursuant to this Agreement (collectively, "FF&E"). The Management Company shall acquire, -6- at its cost, all FF&E, and the Management Company shall retain ownership of all FF&E. The Management Fee payable to the Management Company under this Agreement is intended to compensate the Management Company for the provision of FF&E for use by the Medical Group. As used herein, the term FF&E does not include furniture, furnishings, trade fixtures, and office equipment used in connection with a New Ancillary Service. (c) The Medical Equipment and the FF&E are sometimes referred to collectively as the "Equipment." The acquisition, replacement, relocation, or other disposition of any Equipment shall require prior approval as provided in Section 8.2 hereof. (d) The Management Company's obligations with respect to the Equipment are subject and subordinate to the provisions and obligations contained in any financing, security interest, mortgage, lien or other encumbrance the Management Company may, in its reasonable discretion, place upon the Equipment through an unaffiliated third party. The Medical Group shall use the Equipment only in connection with its provision of the Medical Group Services, and the Medical Group shall not alter, repair, augment, or remove the Equipment from the premises of the Medical Group without the prior written consent of the Management Company and any lessor thereof, which approval may be granted or withheld in the Management Company's or such lessor's sole discretion. To the extent the Equipment is utilized by the Medical Group in the provision of Medical Group Services, the Medical Group shall have the right to exercise reasonable control over the use of such Equipment. (e) From time to time, and as reasonably requested by the Medical Group, the Management Company shall use reasonable efforts to cause the Equipment manufacturer or its authorized agent to provide service and maintenance for the Equipment as needed to maintain the Equipment in an operable condition, so that all such Equipment shall function continuously (subject to interruptions not reasonably avoidable) in accordance with the manufacturer's specifications and so that all conditions imposed by the manufacturer to maintaining the continued effectiveness of any warranty on such Equipment shall be satisfied. The Management Company shall take all reasonable steps to provide that all necessary service and maintenance is -7- obtained in a prompt and timely manner, so as to minimize the amount of time that any of the Equipment is not available for usage by or for patients of the Medical Group. (f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING DISCLAIMER, THE MANAGEMENT COMPANY DOES WARRANT TO THE MEDICAL GROUP THAT THE X-RAY EQUIPMENT AND THE COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL GROUP SHALL BE SUITABLE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES. Nothing in this Agreement shall be construed to affect or limit in any way the professional discretion of the Medical Group to select and use any Equipment acquired by the Management Company in accordance with the terms of this Agreement insofar as such selection or use constitutes or might constitute the practice of medicine. 3.4 New Ancillary Services. (a) For purposes of this Agreement, "New Ancillary Services" means the technical component (but not the professional component) of the following, except as set forth in Schedule I: (i) Physical therapy; (ii) Magnetic resonance imaging and/or other imaging services (except diagnostic radiology); (iii) Outpatient surgery; (iv) Densitometry; and -8- (v) Other revenue-producing services generally recognized as ancillary services, but excluding the following: (A) Plain film radiography; (B) Any other services provided on a regular basis by the Medical Group immediately prior to the Commencement Date of this Agreement; and (C) Any service performed in connection with new Medical Equipment acquired to replace existing Medical Equipment so long as the new Medical Equipment performs substantially the same functions as the replaced Medical Equipment. New Ancillary Services do not include the sale or provision of (or services rendered in connection with) prosthetics, prosthetic devices, orthotics, braces, splints, appliances, crutches, casts, or any other supplies or similar items which are billable to patients or payors. (b) New Ancillary Services may be established only upon agreement of the Medical Group and the Management Company. Such agreement shall be memorialized in a written agreement executed by the parties (or in a written amendment to this Agreement) under which the Management Company agrees to provide all of the Management Services described in this Section 3 in connection with such New Ancillary Service, and for which the Management Company shall be compensated as described in Section 5.9 of this Agreement, except as otherwise agreed by the parties. 3.5 Administration, Finance and Accounting. The Management Company shall provide or arrange for the provision of all administrative, financial, and accounting functions necessary for the operation of the Medical Group, including without limitation -- (a) Creation and maintenance of bank accounts. (b) Deposits of receipts. -9- (c) Preparing accounts receivable summary reports, including various analyses of delinquent accounts. (d) Receiving appropriate approvals as required by the Medical Group Governance Documents prior to distribution of payments to outside parties; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Medical Group Governance Documents. (e) Disbursement of payables, including payables of the Medical Group; provided, however, that payables of the Medical Group shall be paid from an account of the Medical Group and not from the Management Company's Operating Account, and all checks drawn on any Medical Group account shall be signed by an officer or other authorized representative of the Medical Group. (f) Negotiation of vendor contracts. (g) Performing monthly accounting functions, including bank reconciliations, maintenance of books and records, and preparation of financial statements. (h) Analyzing financial data as reasonably requested by physicians. (i) Analyzing potential new office locations, and coordinating all functions associated with opening new office locations. (j) Preparing monthly financial and medical practice statistics reports (i) By satellite office (ii) By physician (k) Providing from the Medical Group's bank account(s) monthly compensation payments to physicians; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Medical Group Governance Documents; provided, further, that all checks drawn on any Medical Group account shall be signed by an authorized representative of the Medical Group. (l) Calculating physicians' annual compensation based on the Medical Group's physician compensation formulas. -10- (m) Ongoing day-to-day communication with the Chairman of the Board and assisting him in fulfilling his responsibilities. (n) Preparing agendas and information packages for Medical Group meetings. (o) Developing budgets and long-term strategies for the Medical Group. (p) Coordinating payroll processing and payroll tax payments. (q) Providing ongoing personnel FTE analysis. (r) Providing administrative services (excluding the services of a plan administrator) in connection with any pension or profit-sharing plan of the Medical Group; provided, however, that the Management Company shall not be responsible for investment decisions. (s) Coordinating recruitment, interviewing, and hiring of new physicians. (t) Implementing fee schedule increases and/or decreases established by the Medical Group. (u) Coordinating depositions and court appearances. (v) Assisting in the coordination of call schedules. (w) Assisting in the coordination of coverage of athletic team events. (x) Acting as liaison to hospital administration, physical therapy, surgery center, MRI, and other ancillary services entities. (y) Cooperating with outside accountants in preparing various schedules and providing other information. (z) Interacting with legal counsel as necessary. 3.6 Billing and Collection. (a) The Medical Group acknowledges that ownership of all Accounts (as hereinafter defined) is transferred by the Medical Group to the Management Company as provided in greater detail in Section 5.1 of this Agreement. In order to facilitate the collection of the Accounts, the Medical Group hereby authorizes the Management Company (i) to bill patients and third party payors in the Medical Group's name; (ii) to collect accounts receivable resulting from such billing; (iii) to receive payments and prepayments from the Medical Group's patients, Blue Cross and Blue Shield organizations, insurance companies, health care plans, Medicare, Medicaid, HMOs, and any and all other third party payors; (iv) to take possession -11- of and deposit into such bank (the "Medical Group Bank") as the Medical Group designates, in an account established by the Medical Group in the name of the Medical Group (the "Medical Group Collections Account"), any and all checks, insurance payments, cash, cash equivalents and other instruments received for Medical Group Services; and (v) to initiate with the consent of the Medical Group, which consent may be withheld by the Medical Group in its sole and absolute discretion, legal proceedings in the name of the Medical Group to collect any accounts and monies owed to the Medical Group, to enforce the rights of the Medical Group as a creditor under any contract or in connection with the rendering of any service, and to contest adjustments and denials by governmental agencies (or its fiscal intermediaries) as third-party payors. Following termination of this Agreement, the Management Company shall continue to use reasonable efforts to collect the Accounts for a period of ninety (90) days thereafter. (b) From time to time at the Management Company's request, the Medical Group shall make available to the Management Company one or more authorized officers (the "Authorized Officers") of the Medical Group to sign any letters, checks, instruments or other documents (the "Documents") on behalf of the Medical Group that are necessary for the Management Company to perform its duties under this Section 3.6 and its other duties under this Agreement. If the Management Company notifies the Medical Group that an Authorized Officer is not signing the Documents in a timely manner, the Management Company shall not be liable for any failure to perform its duties hereunder or for any failure to perform the Management Services to the extent caused by the failure of an Authorized Officer to sign the Documents in a timely manner. (c) The Management Company represents and warrants to the Medical Group that it has sufficient knowledge and expertise in the area of billing for orthopedic and other medical services and ancillary services to be able to adequately perform the billing services required hereunder. The Management Company shall submit all bills and manage the billing process on a timely basis in accordance with the terms of this Agreement and applicable law. (d) Without limiting the generality of the foregoing, the Management Company shall bill patients, bill and submit claims to third party payors, perform appropriate coding for -12- each bill, and collect all fees for professional and other services rendered and for items supplied to patients by the Medical Group, all in a timely manner and in accordance with parameters and criteria established by the Operations Committee (as hereinafter defined). Additionally, the Management Company shall provide the following services which are currently being provided by or on behalf of the Medical Group: (i) Receive and collect from patients at the time of visit all appropriate payments and pre-payments, including co-pays, deductibles, payments for non-covered medical services, and deposits for surgeries (if applicable), and additionally shall obtain all appropriate insurance and other information required. (ii) Submit claims utilizing electronic billing submission, whenever appropriate. (iii) Perform delinquent account collection calls and other appropriate follow-up mechanisms for delinquent accounts of all insurance classifications, all in a timely fashion as determined by the Operations Committee. (iv) Turn over to outside collection agencies all delinquent accounts satisfying the criteria established by the Operations Committee. The Management Company shall also follow-up on the performance of the outside collection agencies and make changes if necessary, and additionally shall reconcile each account turned over to the summary data provided by the collection agency. (v) Write-off account balances according to criteria approved by the Operations Committee. -13- (vi) Prepare claim reviews in accordance with criteria approved by the Operations Committee. (vii) Bill workers' compensation medical services at rates equal to the most recently approved California workers' compensation fee schedule. (viii) Apply "insurance only" and other courtesy write-offs in compliance with Operations Committee policy. (ix) With respect to discounted fee-for-service contracts with Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), the Management Company shall determine that payments from the PPOs and HMOs are in compliance with the contract with the Medical Group. (x) With respect to capitation fee contracts with HMOs, the Management Company shall -- (A) Follow-up to ensure that payments by the HMOs are made on a timely basis; (B) Review and audit enrollment data provided by the HMO to ensure that the capitation payments are based on the proper number of lives enrolled. (xi) With respect to lien accounts, the Management Company shall -- (A) Ensure that appropriate documents are signed and agreed to initially as between Medical Group, attorney and patient; (B) Follow-up on a regular basis as to the status of the account; and (C) Apply the policies of the Operations Committee in resolving open account balances. -14- (xii) With respect to student athlete accounts, the Management Company shall coordinate insurances and other information in compliance with the policy of the Operations Committee. (xiii) With respect to amounts withheld by payors in compliance with contracts between the payor and the Medical Group, the Management Company shall follow-up on a timely basis to ensure that withheld amounts are paid, if warranted, and to ensure that any withheld amounts that are not paid are verified and audited for appropriateness. (xiv) Coordinate the timely payment of refunds to patients and third party payors when appropriate. 3.7 Personnel. (a) The Management Company shall retain and provide or arrange for the retention and provision of all of the following non-medical personnel necessary for the conduct of the Medical Group's business operations (collectively, "Administrative Personnel"): (i) Administration (ii) Accounting (iii) Billing and Collection (iv) Secretarial (v) Transcription (vi) Appointments (vii) Switchboard (viii) Medical Records (ix) Chart Preparation (x) Historians (xi) Clinic Support (xii) Marketing -15- (b) The Management Company shall determine and pay the salaries and fringe benefits of the Administrative Personnel, and shall provide other personnel services related to the Administrative Personnel, including but not limited to scheduling, personnel policies, administering continuing education benefits, and payroll administration. (c) With respect to each applicable new employee in Administrative Personnel, the Management Company shall, as reasonably necessary, verify educational and employment experience, licensure, and insurability. (d) All of the personnel services shall be performed in compliance with all applicable California and Federal labor laws. 3.8 Inventory and Supplies. The Management Company shall order and purchase inventory and supplies on behalf of the Medical Group, and such other ordinary or appropriate materials as the Medical Group reasonably deems to be necessary for it to carry out its professional medical activities. Inventory and supplies shall include, but not be limited to: (a) Medical supplies (b) Office supplies (c) Postage (d) Computer forms and supplies (e) Printing and stationery supplies (f) Printer supplies (g) Linen and laundry supplies 3.9 Taxes. The Management Company shall provide the Medical Group with access to all information necessary for the Medical Group to prepare its tax returns. The Management Company shall have no responsibility for the payment of the Medical Group's taxes. 3.10 Information Systems Management. (a) The Management Company shall provide or arrange for the provision of all management information systems services to be utilized by the Medical Group. These -16- services shall include, but not be limited to, ongoing maintenance and development of the following information systems: (i) Accounts receivable - Billing/Insurance/Collections (ii) On-line appointment scheduling (iii) Internal e-mail (iv) On-line transcription (v) Faxing subsystem (vi) Electronic claims submission (vii) Patient flow monitoring system (viii) Authorization module (ix) Prescription module (x) X-ray tracking system (xi) Voice mail (xii) Paperless medical records (xiii) Bar code chart tracking system (b) The acquisition, replacement, relocation, or other disposition of any equipment described above shall be governed by Section 3.3 hereof. (c) The services provided by the Management Company shall protect the confidentiality of patient medical records to the extent required by applicable law or the Medical Group's payor agreements; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. 3.11 Use of New Technologies in the Practice of Medicine. The Management Company shall promote the integration of new technologies into the professional practice of the Medical Group, including without limitation the use of satellite and other telecommunications services that permit the provision of remote consultations, virtual operations, and other professional services; provided, however, that the foregoing shall be subject to the terms of Section 8.2(e) hereof. -17- 3.12 Public Relations; Marketing and Advertising. The Management Company shall develop and implement community outreach programs and public relations programs designed to educate the patient population regarding the Medical Group, the availability of its medical services, and the availability in terms of any managed care programs in which the Medical Group participates. The Management Company also shall develop and implement marketing and advertising programs as reasonably required to promote and expand the Medical Business, subject to any approved budgets. The programs shall be conducted in compliance with applicable laws and regulations governing advertising by the medical profession. 3.13 Medical Personnel Recruiting. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services who are employees or independent contractors of the Medical Group; (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services that are billable to patients or third party payors (separate and apart from the billable services provided by physicians); and (iii) Technicians who perform diagnostic tests or procedures. (b) With respect to each of the Medical Personnel, the Management Company shall verify educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal commissions. 3.14 Insurance. The Management Company shall provide the insurance coverage described in Sections 12.1 and 12.2 of this Agreement. -18- 3.15 Files and Records. (a) To the extent permitted by applicable law, the Management Company shall supervise and maintain custody of all files and records relating to the operation of the business of the Medical Group, including, without limitation, accounting, billing, collection, and patient medical records. The management of all files and records shall be in compliance with applicable state and federal statutes. Business records of the Medical Group created and/or maintained by the Management Company shall be the joint property of the Management Company and the Medical Group and shall at all times be located at a location that is readily accessible to the parties. Patient medical records shall at all times be and remain the property of the Medical Group and shall be located at a location that is readily accessible for patient care. The Management Company shall preserve the confidentiality of patient medical records and use information contained in such records only for the limited purposes necessary to perform the management services set forth herein; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. (b) The Management Company shall provide all off-site storage of files and records as required and in conjunction with policies established by the Operations Committee. The Management Company shall provide the Medical Group with all requested off-site files and records on a timely basis, consistent with the policies of the Medical Group in effect immediately prior to the Commencement Date. Any change in such policies shall be subject to the approval of the Operations Committee. 3.16 Managed Care Contracts. The Management Company shall solicit, negotiate and administer all managed care contracts on behalf of the Medical Group based on parameters and criteria established by the Operations Committee. Such services shall be performed by the Management Company as agent of the Medical Group, and all managed care contracts shall be subject to the Medical Group's prior approval of any such contract. The Management Company shall prepare cost forecasts and other analyses as reasonably requested by the Medical Group in order to allow the Medical Group to make an informed decision with respect to each proposed contract. -19- 3.17 Budgets. The Management Company shall prepare, for the review and approval of the Operations Committee, annual operating budgets (the "Budgets") reflecting in reasonable detail projected Billings, Collections, Medical Group Costs, and Management Company Operating Costs; provided, however, that the Medical Group shall provide the Management Company with a proposed Budget covering the initial period under this Agreement commencing on the Commencement Date and ending on December 31 of the year in which the Commencement Date occurs. The initial Budget is attached hereto as Schedule II. All other budgets shall be on a calendar year basis. The Management Company shall prepare and submit to the Operations Committee all subsequent Budgets on or before December 15 of the year immediately preceding the calendar year to which such Budgets are applicable. 3.18 Force Majeure. The Management Company shall not be liable to the Medical Group for failure to perform any of the services required herein in the event of strikes, lockouts, calamities, acts of God, unavailability of supplies, changes in applicable law or regulations or other events over which the Management Company has no control for so long as such events continue and for a reasonable time thereafter. SECTION 4. Equity Participation and Other Consideration. In consideration of the Medical Group's entering into this Agreement, the Management Company shall provide to the persons identified in Schedule III attached hereto (the "Eligible Parties") and to the Medical Group the consideration set forth on Schedule III. SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments. 5.1 Ownership of Accounts; Security. The Medical Group hereby transfers to the Management Company ownership of all accounts receivable and the other rights to payment arising from the provision by the Medical Group of Medical Group Services during the term hereof (the "Accounts"); provided, however, that the right to payment of Medicare and Medicaid receivables shall remain with the Medical Group in accordance with applicable Federal and state law. The Management Company shall have the right to grant to any lender (the "Lender") a first priority lien and security interest in and with respect to the Accounts, together with all books, records, computer information, and other general intangibles relating thereto -20- (collectively, the "Collateral"), as security for the obligations of the Management Company to the Lender. The Medical Group hereby irrevocably constitutes and appoints the Management Company as the true and lawful attorney-in-fact for the Medical Group to execute in the name of the Medical Group such financing statements and other documentation as may be necessary or appropriate to evidence or to perfect the Lender's lien and security interest in and with respect to all Accounts and other Collateral. The Medical Group shall cooperate with the Lender as reasonably requested by the Lender in the event that the Lender seeks to enforce its rights and remedies under its agreement with the Management Company, including granting the Lender access, to the extent permitted by law, to all books and records associated with the Collateral. Neither the Management Company nor the Lender shall be required to give the Medical Group any notice in connection with any loan or related financing arrangements affecting the Accounts and other Collateral. 5.2 Bank Accounts and Payments. (a) Bank Accounts. The Medical Group shall instruct the Medical Group Bank to transfer, on a daily basis, all funds in the Medical Group Collections Account (less the amount necessary to avoid the payment of bank charges or fees relating to the failure to maintain a minimum balance in the Medical Group Collections Account) to a bank (the "Management Company Bank") designated by the Management Company, for credit to an account in the Management Company's name (the "Operating Account"). All interest earned on the funds on deposit in the Operating Account shall be for the account of the Management Company. (b) Payments. The Management Company shall pay all of the Medical Group Compensation and all of the Management Company Costs, as hereinafter defined, and the Management Company shall be entitled to retain for itself the Management Fee, as hereinafter defined. The Management Company shall satisfy its obligations hereunder from funds of the Management Company, which funds may be maintained in any bank account of the Management Company. -21- 5.3 Medical Group Compensation. (a) Monthly Draw. (i) On each Draw Date during the Term hereof, the Management Company shall distribute to the Medical Group an amount equal to a percentage (the "Draw Percentage") of the Medical Group's total Billings for Medical Group Services provided during the previous month (the "Monthly Draw"). The Draw Date and the initial Draw Percentage are as set forth in Schedule IV, and the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii). (ii) Commencing May 15, 1998, and effective May 15 of each year thereafter, the Draw Percentage shall be adjusted to equal a fraction, the numerator of which is the Annual Medical Group Compensation Amount for the previous year, and the denominator of which is the total amount of Billings for the previous year. (b) Annual Settlement. (i) On or before April 30, 1998, and on or before April 30 of each year thereafter, the Management Company shall calculate the following (the "Annual Medical Group Compensation Amount"): (A) The total Collections for all Medical Group Services rendered during the previous calendar year, less -- (B) the sum of the following: (1) the Management Fee earned by the Management Company for the previous calendar year; (2) the Authorized Management Company Operating Costs incurred by the Management Company during the previous calendar year; (3) an amount equal to sixty percent (60%) of any Collections pertaining to any New Medical Office -22- during any applicable New Medical Office Start-Up Period. (ii) If the Annual Medical Group Compensation Amount thus determined exceeds the total of the twelve (12) Monthly Draws paid by the Management Company to the Medical Group during the previous calendar year (the "Annual Draw Amount"), the Management Company shall pay to the Medical Group on or before May 15, an amount equal to such excess. If the Annual Draw Amount for the previous calendar year exceeds the Annual Medical Group Compensation Amount for the previous calendar year, the Management Company shall withhold from the Medical Group Compensation otherwise payable to the Medical Group, during each of the following six (6) months, an amount equal to one-sixth (1/6) of such excess. (iii) For purposes of determining the total Collections for all Medical Group Services provided during any calendar year, all Collections during January, February, and March of each year shall be deemed to be for Medical Group Services rendered during the previous calendar year, and all Collections during April through December shall be deemed to be for Medical Group Services rendered during the calendar year in which such Collections were received; provided, however, that for purposes of determining the total Collections during the period commencing on the Commencement Date and ending December 31, 1997, all Collections from and after the Commencement Date through March 31, 1998, shall be deemed to be for Medical Group Services rendered during the period commencing on the Commencement Date and ending December 31, 1997. Notwithstanding the foregoing, the Management Fee applicable to any calendar year shall be based on the Collections actually received during such calendar year. (iv) Notwithstanding anything to the contrary set forth herein, the first period for which the annual settlement described in this Section 5.3(b) shall be applicable is the period commencing on the Commencement Date and ending on December 31, 1997. -23- (c) Notwithstanding the provisions of Section 5.2(a), but subject to the rights of any Lender as provided in Section 5.1, in the event that the Medical Group has not received from the Management Company all or any portion of the Monthly Draw on or before the third business day following the Draw Date, or in the event that the Medical Group has not received from the Management Company all or any portion of any amount payable to the Medical Group pursuant to Section 5.3(b)(ii) on or before the third business day following the date on which such payment is required to be made under the terms of Section 5.3(b)(ii), without limiting any other right or remedy that the Medical Group may have under this Agreement or under applicable law, the Medical Group shall have the right to immediately withdraw such amount directly from the Medical Group Collections Account. (d) For purposes of this Agreement -- (i) "Billings" means, for any applicable period, the gross charges of the Medical Group for all Medical Group Services furnished during such period. (ii) "Collections" means, for any applicable period, all cash or cash equivalents received during such period for Medical Group Services, including any capitation payments received during such period, less -- (A) any refunds paid during such period, and (B) any amounts paid to orthopedists who are not employed by (and who do not otherwise provide professional services through) the Medical Group for the care of patients with respect to whom the Medical Group has received capitation payments. (iii) "Medical Group Services" means the following services rendered by, through, or on behalf of the Medical Group: all professional services rendered by or under the supervision of any of the -24- Medical Personnel (including professional services rendered in connection with New Ancillary Services); all diagnostic radiology services rendered by or under the supervision of any of the Medical Personnel; all other ancillary services (other than New Ancillary Services); all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, and other items and supplies that are billable to patients or to third party payors; and depositions, record review services, court appearances, independent medical exams, and athletic team services. (iv) It is the intent of the parties that Billings, Collections, and Medical Group Services not include any of the following: New Ancillary Services (excluding professional services rendered by Medical Personnel in connection therewith, which professional services are included under Section 5.3(d)(iii) above), interest income, sublease income from HealthSouth Rehabilitation Corporation; royalties payable to any Medical Group physician for medical inventions; income from presentations, writings, and endorsements; proceeds from the sale of any capital assets of the Medical Group; income from investments; Dr. Kane's collections for services rendered in connection with his professional practice in La Jolla, California; Dr. Helgager's collections for services rendered at the IMC occupational medicine clinic; or Dr. Alleyne's collections of interpretation fees relating to data generated in connection with the use of Medex equipment in the space subleased by the Medical Group to HealthSouth Rehabilitation Corporation. 5.4 Management Fee. (a) The compensation payable to the Management Company for the provision of Management Services under this Agreement (the "Management Fee"), which the Management -25- Company may retain from Collections received from time to time at its discretion, shall be equal to the aggregate of the following: (i) An amount equal to the Applicable Percentage of Collections, provided that the amount thus determined shall be reduced by the Medical Equipment Master Lease Payments; and (ii) An amount equal to sixty-six and two-thirds percent (66-2/3%) of the Professional Practice Cost Savings. (b) For purposes of this Agreement -- (i) "Applicable Percentage" has the meaning set forth in Schedule V. (ii) "Medical Equipment Master Lease Payments" means the monthly lease amounts payable for all Medical Equipment determined in accordance with the Medical Equipment Master Lease referenced in Section 3.3(a) hereof. (iii) "Professional Practice Cost Savings" means the cost savings determined in the manner described in Schedule VI. (c) An example of the computation of Medical Group Compensation and the Management Fee is attached hereto as Schedule VII. 5.5 Management Company Costs. (a) The Management Company shall pay all Management Company Operating Costs and all Excluded Costs (collectively, the "Management Company Costs"). All Management Company Costs shall be incurred in the name of the Management Company, and not in the name of the Medical Group, except as specifically approved by the Medical Group. -26- Management Company Costs shall not include any costs or expenses incurred prior to the Commencement Date of this Agreement. (b) The Management Company shall provide to the Medical Group, upon reasonable request by the Medical Group from time to time, supporting documentation and other backup detail relating to any or all of the Management Company Costs. (c) For purposes of this Agreement, "Management Company Operating Costs" means all costs and expenses incurred in connection with the provision of the Management Services, except for any costs and expenses defined as Medical Group Costs in Section 5.8 hereof, and except for Excluded Costs. "Excluded Costs" means all of the following costs and expenses incurred in connection with the provision of the Management Services hereunder: (i) New Medical Office Start-Up Costs; (ii) New Physician Start-Up Costs; (iii) The rent and any other payments due under any of the Office Leases; (iv) The cost of any Medical Equipment leased by the Management Company to the Medical Group; (v) The cost of any FF&E provided by the Management Company to the Medical Group; (vi) Depreciation, amortization, and interest; and (vii) Corporate overhead of the Management Company ("Corporate Overhead") except to the extent that all of the following conditions are satisfied: (A) The Corporate Overhead is incurred in lieu of a pre-existing Management Company Operating Cost; (B) The amount of such Corporate Overhead does not exceed the amount of the Management Company Operating Costs being eliminated; and -27- (C) The Corporate Overhead is allocated to the Medical Group and to all other medical groups utilizing such Corporate Overhead on a pro rata basis. Any Corporate Overhead with respect to which all of the above conditions are satisfied shall be considered Management Company Operating Costs. (d) For purposes of this Agreement, "Authorized Management Company Operating Costs" means all Management Company Operating Costs incurred in any year reduced by any or all of the following, as applicable: (i) any costs that exceed the applicable Management Company Operating Costs Budget which are not approved by the Operations Committee; (ii) any costs with respect to which the Medical Group has reasonably requested supporting documentation or other backup detail which has not been furnished by the Management Company or which does not reasonably establish the appropriateness of such costs; and (iii) any costs that have been determined pursuant to an audit under Section 5.10 not to have been reasonably incurred in connection with the Management Services required to be provided under of this Agreement. 5.6 New Medical Office Start-Up Costs. (a) The Management Company shall pay all New Medical Office Start-Up Costs incurred in connection with the establishment of any New Medical Office. (b) All Medical Equipment utilized at any New Medical Office shall be acquired by the Management Company and leased to the Medical Group in accordance with Section 3.3 hereof. -28- (c) For purposes of this Agreement, "New Medical Office" means any office of the Medical Group other than those offices located in the premises identified in Section 3.2(a) hereof. (d) For purposes of this Agreement, "New Medical Office Start-Up Costs" means the following costs incurred in connection with the establishment of a New Medical Office during the New Medical Office Start-Up Period: all Management Company Costs and all costs other than physician Medical Personnel costs that, but for this provision, would have been considered Medical Group Costs. (e) For purposes of this Agreement, "New Medical Office Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of a New Medical Office and ending on the earlier of (i) the last day of the calendar month in which a period of eighteen (18) months has elapsed from and after the date on which the New Medical Office first opened for the treatment of patients, or (ii) the last day of the first period of two (2) consecutive calendar months for which the costs borne by the Management Company in connection with the New Medical Office are less than sixty percent (60%) of the Collections for Medical Group Services provided at the New Medical Office during such two-month period. In no event shall the Management Company have any obligation under this Section 5.6 to pay any New Medical Office Start-Up Costs incurred later than eighteen (18) months after the New Medical Office first opened for the treatment of patients. 5.7 New Physician Start-Up Costs. (a) Upon the request of the Medical Group and approval by the Management Company, which approval shall not be unreasonably withheld, the Management Company shall pay all New Physician Start-Up Costs (as defined below) to the extent authorized hereunder, subject to recoupment by the Management Company as provided herein. (b) The Management Company shall be entitled to retain all Net Collections (as defined below) during the New Physician Start-Up Period (as defined below), which shall be offset against the New Physician Start-Up Costs that the Medical Group has previously paid and is entitled to recoup as provided in Section 5.7(c) below. -29- (c) Beginning with the month immediately following the expiration of the New Physician Start-Up Period, the Management Company shall be entitled to recoup all of the New Physician Start-Up Costs previously paid by the Management Company by retaining any and all Excess Net Collections (as defined below) until the Management Company has recouped the full amount of New Physician Start-Up Costs previously paid by the Management Company, without interest. (d) "New Physician Start-Up Costs" means the following costs (whether otherwise considered Management Company Costs or Medical Group Costs hereunder) payable to or incurred in connection with a New Physician during the New Physician Start-Up Period, but only to the extent approved by the Operations Committee: all salary and other compensation payable to the New Physician; the cost of health insurance and any other employee benefits provided for the benefit of the New Physician; the cost of professional liability insurance coverage for the New Physician; the cost of continuing professional education incurred for the benefit of the New Physician (including the cost of travel, meals, and lodging incurred in connection with attendance at seminars and similar professional events); and all other direct out-of-pocket costs (but not indirect costs), determined on an incremental basis. (e) "New Physician Start-Up Period" means the period commencing on the date that the New Physician commences performing professional medical services as an employee or independent contractor of the Medical Group and ending on the earlier of (i) the last day of the calendar month in which a period of eighteen (18) months has elapsed from and after the date on which the New Physician commenced performing such services, or (ii) the last day of the first period of two (2) consecutive calendar months for which the amount of Net Collections (as defined below) attributable to the services performed by the New Physician equals or exceeds the amount of New Physician Start-Up Costs paid or payable during such period. In no event shall the Management Company have any obligation under this Section 5.7 to pay any New Physician Start-Up Costs incurred later than eighteen (18) months after the New Physician commenced performing professional medical services as an employee or independent contractor of the Medical Group. -30- (f) "Net Collections" in any period means total Collections in such period less that portion of the Management Fee which is based on the Applicable Percentage of Collections. At all times during and after the New Physician Start-Up Period, the Management Company shall be entitled to receive, as part of its compensation under this Agreement, that portion of the Management Fee which is based on the Applicable Percentage of Collections attributable to the services provided by the New Physician. (g) "Excess Net Collections" means the amount (if any) by which Net Collections in any month attributable to services performed by the New Physician exceed the amount of costs paid or payable during such month which would have been considered New Physician Start-Up Costs had they been paid or payable during the New Physician Start-Up Period. (h) "New Physician" means any physician who becomes an employee or independent contractor of the Medical Group after the date hereof and who practices with the Medical Group on a substantially full-time basis. 5.8 Medical Group Costs. Except as otherwise provided in this Agreement, the Medical Group shall pay all of the costs specified in this Section 5.8 (the "Medical Group Costs"). All Medical Group Costs shall be incurred in the name of the Medical Group, and not in the name of the Management Company, and shall be paid from an account of the Medical Group and not from the Operating Account of the Management Company. The Medical Group Costs are as follows: (a) Compensation of all Medical Personnel; (b) Any applicable fringe benefits for all Medical Personnel, including, but not limited to, payroll taxes, workers' compensation, health insurance (including drug coverage), dental insurance, individual disability insurance, life insurance, business buy-out disability insurance, continuing education, and medical dues and licenses; -31- (c) The cost of prosthetics, prosthetic devices, orthotics, braces, splints, appliances, allografts, x-ray films, and other items and supplies that are billable to patients or to third party payors (the "Billable Items"); (d) The Medical Equipment Master Lease Payments; (e) Any lease payments for New Ancillary Service Medical Equipment; (f) The monthly rent payable under any Office Sublease described in Section 3.2 hereof; and (g) The cost of any items which are not required to be provided by the Management Company under this Agreement and/or which were ordered, purchased, or incurred by the Medical Group directly, including but not limited to the cost of accounting, legal, consulting, or other professional or advisory services, business meetings, and business taxes. 5.9 New Ancillary Services Costs. (a) Any agreement by the parties to establish a New Ancillary Service as described in Section 3.4 of this Agreement shall (unless otherwise agreed by the parties) incorporate the following: (i) The Management Company shall create a separate division for purposes of accounting for the income, costs, profits, and losses of any New Ancillary Service. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Ancillary Service. (ii) Profits and/or losses of any New Ancillary Service shall be divided equally between the Medical Group and the Management Company, and all distributions to the Medical Group and to the Management Company shall be made in equal amounts to each from available cash (after payment of all currently due obligations incurred in connection with such New Ancillary Service, including without limitation any principal and interest amounts then due and payable under Section 5.9(a)(iv) below, and after retention of reasonable reserves) derived from the operation of such Ancillary Division. -32- (iii) All diagnostic and therapeutic equipment utilized in connection with any New Ancillary Service ("New Ancillary Service Medical Equipment") shall be acquired by the Management Company and leased to the Medical Group pursuant to an equipment lease substantially in the form of the Medical Equipment Master Lease. (iv) The Management Company shall pay all of the Ancillary Service Start-Up Costs. Beginning with the month immediately following the expiration of the Ancillary Service Start-Up Period, the Management Company shall be entitled to recoup all of the Ancillary Service Start-Up Costs previously paid by the Management Company in sixty (60) equal monthly installments of principal, plus interest on the unrecouped portion of such costs at the prevailing prime rate as set forth in the Wall Street Journal and/or at the actual rate paid by the Management Company with respect to any part of such costs that have been financed by the Management Company. (v) The Management Company shall provide, in connection with any New Ancillary Service, the full range of management services described in this agreement. (vi) The billings, collections, costs and expenses relating to any New Ancillary Service shall not be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, New Medical Office Start-Up Costs, New Physician Start-Up Costs, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, 5.7, or 5.8, respectively. (b) For purposes of this Section 5.9, "Ancillary Service Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of the New Ancillary Service and ending on the last day of the first period of two (2) consecutive calendar months for which the New Ancillary Service shows a profit. (c) For purposes of this Section 5.9, "Ancillary Service Start-Up Costs" means the total of all of the following costs incurred in connection with the establishment of a New -33- Ancillary Service during the Ancillary Service Start-Up Period (whether such costs would otherwise be considered Management Company Costs or Medical Group Costs) -- (i) Any lease payments for New Ancillary Service Medical Equipment; (ii) All costs of acquiring furniture, fixtures, and office equipment; (iii) All initial occupancy costs, if any, including but not limited to rent deposits, prepaid rent, and tenant improvements; (iv) All other start-up costs, including but not limited to legal, accounting and consulting fees, and the cost of initial inventories of supplies and other items; and (v) All ongoing costs of the New Ancillary Service, including but not limited to personnel (other than physician Medical Personnel) and related benefits, the cost of operating any equipment utilized in providing the service, supplies, insurance, rent, repairs and maintenance, outside services, telephone, taxes, utilities, storage and other ordinary ongoing expenses of providing the New Ancillary Service. 5.10 Review and Audit of Books and Records. Each of the parties shall have the right, during ordinary business hours and upon reasonable notice, to review and make copies of, or to audit through a qualified certified public accountant approved by the other party (which approval shall not be unreasonably withheld), the books and records of the other party relating to the billing, collection, and disbursement of fees, and the determination of costs, under this Agreement. Any such review or audit shall be performed at the cost of the requesting party; provided, however, that in the event that such review or audit requested by the Medical Group discloses a discrepancy indicating that the Medical Group has actually been underpaid by an amount in excess of two percent (2%) of the total amount of Medical Group Compensation -34- payable to the Medical Group for the period covered by the audit, the cost of the audit shall be borne by the Management Company. All documents and other information obtained in the course of such review or audit shall be held in strict confidence. 5.11 Start-Up Period. Consistent with the provisions of Section 2 of this Agreement, the parties acknowledge and agree that, in order to facilitate the transition of responsibilities hereunder, certain requirements and procedures agreed to under this Agreement may be implemented over the course of a period of time commencing on the Commencement Date and ending two (2) months thereafter (subject to extension by agreement of the Medical Group and the Management Company), rather than being fully implemented immediately on the Commencement Date. Accordingly, the parties further agree that the Management Fee and Medical Group Compensation payable in respect of the Management Services and the Medical Group Services applicable to such period of time shall be computed, and any appropriate adjustments shall be made, such that no material financial advantage or disadvantage shall accrue to either party as a result of implementing such requirements and procedures over the course of such start-up period rather than immediately on the Commencement Date. SECTION 6. Representations and Warranties of the Medical Group. The Medical Group hereby represents and warrants to the Management Company, as of the date hereof, as follows: 6.1 Organization; Good Standing; Qualification and Power. The Medical Group is a professional corporation duly organized, validly existing, and in good standing under the laws of the State of California and has all requisite power and authority to own, lease, and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to enter into this Agreement, the Asset Purchase Agreement to which the Medical Group is a party, the Medical Equipment Master Lease, the Assignment of Lease, the Office Sublease, and the Stockholder Non-Competition Agreement (collectively, the "Medical Group Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The Medical Group has delivered to the Management Company a true and correct copy of its Articles of Incorporation and Bylaws (collectively, the "Medical Group Governance Documents"), in effect on the date hereof. -35- 6.2 Equity Investments. The Medical Group currently has no subsidiaries, nor does the Medical Group currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 6.3 Authority. The execution, delivery and performance of the Medical Group Transaction Documents and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of the Medical Group. The Medical Group Transaction Documents have been duly and validly executed and delivered by the Medical Group and constitute the legal, valid and binding obligations of the Medical Group enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally or by applicable laws pertaining to the enforceability of non-competition agreements. Neither the execution, delivery or performance of the Medical Group Transaction Documents by the Medical Group nor the consummation by the Medical Group of the transactions contemplated hereby or thereby, nor compliance by the Medical Group with any provision hereof or thereof will (a) conflict with or result in a breach of any provision of the formation documents of the Medical Group, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Medical Group or the Medical Business is a party or by which they or any of its respective properties or assets may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or (c) to the best knowledge of the Medical Group, but without expressing any opinion regarding the enforceability of non-competition agreements, violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Medical Group, the Medical Business or any of their respective properties or assets. To the best knowledge of the Medical Group, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Medical Group of the Medical Group Transaction Documents or the consummation of the transactions contemplated thereby. -36- 6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's balance sheet as of December 31, 1996 (the "Balance Sheet"; and the date thereof being referred to as the "Balance Sheet Date"), and the related internal statements of revenue and expenses for the period then ended (including the notes thereto and other financial information included therein) (collectively, the "Internal Financial Statements"), (b) the review financial statements of the Medical Business for the periods ended December 31, 1996 and December 31, 1995 (the "Review Financial Statements"), and (c) the historical collection information of the Medical Group and its shareholder employees for the year ended December 31, 1995 and for the ten-month period ended October 31, 1996 (the "Historical Collections Information"). The Internal Financial Statements, the Review Financial Statements, and the Historical Collections Information (i) were prepared in accordance with the books and records of the Medical Business, (ii) fairly present the financial position of the Medical Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the dates thereof. 6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule 6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Balance Sheet, (b) all liability reserves established by the Medical Business on the Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Balance Sheet. 6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, the Medical Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Medical Business; -37- (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Medical Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Medical Business other than such items created or incurred in the ordinary course of the Medical Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Medical Business outside the ordinary course of the Medical Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Medical Business except in the ordinary course of the Medical Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Medical Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Medical Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Medical Business; -38- (i) any general uniform increase in the compensation of employees of the Medical Group or the Medical Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Medical Group or the Medical Business; (j) any change in the accounting methods or practices followed in connection with the Medical Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) the termination of employment of any key employee of the Medical Group or the Medical Business listed on Annex A ("Medical Group Key Personnel"), or any expression of intention by any of the Medical Group Key Personnel to terminate such employment with the Medical Group or the Medical Business; (l) any agreement or commitment relating to the sale of any material fixed assets of the Medical Business; (m) any other transaction relating to the Medical Business other than in the ordinary course of the Medical Business and consistent with past practice; or (n) any agreement or understanding, whether in writing or otherwise, for the Medical Business to take any of the actions specified in items (a) through (m) above. 6.7 Tax Matters. (a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the Medical Business required to be paid by the Medical Group through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed by the Medical Group in connection with the Medical Business prior to the -39- date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Medical Group prior to the date hereof (collectively, "Returns") have been duly filed; (ii) as of the time of filing, the Returns correctly reflected in all material respects (and, as to any Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Medical Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Medical Business that have been shown as due and payable by the Medical Group on the Returns have been timely paid and filed or adequate provisions made to the books and records of the Medical Business; (iv) in connection with the Medical Business (A) the Medical Group has made provision on the Balance Sheet for all Taxes payable by the Medical Group for any periods that end on or before the Balance Sheet Date for which no Returns have yet been filed and for any periods that begin on or before the Balance Sheet Date and end after the Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Balance Sheet Date and (B) provision has been made for all Taxes payable by the Medical Group for any periods that end on or before the date hereof for which no Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Medical Business, and there are no pending tax audits of any Returns relating to the Medical Business; and (vi) no deficiency or addition to Taxes, interest or penalties applicable to the Medical Group for any Taxes relating to the operation of the Medical Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Medical Group or any previous operator of the Medical Business was a member for which the Medical Group could be liable). (b) The Medical Group is not a foreign person within the meaning of ss.1.1445- 2(b) of the Regulations under Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"). -40- (c) The Medical Group has provided the Management Company with true and complete copies of all Federal, state and foreign Returns of the Medical Group for the calendar years ending December 31, 1995 and 1996. (d) For purposes of this Agreement, "Tax" means any of the Taxes and "Taxes" means, with respect to any person or entity, (i) all federal, state, local and foreign income taxes (including any tax on or based upon net income, or gross income, or income as specially defined, or earnings, or profits, or selected items of income, earnings or profits) and all Federal, state, local and foreign gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties or other Federal, state, local and foreign taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) on such person or entity and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of being a `transferee' (within the meaning of Section 6901 of the Code or any other applicable law) of another person or entity or a member of an affiliated or combined group. 6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Medical Group, threatened against the Medical Group or any shareholder of the Medical Group, or in connection with the Medical Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Medical Group, its assets or affecting the Medical Business. The Medical Group has delivered to the Management Company all documents and correspondence relating to matters referred to in said Schedule 6.8. 6.9 Compliance; Governmental Authorizations. The Medical Group and the Medical Business shall have complied in all material respects with all applicable material Federal, state, -41- local or foreign laws, ordinances, regulations and orders. The Medical Group has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Medical Business, the lack of which would have a material adverse effect on the Medical Group's ability to operate the Medical Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Medical Group has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Medical Group, threatened to revoke or limit any thereof. To the best knowledge of the Medical Group, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 6.10 Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 6.10, all of the accounts receivable owing to the Medical Group in connection with the Medical Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Medical Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Medical Group, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 6.10, as of the date hereof, there is (i) no account debtor or note debtor of the Medical Business delinquent in its payment by more than 60 days, (ii) no account debtor or note debtor of the Medical Business who or which has refused to pay its obligations for any reason or is the subject of a bankruptcy proceeding and (iii) no account receivable or note receivable of the Medical Business pledged to any third party. (b) All accounts payable and notes payable by the Medical Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 6.10, there is no account payable or note payable past due or delinquent in its payment. 6.11 Labor Relations; Employees. Schedule 6.11 contains a true and complete list of the persons employed by the Medical Group as of the date hereof (the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and the Medical Business are not delinquent in payments to any of the Employees for any wages, salaries, commissions, bonuses -42- or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Employees; (b) upon termination of the employment of any of the Employees, neither the Medical Group, the Medical Business nor the Management Company will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Medical Group or in connection with the Medical Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Medical Group, threatened against or involving the Medical Group or Medical Business; (e) there is no collective bargaining agreement covering any of the Employees; and (f) to the best knowledge of the Medical Group, no Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Medical Group or the Medical Business. 6.12 Employee Benefit Plans. (a) Schedule 6.12 identifies each `employee benefit plan', as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Medical Group or the Medical Business and any Employee or former employee of the Medical Group or in connection with the Medical Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Medical Group or in connection with the Medical Business for the benefit of any Employee or former employee of the Medical Group or in connection with the Medical Business under which the Medical Group, any affiliate thereof or the Medical Business has any present or future obligation or liability (the "Employee Plans"). The Medical Group has provided the Management Company with true and complete age, salary, service and related data for Employees of the Medical Group and in connection with the Medical Business. -43- (b) Schedule 6.12 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Medical Group or in connection with the Medical Business. 6.13 Insurance. Schedule 6.13 contains a list of all policies of professional liability (medical malpractice), general liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Medical Group covering the assets, properties or operations of the Medical Group and the Medical Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither the Medical Group nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Medical Group or the Medical Business. 6.14 Real Property. Schedule 6.14 sets forth an accurate and complete legal description of the entire right, title and interest of the Medical Group in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real property, owned or leased by the Medical Group (the "Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Real Property, the Medical Group has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Medical Business. The Medical Group has a valid leasehold interest in all Real Property leased by the Medical Group. 6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15, neither the Medical Group nor the Medical Business is bound by any oral or written agreement or contract -44- which by its terms prohibits it from conducting the Medical Group or the Medical Business (or any material part thereof). 6.16 Disclosure. Neither the Medical Group Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Management Company by or on behalf of the Medical Group in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 6.16, there have been no events or transactions, or information which has come to the attention of the Medical Group, which, as they relate directly to the Medical Group or the Medical Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Medical Group and the Medical Business. SECTION 7. Representations and Warranties of the Management Company. The Management Company represents and warrants to the Medical Group, as of the date hereof, as follows: 7.1 Organization, Good Standing and Power. The Management Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement, the Asset Purchase Agreements, the Restricted Stock Agreement, the Medical Equipment Master Lease, the Assignment of Lease, the Office Sublease, and the Stockholder Non-Competition Agreement (collectively, the "Management Company Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. 7.2 Authority. The execution, delivery and performance of the Management Company Transaction Documents, and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action on the part of -45- the Management Company. The Management Company Transaction Documents to which it is a party have been duly and validly executed and delivered by the Management Company, and such Management Company Transaction Documents are valid and binding obligations of the Management Company, enforceable in accordance with their respective terms except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of the Management Company Transaction Documents, nor the consummation by the Management Company of the transactions contemplated thereby, nor compliance by the Management Company with any provision thereof, will (a) conflict with or result in a breach of any provisions of the Certificate of Incorporation or By-laws of the Management Company, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Management Company is a party or by which it or any of its properties or assets is or may be bound or (c) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Management Company or any of its properties or assets. 7.3 Issuance of Common Stock. The Management Company has taken all action necessary or appropriate to duly authorize the creation, issuance and sale of the common stock to be issued hereunder. Such shares of common stock, when issued, sold and delivered, as provided for herein and in the Restricted Stock Agreement, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership of the shares. The issuance of such shares of common stock will not violate any preemptive or similar right of any person. 7.4 Issued and Outstanding Stock. Set forth in Schedule 7.4 is an accurate and complete list of the number and class of issued and outstanding shares of stock of the Management Company. Each of the outstanding shares of capital stock has been duly and validly authorized and issued, is fully paid and non-assessable. -46- 7.5 Permits, Authorizations, Consents, Approvals, Notifications, and Filings. Except as provided in Schedule 7.5, to the best of the Management Company's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Management Company of this Agreement or the consummation by the Management Company of the transactions contemplated hereby. 7.6 Financial Information. Schedule 7.6 contains (a) the unaudited statements of assets, liabilities and stockholders' equity of the Management Business as at the date set forth therein (the "Management Company Balance Sheet"; and the date thereof being referred to as the "Management Company Balance Sheet Date"), and the related unaudited statements of revenue and expenses for the periods then ended (including the notes thereto and other financial information included therein) (collectively, the "Unaudited Financial Statements"). The Unaudited Financial Statements (i) were prepared in accordance with the books and records of the Management Business, (ii) fairly present the financial position of the Management Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the date thereof. 7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule 7.7, as of the Management Company Balance Sheet Date, (a) the Management Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Management Company Balance Sheet, (b) all liability reserves established by the Management Business on the Management Company Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Management Company Balance Sheet. 7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the Management Company Balance Sheet Date, the Management Business has been operated in the ordinary course and consistent with past practice and there has not been: -47- (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Management Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Management Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Management Business other than such items created or incurred in the ordinary course of the Management Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Management Business outside the ordinary course of the Management Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Management Business except in the ordinary course of the Management Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Management Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Management Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused -48- to pay for any reason or with respect to which the Management Business, such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Management Business; (i) any general uniform increase in the compensation of employees of the Management Company or the Management Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Management Company or the Management Business; (j) any change in the accounting methods or practices followed in connection with the Management Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) any termination of employment of any key employee of the Management Company or the Management Business listed on Annex B (each, a "Management Company Key Employee"), or any expression of intention by any Key Employee of the Management Company or the Management Business to terminate such employment with the Management Company or the Management Business; (l) any agreement or commitment relating to the sale of any material fixed assets of the Management Business; (m) any other transaction relating to the Management Business other than in the ordinary course of the Management Business and consistent with past practice; or -49- (n) any agreement or understanding, whether in writing or otherwise, for the Management Business to take any of the actions specified in items (a) through (m) above. 7.9 Tax Matters. (a) Except as set forth on Schedule 7.9, (i) all Taxes relating to the Management Business required to be paid through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed in connection with the Management Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Management Company prior to the date hereof (collectively, "Management Company Returns") have been duly filed; (ii) as of the time of filing, the Management Company Returns correctly reflected in all material respects (and, as to any Management Company Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Management Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Management Business that have been shown as due and payable on the Management Company Returns have been timely paid and filed or adequate provisions made to the books and records of the Management Business; (iv) in connection with the Management Business (A) the Management Company has made provision on the Management Company Balance Sheet for all Taxes payable for any periods that end on or before the Management Company Balance Sheet Date for which no Management Company Returns have yet been filed and for any periods that begin on or before the Management Company Balance Sheet Date and end after the Management Company Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Management Company Balance Sheet Date and (B) provision has been made for all Taxes payable for any periods that end on or before the date hereof for which no Management Company Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Management Business, and there are no pending tax audits of any Management Company Returns relating to the Management Business; and (vi) no deficiency or addition to Taxes, interest or penalties for -50- any Taxes relating to the operation of the Management Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Management Company or any previous operator of the Management Business was a member for which the Management Company could be liable). (b) The Management Company is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Code. 7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Management Company, threatened against the Management Company or in connection with the Management Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Management Company its assets or affecting the Management Business. 7.11 Compliance; Governmental Authorizations. The Management Company and the Management Business have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Management Company has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Management Business, the lack of which would have a material adverse effect on the Management Company's ability to operate the Management Business after the date hereof on substantially the same basis as presently operated, and such licenses and permits are in full force and effect. To the best knowledge of the Management Company, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 7.12 Accounts and Notes Payable. All accounts payable and notes payable by the Management Company to third parties arose in the ordinary course of business, and there is no account payable or note payable which is delinquent. -51- 7.13 Employees. The Management Company is not delinquent in payments to any of the Management Company employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof. 7.14 Employee Benefit Plans. The Management Company is not delinquent in its payments or otherwise in default under any `employee benefit plan', as defined in Section 3(3) of ERISA, or under any other written or oral plans, programs, policies or agreements involving direct or indirect compensation, including any employment agreements entered into between the Management Company and any Management Company employee or former employee in connection with the Management Business. 7.15 Insurance. The Management Company has obtained such policies of insurance as are usual and customary for businesses of the type conducted by the Management Company. All such policies of insurance are valid and enforceable policies, and all premiums with respect thereto are currently paid. The Management Company has not been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Management Company or the Management Business. 7.16 Real Property. The Management Company has a valid leasehold interest in all Management Company real property leased by the Management Company. 7.17 Burdensome Restrictions. Neither the Management Company nor the Management Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Management Company or the Management Business (or any material part thereof). 7.18 Disclosure. Neither the Management Company Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Medical Group by or on behalf of the Management Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein -52- and therein not misleading. Except as set forth on Schedule 7.18, there have been no events or transactions, or information which has come to the attention of the Management Company, which, as they relate directly to the Management Company or the Management Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Management Company and the Management Business. SECTION 8. Operations Committee. 8.1 Formation and Operation of the Operations Committee. The Management Company and the Medical Group shall establish an Operations Committee responsible for directing the Management Company in connection with the development of certain specific management and administrative policies for the overall operation of the Medical Group. The Operations Committee shall consist of four (4) members. The Medical Group shall designate two (2) members of the Operations Committee, each of whom shall be a physician in the Medical Group, and the Management Company shall designate two (2) members of the Operations Committee. The Medical Group hereby designates James C. Esch, M.D. and James A. Helgager, M.D. to serve on the Operations Committee commencing as of the date of this Agreement. The business of the Operations Committee shall be conducted in accordance with the policies and procedures described in Section 8.4 hereof. 8.2 Authoritative Functions of the Operations Committee. The Operations Committee shall perform the following functions, and the decisions of the Operations Committee with respect to such functions shall be binding on the Management Company and the Medical Group: (a) Approve the annual budgets for: (i) Billings and Collections (ii) Medical Group Costs (iii) Management Company Operating Costs (which, in the absence of approval by the Operations Committee, shall be increased by one percent (1.0%) over the total amount approved for the preceding period) -53- (b) Approve costs and expenses that exceed the Management Company Operating Costs Budget. (c) Establish parameters and criteria with respect to the establishment and maintenance of relationships with institutional providers and payors and managed care contracts (except with respect to the establishment of professional fees). (d) Establish parameters and criteria with respect to: (i) Billings (ii) Claims submission (iii) Collections of fees (iv) Delinquent account collection policies (v) Turnover of delinquent accounts to outside collection agencies (vi) Write-offs of account balances (vii) Claim review requests (viii) "Insurance only" and other courtesy write-off policies (ix) Lien account collection policies (x) Student Athlete account policies (e) Approve the acquisition, replacement, relocation, or other disposition of Medical Equipment and FF&E, approve the integration of new technologies into the professional practice of the Medical Group as contemplated by Section 3.11 hereof, and approve the renovation and expansion of any offices of the Medical Group ("Tenant Improvements"); provided, however, that the approval of the Management Company also shall be required prior to (i) the acquisition of any Medical Equipment or FF&E (including any Medical Equipment or FF&E relating to the integration of new technologies into the professional practice of the Medical Group) if and to the extent that the aggregate cost of such items in any calendar year exceeds five percent (5%) of the Management Fee -54- for such year, (ii) the undertaking of any Tenant Improvements relating to patient care facilities that cost more than $10,000 in the aggregate at any one of the Medical Group's office locations in any calendar year, or (iii) the undertaking of any other Tenant Improvements. (f) Establish parameters and criteria for off-site storage of files and records of the Medical Group. (g) Approve any change in the insurance carrier that provides professional liability coverage to the Medical Group. (h) Approve all New Physician Start-Up Costs in accordance with Section 5.7 hereof. 8.3 Advisory Functions of the Operations Committee. The Operations Committee shall review, evaluate and make recommendations to the Medical Group and the Management Company with respect to the following matters: (a) Identification of physician subspecialties required for the efficient operation of the Medical Group; advice regarding all Medical Personnel employment and recruitment contracts to be utilized by the Medical Group. (b) Development of long-term strategic planning objectives for the Medical Group. (c) Public relations, advertising, and other marketing of Medical Group services, including design of exterior signs. (d) The establishment of fees for professional services and ancillary services rendered by the Medical Group. -55- (e) Access and quality issues pertaining to ancillary services. (f) Insurance limits and insurance coverage of the Medical Group and the Management Company, as such coverage may relate to Medical Group operations and activities. (g) Any matters arising in connection with the operations of the Medical Group that are not specifically addressed in this Agreement and as to which the Management Company or the Medical Group requests consideration by the Operations Committee. The recommendations of the Operations Committee with respect to the matters described in this Section 8.3 are intended for the advice and guidance of the Management Company and the Medical Group, and except as provided herein, the Operations Committee does not have the power to bind the Management Company or the Medical Group. Where discretion with respect to any matters is vested in the Management Company or the Medical Group under the terms of this Agreement, the Management Company or the Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Operations Committee. The Management Company and the Medical Group shall, however, take such recommendations of the Operations Committee into account in good faith in the exercise of such discretion. 8.4 Committee Policies and Procedures. (a) The Medical Group shall designate one of its members to act as Chairman of the Committee, and the Management Company shall designate one of its members to act as Vice Chairman. Each party may substitute or change its designated Operations Committee members at any time upon notice to the other party, and any Operations Committee member may designate his or her own substitute at any meeting without notice. Each member shall have one vote and shall have the right to grant his or her proxy to another member of the Operations Committee. The Chairman, if present, shall preside at all meetings of the Operations Committee. In the absence of the designated Chairman, the Vice Chairman shall preside. The -56- only powers of the Chairman and the Vice Chairman that differ from those of the other members of the Operations Committee shall be to call and preside over meetings in accordance with this Section 8.4. (b) The Operations Committee may hold meetings without call or formal notice at such times and places as a quorum of its members may from time to time determine. A meeting of the Operations Committee also may be called by at least two (2) members of the Operations Committee or by the Chairman or Vice Chairman thereof upon at least three (3) days' written notice to the other members of the Operations Committee. Such notice requirement shall be deemed waived with respect to any member of the Operations Committee who attends such meeting. Meetings may be held in person or by telephone. The Operations Committee also may act by written consent as provided in Section 8.4(c). Minutes shall be kept of all formal actions taken by the Operations Committee. (c) No action of the Operations Committee shall be effective unless authorized by the vote of the four (4) members of the Operations Committee present or represented by proxy at the applicable meeting. A quorum of the Operations Committee shall be the four (4) members, in person, by telephone, or by proxy, and a quorum must remain for the duration of the meeting. The Operations Committee may establish such procedures to act by written consent, without a meeting, as the Operations Committee determines are advisable, provided that all four (4) members (in person or by proxy) must sign any written consent. SECTION 9. Obligations of the Medical Group. The Medical Group shall perform the following obligations during the Term: 9.1 Compliance with Laws. The Medical Group shall provide professional services to patients in compliance at all times with ethical standards, laws and regulations to which they are subject. The Medical Group shall verify, with the assistance of the Management Company, that each physician and other Medical Personnel associated with the Medical Group for the purpose of providing medical care to patients of the Medical Group is licensed by the State of California. The Medical Group shall monitor the quality of medical care practiced by physicians -57- and other health care personnel associated with the Medical Group. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician by any payor, patient, state or federal regulatory agency or any other person or entity, the Medical Group shall immediately inform the Management Company of such action and its underlying facts and circumstances. 9.2 Use of Facility. The Medical Group shall use and occupy any Facility (as defined below) exclusively for the practice of medicine, and shall comply with all applicable federal, state and local rules, ordinances and standards of medical care. The medical practice or practices conducted at any Facility described in clause (i) of the definition of the term "Facility" shall be conducted solely by Medical Personnel associated with the Medical Group, and no other physician or medical practitioner shall be permitted to use or occupy any Facility described in clause (i) below without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. The term "Facility" shall mean (i) any medical facility or laboratory controlled, managed or operated by the Management Company or (ii) any hospital at which any Medical Personnel practices medicine or maintains admitting privileges. 9.3 Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts. The Medical Group shall have the exclusive control over the choice of vendors and products utilized with respect to all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, medical supplies and allografts. 9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group shall have exclusive control over the choice of specific physicians and facilities to be utilized by the Medical Group with respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical professionals and facilities; provided, however, that the foregoing shall not limit the provisions of Section 3.4(b) hereof. 9.5 Insurability. The Medical Group shall cooperate with the Management Company in (i) ensuring that its Medical Personnel are insurable or (ii) instituting proceedings to terminate -58- within two business days any Medical Personnel who is not insurable or who loses his or her insurance eligibility. The Medical Group shall notify the Management Company in writing of any change in the insurance status of any Medical Personnel within two days after the Medical Group receives notice of any such change. The Medical Group shall require all Medical Personnel to participate in an on-going risk management program. 9.6 Medicare. The Medical Group shall cause all physicians to be participating providers and accept assignment under Medicare. 9.7 Billing. The Medical Group's Medical Personnel shall be responsible for providing the appropriate current CPT4 coding with respect to the fee tickets prepared by such Medical Personnel. 9.8 Medical Personnel Hiring. The Medical Group shall have the ultimate control over and responsibility for the hiring, compensation, supervision, evaluation and termination of its Medical Personnel; provided, however, that at the request of the Medical Group, the Management Company shall consult with the Medical Group regarding such matters. 9.9 Continuing Education. The Medical Group and its Medical Personnel shall be solely responsible for ongoing membership in professional associations and continuing professional education. The Medical Group shall ensure that its Medical Personnel participate in such continuing professional education as is necessary for such physician or professional to remain current in his or her field of medical practice. 9.10 Sales of Stock. The Eligible Parties shall give to Naresh Nagpal, M.D. and any venture capital firm providing funds to the Management Company the right to participate on a pro rata basis (based on the number of shares, whether preferred or common, calculated on an as-converted basis, held by Naresh Nagpal, M.D. and any such venture capital firm and by any other shareholders who hold the same rights that are conferred by this Section 9.10, including members of other physician groups) in any proposed sale of more than fifty percent (50%) of the stock in the Management Company held by the Eligible Parties to any unaffiliated third party -59- or parties, and the Medical Group shall require the Eligible Parties to comply with the obligations set forth in this Section 9.10; provided, however, that the obligations under this Section 9.10 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. SECTION 10. Certain Covenants. 10.1 Change of Control. During the Term of this Agreement, the Medical Group shall not enter into any single transaction (or group of related transactions undertaken pursuant to a common plan) involving the admission of new shareholders, transfer of stock in the Medical Group, or reorganization or restructuring of the Medical Group if in any such case the effect would be to transfer a majority of the ownership interest in the Medical Group, without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. 10.2 Legend on Securities. During the Term of this Agreement, any certificate or similar evidence representing an equity interest in the Medical Group issued by the Medical Group shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF APRIL 1, 1997, BETWEEN TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION, BONE, MUSCLE AND JOINT, INC., A DELAWARE CORPORATION, AND THE INDEMNIFYING PERSONS (AS DEFINED THEREIN)." The Management Company acknowledges that there is no certificate or other similar evidence representing equity interests in the Medical Group as of the date hereof. Nothing herein shall be construed as requiring the Medical Group to issue any certificate or other evidence representing an equity interest in the Medical Group (other than the Medical Group Governance Documents, or any replacement thereof, as amended from time to time). -60- SECTION 11. Records. 11.1 Medical Records. Upon termination of this Agreement, the Medical Group shall retain all patient medical records maintained by the Medical Group or the Management Company in the name of the Medical Group. 11.2 Management Business Records. All books and records relating in any way to the operation of the Management Business which are not patient medical records shall at all times be the property of the Management Company. The Medical Group shall, upon its written request, be entitled to copies of any such records relating to the Management Services performed by the Management Company. 11.3 Access to Records Following Termination. (a) Following the termination of this Agreement, the Medical Group shall grant (to the extent permitted by law) to the Management Company, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, reasonable access (which shall include making photocopies) to the patient medical records described in Section 11.1 hereof and any other pertinent information regarding the Medical Group during the Term. Prior to accessing such patient medical records, the Management Company shall obtain any required patient authorization. (b) Following the termination of this Agreement, the Management Company shall provide to the Medical Group, promptly upon the Medical Group's written request, photocopies of the Management Business records described in Section 11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, any other pertinent information regarding the Management Company during the Term. SECTION 12. Insurance and Indemnity. 12.1 Professional Liability Insurance. During the Term, the Management Company shall, to the extent permitted by applicable law, and subject to approval by the Operations Committee if required by Section 8.2(g) hereof, procure and maintain for the benefit of itself -61- and the Medical Group comprehensive professional liability insurance providing for (a) general liability coverage and (b) medical malpractice coverage with limits of not less than $1,000,000 per claim and with aggregate policy limits of not less than $3,000,000 covering the Medical Group and each of the Medical Personnel of the Medical Group (or such higher amounts as may be necessary to comply with any regulatory requirement and/or contractual requirement to which such Medical Personnel or the Medical Group may be subject), including coverage for claims made after the Commencement Date relating to events or occurrences at any time prior thereto. The parties hereto acknowledge that the Management Company is procuring the malpractice insurance referenced herein to ensure that the Management Company has protection in the event it is sued as a result of an act or omission of an employee of the Medical Group. The Management Company shall pay the premiums for such general and medical malpractice liability coverage, and the Management Company shall be designated as a co-beneficiary under such insurance policies. 12.2 Life Insurance. The Management Company shall obtain a $500,000 life insurance policy for each duly licensed physician shareholder in the Medical Group. The Management Company shall be designated as the beneficiary under such policies. The premiums for such policies shall be paid by the Management Company and shall not be included as Management Company Operating Costs or otherwise charged to the Medical Group. 12.3 Indemnification by Medical Group. The Medical Group shall indemnify, hold harmless and defend the Management Company, its officers, directors, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Medical Group Services, including without limitation the performance of such services prior to the Commencement Date, (ii) any other acts or omissions of the Medical Group and its Medical Personnel, including without limitation any such acts or omissions that occurred prior to the Commencement Date, or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Medical -62- Group and/or the Medical Personnel and/or their respective agents and/or subcontractors (other than the Management Company) during the Term. 12.4 Indemnification by Certain Individuals. Each of the Medical Personnel who are currently or hereinafter become shareholders in the Medical Group (each, an "Indemnifying Person") shall, on a several basis, indemnify, hold harmless and defend the Management Company, its officers, directors, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of medical services by the Indemnifying Person, (ii) any other acts or omissions by the Indemnifying Person, or (iii) any breach or failure to perform any obligation under this Agreement or the Transaction Documents by the Indemnifying Person and/or his or her agents during the Term. Each new shareholder in the Medical Group shall execute a written statement agreeing to be bound by this Section 12.4. 12.5 Indemnification by Management Company. The Management Company shall indemnify, hold harmless and defend the Medical Group, its officers, directors, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Management Services, (ii) any other acts or omissions of the Management Company and its employees or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Management Company and/or its employees and/or their respective agents and/or subcontractors (other than the Medical Group) during the Term. SECTION 13. Termination. 13.1 Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for -63- the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter diligently prosecute such action to completion, (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice, (d) in the event that the sale of shares of the Management Company pursuant to its IPO is not consummated within forty-eight (48) months after the Commencement Date, (e) at any time during the month of April 1998, if by April 1, 1998, the commencement date of Phase II (as hereinafter defined) has not occurred, or at any time after April 30, 1998, so long as the commencement date of Phase II has not yet occurred; (f) if Naresh Nagpal, M.D. ceases to be and act on a full-time basis as the President and CEO of the Management Company prior to the commencement date of Phase II, provided that the Medical Group gives notice of termination within ninety (90) days after the Medical Group's receipt of written notice from the Management Company that Dr. Nagpal has ceased to be or act on a full-time basis as the President and CEO of the Management Company; or (g) in the event of the Management Company's breach of Section 16.8 hereof pertaining to the initial public offering of the Management Company's common stock. 13.2 Termination by Management Company. The Management Company may terminate this Agreement effective immediately by giving written notice of termination to the Medical Group (a) in the event of a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical Group shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Medical Group shall not have taken -64- reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Medical Group by the Management Company or the Medical Group does not thereafter diligently prosecute such action to completion, (c) in the event that any of the representations and warranties made by the Medical Group in Section 6 is untrue or misleading in any material respect, provided that the Management Company shall have previously given written notice to the Medical Group describing in reasonable detail the nature of the item in question and the Medical Group shall not have cured such matter within thirty (30) days of such notice, or (d) in the event the Medical Group is excluded from the Medicaid or Medicare program for any reason. 13.3 Termination by Medical Group or Management Company. The Medical Group and the Management Company shall each have the right to terminate this Agreement effective immediately by giving written notice of termination to the other party pursuant to Section 27 of this Agreement. 13.4 Effect of Termination. Upon the termination of this Agreement in accordance with the terms hereof, neither party hereto shall have any further obligation or liability to the other party hereunder, except as provided in Section 5.3(b), Section 13.5, and Section 26 hereof, and except to pay in full and satisfy any and all outstanding obligations of the parties accruing through the effective date of termination. In order to accomplish the foregoing, the Annual Medical Group Compensation Amount described in Section 5.3(b) shall be calculated on or before the end of the fourth month following the termination date, rather than on or before April 30 as specified in Section 5.3(b), and the computation made under such section shall be made with respect to the portion of the year ending on the termination date (if the termination date is other than December 31). In making such computation, all Collections during January, February, and March of such year shall be excluded, and all Collections during the three-month period following termination shall be included. Additionally, any payment required under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days after the date by which the foregoing calculation is to be made, rather than on May 15. Any Collections received by the Management Company at any time after the three-month period following termination shall be -65- delivered by the Management Company to the Medical Group and shall belong solely to the Medical Group. 13.5 Repurchase of Assets. Promptly following termination of this Agreement for any reason, the Management Company shall sell, transfer, convey, and assign to the Medical Group, and the Medical Group shall purchase, assume, and accept from the Management Company, at such price and upon such terms as may be agreed upon by the parties -- or, if the parties are unable to agree, at fair market value, determined in the manner set forth below -- all of the following items which are used in connection with the professional practice and related activities of the Medical Group and which, in the case of items (a), (b), (c) and (d), are physically located in any of the offices of the Medical Group, subject to any required consent from any third party having an interest therein: (a) the Medical Equipment owned by the Management Company; (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Management Company; (c) the Management Company's rights and interests in any equipment leased by the Management Company, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; (d) the supplies owned by the Management Company; (e) the Management Company's rights and interests under all of the Office Leases, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; and (f) the deposits of the Management Company relating to the Medical Group. Fair market value of the above described assets shall be determined by an independent appraiser mutually agreed upon by the Medical Group and the Management Company; provided, however, that if the Medical Group and the Management Company are unable to agree upon such an appraiser, each of the parties shall select an appraiser and the two appraisers thus selected shall select a third appraiser. All of the appraisers shall appraise the assets, and for purposes of -66- determining the purchase price, the highest and lowest appraisals shall be disregarded, and the remaining appraisal shall be used. 13.6 Phase II. For purposes of this Agreement, the commencement date of "Phase II" means the earlier of the following: (a) the date on which the Management Company files a Preliminary Prospectus for the initial public offering of its stock with the Securities and Exchange Commission; or (b) the first day of the month next following the first period of twelve (12) consecutive calendar months for which Aggregate Group Collections ("AGC") equals or exceeds Sixty-Five Million Dollars ($65,000,000), where AGC means the sum of the following: (i) the Collections of the Medical Group; provided, however, that with respect to any physician who joins the Medical Group after the Commencement Date and before the end of the third month of the above-described twelve-month period, the collections attributable to such physician for purposes of this computation shall be computed by determining the amount of such collections commencing on the first day of the fourth month after the physician begins performing professional services for or with the Medical Group and ending on the last day of the above-described twelve (12) month period, and then annualizing the amount thus determined; plus (ii) the aggregate amount of the total actual collections of all other medical groups which have entered into management services agreements ("MSAs") with the Management Company (including any such agreement that is to become operational upon the consummation of the Management Company's IPO); provided, however, that with respect to any physician who joins any such -67- medical group during the first three months of the above-described twelve-month period, the collections attributable to such physician for purposes of this computation shall be computed by determining the amount of such collections commencing on the first day of the fourth month after the physician begins performing professional services for or with such medical group and ending on the last day of the above-described twelve-month period, and then annualizing the amount thus determined; provided, further, that in the event any MSA between the Management Company and a medical group provides for a management fee that is other than ten percent (10.0%) of gross collections, then the amount of collections attributable to such medical group for purposes of this computation shall be adjusted by multiplying the actual amount of collections by a fraction, the numerator of which is equal to such management fee percentage figure and the denominator of which is ten (10). For example, if the MSA for another medical group provides for a management fee of five percent (5.0%) of the medical group's collections, then the actual amount of such collections shall be adjusted by multiplying such actual amount by 5/10, or 1/2. For purposes of this computation, any portion of the management fee payable in respect of Professional Practice Cost Savings (as described in Schedule VI) or similar formulations applicable to any other medical group shall be ignored. SECTION 14. Non-Disclosure of Confidential Information. 14.1 Non-Disclosure. Neither the Management Company nor the Medical Group, nor their respective employees, stockholders, consultants or agents shall, at any time after the execution and delivery hereof, directly or indirectly disclose any Confidential or Proprietary Information relating to the other party hereto to any person, firm, corporation, association or other entity, nor shall either party, or their respective employees, stockholders, consultants or agents make use of any of such Confidential or Proprietary Information for its or their own -68- purposes or for the benefit of any person, firm, corporation or other entity except the parties hereto or any subsidiary or affiliate thereof. The foregoing obligation shall not apply to any information which a party hereto can establish to have (a) become publicly known without breach of this Agreement by it or them, (b) to have been given to such party by a third party who is not obligated to maintain the confidentiality of such information, or (c) is disclosed to a third party with the prior written consent of the other party hereto. 14.2 Confidential or Proprietary Information. The term "Confidential or Proprietary Information" means all information known to a party hereto, or to any of its employees, stockholders, officers, directors or consultants, which relates to the Transaction Documents, patient medical and billing records, trade secrets, books and records, supplies, pricing and cost information, marketing plans, strategies and forecasts. Nothing contained herein shall prevent a party hereto from furnishing Confidential or Proprietary Information pursuant to a direct order of a court of competent jurisdiction. SECTION 15. Non-Competition. In consideration of the premises contained herein and the consideration to be received hereunder, and in consideration of and as an inducement to the Management Company to consummate the transactions contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition provisions attached hereto as Schedule VIII, (b) agrees to require each of the Eligible Parties to execute the Stockholder Non-Competition Agreement executed by the Medical Group and the Management Company concurrently herewith (the "Stockholder Non-Competition Agreement"), and (c) agrees to require each person who after the date hereof becomes entitled to receive shares (or options to receive shares) in the Management Company in connection with his or her performance of services for the Medical Group, to execute an agreement substantially identical to the Stockholder Non-Competition Agreement. SECTION 16. Obligations of the Management Company. 16.1 No Practice of Medicine. The Medical Group and the Management Company acknowledge that certain federal and state statutes severely restrict or prohibit the Management Company from providing medical services. Accordingly, during the Term, the Management -69- Company shall not provide or otherwise engage in services or activities which constitute the practice of medicine, as defined in applicable state or federal law, except in compliance therewith. 16.2 No Interference with Professional Judgment. Without in any way limiting Section 16.1 hereof, during the Term, the Management Company shall not interfere with the exercise of professional judgment by any physician or other licensed health care professional who is a shareholder, employee, or contractor of the Medical Group, nor shall the Management Company interfere with, control, direct, or supervise any physician or other licensed health care professional in connection with the provision of professional medical services. The foregoing shall not preclude the Management Company from assisting in the development of professional protocols and monitoring compliance with policies and procedures that have been instituted in accordance with this Agreement. 16.3 Compensation Committee. The Management Company shall establish a compensation committee (the "Compensation Committee") which is comprised of members of the Board of Directors of the Management Company who are not employees of the Management Company, and the compensation payable to the five (5) most highly compensated management employees of the Management Company shall be subject to the approval of the Compensation Committee; provided, however, that the obligations under this Section 16.3 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.4 Budgets. The Board of Directors of the Management Company shall establish budgets for the expenses of the Management Company, and the approval of the Board of Directors shall be required in connection with any expenses in excess of any such approved budget; provided, however, that the obligations under this Section 16.4 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. -70- 16.5 Contracts with Venture Capital Firms. The Management Company shall not enter into any consulting agreement or other contract or arrangement with any venture capital firm (or affiliate thereof) providing financing to the Management Company under which compensation will be payable to any such venture capital firm (or affiliate thereof); provided, however, that the obligations under this Section 16.5 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.6 Stock Held by Certain Individuals or Entities. Naresh Nagpal, M.D. and any venture capital firm providing funds to the Management Company ("Selling Shareholders") shall give to the Eligible Parties the right to participate on a pro rata basis (based on the number of shares, whether preferred or common, calculated on an as-converted basis, held by the Eligible Parties and by any other shareholders who hold the same rights that are conferred by this Section 16.6, including members of other physician groups) in any proposed sale of stock (whether preferred or common) in the Management Company from any of the Selling Shareholders to any unaffiliated third party or parties, and the Management Company shall require the Selling Shareholders to comply with the obligations set forth in this Section 16.6; provided, however, that the obligations under this Section 16.6 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.7 Convertible Preferred Stock. The Management Company shall not sell any common stock or take any other action the effect of which sale or other action would be to give a holder of convertible preferred stock the right to convert any number of shares of convertible preferred stock into a greater number of shares of common stock; provided, however, that the obligations under this Section 16.7 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.8 Initial Public Offering. The Management Company shall not authorize an initial public offering of its common stock for less than Four Dollars ($4.00) per share (appropriately adjusted to reflect any stock dividends, stock splits, or similar transaction). Without waiving or limiting any other right or remedy available to the Medical Group for breach of this covenant by the Management Company, in the event of an initial public offering of the Management -71- Company's common stock at less than Four Dollars ($4.00) per share, if the Medical Group so elects by written notice to the Management Company, such initial public offering shall not be considered as the initial public offering of the Management Company's common stock for any purpose under this Agreement or any of the other Transaction Documents. The Management Company shall disclose this provision to any potential underwriter in connection with the initial public offering of the Management Company's common stock. 16.9 Attendance at Board Meetings. The Medical Group shall have the right to appoint one of its shareholders to attend meetings of the Management Company's Board of Directors; provided, however, that such person shall not be a member of the Board of Directors; provided, further, that the obligations under this Section 16.9 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. SECTION 17. Assignment. The Management Company shall have the right to assign its rights and delegate its obligations hereunder to any affiliate and to assign its rights hereunder to any lending institution from which the Management Company or any affiliate obtains financing for security purposes or as collateral. Except as set forth in the preceding sentence, neither the Management Company nor the Medical Group shall have the right to assign its respective rights or delegate its respective obligations hereunder without the prior written consent of the other; provided, however, that after the consummation of an initial public offering of the Management Company's common stock, the Medical Group's consent shall not be required in connection with a sale of all or substantially all of the stock or assets of the Management Company or the merger, consolidation, or reorganization of the Management Company. SECTION 18. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed sufficient if personally delivered, sent by nationally-recognized overnight courier, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: -72- If to the Management Company: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. If to the Medical Group: Tri-City Orthopaedic Surgery Medical Group, Inc. 3905 Waring Road Oceanside, California 92056 Attention: President or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, and (c) in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to the benefit of any successors to or permitted assigns of the Management Company and of the Medical Group. -73- SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall lie in any Federal or state court located in the State of California. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the nonexclusive jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. SECTION 21. Headings. Section headings are used for convenience only and shall in no way affect the construction of this Agreement. SECTION 22. Entire Agreement; Amendments. This Agreement and the various exhibits hereto and thereto, contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by the Medical Group and the Management Company; provided, however, that in the case of any amendment affecting Section 9.10, Section 12.4, or Section 16.6 hereof, the signatures of all of those persons or entities that have agreed to such provisions as indicated on the signature pages hereof (and, in the case of an amendment to Section 12.4, all of those persons who hereafter sign a written agreement agreeing to be bound by the terms of Section 12.4 hereof) shall also be required in order for such amendment to be effective. -74- SECTION 23. Severability. The provisions of this Agreement shall be deemed severable and if any portion shall be held invalid, illegal or unenforceable for any reason, the remainder of this Agreement shall be effective and binding upon the parties. SECTION 24. Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 25. Waivers. Any party to this Agreement may, by written notice to the other party, waive any provision of this Agreement. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 26. Survival of Termination. Notwithstanding anything contained herein to the contrary, Sections 3.3(f), 3.6, 11, 12, 13.4, 13.5, 14, 15(a), 18, 19, 20, 23, 25, 27 and this Section 26 shall survive any expiration or termination of this Agreement. SECTION 27. Contract Modification for Prospective Legal Events. In the event any state or Federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that the structure of this Agreement may be in violation of such laws or regulations, the Medical Group and the Management Company shall amend this Agreement as necessary to avoid such violation. To the maximum extent possible, any such amendment shall preserve the underlying economic and financial arrangements between the Medical Group and the Management Company. If an amendment is not possible, either party shall have the right to terminate this Agreement. Any dispute between the parties hereto arising under this Section 27 with respect to whether this Agreement violates any state or Federal laws or regulations shall be jointly submitted by the parties and finally settled by binding arbitration in Los Angeles, California, pursuant to the arbitration rules of the National Health Lawyers Association Alternative Dispute Resolution Service. Arbitration shall take place before one arbitrator appointed in accordance with such rules. The governing law of the arbitration shall -75- be the law set forth in Section 20. Any decision rendered by the arbitrator shall clearly set forth the factual and legal basis for such decision. The decision rendered by the arbitrator shall be non-appealable and enforceable in any court having jurisdiction thereof. The administrative costs of the arbitration and the arbitrator fees shall be equally borne by the parties. Each party shall pay its own legal costs and fees in connection with such arbitration. * * * -76- IN WITNESS WHEREOF, the parties have duly executed this Management Services Agreement as of the date first above written. TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC. By: /s/James C. Esch --------------------------------------- James C. Esch, M.D., President BONE, MUSCLE AND JOINT, INC. By: /s/Naresh Nagpal --------------------------------------- Naresh Nagpal, M.D., President and Chief Executive Officer ACCEPTED AND AGREED AS TO SECTION 12.4 INDEMNIFYING PERSONS /s/NEVILLE ALLEYNE - -------------------------------- NEVILLE ALLEYNE, M.D. /s/JAMES C. ESCH - -------------------------------- JAMES C. ESCH, M.D. /s/JAMES A. HELGAGER - -------------------------------- JAMES A. HELGAGER, M.D. /s/NORMAN KANE - -------------------------------- NORMAN KANE, M.D. /s/RICHARD K. MUIR - -------------------------------- RICHARD K. MUIR, M.D. /s/LEONARD R. OZERKIS - -------------------------------- LEONARD R. OZERKIS, M.D. /s/JACOB SHARP - -------------------------------- JACOB SHARP, M.D. [Signatures Continued] -77- ACCEPTED AND AGREED AS TO SECTION 16.6 /s/NARESH NAGPAL - ---------------------------------------- NARESH NAGPAL, M.D. DELPHI VENTURES III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/Donald J. Lothrop ------------------------------------ Donald J. Lothrop, Managing Member DELPHI BIOINVESTMENTS III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/Donald J. Lothrop ------------------------------------ Donald J. Lothrop, Managing Member OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: OAK ASSOCIATES VI, LIMITED PARTNERSHIP, its General Partner By: /s/Ann H. Lamont ------------------------------------ Ann H. Lamont, Managing Partner OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: OAK VI AFFILIATES, LLC, its General Partner By: /s/Ann H. Lamont ------------------------------------ Ann H. Lamont, Managing Member [Signatures Continued] -78- AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT THIS AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT (the "Amendment") is entered into as of April 1, 1997, by and between TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC., a California professional corporation (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with respect to the following facts: A. The parties entered into that certain Management Services Agreement, effective as of April 1, 1997 (the "Agreement"). B. The parties desire to amend the Agreement as set forth below. NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: 1. Section 3.7 of the Agreement is amended by changing the heading to read "Administrative Personnel" in lieu of "Personnel". 2. Section 3.13 (Medical Personnel Recruiting) is deleted from the Agreement, and the following new Section 3.13 is inserted in lieu thereof: "3.13 Medical Personnel. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services who are employees or independent contractors of the Medical Group; and (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services that are billable to patients or third party payors under the name of such health care professional (as distinguished from services that are billable under the name of the supervising physician). 1 (b) With respect to each of the Medical Personnel, the Management Company shall verify educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal commissions." 3. Sections 3.14, 3.15, 3.16, 3.17, and 3.18 of the Agreement are renumbered as Sections 3.15, 3.16, 3.17, 3.18, and 3.19, respectively. 4. A new Section 3.14 is added to the Agreement to read as follows: "3.14 Technical Personnel: Leased Employees. (a) Subject to the conditions set forth in this Section 3.14, the Management Company shall employ or contract with, or shall arrange for, and shall provide to the Medical Group as leased employees, such Technical Personnel (as defined below) as may be reasonably necessary for the conduct of the Medical Group's professional practice. (b) For purposes of this Agreement, "Technical Personnel" means nurses, medical assistants, x-ray technicians, other technicians, and other personnel who perform diagnostic tests or other services that are covered by Medicare or by other third party payors when performed by an employee of a physician under the physician's supervision. (c) The Medical Group shall have the right to exercise, and shall exercise, such supervision and control over the activities of the Technical Personnel as may be necessary for the Technical Personnel to be considered leased employees under the Medicare program and under applicable law. Without limiting the generality of the foregoing, the Medical Group -- (i) shall have the right to have any Technical Personnel terminated from employment; (ii) shall furnish the Technical Personnel with the equipment and supplies needed by the Technical Personnel for their work; (iii) shall provide the Technical Personnel with any necessary training; (iv) shall instruct the Technical Personnel regarding their activities performed for the Medical Group; 2 (v) shall establish the hours of work for the Technical Personnel; (vi) shall approve vacation time and other time off from work; and (vii) shall provide that degree of supervision as is required by Medicare and by other third party payors to satisfy applicable conditions for coverage thereunder. (d) With respect to each of the Technical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal commissions." 5. Section 13.1 is deleted from the Agreement, and the following new Section 13.1 is inserted in lieu thereof: "13.1 Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter diligently prosecute such action to completion, or (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice. 3 6. Schedule V of the Agreement is amended by adding the following new sentence at the end thereof: "Notwithstanding the foregoing, in the event that the common stock of the Management Company has not commenced trading on NASDAQ, the New York Stock Exchange, or other established securities markets within forty-eight (48) months after the date hereof, pursuant to an initial public offering that satisfies the requirements of Section 16.8 of this Agreement, the Applicable Percentage shall be two and one-half percent (2.5%) in lieu of ten percent (10.0%), effective commencing on the fourth anniversary of the date hereof and continuing thereafter during the Term of this Agreement until the common stock of the Management Company commences public trading as specified above pursuant to an initial public offering that satisfies the requirements of Section 16.8." 7. All other terms and conditions of the Agreement remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first above written. TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC. By: /s/ James C. Esch, MD ----------------------------------- James C. Esch, M.D., President BONE, MUSCLE AND JOINT, INC. By: ----------------------------------- Naresh Nagpal, M.D., President and Chief Executive Officer 4 EX-10.27 5 RESTRICTED STOCK AGREEMENT RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of April 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and each of the individuals identified on the signature page hereof (each, a "Stockholder," and collectively, the "Stockholders"), with reference to the following facts. A. This Agreement is entered into in connection with that certain Management Services Agreement effective as of the date hereof (the "Management Services Agreement") by and among the Company, Tri-City Orthopaedic Surgery Medical Group, Inc. (the "Medical Group"), and the Indemnifying Persons thereto. B. Certain capitalized terms used herein are defined in paragraph 5 below. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Company and each Stockholder agree as follows: 1. Purchase and Sale of Restricted Stock. (a) The Company shall issue to each Stockholder the number of shares specified opposite the Stockholder's name in Schedule A attached hereto (the "Restricted Stock") of the common stock of the Company, par value $0.001 per share (the "Common Stock"), pursuant to Section 4 and Schedule III of the Management Services Agreement. (b) In connection with the issuance of the Restricted Stock hereunder, each Stockholder severally represents and warrants to the Company that: (i) the Restricted Stock to be issued to the Stockholder pursuant to this Agreement shall be acquired for the Stockholder's own account, for investment only and not with a view to, or intention of, distribution thereof in violation of the 1933 Act, or any applicable state securities laws, and the Restricted Stock will not be disposed of in contravention of the 1933 Act or any applicable state securities laws; (ii) the Stockholder has generally such knowledge and experience in business and financial matters and with respect to investments in securities of privately held companies so as to enable the Stockholder to understand and evaluate the risks and benefits of his or her investment in the Restricted Stock; (iii) the Stockholder has no need for liquidity in his or her investment in the Restricted Stock and is able to bear the economic risk of his or her investment in the Restricted Stock for an indefinite period of time and understands that the Restricted 1 Stock has not been registered or qualified under the 1933 Act or any applicable state securities laws, by reason of the issuance of the Restricted Stock in a transaction exempt from the registration and qualification requirements of the 1933 Act or such state securities laws and, therefore, cannot be sold unless subsequently registered or qualified under the 1933 Act or such state securities laws or an exemption from such registration or qualification is available; (iv) the Stockholder understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Stockholder) promulgated under the 1933 Act, depends on satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts; (v) the Stockholder is an individual (A) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000 or (B) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and the full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year; or the Stockholder otherwise meets the requirements to be considered an accredited investor, as defined under the 1933 Act; and (vi) the Stockholder has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Restricted Stock and has had full access to or been provided with such other information concerning the Company as he or she has requested. (c) This Agreement constitutes the legal, valid and binding obligation of the Stockholder, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Stockholder does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Stockholder is a party or any judgment, order or decree to which the Stockholder is subject. (d) As an inducement to the Company to issue the Restricted Stock to the Stockholder and as a condition thereto, each Stockholder acknowledges and agrees that: (i) neither the issuance of the Restricted Stock to the Stockholder nor any provision contained herein shall affect the right of the Company to terminate the Management Services Agreement; and (ii) the Company shall provide the Stockholder with substantially the same information regarding the Company that the Company regularly discloses to its other stockholders. -2- 2. Vesting of the Restricted Stock. (a) Except as otherwise provided in paragraphs 2(b) and 2(c) hereof, the Restricted Stock shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in paragraph 2(d) below) by the Stockholder, or (iii) the Stockholder has not died or become permanently disabled: Anniversary of the Date Cumulative Percentage of of this Agreement Restricted Stock Vested ----------------------- ------------------------ First 25% Second 50% Third 75% Fourth 100% Shares of the Restricted Stock which have become vested are referred to herein as "Vested Shares" and all other shares of the Restricted Stock are referred to herein as "Unvested Shares." (b) (i) The provisions of paragraph (ii) below shall be applicable only in the event that the Company has not amended that certain Restricted Stock Agreement entered into by and between the Company and Lehigh Valley Bone, Muscle and Joint Group, L.L.C., a Pennsylvania limited liability company ("Lehigh Valley"), in or about July, 1996, to delete that provision in such agreement which is substantially similar to paragraph (ii) below. If such agreement is so amended, paragraph (ii) below shall become null and void upon the Company's provision of notice thereof to the Medical Group, and the Restricted Stock shall become vested only in annual increments as provided in paragraph 2(a) above. (ii) If the Management Services Agreement is terminated or there is a Cessation of Active Practice by the Stockholder, or if the Stockholder dies or becomes permanently disabled, on any date other than an anniversary date of the issuance of the Restricted Stock, the cumulative percentage of the Restricted Stock to become vested shall be determined on a pro rata basis according to the number of days elapsed since the prior anniversary date or the date of this Agreement (should such termination occur prior to the first anniversary date). (c) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with paragraphs 2(a) and 2(b) above, the number of Unvested Shares scheduled to become Vested Shares pursuant to paragraph 2(a) above during the eighteen-month period immediately following the date of death shall immediately become Vested Shares. (d) For purposes of this Agreement, "Cessation of Active Practice" means a physician Stockholder's failure (other than by reason of death or permanent disability), throughout any twelve-month period ending on the day before any of the vesting dates described -3- in paragraph 2(a) hereof, to engage in the practice of medicine with the Medical Group on a regular basis, including the performance of orthopedic surgical procedures on a regular basis (except in the case of any Stockholder who did not practice surgery on a regular basis immediately prior to the date hereof), such that (i) the Stockholder was engaged in patient care activities with the Medical Group for less than seventy-five percent (75%) of the time that the Stockholder had been engaged in such activities during the twelve-month period immediately preceding the date hereof, and (ii) the Stockholder generated billings with the Medical Group that were less than seventy-five percent (75%) of the amount of such billings generated by the Stockholder during the twelve-month period immediately preceding the date hereof; provided, however, that if a Stockholder satisfies all of the foregoing criteria except that the Stockholder has ceased to conduct his medical practice with the Medical Group, there shall not have been a Cessation of Active Practice within the meaning of this provision if (A) the Stockholder enters into a Management Services Agreement with the Company substantially in the form of the Management Services Agreement entered into by and between the Medical Group and the Company and (B) the Stockholder enters into a new Stockholder Non-Competition Agreement with the Company substantially in the form of the Stockholder Non-Competition Agreement executed by the Stockholder in connection with the Management Services Agreement entered into by and between the Medical Group and the Company. (e) Notwithstanding paragraph 2(d) above, in the case of Jacob Sharp, M.D., the Stockholder shall be deemed to have failed to engage in the practice of medicine with the Medical Group on a regular basis, as stated in paragraph 2(d) above, only if the Stockholder ceases entirely to practice medicine with the Medical Group; provided, further, that in the event of a Cessation of Active Practice by Dr. Sharp, and provided that Dr. Sharp does not breach the Stockholder Non-Competition Agreement entered into concurrently herewith, all Unvested Shares held by Dr. Sharp shall be allocated among and transferred to the other Stockholders identified in Exhibit A attached hereto (other than Richard K. Muir, M.D.) in proportion to the number of shares allocated to each such Stockholder as specified in Exhibit A, and such reallocated shares shall become Vested Shares of each such Stockholder in accordance with the remaining portion of the vesting schedule specified in paragraph 2(a) and subject to all other terms and conditions set forth in this Agreement. (f) If the Stockholder is insured under a disability insurance policy, the determination under such policy as to whether the Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto for purposes of this Agreement. If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (g) Notwithstanding anything to the contrary set forth in this Agreement, including without limitation the provisions of paragraph 2(a) hereof relating to vesting, if as of the date or dates on which any of the Restricted Stock is scheduled to vest, Phase II under the Management Services Agreement has not yet commenced and the Medical Group has not waived the Medical Group's right to terminate the Management Services Agreement pursuant to Section 13.1(e) of the Management Services Agreement (providing the Medical Group the right under -4- certain circumstances to terminate the Management Services Agreement prior to the commencement of Phase II), such vesting shall be deferred until (i) the date on which Phase II under the Management Services Agreement commences or (ii) the date on which the Medical Group gives written notice to the Management Company waiving its right to terminate the Management Services Agreement under Section 13.1(e), whichever first occurs. If the Management Services Agreement is terminated by the Medical Group pursuant to Section 13.1(e) thereof, none of the Restricted Stock shall be deemed to Vested Shares hereunder. 3. Repurchase of Restricted Stock. (a) Except as provided in paragraph 3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below, the Company may elect to repurchase the Restricted Stock (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's permitted transferees) pursuant to the terms and conditions set forth in this paragraph 3 (the "Repurchase Option"). (b) Each of the following shall constitute a "Repurchase Event": (i) Termination of the Management Services Agreement for any reason whatsoever on or before the fourth anniversary of the date of this Agreement; (ii) Termination of the Management Services Agreement by the Medical Group pursuant to Section 13.1(d) thereof (based on failure of the Company to consummate an initial public offering of its Common Stock within forty-eight (48) months after the Commencement Date under the Management Services Agreement); or (iii) The Stockholder's Cessation of Active Practice. (c) The repurchase price for each Unvested Share shall be equal to the Original Value of such share. (d) The repurchase price for each Vested Share shall be the Fair Market Value for such share. (e) The Company may elect to repurchase all or a portion of the Restricted Stock by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that if the Company elects to repurchase less than all of the Restricted Stock, the Company shall repurchase all of the Unvested Shares and may purchase that number of Vested Shares as the Company may, in its discretion, determine. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be acquired, the aggregate consideration to be paid for such shares, and the time and place for the closing of the transaction. If the Repurchase Event giving rise to the Company's election to repurchase consists of the termination of the Management Services Agreement, and if the number of shares of Restricted Stock that the Company has elected to repurchase is less than the total number of shares of Restricted Stock held by all of the Stockholders, the Company shall purchase the shares of Restricted Stock pro rata according to -5- the number of shares of Restricted Stock held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). (f) The closing of the repurchase of Restricted Stock pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the delivery of the Repurchase Notice. The Company shall pay for Restricted Stock to be purchased pursuant to the Repurchase Option by delivery of (i) the Company's check or wire transfer of funds, (ii) a subordinated note or notes payable in up to five equal annual installments beginning on the first anniversary of the closing of such purchase and bearing interest (payable quarterly) at a rate per annum equal to the greater of either the prime rate announced from time to time by The Chase Manhattan Bank (National Association) plus 1/2% or the "applicable Federal rate" (as defined in Section 1274(d) of the Internal Revenue Code) in effect from time to time, or (iii) both (i) and (ii), in the aggregate amount of the repurchase price for such shares; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to the Management Services Agreement, the total of such sums may be offset by the Company against any amounts owed by the Company to the Stockholder pursuant to the Restricted Stock Agreement, such offset amount to be allocated pro rata among all of the Stockholders. Any notes issued by the Company pursuant to this paragraph 3(f) shall be subject to the restrictive covenants, if any, to which the Company is subject at the time of such repurchase. The Company shall be entitled to require the signature of the Stockholder to be guaranteed and to receive representations and warranties from the Stockholder regarding (A) the Stockholder's power, authority and legal capacity to enter into such sale and transfer valid right, title and interest in such Restricted Stock, (B) the Stockholder's ownership of such Restricted Stock and the absence of any liens, pledges, and other encumbrances on such Restricted Stock and (C) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (g) Notwithstanding anything to the contrary set forth in this paragraph 3, in the event of a Repurchase Event consisting of the termination of the Management Services Agreement by the Medical Group pursuant to Section 13.1 of the Management Services Agreement, or in the event of termination of the Management Services Agreement by either party in accordance with Section 27 thereof (pursuant to Section 13.3), the Company shall have the obligation (rather than the option) to purchase all of the Restricted Stock acquired by the Stockholder pursuant to this Agreement, and the repurchase price shall be paid in full in cash not later than sixty (60) days after the date of termination of the Management Services Agreement; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to the Management Services Agreement, the total of such sums may be offset by the Company against any amounts owed by the Company to the Stockholders pursuant to the Restricted Stock Agreement, such offset amount to be allocated pro rata among all of the Stockholders. -6- (h) In the event of the death or permanent disability of the Stockholder, the Company shall repurchase all of the Unvested Shares (but not the Vested Shares) of the Stockholder. The repurchase price for each Unvested Share shall be equal to the Original Value of such share, and such repurchase price shall be paid in full in cash not later than sixty (60) days after the date of death or the date on which such disability is determined to be permanent. (i) In the event that the Stockholder is required, prior to the consummation of an initial public offering of the Company's Common Stock pursuant to the 1933 Act or prior to the second anniversary of the date hereof, whichever is later, to pay any state or federal taxes in connection with the receipt of the Restricted Stock hereunder, the Stockholder shall have the right to sell to the Company, and the Company shall be obligated to purchase from the Stockholder, for the purchase price determined in accordance with this paragraph 3, such number of shares of Vested Stock as the Stockholder may tender to the Company, provided that the purchase price therefor shall not exceed the total amount of the Stockholder's tax liability incurred in connection with the receipt of such stock. In the event that the Stockholder desires to exercise the right conferred under this paragraph 3(i), the Stockholder shall give notice to the Company not earlier than forty-five (45) days prior to, nor later than forty-five (45) days after, the date on which such taxes are due and payable, and the Stockholder shall furnish to the Company reasonable documentation prepared by the Stockholder's certified public accountant establishing the amount of such tax liability. (j) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Stock by the Company shall be subject to applicable restrictions, if any, contained in Federal law or in the Delaware General Corporation Law. Notwithstanding anything to the contrary contained in this Agreement, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Stock hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions. (k) In the event that Restricted Stock is repurchased pursuant to this paragraph 3, the Stockholder and his or her successors and assigns shall take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner. 4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided in paragraph 3, the Stockholder shall sell or transfer or agree to sell or transfer ("Sale" or "Sell") Restricted Stock only in accordance with the following procedures; provided, however, that with respect to this paragraph 4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares and at no time shall the Stockholder have the right to sell Unvested Shares; provided, further, that the restrictions on transfers of Vested Shares set forth in this paragraph 4 shall expire, and shall be of no further force or effect, upon the consummation of initial public offering of the Company's Common Stock pursuant to the 1933 Act: (b) In the event that the Stockholder receives a bona fide offer from a third party (the "Prospective Stockholder") to purchase all or any portion of the Restricted Stock -7- owned by the Stockholder, the Stockholder shall deliver to the Company a written notice (the "Offer Notice"), which shall be irrevocable for a period of fifteen (15) business days after delivery thereof (the "Offer Period"), offering (the "Offer") all of the Restricted Stock proposed to be Sold by the Stockholder to the Prospective Stockholder at the purchase price and on the terms of the proposed Sale to the Prospective Stockholder (such Offer Notice shall include the foregoing information, a copy of the Prospective Stockholder's bona fide offer and all other relevant terms of the proposed Sale, including the identification of the Prospective Stockholder). The Company shall have the right and option, for a period of fifteen (15) business days after delivery of the Offer Notice, to repurchase all of the Restricted Stock so offered at the purchase price and on the terms stated in the Offer Notice. Such acceptance shall be made by delivering a written notice to the Stockholder within said fifteen (15) business-day period. (c) Sales of Restricted Stock under the terms of paragraph 4(b) above shall be made on a mutually satisfactory business day within fifteen (15) business days after the expiration of the Offer Period. Delivery of certificates or other instruments evidencing such Restricted Stock duly endorsed for transfer shall be made on such date against payment of the purchase price therefor. (d) If the Company fails to purchase the Restricted Stock offered for Sale pursuant to the Offer Notice, then at any time within sixty (60) business days after the expiration of the Offer Period the Stockholder may Sell all or any part of the Restricted Stock so offered for Sale on terms no more favorable than the terms stated in the Offer Notice; provided, however, that the Stockholder shall not, under any circumstances, Sell any Restricted Stock to the Prospective Stockholder if the Board of Directors of the Company, in its sole discretion, determines in good faith that the Prospective Stockholder is a competitor, or an Affiliate of a competitor, of the Company or that such Prospective Stockholder's ownership of Restricted Stock would be contrary to the best interests of the Company. In the event that the Restricted Stock is not Sold by the Stockholder to the Prospective Stockholder during such period, the right of the Stockholder to Sell such remaining Restricted Stock to the Prospective Stockholder shall expire and the obligations of the Stockholder pursuant to this paragraph 4 shall be reinstated. (e) Any transferee of Restricted Stock (other than the Company) shall, as a condition to such transfer, agree to be bound by all of the provisions of this Agreement applicable to the Stockholder. (f) The certificates representing the Restricted Stock will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT EFFECTIVE AS OF APRIL 1, 1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." -8- (g) Naresh Nagpal, M.D. and any venture capital firm providing funds to the Company ("Selling Shareholders") shall give to the Stockholder the right to participate on a pro rata basis (based on the number of shares owned, whether preferred or common, held by the Stockholders and by any other shareholders who hold the same rights that are conferred by this paragraph 4(g), including members of other physician groups), in any proposed sale of stock (whether preferred or common) in the Company from any of the Selling Shareholders to any unaffiliated third party, and the Company shall require the Selling Shareholders to comply with the obligations set forth in this paragraph 4(g); provided, however, that the obligation under this paragraph 4(g) shall become null and void upon the consummation of an initial public offering of the Company's Common Stock pursuant to the 1933 Act. (h) The Stockholder hereby agrees to the provisions of Section 9.12 of the Management Services Agreement (relating to the right of Naresh Nagpal, M.D. and any venture capital firm providing funds to the Company to participate in certain sales of stock by the Stockholder). 5. Definitions. (a) "Affiliate" means, with respect to any Person, any of (a) a director, officer or partner of such Person and (b) any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (b) "Fair Market Value" of each share of Restricted Stock means the average of the closing prices of the sales of the Common Stock on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any given day, the average of the last bid and asked prices on all such exchanges at the end of such day, or, if on any given day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq Stock Market National Market System ("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common Stock is not quoted in Nasdaq, the average of the bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the Fair Market Value is being determined and the 20 consecutive trading days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair Market Value shall be that value jointly determined by the Stockholder and the Company, provided that if they cannot so agree, such value shall be determined by a mutually acceptable investment banking or other qualified firm of national or regional reputation, retained jointly by the Company and the Medical Group, and all fees, expenses and other charges of such firm incurred in connection with such determination of Fair Market Value shall be borne and shared equally by the Company and the Medical Group. In the event that the parties are unable to agree upon such an investment banking or other qualified firm within ten (10) days after the date on which either party may initially propose such a firm, a qualified firm shall be selected in the following manner: -9- First, the Stockholder shall send a list of names of four such firms, arranged in order of the Stockholder's preference, by written notice to the Company within seven (7) days after the expiration of the above referenced 10-day period. If the Stockholder does not furnish such a list to the Company within such time period, the Company may, within the next seven (7) days following expiration of such earlier seven-day period, submit a list of names of four such firms to the Stockholder. Second, the Company (or the Stockholder, as applicable) shall select, within seven (7) days after receipt of the above-referenced list, one of the firms identified on such list and shall give written notice thereof to the other party. If the recipient of such list does not make any such selection, the firm identified as the first choice on such list shall be deemed agreed to by the parties. (c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. (d) "Original Value" of each share of Restricted Stock purchased hereunder will be equal to Ten Cents $0.10 (as proportionately adjusted for all subsequent stock splits, stock dividends and other recapitalizations). (e) "Person" shall be construed broadly and shall include, without limitation, an individual, a partnership, an investment fund, a limited liability corporation or partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. (f) "Public Sale" means any sale of Restricted Stock to the public pursuant to an offering registered under the 1933 Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the 1933 Act. (g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The Restricted Stock will continue to be Restricted Stock in the hands of any holder other than the Stockholder (except for the Company and except for transferees in a Public Sale), and except as otherwise provided herein, each such other holder of the Restricted Stock will succeed to all rights and obligations attributable to the Stockholder as the holder of the Restricted Stock hereunder. The Restricted Stock will also include shares of the Company's capital stock issued with respect to the Restricted Stock by way of a stock split, stock dividend or other recapitalization. (h) "1933 Act" means the Securities Act of 1933, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. -10- 6. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Stockholder against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Company contained in this Agreement. (b) Each Stockholder, severally, shall indemnify and hold harmless the Company against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of such Stockholder contained in this Agreement. 7. General Provisions. (a) Transfers in Violation of Agreement. Any sale, transfer, assignment or other disposition (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of any Restricted Stock in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Restricted Stock as the owner of such stock for any purpose. (b) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (c) Entire Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (d) Relationship Among Stockholders. No Stockholder shall have any responsibility for any breach of this Agreement by any other Stockholder or for any representations, warranties, acts or omissions of any other Stockholder. Each Stockholder is entering into this Agreement for and on behalf of such Stockholder only, and no partnership, joint venture, unincorporated association, or any other legal entity is intended to be formed by -11- or among the Stockholders as a result of or in connection with this Agreement. The parties have chosen to execute a single instrument for convenience only, and this Agreement shall be construed as separate and several agreements between the Company and each of the respective Stockholders for all purposes. This Agreement may be executed in separate counterparts. (e) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Stockholder, the Company and their respective successors, assigns, heirs, representatives and estate, as the case may be (including subsequent holders of Restricted Stock); provided that the rights and obligations of the Stockholder under this Agreement shall not be assignable except in connection with a permitted transfer of Restricted Stock hereunder. (f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any choice of law or conflicting provision or rule (whether of the State of California, or any other jurisdiction), that would cause the laws of any jurisdiction other than the State of California to be applied. In furtherance of the foregoing, the internal law of the State of California will control the interpretation and construction of this agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. (g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any California state court or Federal court of the United States of America sitting in the State of California, and any appellate court thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such California state court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. (ii) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any California state or Federal court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (h) Remedies. Each of the parties to this Agreement shall be entitled to enforce its rights under this Agreement specifically to recover damages and costs (including reasonable attorneys' fees) for any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and -12- that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or other injunctive relief (without posting any bond or deposit) in order to enforce or prevent any violations of the provisions of this Agreement. (i) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and the Stockholder and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall be construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Agreement or any provision hereof. (j) Notices. Any notice provided for in this Agreement must be in writing and must be either personally delivered, transmitted via telecopier, mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courier service (charges prepaid) to the recipient at the address below indicated or at such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder and received when delivered personally, when received if transmitted via telecopier, five days after deposit in the U.S. mail and one business day after deposit with a reputable overnight courier service. If to the Company, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Facsimile: (561) 391-1389 with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region Facsimile: (818) 783-1693 and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. Facsimile: (310) 286-7821 -13- If to the Stockholder, to: [Name of Stockholder] Tri-City Orthopaedic Surgery Medical Group, Inc. 3905 Waring Road Oceanside, California 92056 Facsimile: (619) 724-3686 with a copy to: Tri-City Orthopaedic Surgery Medical Group, Inc. 3905 Waring Road Oceanside, California 92056 Attention: President Facsimile: (619) 724-3686 (k) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the State of California, the time period for giving notice or taking action shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (l) Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the losing party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. (m) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (n) Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (o) Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa. * * * -14- IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement effective as of the date first written above. COMPANY BONE, MUSCLE AND JOINT, INC. By: /s/ N. Nagpal --------------------------------- Naresh Nagpal, M.D., President and Chief Executive Officer STOCKHOLDERS /s/ Neville Alleyne, M.D. /s/ Richard K. Muir - ----------------------------- ----------------------------- Neville Alleyne, M.D. Richard K. Muir, M.D. /s/ James C. Esch /s/ Leonard R. Ozerkis - ----------------------------- ----------------------------- James C. Esch, M.D. Leonard R. Ozerkis, M.D. /s/ James A. Helgager, M.D. /s/ Jacob Sharp - ----------------------------- ----------------------------- James A. Helgager, M.D. Jacob Sharp, M.D. /s/ Norman Kane - ----------------------------- Norman Kane, M.D. MEDICAL GROUP ACCEPTED AND AGREED AS TO PARAGRAPH 5(b) TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC. By: /s/ James C. Esch ----------------------------------- James C. Esch, M.D., President [Signatures Continued] -15- ACCEPTED AND AGREED AS TO SECTION 4(g) /s/ N. Nagpal - ---------------------------------------- NARESH NAGPAL, M.D. DELPHI VENTURES III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/ Donald J. Lothrop ------------------------------------- Donald J. Lothrop, Managing Member DELPHI BIOINVESTMENTS III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/ Donald J. Lothrop ------------------------------------- Donald J. Lothrop, Managing Member OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: OAK ASSOCIATES VI, LIMITED PARTNERSHIP, its General Partner By: ------------------------------------- Ann H. Lamont, Managing Partner OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: OAK VI AFFILIATES, LLC, its General Partner By: ------------------------------------- Ann H. Lamont, Managing Member -16- AMENDMENT NO. 1 TO RESTRICTED STOCK AGREEMENT THIS AMENDMENT NO. 1 TO RESTRICTED STOCK AGREEMENT (the "Amendment") is entered into as of April 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and each of the individuals identified on the signature page hereof (each, a "Stockholder," and collectively, the "Stockholders"), with reference to the following facts. A. The parties entered into that certain Restricted Stock Agreement effective as of April 1, 1997 (the "Agreement"). B. The parties desire to amend the Agreement as set forth below. NOW, THEREFORE, the Company and each Stockholder hereby agree as follows: 1. Paragraph 2(d) of the Agreement is deleted, and the following new Paragraph 2(d) in inserted in lieu thereof: "(d) For purposes of this Agreement, "Cessation of Active Practice" means a physician Stockholder's failure (other than by reason of death or permanent disability) to engage in the practice of medicine with the Medical Group on a regular basis, including the performance of orthopedic surgical procedures on a regular basis (except in the case of any Stockholder who did not practice surgery on a regular basis immediately prior to the date hereof); provided, however, that if a Stockholder has ceased to conduct his medical practice with the Medical Group, there shall not have been a Cessation of Active Practice within the meaning of this provision if (A) the Stockholder enters into a Management Services Agreement with the Company substantially in the form of the Management Services Agreement entered into by and between the Medical Group and the Company and (B) the Stockholder enters into a new Stockholder Non-Competition Agreement with the Company substantially in the form of the Stockholder Non-Competition Agreement executed by the Stockholder in connection with the Management Services Agreement entered into by and between the Medical Group and the Company." 1 2. Paragraph 2(e) of the Agreement is deleted, and the following new Paragraph 2(e) is inserted in lieu thereof: "(e) Notwithstanding paragraph 2(d) above, in the case of Jacob Sharp, M.D., the Stockholder shall be deemed to have failed to engage in the practice of medicine with the Medical Group on a regular basis, as stated in paragraph 2(d) above, only if the Stockholder ceases entirely to practice medicine with the Medical Group." 3. A new Paragraph 2(h) is added to the Agreement to read as follows: "(h) Transfer of Restricted Stock to the Medical Group. (i) For purposes of this paragraph 2(h), each of the following shall constitute a "Stockholder Termination Event": (A) Cessation of Active Practice by the Stockholder; (B) Death of the Stockholder; or (C) Permanent disability of the Stockholder. (ii) In the event of a Stockholder Termination Event, the Stockholder shall transfer (or cause to be transferred) to the Medical Group all of the Unvested Shares of Restricted Stock held by the Stockholder (or by the Stockholder's permitted transferee(s)), pursuant to the terms and conditions set forth in this paragraph 2(h). (iii) The Medical Group shall accept such Unvested Shares and shall pay to the Stockholder (or to the Stockholder's permitted transferee(s)) an amount determined by multiplying the number of such Unvested Shares by the Original Value (as defined in this Agreement). Such shares shall be delivered and such sum shall be paid in full in cash not later than sixty (60) days after the date of the Stockholder Termination Event. (iv) A portion of the shares received by the Medical Group pursuant to this paragraph 2(h) shall be held by the Medical Group as Vested Shares, and a portion shall be held as Unvested Shares. The number of such shares to be held as Vested Shares shall be determined by dividing the amount paid by the Medical Group pursuant to paragraph 2(h)(iii) by the Fair Market Value (as hereinafter defined) per share. The remainder of such shares shall be Unvested Shares. Any such Vested Shares may be held, transferred, or sold at the discretion of the Medical 2 Group. Any Unvested Shares may be transferred only in accordance with paragraph 2(h)(v), and such shares may become Vested Shares only as provided in paragraph 2(h)(v). (v) The Medical Group shall not sell or otherwise transfer any Unvested Shares to any person or entity, except to one or more physician employees, independent contractors, or partners in the Medical Group who prior to the receipt of such shares from the Medical Group had not acquired any shares of the Company. As a condition to any such sale or transfer, such physician(s) shall enter into a Restricted Stock Agreement with the Company substantially in the form of this Agreement, effective as of the date of transfer of such shares. Any such sale or transfer to any such physician(s) shall be subject to such additional terms and conditions as may be agreed upon by the Medical Group and such physician(s). (vi) Notwithstanding paragraph 2(h)(iv) above, in the case of transfer of Unvested Shares from Jacob Sharp, M.D. to the Medical Group pursuant to this paragraph 2(h), such shares shall become Vested Shares on the date or dates determined in accordance with paragraph 2(a), except as provided in this Agreement in the event of termination of the Management Services Agreement. Any Vested Shares may be held, transferred, or sold at the discretion of the Medical Group. Any Unvested Shares may be transferred only in accordance with paragraph 2(h)(v)." 4. Paragraph 3(b) of the Agreement is deleted, and the following new Paragraph 3(b) is inserted in lieu thereof: "(b) Each of the following shall constitute a "Repurchase Event": (i) Termination of the Management Services Agreement for any reason whatsoever on or before the fourth anniversary of the date of this Agreement; or (ii) Termination of the Management Services Agreement by the Medical Group pursuant to Section 13.1(d) thereof (based on failure of the Company to consummate an initial public offering of its Common Stock within forty-eight (48) months after the Commencement Date under the Management Services Agreement)." 5. Paragraph 3(h) of the Agreement is deleted in its entirety. 6. All other terms and conditions set forth in the Agreement remain in full force and effect. 3 * * * IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first written above. COMPANY BONE, MUSCLE AND JOINT, INC. By:_____________________________ Naresh Nagpal, M.D., President STOCKHOLDERS /s/ Neville Alleyne, M.D. /s/ Richard K. Muir - ----------------------------- ----------------------------- Neville Alleyne, M.D. Richard K. Muir, M.D. /s/ James C. Esch /s/ Leonard R. Ozerkis - ----------------------------- ----------------------------- James C. Esch, M.D. Leonard R. Ozerkis, M.D. /s/ James A. Helgager, M.D. /s/ Jacob Sharp - ----------------------------- ----------------------------- James A. Helgager, M.D. Jacob Sharp, M.D. /s/ Norman Kane - ----------------------------- Norman Kane, M.D. MEDICAL GROUP ACCEPTED AND AGREED AS TO PARAGRAPHS 2(h) and 5(b) TRI-CITY ORTHOPAEDIC SURGERY MEDICAL GROUP, INC. By: /s/ James C. Esch ----------------------------------- James C. Esch, M.D., President 4 EX-10.29 6 MANAGEMENT SERVICES AGREEMENT MANAGEMENT SERVICES AGREEMENT BETWEEN SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP AND BONE, MUSCLE AND JOINT, INC. Effective as of November 1, 1996 TABLE OF CONTENTS ----------------- Page ---- SECTION 1. Retention of the Management Company.......................... 2 SECTION 2. Term......................................................... 3 SECTION 3. Management Services.......................................... 3 SECTION 4. Equity Participation......................................... 21 SECTION 5. Costs, Compensation, and Other Payments...................... 21 SECTION 6. Representations and Warranties of the Medical Group.......... 34 SECTION 7. Representations and Warranties of the Management Company..... 43 SECTION 8. Operations Committee......................................... 54 SECTION 9. Obligations of the Medical Group............................. 59 SECTION 10. Certain Covenants........................................... 62 SECTION 11. Records..................................................... 62 SECTION 12. Insurance and Indemnity..................................... 63 SECTION 13. Termination................................................. 65 SECTION 14. Non-Disclosure of Confidential Information.................. 69 SECTION 15. Non-Competition............................................. 69 SECTION 16. Obligations of the Management Company....................... 70 SECTION 17. Assignment.................................................. 72 SECTION 18. Notices..................................................... 72 SECTION 19. Benefits of Agreement....................................... 73 SECTION 20. Governing Law; Jurisdiction................................. 74 -i- SECTION 21. Headings.................................................... 74 SECTION 22. Entire Agreement; Amendments................................ 74 SECTION 23. Attorneys' Fees............................................. 74 SECTION 24. Counterparts................................................ 75 SECTION 25. Waivers..................................................... 75 SECTION 26. Survival of Termination..................................... 75 SECTION 27. Contract Modification for Prospective Legal Events.......... 75 -ii- ATTACHMENTS ----------- SCHEDULES - --------- SCHEDULE I -- New Ancillary Services -- Exceptions SCHEDULE II -- Management Company Operating Cost Budget SCHEDULE III -- Equity Participation SCHEDULE IV -- Draw Date and Draw Percentage SCHEDULE V -- Management Fee -- Applicable Percentage SCHEDULE VI -- Professional Practice Cost Savings SCHEDULE VII -- Computation Example SCHEDULE VIII -- Non-Competition SCHEDULE IX -- Royalties SCHEDULE 6.4 -- Financial Information SCHEDULE 6.5 -- Absence of Undisclosed Liabilities SCHEDULE 6.6 -- Absence of Changes SCHEDULE 6.7 -- Tax Matters SCHEDULE 6.8 -- Litigation, Etc. SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable SCHEDULE 6.11 -- Labor Relations; Employees SCHEDULE 6.12 -- Employee Benefit Plans SCHEDULE 6.13 -- Insurance SCHEDULE 6.14 -- Real Property SCHEDULE 6.15 -- Burdensome Restrictions SCHEDULE 6.16 -- Disclosure SCHEDULE 7.2 -- Equity Investments SCHEDULE 7.3(a) -- Issued and Outstanding Stock SCHEDULE 7.3(c) -- Options; Conversion Rights -iii- SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals, Notifications, and Filings SCHEDULE 7.6 -- Financial Information SCHEDULE 7.7 -- Absence of Undisclosed Liabilities SCHEDULE 7.8 -- Absence of Changes SCHEDULE 7.9 -- Tax Matters SCHEDULE 7.10 -- Litigation, Etc. SCHEDULE 7.11 -- Compliance; Governmental Authorizations SCHEDULE 7.12 -- Accounts Receivable; Accounts Payable SCHEDULE 7.13 -- Labor Relations; Employees SCHEDULE 7.14 -- Employee Benefit Plans SCHEDULE 7.15 -- Insurance SCHEDULE 7.16 -- Real Property SCHEDULE 7.17 -- Burdensome Restrictions SCHEDULE 7.18 -- Disclosure ANNEX ANNEX A -- Medical Group Key Personnel ANNEX B -- Management Company Key Employees EXHIBITS EXHIBIT A -- Asset Purchase Agreement EXHIBIT B -- Stockholder Non-Competition Agreement EXHIBIT C -- Restricted Stock Agreement EXHIBIT D -- Assignment of Lease EXHIBIT E -- Office Sublease EXHIBIT F -- Medical Equipment Master Lease -iv- INDEX OF DEFINED TERMS ---------------------- Term Page - ---- ---- Additional Terms........................................................... 3 Administrative Personnel................................................... 16 Agreement.................................................................. 1 Ancillary Division......................................................... 31 Ancillary Service Start-Up Costs........................................... 32 Ancillary Service Start-Up Period.......................................... 32 Annual Draw Amount......................................................... 23 Annual Medical Group Compensation Amount................................... 23 Applicable Percentage...................................................... 26 Asset Purchase Agreement................................................... 1 Authorized Management Company Operating Costs.............................. 28 Authorized Partners........................................................ 13 Balance Sheet.............................................................. 35 Balance Sheet Date......................................................... 35 Bankruptcy Event........................................................... 65 Base Term.................................................................. 3 Billable Items............................................................. 30 Billings................................................................... 24 BMJ Formation Documents.................................................... 44 Budgets.................................................................... 21 Collections................................................................ 24 Commencement Date.......................................................... 3 Compensation Committee..................................................... 70 Competitive Business....................................................... 104 Confidential or Proprietary Information.................................... 69 Corporate Overhead......................................................... 27 COSI....................................................................... 66 Cost Savings............................................................... 99 -v- Documents.................................................................. 13 Draw Date.................................................................. 96 Draw Percentage............................................................ 22 Eligible Parties........................................................... 21 Employee Plans............................................................. 42 Employees.................................................................. 41 Equipment.................................................................. 7 ERISA...................................................................... 41 Excluded Costs............................................................. 27 Facility................................................................... 59 FF&E....................................................................... 7 Incentive Based Costs...................................................... 99 Internal Financial Statements.............................................. 35 IPO........................................................................ 97 Management Business........................................................ 1 Management Company......................................................... 1 Management Company Balance Sheet........................................... 46 Management Company Balance Sheet Date...................................... 46 Management Company Bank.................................................... 22 Management Company Costs................................................... 27 Management Company Employees............................................... 52 Management Company Key Employee............................................ 49 Management Company Operating Costs......................................... 27 Management Company Real Property........................................... 54 Management Company Returns................................................. 49 Management Company Transaction Documents................................... 44 Management Fee............................................................. 26 Management Services........................................................ 2 Medical Business........................................................... 1 Medical Equipment.......................................................... 7 Medical Equipment Master Lease Payments.................................... 26 -vi- Medical Group.............................................................. 1 Medical Group Bank......................................................... 12 Medical Group Collections Account.......................................... 12 Medical Group Costs........................................................ 30 Medical Group Key Personnel................................................ 37 Medical Group Services..................................................... 24 Medical Group Transaction Documents........................................ 34 Medical Personnel.......................................................... 19 MGC........................................................................ 97 Monthly Draw............................................................... 22 MSAs....................................................................... 87 New Ancillary Service Medical Equipment.................................... 31 New Ancillary Services..................................................... 9 New Medical Office......................................................... 29 New Medical Office Start-Up Costs.......................................... 29 New Medical Office Start-Up Period......................................... 29 Office Lease............................................................... 6 Office Sublease............................................................ 5 Office Sublease Payments................................................... 26 OGC........................................................................ 97 Operating Account.......................................................... 22 Phase I.................................................................... 97 Phase II................................................................... 97 Phase III.................................................................. 97 Professional Practice Cost Savings......................................... 26 Real Property.............................................................. 43 Recalculation Date......................................................... 84 Restricted Stock Agreement................................................. 84 Returns.................................................................... 38 Review Financial Statements................................................ 35 SEC........................................................................ 97 -vii- Selling Shareholders....................................................... 71 Shares..................................................................... 88 Signature Date............................................................. 1 Stock...................................................................... 81 Stockholders Agreement..................................................... 45 Tax........................................................................ 39 Taxes...................................................................... 39 Tenant Improvements........................................................ 56 Term....................................................................... 3 Transaction Documents...................................................... 81 Unaudited Financial Statements............................................. 46 Van Nuys Office............................................................ 4 -viii- MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of November 22, 1996 (the "Signature Date"), effective as of November 1, 1996, by and between SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, a California general partnership (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with reference to the following facts: A. The Medical Group is engaged in the business (the "Medical Business") of providing orthopedic medical and surgical services and related medical and ancillary services to the general public. B. The Management Company is a corporation engaged in the business (the "Management Business") of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Management Company and the Medical Group have entered into an Asset Purchase Agreement (the "Asset Purchase Agreement"), pursuant to which the Management Company has acquired substantially all of the assets of the Medical Group. D. The Management Company and the Medical Group now desire to enter into this Management Services Agreement, pursuant to which, among other things, the Management Company will render certain management and administrative services to the Medical Group. NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: -1- SECTION 1. Retention of the Management Company. 1.1 Retention. The Medical Group hereby retains the Management Company to provide all of the management and related services identified or referenced in Section 3 hereof and as otherwise required by this Agreement (collectively, the "Management Services"), and the Management Company hereby accepts such retention and agrees to provide such services, upon the terms and subject to the conditions set forth herein. 1.2 Exclusivity. During the term of this Agreement, the Management Company shall be the exclusive provider of all management and administrative services utilized by the Medical Group; provided, however, that the Medical Group may contract directly with or otherwise engage individuals or companies for the provision of accounting, legal, consulting, or other professional or advisory services (provided that such services shall be in addition to, and not in replacement of, the services to be provided by the Management Company hereunder), all in the sole discretion of the Medical Group and at the sole cost of the Medical Group. 1.3 Relationship of Parties. Notwithstanding anything contained herein to the contrary, (a) the Management Company and the Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, or employment relationship between the parties, and (b) the Management Company is hereby engaged solely to provide management and administrative services to the Medical Group and shall not interfere with, control, direct, or supervise the Medical Group or any medical professional employed by the Medical Group in connection with the provision of professional medical services. 1.4 No Referral Obligation. The parties agree that the benefits to the Medical Group hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral, purchase, or any other arrangement for the provision of any item or service to or for any of the Medical Group's patients in or from any medical facility or laboratory or from any other entity owned, operated, controlled, or managed by the Management Company. The Management Company shall provide prior written notice to the Medical Group before acquiring any ownership, investment interest, or control in, or entering into any agreement or -2- arrangement pursuant to which the Management Company would become responsible for all or any part of the operations or management of, any medical facility, laboratory, or any provider or supplier of ancillary services, diagnostic or therapeutic equipment, prosthetic or orthotic devices, medical supplies, or other items or services furnished to or for use by patients, but only if any of the foregoing is located in California or serves the geographic area served by the Medical Group. SECTION 2. Term. Provided that the Closing under the Asset Purchase Agreement shall have occurred as provided therein, and subject to such start-up procedures as the parties may agree upon for purposes of facilitating the transition of responsibilities required by this Agreement, the performance of services under this Agreement shall commence as of November 1, 1996 (the "Commencement Date") and shall expire on the fortieth anniversary of the Commencement Date unless terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement shall be automatically extended for additional terms ("Additional Terms" and together with the Base Term, the "Term") of five years each, unless either party delivers to the other party, not less than six (6) months nor more than nine (9) months prior to the expiration of the then-current Term, written notice of such party's intention not to extend the Term of this Agreement. SECTION 3. Management Services. 3.1 Management Services Generally. (a) The Management Company shall be the sole and exclusive manager and administrator of all day-to-day business functions for the Medical Group, subject to the provisions of Section 1.2 hereof. The Management Company shall provide all of the management and administrative services reasonably required by the Medical Group in connection with the provision of any and all of the Medical Group Services and as otherwise provided in this Agreement, including without limitation the services described in Sections 3.2 through 3.17 hereof. (b) Without limiting the generality of the provisions of Section 3.1(a), the Management Services shall include such management and administrative services as may be -3- reasonably required in connection with (i) all of the offices (including New Medical Offices) of the Medical Group, and (ii) all professional services and all ancillary services furnished by the Medical Group. (c) Additionally, the full range of Management Services as described in this Agreement shall be applicable with respect to the items identified as Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs shall be paid by the Medical Group rather than by the Management Company. Accordingly, the Management Company shall provide accounting, bookkeeping, and related services with respect to all such costs. (d) The Management Company may enter into such contracts and agreements with outside services and suppliers as the Management Company shall reasonably deem necessary in connection with the provision of the Management Services, and, to the extent permitted by applicable law, such contracts and agreements shall, except as otherwise expressly provided in this Agreement, be in the name of the Management Company. The Management Company shall have no authority, directly or indirectly, to perform, and shall not perform or enter into any agreement to perform, Medical Services or any other medical function required by law to be performed by a licensed physician or by any other licensed health care professional. (e) The Management Company shall comply in all material respects with all applicable material Federal, state and local laws, regulation, and ordinances in connection with the provision of the Management Services hereunder. 3.2 Premises. (a) The Medical Group, as of the Commencement Date of this Agreement, leases premises and provides Medical Services at the following location (the "Van Nuys Office"): 6815 Noble Avenue Van Nuys, California 91405 -4- The above-identified premises are leased to the Medical Group, in the Medical Group's name, and such premises shall continue to be leased to the Medical Group, in the Medical Group's name, from and after the Commencement Date of this Agreement. The Management Company shall not be required to lease such premises. (b) The Medical Group, as of the Commencement Date of this Agreement, also provides Medical Services at the following locations: 23861 McBean Parkway, Suites A-2 and A-4 Valencia, California 91355 7230 Medical Center Drive, Suite 400 West Hills, California 91307 800 South Fairmont, Suite 325 Pasadena, California 91105 2026 21st Street, Suite B Bakersfield, California 93301 Immediately prior to the Commencement Date of this Agreement, all of the above-identified premises were leased to the Medical Group, in the Medical Group's name. Effective from and after the Commencement Date of this Agreement, each of the leases of such premises are to be assigned from the Medical Group to the Management Company pursuant to an assignment substantially in the form of the Assignment of Lease attached hereto as Exhibit D. Additionally, the Management Company shall sublease each of such premises to the Medical Group pursuant to a sublease (each, an "Office Sublease") substantially in the form of the Office Sublease attached hereto as Exhibit E, in consideration of the payments to be made by the Medical Group under such Office Sublease. Upon the expiration of each of the premises leases assigned in accordance with this Section 3.2(b), the Management Company shall use its best efforts to enter into a new lease, in the name of the Management Company, with the landlord of such premises, and the parties shall amend the applicable Office Sublease or enter into a new sublease relating to such new premises lease; provided, however, that the approval of the Medical Group, which shall not be unreasonably withheld, shall be required in the event of any substantial changes in -5- the terms of the premises lease, and if the Medical Group does not give such approval, the failure to enter into such new premises lease shall not constitute a default of the Management Company. Each assigned lease and each new lease entered into between the Management Company and the landlord is referred to herein as an "Office Lease." (c) A New Medical Office (as hereinafter defined) may be opened only upon the agreement of the Medical Group and the Management Company. The capital costs and start-up costs reasonably required in connection with the opening of any New Medical Office shall be borne as set forth in Section 5 hereof. The premises of any New Medical Office shall be leased to the Management Company, in the Management Company's name, and the Medical Group shall not be required to lease any such premises. Additionally, the Management Company shall sublease such premises to the Medical Group pursuant to a sublease substantially in the form of the Sublease attached hereto as Exhibit E, in consideration of the payments to be made by the Medical Group under such sublease. (d) The closing or relocation of any offices of the Medical Group shall be subject to agreement by the Medical Group and the Management Company. (e) The premises services to be provided by the Management Company shall include, without limitation, the negotiation and renegotiation of leases, provision of ongoing liaison with the landlords of the respective office premises of the Medical Group, identification of potential new locations for Medical Group offices, financial analysis relating to the opening, closing, and relocation of offices, arranging for necessary repairs, maintenance and improvements, procurement of property insurance, arranging for telephone and other utility services, arranging for hazardous waste disposal, and all other reasonably necessary or appropriate services related to all of the office premises of the Medical Group. (f) The Management Company also shall provide all necessary or appropriate leasehold improvements to each of the premises, subject to prior approval as provided in Section 8.2 hereof. -6- (g) The Medical Group acknowledges that the Management Company makes no warranties or representations, expressed or implied, regarding the condition of any of the leased premises. 3.3 Equipment. (a) The Management Company shall provide to the Medical Group all of the diagnostic and therapeutic medical equipment reasonably required by the Medical Group in connection with the provision of Medical Group Services (the "Medical Equipment"). All Medical Equipment shall be provided by the Management Company to the Medical Group in consideration of the rental payments to be made by the Medical Group to the Management Company pursuant to an equipment lease substantially in the form of the Medical Equipment Master Lease Agreement attached hereto as Exhibit F. As used herein, the term Medical Equipment shall not include medical equipment used in connection with a New Ancillary Service (as hereinafter defined). (b) The Management Company also shall provide to the Medical Group all furniture, furnishings, trade fixtures, and office equipment reasonably required in connection with the provision of Medical Group Services pursuant to this Agreement (collectively, "FF&E"). The Management Company shall acquire, at its cost, all FF&E, and the Management Company shall retain ownership of all FF&E. The Management Fee payable to the Management Company under this Agreement is intended to compensate the Management Company for the provision of FF&E for use by the Medical Group. As used herein, the term FF&E does not include furniture, furnishings, trade fixtures, and office equipment used in connection with a New Ancillary Service. (c) The Medical Equipment and the FF&E are sometimes referred to collectively as the "Equipment." The acquisition, replacement, relocation, or other disposition of any Equipment shall require prior approval as provided in Section 8.2 hereof. (d) The Management Company's obligations with respect to the Equipment are subject and subordinate to the provisions and obligations contained in any financing, security -7- interest, mortgage, lien or other encumbrance the Management Company may, in its reasonable discretion, place upon the Equipment through an unaffiliated third party. The Medical Group shall use the Equipment only in connection with its provision of the Medical Group Services, and the Medical Group shall not alter, repair, augment, or remove the Equipment from the premises of the Medical Group without the prior written consent of the Management Company and any lessor thereof, which approval may be granted or withheld in the Management Company's or such lessor's sole discretion. To the extent the Equipment is utilized by the Medical Group in the provision of Medical Group Services, the Medical Group shall have the right to exercise reasonable control over the use of such Equipment. (e) From time to time, and as reasonably requested by the Medical Group, the Management Company shall use reasonable efforts to cause the Equipment manufacturer or its authorized agent to provide service and maintenance for the Equipment as needed to maintain the Equipment in an operable condition, so that all such Equipment shall function continuously (subject to interruptions not reasonably avoidable) in accordance with the manufacturer's specifications and so that all conditions imposed by the manufacturer to maintaining the continued effectiveness of any warranty on such Equipment shall be satisfied. The Management Company shall take all reasonable steps to provide that all necessary service and maintenance is obtained in a prompt and timely manner, so as to minimize the amount of time that any of the Equipment is not available for usage by or for patients of the Medical Group. (f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING DISCLAIMER, THE MANAGEMENT COMPANY DOES WARRANT TO THE MEDICAL GROUP THAT THE X-RAY -8- EQUIPMENT AND THE COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL GROUP SHALL BE SUITABLE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES. Nothing in this Agreement shall be construed to affect or limit in any way the professional discretion of the Medical Group to select and use any Equipment acquired by the Management Company in accordance with the terms of this Agreement insofar as such selection or use constitutes or might constitute the practice of medicine. 3.4 New Ancillary Services. (a) For purposes of this Agreement, "New Ancillary Services" means the technical component (but not the professional component) of the following, except as set forth in Schedule I: (i) Physical therapy; (ii) Magnetic resonance imaging and/or other imaging services (except diagnostic radiology); (iii) Outpatient surgery; (iv) Densitometry; and (v) Other revenue-producing services generally recognized as ancillary services, but excluding the following: (A) Plain film radiography; (B) Any other services provided on a regular basis by the Medical Group immediately prior to the Commencement Date of this Agreement, including without limitation (1) other diagnostic radiology (if any) and (2) ultrasound for pediatric patients; and (C) Any service performed in connection with new Medical Equipment acquired to replace existing Medical Equipment so long as the new Medical Equipment performs substantially the same functions as the replaced Medical Equipment. -9- New Ancillary Services do not include the sale or provision of (or services rendered in connection with) prosthetics, prosthetic devices, orthotics, braces, splints, appliances, crutches, casts, or any other supplies or similar items which are billable to patients or payors. (b) New Ancillary Services may be established only upon agreement of the Medical Group and the Management Company. Such agreement shall be memorialized in a written agreement executed by the parties (or in a written amendment to this Agreement) under which the Management Company agrees to provide all of the Management Services described in this Section 3 in connection with such New Ancillary Service, and for which the Management Company shall be compensated as described in Section 5.8 of this Agreement, except as otherwise agreed by the parties. 3.5 Administration, Finance and Accounting. The Management Company shall provide or arrange for the provision of all administrative, financial, and accounting functions necessary for the operation of the Medical Group, including without limitation -- (a) Creation and maintenance of bank accounts. (b) Deposits of receipts. (c) Preparing accounts receivable summary reports, including various analyses of delinquent accounts. (d) Receiving appropriate approvals as required by the Medical Group's General Partnership Agreement prior to distribution of payments to outside parties; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the General Partnership Agreement. (e) Disbursement of payables, including payables of the Medical Group; provided, however, that payables of the Medical Group shall be paid from an account of the Medical Group and not from the Management Company's Operating Account, and all checks drawn on any Medical Group account shall be signed by a partner in the Medical Group or other authorized representative of the Medical Group. -10- (f) Negotiation of vendor contracts. (g) Performing monthly accounting functions, including bank reconciliations, maintenance of books and records, and preparation of financial statements. (h) Analyzing financial data as reasonably requested by physicians. (i) Analyzing potential new office locations, and coordinating all functions associated with opening new office locations. (j) Preparing monthly financial and medical practice statistics reports (i) By satellite office (ii) By physician (k) Providing from the Medical Group's bank account(s) monthly draws to physicians and professional corporations pursuant to service agreements, monthly profit and loss distributions, and quarterly bonus calculations; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the General Partnership Agreement; provided, further, that all checks drawn on any Medical Group account shall be signed by a partner in the Medical Group or other authorized representative of the Medical Group. (l) Calculating physicians' and professional corporations' annual earnings based on the Medical Group's profit and loss distribution formulas. (m) Ongoing day-to-day communication with the managing partner and assisting the managing partner in fulfilling his responsibilities. (n) Preparing agendas and information packages for Medical Group meetings. (o) Developing budgets and long-term strategies for the Medical Group. (p) Coordinating payroll processing and payroll tax payments. (q) Providing ongoing personnel FTE analysis. (r) Providing administrative services (excluding the services of a plan administrator) of the Medical Group's 401(k) and flexible spending plans; provided, however, that the Management Company shall not be responsible for investment decisions. (s) Coordinating recruitment, interviewing, and hiring of new physicians. (t) Implementing Medical Group fee schedule increases and/or decreases. -11- (u) Coordinating depositions and court appearances. (v) Assisting in the coordination of call schedules. (w) Assisting in the coordination of coverage of athletic team events. (x) Assisting in the day-to-day administration of the Medical Group's fellowship program, including the sports clinic. (y) Acting as liaison to hospital administration, physical therapy, surgery center, MRI, and other ancillary services entities. (z) Cooperating with outside accountants in preparing various schedules and providing other information. (aa) Interacting with legal counsel as necessary. 3.6 Billing and Collection. (a) The Medical Group hereby irrevocably designates and appoints the Management Company to be the agent of the Medical Group during the Term, to perform the following duties and for those purposes incidental thereto: (i) to bill patients and third party payors in the Medical Group's name and on its behalf; (ii) to collect accounts receivable resulting from such billing; (iii) to receive payments and prepayments from the Medical Group's patients, Blue Cross and Blue Shield organizations, insurance companies, health care plans, Medicare, Medicaid, HMO's and any and all other third party payors; (iv) to take possession of and deposit into such bank (the "Medical Group Bank") as the Medical Group designates, in an account established by the Medical Group in the name of the Medical Group (the "Medical Group Collections Account"), any and all checks, insurance payments, cash, cash equivalents and other instruments received for Medical Group Services; and (v) to initiate with the consent of the Medical Group, which consent may be withheld by the Medical Group in its sole and absolute discretion, legal proceedings in the name of the Medical Group to collect any accounts and monies owed to the Medical Group, to enforce the rights of the Medical Group as a creditor under any contract or in connection with the rendering of any service, and to contest adjustments and denials by governmental agencies (or its fiscal intermediaries) as third-party payors. The Management Company, in its capacity as agent pursuant to this paragraph, shall not have any duties or responsibilities except those expressly set forth in clauses (i) through (v) above. Following termination of this Agreement, the Management Company shall continue to use -12- reasonable efforts to collect the accounts receivable of the Medical Group as of such termination date for a period of ninety (90) days thereafter. (b) From time to time at the Management Company's request, the Medical Group shall make available to the Management Company one or more authorized partners (the "Authorized Partners") of the Medical Group to sign any letters, checks, instruments or other documents (the "Documents") on behalf of the Medical Group that are necessary for the Management Group to perform its duties as agent under this Section 3.6 and its other duties under this Agreement. If the Management Company notifies the Medical Group that an Authorized Partner is not signing the Documents in a timely manner, the Management Company shall not be liable for any failure to perform its duties as agent hereunder or for any failure to perform the Management Services to the extent caused by the failure of an Authorized Partner to sign the Documents in a timely manner. (c) The Management Company represents and warrants to the Medical Group that it has sufficient knowledge and expertise in the area of billing for orthopedic and other medical services and ancillary services to be able to adequately perform the billing services required by the Medical Group hereunder. The Management Company shall submit all bills and manage the billing process on a timely basis in accordance with the terms of this Agreement and applicable law. (d) Without limiting the generality of the foregoing, the Management Company shall bill patients, bill and submit claims to third party payors, perform appropriate coding for each bill, and collect all fees for professional and other services rendered and for items supplied to patients by the Medical Group, all in a timely manner and in accordance with parameters and criteria established by the Operations Committee (as hereinafter defined). Additionally, the Management Company shall provide the following services which are currently being provided by or on behalf of the Medical Group: (i) Receive and collect from patients at the time of visit all appropriate payments and pre-payments, including co-pays, -13- deductibles, payments for non-covered medical services, and deposits for surgeries (if applicable), and additionally shall obtain all appropriate insurance and other information required. (ii) Submit claims utilizing electronic billing submission, whenever appropriate. (iii) Perform delinquent account collection calls and other appropriate follow-up mechanisms for delinquent accounts of all insurance classifications, all in a timely fashion as determined by the Operations Committee. (iv) Turn over to outside collection agencies all delinquent accounts satisfying the criteria established by the Operations Committee. The Management Company shall also follow-up on the performance of the outside collection agencies and make changes if necessary, and additionally shall reconcile each account turned over to the summary data provided by the collection agency. (v) Write-off account balances according to criteria approved by the Operations Committee. (vi) Prepare claim reviews in accordance with criteria approved by the Operations Committee. (vii) Bill workers' compensation medical services at rates equal to the most recently approved California workers' compensation fee schedule. (viii) Apply "insurance only" and other courtesy write-offs in compliance with Operations Committee policy. -14- (ix) With respect to discounted fee-for-service contracts with Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), the Management Company shall determine that payments from the PPOs and HMOs are in compliance with the contract with the Medical Group. (x) With respect to capitation fee contracts with HMOs, the Management Company shall -- (A) Follow-up to ensure that payments to the Medical Group are made on a timely basis; (B) Review and audit enrollment data provided by the HMO to ensure that Medical Group is being compensated for the proper number of lives enrolled. (xi) With respect to lien accounts, the Management Company shall -- (A) Ensure that appropriate documents are signed and agreed to initially as between Medical Group, attorney and patient; (B) Follow-up on a regular basis as to the status of the account; and (C) Apply the policies of the Operations Committee in resolving open account balances. (xii) With respect to student athlete accounts, the Management Company shall coordinate insurances and other information in compliance with the policy of the Operations Committee. (xiii) With respect to amounts withheld by payors in compliance with contracts between the payor and the Medical Group, the Management Company shall follow-up on a timely basis to ensure that withheld amounts are returned to the Medical Group, if -15- warranted, and to ensure that amounts not returned are verified and audited for appropriateness. (xiv) Coordinate the timely payment of refunds to patients and third party payors when appropriate. (xv) Ensure that revenue related to depositions, record review, court appearances, athletic teams services, and royalties payable to Stephen J. Snyder, M.D., are accounted for, monitored, followed- up, and ultimately collected. 3.7 Personnel. (a) The Management Company shall retain and provide or arrange for the retention and provision of all of the following non-medical personnel necessary for the conduct of the Medical Group's business operations (collectively, "Administrative Personnel"): (i) Administration (ii) Accounting (iii) Billing and Collection (iv) Secretarial (v) Transcription (vi) Appointments (vii) Switchboard (viii) Medical Records (ix) Chart Preparation (x) Historians (xi) Clinic Support (xii) Marketing (b) The Management Company shall determine and pay the salaries and fringe benefits of the Administrative Personnel, and shall provide other personnel services related to -16- the Administrative Personnel, including but not limited to scheduling, personnel policies, administering continuing education benefits, and payroll administration. (c) With respect to each applicable new employee in Administrative Personnel, the Management Company shall, as reasonably necessary, verify educational and employment experience, licensure, and insurability. (d) All of the personnel services shall be performed in compliance with all applicable California and Federal labor laws. 3.8 Inventory and Supplies. The Management Company shall order and purchase inventory and supplies on behalf of the Medical Group, and such other ordinary or appropriate materials as the Medical Group reasonably deems to be necessary for it to carry out its professional medical activities. Inventory and supplies shall include, but not be limited to: (a) Medical supplies (b) Office supplies (c) Postage (d) Computer forms and supplies (e) Printing and stationary supplies (f) Printer supplies (g) Linen and laundry supplies 3.9 Taxes. The Management Company shall provide the Medical Group with access to all information necessary for the Medical Group to prepare its tax returns. The Management Company shall have no responsibility for -- (a) The payment of the Medical Group's taxes; or (b) The preparation of any partnership income tax returns or related Schedule K-1 forms for the Medical Group. -17- 3.10 Information Systems Management. (a) The Management Company shall provide or arrange for the provision of all management information systems services to be utilized by the Medical Group. These services shall include, but not be limited to -- (i) Ongoing maintenance and improvement of the Medical Group's existing information systems: (A) Accounts receivable - Billing/Insurance/Collections (B) On-line appointment scheduling (C) Internal e-mail (D) On-line transcription (E) Faxing subsystem (F) Electronic claims submission (G) Patient flow monitoring system (H) Authorization module (I) Prescription module (J) X-ray tracking system (K) Voice mail (ii) Development of the following new information systems -- (A) Paperless medical records (B) Bar code chart tracking system (b) The services provided by the Management Company shall protect the confidentiality of patient medical records to the extent required by applicable law or the Medical Group's payor agreements; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. 3.11 Use of New Technologies in the Practice of Medicine. The Management Company shall promote the integration of new technologies into the professional practice of the Medical Group, including without limitation the use of satellite and other telecommunications -18- services that permit the provision of remote consultations, virtual operations, and other professional services; provided, however, that the foregoing shall be subject to the terms of Section 8.2(e) hereof. 3.12 Public Relations; Marketing and Advertising. The Management Company shall develop and implement community outreach programs and public relations programs designed to educate the patient population regarding the Medical Group, the availability of its medical services, and the availability in terms of any managed care programs in which the Medical Group participates. The Management Company also shall develop and implement marketing and advertising programs as reasonably required to promote and expand the Medical Business, subject to any approved budgets. The programs shall be conducted in compliance with applicable laws and regulations governing advertising by the medical profession. 3.13 Medical Personnel Recruiting. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services who are employees, independent contractors, partners, or physician-employees of corporate partners in the Medical Group; (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services that are billable to patients or third party payors (separate and apart from the billable services provided by physicians); and (iii) Technicians who perform diagnostic tests or procedures. (b) With respect to each of the Medical Personnel, the Management Company shall verify educational and employment experience, licensure and insurability, and shall review -19- and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal sanctioned commissions. 3.14 Insurance. The Management Company shall provide the insurance coverage described in Sections 12.1 and 12.2 of this Agreement. 3.15 Files and Records. (a) To the extent permitted by applicable law, the Management Company shall supervise and maintain custody of all files and records relating to the operation of the business of the Medical Group, including, without limitation, accounting, billing, collection, or patient medical records. The management of all files and records shall be in compliance with applicable state and federal statutes. Business records of the Medical Group created and/or maintained by the Management Company shall be the joint property of the Management Company and the Medical Group and shall at all times be located at a location that is readily accessible to the parties. Patient medical records shall at all times be and remain the property of the Medical Group and shall be located at a location that is readily accessible for patient care. The Management Company shall preserve the confidentiality of patient medical records and use information contained in such records only for the limited purposes necessary to perform the management services set forth herein; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. (b) The Management Company shall provide all off site storage of files and records as required and in conjunction with policies established by the Operations Committee. The Management Company shall provide the Medical Group with all requested off-site files and records on a timely basis, consistent with the policies of the Medical Group in effect immediately prior to the Commencement Date. Any change in such policies shall be subject to the approval of the Operations Committee. 3.16 Managed Care Contracts. The Management Company shall solicit, negotiate and administer all managed care contracts on behalf of the Medical Group based on parameters and -20- criteria established by the Operations Committee. Such services shall be performed by the Management Company as agent of the Medical Group, and all managed care contracts shall be subject to the Medical Group's prior approval of any such contract. The Management Company shall prepare cost forecasts and other analyses as reasonably requested by the Medical Group in order to allow the Medical Group to make an informed decision with respect to each proposed contract. 3.17 Budgets. The Management Company shall prepare, for the review and approval of the Operations Committee, annual operating budgets (the "Budgets") reflecting in reasonable detail projected Billings, Collections, Medical Group Costs, and Management Company Operating Costs; provided, however, that the Medical Group shall provide the Management Company with a proposed Budget covering the initial three-month period under this Agreement. The initial Budget, which shall be applicable to the period commencing on the Commencement Date and ending three (3) months thereafter, is attached hereto as Schedule II. All other budgets shall be on a calendar year basis. The Management Company shall prepare and submit to the Operations Committee all subsequent Budgets on or before December 15 of the year immediately preceding the calendar year to which such Budgets are applicable. 3.18 Force Majeure. The Management Company shall not be liable to the Medical Group for failure to perform any of the services required herein in the event of strikes, lockouts, calamities, acts of God, unavailability of supplies, changes in applicable law or regulations or other events over which the Management Company has no control for so long as such events continue and for a reasonable time thereafter. SECTION 4. Equity Participation. In consideration of the Medical Group's entering into this Agreement, the Management Company shall provide to the persons identified in Schedule III attached hereto (the "Eligible Parties") the consideration set forth on Schedule III. SECTION 5. Costs, Compensation, and Other Payments. 5.1 Bank Accounts. The Medical Group shall instruct the Medical Group Bank to transfer, on a weekly basis, all funds in the Medical Group Collections Account (less the amount -21- necessary to avoid the payment of bank charges or fees relating to the failure to maintain a minimum balance in the Medical Group Collections Account) to a bank (the "Management Company Bank") designated by the Management Company, for credit to an account in the Management Company's name (the "Operating Account"). All interest earned on the funds on deposit in the Operating Account shall be for the account of the Management Company. 5.2 Payments. The Management Company shall pay all of the Medical Group Compensation and all of the Management Company Costs, as hereinafter defined, and the Management Company shall be entitled to retain for itself the Management Fee, as hereinafter defined. The Management Company may disburse funds from the Operating Account only for the purposes specified in this Section 5, including without limitation for the payment of Medical Group Compensation, Authorized Management Company Operating Costs, and the Management Fee. If at any time there are insufficient funds in the Operating Account to satisfy any of the payment obligations of the Management Company under this Agreement, the Management Company shall satisfy such obligations from other funds of the Management Company, and the Management Company may thereafter reimburse itself such amounts from the Operating Account. 5.3 Medical Group Compensation. (a) Monthly Draw. (i) On each Draw Date during the Term hereof, the Management Company shall distribute to the Medical Group an amount equal to a percentage (the "Draw Percentage") of the Medical Group's total Billings for Medical Group Services provided during the previous month (the "Monthly Draw"). The Draw Date and the initial Draw Percentage are as set forth in Schedule IV, and the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii). (ii) Commencing May 15, 1998, and effective May 15 of each year thereafter, the Draw Percentage shall be adjusted to equal a fraction, the numerator of which is the Annual Medical Group Compensation Amount for the previous year, and the denominator of which is the total amount of Billings for the previous year. -22- (b) Annual Settlement. (i) On or before April 30, 1998, and on or before April 30 of each year thereafter, the Management Company shall calculate the following (the "Annual Medical Group Compensation Amount"): (A) The total Collections for all Medical Group Services rendered during the previous calendar year, less -- (B) the sum of the following: (1) the Management Fee earned by the Management Company for the previous calendar year; and (2) the Authorized Management Company Operating Costs incurred by the Management Company during the previous calendar year. (ii) If the Annual Medical Group Compensation Amount thus determined exceeds the total of the twelve (12) Monthly Draws paid by the Management Company to the Medical Group during the previous calendar year (the "Annual Draw Amount"), the Management Company shall pay to the Medical Group on or before May 15, an amount equal to such excess. If the Annual Draw Amount for the previous calendar year exceeds the Annual Medical Group Compensation Amount for the previous calendar year, the Management Company shall withhold from the Medical Group Compensation otherwise payable to the Medical Group, during each of the following six (6) months, an amount equal to one-sixth (1/6) of such excess. (iii) For purposes of determining the total Collections for all Medical Group Services provided during any calendar year, all Collections during January, February, and March of each year shall be deemed to be for Medical Group Services rendered during the previous calendar year, and all Collections during April through December shall be deemed to be for Medical Group Services rendered during the calendar year in which such Collections were received; provided, however, that for purposes of determining the total Collections during the period commencing on the Commencement Date and ending December 31, 1997, all Collections from and after the Commencement Date through March 31, 1998, shall be deemed to be for -23- Medical Group Services rendered during the period commencing on the Commencement Date and ending December 31, 1997. Notwithstanding the foregoing, the Management Fee applicable to any calendar year shall be based on the Collections actually received during such calendar year. (iv) Notwithstanding anything to the contrary set forth herein, the first period for which the annual settlement described in this Section 5.3(b) shall be applicable is the period commencing on the Commencement Date and ending on December 31, 1997. (c) Notwithstanding the provisions of Section 5.1, in the event that the Medical Group has not received from the Management Company all or any portion of the Monthly Draw on or before the third business day following the Draw Date, or in the event that the Medical Group has not received from the Management Company all or any portion of any amount payable to the Medical Group pursuant to Section 5.3(b)(ii) on or before the third business day following the date on which such payment is required to be made under the terms of Section 5.3(b)(ii), without limiting any other right or remedy that the Medical Group may have under this Agreement or under applicable law, the Medical Group shall have the right to immediately withdraw such amount directly from the Medical Group Collections Account. (d) For purposes of this Agreement -- (i) "Billings" means, for any applicable period, the gross charges of the Medical Group for all Medical Group Services furnished during such period. (ii) "Collections" means, for any applicable period, all cash or cash equivalents received during such period, net of refunds paid during such period, for Medical Group Services. (iii) "Medical Group Services" means the following services rendered by, through, or on behalf of the Medical Group: all professional -24- services rendered by or under the supervision of any of the Medical Personnel (including professional services rendered in connection with New Ancillary Services); all diagnostic radiology services rendered by or under the supervision of any of the Medical Personnel; all other ancillary services (other than New Ancillary Services); all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, and other items and supplies that are billable to patients or to third party payors; depositions, record review services, court appearances, independent medical exams, athletic team services; bookkeeping fees received from SCORE and from FDP Development, Inc.; and those services of Stephen J. Snyder, M.D. which are compensated through the payment of royalties (other than book royalties), a current list of which is attached hereto as Schedule IX. (iv) It is the intent of the parties that Billings, Collections, and Medical Group Services not include any of the following: New Ancillary Services (excluding professional services rendered by Medical Personnel in connection therewith, which professional services are included under Section 5.3(d)(iii) above), interest income, income from the HealthSouth Rehabilitation Corporation with respect to a Services Agreement under which computer, linen, and telephone support services are provided; royalties payable to any Medical Group physician (except Stephen J. Snyder, M.D.) for medical inventions; fees payable under consulting agreements entered into by Medical Group physicians (including Stephen J. Snyder, M.D.); income from presentations, writings, and endorsements; proceeds from the sale of any capital assets of the Medical Group; and any income from investments. -25- 5.4 Management Fee. (a) The compensation payable to the Management Company for the provision of Management Services under this Agreement (the "Management Fee"), which the Management Company may disburse from the Operating Account from time to time at its discretion, shall be equal to the aggregate of the following: (i) An amount equal to the Applicable Percentage of Collections, provided that the amount thus determined shall be reduced by the Medical Equipment Master Lease Payments; and (ii) An amount equal to sixty-six and two-thirds percent (66-2/3%) of the Professional Practice Cost Savings. (b) For purposes of this Section 5.4, "Applicable Percentage" has the meaning set forth in Schedule V. (c) For purposes of this Agreement, "Office Sublease Payments" means the aggregate of the monthly lease amounts payable under all of the Office Subleases described in Section 3.2 hereof. (d) For purposes of this Agreement, "Medical Equipment Master Lease Payments" means the monthly lease amounts payable for all Medical Equipment determined in accordance with the Medical Equipment Master Lease Agreement referenced in Section 3.3(a) hereof. (e) For purposes of this Section 5.4, "Professional Practice Cost Savings" means the cost savings determined in the manner described in Schedule VI. (f) An example of the computation of Medical Group Compensation and the Management Fee is attached hereto as Schedule VII. -26- 5.5 Management Company Costs. (a) The Management Company shall pay all Management Company Operating Costs and all Excluded Costs (collectively, the "Management Company Costs"). (Authorized Management Company Operating Costs may be paid from the Operating Account, but Excluded Costs shall be paid from a separate account of the Management Company.) All Management Company Costs shall be incurred in the name of the Management Company, and not in the name of the Medical Group, except as specifically approved by the Medical Group. Management Company Costs shall not include any costs or expenses incurred prior to the Commencement Date of this Agreement. (b) The Management Company shall provide to the Medical Group, upon reasonable request by the Medical Group from time to time, supporting documentation and other backup detail relating to any or all of the Management Company Costs. (c) For purposes of this Agreement, "Management Company Operating Costs" means all costs and expenses incurred in connection with the provision of the Management Services, except for any costs and expenses defined as Medical Group Costs in Section 5.7 hereof, and except for Excluded Costs. "Excluded Costs" means all of the following costs and expenses incurred in connection with the provision of the Management Services hereunder: (i) New Medical Office Start-Up Costs; (ii) The rent and any other payments due under any of the Office Leases; (iii) The cost of any Medical Equipment leased by the Management Company to the Medical Group; (iv) The cost of any FF&E provided by the Management Company to the Medical Group; (v) Depreciation, amortization, and interest; and (vi) Corporate overhead of the Management Company ("Corporate Overhead") except to the extent that all of the following conditions are satisfied: -27- (A) The Corporate Overhead is incurred in lieu of a pre-existing Management Company Operating Cost; (B) The amount of such Corporate Overhead does not exceed the amount of the Management Company Operating Costs being eliminated; and (C) The Corporate Overhead is allocated to the Medical Group and to all other medical groups utilizing such Corporate Overhead on a pro rata basis. Any Corporate Overhead with respect to which all of the above conditions are satisfied shall be considered Management Company Operating Costs. (d) For purposes of this Agreement, "Authorized Management Company Operating Costs" means all Management Company Operating Costs incurred in any year reduced by any or all of the following, as applicable: (i) any costs that exceed the applicable Management Company Operating Costs Budget which are not approved by the Operations Committee; (ii) any costs with respect to which the Medical Group has reasonably requested supporting documentation or other backup detail which has not been furnished by the Management Company or which does not reasonably establish the appropriateness of such costs; and (iii) any costs that have been determined pursuant to an audit under Section 5.9 not to have been reasonably incurred in connection with the Management Services required to be provided under of this Agreement. -28- 5.6 New Medical Office Start-Up Costs. (a) The Management Company shall pay all New Medical Office Start-Up Costs incurred in connection with the establishment of any New Medical Office. (b) All Medical Equipment utilized at any New Medical Office shall be acquired by the Management Company and leased to the Medical Group in accordance with Section 3.3 hereof. (c) For purposes of this Agreement, "New Medical Office" means any office of the Medical Group other than those offices located in the premises identified in Sections 3.2(a) and 3.2(b) hereof. (d) For purposes of this Agreement, "New Medical Office Start-Up Costs" means the following costs incurred in connection with the establishment of a New Medical Office during the New Medical Office Start-Up Period: all Management Company Costs and all costs other than physician Medical Personnel costs that, but for this provision, would have been considered Medical Group Costs. (e) For purposes of this Agreement, "New Medical Office Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of a New Medical Office and ending on the earlier of (i) the last day of the calendar month in which a period of eighteen (18) months has elapsed from and after the date on which the New Medical Office first opened for the treatment of patients, or (ii) the last day of the first period of two (2) consecutive calendar months for which the costs borne by the Management Company in connection with the New Medical Office are less than sixty percent (60%) of the Collections for Medical Group Services provided at the New Medical Office during such two-month period. In no event shall the Management Company have any obligation under this Section 5.6 to pay any New Medical Office Start-Up Costs incurred later than eighteen (18) months after the New Medical Office first opened for the treatment of patients. -29- 5.7 Medical Group Costs. Except as otherwise provided in this Agreement, the Medical Group shall pay all of the costs specified in this Section 5.7 (the "Medical Group Costs"). All Medical Group Costs shall be incurred in the name of the Medical Group, and not in the name of the Management Company, and shall be paid from an account of the Medical Group and not from the Operating Account of the Management Company. The Medical Group Costs are as follows: (a) Compensation of all Medical Personnel; (b) Any applicable fringe benefits for all Medical Personnel, including, but not limited to, payroll taxes, workers' compensation, health insurance (including drug coverage), dental insurance, individual disability insurance, life insurance, business buy-out disability insurance, continuing education, and medical dues and licenses; (c) The cost of prosthetics, prosthetic devices, orthotics, braces, splints, appliances, allografts, x-ray films, and other items and supplies that are billable to patients or to third party payors (the "Billable Items"); (d) The Medical Equipment Master Lease Payments; (e) Any lease payments for New Ancillary Service Medical Equipment; (f) Rent for the Van Nuys Office and any other offices leased by the Medical Group; (g) The Office Sublease Payments; and (h) The cost of any items which are not required to be provided by the Management Company under this Agreement and/or which were ordered, purchased, or incurred by the Medical Group directly, including but not limited to the cost of accounting, legal, consulting, or other professional or advisory services, business meetings, and business taxes. 5.8 New Ancillary Services Costs. (a) Any agreement by the parties to establish a New Ancillary Service as described in Section 3.4 of this Agreement shall (unless otherwise agreed by the parties) incorporate the following: -30- (i) The Management Company shall create a separate division ("Ancillary Division") for purposes of accounting for the income, costs, profits, and losses of any New Ancillary Service. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Ancillary Service. (ii) Profits and/or losses of any Ancillary Division shall be divided equally between the Medical Group and the Management Company, and all distributions to the Medical Group and to the Management Company shall be made in equal amounts to each from available cash (after payment of all currently due obligations incurred in connection with such New Ancillary Division, including without limitation any principal and interest amounts then due and payable under Section 5.8(a)(iv) below, and after retention of reasonable reserves) derived from the operation of such Ancillary Division. (iii) All diagnostic and therapeutic equipment utilized in connection with any New Ancillary Service ("New Ancillary Service Medical Equipment") shall be acquired by the Management Company and leased to the Medical Group pursuant to an equipment lease substantially in the form of the Medical Equipment Master Lease Agreement attached hereto as Exhibit F. (iv) The Management Company shall pay all of the Ancillary Service Start-Up Costs. Beginning with the month following the expiration of the Ancillary Service Start-Up Period, the Management Company shall be entitled to recoup all of the Ancillary Service Start-Up Costs previously paid by the Management Company in sixty (60) equal monthly installments of principal, plus interest on the unrecouped portion of such costs at the prevailing prime rate as set forth in the Wall Street Journal and/or at the actual rate paid by the Management Company with respect to any part of such costs that have been financed by the Management Company. (v) The Management Company shall provide, in connection with any New Ancillary Service, the full range of management services described in this agreement. -31- (vi) The billings, collections, costs and expenses relating to any New Ancillary Service shall not be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, New Medical Office Start-Up Costs, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively. (b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of the New Ancillary Service and ending on the last day of the first period of two (2) consecutive calendar months for which the New Ancillary Service shows a profit. (c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs" means the total of all of the following costs incurred in connection with the establishment of a New Ancillary Service during the Ancillary Service Start-Up Period (whether such costs would otherwise be considered Management Company Costs or Medical Group Costs) -- (i) Any lease payments for New Ancillary Service Medical Equipment; (ii) All costs of acquiring furniture, fixtures, and office equipment; (iii) All initial occupancy costs, if any, including but not limited to rent deposits, prepaid rent, and tenant improvements; (iv) All other start-up costs, including but not limited to legal, accounting and consulting fees, and the cost of initial inventories of supplies and other items; and (v) All ongoing costs of the New Ancillary Service, including but not limited to personnel (other than physician Medical Personnel) and related benefits, the cost of operating any equipment utilized in providing the service, supplies, insurance, rent, repairs and -32- maintenance, outside services, telephone, taxes, utilities, storage and other ordinary ongoing expenses of providing the New Ancillary Service. 5.9 Review and Audit of Books and Records. Each of the parties shall have the right, during ordinary business hours and upon reasonable notice, to review and make copies of, or to audit through a qualified certified public accountant approved by the other party (which approval shall not be unreasonably withheld), the books and records of the other party relating to the billing, collection, and disbursement of fees, and the determination of costs, under this Agreement. Any such review or audit shall be performed at the cost of the requesting party; provided, however, that in the event that such review or audit requested by the Medical Group discloses a discrepancy indicating that the Medical Group has actually been underpaid by an amount in excess of two percent (2%) of the total amount of Medical Group Compensation payable to the Medical Group for the period covered by the audit, the cost of the audit shall be borne by the Management Company. All documents and other information obtained in the course of such review or audit shall be held in strict confidence. 5.10 Start-Up Period. Consistent with the provisions of Section 2 of this Agreement, the parties acknowledge and agree that, in order to facilitate the transition of responsibilities hereunder, certain requirements and procedures agreed to under this Agreement may be implemented over the course of a period of time commencing on the Commencement Date and ending December 31, 1996 (subject to extension by agreement of the Medical Group and the Management Company), rather than being fully implemented immediately on the Commencement Date. Accordingly, the parties further agree that the Management Fee and Medical Group Compensation payable in respect of the Management Services and the Medical Group Services applicable to such period of time shall be computed, and any appropriate adjustments shall be made, such that no material financial advantage or disadvantage shall accrue to either party as a result of implementing such requirements and procedures over the course of such start-up period rather than immediately on the Commencement Date. -33- SECTION 6. Representations and Warranties of the Medical Group. The Medical Group hereby represents and warrants to the Management Company, as of the Signature Date hereof, as follows: 6.1 Organization; Good Standing; Qualification and Power. The Medical Group is a general partnership duly organized, validly existing, and in good standing under the laws of the State of California and has all requisite power and authority to own, lease, and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to enter into this Agreement, the Asset Purchase Agreement, the Medical Equipment Master Lease, each Assignment of Lease, each Office Sublease, and each Stockholder Non-Competition Agreement (collectively, the "Medical Group Transaction Documents"), to perform its obligations thereunder, and to consummate the transactions contemplated hereby and thereby. The Medical Group has delivered to the Management Company a true and correct copy of its General Partnership Agreement, in effect on the date hereof. 6.2 Equity Investments. The Medical Group currently has no subsidiaries, nor does the Medical Group currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 6.3 Authority. The execution, delivery and performance of the Medical Group Transaction Documents and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of the Medical Group. The Medical Group Transaction Documents have been duly and validly executed and delivered by the Medical Group and constitute the legal, valid and binding obligations of the Medical Group enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally or by applicable laws pertaining to the enforceability of non-competition agreements. Neither the execution, delivery or performance of the Medical Group Transaction Documents by the Medical Group nor the consummation by the Medical Group of the transactions contemplated hereby or thereby, nor compliance by the Medical Group with any provision hereof or thereof will (a) conflict with or result in a breach of any provision of the -34- formation documents of the Medical Group, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Medical Group or the Medical Business is a party or by which they or any of its respective properties or assets may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or (c) to the best knowledge of the Medical Group, but without expressing any opinion regarding the enforceability of non-competition agreements, violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Medical Group, the Medical Business or any of their respective properties or assets. To the best knowledge of the Medical Group, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Medical Group of the Medical Group Transaction Documents or the consummation of the transactions contemplated thereby. 6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's internal statements of assets, liabilities and partners' equity of the Medical Business at September 30, 1996 (the "Balance Sheet"; and the date thereof being referred to as the "Balance Sheet Date"), and the related internal statements of revenue and expenses for the period then ended (including the notes thereto and other financial information included therein) (collectively, the "Internal Financial Statements"), and (b) the review financial statements of the Medical Business for the periods ended December 31, 1995 and December 31, 1994 (the "Review Financial Statements"). The Internal Financial Statements and the Review Financial Statements (i) were prepared in accordance with the books and records of the Medical Business, (ii) fairly present the financial position of the Medical Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the dates thereof. 6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule 6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided -35- for or disclosed on the Balance Sheet, (b) all liability reserves established by the Medical Business on the Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Balance Sheet. 6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, the Medical Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Medical Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Medical Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Medical Business other than such items created or incurred in the ordinary course of the Medical Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Medical Business outside the ordinary course of the Medical Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Medical Business except in the ordinary course of the Medical Business and consistent with past practice; -36- (f) any write-off as uncollectible of any accounts receivable in connection with the Medical Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Medical Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Medical Business; (i) any general uniform increase in the compensation of employees of the Medical Group or the Medical Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Medical Group or the Medical Business; (j) any change in the accounting methods or practices followed in connection with the Medical Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) the termination of any partner and/or key employee of the Medical Group or the Medical Business listed on Annex A ("Medical Group Key Personnel"), or any expression of intention by any of the Medical Group Key Personnel to terminate such partnership status or employment with the Medical Group or the Medical Business; -37- (l) any agreement or commitment relating to the sale of any material fixed assets of the Medical Business; (m) any other transaction relating to the Medical Business other than in the ordinary course of the Medical Business and consistent with past practice; or (n) any agreement or understanding, whether in writing or otherwise, for the Medical Business to take any of the actions specified in items (a) through (m) above. 6.7 Tax Matters. (a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the Medical Business required to be paid by the Medical Group through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed by the Medical Group in connection with the Medical Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Medical Group prior to the date hereof (collectively, "Returns") have been duly filed; (ii) as of the time of filing, the Returns correctly reflected in all material respects (and, as to any Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Medical Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Medical Business that have been shown as due and payable by the Medical Group on the Returns have been timely paid and filed or adequate provisions made to the books and records of the Medical Business; (iv) in connection with the Medical Business (x) the Medical Group has made provision on the Balance Sheet for all Taxes payable by the Medical Group for any periods that end on or before the Balance Sheet Date for which no Returns have yet been filed and for any periods that begin on or before the Balance Sheet Date and end after the Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Balance Sheet Date and (y) provision has been made for all Taxes payable by the Medical Group for any periods that end on or before the date hereof for which no Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such -38- Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Medical Business, and there are no pending tax audits of any Returns relating to the Medical Business; and (vi) no deficiency or addition to Taxes, interest or penalties applicable to the Medical Group for any Taxes relating to the operation of the Medical Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Medical Group or any previous operator of the Medical Business was a member for which the Medical Group could be liable). (b) The Medical Group is not a foreign person within the meaning of Sections 1.1445-2(b) of the Regulations under Section 1445 of the Code. (c) The Medical Group has provided the Management Company with true and complete copies of all Federal, state and foreign Returns of the Medical Group for the calendar years ending December 31, 1994 and 1995. (d) For purposes of this Agreement, "Tax" means any of the Taxes and "Taxes" means, with respect to any person or entity, (i) all federal, state, local and foreign income taxes (including any tax on or based upon net income, or gross income, or income as specially defined, or earnings, or profits, or selected items of income, earnings or profits) and all Federal, state, local and foreign gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties or other Federal, state, local and foreign taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) on such person or entity and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of being a `transferee' (within the meaning of Section 6901 of the Code or any other applicable law) of another person or entity or a member of an affiliated or combined group. 6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to -39- the best knowledge of the Medical Group, threatened against the Medical Group or in connection with the Medical Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Medical Group, its assets or affecting the Medical Business. The Medical Group has delivered to the Management Company all documents and correspondence relating to matters referred to in said Schedule 6.8. 6.9 Compliance; Governmental Authorizations. The Medical Group and the Medical Business shall have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Medical Group has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Medical Business, the lack of which would have a material adverse effect on the Medical Group's ability to operate the Medical Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Medical Group has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Medical Group, threatened to revoke or limit any thereof. To the best knowledge of the Medical Group, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 6.10 Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 6.10, all of the accounts receivable owing to the Medical Group in connection with the Medical Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Medical Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Medical Group, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 6.10, as of the date hereof, there is (i) no account debtor or note debtor of the Medical Business delinquent in its payment by more than 60 days, (ii) no account debtor or note debtor of the Medical Business who or which -40- has refused to pay its obligations for any reason or is the subject of a bankruptcy proceeding and (iii) no account receivable or note receivable of the Medical Business pledged to any third party. (b) All accounts payable and notes payable by the Medical Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 6.10, there is no account payable or note payable past due or delinquent in its payment. 6.11 Labor Relations; Employees. Schedule 6.11 contains a true and complete list of the persons employed by the Medical Group as of the date hereof (the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and the Medical Business are not delinquent in payments to any of the Employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Employees; (b) upon termination of the employment of any of the Employees, neither the Medical Group, the Medical Business nor the Management Company will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Medical Group or in connection with the Medical Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Medical Group, threatened against or involving the Medical Group or Medical Business; (e) there is no collective bargaining agreement covering any of the Employees; and (f) to the best knowledge of the Medical Group, no Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Medical Group or the Medical Business. 6.12 Employee Benefit Plans. (a) Schedule 6.12 identifies each `employee benefit plan', as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all -41- other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Medical Group or the Medical Business and any Employee or former employee of the Medical Group or in connection with the Medical Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Medical Group or in connection with the Medical Business for the benefit of any Employee or former employee of the Medical Group or in connection with the Medical Business under which the Medical Group, any affiliate thereof or the Medical Business has any present or future obligation or liability (the "Employee Plans"). The Medical Group has provided the Management Company with true and complete age, salary, service and related data for Employees of the Medical Group and in connection with the Medical Business. (b) Schedule 6.12 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Medical Group or in connection with the Medical Business. 6.13 Insurance. Schedule 6.13 contains a list of all policies of professional liability (medical malpractice), general liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Medical Group covering the assets, properties or operations of the Medical Group and the Medical Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither the Medical Group nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Medical Group or the Medical Business. -42- 6.14 Real Property. Schedule 6.14 sets forth an accurate and complete legal description of the entire right, title and interest of the Medical Group in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real property, owned or leased by the Medical Group (the "Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Real Property, the Medical Group has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Medical Business. The Medical Group has a valid leasehold interest in all Real Property leased by the Medical Group. 6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15, neither the Medical Group nor the Medical Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Medical Group or the Medical Business (or any material part thereof). 6.16 Disclosure. Neither the Medical Group Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Management Company by or on behalf of the Medical Group in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 6.16, there have been no events or transactions, or information which has come to the attention of the Medical Group, which, as they relate directly to the Medical Group or the Medical Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Medical Group and the Medical Business. SECTION 7. Representations and Warranties of the Management Company. The Management Company represents and warrants to the Medical Group, as of the Signature Date hereof, as follows: -43- 7.1 Organization, Good Standing and Power. The Management Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement, the Asset Purchase Agreement, each Restricted Stock Agreement, the Medical Equipment Master Lease, each Assignment of Lease, each Office Sublease, and each Stockholder Non-Competition Agreement (collectively, the "Management Company Transaction Documents"), to perform its obligations thereunder, and to consummate the transactions contemplated hereby and thereby. The Management Company has delivered to the Medical Group a true and correct copy of its formation documents, consisting of the following: Amended and Restated Certificate of Incorporation filed November 12, 1996 (the "BMJ Formation Documents"). The BMJ Formation Documents have not been amended, and the BMJ Formation Documents are in effect as of the date hereof. 7.2 Equity Investments. Except as identified in Schedule 7.2, the Management Company currently has no subsidiaries, nor does the Management Company currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 7.3 Capitalization. (a) The total authorized capital of the Management Company consists of 10,000,000 shares of common stock and 5,000,000 shares of preferred stock. Set forth in Schedule 7.3(a) is an accurate and complete listing of all of the stockholders of the Management Company and the number and class of shares held by each. Except as set forth in Schedule 7.3(a), the Management Company has no other outstanding stock or securities of any kind or nature, and no shares of capital stock are held by the Management Company in its treasury. Each of the outstanding shares of capital stock has been duly and validly authorized and issued, is fully paid and non-assessable, and was issued in compliance with all applicable federal and state securities laws. Except as set forth in the Stockholders Agreement (as hereinafter defined), no person is entitled to any preemptive or similar right with respect to the issuance of any shares of capital stock of the Management Company. -44- (b) No sale of common stock has been effected or any other action taken the effect of which sale or other action would require or permit an adjustment of the Conversion Price of any issued and outstanding convertible preferred stock. The exercise of the right of any holder of convertible preferred stock to convert such stock to common stock on or as of the Commencement Date hereunder would entitle such holder of preferred stock to receive one share of common stock for each share of preferred stock. (c) There are no outstanding warrants, options, calls, conversion rights or commitments or other rights to subscribe for or purchase from the Management Company any shares of capital stock of the Management Company or securities convertible into or exchangeable for capital stock, except as set forth in Schedule 7.3(c). (d) The Management Company has taken all action necessary or appropriate to duly authorize the creation, issuance and sale of the common stock to be issued hereunder. Such shares of common stock, when issued, sold and delivered, as provided for herein and in the Restricted Stock Agreements, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership of the shares. The issuance of such shares of common stock will not violate any preemptive or similar right of any person. 7.4 Stockholders Agreement. The Management Company has delivered to the Medical Group a true and correct copy of that certain Amended and Restated Stockholders Agreement dated as of November 12, 1996 (the "Stockholders Agreement"), entered into by and among the Management Company and the stockholders identified therein. The Stockholders Agreement has not been terminated or amended and remains in full force and effect. 7.5 Authority. The execution, delivery and performance of the Management Company Transaction Documents, and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action on the part of the Management Company. The Management Company Transaction Documents to which it is a party have been duly and validly executed and delivered by the Management Company, and such Management Company Transaction Documents are valid and binding obligations of the -45- Management Company, enforceable in accordance with their respective terms except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of the Management Company Transaction Documents, nor the consummation by the Management Company of the transactions contemplated thereby, nor compliance by the Management Company with any provision thereof, will (a) conflict with or result in a breach of any provisions of the BMJ Formation Documents or By-laws of the Management Company, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Management Company is a party or by which it or any of its properties or assets is or may be bound or (c) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Management Company or any of its properties or assets. Except as provided in Schedule 7.5, to the best of the Management Company's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Management Company of this Agreement or the consummation by the Management Company of the transactions contemplated hereby. 7.6 Financial Information. Schedule 7.6 contains (a) the unaudited statements of assets, liabilities and stockholders' equity of the Management Business at September 30, 1996 (the "Management Company Balance Sheet"; and the date thereof being referred to as the "Management Company Balance Sheet Date"), and the related unaudited statements of revenue and expenses for the periods then ended (including the notes thereto and other financial information included therein) (collectively, the "Unaudited Financial Statements"). The Unaudited Financial Statements (i) were prepared in accordance with the books and records of the Management Business, (ii) fairly present the financial position of the Management Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the date thereof. -46- 7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule 7.7, as of the Management Company Balance Sheet Date, (a) the Management Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Management Company Balance Sheet, (b) all liability reserves established by the Management Business on the Management Company Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Management Company Balance Sheet. 7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the Management Company Balance Sheet Date, the Management Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Management Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Management Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Management Business other than such items created or incurred in the ordinary course of the Management Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Management Business outside the ordinary course of the Management Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); -47- (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Management Business except in the ordinary course of the Management Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Management Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Management Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which the Management Business, such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Management Business; (i) any general uniform increase in the compensation of employees of the Management Company or the Management Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Management Company or the Management Business; (j) any change in the accounting methods or practices followed in connection with the Management Business or any change in depreciation or amortization policies or rates theretofore adopted; -48- (k) any termination of employment of any key employee of the Management Company or the Management Business listed on Annex B (each, a "Management Company Key Employee"), or any expression of intention by any Key Employee of the Management Company or the Management Business to terminate such employment with the Management Company or the Management Business; (l) any agreement or commitment relating to the sale of any material fixed assets of the Management Business; (m) any other transaction relating to the Management Business other than in the ordinary course of the Management Business and consistent with past practice; or (n) any agreement or understanding, whether in writing or otherwise, for the Management Business to take any of the actions specified in items (a) through (m) above. 7.9 Tax Matters. (a) Except as set forth on Schedule 7.9, (i) all Taxes relating to the Management Business required to be paid through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed in connection with the Management Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Management Company prior to the date hereof (collectively, "Management Company Returns") have been duly filed; (ii) as of the time of filing, the Management Company Returns correctly reflected in all material respects (and, as to any Management Company Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Management Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Management Business that have been shown as due and payable on the Management Company Returns have been timely paid and filed or adequate provisions made to the books and records of the Management Business; (iv) in connection with the Management Business (x) the Management Company has made provision on the Management -49- Company Balance Sheet for all Taxes payable for any periods that end on or before the Management Company Balance Sheet Date for which no Management Company Returns have yet been filed and for any periods that begin on or before the Management Company Balance Sheet Date and end after the Management Company Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Management Company Balance Sheet Date and (y) provision has been made for all Taxes payable for any periods that end on or before the date hereof for which no Management Company Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Management Business, and there are no pending tax audits of any Management Company Returns relating to the Management Business; and (vi) no deficiency or addition to Taxes, interest or penalties for any Taxes relating to the operation of the Management Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Management Company or any previous operator of the Management Business was a member for which the Management Company could be liable). (b) The Management Company is not a foreign person within the meaning of Sections 1.1445-2(b) of the Regulations under Section 1445 of the Code. 7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Management Company, threatened against the Management Company or in connection with the Management Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Management Company its assets or affecting the Management Business. The Management Company has delivered to the Medical Group all documents and correspondence relating to matters referred to in said Schedule 7.10. -50- 7.11 Compliance; Governmental Authorizations. The Management Company and the Management Business shall have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Management Company has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Management Business, the lack of which would have a material adverse effect on the Management Company's ability to operate the Management Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Management Company has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Management Company, threatened to revoke or limit any thereof. To the best knowledge of the Management Company, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 7.12 Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 7.12, all of the accounts receivable owing to the Management Company in connection with the Management Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Management Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Management Company, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 7.12, as of the date hereof, there is (i) no account debtor or note debtor of the Management Business delinquent in its payment by more than 60 days, (ii) no account debtor or note debtor of the Management Business who or which has refused to pay its obligations for any reason or is the subject of a bankruptcy proceeding and (iii) no account receivable or note receivable of the Management Business pledged to any third party. (b) All accounts payable and notes payable by the Management Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 7.12, there is no account payable or note payable past due or delinquent in its payment. -51- 7.13 Labor Relations; Employees. Schedule 7.13 contains a true and complete list of the persons employed by the Management Company as of the date hereof (the "Management Company Employees"). Except as set forth on Schedule 7.13, (a) the Management Company and the Management Business are not delinquent in payments to any of the Management Company Employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Management Company Employees; (b) upon termination of the employment of any of the Management Company Employees, neither the Management Company, the Management Business nor the Medical Group will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the Management Company Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Management Company or in connection with the Management Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Management Company, threatened against or involving the Management Company or Management Business; (e) there is no collective bargaining agreement covering any of the Management Company Employees; and (f) to the best knowledge of the Management Company, no Management Company Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Management Company or the Management Business. 7.14 Employee Benefit Plans. (a) Schedule 7.14 identifies each `employee benefit plan', as defined in Section 3(3) of ERISA, and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Management Company or the Management Business and any Management Company Employee or former employee of the Management Company or in connection with the Management Business, but excluding workers' compensation, unemployment compensation and other -52- government-mandated programs) currently or previously maintained or entered into by the Management Company or in connection with the Management Business for the benefit of any Management Company Employee or former employee of the Management Company or in connection with the Management Business under which the Management Company, any affiliate thereof or the Management Business has any present or future obligation or liability. The Management Company has provided the Medical Group with true and complete age, salary, service and related data for Management Company Employees and in connection with the Management Business. (b) Schedule 7.14 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Management Company or in connection with the Management Business. 7.15 Insurance. Schedule 7.15 contains a list of all policies of liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Management Company covering the assets, properties or operations of the Management Company and the Management Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither the Management Company nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Management Company or the Management Business. 7.16 Real Property. Schedule 7.16 sets forth an accurate and complete legal description of the entire right, title and interest of the Management Company in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real -53- property, owned or leased by the Management Company (the "Management Company Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Management Company Real Property, the Management Company has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Management Business. The Management Company has a valid leasehold interest in all Management Company Real Property leased by the Management Company. 7.17 Burdensome Restrictions. Except as set forth on Schedule 7.17, neither the Management Company nor the Management Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Management Company or the Management Business (or any material part thereof). 7.18 Disclosure. Neither the Management Company Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Medical Group by or on behalf of the Management Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 7.18, there have been no events or transactions, or information which has come to the attention of the Management Company, which, as they relate directly to the Management Company or the Management Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Management Company and the Management Business. SECTION 8. Operations Committee. 8.1 Formation and Operation of the Operations Committee. The Management Company and the Medical Group shall establish an Operations Committee responsible for directing the Management Company in connection with the development of certain specific management and administrative policies for the overall operation of the Medical Group. The Operations Committee shall consist of six (6) members. The Medical Group shall designate -54- three (3) members of the Operations Committee, each of whom shall be a physician in the Medical Group, and the Management Company shall designate three (3) members of the Operations Committee. The business of the Operations Committee shall be conducted in accordance with the policies and procedures described in Section 8.4 hereof. 8.2 Authoritative Functions of the Operations Committee. The Operations Committee shall perform the following functions, and the decisions of the Operations Committee with respect to such functions shall be binding on the Management Company and the Medical Group: (a) Approve the annual budgets for: (i) Billings and Collections (ii) Medical Group Costs (iii) Management Company Operating Costs (which, in the absence of approval by the Operations Committee, shall be increased by one percent (1.0%) over the total amount approved for the preceding period) (b) Approve costs and expenses that exceed the Management Company Operating Costs Budget. (c) Establish parameters and criteria with respect to the establishment and maintenance of relationships with institutional providers and payors and managed care contracts (except with respect to the establishment of professional fees). (d) Establish parameters and criteria with respect to: (i) Billings (ii) Claims submission (iii) Collections of fees (iv) Delinquent account collection policies (v) Turnover of delinquent accounts to outside collection agencies (vi) Write-offs of account balances -55- (vii) Claim review requests (viii) "Insurance only" and other courtesy write-off policies (ix) Lien account collection policies (x) Student Athlete account policies (e) Approve the acquisition, replacement, relocation, or other disposition of Medical Equipment and FF&E, approve the integration of new technologies into the professional practice of the Medical Group as contemplated by Section 3.11 hereof, and approve the renovation and expansion of any offices of the Medical Group ("Tenant Improvements"); provided, however, that the approval of the Management Company also shall be required prior to (i) the acquisition of any Medical Equipment or FF&E (including any Medical Equipment or FF&E relating to the integration of new technologies into the professional practice of the Medical Group) if and to the extent that the aggregate cost of such items in any calendar year exceeds five percent (5%) of the Management Fee for such year, (ii) the undertaking of any Tenant Improvements relating to patient care facilities that cost more than $25,000 in the aggregate at any one of the Medical Group's office locations in any calendar year, or (iii) the undertaking of any other Tenant Improvements. (f) Establish parameters and criteria for off-site storage of files and records of the Medical Group. 8.3 Advisory Functions of the Operations Committee. The Operations Committee shall review, evaluate and make recommendations to the Medical Group and the Management Company with respect to the following matters: (a) Identification of physician subspecialties required for the efficient operation of the Medical Group; advice regarding all Medical Personnel -56- employment and recruitment contracts to be utilized by the Medical Group. (b) Development of long-term strategic planning objectives for the Medical Group. (c) Public relations, advertising, and other marketing of Medical Group services, including design of exterior signs. (d) The establishment of fees for professional services and ancillary services rendered by the Medical Group. (e) Access and quality issues pertaining to ancillary services. (f) Insurance limits and insurance coverage of the Medical Group and the Management Company, as such coverage may relate to Medical Group operations and activities. (g) Any matters arising in connection with the operations of the Medical Group that are not specifically addressed in this Agreement and as to which the Management Company or the Medical Group requests consideration by the Operations Committee. The recommendations of the Operations Committee with respect to the matters described in this Section 8.3 are intended for the advice and guidance of the Management Company and the Medical Group, and except as provided herein, the Operations Committee does not have the power to bind the Management Company or the Medical Group. Where discretion with respect to any matters is vested in the Management Company or the Medical Group under the terms of this Agreement, the Management Company or the Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Operations Committee. The Management Company and the Medical -57- Group shall, however, take such recommendations of the Operations Committee into account in good faith in the exercise of such discretion. 8.4 Committee Policies and Procedures. (a) The Medical Group shall designate one of its members to act as Chairman of the Committee, and the Management Company shall designate one of its members to act as Vice Chairman. Each party may substitute or change its designated Operations Committee members at any time upon notice to the other party, and any Operations Committee member may designate his or her own substitute at any meeting without notice. Each member shall have one vote and shall have the right to grant his or her proxy to another member of the Operations Committee. The Chairman, if present, shall preside at all meetings of the Operations Committee. In the absence of the designated Chairman, the Vice Chairman shall preside. The only powers of the Chairman and the Vice Chairman that differ from those of the other members of the Operations Committee shall be to call and preside over meetings in accordance with this Section 8.4. (b) The Operations Committee may hold meetings without call or formal notice at such times and places as a quorum of its members may from time to time determine. A meeting of the Operations Committee also may be called by at least two (2) members of the Operations Committee or by the Chairman or Vice Chairman thereof upon at least three (3) days' written notice to the other members of the Operations Committee. Such notice requirement shall be deemed waived with respect to any member of the Operations Committee who attends such meeting. Meetings may be held in person or by telephone. The Operations Committee also may act by written consent as provided in Section 8.4(c). Minutes shall be kept of all formal actions taken by the Operations Committee. (c) No action of the Operations Committee shall be effective unless authorized by the vote of four (4) or more members of the Operations Committee present or represented by proxy at the applicable meeting. A quorum of the Operations Committee shall be four (4) members, in person, by telephone, or by proxy, and a quorum must remain for the duration of the meeting. The Operations Committee may establish such procedures to act by written -58- consent, without a meeting, as the Operations Committee determines are advisable, provided that all six (6) members (in person or by proxy) must sign any written consent. SECTION 9. Obligations of the Medical Group. The Medical Group shall perform the following obligations during the Term: 9.1 Compliance with Laws. The Medical Group shall provide professional services to patients in compliance at all times with ethical standards, laws and regulations to which they are subject. The Medical Group shall verify, with the assistance of the Management Company, that each physician and other Medical Personnel associated with the Medical Group for the purpose of providing medical care to patients of the Medical Group is licensed by the State of California. The Medical Group shall monitor the quality of medical care practiced by physicians and other health care personnel associated with the Medical Group. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician by any payor, patient, state or federal regulatory agency or any other person or entity, the Medical Group shall immediately inform the Management Company of such action and its underlying facts and circumstances. 9.2 Use of Facility. The Medical Group shall use and occupy any Facility (as defined below) exclusively for the practice of medicine, and shall comply with all applicable federal, state and local rules, ordinances and standards of medical care. The medical practice or practices conducted at any Facility described in clause (i) of the definition of the term "Facility" shall be conducted solely by Medical Personnel associated with the Medical Group, and no other physician or medical practitioner shall be permitted to use or occupy any Facility described in clause (i) below without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. The term "Facility" shall mean (i) any medical facility or laboratory controlled, managed or operated by the Management Company or (ii) any hospital at which any Medical Personnel practices medicine or maintains admitting privileges. -59- 9.3 Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts. The Medical Group shall have the exclusive control over the choice of vendors and products utilized with respect to all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, medical supplies and allografts. 9.4 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group shall have exclusive control over the choice of specific physicians and facilities to be utilized by the Medical Group with respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical professionals and facilities; provided, however, that the foregoing shall not limit the provisions of Section 3.4(b) hereof. 9.5 Insurability. The Medical Group shall cooperate with the Management Company in (i) ensuring that its Medical Personnel are insurable or (ii) instituting proceedings to terminate within two business days any Medical Personnel who is not insurable or who loses his or her insurance eligibility. The Medical Group shall notify the Management Company in writing of any change in the insurance status of any Medical Personnel within two days after the Medical Group receives notice of any such change. The Medical Group shall require all Medical Personnel to participate in an on-going risk management program. 9.6 Medicare. The Medical Group shall cause all physicians to be participating providers and accept assignment under Medicare. 9.7 Billing. The Medical Group's Medical Personnel shall be responsible for providing the appropriate current CPT4 coding with respect to the fee tickets prepared by such Medical Personnel. 9.8 Medical Personnel Hiring. The Medical Group shall have the ultimate control over and responsibility for the hiring, compensation, supervision, evaluation and termination of its Medical Personnel; provided, however, that at the request of the Medical Group, the Management Company shall consult with the Medical Group regarding such matters. -60- 9.9 Continuing Education. The Medical Group and its Medical Personnel shall be solely responsible for ongoing membership in professional associations and continuing professional education. The Medical Group shall ensure that its Medical Personnel participate in such continuing professional education as is necessary for such physician or professional to remain current in his or her field of medical practice. 9.10 Physician Fellowship Program. The Medical Group shall have the ultimate control over and responsibility for the Physician Fellowship Program of the Medical Group, including but not be limited to fellow interviewing, hiring, termination, compensation, day-to-day supervision, and assignment of responsibilities and projects. 9.11 Clinical Research. The Medical Group shall have the ultimate control over and responsibility for the clinical research program pertaining to patients of the Medical Group. This shall include but not be limited to research personnel interviewing, hiring, termination, compensation, day-to-day supervision, and assignment of responsibilities and projects. However, the Medical Group will cooperate with and take direction from the Management Company in its nationwide efforts to provide an effective disease management information system and outcome studies programs. 9.12 Sales of Stock. The Eligible Parties shall give to Naresh Nagpal, M.D. and any venture capital firm providing funds to the Management Company the right to participate on a pro rata basis (based on the number of shares, whether preferred or common, calculated on an as-converted basis, held by Naresh Nagpal, M.D. and any such venture capital firm and by any other shareholders who hold the same rights that are conferred by this Section 9.12, including members of other physician groups) in any proposed sale of more than fifty percent (50%) of the stock in the Management Company held by the Eligible Parties to any unaffiliated third party or parties, and the Medical Group shall require the Eligible Parties to comply with the obligations set forth in this Section 9.12; provided, however, that the obligations under this Section 9.12 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. -61- SECTION 10. Certain Covenants. 10.1 Change of Control. During the Term of this Agreement, the Medical Group shall not enter into any single transaction (or group of related transactions undertaken pursuant to a common plan) involving the admission of new partners, transfer of partnership interests, or reorganization or restructuring of the Medical Group if in any such case the effect would be to transfer a majority of the ownership interest in the Medical Group, without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. 10.2 Legend on Securities. During the Term of this Agreement, any certificate or similar evidence representing an equity interest in the Medical Group issued by the Medical Group shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF NOVEMBER 1, 1996, BETWEEN SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, A CALIFORNIA GENERAL PARTNERSHIP, AND BONE, MUSCLE AND JOINT, INC., A DELAWARE CORPORATION." The Management Company acknowledges that there is no certificate or other similar evidence representing equity interests in the Medical Group as of the Effective Date hereof. Nothing herein shall be construed as requiring the Medical Group to issue any certificate or other evidence representing an equity interest in the Medical Group (other than the Medical Group's General Partnership Agreement, or any replacement thereof, as amended from time to time). SECTION 11. Records. 11.1 Medical Records. Upon termination of this Agreement, the Medical Group shall retain all patient medical records maintained by the Medical Group or the Management Company in the name of the Medical Group. -62- 11.2 Management Business Records. All books and records relating in any way to the operation of the Management Business which are not patient medical records shall at all times be the joint property of the Management Company and the Medical Group. The Management Company shall maintain custody of such records, and the Medical Group shall, upon its written request, be entitled to copies of any such records relating to the Management Services performed by the Management Company. 11.3 Access to Records Following Termination. (a) Following the termination of this Agreement, the Medical Group shall grant (to the extent permitted by law) to the Management Company, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, reasonable access (which shall include making photocopies) to the patient medical records described in Section 11.1 hereof and any other pertinent information regarding the Medical Group during the Term. Prior to accessing such patient medical records, the Management Company shall obtain any required patient authorization. (b) Following the termination of this Agreement, the Management Company shall provide to the Medical Group, promptly upon the Medical Group's written request, photocopies of the Management Business records described in Section 11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, any other pertinent information regarding the Management Company during the Term. SECTION 12. Insurance and Indemnity. 12.1 Professional Liability Insurance. During the Term, the Management Company shall, to the extent permitted by applicable law, procure and maintain for the benefit of itself and the Medical Group comprehensive professional liability insurance providing for (a) general liability coverage and (b) medical malpractice coverage with limits of not less than $1,000,000 per claim and with aggregate policy limits of not less than $3,000,000 covering the Medical Group and each of the Medical Personnel of the Medical Group (or such higher amounts as may be necessary to comply with any regulatory requirement and/or contractual requirement to which -63- such Medical Personnel or the Medical Group may be subject), including coverage for claims made after the Commencement Date relating to events or occurrences at any time prior thereto. The parties hereto acknowledge that the Management Company is procuring the malpractice insurance referenced herein to ensure that the Management Company has protection in the event it is sued as a result of an act or omission of an employee of the Medical Group. The Management Company shall pay the premiums for such general and medical malpractice liability coverage, and the Management Company shall be designated as a co-beneficiary under such insurance policies. 12.2 Life Insurance. The Management Company shall obtain a $500,000 life insurance policy for each duly licensed physician partner in the Medical Group. The Management Company shall be designated as the beneficiary under such policies. The premiums for such policies shall be paid by the Management Company and shall not be included as Management Company Operating Costs or otherwise charged to the Medical Group. 12.3 Indemnification by Medical Group. The Medical Group shall indemnify, hold harmless and defend the Management Company, its officers, directors, shareholders, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Medical Group Services, including without limitation the performance of such services prior to the Commencement Date, (ii) any other acts or omissions of the Medical Group and its Medical Personnel, including without limitation any such acts or omissions that occurred prior to the Commencement Date, or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Medical Group and/or the Medical Personnel and/or their respective agents and/or subcontractors (other than the Management Company) during the Term. 12.4 Indemnification by Management Company. The Management Company shall indemnify, hold harmless and defend the Medical Group, its officers, directors, partners, members, employees, agents and independent contractors from and against any and all liabilities, -64- losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Management Services, (ii) any other acts or omissions of the Management Company and its employees or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Management Company and/or its partners, agents, employees and/or subcontractors (other than the Medical Group) during the Term. SECTION 13. Termination. 13.1 Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter diligently prosecute such action to completion, (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice, (d) in the event that the sale of shares of the Management Company pursuant to its IPO is not consummated within forty-eight (48) months after the Commencement Date, (e) at any time during the month of January 1998, if by December 31, 1997, the commencement date of Phase II (as described in Schedule V) has not occurred, or at any time after January 31, 1998, so long as the commencement date of Phase II has not yet occurred; (f) if Naresh Nagpal, M.D. ceases to be and act on a full-time -65- basis as the President and CEO of the Management Company prior to the commencement date of Phase II, provided that the Medical Group gives notice of termination within ninety (90) days after the Medical Group's receipt of written notice from the Management Company that Dr. Nagpal has ceased to be or act on a full-time basis as the President and CEO of the Management Company; (g) in the event of the Management Company's breach of Section 16.8 hereof pertaining to the initial public offering of the Management Company's common stock; (h) in the event of the failure of the Management Company and the Center for Orthopedic Surgery, Inc. ("COSI") (an affiliate of the Medical Group) to enter into, on or before December 31, 1996, the definitive agreements described in that certain Letter of Intent Regarding Surgical Clinic Transaction entered into as of the date hereof by the Management Company and COSI, pursuant to which (A) the Management Company is to assume management responsibilities for the ambulatory surgery center to be constructed on the fourth floor of the building in which the Medical Group's Van Nuys Office is located, and (B) the Management Company is to issue common stock of the Management Company to the shareholders of COSI; (i) in the event of the failure of the Management Company to issue, on or before December 31, 1996, one hundred eighty-three thousand three hundred thirty-three (183,333) shares of convertible preferred stock of the Management Company at a purchase price of $3.00 per share to the members of the Medical Group and/or other persons designated by the Medical Group, and approved by the Management Company, except to the extent that the Management Company's failure to issue such shares is the result of any delay or inaction by any of such members of the Medical Group or such other persons; or (j) in the event that the Management Company fails to take such steps as may be necessary to implement the provisions of Section 16.9 (relating to the appointment of a member of the Medical Group to the Board of Directors of the Management Company) of this Agreement. 13.2 Termination by Management Company. The Management Company may terminate this Agreement effective immediately by giving written notice of termination to the Medical Group (a) in the event of a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical Group shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Medical Group shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice -66- thereof has been given to the Medical Group by the Management Company or the Medical Group does not thereafter diligently prosecute such action to completion, (c) in the event that any of the representations and warranties made by the Medical Group in Section 6 is untrue or misleading in any material respect, provided that the Management Company shall have previously given written notice to the Medical Group describing in reasonable detail the nature of the item in question and the Medical Group shall not have cured such matter within thirty (30) days of such notice, or (d) in the event the Medical Group is excluded from the Medicaid or Medicare program for any reason. 13.3 Termination by Medical Group or Management Company. The Medical Group and the Management Company shall each have the right to terminate this Agreement effective immediately by giving written notice of termination to the other party pursuant to Section 27 of this Agreement. 13.4 Effect of Termination. Upon the termination of this Agreement in accordance with the terms hereof, neither party hereto shall have any further obligation or liability to the other party hereunder, except as provided in Section 13.5 and in Section 26 hereof, and except to pay in full and satisfy any and all outstanding obligations of the parties accruing through the effective date of termination. In order to accomplish the foregoing, the Annual Medical Group Compensation Amount described in Section 5.3(b) shall be calculated on or before the end of the fourth month following the termination date, rather than on or before April 30 as specified in Section 5.3(b), and the computation made under such section shall be made with respect to the portion of the year ending on the termination date (if the termination date is other than December 31). In making such computation, all Collections during January, February, and March of such year shall be excluded, and all Collections during the three-month period following termination shall be included. Additionally, any payment required under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days after the date by which the foregoing calculation is to be made, rather than on May 15. 13.5 Repurchase of Assets. Promptly following termination of this Agreement for any reason, the Management Company shall sell, transfer, convey, and assign to the Medical Group, -67- and the Medical Group shall purchase, assume, and accept from the Management Company, at such price and upon such terms as may be agreed upon by the parties - -- or, if the parties are unable to agree, at fair market value, determined in the manner set forth below -- all of the following items which are used in connection with the professional practice and related activities of the Medical Group and which, in the case of items (a), (b), (c) and (d), are physically located in any of the offices of the Medical Group, subject to any required consent from any third party having an interest therein: (a) the Medical Equipment owned by the Management Company; (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Management Company; (c) the Management Company's rights and interests in any equipment leased by the Management Company, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; (d) the supplies owned by the Management Company; (e) the Management Company's rights and interests under all of the Office Leases, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; and (f) the deposits of the Management Company relating to the Medical Group. Fair market value of the above described assets shall be determined by an independent appraiser mutually agreed upon by the Medical Group and the Management Company; provided, however, that if the Medical Group and the Management Company are unable to agree upon such an appraiser, each of the parties shall select an appraiser and the two appraisers thus selected shall select a third appraiser. All of the appraisers shall appraise the assets, and for purposes of determining the purchase price, the highest and lowest appraisals shall be disregarded, and the remaining appraisal shall be used. -68- SECTION 14. Non-Disclosure of Confidential Information. 14.1 Non-Disclosure. Neither the Management Company nor the Medical Group, nor their respective employees, stockholders, consultants or agents shall, at any time after the execution and delivery hereof, directly or indirectly disclose any Confidential or Proprietary Information relating to the other party hereto to any person, firm, corporation, association or other entity, nor shall either party, or their respective employees, stockholders, consultants or agents make use of any of such Confidential or Proprietary Information for its or their own purposes or for the benefit of any person, firm, corporation or other entity except the parties hereto or any subsidiary or affiliate thereof. The foregoing obligation shall not apply to any information which a party hereto can establish to have (a) become publicly known without breach of this Agreement by it or them, (b) to have been given to such party by a third party who is not obligated to maintain the confidentiality of such information, or (c) is disclosed to a third party with the prior written consent of the other party hereto. 14.2 Confidential or Proprietary Information. The term "Confidential or Proprietary Information" means all information known to a party hereto, or to any of its employees, stockholders, officers, directors or consultants, which relates to the Transaction Documents, patient medical and billing records, trade secrets, books and records, supplies, pricing and cost information, marketing plans, strategies and forecasts. Nothing contained herein shall prevent a party hereto from furnishing Confidential or Proprietary Information pursuant to a direct order of a court of competent jurisdiction. SECTION 15. Non-Competition. In consideration of the premises contained herein and the consideration to be received hereunder, and in consideration of and as an inducement to the Management Company to consummate the transactions contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition provisions attached hereto as Schedule VIII and (b) agrees to require each of the Eligible Parties, and each person who after the date hereof becomes entitled to receive shares (or options to receive shares) in the Management Company in connection with his or her performance of services for the Medical Group, to execute a Stockholder Non-Competition Agreement substantially in the form attached hereto as Exhibit B. -69- SECTION 16. Obligations of the Management Company. 16.1 No Practice of Medicine. The Medical Group and the Management Company acknowledge that certain federal and state statutes severely restrict or prohibit the Management Company from providing medical services. Accordingly, during the Term, the Management Company shall not provide or otherwise engage in services or activities which constitute the practice of medicine, as defined in applicable state or federal law, except in compliance therewith. 16.2 No Interference with Professional Judgment. Without in any way limiting Section 16.1 hereof, during the Term, the Management Company shall not interfere with the exercise of professional judgment by any physician or other licensed health care professional who is a partner, employee, or contractor of the Medical Group, nor shall the Management Company interfere with, control, direct, or supervise any physician or other licensed health care professional in connection with the provision of Medical Services. The foregoing shall not preclude the Management Company from assisting in the development of professional protocols and monitoring compliance with policies and procedures that have been instituted in accordance with this Agreement. 16.3 Compensation Committee. The Management Company shall establish a compensation committee (the "Compensation Committee") which is comprised of members of the Board of Directors of the Management Company who are not employees of the Management Company. The compensation payable to the five (5) most highly compensated management employees of the Management Company shall be subject to the approval of the Compensation Committee. 16.4 Budgets. The Board of Directors of the Management Company shall establish budgets for the expenses of the Management Company, and the approval of the Board of Directors shall be required in connection with any expenses in excess of any such approved budget; provided, however, that following consummation of an initial public offering of the Company's Common Stock, the responsibility of the Board of Directors with respect to such -70- budgets shall be exercised in accordance with the standards applicable to the conduct of business of public companies. 16.5 Contracts with Venture Capital Firms. The Management Company shall not enter into any consulting agreement or other contract or arrangement with any venture capital firm (or affiliate thereof) providing financing to the Management Company under which compensation will be payable to any such venture capital firm (or affiliate thereof). 16.6 Stock Held by Certain Individuals or Entities. Naresh Nagpal, M.D. and any venture capital firm providing funds to the Management Company ("Selling Shareholders") shall give to the Eligible Parties the right to participate on a pro rata basis (based on the number of shares, whether preferred or common, calculated on an as-converted basis, held by the Eligible Parties and by any other shareholders who hold the same rights that are conferred by this Section 16.6, including members of other physician groups) in any proposed sale of stock (whether preferred or common) in the Management Company from any of the Selling Shareholders to any unaffiliated third party or parties, and the Management Company shall require the Selling Shareholders to comply with the obligations set forth in this Section 16.6; provided, however, that the obligations under this Section 16.6 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.7 Convertible Preferred Stock. The Management Company shall not sell any common stock or take any other action the effect of which sale or other action would be to give a holder of convertible preferred stock the right to convert any number of shares of convertible preferred stock into a greater number of shares of common stock; provided, however, that the obligations under this Section 16.7 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.8 Initial Public Offering. The Management Company shall not authorize an initial public offering of its common stock for less than Four Dollars ($4.00) per share (appropriately adjusted to reflect any stock dividends, stock splits, or similar transaction). Without waiving or limiting any other right or remedy available to the Medical Group for breach of this covenant -71- by the Management Company, in the event of an initial public offering of the Management Company's common stock at less than Four Dollars ($4.00) per share, if the Medical Group so elects by written notice to the Management Company, such initial public offering shall not be considered as the initial public offering of the Management Company's common stock for any purpose under this Agreement or any of the other Transaction Documents. The Management Company shall disclose this provision to any potential underwriter in connection with the initial public offering of the Management Company's common stock. 16.9 Representation on Board of Directors. The Management Company shall take such actions as may be necessary to provide that a physician member of the Medical Group be appointed as a member of the Management Company's Board of Directors; provided, however, that the obligations under this Section 16.9 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. SECTION 17. Assignment. The Management Company shall have the right to assign its rights and delegate its obligations hereunder to any affiliate and to assign its rights hereunder to any lending institution from which the Management Company or any affiliate obtains financing for security purposes or as collateral. Except as set forth in the preceding sentence, neither the Management Company nor the Medical Group shall have the right to assign their respective rights and delegate their respective obligations hereunder without the prior written consent of the other party; provided, however, that after the consummation of an initial public offering of the Management Company's common stock, the Medical Group's consent shall not be required in connection with a sale of all or substantially all of the stock or assets of the Management Company or the merger, consolidation, or reorganization of the Management Company. SECTION 18. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed sufficient if personally delivered, sent by nationally-recognized overnight courier, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: -72- If to the Management Company: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Jeffrey S. Held, Esq. If to the Medical Group: Southern California Orthopedic Institute Medical Group 6815 Noble Avenue Van Nuys, California 94105 Attention: Managing Partner with a copy to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, and (c) in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to the benefit of any successors to or permitted assigns of the Management Company and the Medical Group. -73- SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall lie in any Federal or state court located in the State of California. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the nonexclusive jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. SECTION 21. Headings. Section headings are used for convenience only and shall in no way affect the construction of this Agreement. SECTION 22. Entire Agreement; Amendments. This Agreement and the various exhibits hereto and thereto, contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by each of the parties hereto. SECTION 23. Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all reasonable costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. -74- SECTION 24. Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 25. Waivers. Any party to this Agreement may, by written notice to the other party, waive any provision of this Agreement. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 26. Survival of Termination. Notwithstanding anything contained herein to the contrary, Sections 3.3(f), 3.6, 11, 12, 13.4, 13.5, 14, 15(a), 18, 19, 20, 23, 25, 27 and this Section 26 shall survive any expiration or termination of this Agreement. SECTION 27. Contract Modification for Prospective Legal Events. In the event any state or Federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that the structure of this Agreement may be in violation of such laws or regulations, the Medical Group and the Management Company shall amend this Agreement as necessary to avoid such violation. To the maximum extent possible, any such amendment shall preserve the underlying economic and financial arrangements between the Medical Group and the Management Company. If an amendment is not possible, either party shall have the right to terminate this Agreement. Any dispute between the parties hereto arising under this Section 27 with respect to whether this Agreement violates any state or Federal laws or regulations shall be jointly submitted by the parties and finally settled by binding arbitration in Los Angeles, California, pursuant to the arbitration rules of the National Health Lawyers Association Alternative Dispute Resolution Service. Arbitration shall take place before one arbitrator appointed in accordance with such rules. The governing law of the arbitration shall be the law set forth in Section 21. Any decision rendered by the arbitrator shall clearly set forth the factual and legal basis for such decision. The decision rendered by the arbitrator shall be non-appealable and enforceable in any court having jurisdiction thereof. The administrative costs of the arbitration and the arbitrator fees shall be -75- equally borne by the parties. Each party shall pay its own legal costs and fees in connection with such arbitration. * * * -76- IN WITNESS WHEREOF, the parties have duly executed this Management Services Agreement as of the date first above written. SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP JAMES M. FOX, M.D., INC. By: /s/ James M. Fox ------------------------------------- James M. Fox, M.D., President WILSON DEL PIZZO, M.D., INC. By: /s/ Wilson Del Pizzo ------------------------------------- Wilson Del Pizzo, M.D., President MARC J. FRIEDMAN, M.D., INC. By: /s/ Marc J. Friedman ------------------------------------- Marc J. Friedman, M.D., President /s/ Stephen J. Snyder ------------------------------------------ STEPHEN J. SNYDER, M.D. /s/ Richard D. Ferkel ------------------------------------------ RICHARD D. FERKEL, M.D. /s/ Todd D. Moldawer, M.D. ------------------------------------------ TODD D. MOLDAWER, M.D. /s/ Gregory J. Hanker, M.D. ------------------------------------------ GREGORY J. HANKER, M.D. [Signatures Continued] -77- HERBERT DENNIS HUDDLESTON, M.D., INC. By:/s/ Herbert Dennis Huddleston --------------------------------------- Herbert Dennis Huddleston, M.D., President /s/ A. Elizabeth Bloze ------------------------------------------ A. ELIZABETH BLOZE, M.D. /s/ Todd D. Molnar ------------------------------------------ TODD D. MOLNAR, M.D. TREVOR P. LYNCH, M.D., A Medical Corporation By:/s/ Trevor P. Lynch --------------------------------------- Trevor P. Lynch, M.D., President SAUL M. BERNSTEIN, M.D., INC. By:/s/ Saul M. Bernstein --------------------------------------- Saul M. Bernstein, M.D., President /s/ Steven A. Schopler ------------------------------------------ STEVEN A. SCHOPLER, M.D. /s/ Ronald P. Karzel ------------------------------------------ RONALD P. KARZEL, M.D. /s/ Hrair E. Darakjian ------------------------------------------ HRAIR E. DARAKJIAN, M.D. /s/ Jonathan S. Jaivin ------------------------------------------ JONATHAN S. JAIVIN, M.D. [Signatures Continued] -78- /s/ Donald A. Wiss ------------------------------------------ DONALD A. WISS, M.D. /s/ Patricia C. McKeever ------------------------------------------ PATRICIA C. McKEEVER, M.D. /s/ David M. Auerbach ------------------------------------------ DAVID M. AUERBACH, M.D. BONE, MUSCLE AND JOINT, INC. By: /s/ Naresh Nagpal, M.D. ------------------------------------- Naresh Nagpal, M.D., President and Chief Executive Officer ACCEPTED AND AGREED AS TO THOSE PORTIONS OF SECTIONS 3.6(d)(xv), 5.3(c)(iii), and 5.3(c)(iv) THAT PERTAIN SPECIFICALLY TO THE UNDERSIGNED /s/ Stephen J. Snyder - ------------------------------ STEPHEN J. SNYDER, M.D. [Signatures Continued] -79- ACCEPTED AND AGREED AS TO SECTION 16.6 /s/ Naresh Nagpal, M.D. - ---------------------------------------- NARESH NAGPAL, M.D. DELPHI VENTURES III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/ Donald J. Lothrop ------------------------------------ Donald J. Lothrop, Managing Member DELPHI BIOINVESTMENTS III, L.P. By: DELPHI MANAGEMENT PARTNERS III, L.L.C., its General Partner By: /s/ Donald J. Lothrop ------------------------------------ Donald J. Lothrop, Managing Member OAK INVESTMENT PARTNERS VI, LIMITED PARTNERSHIP By: OAK ASSOCIATES VI, LIMITED PARTNERSHIP, its General Partner By: /s/ Ann H. Lamont ------------------------------------ Ann H. Lamont, Managing Member OAK VI AFFILIATES FUND, LIMITED PARTNERSHIP By: OAK VI AFFILIATES, LLC, its General Partner By: /s/ Ann H. Lamont ------------------------------------ Ann H. Lamont, Managing Member [Signatures Continued] -80- EXECUTION COPY AMENDMENT NO. 3 TO THE MANAGEMENT SERVICES AGREEMENT dated as of September 11, 1997, between SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP, a California general partnership (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"). Reference is made to the Management Services Agreement effective as of November 1, 1996 (as amended by Amendment No. 1 to the Management Services Agreement dated as of March 31, 1997, the "Management Services Agreement"), between the Medical Group and the Management Company, pursuant to which the Management Company has agreed to provide the Medical Group with certain management, administrative and other related services in connection with the Medical Business (as defined in the Management Services Agreement). The parties hereto desire to amend the Management Services Agreement to provide that the Management Company arrange for the provision of Technical Personnel (as hereinafter defined) to the Medical Group on the terms hereinafter set forth. NOW, THEREFORE, in consideration for the mutual agreements contained in this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Medical Group and the Management Company hereby agree as follows: Section 1. All capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. Section 2. Section 3.13(a) of the Management Services Agreement is hereby amended by (a) inserting "and" at the end of clause (i) and (b) deleting ", and (iii) Technicians who perform diagnostic tests or procedures" and inserting "." in lieu thereof. Section 3. Section 3 of the Management Services Agreement is hereby amended by adding a new Section 3.19 thereto, to read in its entirety as follows: "3.19 Technical Personnel; Leased Employees. (a) Subject to the conditions set forth in this Section 3.19, the Management Company shall employ or contract with, or shall arrange for, and shall provide to the Medical Group as leased employees, such Technical Personnel (as defined below) as may reasonably be necessary for the conduct of the Medical Business. (b) For purposes of this Agreement, "Technical Personnel" means nurses, medical assistants, x-ray technicians, other technicians, and other personnel who perform diagnostic tests or other services that are covered by Medicare or by other third party payors when performed by an employee of a physician under the physician's supervision. (c) The Medical Group shall have the right to exercise, and shall exercise, such supervision and control over the activities of the Technical Personnel as may be necessary for the Technical Personnel to be considered leased employees under the Medicare program and under applicable law. Without limiting the generality of the foregoing, the Medical Group shall: (i) have the right to have any Technical Personnel terminated from employment; (ii) furnish the Technical Personnel with the equipment and supplies needed by the Technical Personnel for their work; (iii) provide the Technical Personnel with any necessary training; (iv) instruct the Technical Personnel regarding their activities performed for the Medical Group; (v) establish the hours of work for the Technical Personnel; (vi) approve vacation time and other time off from work; and (vii) provide that degree of supervision as is required by Medicare and by other third party payors to satisfy applicable conditions for coverage thereunder. (d) With respect to each of the Technical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and Federal commissions." -2- Section 4. Section 12.3 of the Management Services Agreement is hereby amended by (a) inserting "or Technical Personnel" after "Medical Personnel" on the eighth line thereof, and (b) inserting "and/or the Technical Personnel" after "Medical Personnel" on the eleventh line thereof. Section 5. Section 13.1 of the Management Services Agreement is hereby amended by (i) inserting at the end of clause (b) thereof "; provided, however, that if the Medical Group intends to terminate this Agreement due to the Management Company's default under Section 16.9, the Medical Group must so notify the Management Company within 60 days after the occurrence of such default in order for such termination to be effective; or" and (ii) deleting clauses (d), (e), (f), (g), (h), (i) and (j) therefrom. Section 6. Section 16.8 of the Management Services Agreement is hereby amended and restated in its entirety to read as follows: "16.8 In the event of an initial public offering of the Management Company's common stock at less than Four Dollars ($4.00) per share, if the Medical Group so elects by written notice to the Management Company, such public offering shall not be considered as the initial public offering of the Management Company's common stock for any purpose under this Agreement or any of the other Transaction Documents." Section 7. Schedule V to the Management Services Agreement is hereby amended by inserting the following after paragraph (iii) and renumbering the last paragraph thereof to be paragraph (vi). "(iv) Anything contained in this Agreement to the contrary notwithstanding, if the commencement date of Phase II (as described in Schedule V) has not occurred by January 1, 1998, the Applicable Percentage shall, effective January 1, 1998, be two and one-half percent (2.5%), which percentage shall remain in effect throughout the Term; provided, however, that (A) such percentage shall increase to ten percent (10%) (pursuant to paragraph (iii) above) once the Management Company files a Preliminary Prospectus for the initial public offering of its stock with the Securities and Exchange Commission and (B) if the Management Company does not consummate the sale of shares pursuant to such public offering within ninety (90) days of the filing of such Preliminary Prospectus, the Applicable Percentage shall revert back to two and one-half percent (2.5%) retroactively to the date of filing of such Preliminary Prospectus. In the event the Management Company does not consummate an initial public offering as described above, the provisions of -3- the preceding proviso shall again become applicable upon any subsequent filing of a Preliminary Prospectus in connection with an initial public offering of the Management Company Common Stock or upon the consummation of the sale of shares pursuant to the Management Company's previous filing of such a Preliminary Prospectus. (v) Notwithstanding the provisions of paragraphs (i), (ii), (iii) and (iv) above, in the event that the common stock of the Management Company has not, within forty-eight (48) months after the date hereof, commenced trading at a price not less than $4.00 per share on NASDAQ, the New York Stock Exchange, or any other established securities market pursuant to an initial public offering of such common stock, the Applicable Percentage shall be two and one-half percent (2.5%), which decreased percentage shall become effective on the fourth anniversary of the date hereof and remain effective throughout the Term or until the common stock of the Management Company commences public trading as described above." Section 8. Except as expressly provided in this Amendment No. 3, the Management Services Agreement remains in full force and effect in accordance with its terms. Section 9. This Amendment No. 3 may be executed in more than one counterparts, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. Section 10. This Amendment No. 3 shall by governed by, construed and interpreted in accordance with the laws of the State of California. * * * * -4- IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 3 to the Management Services Agreement as of the date first above written. BONE, MUSCLE AND JOINT, INC. By: -------------------------------- Name: Title: SOUTHERN CALIFORNIA ORTHOPEDIC INSTITUTE MEDICAL GROUP By Its Partners: JAMES M. FOX, M.D., INC. By: -------------------------------- James M. Fox, M.D., President WILSON DEL PIZZO, M.D., INC. By: -------------------------------- Wilson Del Pizzo, M.D., President MARC J. FRIEDMAN, M.D., INC. By: -------------------------------- Marc J. Friedman, M.D., President ------------------------------------ Stephen J. Snyder, M.D. ------------------------------------ Richard D. Ferkel, M.D. ------------------------------------ Todd D. Moldawer, M.D. ------------------------------------ Gregory J. Hanker, M.D. HERBERT DENNIS HUDDLESTON, M.D.,INC. By: -------------------------------- Herbert Dennis Huddleston, M.D., President ------------------------------------ A. Elizabeth Bloze, M.D. ------------------------------------ Todd J. Molnar, M.D. TREVOR P. LYNCH, M.D., A MEDICAL CORPORATION By: -------------------------------- Trevor P. Lynch, M.D., President SAUL M. BERNSTEIN, M.D., INC. By: ---------------------------------- Saul M. Bernstein, M.D., President ------------------------------------ Steven A. Schopler, M.D. ------------------------------------ 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. EX-10.31 7 RESTRICTED STOCK AGREEMENT 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- (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- (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- 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- 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- 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- 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- 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- 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- 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- (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- 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- 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- 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- (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- EX-10.33 8 MANAGEMENT SERVICES AGREEMENT EXECUTION COPY ================================================================================ MANAGEMENT SERVICES AGREEMENT BETWEEN BONE, MUSCLE AND JOINT, INC. AND LAUDERDALE ORTHOPAEDIC SURGEONS Effective as of April 1, 1997 ================================================================================ ATTACHMENTS SCHEDULES - --------- SCHEDULE I -- New Ancillary Services -- Exceptions SCHEDULE II -- Management Company Operating Cost Budget SCHEDULE III -- Equity Participation SCHEDULE IV -- Draw Date and Draw Percentage SCHEDULE V -- Management Fee -- Applicable Percentage SCHEDULE VI -- Professional Practice Cost Savings SCHEDULE VII -- Computation Example SCHEDULE VIII -- Non-Competition SCHEDULE 6.2 -- Equity Investments SCHEDULE 6.3 -- Consents SCHEDULE 6.4 -- Financial Information SCHEDULE 6.5 -- Absence of Undisclosed Liabilities SCHEDULE 6.6 -- Absence of Changes SCHEDULE 6.7 -- Tax Matters SCHEDULE 6.8 -- Litigation, Etc. SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable SCHEDULE 6.11 -- Labor Relations; Employees SCHEDULE 6.12 -- Employee Benefit Plans SCHEDULE 6.13 -- Insurance SCHEDULE 6.14 -- Real Property SCHEDULE 6.15 -- Burdensome Restrictions SCHEDULE 6.16 -- Disclosure SCHEDULE 7.2 -- Equity Investments SCHEDULE 7.3(a) -- Issued and Outstanding Stock SCHEDULE 7.3(c) -- Options; Conversion Rights SCHEDULE 7.4 -- Consents SCHEDULE 7.5 -- Financial Information SCHEDULE 7.6 -- Absence of Undisclosed Liabilities SCHEDULE 7.7 -- Absence of Changes SCHEDULE 7.8 -- Tax Matters SCHEDULE 7.9 -- Litigation, Etc. SCHEDULE 7.11 -- Accounts Receivable; Accounts Payable SCHEDULE 7.12 -- Labor Relations; Employees SCHEDULE 7.13 -- Employee Benefit Plans SCHEDULE 7.14 -- Insurance SCHEDULE 7.15 -- Real Property SCHEDULE 7.16 -- Burdensome Restrictions SCHEDULE 7.17 -- Disclosure EXHIBITS EXHIBIT A -- Asset Purchase Agreement EXHIBIT B -- Assignment of Lease EXHIBIT C -- Restricted Stock Agreement EXHIBIT D -- Stockholder Non-Competition Agreement THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of May 6, 1997 (the "Signature Date"), effective as of April 1, 1997, by and between LAUDERDALE ORTHOPAEDIC SURGEONS, a Florida partnership (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with reference to the following facts: A. The Medical Group is engaged in the business (the "Medical Business") of providing orthopedic medical and surgical services and related medical and ancillary services to the general public. B. The Management Company is a corporation engaged in the business (the "Management Business") of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Management Company and the Medical Group are entering into an Asset Purchase Agreement (the "Asset Purchase Agreement"), in the form of Exhibit A attached hereto, pursuant to which the Management Company is acquiring substantially all of the assets of the Medical Group. D. The Management Company and the Medical Group desire to enter into this Management Services Agreement, pursuant to which, among other things, the Management Company will render certain management and administrative services to the Medical Group. NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: SECTION 1. Retention of the Management Company. 1.1. Retention. The Medical Group hereby retains the Management Company to provide all of the management and related services identified or referenced in Section 3 hereof and as otherwise required by this Agreement (collectively, the "Management Services"), and the Management Company hereby accepts such retention and agrees to provide such services, upon the terms and subject to the conditions set forth herein. 1.2. Exclusivity. During the term of this Agreement, the Management Company shall be the exclusive provider of all management and administrative services utilized by the Medical Group; provided, however, that the Medical Group may contract directly with or otherwise engage individuals or companies for the provision of accounting, legal, consulting, or other professional or advisory services (provided that such services shall be in addition to, and not in replacement of, the services to be provided by the Management Company hereunder), all in the sole discretion of the Medical Group and at the sole cost of the Medical Group. 1.3. Relationship of Parties. Notwithstanding anything contained herein to the contrary, (a) the Management Company and the Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, or employment relationship between the parties, and (b) the Management Company is hereby engaged solely to provide management and administrative services to the Medical Group and shall not interfere with, control, direct, or supervise the Medical Group or any medical professional employed by the Medical Group in connection with the provision of professional medical services. -2- 1.4. No Referral Obligation. The parties agree that the benefits to the Medical Group hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral, purchase, or any other arrangement for the provision of any item or service to or for any of the Medical Group's patients in or from any medical facility or laboratory or from any other entity owned, operated, controlled, or managed by the Management Company. The Management Company shall provide prior written notice to the Medical Group before acquiring any ownership, investment interest, or control in, or entering into any agreement or arrangement pursuant to which the Management Company would become responsible for all or any part of the operations or management of, any medical facility, laboratory, or any provider or supplier of ancillary services, diagnostic or therapeutic equipment, prosthetic or orthotic devices, medical supplies, or other items or services furnished to or for use by patients, but only if any of the foregoing is located in Dade, Palm Beach or Broward County, Florida or serves the geographic area served by the Medical Group. SECTION 2. Term. Provided that the Closing under the Asset Purchase Agreement shall have occurred as provided therein, and subject to such start-up procedures as the parties may agree upon for purposes of facilitating the transition of responsibilities required by this Agreement, the performance of services under this Agreement shall commence as of April 1, 1997 (the "Commencement Date") and shall expire on the fortieth anniversary of the Commencement Date unless terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement shall be automatically extended for successive terms (each, an "Additional Term," and together with the Base Term, the "Term") of five years each, unless either party delivers to the other party, not less than six (6) months nor more than nine (9) -3- months prior to the expiration of the then-current Term, written notice of such party's intention not to so extend the Term of this Agreement. SECTION 3. Management Services. 3.1 Management Services Generally. (a) The Management Company shall be the sole and exclusive manager and administrator of all day-to-day business functions for the Medical Group, subject to the provisions of Section 1.2 hereof. The Management Company shall provide all of the management and administrative services reasonably required by the Medical Group in connection with the provision of any and all of the Medical Group Services (as hereinafter defined) and as otherwise provided in this Agreement, including without limitation the services described in Sections 3.2 through 3.17 hereof. (b) Without limiting the generality of the provisions of Section 3.1(a), and subject to the further provisions of this Agreement, the Management Services shall include such management and administrative services as may be reasonably required in connection with (i) all of the offices (including New Medical Offices, as hereinafter defined) of the Medical Group, and (ii) all professional services and all ancillary services furnished by the Medical Group. (c) Additionally, the full range of Management Services as described in this Agreement shall be applicable with respect to the items identified as Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs shall be paid by the Medical Group rather than by the Management Company. Accordingly, the Management Company shall provide accounting, bookkeeping, and related services with respect to all such costs. (d) The Management Company may enter into such contracts and agreements with outside services and suppliers as -4- the Management Company shall reasonably deem necessary in connection with the provision of the Management Services, and, to the extent permitted by applicable law, such contracts and agreements shall, except as otherwise expressly provided in this Agreement, be in the name of the Management Company; provided, however, that without the prior approval of the Operations Committee (as hereinafter defined), the Management Company shall not enter into any agreement pursuant to which an unaffiliated (as hereinafter defined) third party will perform substantially all of the duties of the Management Company set forth in Section 3.6(a) hereof. The Management Company shall have no authority, directly or indirectly, to perform, and shall not perform or enter into any agreement to perform, Medical Group Services or any other medical function required by law to be performed by a licensed physician or by any other licensed health care professional. As used herein, "unaffiliated third party" means, with respect to the Management Company, a person or entity that is not controlled by or under common control with the Management Company. (e) The Management Company shall comply in all material respects with all applicable material Federal, state and local laws, regulation, and ordinances in connection with the provision of the Management Services hereunder. 3.2 Premises. (a) The Medical Group, as of the Commencement Date, leases premises and provides Medical Services at the following locations: (i) 1212 E. Broward Boulevard Fort Lauderdale, Florida 33301 (ii) 4850 W. Oakland Park Boulevard Lauderdale Lakes, Florida 33313 Immediately prior to the Commencement Date, all of the above-identified premises were leased to the Medical Group, in -5- the Medical Group's name. Effective from and after the Commencement Date, each of the leases for such premises are to be assigned from the Medical Group to the Management Company pursuant to an assignment (each, an "Assignment of Lease") substantially in the form attached hereto as Exhibit B. During the Term, the Medical Group shall, subject in all instances to the terms of such leases, have the right to use such premises solely for the provision of Medical Services in accordance with the terms of this Agreement. In connection therewith, the Medical Group agrees in all instances to abide by all of the terms and provisions of all such leases. Upon the expiration of each of the leases assigned in accordance with this Section 3.2(a), the Management Company shall use its best efforts to enter into a new lease, in the name of the Management Company, with the landlord of such premises; provided, however, that the approval of the Medical Group, which shall not be unreasonably withheld, shall be required in the event of any substantial changes in the terms of such lease, and if the Medical Group does not give such approval, the failure to enter into such new lease shall not constitute a default of the Management Company. Each assigned lease and each new lease entered into between the Management Company and the landlord is referred to herein as an "Office Lease." (b) A New Medical Office (as hereinafter defined) may be opened only upon the agreement of the Medical Group and the Management Company. The capital costs and start-up costs reasonably required in connection with the opening of any New Medical Office shall be borne as set forth in Section 5 hereof. The premises of any New Medical Office shall be leased by the Management Company, in the Management Company's name, and the Medical Group shall, subject in each instance to the terms of any such lease, have the right to use the premises of any such New Medical Office solely for the provision of Medical Services in accordance with the terms of this Agreement. In connection therewith, the Medical Group agrees in all instances to abide by -6- all of the terms and provisions of all such leases. Notwithstanding anything to the contrary contained in this Agreement, the Management Company may, in its sole discretion, determine to permanently close any New Medical Office if such office is not, after 12 months of operation, profitable (as hereinafter defined and as determined in the sole discretion of the Management Company); provided, however, that if the Medical Group elects to pay 80% of any deficit generated by the operations of such New Medical Office at all times after the initial 12 months and until such New Medical Office becomes profitable, then the Management Company shall not close such New Medical Office; provided further, however, that notwithstanding the foregoing, if such New Medical Office incurred a loss during the initial 12 months of operation in excess of $100,000, then such New Medical Office shall be closed in the sole discretion of the Management Company unless the Medical Group agrees to incur all future costs and expenses (including Management Company Operating Costs) associated with such office until it becomes profitable. As used herein, "profitable" means, as to any New Medical Office, that the aggregate revenues generated by such New Medical Office during any calendar year exceed the aggregate costs and expenses relating to the operation of such New Medical Office during such calendar year. (c) Except as set forth in Sections 3.2(a) or (b) above, the closing or relocation of any offices of the Medical Group shall be subject to agreement by the Medical Group and the Management Company. (d) The services to be provided by the Management Company with respect to the premises leased in accordance with this Section 3.2 shall include, without limitation, the negotiation and renegotiation of leases, communication with the landlords of the respective premises, identification of potential new locations for Medical Group offices, financial analysis relating to the opening, closing, and relocation of any offices, -7- arrangement of necessary repairs, maintenance and improvements, procurement of property insurance, arrangement of telephone and other utility services, and hazardous waste disposal, and all other reasonably necessary or appropriate services related to all of the offices of the Medical Group. (e) The Management Company also shall provide all necessary or appropriate leasehold improvements to each of the premises, subject to prior approval as provided in Section 8.2 hereof. (f) The Medical Group acknowledges that the Management Company makes no warranties or representations, expressed or implied, regarding the condition of any of the leased premises. 3.3. Equipment. (a) During the Term, the Management Company shall provide to the Medical Group the diagnostic and therapeutic medical equipment reasonably required by the Medical Group in connection with the provision of Medical Group Services (collectively, the "Medical Equipment"). The Management Company shall acquire (or lease), at its cost, all Medical Equipment, and the Management Company shall retain ownership of (or the leasehold interest with respect to) all Medical Equipment. As used herein, the term Medical Equipment shall not include medical equipment used in connection with a New Ancillary Service (as hereinafter defined). (b) The Management Company also shall provide to the Medical Group all furniture, furnishings, trade fixtures, and office equipment reasonably required in connection with the provision of Medical Group Services pursuant to this Agreement (collectively, "FF&E"). The Management Company shall acquire, at its cost, all FF&E, and the Management Company shall retain ownership of all FF&E. As used herein, the term FF&E does not -8- include furniture, furnishings, trade fixtures, and office equipment used in connection with a New Ancillary Service. (c) The Medical Equipment and the FF&E are sometimes referred to collectively as the "Equipment." The acquisition, replacement, relocation, or other disposition of any Equipment shall require prior approval as provided in Section 8.2 hereof. All of the Equipment acquired by the Management Company under the Asset Purchase Agreement and maintained after the date hereof in any facility operated by the Medical Group shall be provided to the Medical Group for its exclusive use and benefit. (d) The Medical Group's right to use the Equipment shall be subordinate to the rights of any unaffiliated third party to which the Management Company elects, in its sole discretion, to grant any security interest, mortgage, lien or other encumbrance in or on the Equipment. The Medical Group shall use the Equipment only in connection with its provision of the Medical Group Services, and the Medical Group shall not alter, repair, augment, or remove the Equipment from the premises of the Medical Group without the prior written consent of the Management Company and any lessor thereof, which approval may be granted or withheld in the Management Company's or such lessor's sole discretion. To the extent the Equipment is utilized by the Medical Group in the provision of Medical Group Services, the Medical Group shall have the right to exercise reasonable control over the use of such Equipment. (e) From time to time, and as reasonably requested by the Medical Group, the Management Company shall use reasonable efforts to cause the Equipment manufacturer or its authorized agent to provide service and maintenance for the Equipment as needed to maintain the Equipment in an operable condition, so that all such Equipment shall function continuously (subject to interruptions not reasonably avoidable) in accordance with the manufacturer's specifications and so that all conditions imposed -9- by the manufacturer to maintaining the continued effectiveness of any warranty on such Equipment shall be satisfied. The Management Company shall take all reasonable steps to provide that all necessary service and maintenance is obtained in a prompt and timely manner, so as to minimize the amount of time that any of the Equipment is not available for usage by or for patients of the Medical Group. (f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. Nothing in this Agreement shall be construed to affect or limit in any way the professional discretion of the Medical Group to select and use any Equipment acquired by the Management Company in accordance with the terms of this Agreement insofar as such selection or use constitutes or might constitute the practice of medicine. 3.4. New Ancillary Services. (a) For purposes of this Agreement, "New Ancillary Services" means the technical component (but not the professional component) of the following, except as set forth in Schedule I: (i) Physical therapy (excluding those services provided in the Medical Group's offices as of the Signature Date); (ii) Magnetic resonance imaging and/or other imaging services (except diagnostic radiology); (iii) Outpatient surgery; -10- (iv) Densitometry; and (v) Other revenue-producing services generally recognized as ancillary services, but excluding the following: (A) Any services provided on a regular basis by the Medical Group immediately prior to the Commencement Date, including without limitation (1) plain film and other diagnostic radiology (if any) and (2) ultrasound for pediatric patients; and (B) Any service performed in connection with new Medical Equipment acquired to replace existing Medical Equipment so long as the new Medical Equipment performs substantially the same functions as the replaced Medical Equipment. New Ancillary Services do not include the sale or provision of (or services rendered in connection with) prosthetics, prosthetic devices, orthotics, braces, splints, appliances, crutches, casts, or any other supplies or similar items which are billable to patients or payors, all of which are to be included in the scope of Medical Group Services. (b) New Ancillary Services may be established only upon agreement of the Medical Group and the Management Company. Such agreement shall be memorialized in a written agreement executed by the parties (or in a written amendment to this Agreement) under which the Management Company agrees to provide all of the Management Services described in this Section 3 in connection with such New Ancillary Service, and for which the Management Company shall be compensated as described in Section -11- 5.8 of this Agreement, except as may otherwise be agreed upon by the parties. 3.5. Administration, Finance and Accounting. The Management Company shall provide or arrange for the provision of all administrative, financial, and accounting functions necessary for the operation of the Medical Group, including, without limitation, the following (if applicable): (a) Creation and maintenance of bank accounts. (b) Deposits of receipts. (c) Preparing accounts receivable summary reports, including various analyses of delinquent accounts. (d) Receiving appropriate approvals as required by the Medical Group's General Partnership Agreement (the "Partnership Agreement") prior to distribution of payments to outside parties; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Partnership Agreement. (e) Disbursement of payables, including payables of the Medical Group; provided, however, that payables of the Medical Group shall be paid from an account of the Medical Group and not from any of the Management Company's bank accounts, and all checks drawn on any Medical Group account shall be signed by a partner in the Medical Group or another authorized representative of the Medical Group. (f) Negotiation of vendor contracts. -12- (g) Performing monthly accounting functions, including bank reconciliations, maintenance of books and records, and preparation of financial statements. (h) Analyzing financial data as reasonably requested by physicians. (i) Analyzing potential New Medical Office locations, and coordinating all functions associated with opening New Medical Office locations. (j) Preparing monthly financial and medical practice statistics reports by satellite office and by physician, and the Management Company shall use its reasonable efforts to have such reports available, with respect to any given month, 20 days after the end of such month. (k) Providing from the Medical Group's bank account(s) monthly draws to physicians and professional corporations pursuant to service agreements, monthly profit and loss distributions, and quarterly bonus calculations; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Partnership Agreement; provided, further, that all checks drawn on any Medical Group bank account shall be signed by a partner in the Medical Group or other authorized representative of the Medical Group. -13- (l) Calculating physicians' and partnership's annual earnings based on the Medical Group's profit and loss distribution formulas. (m) Ongoing day-to-day communication with the managing partner (or other manager of the Medical Group) and assisting such person in fulfilling his responsibilities. (n) Preparing agendas and information packages for Medical Group meetings. (o) Developing budgets and long-term strategies for the Medical Group, including an initial long-term plan and capital expenditures budget and the Management Company shall use its reasonable efforts to have such plan and budget delivered to the Medical Group within 180 days and 90 days, respectively, after the Commencement Date. (p) Coordinating payroll processing and payroll tax payments. (q) Providing ongoing personnel FTE analysis. (r) Sponsoring employee benefit plans and providing administrative services relating thereto for the Medical Personnel (as hereinafter defined). (s) Coordinating recruitment, interviewing, and hiring of new physicians. (t) Implementing Medical Group fee schedule increases and/or decreases. (u) Coordinating depositions and court appearances. -14- (v) Assisting in the coordination of call schedules. (w) Assisting in the coordination of coverage of athletic team events. (x) Acting as liaison to hospital administration, physical therapy, surgery center, MRI, and other ancillary services entities. (y) Cooperating with outside accountants in preparing various schedules and providing other information. (z) Interacting with legal counsel as necessary. (aa) Preparing and filing all state and Federal reports regarding health care ownership and referrals, including, without limitation, group practice compliance certification, and HCCCB tax reports, provided that the Management Company shall not be obligated to perform the duties under this clause (aa) prior to March 1, 1998. 3.6. Billing and Collection. (a) The Medical Group acknowledges that ownership of all Accounts (as hereinafter defined) is transferred by the Medical Group to the Management Company as provided in greater detail in Section 5.1 of this Agreement. In order to facilitate the collection of the Accounts, the Management Company shall (i) bill patients and third party payors in the Medical Group's name; (ii) collect accounts receivable resulting from such billing; (iii) receive payments and prepayments from the Medical Group's patients, Blue Cross and Blue Shield organizations, insurance companies, health care plans, Medicare, Medicaid, HMOs, and any and all other third party payors; (iv) take possession of and deposit into such bank (the "Medical Group Bank") as the Medical -15- Group designates, in an account established by the Medical Group in the name of the Medical Group (the "Medical Group Collections Account"), any and all checks, insurance payments, cash, cash equivalents and other instruments received for Medical Group Services; and (v) initiate with the consent of the Medical Group, which consent may be withheld by the Medical Group in its sole and absolute discretion, legal proceedings in the name of the Medical Group to collect any Accounts and monies owed to the Medical Group, to enforce the rights of the Medical Group as a creditor under any contract or in connection with the rendering of any service, and to contest adjustments and denials by governmental agencies (or their fiscal intermediaries) as third-party payors. (b) From time to time at the Management Company's request, the Medical Group shall make available to the Management Company one or more authorized partners or other authorized signatories (the "Authorized Partners") of the Medical Group to sign any letters, checks, instruments or other documents (the "Documents") on behalf of the Medical Group that are necessary for the Management Company to take the actions specified in this Section 3.6 and to perform its duties under this Agreement. If the Management Company notifies the Medical Group that an Authorized Partner is not signing the Documents in a timely manner, the Management Company shall not be liable for any failure to perform its duties hereunder or for any failure to take the actions specified herein or to perform the Management Services to the extent caused by the failure of an Authorized Partner to sign the Documents in a timely manner. (c) The Management Company represents and warrants to the Medical Group that it has sufficient knowledge and expertise in the area of billing for orthopedic and other medical services and ancillary services to be able to adequately perform the billing services required by the Medical Group hereunder. The Management Company shall submit all bills and manage the -16- billing process on a timely basis in accordance with the terms of this Agreement and applicable law. (d) Without limiting the generality of the foregoing, the Management Company shall bill patients, bill and submit claims to third party payors, perform appropriate coding for each bill, and collect all fees for professional and other services rendered and for items supplied to patients by the Medical Group, all in a timely manner and in accordance with parameters and criteria established by the Operations Committee (as hereinafter defined). Additionally, the Management Company shall provide the following services which are currently being provided by or on behalf of the Medical Group: (i) Receive and collect from patients at the time of visit all appropriate payments and pre-payments, including co-pays, deductibles, payments for non-covered medical services, and deposits for surgeries (if applicable), and shall obtain all appropriate insurance and other information required. (ii) Submit claims utilizing electronic billing submission, whenever appropriate. (iii) Perform delinquent account collection calls and other appropriate follow-up mechanics for delinquent accounts of all insurance classifications, all in a timely fashion as determined by the Operations Committee. (iv) Turn over to outside collection agencies all delinquent accounts satisfying the criteria established by the Operations Committee. The Management Company shall also follow-up on the performance of the outside collection agencies and make changes, if necessary, and shall reconcile each account turned over to the summary data provided by the collection agency. -17- (v) Write-off account balances according to criteria approved by the Operations Committee. (vi) Prepare claim reviews in accordance with criteria approved by the Operations Committee. (vii) Bill workers' compensation medical services at rates equal to the most recently approved Florida workers' compensation fee schedule. (viii) Apply "insurance only" and other courtesy write-offs in compliance with Operations Committee policy. (ix) With respect to discounted fee-for-service contracts with Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), the Management Company shall determine that payments received from PPOs and HMOs are in compliance with their respective contracts with the Medical Group. (x) With respect to capitation fee contracts with HMOs, the Management Company shall: (a) Follow-up to ensure that payments to the Medical Group are made on a timely basis; (b) Review and audit enrollment data provided by the HMO to ensure that the Medical Group is being compensated for the proper number of lives enrolled; and (c) Review and audit appropriateness of withholds and reserves with respect to specialty risk pools. (xi) With respect to lien accounts, the Management Company shall: (a) Ensure that appropriate documents are signed and agreed to initially as between the Medical Group, attorney and patient; -18- (b) Follow-up on a regular basis as to the status of the account; and (c) Apply the policies of the Operations Committee in resolving open account balances. (xii) With respect to student athlete accounts, the Management Company shall coordinate insurance and other information in compliance with the policy of the Operations Committee. (xiii) With respect to amounts withheld by payors in compliance with contracts between the payor and the Medical Group, the Management Company shall follow-up on a timely basis to ensure that withheld amounts are returned to the Medical Group, if warranted, and to ensure that amounts not returned are verified and audited for appropriateness. (xiv) Coordinate the timely payment of refunds to patients and third party payors when appropriate. (xv) Ensure that revenues related to depositions, record review and court appearances are accounted for, monitored, followed-up, and ultimately collected. 3.7. Administrative Personnel. (a) The Management Company shall retain and provide or arrange for the retention and provision of all of the following non-medical personnel necessary for the conduct of the Medical Group's business operations (collectively, "Administrative Personnel"): (i) Administration; (ii) Accounting; (iii) Billing and Collection; (iv) Secretarial; -19- (v) Transcription; (vi) Appointments; (vii) Switchboard; (viii) Medical Records; (ix) Chart Preparation; (x) Historians; (xi) Clinic Support; and (xii) Marketing. (b) The Management Company shall determine and pay the salaries and fringe benefits of the Administrative Personnel, and shall provide other personnel services related to the Administrative Personnel, including, but not limited to, scheduling, personnel policies, administering continuing education benefits, and payroll administration. (c) With respect to each applicable new employee in Administrative Personnel, the Management Company shall, as reasonably necessary, verify educational and employment experience, licensure, and insurability. (d) The Management Company shall attempt, consistent with sound business practices, to honor Medical Group requests with regard to the retention or assignment of specific Administrative Personnel to the Medical Group. In the event that the Management Company receives a complaint from the Medical Group that any of the Administrative Personnel is interfering with or disrupting the provision of Medical Services by the Medical Group, the Management Company will use reasonable efforts to attempt to promptly remedy any such complaint. If any such complaint is not remedied to the reasonable satisfaction of the Medical Group, then the Management Company shall remove such Administrative Personnel, if requested by the Medical Group, from -20- the Medical Group's facilities, if and to the extent such action by the Management Company will not violate any applicable law. (e) All of the services provided by the Management Company under this Section 3.7, including the obligations set forth in Section 3.7(d), shall be performed in compliance with all applicable state and Federal laws. 3.8 Technical Personnel; Leased Employees. (a) Subject to the conditions set forth in this Section 3.8, the Management Company shall employ or contract with, or shall arrange for, and shall provided to the Medical Group as leased employees, such Technical Personnel (as hereinafter defined) as may be reasonably necessary for the conduct of the Medical Group's professional practice. (b) For purposes of this Agreement, "Technical Personnel" means nurses, medical assistants, x-ray technicians, other technicians, and other personnel who perform diagnostic tests or other services that are covered by Medicare or by other third party payors when performed by an employee of a physician under the physician's supervision. (c) The Medical Group shall have the right to exercise, and shall exercise, such supervision and control over the activities of the Technical Personnel as may be necessary for the Technical Personnel to be considered leased employees under the Medicare program and under applicable law. Without limiting the generality of the foregoing, the Medical Group shall: (i) have the right to have any Technical Personnel terminated from employment; (ii) furnish the Technical Personnel with the equipment and supplies needed by the Technical Personnel for their work; -21- (iii) provide the Technical Personnel with any necessary training; (iv) instruct the Technical Personnel regarding their activities performed for the Medical Group; (v) establish the hours of work for the Technical Personnel; (vi) approve vacation time and other time off from work; and (vii) provide that degree of supervision as is required by Medicare and by other third party payors to satisfy applicable conditions for coverage thereunder. (d) With respect to each of the Technical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and Federal commissions. 3.9. Medical Personnel. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. The employment or retention of any Medical Personnel shall be in the sole discretion of the Medical Group. The employment or retention of any Medical Personnel shall be in the sole discretion of the Medical Group. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services who are employees or independent contractors of the Medical Group; and (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services -22- that are billable to patients or third party payors under the name of such health care professional (as distinguished from services that are billable under the name of the supervising physician). (b) With respect to each of the Medical Personnel, the Management Company shall verify educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and Federal sanctioned commissions. 3.10. Inventory and Supplies. The Management Company shall order and purchase inventory and supplies on behalf of the Medical Group, and such other ordinary or appropriate materials as the Management Company and the Medical Group may mutually agree is necessary for the Medical Group to carry out its Medical Group Services. Inventory and supplies shall include, but not be limited, to: (a) Medical supplies; (b) Office supplies; (c) Postage; (d) Computer forms and supplies; (e) Printing and stationary supplies; (f) Printer supplies; (h) Uniforms; (i) Duplication services; and (j) Linen and laundry supplies. -23- 3.11. Taxes. The Management Company shall provide the Medical Group with timely access to all information necessary for the Medical Group to prepare its tax returns. The Management Company shall have no responsibility for: (a) The payment of the Medical Group's taxes; or (b) The preparation of any partnership income tax returns or related Schedule K-1 forms for the Medical Group. 3.12. Information Systems Management. (a) The Management Company shall provide or arrange for the provision of all management information systems services to be utilized by the Medical Group. These services shall include, but not be limited to, ongoing maintenance and improvement of the information systems used by the Medical Group in connection with the provision of the following services: (i) Accounts receivable - Billing/Insurance/ Collections; (ii) On-line appointment scheduling; (iii) Internal e-mail; (vi) On-line transcription; (v) Faxing subsystem; (vi) Electronic claims submission; (vii) Patient flow monitoring system; (viii) Authorization module; (ix) Prescription module; (x) X-ray tracking system; (xi) Voice mail; -24- (xii) Paperless medical records; and (xiii) Bar code chart tracking system. (b) The services provided by the Management Company shall protect the confidentiality of patient medical records to the extent required by applicable law or the Medical Group's payor agreements; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. 3.13. Use of New Technologies in the Practice of Medicine. The Management Company shall promote the integration of new technologies into the professional practice of the Medical Group, including, without limitation, the use of satellite and other telecommunications services that permit the provision of remote consultations, virtual operations, and other professional services; provided, however, that the foregoing shall be subject to the terms of Section 8.2(e) hereof. 3.14. Public Relations; Marketing and Advertising. The Management Company shall develop and implement community outreach programs and public relations programs designed to educate the patient population regarding the Medical Group, the availability of its medical services, and the availability in terms of any managed care programs in which the Medical Group participates. The Management Company also shall develop and implement marketing and advertising programs as reasonably required to promote and expand the Medical Business, subject to any approved budgets. The programs shall be conducted in compliance with applicable laws and regulations governing advertising by the medical profession. Any promotional materials created solely for the purpose of marketing the services provided by the Medical Group and the use of any individual physician's -25- name in any promotional materials shall require the consent of the Medical Group or such physician, as the case may be. 3.15. Insurance. The Management Company shall provide the insurance coverage described in Sections 12.1 and 12.2 of this Agreement. 3.16. Files and Records. (a) To the extent permitted by applicable law, the Management Company shall supervise and maintain custody of all files and records relating to the operation of the business of the Medical Group, including, without limitation, accounting, billing, collection, or patient medical records. The management of all files and records shall be in compliance with applicable state and Federal statutes. Patient medical records shall at all times be and remain the property of the Medical Group and shall be located at a location that is readily accessible for patient care. The Management Company shall preserve the confidentiality of patient medical records and use information contained in such records only for the limited purposes necessary to perform the management services set forth herein; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. (b) The Management Company shall provide all off-site storage of files and records as required and in conjunction with policies established by the Operations Committee. The Management Company shall provide the Medical Group with all requested off-site files and records on a timely basis, consistent with the policies of the Medical Group in effect immediately prior to the Commencement Date. Any change in such policies shall be subject to the approval of the Operations Committee. -26- (c) In the event of termination of this Agreement, the Management Company shall deliver to the Medical Group at no charge a copy of the books and records of the Medical Group in the Management Company's possession. In the event any physician of the Medical Group terminates his affiliation with the Medical Group during the Term, the Management Company shall, within 30 days of receipt of written instructions from the Medical Group, deliver to such physician a copy of the books and records pertaining to the services provided by such physician during the five years prior to such physician's departure from the Medical Group; provided that the Management Company shall not be obligated to return any books and records pertaining to services provided prior to the Commencement Date. 3.17. Managed Care Contracts. The Management Company shall solicit, negotiate and administer all managed care contracts on behalf of the Medical Group based on parameters and criteria established by the Operations Committee. Such services shall be performed by the Management Company as agent of the Medical Group, and all managed care contracts shall be subject to the Medical Group's prior approval of any such contract. The Management Company shall prepare cost forecasts and other analyses as reasonably requested by the Medical Group in order to allow the Medical Group to make an informed decision with respect to each proposed contract. 3.18. Budgets. The Management Company shall prepare, for the review and approval of the Operations Committee, annual operating budgets (the "Budgets") reflecting in reasonable detail projected Billings, Collections, Medical Group Costs, and Management Company Operating Costs (all as hereinafter defined); provided, however, that the Medical Group shall provide the Management Company with a proposed Budget covering the initial three-month -27- period under this Agreement. The initial Budget, which shall be applicable to the period commencing on the Commencement Date and ending three (3) months thereafter, is attached hereto as Schedule II. All other budgets shall be on a calendar year basis. The Management Company shall prepare and submit to the Operations Committee all subsequent Budgets on or before December 15 of the year immediately preceding the calendar year for which any Budget is applicable. 3.19. Force Majeure. The Management Company shall not be liable to the Medical Group for failure to perform any of the services required herein in the event of strikes, lock-outs, calamities, acts of God, unavailability of supplies, changes in applicable law or regulations or other events over which the Management Company has no control for so long as such events continue and for a reasonable time thereafter. SECTION 4. Equity Participation. In consideration of the Medical Group's entering into this Agreement, the Management Company shall provide to each person identified on Schedule III attached hereto (the "Eligible Parties") the consideration set forth opposite such person's name on Schedule III, which consideration consists of cash and equity. SECTION 5. Costs, Compensation, and Other Payments. 5.1. Ownership of Accounts; Security. The Medical Group hereby transfers to the Management Company ownership of all accounts receivable and other rights to payment arising from the provision by the Medical Group of orthopedic medical and surgical services and related medical services to the general public during the Term (the "Accounts"); provided, however, that the right to payment of Medicaid and Medicare receivables shall remain with the Medical Group in -28- accordance with applicable Federal and state law. The Management Company shall have the right to grant to any lender (the "Lender") a first priority lien and security interest in and with respect to the Accounts, together with all books, records, computer information and other general intangibles relating thereto (collectively, the "Collateral"), as security for the obligations of the Management Company to the Lender. The Medical Group shall cooperate with the Lender as reasonably requested in the event the Lender seeks to enforce its rights and remedies under its agreement with the Management Company, including granting the Lender access, to the extent permitted by law, to all books and records associated with the Collateral. Neither the Management Company nor the Lender shall be required to give the Medical Group any notice in connection with any loan or related financing arrangements affecting the Accounts or other Collateral. 5.2. Bank Accounts. The Medical Group shall instruct the Medical Group Bank to transfer, on a daily basis, all funds in the Medical Group Collections Account (less the amount necessary to avoid the payment of bank charges or fees relating to the failure to maintain a minimum balance in the Medical Group Collections Account) to a bank (the "Management Company Bank") designated by the Management Company, for credit to an account in the Management Company's name (the "Operating Account"). 5.3. Medical Group Compensation. (a) Monthly Draw. (i) On each Draw Date (as hereinafter defined) during the Term hereof, the Management Company shall distribute to the Medical Group an amount equal to a percentage (the "Draw Percentage") of the Medical Group's total Billings (as hereinafter defined) for Medical Group -29- Services provided during the previous month (the "Monthly Draw"). The Draw Date and the initial Draw Percentage are as set forth on Schedule IV, and the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii). (ii) Commencing May 15, 1998, and effective May 15 of each year thereafter, the Draw Percentage shall be adjusted to equal a fraction, the numerator of which is the Annual Medical Group Compensation Amount (as hereinafter defined) for the previous year, and the denominator of which is the total amount of Billings for the previous year. (b) Annual Settlement. (i) On or before April 30 of each year beginning 1998, the Management Company shall determine the compensation (the "Annual Medical Group Compensation Amount") earned by the Medical Group with respect to the prior calendar year in accordance with the following calculation: (A) The total Collections for all Medical Group Services rendered during such year, minus (B) the sum of the following: (1) the Management Fee earned by the Management Company fo the previous calendar year; and (2) the Authorized Management Company Operating Costs (as hereinafter defined) incurred by the Management Company during such year. -30- (ii) If the Annual Medical Group Compensation Amount thus determined exceeds (the "Annual Shortfall") the total of the twelve (12) Monthly Draws paid by the Management Company to the Medical Group during the previous calendar year (the "Annual Draw Amount"), the Management Company shall pay to the Medical Group on or before May 15, an amount equal to the Annual Shortfall. If the Annual Medical Group Compensation is less (the "Annual Overpayment") than the Annual Draw Amount, the Management Company shall withhold from the Monthly Draw otherwise payable to the Medical Group, during each of the following six (6) months, an amount equal to one-sixth (1/6) of such Annual Overpayment. (iii) With respect to this Section 5.3(b), for purposes of determining the total Collections for all Medical Group Services provided during any calendar year (or portion thereof) during the Term, all Collections during January, February, and March of each year (or portion thereof) shall be deemed to be for Medical Group Services rendered during the previous calendar year, and all Collections during April through December shall be deemed to be for Medical Group Services rendered during the calendar year (or portion thereof) during the Term in which such Collections were received. The foregoing shall also apply with respect to determining the Management Fee earned by the Management Company for the previous calendar year, for purposes of this Section 5.3(b). (iv) Notwithstanding anything to the contrary set forth herein, the first period for which the annual settlement described in this Section 5.3(b) shall be applicable is the period commencing on the Commencement Date and ending on December 31, 1997. (c) For purposes of this Agreement: -31- (i) "Billings" means, for any applicable period, the gross charges of the Medical Group for all Medical Group Services furnished during such period. (ii) "Collections" means, for any applicable period, all cash or cash equivalents received during such period, net of refunds paid during such period, for Medical Group Services. (iii) "Medical Group Services" means the following services rendered by, through, or on behalf of the Medical Group: all professional services rendered by or under the supervision of any of the Medical Personnel (including professional services rendered in connection with New Ancillary Services); all plain film and other diagnostic radiology services rendered by or under the supervision of any of the Medical Personnel; all other ancillary services (other than New Ancillary Services); all ultrasound for pediatric patients; all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, and other items and supplies that are billable to patients or to third party payors; depositions, record review services, court appearances, and independent medical exams; and all other services provided on a regular basis by the Medical Group immediately prior to the Commencement Date (except as set forth below). (iv) It is the intent of the parties that Billings, Collections, and Medical Group Services not include any of the following: (A) New Ancillary Services (excluding professional services rendered by Medical Personnel in connection therewith, which professional services are included under Section 5.3(c)(iii) above); -32- (B) interest income; (C) royalties payable to any Medical Group physician for medical inventions; (D) fees payable under consulting agreements entered into by Medical Group physicians; (E) revenues from presentations, publications, medical directorships, serving as head of a hospital department, home health, hospice or nursing facility, and endorsements; (F) proceeds from the sale of any capital assets of the Medical Group; and (G) any income from investments. Notwithstanding anything to the contrary contained herein, any revenues received by any Billable Medical Personnel (as hereinafter defined) from any source set forth in clause (E) above, shall be included in Billings, Collections and Medical Group Services if the revenues from Medical Group Services generated by such Billable Medical Personnel during any year are materially reduced by the Billable Medical Personnel's participation in such activity. (v) For illustrative purposes only, an example of the computation of the Annual Settlement is set forth on Schedule VII attached hereto. 5.4. Management Fee. (a) The compensation payable to the Management Company for the provision of Management Services under this -33- Agreement (the "Management Fee"), which the Management Company may disburse from time to time at its discretion, shall be equal to (i) the sum of (A) the Applicable Percentage (as hereinafter defined) of Net Operating Income (as hereinafter defined), (B) an amount equal to sixty-six and two-thirds percent (66-2/3%) of the Professional Management Cost Savings (as hereinafter defined) and (C) any amounts owed to the Management Company pursuant to Section 5.11 hereof, if any, less (ii) an amount equal to the Medical Group's pro rata portion of the Specialty Care Network Profit (as hereinafter defined) for such period , if any, based on the number of claims generated by the Medical Group through the specialty care network owned or operated by the Management Company during the applicable period; provided, however, that in the event the Applicable Percentage of Net Operating Income shall equal an amount that is less than $400,000 for any calendar year ending on or before December 31, 2004, the Management Fee for such period shall, notwithstanding anything to the contrary contained herein, equal $400,000 plus the amounts described in clauses (B) and (C) above (the "Guaranteed Minimum Fee"); provided further, however, that at such time as the sum of the amounts determined by taking the Applicable Percentage of Net Operating Income for each calendar year ending on or prior to the date of determination shall equal or exceed $3,000,000, the preceding provisions relating to the payment of a Guaranteed Minimum Fee shall be null and void as to any future periods. Notwithstanding anything contained herein to the contrary, the portion of the Management Fee calculated for the month of April 1997 by the Medical Group, and payable to the Management Company for such month, shall equal $45,000. For illustrative purposes only, an example of the computation of the Management Fee is set forth on Schedule VII attached hereto. (b) For purposes of this Section 5.4, the following terms have the meanings set forth below: -34- (i) "Addbacks" means, for any applicable period, the aggregate amount of expense incurred during such period for the benefit of the Medical Group for each of the following line items in excess of the respective amounts budgeted therefor in the Budget for such period: (A) entertainment and (B) automobiles. (ii) "Adjusted Operating Expenses" means, for any period, an amount equal to (A) Professional Practice Cost Savings (as hereinafter defined), plus (B) Authorized Management Company Operating Costs, minus (C) Addbacks; (iii) "Applicable Percentage" has the meaning set forth on Schedule V; (iv) "Net Operating Income" means, for any period, an amount equal to Collections minus Adjusted Operating Expenses; (v) "Professional Management Cost Savings" means the Professional Practice Cost Savings described in Section A.1 of Schedule VI; (vi) "Professional Practice Cost Savings" means the cost savings determined in the manner described in Schedule VI; and (vii) "Specialty Care Network Profit" means the excess of the fee(s) received by the Management Company over the costs incurred by the Management Company, each in connection with its ownership and/or operation of a specialty care network. 5.5. Management Company Costs. (a) The Management Company shall pay all Management Company Operating Costs and all Excluded Costs (collectively, the "Management Company Costs"). All Management Company Costs shall be incurred in the name of the Management -35- Company, and not in the name of the Medical Group, except as specifically approved by the Medical Group. Management Company Costs shall not include any costs or expenses incurred prior to the Commencement Date. (b) The Management Company shall provide to the Medical Group, upon reasonable request by the Medical Group from time to time, supporting documentation and other backup detail relating to any or all of the Management Company Costs. (c) For purposes of this Agreement, "Management Company Operating Costs" means all costs and expenses incurred in connection with the provision of the Management Services, including, without limitation, those costs and expenses set forth in the Budget, except that any costs and expenses defined as Medical Group Costs in Section 5.7 hereof, and any Excluded Costs (as hereinafter defined) shall not be deemed Management Company Operating Costs. To the extent that the Medical Group and the Management Company mutually determine that an expenditure not included in the Budget needs to be incurred in connection with the provision of Management Services hereunder, such expenditure shall be included in Management Company Operating Costs for purposes of this Agreement. "Excluded Costs" means all of the following costs and expenses incurred in connection with the provision of the Management Services hereunder: (i) New Medical Office Start-Up Costs; (ii) The cost of any FF&E provided by the Management Company to the Medical Group, including the capital costs associated with any information systems technology implemented by the Management Company (subject to the provisions of Section 8.2(e) hereof); provided that the costs associated with the maintenance of such technology shall be an expense included in the Budget and shall be deemed an Authorized Management Company Operating Cost for purposes of this Agreement; -36- (iii) Depreciation, amortization, and interest; and (iv) Corporate overhead of the Management Company ("Corporate Overhead") except to the extent that all of the following conditions are satisfied: (A) The Corporate Overhead is incurred in lieu of a pre-existing Management Company Operating Cost; (B) The amount of such Corporate Overhead does not exceed the amount of the Management Company Operating Costs being eliminated; and (C) The Corporate Overhead is allocated to the Medical Group and to all other medical groups utilizing such Corporate Overhead on a pro rata basis. Any Corporate Overhead with respect to which all of the above conditions are satisfied shall be considered Management Company Operating Costs. (d) For purposes of this Agreement, "Authorized Management Company Operating Costs" means all Management Company Operating Costs incurred in any year reduced by any or all of the following, as applicable: (i) any costs that exceed the applicable Management Company Operating Costs Budget which are not approved by the Operations Committee; (ii) any costs with respect to which the Medical Group has reasonably requested supporting documentation or other backup detail which has not been -37- furnished by the Management Company or which does not reasonably establish the appropriateness of such costs; and (iii) any costs that have been determined pursuant to an audit under Section 5.9 not to have been reasonably incurred in connection with the Management Services required to be provided under this Agreement. 5.6. New Medical Office Start-Up Costs. (a) The Management Company shall pay, to the extent provided herein, all New Medical Office Start-Up Costs incurred in connection with the establishment of any New Medical Office. The Management Company shall create a separate division (the "New Office Division") for purposes of accounting for the income, costs, profits, and losses of any New Medical Office. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Medical Office. Notwithstanding anything to the contrary contained herein, Corporate Overhead shall not be included in determining the costs and expenses associated with any New Medical Office. At the end of the New Medical Office Start-Up Period (as hereinafter defined), (i) the Management Company shall be entitled to receive the aggregate Management Fee as described in Section 5.4 and (ii) the Medical Group shall be entitled to receive the Annual Medical Group Compensation Amount for such New Medical Office, in each case, as if such New Medical Office had been any other office of the Medical Group during the New Medical Office Start-Up Period; provided, however, that notwithstanding the foregoing, if the Net Operating Income of such New Medical Office for the New Medical Office Start-Up Period is equal to or less than zero, then (A) all of the New Medical Office Start-Up Costs shall be borne solely by the Management Company and such costs shall be considered Excluded Costs for purposes of this Agreement and (B) the Management Company and the Medical Group -38- shall not be entitled to receive the Management Fee or the Annual Medical Group Compensation Amount, as applicable. (b) Except to the extent provided in Section 5.6(a) above, the billings, collections, costs and expenses relating to any New Medical Office shall not, during the New Medical Office Start-Up Period, be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, Ancillary Services, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.8, or 5.7, respectively. (c) All Medical Equipment utilized at any New Medical Office shall be acquired by the Management Company and provided to the Medical Group in accordance with the terms of Section 3.3 hereof. (d) For purposes of this Agreement, "New Medical Office" means any office of the Medical Group other than those offices located in the premises identified in Section 3.2(a) hereof. (e) For purposes of this Agreement, "New Medical Office Start-Up Costs" means the following costs incurred in connection with the establishment of a New Medical Office during the New Medical Office Start-Up Period: all Management Company Costs and all costs associated with the development of such New Medical Office other than Medical Group Costs, provided that, the costs incurred in connection with any New Physician (as hereinafter defined) shall be borne in accordance with the provisions of Section 5.11 hereof. (f) For purposes of this Agreement, "New Medical Office Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of a New Medical Office and ending on the last day of the calendar month in which a period of twelve (12) months has elapsed from and after the date on which the New Medical Office -39- first opened for the treatment of patients. In the event that the New Medical Office is profitable (as defined in Section 3.2(b) and as determined by the Management Company) as of the end of the New Medical Office Start-Up Period, at all times thereafter such New Medical Office shall, for all purposes of this Agreement, be treated as any other office of the Medical Group. 5.7 Medical Group Costs. Except as otherwise provided in this Agreement, the Medical Group shall pay all of the costs specified in this Section 5.7 (the "Medical Group Costs"). All Medical Group Costs shall be incurred in the name of the Medical Group, and not in the name of the Management Company, and shall be paid from an account of the Medical Group and not from any bank account of the Management Company. The Medical Group Costs are as follows: (a) Compensation of all Medical Personnel that (i) are authorized to directly bill patients, Medicare, Medicaid and third party payors and (ii) are employed directly by the Medical Group (such persons being referred to herein as the "Billable Medical Personnel"); (b) Any applicable fringe benefits for all Medical Personnel, including, but not limited to, payroll taxes, workers' compensation, disability insurance, life insurance, 401(k) retirement plan, business buy-out disability insurance and continuing education; and (c) The cost of any items (excluding automobile and entertainment expenses which shall be included in Authorized Management Company Operating Costs) which are not required to be provided by the Management Company under this -40- Agreement and/or which were ordered, purchased, or incurred by the Medical Group directly, including but not limited to the cost of accounting, legal, consulting, or other professional or advisory services, business meetings, and business taxes. 5.8. New Ancillary Services Costs. (a) Any agreement by the parties to establish a New Ancillary Service as described in Section 3.4 of this Agreement shall (unless otherwise agreed by the parties) incorporate the following: (i) The Management Company shall create a separate division ("Ancillary Division") for purposes of accounting for the income, costs, profits, and losses of any New Ancillary Service. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Ancillary Service. Notwithstanding anything to the contrary contained herein, Corporate Overhead shall not be included in determining the costs and expenses associated with any New Ancillary Service. (ii) Profits and/or losses of any Ancillary Division shall be divided equally between the Medical Group and the Management Company, and all distributions to the Medical Group and to the Management Company shall be made in equal amounts to each from available cash (after payment of all currently due obligations incurred in connection with such New Ancillary Division, including, without limitation, any principal and interest amounts then due and payable under Section 5.8(a)(iv) below, and after retention of reasonable reserves) derived from the operation of such Ancillary Division. -41- (iii) All diagnostic and therapeutic equipment utilized in connection with any New Ancillary Service ("New Ancillary Service Medical Equipment") shall be acquired by the Management Company and shall be provided to the Medical Group on terms substantially similar to those set forth in Section 3.3 hereof. (iv) The Management Company shall pay all of the Ancillary Service Start-Up Costs (as hereinafter defined). Beginning with the month following the expiration of the Ancillary Service Start-Up Period (as hereinafter defined), the Management Company shall be entitled to recoup all of the Ancillary Service Start-Up Costs (as hereinafter defined) previously paid by the Management Company in sixty (60) equal monthly installments of principal, plus interest on the unrecouped portion of such costs at the prevailing prime rate as set forth in the Wall Street Journal or at the actual rate paid by the Management Company with respect to any part of such costs that have been financed by the Management Company, if applicable. (v) The Management Company shall provide, in connection with any New Ancillary Service, the full range of management services described in this Agreement. (vi) The billings, collections, costs and expenses relating to any New Ancillary Service shall not be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, New Medical Office Start-Up Costs, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively. (b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of the New Ancillary Service, which date shall not be prior to the date of the agreement establishing such New Ancillary Service, and ending on the earlier to occur of (i) the last day -42- of the first period of two (2) consecutive calendar months for which the New Ancillary Service shows a profit or (ii) the last day of the twelfth month after the establishment of such New Ancillary Service. (c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs" means the total of all of the following costs incurred in connection with the establishment of a New Ancillary Service during the Ancillary Service Start-Up Period (whether such costs would otherwise be considered Management Company Costs or Medical Group Costs): (i) Any lease payments for New Ancillary Service Medical Equipment; (ii) All costs of acquiring furniture, fixtures, and office equipment; (iii) All initial occupancy costs, if any, including but not limited to prepaid rent, and tenant improvements; (iv) All costs related to the acquisition of materials and supplies related to the provision of such New Ancillary Service; and (v) All ongoing costs of the New Ancillary Service, including but not limited to personnel (other than the Billable Medical Personnel) and related benefits, the cost of operating any equipment utilized in providing the service, supplies, insurance, rent, repairs and maintenance, outside services, telephone, taxes, utilities, storage and other ordinary ongoing expenses of providing the New Ancillary Service. 5.9 Review and Audit of Books and Records. Each of the parties shall have the right, during ordinary business hours and upon reasonable notice, to review and -43- make copies of, or to audit through a qualified certified public accountant approved by the other party (which approval shall not be unreasonably withheld), the books and records of the other party relating to the billing, collection, and disbursement of fees, and the determination of costs, under this Agreement. Any such review or audit shall be performed at the cost of the requesting party; provided, however, that in the event that such review or audit requested by the Medical Group discloses a discrepancy indicating that the Medical Group has actually been underpaid by an amount in excess of four percent (4%) of the total amount of Medical Group Compensation otherwise payable to the Medical Group for the period covered by the audit, the cost of the audit shall be borne by the Management Company. All documents and other information obtained in the course of such review or audit shall be held in strict confidence. 5.10. Start-Up Period. Consistent with the provisions of Section 2 of this Agreement, the parties acknowledge and agree that, in order to facilitate the transition of responsibilities hereunder, certain requirements and procedures agreed to under this Agreement may be implemented, in whole or in part and at any time during the period commencing on the Commencement Date and ending on July 1, 1997 (subject to extension by agreement of the Medical Group and the Management Company), rather than being fully implemented immediately on the Commencement Date. Accordingly, the parties further agree that the Management Fee and Monthly Draw payable in respect of the Management Services and the Medical Group Services applicable to such period of time shall be computed, and any appropriate adjustments shall be made, such that no material financial advantage or disadvantage shall accrue to either party as a result of implementing such requirements and procedures over the course of such start-up period rather than immediately on the Commencement Date. -44- 5.11. New Physician Compensation Costs. (a) Notwithstanding anything contained herein to the contrary, during the period beginning on the New Physician Start Date (as hereinafter defined) and ending on the Physician Breakeven Date (as hereinafter defined), the Management Company shall be responsible for the payment of all New Physician Compensation (as hereinafter defined) and, notwithstanding anything to the contrary contained in this Agreement, shall receive, in consideration therefor, sixty six and two-thirds percent (66 2/3%) of all Collections generated by such New Physician for those Medical Group Services performed by such New Physician, and such amounts shall not be included in determining Net Operating Income for purposes of this Agreement. The remaining thirty three and one-third percent (33 1/3%) of such Collections shall belong to the Medical Group and shall not be included in determining Net Operating Income for purposes of this Agreement. As of the Physician Breakeven Date, the New Physician Compensation shall be payable by, and become the responsibility of, the Medical Group in accordance with Section 5.7 hereof, and all of the Billings and Collections generated by such New Physician thereafter shall be considered Billings and Collections for purposes of this Agreement. (b) "New Physician" means, any physician who, at any time after the Commencement Date, becomes affiliated with or employed by the Medical Group; provided that if such physician becomes affiliated with or employed by the Medical Group pursuant to a transaction between the Management Company and such physician or a medical group with which such physician is affiliated in which the Management Company acquires any assets or accounts receivable from such physician or such medical group or pays any other consideration to such physician or such medical group in connection with such physician's affiliation or employment with the Medical Group and/or the Management Company, -45- then such physician shall not be deemed to be a New Physician for purposes of this Agreement. (c) "Physician Breakeven Date" means, with respect to any New Physician, the date on which the Collections generated by such New Physician during the period beginning on the New Physician Start Date and ending on the date of determination first equal or exceed (i) the aggregate amount of New Physician Compensation paid to such New Physician for the foregoing period plus (ii) that portion of the Medical Group Costs and Management Company Costs associated with such New Physician and/or the Medical Group Services provided by such New Physician. (d) "New Physician Compensation" means, with respect to any New Physician and for any period in question, the amount of compensation (wages and otherwise) payable to such New Physician by the Medical Group. (e) "Physician Start Date" means, with respect to any New Physician, the date such New Physician becomes affiliated with or employed by the Medical Group. SECTION 6. Representations and Warranties of the Medical Group The Medical Group hereby represents and warrants to the Management Company, as of the Signature Date hereof, as follows: 6.1 Organization; Good Standing; Qualification and Power. The Medical Group is a partnership duly organized, validly existing, and in good standing under the laws of the State of Florida and has all requisite power and authority to own, lease, and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to enter into this Agreement, the Asset Purchase Agreement, each Assignment of Lease, and each Stockholder Non-Competition -46- Agreement (collectively, the "Medical Group Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The Medical Group has delivered to the Management Company a true and correct copy of its partnership agreement, in effect on the date hereof. 6.2. Equity Investments. Except as set forth on Schedule 6.2, the Medical Group currently has no subsidiaries, nor does the Medical Group currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 6.3. Authority. The execution, delivery and performance of this Agreement and the other Medical Group Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Medical Group. This Agreement and the other Medical Group Transaction Documents have been duly and validly executed and delivered by the Medical Group and constitute the legal, valid and binding obligations of the Medical Group enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of this Agreement or any other Medical Group Transaction Document by the Medical Group nor the consummation by the Medical Group of the transactions contemplated hereby or thereby, nor compliance by the Medical Group with any provision hereof or thereof will conflict with or result in a breach of any provision of the formation documents of the Medical Group, cause a default (with due notice, lapse of -47- time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Medical Group is a party or by which the Medical Group or any of its properties or assets may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Medical Group or any of its properties or assets or the Medical Business. Except as provided on Schedule 6.3, to the best of the Medical Group's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Medical Group of this Agreement or any other Medical Group Transaction Document or the consummation of the transactions contemplated hereby and thereby. 6.4. Financial Information. Schedule 6.4 contains the Medical Group's internal statements of assets, liabilities and partners' equity of the Medical Business at January 31, 1997 (the "Balance Sheet"; and the date thereof being referred to as the "Balance Sheet Date"), and the related internal statements of revenue and expenses for the one-month period then ended (including the notes thereto and other financial information included therein) (collectively, the "Internal Financial Statements"), and (b) the compiled financial statements of the Medical Business for the periods ended December 31, 1996, December 31, 1995 and December 31, 1994 (the "Review Financial Statements"). The Internal Financial Statements and the Review Financial Statements (i) are in accordance with the books and records of the Medical Business, (ii) fairly present the financial position of the Medical Business as of the dates -48- thereof, (iii) have been prepared in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants consistently applied throughout the periods covered thereby, and (iv) are true, correct and complete in all material respects as of the dates thereof. 6.5. Absence of Undisclosed Liabilities. Except as set forth on Schedule 6.5, as of the Balance Sheet Date, the Medical Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Balance Sheet, all liability reserves established by the Medical Business on the Balance Sheet were adequate and there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Balance Sheet. 6.6. Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, the Medical Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Medical Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Medical Business; -49- (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Medical Business other than such items created or incurred in the ordinary course of the Medical Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Medical Business outside the ordinary course of the Medical Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Medical Business except in the ordinary course of the Medical Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Medical Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Medical Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Medical Business; -50- (i) any general uniform increase in the compensation of employees of the Medical Group or the Medical Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Medical Group or the Medical Business; (j) any change in the accounting methods or practices followed in connection with the Medical Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) any agreement or commitment relating to the sale of any material fixed assets of the Medical Business; (l) any other transaction relating to the Medical Business other than in the ordinary course of the Medical Business and consistent with past practice; or (m) any agreement or understanding, whether in writing or otherwise, for the Medical Business to take any of the actions specified in items (a) through (l) above. 6.7. Tax Matters. (a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the Medical Business required to be paid by the Medical Group through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed by the Medical Group in connection with the Medical Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to -51- any income, properties or operations of the Medical Group prior to the date hereof (collectively, "Returns") have been duly filed; (ii) as of the time of filing, the Returns correctly reflected in all material respects (and, as to any Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Medical Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Medical Business that have been shown as due and payable by the Medical Group on the Returns have been timely paid and filed or adequate provisions made to the books and records of the Medical Business; (iv) in connection with the Medical Business (x) the Medical Group has made provision on the Balance Sheet for all Taxes payable by the Medical Group for any periods that end on or before the Balance Sheet Date for which no Returns have yet been filed and for any periods that begin on or before the Balance Sheet Date and end after the Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Balance Sheet Date and (y) provision has been made for all Taxes payable by the Medical Group for any periods that end on or before the date hereof for which no Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Medical Business, and there are no pending tax audits of any Returns relating to the Medical Business; and (vi) no deficiency or addition to Taxes, interest or penalties applicable to the Medical Group for any Taxes relating to the operation of the Medical Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Medical Group or any previous operator of the Medical Business was a member for which the Medical Group could be liable). -52- (b) The Medical Group is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Code. (c) The Medical Group has provided the Management Company with true and complete copies of all Federal, state and foreign Returns of the Medical Group for the calendar years ending December 31, 1994 and 1995. (d) For purposes of this Agreement, "Tax" means any of the Taxes and "Taxes" means, with respect to any person or entity, (i) all Federal, state, local and foreign income taxes (including any tax on or based upon net income, or gross income, or income as specially defined, or earnings, or profits, or selected items of income, earnings or profits) and all Federal, state, local and foreign gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties or other Federal, state, local and foreign taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) on such person or entity and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of being a `transferee' (within the meaning of Section 6901 of the Code or any other applicable law) of another person or entity or a member of an affiliated or combined group. 6.8. Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Medical Group, threatened against the Medical Group or in connection with the Medical Business, whether at law or in -53- equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Medical Group, its assets or affecting the Medical Business. The Medical Group has delivered to the Management Company all documents and correspondence relating to matters referred to in said Schedule 6.8. 6.9 Compliance; Governmental Authorizations. The Medical Group and the Medical Business have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Medical Group has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Medical Business, the lack of which would have a material adverse effect on the Medical Group's ability to operate the Medical Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Medical Group has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Medical Group, threatened to revoke or limit any thereof. To the best knowledge of the Medical Group, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. To the best knowledge of the Medical Group, neither the Medical Group nor any of the Medical Personnel employed by the Medical Group is now or in the last four years has been the subject of or involved in any investigation by any Federal, state or local regulatory agency related to its or his Medicare, Medicaid or other third party payor billing practices. -54- 6.10. Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 6.10, all of the accounts receivable owing to the Medical Group in connection with the Medical Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Medical Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Medical Group, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 6.10, as of the date hereof, there is no account receivable or note receivable of the Medical Business pledged to any third party. The Medical Group has, within 15 days prior to the Commencement Date, provided the Management Company with an accounts receivable aging report that is true and complete as of the date given to the Management Company. (b) All accounts payable and notes payable by the Medical Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 6.10, there is no account payable or note payable past due or delinquent in its payment. 6.11. Labor Relations; Employees. Schedule 6.11 contains a true and complete list of the persons employed by the Medical Group as of the date hereof (the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and the Medical Business are not delinquent in payments to any of the Employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Employees; (b) upon termination of the employment of any of the Employees, neither the Medical Group, the Medical Business nor the Management Company will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable -55- for any excise taxes pursuant to Section 4980B of the Code or to any of the Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Medical Group or in connection with the Medical Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Medical Group, threatened against or involving the Medical Group or Medical Business; (e) there is no collective bargaining agreement covering any of the Employees; and (f) to the best knowledge of the Medical Group, no Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Medical Group or the Medical Business. 6.12 Employee Benefit Plans. (a) Schedule 6.12 identifies each 'employee benefit plan', as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Medical Group or the Medical Business and any Employee or former employee of the Medical Group or in connection with the Medical Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Medical Group or in connection with the Medical Business for the benefit of any Employee or former employee of the Medical Group or in connection with the Medical Business under which the Medical Group, any affiliate thereof or the Medical Business has any present or future obligation or liability (the "Employee Plans"). The Medical -56- Group has provided the Management Company with true and complete age, salary, service and related data for Employees of the Medical Group and in connection with the Medical Business. (b) Schedule 6.12 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Medical Group or in connection with the Medical Business. (c) Except as set forth on the Schedule 6.12; (i) each Employee Plan has been operated and administered in compliance with ERISA, the Code and in accordance with the provisions of all other applicable Federal and state laws; (ii) all reporting and disclosure obligations imposed under ERISA and the Code have been satisfied with respect to each Employee Plan; (iii) no breaches of fiduciary duty or prohibited transactions have occurred with respect to any Employee Plan; and (iv) all reporting, disclosure and bonding obligations have been satisfied with respect to each Employee Plan. (d) The Medical Group has made available to the Management Company a true and complete copy of each Employee Plan and a true and complete copy of each of the following documents, prepared in connection with such Employee Plan; (i) each trust or other funding arrangement, (ii) the two most recently filed Annual Reports (Form 5500), including attachments, for each Employee Plan, and (iii) the most recently received IRS determination letter. -57- 6.13. Insurance. Schedule 6.13 contains a list of all policies of professional liability (medical malpractice), general liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Medical Group covering the assets, properties or operations of the Medical Group and the Medical Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither the Medical Group nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Medical Group or the Medical Business. 6.14. Real Property. Schedule 6.14 sets forth an accurate and complete legal description of the entire right, title and interest of the Medical Group in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real property, owned or leased by the Medical Group (the "Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Real Property, the Medical Group has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Medical Business. The Medical Group has a valid leasehold interest in all Real Property leased by the Medical Group. -58- 6.15. Burdensome Restrictions. Except as set forth on Schedule 6.15, neither the Medical Group nor the Medical Business is bound by any oral or written agreement or contract which by its terms prohibits or restricts it from conducting the Medical Group or the Medical Business (or any material part thereof). 6.16. Disclosure. Neither the Medical Group Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Management Company by or on behalf of the Medical Group in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 6.16, there have been no events or transactions, or information which has come to the attention of the Medical Group, which, as they relate directly to the Medical Group or the Medical Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Medical Group and the Medical Business. SECTION 7. Representations and Warranties of the Management Company The Management Company represents and warrants to the Medical Group, as of the Signature Date hereof, as follows: 7.1. Organization, Good Standing and Power. The Management Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted and as proposed to -59- be conducted, to execute and deliver this Agreement and each of the Asset Purchase Agreement, the Restricted Stock Agreements (as hereinafter defined), the Assignments of Lease, and the Stockholder Non-Competition Agreements (as hereinafter defined) (collectively, the "Management Company Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The Management Company has delivered to the Medical Group a true and correct copy of its formation documents, consisting of (i) the Amended and Restated Certificate of Incorporation filed January 22, 1997, as amended by that certain Certificate of Amendment dated as of March 12, 1997, and (ii) the By-Laws (the "BMJ Formation Documents"). The BMJ Formation Documents have not been amended, and the BMJ Formation Documents are in effect as of the date hereof. 7.2. Equity Investments. Except as identified in Schedule 7.2, the Management Company currently has no subsidiaries, nor does the Management Company currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 7.3. Capitalization. (a) The total authorized capital of the Management Company consists of 15,000,000 shares of common stock and 6,685,000 shares of preferred stock. Set forth in Schedule 7.3(a) is an accurate and complete listing of all of the stockholders of the Management Company and the number and class of shares held by each. Except as set forth in Schedule 7.3(a), the Management Company has no other outstanding stock or securities of any kind or nature, and no shares of capital stock are held by the Management Company in its treasury. Each of the outstanding shares of capital stock has been duly and validly -60- authorized and issued, is fully paid and non-assessable, and was issued in compliance with all applicable Federal and state securities laws. Except as set forth in the Second Amended and Restated Stockholders Agreement dated as of November 22, 1996, no person is entitled to any preemptive or similar right with respect to the issuance of any shares of capital stock of the Management Company. (b) No sale of common stock has been effected or any other action taken the effect of which sale or other action would require or permit an adjustment of the conversion price of any issued and outstanding convertible preferred stock. The exercise of the right of any holder of convertible preferred stock to convert such stock to common stock on or as of the Commencement Date hereunder would entitle such holder of preferred stock to receive one share of common stock for each share of preferred stock. (c) There are no outstanding warrants, options, calls, conversion rights or commitments or other rights to subscribe for or purchase from the Management Company any shares of capital stock of the Management Company or securities convertible into or exchangeable for capital stock, except as set forth in Schedule 7.3(c). (d) The Management Company has taken all action necessary or appropriate to duly authorize the creation, issuance and sale of the common stock to be issued hereunder. Such shares of common stock, when issued, sold and delivered, as provided for herein and in the Restricted Stock Agreements, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership of the shares. The issuance of such shares of common stock will not violate any preemptive or similar right of any person. -61- 7.4. Authority. The execution, delivery and performance of this Agreement and the other Management Company Transaction Documents, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Management Company. This Agreement and each Management Company Transaction Document to which it is a party has been duly and validly executed and delivered by the Management Company, and this Agreement and each such Management Company Transaction Document is the valid and binding obligation of the Management Company, enforceable in accordance with its respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of this Agreement or any other Management Company Transaction Document, nor the consummation by the Management Company of the transactions contemplated hereby or thereby, nor compliance by the Management Company with any provision hereof or thereof, will (a) conflict with or result in a breach of any provisions of the BMJ Formation Documents, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Management Company is a party or by which it or any of its properties or assets is or may be bound or (c) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Management Company or any of its properties or assets. Except as provided in Schedule 7.4, to the best of the Management Company's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or -62- performance by the Management Company of this Agreement or the consummation by the Management Company of the transactions contemplated hereby. 7.5. Financial Information. Schedule 7.5 contains (a) the unaudited statements of assets, liabilities and stockholders' equity of the Management Business at March 31, 1997 (the "Management Company Balance Sheet"; and the date thereof being referred to as the "Management Company Balance Sheet Date"), and the related unaudited statements of revenue and expenses for the periods then ended (including the notes thereto and other financial information included therein) (collectively, the "Unaudited Financial Statements"). The Unaudited Financial Statements (i) were prepared in accordance with the books and records of the Management Business, (ii) fairly present the financial position of the Management Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the date thereof. 7.6 Absence of Undisclosed Liabilities. Except as set forth on Schedule 7.6, as of the Management Company Balance Sheet Date, (a) the Management Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Management Company Balance Sheet, (b) all liability reserves established by the Management Business on the Management Company Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Management Company Balance Sheet. -63- 7.7. Absence of Changes. Except as set forth on Schedule 7.7, since the Management Company Balance Sheet Date, the Management Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Management Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Management Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Management Business other than such items created or incurred in the ordinary course of the Management Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Management Business outside the ordinary course of the Management Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Management Business except in the ordinary course of the Management Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Management Business or any -64- portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Management Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which the Management Business, such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Management Business; (i) any general uniform increase in the compensation of employees of the Management Company or the Management Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Management Company or the Management Business; (j) any change in the accounting methods or practices followed in connection with the Management Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) any agreement or commitment relating to the sale of any material fixed assets of the Management Business; -65- (l) any other transaction relating to the Management Business other than in the ordinary course of the Management Business and consistent with past practice; or (m) any agreement or understanding, whether in writing or otherwise, for the Management Business to take any of the actions specified in items (a) through (l) above. 7.8. Tax Matters. (a) Except as set forth on Schedule 7.8, (i) all Taxes relating to the Management Business required to be paid through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed in connection with the Management Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Management Company prior to the date hereof (collectively, "Management Company Returns") have been duly filed; (ii) as of the time of filing, the Management Company Returns correctly reflected in all material respects (and, as to any Management Company Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Management Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Management Business that have been shown as due and payable on the Management Company Returns have been timely paid and filed or adequate provisions made to the books and records of the Management Business; (iv) in connection with the Management Business (x) the Management Company has made provision on the Management Company Balance Sheet for all Taxes payable for any periods that end on or before the Management Company Balance Sheet Date for which no Management Company Returns have yet been filed and for any periods that begin on or before the Management Company Balance Sheet Date and end after the Management Company Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Management Company Balance Sheet Date and (y) provision has been made for all Taxes payable for any periods that end on or before the date hereof for which no Management Company Returns have then been filed and for any periods that -66- begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Management Business, and there are no pending tax audits of any Management Company Returns relating to the Management Business; and (vi) no deficiency or addition to Taxes, interest or penalties for any Taxes relating to the operation of the Management Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Management Company or any previous operator of the Management Business was a member for which the Management Company could be liable). (b) The Management Company is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Code. 7.9 Litigation, Etc. Except as set forth on Schedule 7.9, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Management Company, threatened against the Management Company or in connection with the Management Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Management Company its -67- assets or affecting the Management Business. The Management Company has delivered to the Medical Group all documents and correspondence relating to matters referred to in said Schedule 7.9. 7.10. Compliance; Governmental Authorizations. The Management Company and the Management Business shall have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Management Company has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Management Business, the lack of which would have a material adverse effect on the Management Company's ability to operate the Management Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Management Company has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Management Company, threatened to revoke or limit any thereof. To the best knowledge of the Management Company, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 7.11. Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 7.11, all of the accounts receivable owing to the Management Company in connection with the Management Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Management Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Management Company, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 7.11, as of -68- the date hereof, there is no account receivable or note receivable of the Management Business pledged to any third party. (b) All accounts payable and notes payable by the Management Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 7.11, there is no account payable or note payable past due or delinquent in its payment. 7.12. Labor Relations; Employees. Except as set forth on Schedule 7.12, (a) the Management Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Management Company Employees; (b) upon termination of the employment of any of the Management Company's employees, neither the Management Company nor the Medical Group will, by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the employees of the Management Company for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Management Company or in connection with the Management Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Management Company, threatened against or involving the Management Company or Management Business; (e) there is no collective bargaining agreement covering any of the Management Company Employees; and (f) to the best knowledge of the Management Company, none of its employees or consultants is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the -69- use of any information or materials used or being used by such person in connection with such person's employment by or association with the Management Company or the Management Business. 7.13. Employee Benefit Plans. (a) Schedule 7.13 identifies each `employee benefit plan', as defined in Section 3(3) of ERISA, and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Management Company and any employee or former employee of the Management Company or in connection with the Management Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Management Company or in connection with the Management Business for the benefit of any employee or former employee of the Management Company or in connection with the Management Business under which the Management Company, any affiliate thereof or the Management Business has any present or future obligation or liability. (b) Schedule 7.13 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Management Company or in connection with the Management Business. -70- 7.14 Insurance. Schedule 7.14 contains a list of all policies of liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Management Company covering the assets, properties or operations of the Management Company and the Management Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. The Management Company has not since its incorporation, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Management Company or the Management Business. 7.15. Real Property. Schedule 7.15 sets forth an accurate and complete legal description of the entire right, title and interest of the Management Company in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real property, owned or leased by the Management Company (the "Management Company Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Management Company Real Property, the Management Company has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Management Business. The Management Company has a valid leasehold interest in all Management Company Real Property leased by the Management Company. -71- 7.16 Burdensome Restrictions. Except as set forth on Schedule 7.16, neither the Management Company nor the Management Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Management Company or the Management Business (or any material part thereof). 7.17. Disclosure. Neither the Management Company Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Medical Group by or on behalf of the Management Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 7.17, there have been no events or transactions, or information which has come to the attention of the Management Company, which, as they relate directly to the Management Company or the Management Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Management Company and the Management Business. SECTION 8. Operations Committee. 8.1. Formation and Operation of the Operations Committee. The Management Company and the Medical Group shall establish a committee (the "Operations Committee") responsible for directing the Management Company in connection with the development of certain specific management and administrative policies for the overall operation of the Medical Group. The Operations Committee shall consist of six (6) members. The Medical Group shall designate three (3) members of the Operations -72- Committee, each of whom shall be a physician in the Medical Group, and the Management Company shall designate three (3) members of the Operations Committee. The business of the Operations Committee shall be conducted in accordance with the policies and procedures described in Section 8.4 hereof. 8.2. Authoritative Functions of the Operations Committee. The Operations Committee shall perform the following functions, and the decisions of the Operations Committee with respect to such functions shall be binding on the Management Company and the Medical Group: (a) Approve the annual budgets for: (i) Billings and Collections; (ii) Medical Group Costs; (iii) Capital expenditures to be made by the Management Company in fulfillment of its obligations hereunder; (iv) Management Company Operating Costs (which, in the absence of approval by the Operations Committee, shall be increased by one percent (1.0%) over the total amount approved for the preceding period) (b) Approve costs and expenses that exceed the Management Company Operating Costs Budget. (c) Establish parameters and criteria with respect to the establishment and maintenance of relationships with institutional providers and payors and managed care contracts (except with respect to the establishment of professional fees). -73- (d) Establish parameters and criteria with respect to: (i) Billings (ii) Claims submission (iii) Collections of fees (iv) Delinquent account collection policies (v) Turnover of delinquent accounts to outside collection agencies (vi) Write-offs of account balances (vii) Claim review requests (viii) "Insurance only" and other courtesy write-off policies (ix) Lien account collection policies (x) Student Athlete account policies (e) Approve the acquisition, replacement, relocation, or other disposition of Medical Equipment and FF&E, approve the integration of new technologies into the professional practice of the Medical Group as contemplated by Section 3.11 hereof, and approve the renovation and expansion of any offices of the Medical Group ("Tenant Improvements"); provided, however, that the approval of the Management Company also shall be required prior to (i) the acquisition of any Medical Equipment or FF&E (including any Medical Equipment or FF&E relating to the integration of new technologies into the professional practice of the Medical Group) if and to the extent that the aggregate cost of such items in any calendar year exceeds five percent (5%) -74- of the Management Fee for such year, (ii) the undertaking of any Tenant Improvements relating to patient care facilities that cost more than $10,000 in the aggregate at any one of the Medical Group's office locations in any calendar year, or (iii) the undertaking of any other Tenant Improvements. (f) Establish parameters and criteria for off-site storage of files and records of the Medical Group. 8.3. Advisory Functions of the Operations Committee. The Operations Committee shall review, evaluate and make recommendations to the Medical Group and the Management Company with respect to the following matters: (a) Identification of physician subspecialties required for the efficient operation of the Medical Group; advice regarding all Medical Personnel employment and recruitment contracts to be utilized by the Medical Group. (b) Development of long-term strategic planning objectives for the Medical Group. (c) Public relations, advertising, and other marketing of Medical Group services, including design of exterior signs. (d) The establishment of fees for professional services and ancillary services rendered by the Medical Group. (e) Access and quality issues pertaining to ancillary services. (f) Insurance limits and insurance coverage of the Medical Group and the Management Company, as -75- such coverage may relate to Medical Group operations and activities. (g) Any matters arising in connection with the operations of the Medical Group that are not specifically addressed in this Agreement and as to which the Management Company or the Medical Group requests consideration by the Operations Committee. The recommendations of the Operations Committee with respect to the matters described in this Section 8.3 are intended for the advice and guidance of the Management Company and the Medical Group, and except as provided herein, the Operations Committee does not have the power to bind the Management Company or the Medical Group. Where discretion with respect to any matters is vested in the Management Company or the Medical Group under the terms of this Agreement, the Management Company or the Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Operations Committee. The Management Company and the Medical Group shall, however, take such recommendations of the Operations Committee into account in good faith in the exercise of such discretion. 8.4. Committee Policies and Procedures. (a) The Medical Group shall designate one of its members to act as Chairman of the Committee, and the Management Company shall designate one of its members to act as Vice Chairman. Each party may substitute or change its designated Operations Committee members at any time upon notice to the other party, and any Operations Committee member may designate his or her own substitute at any meeting without notice. Each member shall have one vote and shall have the right to grant his or her proxy to another member of the Operations Committee. The Chairman, if present, shall preside at all meetings of the Operations Committee. In the absence of the designated Chairman, -76- the Vice Chairman shall preside. The only powers of the Chairman and the Vice Chairman that differ from those of the other members of the Operations Committee shall be to call and preside over meetings in accordance with this Section 8.4. (b) The Operations Committee may hold meetings without call or formal notice at such times and places as a quorum of its members may from time to time determine. A meeting of the Operations Committee also may be called by at least two (2) members of the Operations Committee or by the Chairman or Vice Chairman thereof upon at least three (3) days' written notice to the other members of the Operations Committee. Such notice requirement shall be deemed waived with respect to any member of the Operations Committee who attends such meeting. Meetings may be held in person or by telephone. The Operations Committee also may act by written consent as provided in Section 8.4(c). Minutes shall be kept of all formal actions taken by the Operations Committee. (c) No action of the Operations Committee shall be effective unless authorized by the vote of four (4) or more members of the Operations Committee present or represented by proxy at the applicable meeting. A quorum of the Operations Committee shall be four (4) members, in person, by telephone, or by proxy, and a quorum must remain for the duration of the meeting. The Operations Committee may establish such procedures to act by written consent, without a meeting, as the Operations Committee determines are advisable, provided that all six (6) members (in person or by proxy) must sign any written consent. SECTION 9. Obligations of the Medical Group. The Medical Group shall have the following obligations during the Term: -77- 9.1. Compliance with Laws. The Medical Group shall provide professional services to patients in compliance at all times with those ethical standards, laws and regulations to which they are subject. The Medical Group shall verify, with the assistance of the Management Company, that each physician and other Medical Personnel associated with the Medical Group for the purpose of providing medical care to patients of the Medical Group is licensed by the State of Florida. The Medical Group shall monitor the quality of medical care practiced by physicians and other health care personnel associated with the Medical Group. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician by any payor, patient, state or Federal regulatory agency or any other person or entity, the Medical Group shall immediately inform the Management Company of such action and its underlying facts and circumstances. 9.2. Use of Facility. The Medical Group shall use and occupy any Facility (as defined below) exclusively for the practice of medicine, and shall comply with all applicable Federal, state and local rules, ordinances and standards of medical care. The medical practice or practices conducted at any Facility described in clause (i) of the definition of the term "Facility" shall be conducted solely by Medical Personnel associated with the Medical Group, and no other physician or medical practitioner shall be permitted to use or occupy any Facility described in clause (i) below without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. The term "Facility" shall mean (i) any medical facility or laboratory controlled, managed or operated by the Management Company or (ii) any hospital at which any Medical Personnel practices medicine or maintains admitting privileges. -78- 9.3. Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts. The Medical Group shall have the exclusive control over the choice of vendors and products utilized with respect to all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, medical supplies and allografts. 9.4. Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group shall have exclusive control over the choice of specific physicians and facilities to be utilized by the Medical Group with respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical professionals and facilities; provided, however, that the foregoing shall not be considered New Ancillary Services or New Medical Offices, as the case may be, unless the parties have agreed thereto in accordance with Section 3.4(b) or 3.2(b), as the case may be. 9.5. Insurability. The Medical Group shall cooperate with the Management Company in (i) ensuring that its Medical Personnel are insurable under commercially available malpractice insurance policies or (ii) instituting proceedings to terminate within thirty business days any Medical Personnel who is not so insurable or who loses his or her malpractice insurance eligibility unless the Medical Group makes (within such 30-day period) other arrangements reasonably appropriate under the circumstances and reasonably acceptable to the Management Company. The Medical Group shall notify the Management Company in writing of any change in the insurance status of any Medical Personnel within two days after the Medical Group receives notice of any such change. The Medical Group shall require all Medical Personnel to participate in an on-going risk management program. -79- 9.6. Medicare. The Medical Group shall cause all physicians to be participating providers and accept assignment under Medicare. 9.7. Accounts Receivable; Billing. From the Commencement Date, the Medical Group acknowledges and agrees that all accounts receivable of the Medical Group or its Medical Personnel shall be the property of the Management Company hereunder and the Medical Group and the Medical Personnel hereby transfer and assign all of their right, title and interest to such accounts receivable to the Management Company; provided, however, that the right to payment of Medicaid and Medicare receivables shall remain with the Medical Group in accordance with applicable Federal law. The Medical Group's Medical Personnel shall be responsible for providing the appropriate current CPT4 coding with respect to the fee tickets prepared by such Medical Personnel. 9.8. Medical Personnel Hiring. The Medical Group shall have the ultimate control over and responsibility for the hiring, compensation, supervision, evaluation and termination of its Medical Personnel; provided, however, that at the request of the Medical Group, the Management Company shall consult with the Medical Group regarding such matters. 9.9. Continuing Education. The Medical Group and its Medical Personnel shall be solely responsible for ongoing membership in professional associations and continuing professional education. The Medical Group shall ensure that its Medical Personnel participate in such continuing professional education as is necessary for such -80- physician or professional to remain current in his or her field of medical practice. 9.10. Clinical Research. The Medical Group shall have the ultimate control over and responsibility for any clinical research program pertaining to patients of the Medical Group. This shall include but not be limited to research personnel interviewing, hiring, termination, compensation, day-to-day supervision, and assignment of responsibilities and projects. However, the Medical Group will cooperate with and take direction from the Management Company in its nationwide efforts to provide an effective disease management information system and outcome studies programs. 9.11. Sales of Stock. The Eligible Parties shall give to Naresh Nagpal, M.D. and each venture capital firm providing funds to the Management Company and executing this Agreement the right to participate on a pro rata basis (based on the number of shares, whether preferred or common, calculated on an as-converted basis, held by Naresh Nagpal, M.D. and any such venture capital firm and by any other stockholders who hold the same rights that are conferred by this Section 9.11, including members of other physician groups) in any proposed sale of more than fifty percent (50%) of the stock in the Management Company held by the Eligible Parties to any unaffiliated third party or parties, and the Medical Group shall require the Eligible Parties to comply with the obligations set forth in this Section 9.11; provided, however, that the obligations under this Section 9.11 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. -81- SECTION 10. Certain Covenants. 10.1. Change of Control. During the Term of this Agreement, the Medical Group shall not enter into any single transaction (or group of related transactions undertaken pursuant to a common plan) involving the admission of new partners, transfer of partnership interests, or reorganization or restructuring of the Medical Group, if in any such case the effect would be to transfer a majority of the ownership interest in the Medical Group, without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. 10.2. Legend on Securities. During the Term of this Agreement, any certificate or similar evidence representing an equity interest in the Medical Group issued by the Medical Group shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF APRIL 1, 1997, BETWEEN LAUDERDALE ORTHOPAEDIC SURGEONS, A FLORIDA PARTNERSHIP, AND BONE, MUSCLE AND JOINT, INC., A DELAWARE CORPORATION." The Management Company acknowledges that there is no certificate or other similar evidence representing equity interests in the Medical Group as of the Signature Date hereof. Nothing herein shall be construed as requiring the Medical Group to issue any -82- certificate or other evidence representing an equity interest in the Medical Group. SECTION 11. Records. 11.1. Medical Records. Upon termination of this Agreement, the Medical Group shall retain all patient medical records maintained by the Medical Group or the Management Company in the name of the Medical Group. 11.2 Management Business Records. All books and records relating in any way to the operation of the Management Business which are not patient medical records shall at all times be the property of the Management Company. The Management Company shall maintain custody of such records, and the Medical Group shall, upon its written request, be entitled to copies of any such records relating to the Management Services performed by the Management Company. 11.3. Access to Records Following Termination. Following the termination of this Agreement, the Medical Group shall grant (to the extent permitted by law) to the Management Company, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, reasonable access (which shall include making photocopies) to the patient medical records described in Section 11.1 hereof and any other pertinent information regarding the Medical Group during the Term. Prior to accessing such patient medical records, the Management Company shall obtain any required patient authorization. -83- Following the termination of this Agreement, the Management Company shall provide to the Medical Group, promptly upon the Medical Group's written request, photocopies of the Management Business records described in Section 11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, any other pertinent information regarding the Management Company during the Term. SECTION 12. Insurance and Indemnity. 12.1 Professional Liability Insurance. During the Term, the Management Company shall, to the extent permitted by applicable law, procure and maintain for the benefit of itself and the Medical Group comprehensive professional liability insurance providing for (a) general liability coverage and (b) medical malpractice coverage with limits of not less than $250,000 per claim and with aggregate policy limits of not less than $750,000 covering the Medical Group and each of the Medical Personnel of the Medical Group (or such higher amounts as may be necessary to comply with any regulatory requirement and/or contractual requirement to which such Medical Personnel or the Medical Group may be subject), including coverage for claims made after the Commencement Date relating to events or occurrences at any time prior thereto. The parties hereto acknowledge that the Management Company is procuring the malpractice insurance referenced herein to ensure that the Management Company has protection in the event it is sued as a result of an act or omission of an employee of the Medical Group. The Management Company shall pay the premiums for such general and medical malpractice liability coverage, and the Management Company shall be designated as a co-beneficiary under such insurance policies. -84- 12.2 Life Insurance; Business Interruption. The Management Company shall obtain a $500,000 life insurance policy for each duly licensed physician partner in the Medical Group. The Management Company shall also obtain business interruption insurance for each Medical Office in amounts to be mutually agreed upon by the parties. The Management Company and the Medical Group shall be designated as the beneficiaries under each of the aforementioned policies and shall each receive fifty percent of any proceeds resulting from an insurable event thereunder; provided that until such time as the Management Company is no longer entitled to receive the Guaranteed Minimum Fee, the Management Company shall forward to the Medical Group the total amount of any such proceeds received by the Management Company. The premiums for such policies shall be paid equally by the Management Company and the Medical Group, provided that the Medical Group's share of the aggregate amount of such premiums shall not exceed $5,000 in the first year of the Term and in any year thereafter shall not be in excess of the amount determined by taking the sum of (a) the then current amount of the Medical Group's share, plus (b) the product determined by multiplying the then current amount of the Medical Group's share by the percentage by which the CPI in effect in the last month of such year exceeds the CPI in the same month for the immediately prior year. As used herein, "CPI" means the Consumer Price Index for Urban Wage Earners and Clerical Workers, All Items, for Miami-Fort Lauderdale, Florida, published by the Bureau of Labor Statistics of the U.S. Department of Labor with a 1982-84 = 100 base; provided, however, that if such index (or an index substituted therefor as hereinafter provided) shall cease to be published, then for purposes of this Agreement there shall be substituted for such index another index of a similar kind published by a governmental or other nonpartisan organization, as may be mutually agreed upon by the Management Company and the Medical Group. -85- 12.3 Indemnification by Medical Group. The Medical Group shall indemnify, hold harmless and defend the Management Company, its officers, directors, shareholders, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Medical Group Services, including without limitation the performance of such services prior to the Commencement Date, (ii) any other acts or omissions of the Medical Group and its Medical Personnel, including without limitation any such acts or omissions that occurred prior to the Commencement Date, or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Medical Group and/or the Medical Personnel and/or their respective agents and/or subcontractors (other than the Management Company) during the Term. 12.4 Indemnification by Management Company. The Management Company shall indemnify, hold harmless and defend the Medical Group, its partners, members, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Management Services, (ii) any other acts or omissions of the Management Company and its employees or (iii) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Management Company and/or its agents, employees and/or subcontractors (other than the Medical Group) during the Term. -86- SECTION 13. Termination. 13.1. Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any Federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter diligently prosecute such action to completion; provided, however, that the Management Company shall have only 10 days after written notice to cure a default arising as a result of its failure to pay the Monthly Draw pursuant to Section 5.3(a) or any other monetary obligation owed to the Medical Group hereunder, (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice, (d) the Management Company shall have been sanctioned in writing by the Health Care Finance Administration for any violation of the Social Security Act, the Health Care Quality Improvement Act or any similar Federal law in a final, -87- nonappealable proceeding and such sanction prevents the Management Company from fulfilling its obligations hereunder in accordance with all applicable law, or (e) in the event Naresh Nagpal, M.D., ceases to be and act on a full-time basis as the Chief Executive Officer of the Management Company at all times prior to the initial public offering of the common stock of the Management Company, provided that the Medical Group shall give the Management Company at least ninety (90) days prior written notice of its intention to terminate this Agreement pursuant to this Section 13.1(e). 13.2 Termination by Management Company. The Management Company may terminate this Agreement effective immediately by giving written notice of termination to the Medical Group (a) in the event of a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical Group shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Medical Group shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Medical Group by the Management Company or the Medical Group does not thereafter diligently prosecute such action to completion; provided, however, that the Medical Group shall have only 10 days after written notice to cure a default arising as a result of its failure to pay any monetary obligation owed to the Management Company hereunder, (c) in the event that any of the representations and warranties made by the Medical Group in Section 6 is untrue or misleading in any material respect, provided that the Management Company shall have previously given written notice to the Medical Group describing in reasonable detail the nature of the item in question and the Medical Group shall not have cured such matter within thirty (30) days of such notice, or (d) in the event the Medical Group is excluded from the Medicaid or Medicare program for any reason. -88- 13.3 Termination by Medical Group or Management Company. The Medical Group and the Management Company shall each have the right to terminate this Agreement effective immediately by giving written notice of termination to the other party pursuant to Section 29 of this Agreement. 13.4 Effect of Termination. (a) Upon the termination of this Agreement in accordance with the terms hereof, neither party hereto shall have any further obligation or liability to the other party hereunder, except as provided in Sections 3.15(c), 5.3(b) (as modified by Section 13.4(b) below), 13.5 and 28 hereof, and except to pay in full and satisfy any and all outstanding obligations of the parties accruing through the effective date of termination. (b) Upon the termination of this Agreement, the Annual Medical Group Compensation Amount described in Section 5.3(b) shall be calculated on or before the end of the fourth month following the termination date, rather than on or before April 30 as specified in Section 5.3(b), and the computation made under such Section shall be made with respect to the portion of the year ending on the termination date (if the termination date is other than December 31). In making such computation, all Collections during January, February, and March of such year shall be excluded, and all Collections during the three-month period following termination shall be included. All Collections during the three-month period following termination shall be credited to the Management Company in accordance with Section 3.19 and all Collections thereafter shall belong to the Medical Group. Any payment required under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days after the date by which the foregoing calculation is to be made, rather than on May 15. -89- 13.5. Repurchase of Assets. Promptly following termination of this Agreement for any reason, the Management Company shall sell, transfer, convey, and assign to the Medical Group, and the Medical Group shall purchase, assume, and accept from the Management Company, at such price and upon such terms as may be agreed upon by the parties -- or, if the parties are unable to agree, at fair market value, determined in the manner set forth below -- all of the following items which are used in connection with the professional practice and related activities of the Medical Group and which, in the case of items (a), (b), (c) and (d) below, are physically located in any of the offices of the Medical Group, subject to any required consent from any third party having an interest therein, but otherwise free and clear of any liens, claims or encumbrances; provided that any leased equipment or property shall be assigned to the Medical Group subject to the applicable lease agreement and any liens granted thereunder: (a) the Medical Equipment owned by the Management Company; (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Management Company; (c) the Management Company's rights and interests in any equipment leased by the Management Company, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; (d) the supplies owned by the Management Company; (e) the Management Company's rights and interests under all of the Office Leases, subject to the Medical Group's assumption of the obligations -90- accruing thereunder after the date of termination of this Agreement; and (f) the deposits of the Management Company relating to the Medical Group. Fair market value of the above described assets shall be determined by an independent appraiser mutually agreed upon by the Medical Group and the Management Company; provided, however, that if the Medical Group and the Management Company are unable to agree upon such an appraiser, each of the parties shall select an appraiser and the two appraisers thus selected shall select a third appraiser. All of the appraisers shall appraise the assets, and for purposes of determining the purchase price, the highest and lowest appraisals shall be disregarded, and the remaining appraisal shall be used. Notwithstanding anything contained herein to the contrary, the consideration payable by the Medical Group to the Management Company under this Section 13.5 shall be reduced by the aggregate amount, if any, payable by the Management Company to the Stockholders (as such term is defined in the Restricted Stock Agreements). SECTION 14. Rescission. 14.1 Rescission By Medical Group. (a) In the event that the Management Company has not consummated an initial public offering of its Common Stock under the Securities Act of 1933, as amended, by December 29, 1997, the Medical Group may, in its sole discretion at any time during the period beginning December 31, 1997 and ending February 28, 1998 (such period being referred to herein as the "Rescission Period"), rescind (the "Rescission Option") this Agreement and disengage itself from its obligations under this Agreement. The Medical Group may exercise its Rescission Option during the Rescission Period by giving 30 days' prior written notice (the "Rescission Notice") to the Management Company and by complying with the other provisions contained in this Section 14.1. The -91- effective date (the "Rescission Effective Date") of the rescission shall be the date of such Rescission Notice. (b) Effect of Rescission. In the event that the Medical Group exercises its Rescission Option pursuant to this Section 14.1, the procedures set forth in Section 13.4 of this Agreement shall apply. (c) Repurchase of Assets. Within 30 days following the Rescission Effective Date the Management Company shall, subject to the prior receipt of any required landlord and third party consents, transfer, convey and assign to the Medical Group, and the Medical Group shall assume and accept from the Management Company the property described in Section 13.5 hereof. (d) Repayment of Consideration. On or before the Rescission Effective Date, the Medical Group shall deliver to the Management Company the cash consideration received by the Medical Group from the Management Company pursuant to this Agreement and the Asset Purchase Agreement less the aggregate amount of the Management Fees paid to the Management Company hereunder; provided, however, that the portion of such consideration attributed to the A/R Amount (as defined in the Asset Purchase Agreement), as adjusted pursuant to Section 2.3 thereof, shall not be returned to the Management Company. (e) Stock of Management Company. The Medical Group shall cause each physician receiving capital stock of the Management Company as of the date hereof to, and each such physician shall, return and deliver to the Management Company the stock certificates representing shares of common stock of the Management Company issued to each such physician pursuant to a restricted stock agreement (each, a "Restricted Stock Agreement"), substantially in the form attached hereto as Exhibit C. In the event any portion of such shares shall have been previously transferred by any such physician, any transferee of such physician shall, and the physician shall cause such -92- transferee to, deliver the certificate(s) representing such shares to the Management Company. Certificates delivered pursuant to this Section 14.1(e) shall be duly endorsed for transfer to the Management Company. 14.2 Waiver of Rescission Option. Notwithstanding anything contained herein to the contrary, the parties hereto expressly agree and acknowledge that if the Medical Group shall fail to deliver the notice of rescission referenced in Section 14.1(a) hereof prior to the end of the Rescission Period, then the Medical Group shall be deemed to have expressly and irrevocably waived its right to rescind this Agreement and to disengage itself from its obligations hereunder. 14.3. Discontinuation of Management Fees The parties hereto acknowledge that in the event this Agreement is rescinded pursuant to the provisions of Article 14 hereof, the Management Company shall not be entitled to any Management Fees otherwise payable hereunder for Medical Services provided by the Medical Group from the date on which the Rescission Notice is delivered through and including the Rescission Effective Date. 14.4 Disengagement of Individual Member. (a) In the event that, during the Rescission Period, any Eligible Party terminates his affiliation with the Medical Group (such person being referred to herein as a "Disengaging Member"), such Disengaging Member shall return to the Management Group the stock certificate(s) issued to such Disengaging Member pursuant to a Restricted Stock Agreement, and the Management Company shall, upon notice from such Disengaging Member, return to the Disengaging Member the consideration paid by such Disengaging Member for the shares of common stock underlying such stock certificate(s). In the event that any -93- portion of such shares shall have been previously transferred by such Disengaging Member, any transferee of such Disengaging Member shall, and the Disengaging Member shall cause such transferee to, deliver the certificate(s) representing such shares to the Management Company. Certificates delivered pursuant to this Section 14.4(a) shall be duly endorsed for transfer to the Management Company. (b) Upon the rescission of this Agreement by a Disengaging Member pursuant to the provisions of this Section 14.4 such Disengaging Member and the Management Company shall have no further obligations or liabilities to the other except as set forth in Section 14.4(a) above. However, the disengagement by the Disengaging Member shall have no effect upon the continuing rights and obligations of the Medical Group vis-a-vis the Management Company under the terms of this Agreement. SECTION 15. Non-Disclosure of Confidential Information. 15.1. Non-Disclosure. (a) Neither the Management Company nor the Medical Group, nor their respective employees, stockholders, consultants or agents shall, at any time after the execution and delivery hereof, directly or indirectly disclose any Confidential or Proprietary Information relating to the other party hereto to any person, firm, corporation, association or other entity, nor shall either party, or their respective employees, stockholders, consultants or agents make use of any of such Confidential or Proprietary Information for its or their own purposes or for the benefit of any person, firm, corporation or other entity except the parties hereto or any subsidiary or affiliate thereof. The foregoing obligation shall not apply to any information which a party hereto can establish to have (a) become publicly known without breach of this Agreement by it or them, (b) to have been given to such party by a third party who is not obligated to maintain the confidentiality of such information, or (c) is -94- disclosed to a third party with the prior written consent of the other party hereto. Nothing contained herein shall be construed to prevent any party hereto from disclosing any Confidential or Proprietary Information of any other party to its professional advisers for purposes of evaluating, negotiating or otherwise assisting such party in connection with the transactions contemplated by this Agreement; provided that such party shall be liable to such other party for the disclosure by any of its professional advisers of such other party's Confidential or Proprietary Information, unless such information falls within one of the categories set forth in clauses (a), (b) or (c) of the preceding sentence. (b) For purposes of this Section 15, the term "Confidential or Proprietary Information" means all information known to a party hereto, or to any of its employees, stockholders, officers, directors or consultants, which relates to the Transaction Documents, patient medical and billing records, trade secrets, books and records, supplies, pricing and cost information, marketing plans, strategies and forecasts. Nothing contained herein shall prevent a party hereto from furnishing Confidential or Proprietary Information pursuant to a direct order of a court of competent jurisdiction. (c) In the event any physician, representative, agent, employee or employed professional of the Medical Group discloses to any person or entity the structure or terms of this transaction, such disclosure shall be deemed a default under this Agreement and the Management Company shall have the right, to be exercised in its sole discretion, to terminate this transaction immediately upon notice thereof to the Medical Group. In the event the Management Company terminates this Agreement pursuant to the preceding sentence, the terms and provisions of Sections 14.1(b) through (e) shall apply. -95- SECTION 16. Non-Competition. In consideration of the premises contained herein and the consideration to be received hereunder, and in consideration of and as an inducement to the Management Company to consummate the transactions contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition covenants attached hereto as Schedule VIII and (b) agrees to require each of the physicians receiving capital stock of the Management Company as of the date hereof, and each person who after the date hereof becomes entitled to receive stock (or options to receive stock) in the Management Company in connection with his or her performance of services for the Medical Group, to execute a Stockholder Non-Competition Agreement substantially in the form attached hereto as Exhibit D. SECTION 17. Obligations of the Management Company. 17.1. No Practice of Medicine. During the Term, the Management Company shall not provide or otherwise engage in services or activities which constitute the practice of medicine, as defined in applicable state or Federal law, except in compliance therewith. 17.2. No Interference with Professional Judgment. Without in any way limiting Section 17.1 hereof, during the Term, the Management Company shall not interfere with the exercise of professional judgment by any physician or other licensed health care professional who is a partner, employee, or contractor of the Medical Group, nor shall the Management Company interfere with, control, direct, or supervise any physician or other licensed health care professional in connection with the provision of Medical Services. The foregoing shall not preclude the Management Company from assisting in the development of professional protocols and monitoring compliance with policies -96- and procedures that have been instituted in accordance with this Agreement. 17.3 Physician Advisory Board. The Management Company is developing an advisory group (the "Physician Advisory Board") to be comprised of physicians practicing in the State of Florida. Upon the establishment of the Physician Advisory Board, which is anticipated to occur on or about October 1, 1997, and in accordance with the governing documents thereof, the Management Company shall, or shall cause the Physician Advisory Board to, appoint Martin Silverstein, M.D. to serve on the Physician Advisory Board. The terms of Dr. Silverstein's service on such board shall be set forth in an agreement between Dr. Silverstein and the Management Company, which shall provide, among other things, that Dr. Silverstein's appointment shall not be terminated other than by mutual agreement of the parties or upon termination of this Agreement. 17.4 Budgets. The Board of Directors of the Management Company shall establish budgets for the expenses of the Management Company, and the approval of the Board of Directors shall be required in connection with any expenses in excess of any such approved budget; provided, however, that following consummation of an initial public offering of the Company's Common Stock, the responsibility of the Board of Directors with respect to such budgets shall be exercised in accordance with the standards applicable to the conduct of business of public companies. 17.5 Stock Held by Certain Individuals or Entities. Naresh Nagpal, M.D. and each venture capital firm providing funds to the Management Company and executing this Agreement ("Selling Shareholders") shall give to the Eligible Parties the right to participate on a pro rata basis (based on -97- the number of shares, whether preferred or common, calculated on an as-converted basis, held by the Eligible Parties and by any other shareholders who hold the same rights that are conferred by this Section 17.5, including members of other physician groups) in any proposed sale of stock (whether preferred or common) in the Management Company from any of the Selling Shareholders to any unaffiliated third party or parties, and the Management Company shall require the Selling Shareholders to comply with the obligations set forth in this Section 17.5; provided, however, that the obligations under this Section 17.5 shall become null and void upon the consummation of an initial public offering of the Management Company's Common Stock. 17.6. Convertible Preferred Stock. The Management Company shall not sell any Common Stock or take any other action the effect of which sale or other action would be to give a holder of convertible preferred stock the right to convert any number of shares of convertible preferred stock into a greater number of shares of Common Stock; provided, however, that the obligations under this Section 17.6 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. SECTION 18. Bahamas Option. The Medical Group and the Management Company hereby agree that the medical practice (the "Bahamas Practice") being operated by the Medical Group as of the date hereof in the Bahamas is not subject to the terms and conditions set forth in this Agreement. Without limiting the generality of the foregoing, the Medical Group hereby grants the Management Company an option (the "Bahamas Option") to manage the Bahamas Practice, which Bahamas Option the Management Company may exercise by giving notice of its intention to so exercise to the Medical Group at any time during the period beginning on the first anniversary of the Commencement Date and ending on May 31, 1998. -98- In the event the Management Company exercises the Bahamas Option, it shall be deemed a part of the Medical Group for all purposes of this Agreement, and the Medical Group and the Management Company shall use their best efforts to agree, in a timely manner, on the additional consideration payable to the Medical Group and the additional fee payable to the Management Company in connection therewith. The Medical Group and the Management Company shall within 30 days following the giving of the notice required hereunder, execute and deliver an amendment to this Agreement, which amendment shall set forth the terms and conditions agreed upon pursuant to this Section 18. Failure of the parties to reach agreement as to the terms described above shall not constitute a default hereunder by either party. The Medical Group may, in its sole discretion at anytime prior to the Management Company's exercise of the Bahamas Option, cease the operation of its Bahamas Practice; provided that if the Medical Group or any of the physician owners of the Medical Group reinitiate the operations of an orthopedic practice in the Bahamas within 180 days after the Bahamas Practice is closed, the Medical Group or such physician owners shall grant the Management Company an option to enter into a management services agreement substantially similar to this agreement for the provision of management services to such practice. SECTION 19 Assignment. The Management Company shall have the right to assign its rights and delegate its obligations hereunder to any affiliate and to assign its rights hereunder to any lending institution from which the Management Company or any affiliate obtains financing for security purposes or as collateral. Except as set forth in the preceding sentence, neither the Management Company nor the Medical Group shall have the right to assign their respective rights and delegate their respective obligations hereunder without the prior written consent of the other party; provided, however, that after the consummation of an initial -99- public offering of the Management Company's common stock, the Medical Group's consent shall not be required in connection with any assignment by the Management Company arising out of or in connection with a sale of all or substantially all of the stock or assets of the Management Company or the merger, consolidation, or reorganization of the Management Company. SECTION 20. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed sufficient if personally delivered, telecopied (with original sent by mail), sent by nationally-recognized overnight courier, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: If to the Management Company: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Telecopier: (561) 391-1389; with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Jeffrey S. Held, Esq. Telecopier: (212) 408-2420; and If to the Medical Group: Lauderdale Orthopaedic Surgeons 1212 East Broward Boulevard Fort Lauderdale, Florida 33301 Attention: Martin Silverstein, M.D. Telecopier: (954) 761-9625; -100- with a copy to: Ritter & Chusid 7000 West Palmetto Park Road Suite 400 Boca Raton, Florida 33433 Attention: Gregory J. Ritter, Esq. Telecopier: (561) 394-2582; or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery and telecopier, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, and (c) in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 21. Benefits of Agreement. This Agreement shall bind and inure to the benefit of any successors to or permitted assigns of the Management Company and the Medical Group. SECTION Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement may lie in any Federal or state court located in Broward County, Florida or the Southern District of Florida. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the nonexclusive jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in -101- such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. SECTION 23. Headings. Section headings are used for convenience only and shall in no way affect the construction of this Agreement. SECTION 24. Entire Agreement; Amendments. This Agreement and the exhibits and schedules hereto contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by all of the parties against whom enforcement is sought. SECTION 25. Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all reasonable costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. SECTION 26. Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. -102- SECTION 27. Waivers. Any party to this Agreement may, by written notice to the other party, waive any provision of this Agreement. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 28. Survival of Termination. Notwithstanding anything contained herein to the contrary, Sections 3.3(f), 3.6, 3.19, 11, 12, 13.4, 13.5, 14, 15, 16, 20, 21, 22, 24, 25 and this Section 28 shall survive any expiration or termination of this Agreement. SECTION 29. Contract Modification for Prospective Legal Events. In the event any state or Federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that the structure of this Agreement may be in violation of such laws or regulations, the Medical Group and the Management Company shall amend this Agreement as necessary to avoid such violation. To the maximum extent possible, any such amendment shall preserve the underlying economic and financial arrangements between the Medical Group and the Management Company. If an amendment is not possible, either party shall have the right to terminate this Agreement. Any dispute between the parties hereto arising under this Section 29 with respect to whether this Agreement violates any state or Federal laws or regulations shall be jointly submitted by the parties and finally settled by binding arbitration in Florida, pursuant to the arbitration rules of the National Health Lawyers Association Alternative Dispute Resolution Service. Arbitration shall take place before one arbitrator appointed in accordance with such rules. The governing law of the arbitration shall be the law set forth in -103- Section 22. Any decision rendered by the arbitrator shall clearly set forth the factual and legal basis for such decision. The decision rendered by the arbitrator shall be non-appealable and enforceable in any court having jurisdiction thereof. The administrative costs of the arbitration and the arbitrator fees shall be equally borne by the parties. Each party shall pay its own legal costs and fees in connection with such arbitration. * * * * * -104- IN WITNESS WHEREOF, the parties have duly executed this Management Services Agreement as of the date first above written. LAUDERDALE ORTHOPAEDIC SURGEONS By: ------------------------------ Name: Title: BONE, MUSCLE AND JOINT, INC. By: ------------------------------ Naresh Nagpal, M.D. President and Chief Executive Officer Acknowledged and Agreed to (as to Sections 4, 9.7, 9.11, 14.1, 14.2, 14.3, 14.4, 15 and 16): - ------------------------------ Martin Silverstein, M.D. - ------------------------------ Raul Aparicio, M.D. - ------------------------------ Michael Ruddy, M.D. - ------------------------------ Michael Weiss, D.O. Acknowledged and Agreed to (as to Sections 14.1(e), 15 and 16): - ------------------------------ Verano M. Hermida - ------------------------------ Paul M. Greenman Acknowledged and Agreed to (as to Sections 9.7, 14.1, 14.2, and 14.3) - ------------------------------ Verona M. Hermida, M.D. - ------------------------------ Paul M. Greenman, D.P.M. Acknowledged and Agreed to (as to Section 17.5): - ------------------------------ Naresh Nagpal, M.D. OAK INVESTMENT PARTNERS VI, L.P. By: Oak Associates VI, L.P. its General Partner By: --------------------------- Ann H. Lamont General Partner OAK VI AFFILIATES FUND, L.P. By: Oak VI Affiliates, LLC its General Partner By: --------------------------- Ann H. Lamont Managing Member DELPHI VENTURES III, L.P. By: Delphi Management Partners, LLC its General Partner By: --------------------------- Donald J. Lothrop Managing Member DELPHI BIOINVESTMENTS III, L.P. By: Delphi Management Partners, LLC its General Partner By: --------------------------- Donald J. Lothrop Managing Member EXECUTION COPY AMENDMENT NO. 1 TO THE MANAGEMENT SERVICES AGREEMENT dated as of September 4, 1997, between LAUDERDALE ORTHOPAEDIC SURGEONS, a Florida partnership (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"). Reference is made to the Management Services Agreement effective as of April 1, 1997 (the "Management Services Agreement"), between the Medical Group and the Management Company, pursuant to which the Management Company has agreed to provide the Medical Group with certain management, administrative and other related services in connection with the Medical Business (as defined in the Management Services Agreement). The parties hereto desire to amend the Management Services Agreement in accordance with the terms hereinafter set forth. NOW, THEREFORE, in consideration for the mutual agreements contained in this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Medical Group and the Management Company hereby agree as follows: SECTION 1. All capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. SECTION 2. Section 13.1 of the Management Services Agreement is hereby amended by (i) inserting at the end of clause (b) thereof "; provided further, however, that if the Medical Group intends to terminate this Agreement due to the Management Company's default under Section 17.7, the Medical Group must so notify the Management Company by February 28, 1998 in order for such termination to be effective", (ii) inserting "or" immediately before clause (d) thereof, (iii) deleting ", or" at the end of clause (d) and (iv) deleting clause (e) therefrom. SECTION 3. Section 13.4(a) of the Management Services Agreement is hereby amended by adding at the end thereof "; provided that in the event this Agreement is terminated by the Medical Group as a result of the Management Company's breach of its covenant in Section 17.7 hereof, those provisions set forth in Section 13.6 shall also apply." SECTION 4. Section 13 of the Management Services Agreement is hereby amended by adding at the end thereof a new Section 13.6 to read in its entirety as follows: "13.6. Effect of Termination Resulting from Failure to Publicly Report. In the event that the Medical Group terminates this Agreement due to the Management Company's breach of its covenant set forth in Section 17.7 hereof, the Medical Group shall deliver to the Management Company an amount equal to $394,500. The Medical Group shall also cause each physician affiliated with the Medical Group who received shares of capital stock of the Management Company in connection with the execution and delivery of this Agreement to, and each such physician shall, return and deliver to the Management Company the certificates representing all of such shares of capital stock. Certificates delivered pursuant to this Section 13.6 shall be duly endorsed for transfer to the Management Company." SECTION 5. Section 14 of the Management Services Agreement is hereby amended and restated in its entirety to read as follows: "Section 14. [Intentionally Omitted]" SECTION 6. Section 17 of the Management Services Agreement is hereby amended by adding a new Section 17.7 thereto, to read in its entirety as follows: "17.7 Covenant to Develop a Public Company. The Management Company shall use its best efforts to cause the Management Company to become a public reporting company under the Securities Exchange Act of 1934, as amended, by December 29, 1997. To the best knowledge of the Management Company, there are no facts or circumstances which (a) would prevent the Management Company from becoming a public reporting company within such time period or (b) are inconsistent with the Management Company's fulfillment of the foregoing covenant." SECTION 7. Section 28 is hereby amended by inserting ", 30" on the third line thereof after "25". SECTION 8. The Management Services Agreement is hereby amended by adding a new Section 30, to read in its entirety as follows: "Section 30. Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which -107- enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction." SECTION 9. Except as expressly provided in this Amendment No. 1, the Management Services Agreement remains in full force and effect in accordance with its terms. SECTION 10. This Amendment No. 1 may be executed in more than one counterparts, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. SECTION 11. This Amendment No. 1 shall by governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 1 to the Management Services Agreement as of the date first above written. LAUDERDALE ORTHOPAEDIC SURGEONS By: ------------------------------ Name: Title: BONE, MUSCLE AND JOINT, INC. By: ------------------------------ Name: Title: EX-10.35 9 RESTRICTED STOCK AGREEMENT EXECUTION COPY RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of May 6, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and the individual identified on the signature page hereto (the "Stockholder"), with reference to the following facts. Certain capitalized terms used herein are defined in Section 6 below. A. This Agreement is entered into in connection with and concurrently with that certain Management Services Agreement dated as of the date hereof (the "Management Services Agreement") between the Company and Lauderdale Orthopaedic Surgeons (the "Medical Group"). B. This Agreement is being entered into concurrently with substantially identical Restricted Stock Agreements between the Company and the other partners in or employees of the Medical Group identified on Schedule A attached hereto (such individuals and their Permitted Transferees are referred to herein collectively as the "Stockholders"). NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Purchase and Sale of Restricted Shares; Representations and Warranties of Stockholder. (a) Upon execution of this Agreement, the Company shall, pursuant to Section 4 and Schedule III of the Management Services Agreement, issue to the Stockholder that number of shares (such shares together with those shares hereafter acquired pursuant to the terms hereof, are referred to herein as the "Restricted Shares") of common stock, $.001 par value (the "Common Stock"), of the Company set forth opposite the Stockholder's name on Schedule A attached hereto. The aggregate shares of Common Stock issued to the Stockholders are referred to collectively herein as "Restricted Stock." Simultaneously with the execution and delivery hereof, the Company is delivering to the Stockholder the certificate(s) representing the Restricted Shares against receipt by the Company of the consideration therefor as set forth opposite the Stockholder's name on Schedule A attached hereto. (b) In connection with the issuance of the Restricted Shares hereunder, the Stockholder represents and warrants to the Company that: (i) the Restricted Shares to be issued to the Stockholder pursuant to this Agreement shall be acquired for the Stockholder's own account, for investment only and not with a view to, or intention of, distribution thereof in violation of the 1933 Act, or any applicable state securities laws, and the Restricted Shares will not be disposed of in contravention of the 1933 Act or any applicable state securities laws; (ii) the Stockholder has generally such knowledge and experience in business and financial matters and with respect to investments in securities of privately held companies so as to enable the Stockholder to understand and evaluate the risks and benefits of his or her investment in the Restricted Shares; (iii) the Stockholder has no need for liquidity in his or her investment in the Restricted Shares and is able to bear the economic risk of his or her investment in the Restricted Shares for an indefinite period of time and understands that the Restricted Shares have not been registered or qualified under the 1933 Act or any applicable state securities laws, by reason of the issuance of the Restricted Shares in a transaction exempt from the registration and qualification requirements of the 1933 Act or such state securities laws and, therefore, cannot be sold unless subsequently registered or qualified under the 1933 Act or such state securities laws or an exemption from such registration or qualification is available; (iv) the Stockholder understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Stockholder) promulgated under the 1933 Act, depends on satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts; (v) the Stockholder is an individual (A) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000 or (B) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and the full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year; or the Stockholder otherwise meets the requirements to be considered an accredited investor, as defined under the 1933 Act; and (vi) the Stockholder has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Restricted Shares and has had full access to or been provided with such other -2- information concerning the Company as he or she has requested. (c) This Agreement constitutes the legal, valid and binding obligation of the Stockholder, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Stockholder does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Stockholder is a party or any judgment, order or decree to which the Stockholder is subject. (d) As an inducement to the Company to issue the Restricted Shares to the Stockholder and as a condition thereto, the Stockholder acknowledges and agrees that: (i) neither the issuance of the Restricted Shares to the Stockholder nor any provision contained herein shall affect the right of the Company to terminate the Management Services Agreement in accordance with its terms; and (ii) the Company shall provide the Stockholder with substantially the same information regarding the Company that the Company regularly discloses to its other shareholders. 2. Vesting of the Restricted Shares. (a) Except as otherwise provided in Section 2(b) below, the Restricted Shares shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in Section 2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently disabled, and (iv) the Stockholder has not died: Anniversary Date Cumulative Percentage of of this Agreement Restricted Shares Vested ----------------- ------------------------ First 25% Second 50% Third 75% Fourth 100% For purposes of this Agreement, "Anniversary Date of this Agreement" means April 1 of each year after 1997. Restricted Shares which have become vested are referred to herein as "Vested Shares" and all other Restricted Shares are referred to herein as "Unvested Shares." -3- (b) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with Section 2(a) above, the number of Unvested Shares, if any, that would have become Vested Shares during the 18-month period immediately following the date of death had such death not occurred shall be deemed Vested Shares as of the date of death. (c) For purposes of this Agreement, "Cessation of Active Practice" means a physician Stockholder's failure (other than by reason of death), throughout any twelve-month period ending on the day before any of the vesting dates described in Section 2(a) hereof, to engage in the practice of medicine with the Medical Group on a regular basis, including the performance of orthopedic surgical procedures on a regular basis (except in the case of any Stockholder who did not practice surgery on a regular basis immediately prior to the date hereof), such that (i) the Stockholder was engaged in patient care activities for less than seventy-five percent (75%) of the time that the Stockholder had been engaged in such activities during the twelve-month period immediately preceding the date hereof, and (ii) the Stockholder generated billings that were less than seventy-five percent (75%) of the amount of billings generated by the Stockholder during the twelve-month period immediately preceding the date hereof. 3. Repurchase of Restricted Shares. (a) In the event of the termination of the Management Services Agreement pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth anniversary of the date hereof, the Company shall have the right (but not the obligation) (the "Repurchase Option"), to be exercised in its sole discretion, to repurchase all or any portion of the Restricted Shares (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's Permitted Transferees) pursuant to the terms and conditions set forth in this Section 3. (b) The Company may elect to repurchase all or any portion of the Restricted Shares by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that if the Company elects to repurchase less than all of the Restricted Shares, the Company shall first repurchase Unvested Shares and then repurchase that number of Vested Shares, if any, as the Company may, in its sole discretion, elect. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be repurchased, the aggregate consideration to be paid for such shares, and the time and place for the closing of the transaction. The purchase price payable for each Unvested Share shall equal the Original Value of such share and the purchase price payable for each Vested Share shall equal the Fair Market -4- Value of such share. If the Company decides to repurchase Restricted Shares from any Stockholder pursuant to this Section 3(b), then the Company must purchase that number of Restricted Shares which it has elected to repurchase from all of the Stockholders pro rata according to the number of shares of Restricted Stock held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest whole share). (c) The closing of the repurchase of Restricted Shares pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the delivery of the Repurchase Notice. The Company shall pay for the Restricted Shares to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the repurchase price for such shares; provided, however, that in the event the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to Section 13.5 or 14.1 of the Management Services Agreement, the total amount of such sums may be offset by the Company against any amounts owed by the Company to the Stockholder pursuant to this Agreement (if such Stockholder is, at such time, an equity owner of or partner in the Medical Group), such offset amount to be allocated pro rata among all of the Stockholders who at such time hold equity of or are partners in the Medical Group. The Company's payment under this Section 3(c) shall be subject to the terms and provisions of any financing agreement, if any, to which the Company is a party, its certificate of incorporation and the operation of law. The Company shall be entitled to require the signature of the Stockholder to be guaranteed and to receive representations and warranties from the Stockholder regarding (i) the Stockholder's power, authority and legal capacity to enter into such sale and to transfer valid right, title and interest in such Restricted Shares, (i i) the Stockholder's ownership of such Restricted Shares and the absence of any liens, pledges, and other encumbrances on such Restricted Shares and (iii) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (d) In the event of the Cessation of Active Practice, the death or permanent disability of the Stockholder, the Company shall repurchase all of the Unvested Shares of the Stockholder pursuant to the following terms. The repurchase price for each Unvested Share shall be equal to the Original Value of such share, and such repurchase price shall be paid in full in cash not later than sixty (60) days after the date of Cessation of Active Practice, death or permanent disability of the Stockholder. For purposes of this Section 3(d), if the Stockholder is insured under a disability insurance policy, the -5- determination under such policy as to whether the Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto for purposes of this Section 3(d). If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (e) In the event that the Stockholder is required, prior to the consummation of an initial public offering of the Company's Common Stock pursuant to the 1933 Act or prior to the second anniversary of the date hereof, whichever is later, to pay any state or Federal taxes in connection with the receipt of the Restricted Shares hereunder, the Stockholder shall have the right to sell to the Company, and the Company shall be obligated to purchase from the Stockholder, for the purchase price determined in accordance with this Section 3, such number of shares of Vested Stock as the Stockholder may tender to the Company, provided that the purchase price therefor shall not exceed the total amount of the Stockholder's tax liability incurred in connection with the receipt of such stock. In the event that the Stockholder desires to exercise the right conferred under this Section 3(e), the Stockholder shall give notice to the Company not earlier than forty-five (45) days prior to, nor later than forty-five (45) days after, the date on which such taxes are due and payable, and the Stockholder shall furnish to the Company reasonable documentation prepared by the Stockholder's certified public accountant establishing the amo unt of such tax liability. (f) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Shares by the Company shall be subject to applicable restrictions, if any, contained in Federal law or in the Delaware General Corporation Law and, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Shares hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under the applicable Federal law or the Delaware General Corporation Law. (g) In the event that any Restricted Shares are repurchased pursuant to this Section 3 (other than pursuant to Section 3(e)), the Stockholder and his or her successors and assigns shall, at the Company's expense, take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner. -6- 4. Transfer Restriction; Legend. Except as otherwise expressly provided in Section 3 and except for Permitted Transfers, the Stockholder may not sell or transfer or agree to sell or transfer ("Sale" or "Sell") any Restricted Shares unless such Sale shall be in accordance with the procedures set forth in this Section 4; provided, however, that with respect to this Section 4, Restricted Shares, at any point in time, shall be limited to Vested Shares and at no time shall the Stockholder have the right to Sell Unvested Shares (except as provided in Sections 3(b) and 3(d) hereof): (a) In the event that the Stockholder receives a bona fide offer from a third party (the "Prospective Stockholder") to purchase all or any part of the Restricted Shares owned by the Stockholder, the Stockholder shall deliver to the Company a written notice (the "Offer Notice"), which shall be irrevocable for a period of fifteen (15) business days after delivery thereof (the "Offer Period"), offering (the "Offer") all of the Restricted Shares proposed to be Sold by the Stockholder to the Prospective Stockholder at the purchase price and on the terms of the proposed Sale to the Prospective Stockholder (such Offer Notice shall include the foregoing information, a copy of the Prospective Stockholder's bona fide offer and all other relevant terms of the proposed Sale, including the identification of the Prospective Stockholder). The Company shall have the right and option, for a period of fifteen (15) business days after delivery of the Offer Notice, to repurchase all of the Restricted Shares so offered at the purchase price and on the terms stated in the Offer Notice. Such acceptance shall be made by delivering a written notice to the Stockholder within said fifteen (15) business-day period. (b) Sales of Restricted Shares under the terms of Section 4(a) above shall be made on a mutually satisfactory business day within fifteen (15) business days after the expiration of the Offer Period. Delivery of certificates or other instruments evidencing such Restricted Shares duly endorsed for transfer shall be made on such date against payment of the purchase price therefor. (c) If the Company fails to purchase all of the Restricted Shares offered for Sale pursuant to the Offer Notice, then at any time within sixty (60) business days after the expiration of the Offer Period the Stockholder may Sell all or any part of the remaining Restricted Shares so offered for Sale on terms no more favorable to the Prospective Stockholder than the terms stated in the Offer Notice; provided, however, that the Stockholder shall not, under any circumstances, Sell any Restricted Shares to the Prospective Stockholder if the Board of Directors of the Company, in its sole discretion, determines in good faith that the Prospective Stockholder is a competitor, or an Affiliate of a competitor, of the Company or that such -7- Prospective Stockholder's ownership of such Restricted Shares would be contrary to the best interests of the Company. In the event that all of such Restricted Shares are not Sold by the Stockholder to the Prospective Stockholder during such period, the right of the Stockholder to Sell such Restricted Shares to the Prospective Stockholder shall expire and the obligations of the Stockholder pursuant to this Section 4 shall be reinstated. (d) Any Permitted Transferee (other than the Company and any transferee pursuant to Section 17.5 of the Management Services Agreement), shall, as a condition to such transfer, (i) agree to be bound by all of the provisions of this Agreement applicable to the Stockholder and shall evidence such agreement by executing and delivering to the Company a joinder to this Agreement in form and substance satisfactory to the Company, and (ii) if such transferee is a partner in or an equity owner of the Medical Group, execute a noncompetition agreement in form and substance satisfactory to the Company (if such transferee is not, as of the date of such transfer, a party to such an agreement with the Company). (e) The certificate(s) representing the Restricted Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UN DER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS, TRANSFER RESTRICTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT DATED AS OF MAY 6, 1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." (f) The restrictions on transfers of Vested Shares set forth in this Section 4 shall expire, and shall be of no further force or effect, upon the consummation of initial public offering of the Company's Common Stock pursuant to the 1933 Act. 5. Registration Rights. (a) Piggyback Registration. If the Company, at any time after that date which is six months after the consummation of the initial public offering of the Common Stock, proposes for any reason to register Primary Shares or Other Shares under the Securities Act (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto), it -8- shall promptly give written notice to the Stockholders of its intention so to register the Primary Shares or Other Shares and, upon the written request, given within 15 days after delivery of any such notice by the Company, of any Stockholder to include in such registration Registrable Shares held by such Stockholder (which request shall specify the number of Registrable Shares proposed to be included in such registration), the Company shall use its best efforts to cause all such Registrable Shares to be included in such registration on the same terms and conditions as the securities otherwise being sold in such registration; provided, however, that if the managing underwriter advises the Company that the inclusion of all Registrable Shares requested by the Stockholders to be included in such registration, together with the inclusion of all Other Shares, would interfere with the successful marketing (including pricing) of Primary Shares proposed to be registered by the Company, then the number of Primary Shares, Registrable Shares and Other Shares proposed to be included in such registration shall be included in the following order: (i)first, the Primary Shares; (ii) second, the Venture Capital Shares requested to be included in such registration by the Venture Capitalists (pro rata based on the number of Venture Capital Shares held by all Venture Capitalists requesting inclusion of Venture Capital Shares in such registration) ; (iii) third, the Other Shares in such proportion as shall be determined by the Company; and (iv) fourth, the Registrable Shares requested to be included in such registration by the Stockholders (pro rata based on the number of Registrable Shares held by all Stockholders requesting inclusion of Registrable Shares in such registration). (b) Condition to Registration Obligations. The Corporation shall not be obligated to effect the registration of the Registrable Shares pursuant to Section 5(a) above unless the Stockholder executes a power of attorney, custody arrangement and other documents customary in such transactions and reasonably required by the managing underwriter thereof prior to the filing of the registration statement. (c) Holdback Agreement. If the Company at any time shall register shares of Common Stock under the Securities Act (including any registration pursuant to Section 5(a) above) for sale to the public, the Stockholder shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Restricted Shares (other than those shares of Common Stock included in such registration pursuant to Section 5(a) above) without the prior written -9- consent of the Company for a period designated by the Company in writing to the holders of Registrable Shares, which period shall not begin more than 10 days prior to the effectiveness of the registration statement pursuant to which such public offering shall be made and shall not last more than 180 days after the effective date of such registration statement. (d) Indemnification. In connection with any registration of Registrable Shares under the Securities Act pursuant to this Agreement, the Stockholder shall indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall sign such registration statement, each underwriter, broker or other person acting on behalf of the holders of Registrable Shares and each person who controls any of the foregoing persons within the meaning of the Securities Act with respect to any statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or such underwriter through an instrument duly executed by such ho lder of Registrable Shares specifically for use in connection with the preparation of such registration statement, preliminary prospectus, final prospectus, amendment, supplement or document. (e) Information by Stockholder. In the event the Stockholder elects to sell Registrable Shares pursuant to Section 5(a) above, the Stockholder shall furnish to the Company such written information regarding the Stockholder and the distribution proposed by the Stockholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 5. 6. Definitions. (a) "Affiliate" means, with respect to any Person, (a) any director, officer or partner of such Person and (b) any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (b) "Fair Market Value" of each share of Restricted Stock means the average of the closing prices of the sales of the Common Stock on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales -10- on any such exchange on any given day, the average of the last bid and asked prices on all such exchanges at the end of such day, or, if on any given day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq Stock Market National Market System ("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common Stock is not quoted in Nasdaq, the average of the bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the Fair Market Value is being determined and the 20 consecutive trading days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair Market Value shall be that value jointly determined by the Stockholder and the Company, provided that if they cannot so agree, such value shall be determined by a mutually acceptable investment banking or other qua lified firm of national or regional reputation, retained jointly by the Company and the Medical Group, and all fees, expenses and other charges of such firm incurred in connection with such determination of Fair Market Value shall be borne and shared equally by the Company and the Medical Group. In the event that the parties are unable to agree upon such an investment banking or other qualified firm within ten (10) days after the date on which either party may initially propose such a firm, a qualified firm shall be selected in the following manner: First, the Stockholder shall send a list of four such firms, arranged in order of the Stockholder's preference, by written notice to the Company within seven (7) days after the expiration of the above referenced 10-day period. If the Stockholder does not furnish such list to the Company within the required time period, the Company may, within seven (7) days following expiration of the initial seven-day period, submit a list of four such firms to the Stockholder. Second, the Company (or the Stockholder, as applicable) shall select, within seven (7) days after receipt of the above-referenced list, one of the firms identified on such list and shall give written notice thereof to the other party. If the recipient of such list does not make any such selection, the firm identified as the first choice on such list shall be deemed acceptable and agreeable to each of the parties. (c) "Internal Revenue Code" means the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. (d) "Original Value" of each share of Restricted Stock purchased hereunder will be equal to $0.001 (as -11- proportionately adjusted for all subsequent stock splits, stock dividends and other recapitalizations). (e) "Other Shares" means at any time those shares of Common Stock that do not constitute Primary Shares or Registrable Shares. (f) "Person" shall be construed broadly and shall include, without limitation, an individual, a partnership, an investment fund, a limited liability corporation or partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. (g) "Permitted Transferee" means, as to the Stockholder, any transferee who acquires the Restricted Shares pursuant to a Permitted Transfer or any other transfer made in accordance with the provisions of this Agreement. (h) "Permitted Transfer" means, as to the Stockholder, (i) any sale or transfer of Vested Shares to (A) the spouse or lineal descendants of such Stockholder or (B) a trust for the benefit of any of the foregoing and (ii) any sale or transfer of Vested Shares or Unvested Shares to any other Stockholder, or any physician who, as of the date of such transfer, is a partner of or equity owner in the Medical Group. (i) "Primary Shares" means at any time the authorized but unissued shares of Common Stock or shares of Common Stock held by the Company in its treasury. (j) "Public Sale" means any sale of Restricted Stock to the public pursuant to an offering registered under the 1933 Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the 1933 Act. (k) "Registrable Shares" means the shares of Common Stock or any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock and any securities received in respect thereof, which are held by the Stockholders and which have not theretofore been sold to the public pursuant to a registration statement under the Securities Act or pursuant to Rule 144; provided that, unvested shares shall not under any circumstance be Registrable Shares. (l) "Restricted Shares" has the meaning set forth in Section 1(a). The Restricted Shares will continue to be Restricted Shares in the hands of any holder other than the Stockholder (except for the Company and except for transferees in a Public Sale), and except as otherwise provided herein, each such other holder of the Restricted Shares will succeed to all -12- rights and obligations attributable to the Stockholder as the holder of the Restricted Shares hereunder. The Restricted Shares will also include shares of the Company's capital stock issued with respect to the Restricted Stock by way of a stock split, stock dividend or other recapitalization. (m) "Venture Capitalists" means Naresh Nagpal and those venture capital firms that have acquired, prior to the date hereof, and may acquire, at any time hereafter, securities of the Company and in connection with such acquisition have obtained or may obtain registration rights. (n) "Venture Capital Shares" means the shares of Common Stock or any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock and any securities received in respect thereof, which are held by a Venture Capitalist and which have not theretofore been sold to the public pursuant to a registration statement under the Securities Act or pursuant to Rule 144. (o) "1933 Act" means the Securities Act of 1933, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. 7. Indemnification. (a) The Company shall indemnify, defend and hold harmless the Stockholder against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Company contained in this Agreement. (b) The Stockholder shall indemnify and hold harmless the Company against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Stockholder contained in this Agreement. 8. General Provisions. (a) Transfers in Violation of Agreement. Any sale, transfer, assignment or other disposition (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) (each, a "Transfer") or attempted Transfer of any Restricted Shares in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported -13- transferee of such Restricted Shares as the owner of such stock for any purpose. (b) Binding Effect of Management Services Agreement. The Stockholder hereby agrees to be bound by the provisions of Sections 9.11 and 14 of the Management Services Agreement, which provisions such Stockholder has reviewed. (c) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (d) Entire Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (e) Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. (f) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Stockholder, the Company and their respective successors, permitted assigns, heirs, representatives and estate, as the case may be (including subsequent holders of Restricted Stock); provided, however, that the rights and obligations of the Stockholder under this Agreement shall not be assignable except in connection with a Permitted Transfer of Restricted Shares hereunder and; provided further, however, that the rights of the Stockholder set forth in Section 5 hereof may not be assigned to any transferee. -14- (g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without giving effect to any choice of law or conflicting provision or rule (whether of the State of Florida, or any other jurisdiction), that would cause the laws of any jurisdiction other than the State of Florida to be applied. In furtherance of the foregoing, the internal law of the State of Florida will control the interpretation and construction of this agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. (h) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any Florida state court or Federal court of the United States of America sitting in the State of Florida, and any appellate court thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such Florida state court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. (ii) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any Florida state or Federal court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (i) Remedies. Each of the parties to this Agreement shall be entitled to enforce its rights under this Agreement specifically to recover damages and costs (including reasonable attorneys' fees) for any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for the Company in the event of a breach of the provisions of this Agreement by the Stockholder and that the Company may, in its sole discretion, -15- apply to any court of law or equity of competent jurisdiction for specific performance and/or other injunctive relief (without posting any bond or deposit) in order to enforce or prevent any violations of the provisions of this Agreement. (j) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and the Stockholder and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall be construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Agreement or any provision hereof; provided, however, that the Company may amend, without the Stockholder's consent, Schedule A hereto upon consummation of a Permitted Transfer of shares hereunder to reflect the then current ownership of the Restricted Stock. (k) Notices. Any notice provided for in this Agreement must be in writing and must be either personally delivered, transmitted via telecopier, mailed by first class mail (postage prepaid and return receipt requested) or sent by nationally-recognized overnight courier service (charges prepaid) to the recipient at the address below indicated or at such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder and received when delivered personally, when received if transmitted via telecopier, five days a fter deposit in the U.S. mail and one business day after deposit with a nationally-recognized overnight courier service. (i) If to the Company, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Telephone: (561) 391-1311 Telecopier: (561) 391-1389; with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza, 41st Floor New York, New York 10112 Attention: Jeffrey S. Held, Esq. Telephone: (212) 408-2417 Telecopier: (212) 408-2420; and -16- (ii) If to the Stockholder, to: Martin B. Silverstein, M.D. 1621 SE 8th Street Fort Lauderdale, Florida 33316; with copies to: Lauderdale Orthopaedic Surgeons 1212 East Broward Boulevard Fort Lauderdale, Florida 33301 Attention: Martin Silverstein, M.D. Telephone: (954) 462-1526 Telecopier: (954) 761-9625; and Moore & Menkhaus, P.A. 4800 N. Federal Highway, Suite 210A Boca Raton, Florida 33431 Attention: David Menkhaus, Esq. Telephone: (561) 394-7910 Telecopier: (561) 393-6541. (l) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the State of Florida, the time period for giving notice or taking action shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (m) Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. (n) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (o) Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which i t relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (p) Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the -17- singular form of nouns and pronouns shall include the plural and vice-versa. * * * * -18- IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement effective as of the date first written above. COMPANY ------- BONE, MUSCLE AND JOINT, INC. By:__________________________ Name: Title: STOCKHOLDER ----------- ----------------------------- Martin B. Silverstein, M.D. MEDICAL GROUP - ------------- ACCEPTED AND AGREED AS TO PARAGRAPHS 3(d)(iv), and 6(b) LAUDERDALE ORTHOPAEDIC SURGEONS By:_________________________ Name: Title: IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement effective as of the date first written above. COMPANY ------- BONE, MUSCLE AND JOINT, INC. By:__________________________ Name: Title: STOCKHOLDER ----------- ----------------------------- MEDICAL GROUP - ------------- ACCEPTED AND AGREED AS TO PARAGRAPHS 3(d)(iv), and 6(b) LAUDERDALE ORTHOPAEDIC SURGEONS By:_________________________ Name: Title: EXECUTION COPY -------------- AMENDMENT NO. 1 TO THE RESTRICTED STOCK AGREEMENT dated as of September 4, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and the individual identified on the signature page hereof (the "Stockholder"). Reference is made to the Restricted Stock Agreement entered into as of May 6, 1997 (the "Restricted Stock Agreement"), pursuant to which the Stockholder acquired shares (the "Restricted Shares") of the common stock of the Company, par value $0.001 per share (the "Common Stock"). The parties hereto desire to amend certain of the provisions of the Restricted Stock Agreement relating to the vesting of the Restricted Shares and the transferability thereof. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. All capitalized terms used but not defined herein have the meanings ascribed in the Restricted Stock Agreement. Section 2. to the Restricted Stock Agreement is hereby amended in its entirety, to read as follows: "2. Vesting of the Restricted Shares. (a) Except as otherwise provided in Section 2(b) below, the Restricted Shares shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in paragraph 2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently disabled (as described in Section 3(a)(iii) below), and (iv) the Stockholder has not died: Anniversary Date Percentage of of this Agreement Restricted Stock Vested ----------------- ----------------------- First 25% Second 25% Third 25% Fourth 25% For purposes of this Agreement, "Anniversary Date of this Agreement" means April 1 of each year after 1997. Restricted Shares which have become vested are referred to herein as "Vested Shares" and all other Restricted Shares are referred to herein as "Unvested Shares." (b) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with paragraph 2(a) above, the number of Unvested Shares, if any, that would have become Vested Shares during the 18-month period immediately following the date of death had such death not occurred shall be deemed Vested Shares as of the date of death. (c) For purposes of this Agreement, "Cessation of Active Practice" means the Stockholder's resignation from or termination of employment with the Medical Group (other than by reason of death or permanent disability)." Section 3. to the Restricted Stock Agreement is hereby amended in its entirety, to read as follows: "3. Forfeiture and Repurchase of Restricted Shares. (a) In the event of the Cessation of Active Practice by or the death or permanent disability of the Stockholder (the "Forfeiture Event"), the following provisions shall apply. (i) The Stockholder or the estate (in the case of death) of the Stockholder shall transfer to the Medical Group, all of the Unvested Shares held by the Stockholder. Such Unvested Shares shall be transferred for no consideration from the Company and the stock certificate(s) representing those shares shall be delivered to the Company, no later than thirty (30) days after the Forfeiture Event, duly endorsed for transfer in accordance with this Section 3(a). The Company shall, within thirty (30) days after its receipt of a joinder to this Agreement executed by the Medical Group, issue and deliver to the Medical Group a certificate representing the Unvested Shares. Such Unvested Shares shall continue to vest according to the vesting schedule set forth in Section 2(a) above. (ii) The Medical Group shall not Sell (as hereinafter defined) any Unvested Shares to any Person, other than to one or more physician -2- employees or equity owners of the Medical Group, who prior to the receipt of such shares from the Medical Group had not acquired any shares of the Company's Common Stock pursuant to the Management Services Agreement between the Company and the Medical Group. As a condition to any such Sale, the transferee shall execute and deliver to the Company a Restricted Stock Agreement in substantially the form of this Agreement, effective as of the date of transfer of such shares. Any Unvested Shares distributed according to this Section 3(a) shall be subject to a vesting schedule identical to the schedule set forth in Section 2(a) hereof. (iii) For purposes of this Agreement, if the Stockholder is insured under a disability insurance policy, the determination under such policy as to whether such Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto. If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (b) In the event of the termination of the Management Services Agreement pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth anniversary of the Commencement Date (as defined therein), the Company shall have the right (but not the obligation) (the "Repurchase Option"), to be exercised in its sole discretion, to repurchase all or any portion of the Restricted Stock (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's Permitted Transferees) pursuant to the terms and conditions set forth in this Section 3. (i) The Company may elect to repurchase all or any portion of the Restricted Shares by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that, if the Company elects to repurchase less than all of the Restricted Shares, the Company shall first repurchase Unvested Shares and then repurchase that number of Vested Shares, if any, as the Company may, in its sole discretion, elect. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be repurchased, the aggregate consideration to be -3- paid for such shares, and the time and place for the closing of the transaction. The purchase price payable for each Unvested Share shall equal the Original Value for such share and the purchase price payable for each Vested Share shall equal the Fair Market Value for such share. If the Company decides to repurchase Restricted Shares from any Stockholder pursuant to this Section 3(b), then the Company must purchase that number of Restricted Stock which it has elected to repurchase from all of the Stockholders pro rata according to the number of shares of Restricted Stock held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest whole share). (ii) The closing of the repurchase of Restricted Shares pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the delivery of the Repurchase Notice. The Company shall pay for Restricted Shares to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the repurchase price for the shares; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to Section 13.5 or 14.1 of the Management Services Agreement, the total amount of such sums may be offset by the Company against any amounts owed by the Company to the Stockholders pursuant to this Agreement (if such Stockholder is, at such time, an equity owner of or partner in the Medical Group), such offset amount to be allocated pro rata among all of the Stockholders who at such time hold equity of or are partners in the Medical Group. The Company's payment under this Section 3(b) shall be subject to the terms and provisions of any financing agreement, if any, to which the Company is a party, its certificate of incorporation and the operation of law. The Company shall be entitled to require the signature of the Stockholder to be guaranteed and to receive representations and warranties from the Stockholder regarding (x) the Stockholder's power, authority and legal capacity to enter into such sale and to transfer valid right, title and interest in such Restricted Shares, (y) the Stockholder's ownership of such Restricted Shares and the absence of any liens, -4- pledges, and other encumbrances on such Restricted Shares and (z) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (iii) In the event that the Stockholder is required, prior to the consummation of an initial public offering of the Company's Common Stock pursuant to the 1933 Act or prior to the second anniversary of the date hereof, whichever is later, to pay any state or Federal taxes in connection with the receipt of the Restricted Shares hereunder, the Stockholder shall have the right to Sell to the Company, and the Company shall be obligated to purchase from the Stockholder, for the purchase price determined in accordance with this Section 3, such number of shares of Vested Stock, which shares shall have been held by the Stockholder for at least six (6) months, as the Stockholder may tender to the Company, provided that the purchase price therefor shall not exceed the total amount of the Stockholder's tax liability incurred in connection with the receipt of such stock. In the event that the Stockholder desires to exercise the right conferred under this Section 3(c), the Stockholder shall give notice to the Company not earlier than forty-five (45) days prior to, nor later than forty-five (45) days after, the date on which such taxes are due and payable, and the Stockholder shall furnish to the Company reasonable documentation prepared by the Stockholder's certified public accountant establishing the amount of such tax liability. (c) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Shares by the Company under this Section 3 shall be subject to applicable restrictions, if any, contained in Federal law or in the Delaware General Corporation Law and, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Shares hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under applicable Federal law or the Delaware General Corporation Law. (d) In the event that any Restricted Shares are repurchased pursuant to this Section 3 (other than pursuant to Section 3(c)), the Stockholder and his or her successors and assigns shall, at the Company's -5- expense, take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner." SECTION 4. Section 8(b) of the Restricted Stock Agreement is hereby amended by deleting "Section 14" on the third line and inserting "Section 13.6" in lieu thereof. SECTION 5. This Amendment No. 1 shall be deemed effective as of May 6, 1997. Except as expressly provided in this Amendment No. 1, the Restricted Stock Agreement remains in full force and effect in accordance with its terms. SECTION 6. This Amendment No. 1 may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. SECTION 74. This Amendment No. 1 shall by governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * -6- IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Restricted Stock Agreement effective as of the date first written above. COMPANY ------- BONE, MUSCLE AND JOINT, INC. By:__________________________ STOCKHOLDER ----------- __________________________ Signature __________________________ Printed Name EX-10.37 10 MANAGEMENT SERVICES AGREEMENT MANAGEMENT SERVICES AGREEMENT AMONG SUN VALLEY ORTHOPAEDIC SURGEONS AND BONE, MUSCLE AND JOINT, INC. AND THE INDEMNIFYING PARTIES Effective as of July 1, 1997 TABLE OF CONTENTS Page ---- SECTION 1. Retention of the Management Company..............................2 1.1 Retention........................................................2 1.2 Exclusivity......................................................2 1.3 Relationship of Parties..........................................2 1.4 No Referral Obligation...........................................3 SECTION 2. Term.............................................................3 SECTION 3. Management Services..............................................4 3.1 Management Services Generally....................................4 3.2 Premises.........................................................5 3.3 Equipment........................................................7 3.4 New Ancillary Services...........................................9 3.5 Administration, Finance and Accounting..........................10 3.6 Billing and Collection..........................................12 3.7 Administrative Personnel........................................16 3.8 Technical Personnel: Leased Employees...........................17 3.9 Medical Personnel...............................................18 3.10 Inventory and Supplies..........................................19 3.11 Taxes...........................................................19 3.12 Information Systems Management..................................19 3.13 Use of New Technologies in the Practice of Medicine.............20 3.14 Public Relations; Marketing and Advertising.....................20 3.15 Insurance.......................................................21 3.16 Files and Records...............................................21 3.17 Managed Care Contracts..........................................21 3.18 Budgets.........................................................22 3.19 Force Majeure...................................................22 SECTION 4. Equity Participation and Other Consideration....................22 SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments..22 5.1 Ownership of Accounts; Security.................................22 5.2 Bank Accounts and Payments......................................23 5.3 Medical Group Compensation......................................24 5.4 Management Fee..................................................27 5.5 Management Company Costs........................................28 5.6 New Medical Office Start-Up Costs...............................30 5.7 New Physician Start-Up Costs....................................31 5.8 Medical Group Costs.............................................33 5.9 New Ancillary Services Costs....................................34 -i- 5.10 Review and Audit of Books and Records...........................36 5.11 Start-Up Period.................................................37 SECTION 6. Representations and Warranties of the Medical Group.............38 6.1 Organization; Good Standing; Qualification and Power............38 6.2 Equity Investments..............................................38 6.3 Authority.......................................................38 6.4 Financial Information...........................................39 6.5 Absence of Undisclosed Liabilities..............................40 6.6 Absence of Changes..............................................40 6.7 Tax Matters.....................................................42 6.8 Litigation, Etc.................................................44 6.9 Compliance; Governmental Authorizations.........................44 6.10 Accounts Receivable; Accounts Payable...........................44 6.11 Labor Relations; Employees......................................45 6.12 Employee Benefit Plans..........................................46 6.13 Insurance.......................................................46 6.14 Real Property...................................................47 6.15 Burdensome Restrictions.........................................47 6.16 Disclosure......................................................47 SECTION 7. Representations and Warranties of the Management Company........48 7.1 Organization, Good Standing and Power...........................48 7.2 Authority.......................................................48 7.3 Issuance of Common Stock........................................49 7.4 Issued and Outstanding Stock....................................49 7.5 Permits, Authorizations, Consents, Approvals, Notifications, and Filings......................................49 7.6 Financial Information...........................................49 7.7 Absence of Undisclosed Liabilities..............................50 7.8 Absence of Changes..............................................50 7.9 Tax Matters.....................................................52 7.10 Litigation, Etc.................................................53 7.11 Compliance; Governmental Authorizations.........................53 7.12 Accounts and Notes Payable......................................54 7.13 Employees.......................................................54 7.14 Employee Benefit Plans..........................................54 7.15 Insurance.......................................................54 7.16 Real Property...................................................54 7.17 Burdensome Restrictions.........................................54 7.18 Disclosure......................................................55 SECTION 8. Operations Committee............................................55 8.1 Formation and Operation of the Operations Committee.............55 8.2 Authoritative Functions of the Operations Committee.............55 8.3 Advisory Functions of the Operations Committee..................57 8.4 Committee Policies and Procedures...............................58 -ii- SECTION 9. Obligations of the Medical Group................................59 9.1 Compliance with Laws............................................60 9.2 Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts..................................................60 9.3 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities....60 9.4 Insurability....................................................60 9.5 Medicare........................................................61 9.6 Billing.........................................................61 9.7 Medical Personnel Hiring........................................61 9.8 Continuing Education............................................61 SECTION 10. Certain Covenants...............................................61 10.1 Change of Control...............................................61 10.2 Legend on Securities............................................61 10.3 Non-Disclosure of Confidential Information......................62 10.4 Confidential or Proprietary Information.........................62 SECTION 11. Records.........................................................63 11.1 Medical Records.................................................63 11.2 Management Business Records.....................................63 11.3 Access to Records Following Termination.........................63 SECTION 12. Insurance and Indemnity.........................................63 12.1 Professional Liability Insurance................................63 12.2 Life Insurance..................................................64 12.3 Indemnification by Medical Group................................64 12.4 Indemnification by Certain Individuals..........................65 12.5 Indemnification by Management Company...........................65 12.6 Notice and Control of Litigation................................66 SECTION 13. Termination.....................................................66 13.1 Termination by Medical Group....................................66 13.2 Termination by Management Company...............................67 13.3 Termination by Medical Group or Management Company..............67 13.4 Effect of Termination...........................................68 13.5 Repurchase of Assets............................................68 13.6 Phase II........................................................69 SECTION 14. Rescission/Disengagement........................................71 14.1 Seventh Anniversary of Agreement................................71 14.2 Rescission/Disengagement by Medical Group.......................71 14.3 Waiver of Rescission/Disengagement Right........................73 14.4 Continuation of Management Fees.................................73 SECTION 15. Non-Competition.................................................73 -iii- SECTION 16. Obligations of the Management Company...........................74 16.1 No Practice of Medicine.........................................74 16.2 No Interference with Professional Judgment......................74 16.3 Compensation Committee..........................................74 16.4 Budgets.........................................................74 16.5 Contracts with Venture Capital Firms............................75 16.6 Convertible Preferred Stock.....................................75 16.7 Initial Public Offering.........................................75 SECTION 17. Assignment......................................................76 17.1 Generally.......................................................76 17.2 Assignment to Partners..........................................76 SECTION 18. Notices.........................................................76 SECTION 19. Benefits of Agreement...........................................77 SECTION 20. Governing Law; Jurisdiction.....................................78 SECTION 21. Headings........................................................78 SECTION 22. Entire Agreement; Amendments....................................78 SECTION 23. Severability....................................................78 SECTION 24. Counterparts....................................................79 SECTION 25. Waivers.........................................................79 SECTION 26. Survival of Termination.........................................79 SECTION 27. Contract Modification for Prospective Legal Events..............79 -iv- ATTACHMENTS SCHEDULES SCHEDULE I -- New Ancillary Services -- Exceptions SCHEDULE II -- Management Company Operating Cost Budget SCHEDULE III -- Equity Participation and Other Consideration SCHEDULE IV -- Draw Date and Draw Percentage SCHEDULE V -- Management Fee -- Applicable Percentage SCHEDULE VI -- Professional Practice Cost Savings SCHEDULE VII -- Computation Example SCHEDULE VIII -- Non-Competition SCHEDULE 6.4 -- Financial Information SCHEDULE 6.5 -- Absence of Undisclosed Liabilities SCHEDULE 6.6 -- Absence of Changes SCHEDULE 6.7 -- Tax Matters SCHEDULE 6.8 -- Litigation, Etc. SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable SCHEDULE 6.11 -- Labor Relations; Employees SCHEDULE 6.12 -- Employee Benefit Plans SCHEDULE 6.13 -- Insurance SCHEDULE 6.14 -- Real Property SCHEDULE 6.15 -- Burdensome Restrictions SCHEDULE 6.16 -- Disclosure SCHEDULE 7.4 -- Issued and Outstanding Stock SCHEDULE 7.5 -- Permits, Authorizations, Consents, Approvals, Notifications, and Filings SCHEDULE 7.6 -- Financial Information -v- SCHEDULE 7.7 -- Absence of Undisclosed Liabilities SCHEDULE 7.8 -- Absence of Changes SCHEDULE 7.9 -- Tax Matters SCHEDULE 7.10 -- Litigation, Etc. SCHEDULE 7.13 -- Employees SCHEDULE 7.18 -- Disclosure -vi- INDEX OF DEFINED TERMS Term Page - ---- ---- Accounts....................................................................23 Additional Terms.............................................................3 Administrative Personnel....................................................16 AGC ......................................................................70 Agreement....................................................................1 Ancillary Service Start-Up Costs............................................35 Ancillary Service Start-Up Period...........................................35 Annual Draw Amount..........................................................25 Annual Medical Group Compensation Amount....................................24 Applicable Percentage.......................................................27 Asset Purchase Agreement.....................................................1 Assignment of Office Lease...................................................5 Authorized Management Company Operating Costs...............................29 Authorized Signatory........................................................13 Balance Sheet...............................................................39 Balance Sheet Date..........................................................39 Bankruptcy Event............................................................66 Base Term....................................................................3 Billable Items..............................................................33 Billings....................................................................26 Budgets.....................................................................22 Code ......................................................................43 Collateral..................................................................23 Collections.................................................................26 Compensation Committee......................................................74 Competitive Business........................................................93 Confidential or Proprietary Information.....................................62 Corporate Overhead..........................................................29 -vii- Cost Savings................................................................89 Documents...................................................................13 Draw Date...................................................................87 Draw Percentage.............................................................24 Effective Date..............................................................71 Eligible Parties............................................................22 Employee Plans..............................................................46 Employees...................................................................45 Equipment....................................................................7 ERISA ......................................................................46 Excess Net Collections......................................................32 Excluded Costs..............................................................28 FF&E .......................................................................7 Financing Statement.........................................................23 Historical Collections Information..........................................39 Incentive Based Costs.......................................................89 Indemnifying Party..........................................................65 Indemnitee..................................................................66 Indemnitor..................................................................66 Internal Financial Statements...............................................39 Lender......................................................................23 Management Business..........................................................1 Management Company...........................................................1 Management Company Balance Sheet............................................49 Management Company Balance Sheet Date.......................................49 Management Company Bank.....................................................23 Management Company Costs....................................................28 Management Company Operating Costs..........................................28 Management Company Returns..................................................52 Management Fee..............................................................27 Management Services..........................................................2 -viii- Medical Business.............................................................1 Medical Equipment............................................................7 Medical Equipment Master Lease...............................................7 Medical Equipment Master Lease Payments.....................................27 Medical Group................................................................1 Medical Group Bank..........................................................13 Medical Group Collections Account...........................................13 Medical Group Costs.........................................................33 Medical Group Governance Documents..........................................38 Medical Group Services......................................................26 Medical Personnel...........................................................18 Monthly Draw................................................................24 MSAs ......................................................................70 Net Collections.............................................................32 New Ancillary Service Medical Equipment.....................................34 New Ancillary Services.......................................................9 New Medical Office..........................................................30 New Medical Office Start-Up Costs...........................................30 New Medical Office Start-Up Period..........................................30 New Physician...............................................................33 New Physician Start-Up Costs................................................31 New Physician Start-Up Period...............................................32 Non-Compete Period..........................................................93 Office Lease.................................................................5 Office Sublease..............................................................5 Partner......................................................................1 Phase II....................................................................69 Principal....................................................................1 Professional Practice Cost Savings..........................................28 Provider Account Agreement..................................................24 Real Property...............................................................47 -ix- Restricted Stock Agreement..................................................22 Returns.....................................................................42 Review Financial Statements.................................................39 Stock ......................................................................83 Stockholder Non-Competition Agreement.......................................73 Tax ......................................................................43 Taxes ......................................................................43 Technical Personnel.........................................................17 Tenant Improvements.........................................................56 Term .......................................................................3 Transaction Documents.......................................................38 Unaudited Financial Statements..............................................49 Wilson MSA...................................................................2 -x- MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of July 1, 1997, by and among SUN VALLEY ORTHOPAEDIC SURGEONS, an Arizona general partnership (the "Medical Group"), the INDEMNIFYING PARTIES referred to in Section 12.4 whose signatures appear on the signature page hereto, those persons who hereafter sign a written agreement agreeing to be bound by the terms of Section 12.4 hereof, and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with reference to the following facts: A. The Medical Group is an Arizona general partnership comprised of individual physicians and Arizona professional corporations, and is engaged in the business (the "Medical Business") of providing orthopedic medical and surgical services and related medical and ancillary services to the general public. (Each partner in the Medical Group is referred to herein as a "Partner," and each shareholder of a professional corporation that is a Partner is referred to herein as a "Principal.") B. The Management Company is a corporation engaged in the business (the "Management Business") of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Management Company has entered into an Asset Purchase Agreement with the Medical Group (the "Asset Purchase Agreement"), pursuant to which the Management Company has acquired substantially all of the assets owned by the Medical Group. D. The Management Company and the Medical Group now desire to enter into this Management Services Agreement, pursuant to which, among other things, the Management Company will render certain management and administrative services to the Medical Group. -1- E. Concurrently herewith, the Management Company is entering into a Management Services Agreement with Robert O. Wilson, M.D., P.C. (the "Wilson MSA"). NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: SECTION 1. Retention of the Management Company. 1.1 Retention. The Medical Group hereby retains the Management Company to provide all of the management and related services identified or referenced in Section 3 hereof and as otherwise required by this Agreement (collectively, the "Management Services"), and the Management Company hereby accepts such retention and agrees to provide such services, upon the terms and subject to the conditions set forth herein. Notwithstanding the foregoing, the parties hereby agree that to the extent that any of the services provided (or required to be provided) by the Management Company to the Medical Group pursuant to this Agreement relate to Robert O. Wilson, M.D., P.C. or Robert O. Wilson, M.D., the Wilson MSA and the other agreements, documents, and instruments referred to therein (rather than this Agreement and the other agreements, documents, and instruments referred to herein) shall govern. 1.2 Exclusivity. During the term of this Agreement, the Management Company shall be the exclusive provider of all management and administrative services utilized by the Medical Group; provided, however, that the Medical Group may contract directly with or otherwise engage individuals or companies for the provision of accounting, legal, consulting, or other professional or advisory services (provided that such services shall be in addition to, and not in replacement of, the services to be provided by the Management Company hereunder), all in the sole discretion of the Medical Group and at the sole cost of the Medical Group. 1.3 Relationship of Parties. Notwithstanding anything contained herein to the contrary, (a) the Management Company and the Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, or employment relationship between the parties, and (b) the Management Company is hereby engaged solely to provide management and administrative services to the Medical -2- Group and shall not interfere with, control, direct, or supervise the Medical Group or any medical professional employed by the Medical Group in connection with the provision of professional medical services. 1.4 No Referral Obligation. The parties agree that the benefits to the Medical Group hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral, purchase, or any other arrangement for the provision of any item or service to or for any of the Medical Group's patients in or from any medical facility or laboratory or from any other entity owned, operated, controlled, or managed by the Management Company. The Management Company shall provide prior written notice to the Medical Group before acquiring any ownership, investment interest, or control in, or entering into any agreement or arrangement pursuant to which the Management Company would become responsible for all or any part of the operations or management of, any medical facility, laboratory, or any provider or supplier of ancillary services, diagnostic or therapeutic equipment, prosthetic or orthotic devices, medical supplies, or other items or services furnished to or for use by patients, but only if any of the foregoing serves the geographic area served by the Medical Group. SECTION 2. Term. Provided that the Closing under the Asset Purchase Agreement shall have occurred as provided therein, and subject to such start-up procedures as the parties may agree upon for purposes of facilitating the transition of responsibilities required by this Agreement, the performance of services under this Agreement shall commence as of the date hereof and shall expire on the fortieth anniversary of the date hereof unless terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement shall be automatically extended for additional terms ("Additional Terms" and together with the Base Term, the "Term") of five years each, unless either party delivers to the other party, not less than six (6) months nor more than nine (9) months prior to the expiration of the then-current Term, written notice of such party's intention not to extend the Term of this Agreement. -3- SECTION 3. Management Services. 3.1 Management Services Generally. (a) The Management Company shall be the sole and exclusive manager and administrator of all day-to-day business functions for the Medical Group, subject to the provisions of Section 1.2 hereof. The Management Company shall provide all of the management and administrative services reasonably required by the Medical Group in connection with the provision of any and all of the Medical Group Services and as otherwise provided in this Agreement, including without limitation the services described in Sections 3.2 through 3.18 hereof. (b) Without limiting the generality of the provisions of Section 3.1(a), the Management Services shall include such management and administrative services as may be reasonably required in connection with (i) all of the offices (including New Medical Offices) of the Medical Group, and (ii) all professional services and all ancillary services furnished by the Medical Group. (c) Additionally, the full range of Management Services as described in this Agreement shall be applicable with respect to the items identified as Medical Group Costs in Section 5.8 hereof, except that such Medical Group Costs shall be paid by the Medical Group rather than by the Management Company. Accordingly, the Management Company shall provide accounting, bookkeeping, and related services with respect to all such costs. (d) The Management Company may enter into such contracts and agreements with outside services and suppliers as the Management Company shall reasonably deem necessary in connection with the provision of the Management Services, and, to the extent permitted by applicable law, such contracts and agreements shall, except as otherwise expressly provided in this Agreement, be in the name of the Management Company. The Management Company shall have no authority, directly or indirectly, to perform, and shall not perform or enter into any agreement to perform, professional medical services or any other medical function required by law to be performed by a licensed physician or by any other licensed health care professional. -4- (e) The Management Company shall comply in all material respects with all applicable material Federal, state and local laws, regulation, and ordinances in connection with the provision of the Management Services hereunder. 3.2 Premises. (a) The Medical Group, as of the date of this Agreement, leases premises and provides professional medical services at the following locations: 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 9403 West Thunderbird Road Peoria, Arizona 85381 Immediately prior to the date of this Agreement, the premises were leased to the Medical Group, in the Medical Group's name. Effective from and after the date of this Agreement, the leases of such premises are to be assigned from the Medical Group to the Management Company pursuant to two Assignment of Lease agreements (each, an "Assignment of Office Lease") entered into as of the date hereof. Additionally, the Management Company shall sublease the premises of both offices to the Medical Group pursuant to subleases (each, an "Office Sublease") entered into as of the date hereof, in consideration of the payments to be made by the Medical Group under such Office Subleases. Upon the expiration of each premises lease assigned in accordance with this Section 3.2(a), the Management Company shall use its best efforts to enter into a new lease, in the name of the Management Company, with the landlord of such premises, and the parties shall amend the applicable Office Sublease or enter into a new sublease relating to such new premises lease; provided, however, that the approval of the Medical Group, which shall not be unreasonably withheld, shall be required in the event of any substantial changes in the terms of the premises lease, and if the Medical Group does not give such approval, the failure to enter into such new premises lease shall not constitute a default of the Management Company. Each assigned lease and each new lease entered into between the Management Company and the landlord is referred to herein as an "Office Lease." -5- (b) A New Medical Office (as hereinafter defined) may be opened only upon the agreement of the Medical Group and the Management Company. The capital costs and start-up costs reasonably required in connection with the opening of any New Medical Office shall be borne as set forth in Section 5 hereof. The premises of any New Medical Office shall be leased to the Management Company, in the Management Company's name, and the Medical Group shall not be required to lease any such premises. Additionally, the Management Company shall sublease such premises to the Medical Group pursuant to a sublease substantially in the form of the Office Sublease, in consideration of the payments to be made by the Medical Group under such sublease. (c) The closing or relocation of any offices of the Medical Group shall be subject to agreement by the Medical Group and the Management Company. (d) The premises services to be provided by the Management Company shall include, without limitation, the negotiation and renegotiation of leases, provision of ongoing liaison with the landlords of the respective office premises of the Medical Group, identification of potential new locations for Medical Group offices, including a review of current satellite offices of the Medical Group and potential satellite offices to be considered by the Medical Group, financial analysis relating to the opening, closing, and relocation of offices, arranging for necessary repairs, maintenance and improvements, procurement of property insurance, arranging for telephone and other utility services, arranging for hazardous waste disposal, and all other reasonably necessary or appropriate services related to all of the office premises of the Medical Group. (e) The Management Company also shall provide all necessary or appropriate leasehold improvements to each of the premises, subject to prior approval as provided in Section 8.2(e) hereof. (f) The Medical Group acknowledges that the Management Company makes no warranties or representations, expressed or implied, regarding the condition of any of the leased premises. -6- 3.3 Equipment. (a) The Management Company shall provide or arrange for the provision of all of the diagnostic and therapeutic medical equipment reasonably required by the Medical Group in connection with the provision of Medical Group Services (the "Medical Equipment"). All Medical Equipment shall be provided by the Management Company to the Medical Group in consideration of the rental payments to be made by the Medical Group to the Management Company pursuant to an equipment lease entered into as of the date hereof (the "Medical Equipment Master Lease"). As used herein, the term Medical Equipment shall not include medical equipment used in connection with a New Ancillary Service (as hereinafter defined). (b) The Management Company also shall provide or arrange for the provision of all furniture, furnishings, trade fixtures, and office equipment (including computer hardware and software) reasonably required in connection with the provision of Medical Group Services pursuant to this Agreement (collectively, "FF&E"). The Management Company shall acquire, at its cost, all FF&E, and the Management Company shall retain ownership of all FF&E. The Management Fee payable to the Management Company under this Agreement is intended to compensate the Management Company for the provision of FF&E for use by the Medical Group. As used herein, the term FF&E does not include furniture, furnishings, trade fixtures, and office equipment used in connection with a New Ancillary Service. (c) The Medical Equipment and the FF&E are sometimes referred to collectively as the "Equipment." The acquisition, replacement, relocation, or other disposition of any Equipment shall require prior approval as provided in Section 8.2 hereof. (d) The Management Company's obligations with respect to the Equipment are subject and subordinate to the provisions and obligations contained in any financing, security interest, mortgage, lien or other encumbrance the Management Company may, in its reasonable discretion, place upon the Equipment through an unaffiliated third party. The Medical Group shall use the Equipment only in connection with its provision of the Medical Group Services, and the Medical Group shall not alter, repair, augment, or remove the Equipment from the premises of the Medical Group without the prior written consent of the Management Company -7- and any lessor thereof, which approval may be granted or withheld in the Management Company's or such lessor's sole discretion. Notwithstanding the foregoing, in the event of an emergency relating to the provision of patient care, the Medical Group may order repairs and replacements of Equipment not exceeding $5,000, and the Medical Group shall notify the Management Company immediately in any such event. To the extent the Equipment is utilized by the Medical Group in the provision of Medical Group Services, the Medical Group shall have the right to exercise reasonable control over the use of such Equipment. (e) From time to time, and as reasonably requested by the Medical Group, the Management Company shall use reasonable efforts to cause the Equipment manufacturer or its authorized agent to provide service and maintenance for the Equipment as needed to maintain the Equipment in an operable condition, so that all such Equipment shall function continuously (subject to interruptions not reasonably avoidable) in accordance with the manufacturer's specifications and so that all conditions imposed by the manufacturer to maintaining the continued effectiveness of any warranty on such Equipment shall be satisfied. The Management Company shall take all reasonable steps to provide that all necessary service and maintenance is obtained in a prompt and timely manner, so as to minimize the amount of time that any of the Equipment is not available for usage by or for patients of the Medical Group. (f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING DISCLAIMER, THE MANAGEMENT COMPANY DOES WARRANT TO THE MEDICAL GROUP THAT THE X-RAY EQUIPMENT AND THE COMPUTER HARDWARE AND COMPUTER SOFTWARE THAT THE MANAGEMENT COMPANY SELECTS FOR USE BY THE MEDICAL -8- GROUP SHALL BE SUITABLE FOR USE BY THE MEDICAL GROUP FOR SUCH INTENDED USES. Nothing in this Agreement shall be construed to affect or limit in any way the professional discretion of the Medical Group to select and use any Equipment acquired by the Management Company in accordance with the terms of this Agreement insofar as such selection or use constitutes or might constitute the practice of medicine. 3.4 New Ancillary Services. (a) For purposes of this Agreement, "New Ancillary Services" means the technical component (but not the professional component) of the following, except as set forth in Schedule I: (i) Physical therapy; (ii) Magnetic resonance imaging and/or other imaging services (except diagnostic radiology); (iii) Outpatient surgery; (iv) Densitometry; and (v) Other revenue-producing services generally recognized as ancillary services, but excluding the following: (A) Plain film radiography; (B) Any other services provided on a regular basis by the Medical Group immediately prior to the date of this Agreement; and (C) Any service performed in connection with new Medical Equipment acquired to replace existing Medical Equipment so long as the new Medical Equipment performs substantially the same functions as the replaced Medical Equipment. New Ancillary Services do not include the sale or provision of (or services rendered in connection with) prosthetics, prosthetic devices, orthotics, braces, splints, appliances, crutches, casts, or any other supplies or similar items which are billable to patients or payors. -9- (b) The Management Company shall review the ancillary services currently provided by the Medical Group and potential New Ancillary Services opportunities to be considered by the Medical Group. New Ancillary Services may be established only upon agreement of the Medical Group and the Management Company. Such agreement shall be memorialized in a written agreement executed by the parties (or in a written amendment to this Agreement) under which the Management Company agrees to provide all of the Management Services described in this Section 3 in connection with such New Ancillary Service, and for which the Management Company shall be compensated as described in Section 5.9 of this Agreement, except as otherwise agreed by the parties. 3.5 Administration, Finance and Accounting. The Management Company shall provide or arrange for the provision of all administrative, financial, and accounting functions necessary for the operation of the Medical Group, including without limitation -- (a) Creation and maintenance of bank accounts. (b) Deposits of receipts. (c) Preparing accounts receivable summary reports, including various analyses of delinquent accounts. (d) Receiving appropriate approvals as required by the Medical Group Governance Documents prior to distribution of payments to outside parties; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Medical Group Governance Documents. (e) Disbursement of payables, including payables of the Medical Group; provided, however, that payables of the Medical Group shall be paid from an account of the Medical Group and not from the Management Company's Operating Account, and all checks drawn on any Medical Group account shall be signed by an officer or other authorized representative of the Medical Group. (f) Negotiation of vendor contracts. (g) Performing monthly accounting functions, including bank reconciliations, maintenance of books and records, and preparation of financial statements. -10- (h) Analyzing financial data as reasonably requested by physicians. (i) Analyzing potential new office locations, and coordinating all functions associated with opening new office locations. (j) Preparing monthly financial and medical practice statistics reports (i) By satellite office (ii) By physician (k) Providing from the Medical Group's bank account(s) monthly compensation payments to physicians; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Medical Group Governance Documents; provided, further, that all checks drawn on any Medical Group account shall be signed by an authorized representative of the Medical Group. (l) Calculating physicians' annual compensation based on the Medical Group's physician compensation formulas. (m) Ongoing day-to-day communication with the designated representative(s) of the Medical Group and assisting such representative(s) in fulfilling his, her or their responsibilities. (n) Preparing agendas and information packages for Medical Group meetings. (o) Developing budgets and long-term strategies for the Medical Group. (p) Coordinating payroll processing and payroll tax payments. (q) Providing ongoing personnel FTE analysis. (r) Providing administrative services (excluding the services of a plan administrator) in connection with any pension or profit-sharing plan of the Medical Group; provided, however, that the Management Company shall not be responsible for investment decisions. (s) Reviewing current physician makeup of the Medical Group, particularly with respect to subspecialty coverage, and potential physician additions to be considered by the Medical Group. (t) Coordinating recruitment, interviewing, and hiring of new physicians. (u) Implementing fee schedule increases and/or decreases established by the Medical Group. -11- (v) Coordinating depositions and court appearances. (w) Assisting in the coordination of call schedules. (x) Assisting in the coordination of coverage of athletic team events. (y) Acting as liaison to hospital administration, physical therapy, surgery center, MRI, and other ancillary services entities. (z) Cooperating with outside accountants in preparing various schedules and providing other information. (aa) Interacting with legal counsel as necessary. (bb) Providing a complete operational review of the practice, involving a breakdown of each practice component and relevant statistics on each component. (cc) Reviewing current managed care contracts the Medical Group has executed, and potential managed care relationships to be considered by the Medical Group. (dd) Reviewing current workers' compensation relationships the Medical Group has developed, and potential workers' compensation relationships to be considered by the Medical Group. The Management Company shall provide to the Medical Group, upon written request by the Medical Group (but not more frequently than annually), within sixty (60) days after receipt of any such request, written reports addressing the points identified in items (s), (aa), (bb), and (cc) above. 3.6 Billing and Collection. (a) The Medical Group acknowledges that ownership of all Accounts (as hereinafter defined) is transferred by the Medical Group to the Management Company as provided in greater detail in Section 5.1 of this Agreement. In order to facilitate the collection of the Accounts, the Medical Group hereby authorizes the Management Company (i) to bill patients and third party payors in the Medical Group's name; (ii) to collect accounts receivable resulting from such billing; (iii) to receive payments and prepayments from the Medical Group's patients, Blue Cross and Blue Shield organizations, insurance companies, health care plans, -12- Medicare, Medicaid, HMOs, and any and all other third party payors; (iv) to take possession of and deposit into such bank (the "Medical Group Bank") as the Medical Group designates, in an account established by the Medical Group in the name of the Medical Group (the "Medical Group Collections Account"), any and all checks, insurance payments, cash, cash equivalents and other instruments received for Medical Group Services; and (v) to initiate with the consent of the Medical Group, which consent may be withheld by the Medical Group in its sole and absolute discretion, legal proceedings in the name of the Medical Group to collect any accounts and monies owed to the Medical Group, to enforce the rights of the Medical Group as a creditor under any contract or in connection with the rendering of any service, and to contest adjustments and denials by governmental agencies (or its fiscal intermediaries) as third party payors. The Medical Group shall promptly turn over to the Management Company for deposit into the Medical Group Collections Account in accordance with this Agreement all checks and other payments received by the Medical Group or by any of its shareholders from any patient or third party payor for Medical Group Services rendered hereunder. Following termination of this Agreement, the Management Company shall continue to use reasonable efforts to collect the Accounts for a period of ninety (90) days thereafter (and any amounts collected during such period shall be considered as Collections under this Agreement). (b) From time to time at the Management Company's request, the Medical Group shall make available to the Management Company one or more authorized representatives (each, an "Authorized Signatory") of the Medical Group to sign any letters, checks, instruments or other documents (the "Documents") on behalf of the Medical Group that are necessary for the Management Company to perform its duties under this Section 3.6 and its other duties under this Agreement. If the Management Company notifies the Medical Group that an Authorized Signatory is not signing the Documents in a timely manner, the Management Company shall not be liable for any failure to perform its duties hereunder or for any failure to perform the Management Services to the extent caused by the failure of an Authorized Signatory to sign the Documents in a timely manner. (c) The Management Company shall submit all bills and manage the billing process on a timely basis in accordance with the terms of this Agreement and applicable law. -13- (d) Without limiting the generality of the foregoing, the Management Company shall bill patients, bill and submit claims to third party payors, perform appropriate coding for each bill, and collect all fees for professional and other services rendered and for items supplied to patients by the Medical Group, all in a timely manner and in accordance with parameters and criteria established by the Operations Committee (as hereinafter defined). The Management Company may discharge its billing and collection responsibilities hereunder by arranging for such duties to be carried out by the billing service that furnished such services to the Medical Corporation immediately prior to the date hereof, or by such other billing service as the Management Company may in its discretion select. Additionally, the Management Company shall provide or arrange for the provision of the following services: (i) Receive and collect from patients at the time of visit all appropriate payments and pre-payments, including co-pays, deductibles, payments for non-covered medical services, and deposits for surgeries (if applicable), and additionally shall obtain all appropriate insurance and other information required. (ii) Submit claims utilizing electronic billing submission, whenever appropriate. (iii) Perform delinquent account collection calls and other appropriate follow-up mechanisms for delinquent accounts of all insurance classifications, all in a timely fashion as determined by the Operations Committee. (iv) Turn over to outside collection agencies all delinquent accounts satisfying the criteria established by the Operations Committee, follow-up on the performance of the outside collection agencies and make changes if necessary, and reconcile each account turned over to the summary data provided by the collection agency. -14- (v) Write-off account balances according to criteria approved by the Operations Committee. (vi) Prepare claim reviews in accordance with criteria approved by the Operations Committee. (vii) Bill workers' compensation medical services at rates equal to the most recently approved state workers' compensation fee schedule. (viii) Apply "insurance only" and other courtesy write-offs in compliance with Operations Committee policy. (ix) With respect to discounted fee-for-service contracts with Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), determine that payments from the PPOs and HMOs are in compliance with the contract with the Medical Group. (x) With respect to capitation fee contracts with HMOs -- (A) Follow-up to ensure that payments by the HMOs are made on a timely basis; (B) Review and audit enrollment data provided by the HMO to ensure that the capitation payments are based on the proper number of lives enrolled. (xi) With respect to lien accounts -- (A) Ensure that appropriate documents are signed and agreed to initially as between Medical Group, attorney and patient; (B) Follow-up on a regular basis as to the status of the account; and -15- (C) Apply the policies of the Operations Committee in resolving open account balances. (xii) With respect to student athlete accounts, coordinate insurances and other information in compliance with the policy of the Operations Committee. (xiii) With respect to amounts withheld by payors in compliance with contracts between the payor and the Medical Group, follow-up on a timely basis to ensure that withheld amounts are paid, if warranted, and to ensure that any withheld amounts that are not paid are verified and audited for appropriateness. (xiv) Coordinate the timely payment of refunds to patients and third party payors when appropriate. 3.7 Administrative Personnel. (a) The Management Company shall retain and provide or arrange for the retention and provision of all of the following non-medical personnel necessary for the conduct of the Medical Group's business operations (collectively, "Administrative Personnel"): (i) Administration (ii) Accounting (iii) Billing and Collection (iv) Secretarial (v) Transcription (vi) Appointments (vii) Switchboard (viii) Medical Records (ix) Chart Preparation (x) Historians -16- (xi) Clinic Support (xii) Marketing (b) The Management Company shall determine and pay or arrange for the payment of the salaries and fringe benefits of the Administrative Personnel, and shall provide or arrange for other personnel services related to the Administrative Personnel, including but not limited to scheduling, personnel policies, administering continuing education benefits, and payroll administration. (c) With respect to each applicable new employee in Administrative Personnel, the Management Company shall, as reasonably necessary, verify or arrange for the verification of educational and employment experience, licensure, and insurability. (d) All of the personnel services shall be performed in compliance with all applicable state and Federal labor laws. 3.8 Technical Personnel: Leased Employees. (a) Subject to the conditions set forth in this Section 3.8, the Management Company shall employ or contract with, or shall arrange for, and shall provide to the Medical Group as leased employees, such Technical Personnel (as defined below) as may be reasonably necessary for the conduct of the Medical Group's professional practice. (b) For purposes of this Agreement, "Technical Personnel" means nurses, medical assistants, x-ray technicians, other technicians, and other personnel who perform diagnostic tests or other services that are covered by Medicare or by other third party payors when performed by an employee of a physician under the physician's supervision. (c) The Medical Group shall have the right to exercise, and shall exercise, such supervision and control over the activities of the Technical Personnel as may be necessary for the Technical Personnel to be considered leased employees under the Medicare program and under applicable law. Without limiting the generality of the foregoing, the Medical Group -- -17- (i) shall have the right to have any Technical Personnel terminated from employment; (ii) shall furnish the Technical Personnel with the equipment and supplies needed by the Technical Personnel for their work; (iii) shall provide the Technical Personnel with any necessary training; (iv) shall instruct the Technical Personnel regarding their activities performed for the Medical Group; (v) shall establish the hours of work for the Technical Personnel; (vi) shall approve vacation time and other time off from work; and (vii) shall provide that degree of supervision as is required by Medicare and by other third party payors to satisfy applicable conditions for coverage thereunder. (d) With respect to each of the Technical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal commissions. 3.9 Medical Personnel. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services for or in connection with the Medical Group; and (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services that are billable to patients or third party payors under the name of such health care professional (as distinguished from services that are billable under the name of the supervising physician). -18- (b) With respect to each of the Medical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and federal commissions. 3.10 Inventory and Supplies. The Management Company shall order and purchase, or arrange for the order and purchase of, inventory and supplies on behalf of the Medical Group, and such other ordinary or appropriate materials as the Medical Group reasonably deems to be necessary for it to carry out its professional medical activities. Inventory and supplies shall include, but not be limited to: (a) Medical supplies (b) Office supplies (c) Postage (d) Computer forms and supplies (e) Printing and stationery supplies (f) Printer supplies (g) Linen and laundry supplies 3.11 Taxes. The Management Company shall provide the Medical Group with access to all information necessary for the Medical Group to prepare its tax returns. The Management Company shall have no responsibility for the payment of the Medical Group's taxes. 3.12 Information Systems Management. (a) The Management Company shall provide or arrange for the provision of all management information systems services to be utilized by the Medical Group. These services shall include, but not be limited to, ongoing maintenance and development of the following information systems: (i) Accounts receivable - Billing/Insurance/Collections (ii) On-line appointment scheduling (iii) Internal e-mail (iv) On-line transcription -19- (v) Faxing subsystem (vi) Electronic claims submission (vii) Patient flow monitoring system (viii) Authorization module (ix) Prescription module (x) X-ray tracking system (xi) Voice mail (xii) Paperless medical records (xiii) Bar code chart tracking system (b) The acquisition, replacement, relocation, or other disposition of any equipment described above shall be governed by Section 3.3 hereof. (c) The services provided by the Management Company shall protect the confidentiality of patient medical records to the extent required by applicable law or the Medical Group's payor agreements; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. 3.13 Use of New Technologies in the Practice of Medicine. The Management Company shall promote the integration of new technologies into the professional practice of the Medical Group, including without limitation the use of satellite and other telecommunications services that permit the provision of remote consultations, virtual operations, and other professional services; provided, however, that the foregoing shall be subject to the terms of Section 8.2(e) hereof. 3.14 Public Relations; Marketing and Advertising. The Management Company shall develop and implement community outreach programs and public relations programs designed to educate the patient population regarding the Medical Group, the availability of its medical services, and the availability in terms of any managed care programs in which the Medical Group participates. The Management Company also shall develop and implement marketing and -20- advertising programs as reasonably required to promote and expand the Medical Business, subject to any approved budgets. The programs shall be conducted in compliance with applicable laws and regulations governing advertising by the medical profession. 3.15 Insurance. The Management Company shall provide the insurance coverage described in Sections 12.1 and 12.2 of this Agreement. 3.16 Files and Records. (a) To the extent permitted by applicable law, the Management Company shall supervise and maintain custody of all files and records relating to the operation of the business of the Medical Group, including, without limitation, accounting, billing, collection, and patient medical records. The management of all files and records shall be in compliance with applicable state and federal statutes. Patient medical records shall be kept at a location that is readily accessible for patient care. The Management Company shall preserve the confidentiality of patient medical records and use information contained in such records only for the limited purposes necessary to perform the management services set forth herein; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. (b) The Management Company shall provide all off-site storage of files and records as required and in conjunction with policies established by the Operations Committee. The Management Company shall provide the Medical Group with all requested off-site files and records on a timely basis, consistent with the policies of the Medical Group in effect immediately prior to the date hereof. Any change in such policies shall be subject to the approval of the Operations Committee. 3.17 Managed Care Contracts. The Management Company shall solicit, negotiate and administer all managed care contracts on behalf of the Medical Group based on parameters and criteria established by the Operations Committee. Such services shall be performed by the Management Company as agent of the Medical Group, and all managed care contracts shall be subject to the Medical Group's prior approval of any such contract. The Management Company -21- shall prepare cost forecasts and other analyses as reasonably requested by the Medical Group in order to allow the Medical Group to make an informed decision with respect to each proposed contract. 3.18 Budgets. The Management Company shall prepare, for the review and approval of the Operations Committee, annual operating budgets (the "Budgets") reflecting in reasonable detail projected Billings, Collections, Medical Group Costs, and Management Company Operating Costs; provided, however, that the Medical Group and the Management Company hereby agree that the Budget covering the initial period under this Agreement shall be the Budget attached hereto as Schedule II. All other budgets shall be on a calendar year basis. The Management Company shall prepare and submit to the Operations Committee all subsequent Budgets on or before December 15 of the year immediately preceding the calendar year to which such Budgets are applicable. 3.19 Force Majeure. The Management Company shall not be liable to the Medical Group for failure to perform any of the services required herein in the event of strikes, lockouts, calamities, acts of God, unavailability of supplies, changes in applicable law or regulations or other events over which the Management Company has no control for so long as such events continue and for a reasonable time thereafter. SECTION 4. Equity Participation and Other Consideration. In consideration of the Medical Group's entering into this Agreement, the Management Company shall provide to the persons identified in Schedule III attached hereto (the "Eligible Parties") and to the Medical Group the consideration set forth on Schedule III, provided that the Eligible Parties execute the Restricted Stock Agreement presented for signature herewith (the "Restricted Stock Agreement"). SECTION 5. Ownership of Accounts; Costs, Compensation, and Other Payments. 5.1 Ownership of Accounts; Security. The Medical Group hereby transfers to the Management Company ownership of all accounts receivable and the other rights to payment arising from the provision by the Medical Group of Medical Group Services during the term -22- hereof (the "Accounts"); provided, however, that the right to payment of Medicare and Medicaid receivables shall remain with the Medical Group in accordance with applicable Federal and state law. The Medical Corporation agrees to execute the Financing Statement presented for signature herewith (the "Financing Statement") and such additional financing statements and continuation statements as the Management Company may reasonably request to evidence, protect, or perfect the Management Company's ownership interest in the Accounts. The Management Company shall have the right to grant to any lender (the "Lender") a first priority lien and security interest in and with respect to the Accounts, together with all books, records, computer information, and other general intangibles relating thereto (collectively, the "Collateral"), as security for the obligations of the Management Company to the Lender. The Medical Group hereby irrevocably constitutes and appoints the Management Company as the true and lawful attorney-in-fact for the Medical Group to execute in the name of the Medical Group such financing statements, continuation statements, and other documentation as may be necessary or appropriate to evidence, protect, or perfect the Management Company's interest in and/or the Lender's lien and security interest in and with respect to all Accounts and other Collateral. The Medical Group shall cooperate with the Lender as reasonably requested by the Lender in the event that the Lender seeks to enforce its rights and remedies under its agreement with the Management Company, including granting the Lender access, to the extent permitted by law, to all books and records associated with the Collateral. Neither the Management Company nor the Lender shall be required to give the Medical Group any notice in connection with any loan or related financing arrangements affecting the Accounts and other Collateral. 5.2 Bank Accounts and Payments. (a) The Medical Group shall instruct the Medical Group Bank to transfer, on a daily basis, all funds in the Medical Group Collections Account (less the amount necessary to avoid the payment of bank charges or fees relating to the failure to maintain a minimum balance in the Medical Group Collections Account) to a bank (the "Management Company Bank") designated by the Management Company, for credit to an account of the Management Company in the Management Company's name. Concurrently herewith, the Medical Corporation is entering into a Provider Account Agreement with the Medical Corporation Bank, the -23- Management Company, and the Management Company's lender (the "Provider Account Agreement"), in order to implement the foregoing obligation. (b) The Management Company shall pay all of the Medical Group Compensation and all of the Management Company Costs, as hereinafter defined, and the Management Company shall be entitled to retain for itself the Management Fee, as hereinafter defined. 5.3 Medical Group Compensation. (a) Monthly Draw. (i) On each Draw Date during the Term hereof, the Management Company shall distribute to the Medical Group an amount equal to a percentage (the "Draw Percentage") of the Medical Group's total Billings for Medical Group Services provided during the previous month (the "Monthly Draw"). The Draw Date and the initial Draw Percentage are as set forth in Schedule IV, and the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii). (ii) Commencing May 15, 1998, and effective May 15 of each year thereafter, the Draw Percentage shall be adjusted to equal a fraction, the numerator of which is the Annual Medical Group Compensation Amount for the previous year, and the denominator of which is the total amount of Billings for the previous year. Additionally, the Management Company may adjust the Draw Percentage from time to time based on the actual amount of Collections year-to-date in order to minimize the amount of any annual settlement payment reasonably anticipated to be required under Section 5.3(b). (b) Annual Settlement. (i) On or before April 30, 1998, and on or before April 30 of each year thereafter, the Management Company shall calculate the following (the "Annual Medical Group Compensation Amount"): (A) The total Collections for all Medical Group Services rendered during the previous calendar year, less -- -24- (B) the sum of the following: (1) the Management Fee earned by the Management Company for the previous calendar year; and (2) the Authorized Management Company Operating Costs incurred by the Management Company during the previous calendar year. (ii) If the Annual Medical Group Compensation Amount thus determined exceeds the total of the twelve (12) Monthly Draws paid by the Management Company to the Medical Group during the previous calendar year (the "Annual Draw Amount"), the Management Company shall pay to the Medical Group, together with the compensation amount otherwise payable to the Medical Group, during each of the following twelve (12) months, an amount equal to one-twelfth (1/12) of such excess. If the Annual Draw Amount for the previous calendar year exceeds the Annual Medical Group Compensation Amount for the previous calendar year, the Management Company shall withhold from the Medical Group compensation otherwise payable to the Medical Group, during each of the following twelve (12) months, an amount equal to one-twelfth (1/12) of such excess. Notwithstanding the foregoing, the party which is required to pay to the other any such excess may elect to pay such excess in equal installments over a period that is shorter than twelve (12) months. (iii) For purposes of determining the total Collections for all Medical Group Services provided during any calendar year, all Collections during January, February, and March of each year shall be deemed to be for Medical Group Services rendered during the previous calendar year, and all Collections during April through December shall be deemed to be for Medical Group Services rendered during the calendar year in which such Collections were received; provided, however, that for purposes of determining the total Collections during the period commencing on the date hereof and ending December 31, 1997, all Collections from and after the date hereof through March 31, 1998, shall be deemed to be for Medical Group Services rendered during the period commencing on the date hereof and ending December 31, 1997. Notwithstanding the foregoing, the Management Fee applicable to any calendar year shall be based on the Collections actually received during such calendar year. -25- (iv) Notwithstanding anything to the contrary set forth herein, the first period for which the annual settlement described in this Section 5.3(b) shall be applicable is the period commencing on the date hereof and ending on December 31, 1997. (c) For purposes of this Agreement -- (i) "Billings" means, for any applicable period, the gross charges of the Medical Group for all Medical Group Services furnished during such period. (ii) "Collections" means, for any applicable period, all cash or cash equivalents received during such period for Medical Group Services, including any capitation payments received during such period, less any refunds paid during such period. (iii) "Medical Group Services" means the following services rendered by, through, or on behalf of the Medical Group during the Term at the offices identified in Section 3.2 hereof or at any other location: all professional services rendered by or under the supervision of any of the Medical Personnel (including professional services rendered in connection with New Ancillary Services), except for services rendered by or under the supervision of Robert O. Wilson, M.D., P.C. and Robert O. Wilson, M.D.; all diagnostic radiology services rendered by or under the supervision of any of the Medical Personnel; all diagnostic tests and other services rendered by Technical Personnel; all other ancillary services (other than New Ancillary Services); all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, and other items and supplies that are billable to patients or to third party payors; and depositions, record review services, court appearances, independent medical exams, and athletic team services. -26- (iv) It is the intent of the parties that Billings, Collections, and Medical Group Services not include any of the following: services rendered by or under the supervision of Robert O. Wilson, M.D., P.C. and Robert O. Wilson, M.D. (which are included under the Wilson MSA); New Ancillary Services (excluding professional services rendered by Medical Personnel in connection therewith, which professional services are included under Section 5.3(c)(iii) above); interest income; sublease income, if any; royalties payable to any Medical Group physician for medical inventions; income from presentations, writings, and endorsements; proceeds from the sale of any capital assets of the Medical Group; or income from investments. 5.4 Management Fee. (a) The compensation payable to the Management Company for the provision of Management Services under this Agreement (the "Management Fee"), which the Management Company may retain from funds received by the Management Company from time to time at its discretion, shall be equal to the aggregate of the following: (i) An amount equal to the Applicable Percentage of Collections, provided that the amount thus determined shall be reduced by the Medical Equipment Master Lease Payments; and (ii) An amount equal to sixty-six and two-thirds percent (66-2/3%) of the Professional Practice Cost Savings. (b) For purposes of this Agreement -- (i) "Applicable Percentage" has the meaning set forth in Schedule V. (ii) "Medical Equipment Master Lease Payments" means the monthly lease amounts payable for all Medical Equipment (except for any amounts payable by or on behalf of Robert O. Wilson, M.D., P.C. or Robert O. Wilson, M.D.) determined in accordance with the -27- Medical Equipment Master Lease referenced in Section 3.3(a) hereof. (iii) "Professional Practice Cost Savings" means the cost savings determined in the manner described in Schedule VI. (c) An example of the computation of Medical Group Compensation and the Management Fee is attached hereto as Schedule VII. 5.5 Management Company Costs. (a) The Management Company shall pay all Management Company Operating Costs and all Excluded Costs (collectively, the "Management Company Costs"). All Management Company Costs shall be incurred in the name of the Management Company, and not in the name of the Medical Group, except as specifically approved by the Medical Group. Management Company Costs shall not include any costs or expenses incurred prior to the date of this Agreement. (b) The Management Company shall provide to the Medical Group, upon reasonable request by the Medical Group from time to time, supporting documentation and other backup detail relating to any or all of the Management Company Costs. (c) For purposes of this Agreement, "Management Company Operating Costs" means all costs and expenses incurred in connection with the provision of the Management Services, except for any costs and expenses defined as Medical Group Costs in Section 5.8 hereof, and except for Excluded Costs. Management Company Operating Costs also include the cost of billing and collecting any accounts receivable generated prior to the date hereof and purchased by the Management Company pursuant to the Asset Purchase Agreement. "Excluded Costs" means all of the following costs and expenses incurred in connection with the provision of the Management Services hereunder: (i) New Medical Office Start-Up Costs; (ii) New Physician Start-Up Costs; -28- (iii) The rent and any other payments due under any of the Office Leases; (iv) The cost of any Medical Equipment leased by the Management Company to the Medical Group; (v) The cost of any FF&E provided by the Management Company to the Medical Group; (vi) Depreciation, amortization, and interest; and (vii) Corporate overhead of the Management Company ("Corporate Overhead") except to the extent that all of the following conditions are satisfied: (A) The Corporate Overhead is incurred in lieu of a pre-existing Management Company Operating Cost; (B) The amount of such Corporate Overhead does not exceed the amount of the Management Company Operating Costs being eliminated; and (C) The Corporate Overhead is allocated to the Medical Group and to all other medical groups utilizing such Corporate Overhead on a pro rata basis. Any Corporate Overhead with respect to which all of the above conditions are satisfied shall be considered Management Company Operating Costs. Under no circumstances shall any Corporate Overhead cost allocation include compensation payable to corporate staff, nor shall there be any other Corporate Overhead cost allocation of any kind except to the extent that the conditions set forth in this item (vii) above are satisfied. (d) For purposes of this Agreement, "Authorized Management Company Operating Costs" means all Management Company Operating Costs incurred in any year, reduced by any or all of the following costs if and to the extent that such costs were under the sole control of the Management Company and were not approved by the Operations Committee or by the Medical Group: -29- (i) any costs that exceed the applicable Management Company Operating Costs Budget; (ii) any costs with respect to which the Medical Group has reasonably requested supporting documentation or other backup detail which has not been furnished by the Management Company or which does not reasonably establish the appropriateness of such costs; and (iii) any costs that have been determined pursuant to an audit under Section 5.10 not to have been reasonably incurred in connection with the Management Services required to be provided under of this Agreement. 5.6 New Medical Office Start-Up Costs. (a) The Management Company shall pay all New Medical Office Start-Up Costs incurred in connection with the establishment of any New Medical Office. (b) All Medical Equipment utilized at any New Medical Office shall be acquired by the Management Company and leased to the Medical Group in accordance with Section 3.3 hereof. (c) For purposes of this Agreement, "New Medical Office" means any office of the Medical Group other that the office(s) identified in Section 3.2(a) hereof. (d) For purposes of this Agreement, "New Medical Office Start-Up Costs" means the following costs incurred in connection with the establishment of a New Medical Office during the New Medical Office Start-Up Period: all Management Company Costs and all costs other than physician Medical Personnel costs that, but for this provision, would have been considered Medical Group Costs. (e) For purposes of this Agreement, "New Medical Office Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the -30- establishment of a New Medical Office and ending on the earlier of (i) the last day of the calendar month in which a period of eighteen (18) months has elapsed from and after the date on which the New Medical Office first opened for the treatment of patients, or (ii) the last day of the first period of two (2) consecutive calendar months for which Collections reach a level such that the costs borne by the Management Company in connection with the New Medical Office are less than sixty percent (60%) of the Collections for Medical Group Services provided at the New Medical Office during such two-month period. In no event shall the Management Company have any obligation under this Section 5.6 to pay any New Medical Office Start-Up Costs incurred later than eighteen (18) months after the New Medical Office first opened for the treatment of patients. 5.7 New Physician Start-Up Costs. (a) Upon the request of the Medical Group and approval by the Management Company, which approval shall not be unreasonably withheld, the Management Company shall pay all New Physician Start-Up Costs (as defined below) to the extent authorized hereunder, subject to recoupment by the Management Company as provided herein. (b) The Management Company shall be entitled to retain all Net Collections (as defined below) during the New Physician Start-Up Period (as defined below), which shall be offset against the New Physician Start-Up Costs that the Medical Group has previously paid and is entitled to recoup as provided in Section 5.7(c) below. (c) Beginning with the month immediately following the expiration of the New Physician Start-Up Period, the Management Company shall be entitled to recoup all of the New Physician Start-Up Costs previously paid by the Management Company by retaining any and all Excess Net Collections (as defined below) until the Management Company has recouped the full amount of New Physician Start-Up Costs previously paid by the Management Company, without interest. (d) "New Physician Start-Up Costs" means the following costs (whether otherwise considered Management Company Costs or Medical Group Costs hereunder) payable -31- to or incurred in connection with a New Physician during the New Physician Start-Up Period, but only to the extent approved by the Operations Committee: all salary and other compensation payable to the New Physician; the cost of health insurance and any other employee benefits provided for the benefit of the New Physician; the cost of professional liability insurance coverage for the New Physician; the cost of continuing professional education incurred for the benefit of the New Physician (including the cost of travel, meals, and lodging incurred in connection with attendance at seminars and similar professional events); and all other direct out-of-pocket costs (but not indirect costs), determined on an incremental basis. (e) "New Physician Start-Up Period" means the period commencing on the date that the New Physician commences performing professional medical services as an employee or independent contractor of the Medical Group and ending on the earlier of (i) the last day of the calendar month in which a period of eighteen (18) months has elapsed from and after the date on which the New Physician commenced performing such services, or (ii) the last day of the first period of two (2) consecutive calendar months for which the amount of Net Collections (as defined below) attributable to the services performed by the New Physician equals or exceeds the amount of New Physician Start-Up Costs paid or payable during such period. In no event shall the Management Company have any obligation under this Section 5.7 to pay any New Physician Start-Up Costs incurred later than eighteen (18) months after the New Physician commenced performing professional medical services as an employee or independent contractor of the Medical Group. (f) "Net Collections" in any period means total Collections in such period less that portion of the Management Fee which is based on the Applicable Percentage of Collections. At all times during and after the New Physician Start-Up Period, the Management Company shall be entitled to receive, as part of its compensation under this Agreement, that portion of the Management Fee which is based on the Applicable Percentage of Collections attributable to the services provided by the New Physician. (g) "Excess Net Collections" means the amount (if any) by which Net Collections in any month attributable to services performed by the New Physician exceed the -32- amount of costs paid or payable during such month which would have been considered New Physician Start-Up Costs had they been paid or payable during the New Physician Start-Up Period. (h) "New Physician" means any physician who becomes an employee or independent contractor of the Medical Group after the date hereof and who practices with the Medical Group on a substantially full-time basis. 5.8 Medical Group Costs. Except as otherwise provided in this Agreement, the Medical Group shall pay all of the costs specified in this Section 5.8 (the "Medical Group Costs"). All Medical Group Costs shall be incurred in the name of the Medical Group, and not in the name of the Management Company, and shall be paid from an account of the Medical Group. The Medical Group Costs are as follows: (a) Compensation of all Medical Personnel; (b) Any applicable fringe benefits for all Medical Personnel, including, but not limited to, payroll taxes, workers' compensation, health insurance (including drug coverage), dental insurance, individual disability insurance, life insurance, business buy-out disability insurance, continuing education, and medical dues and licenses; (c) The cost of prosthetics, prosthetic devices, orthotics, braces, splints, appliances, allografts, x-ray films, and other items and supplies that are billable to patients or to third party payors (the "Billable Items"); (d) The Medical Equipment Master Lease Payments; (e) Any lease payments for New Ancillary Service Medical Equipment; (f) The rent payable under any Office Sublease described in Section 3.2 hereof or under any other office sublease entered into with the Management Company; and (g) The cost of any items which are not required to be provided by the Management Company under this Agreement and/or which were ordered, purchased, or incurred by the Medical Group directly, including but not -33- limited to the cost of accounting, legal, consulting, or other professional or advisory services, business meetings, and business taxes. 5.9 New Ancillary Services Costs. (a) Any agreement by the parties to establish a New Ancillary Service as described in Section 3.4 of this Agreement shall (unless otherwise agreed by the parties) incorporate the following: (i) The Management Company shall create a separate division for purposes of accounting for the income, costs, profits, and losses of any New Ancillary Service. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Ancillary Service. (ii) Profits and/or losses of any New Ancillary Service shall be divided equally between the Medical Group and the Management Company, and all distributions to the Medical Group and to the Management Company shall be made in equal amounts to each from available cash (after payment of all currently due obligations incurred in connection with such New Ancillary Service, including without limitation any principal and interest amounts then due and payable under Section 5.9(a)(iv) below, and after retention of reasonable reserves) derived from the operation of such New Ancillary Service. (iii) All diagnostic and therapeutic equipment utilized in connection with any New Ancillary Service ("New Ancillary Service Medical Equipment") shall be acquired by the Management Company and leased to the Medical Group pursuant to an equipment lease substantially in the form of the Medical Equipment Master Lease. (iv) The Management Company shall pay all of the Ancillary Service Start-Up Costs. Beginning with the month immediately following the expiration of the Ancillary Service Start-Up Period, the Management Company shall be entitled to recoup all of the Ancillary Service Start-Up Costs previously paid by the Management Company in sixty (60) equal monthly installments of principal, plus interest on the unrecouped portion of such costs -34- at the prevailing prime rate as set forth in the Wall Street Journal and/or at the actual rate paid by the Management Company (but in no event greater than prime plus two percent (2%)) with respect to any part of such costs that have been financed by the Management Company. (v) The Management Company shall provide, in connection with any New Ancillary Service, the full range of management services described in this agreement. (vi) The billings, collections, costs and expenses relating to any New Ancillary Service shall not be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, New Medical Office Start-Up Costs, New Physician Start-Up Costs, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, 5.7, or 5.8, respectively. (b) For purposes of this Section 5.9, "Ancillary Service Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of the New Ancillary Service and ending on the last day of the first period of two (2) consecutive calendar months for which the New Ancillary Service shows a profit. (c) For purposes of this Section 5.9, "Ancillary Service Start-Up Costs" means the total of all of the following costs incurred in connection with the establishment of a New Ancillary Service during the Ancillary Service Start-Up Period (whether such costs would otherwise be considered Management Company Costs or Medical Group Costs) -- (i) Any lease payments for New Ancillary Service Medical Equipment; (ii) All costs of acquiring furniture, fixtures, and office equipment; (iii) All initial occupancy costs, if any, including but not limited to rent deposits, prepaid rent, and tenant improvements; -35- (iv) All other start-up costs, including but not limited to legal, accounting and consulting fees, and the cost of initial inventories of supplies and other items; and (v) All ongoing costs of the New Ancillary Service, including but not limited to personnel (other than physician Medical Personnel) and related benefits, the cost of operating any equipment utilized in providing the service, supplies, insurance, rent, repairs and maintenance, outside services, telephone, taxes, utilities, storage and other ordinary ongoing expenses of providing the New Ancillary Service. (d) New Ancillary Services shall be provided through legal structures as agreed to by the parties, including but not limited to limited partnerships. Additionally, upon agreement of the parties, New Ancillary Services may be structured to permit the participation of physicians who are not members of the Medical Group and/or who do not have contracts with the Management Company. 5.10 Review and Audit of Books and Records. Each of the parties shall have the right, during ordinary business hours and upon reasonable notice, to review and make copies of, or to audit through a qualified certified public accountant approved by the other party (which approval shall not be unreasonably withheld), the books and records of the other party relating to the billing, collection, and disbursement of fees, and the determination of costs, under this Agreement. Any such review or audit shall be performed at the cost of the requesting party; provided, however, that in the event that such review or audit requested by the Medical Group discloses a discrepancy indicating that the Medical Group has actually been underpaid by an amount in excess of two percent (2%) of the total amount of Medical Group Compensation payable to the Medical Group for the period covered by the audit, the cost of the audit shall be borne by the Management Company. All documents and other information obtained in the course of such review or audit shall be held in strict confidence. -36- 5.11 Start-Up Period. (a) Consistent with the provisions of Section 2 of this Agreement, the parties acknowledge and agree that, in order to facilitate the transition of responsibilities hereunder, certain requirements and procedures agreed to under this Agreement may be implemented over the course of a period of time commencing on the date hereof and ending two (2) months thereafter (subject to extension by agreement of the Medical Group and the Management Company), rather than being fully implemented immediately on the date hereof. Accordingly, the parties may implement interim procedures during such start-up period, including the procedures set forth in Section 5.11(b) hereof. The parties further agree that the Management Fee and Medical Group Compensation payable in respect of the Management Services and the Medical Group Services applicable to such period of time shall be computed, and any appropriate adjustments shall be made, such that no material financial advantage or disadvantage shall accrue to either party as a result of implementing such requirements and procedures over the course of such start-up period rather than immediately on the date hereof. (b) Until such time as the Management Company is able to pay directly, from an account of the Management Company, all Authorized Management Company Operating Costs, the Management Company shall advance to the Medical Group, on or before the first business day of each calendar month, such amount as may be reasonably necessary to pay, on a timely basis, the estimated amount of such costs for such month that the Management Company is not able to pay directly. The Medical Group shall pay such costs on a timely basis, on behalf of the Management Company, from such funds. If additional funds are needed to pay such costs during such month, the Management Company shall provide additional funds to the Medical Group as reasonably required. Any such funds received by the Medical Group from the Management Company which have not been applied by the Medical Group in payment of Authorized Management Company Operating Costs during such month shall be applied to such costs during the subsequent month or refunded to the Management Company. This arrangement shall terminate at such time as procedures have been developed that enable the Management Company to pay all Authorized Management Company Operating Costs directly from an account of the Management Company. Any direct costs incurred in order to implement this interim arrangement shall be borne by the Management Company, and not by the Medical Group. -37- SECTION 6. Representations and Warranties of the Medical Group. The Medical Group hereby represents and warrants to the Management Company, as of the date hereof, as follows: 6.1 Organization; Good Standing; Qualification and Power. The Medical Group is a general partnership duly organized, validly existing, and in good standing under the laws of the State of Arizona and has all requisite power and authority to own, lease, and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement, the Asset Purchase Agreement, the Stockholder Non-Competition Agreement, the Restricted Stock Agreement, the Provider Account Agreement, the Financing Statement, the Medical Equipment Master Lease, each Assignment of Lease, and each Office Sublease (collectively, the "Transaction Documents"), to perform its obligations thereunder, and to consummate the transactions contemplated thereby. The Medical Group has delivered to the Management Company a true and correct copy of its partnership agreement and all amendments thereto (the "Medical Group Governance Documents"), in effect on the date hereof. 6.2 Equity Investments. The Medical Group currently has no subsidiaries, nor does the Medical Group currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. The foregoing shall not be interpreted to be applicable to any of the Partners, individually. 6.3 Authority. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of the Medical Group. The Transaction Documents have been duly and validly executed and delivered by the Medical Group and constitute the legal, valid and binding obligations of the Medical Group enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally or by applicable laws pertaining to the enforceability of non-competition agreements. Neither the execution, delivery or performance of the Transaction Documents by -38- the Medical Group nor the consummation by the Medical Group of the transactions contemplated thereby, nor compliance by the Medical Group with any provision thereof will (a) conflict with or result in a breach of any provision of the Medical Group Governance Documents, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Medical Group or the Medical Business is a party or by which they or any of its respective properties or assets may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or (c) to the best knowledge of the Medical Group, but without expressing any opinion regarding the enforceability of non-competition agreements, violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Medical Group, the Medical Business or any of their respective properties or assets. To the best knowledge of the Medical Group, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Medical Group of the Transaction Documents or the consummation of the transactions contemplated thereby. 6.4 Financial Information. Schedule 6.4 contains (a) the Medical Group's internal statement of assets, liabilities, and partners' equity of the Medical Business as of March 31, 1997 (the "Balance Sheet"; and the date thereof being referred to as the "Balance Sheet Date"), and the related internal statements of revenue and expenses for the period then ended (including the notes thereto and other financial information included therein) (collectively, the "Internal Financial Statements"), (b) the review financial statements of the Medical Business for the periods ended December 31, 1996 and December 31, 1995 (the "Review Financial Statements"), and (c) the historical collections information of the Medical Group for the periods ended April 30, 1997, December 31, 1996, December 31, 1995, and December 31, 1994 (the "Historical Collections Information"). The Internal Financial Statements, the Review Financial Statements, and the Historical Collections Information (i) were prepared in accordance with the books and records of the Medical Business, (ii) fairly present the financial position of the -39- Medical Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the dates thereof. 6.5 Absence of Undisclosed Liabilities. Except as set forth on Schedule 6.5, as of the Balance Sheet Date, (a) the Medical Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Balance Sheet, (b) all liability reserves established by the Medical Business on the Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Balance Sheet. 6.6 Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, the Medical Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Medical Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Medical Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Medical Business other than such items created or incurred in the ordinary course of the Medical Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Medical Business outside the ordinary course of the Medical -40- Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Medical Business except in the ordinary course of the Medical Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Medical Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Medical Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Medical Business; (i) any general uniform increase in the compensation of employees of the Medical Group or the Medical Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any Partner or Principal, or the entering into of any contract with any Partner or Principal, or the making of any loan to, or the engagement in any transaction with, any Partner or Principal; (j) any change in the accounting methods or practices followed in connection with the Medical Business or any change in depreciation or amortization policies or rates theretofore adopted; -41- (k) any agreement or commitment relating to the sale of any material fixed assets of the Medical Business; (l) any other transaction relating to the Medical Business other than in the ordinary course of the Medical Business and consistent with past practice; or (m) any agreement or understanding, whether in writing or otherwise, for the Medical Business to take any of the actions specified in items (a) through (l) above. 6.7 Tax Matters. (a) Except as set forth on Schedule 6.7, (i) all Taxes relating to the Medical Business required to be paid by the Medical Group through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed by the Medical Group in connection with the Medical Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Medical Group prior to the date hereof (collectively, "Returns") have been duly filed; (ii) as of the time of filing, the Returns correctly reflected in all material respects (and, as to any Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Medical Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Medical Business that have been shown as due and payable by the Medical Group on the Returns have been timely paid and filed or adequate provisions made to the books and records of the Medical Business; (iv) in connection with the Medical Business (A) the Medical Group has made provision on the Balance Sheet for all Taxes payable by the Medical Group for any periods that end on or before the Balance Sheet Date for which no Returns have yet been filed and for any periods that begin on or before the Balance Sheet Date and end after the Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Balance Sheet Date and (B) provision has been made for all Taxes payable by the Medical Group for any periods that end on or before the date hereof for which no Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such -42- Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Medical Business, and there are no pending tax audits of any Returns relating to the Medical Business; and (vi) no deficiency or addition to Taxes, interest or penalties applicable to the Medical Group for any Taxes relating to the operation of the Medical Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Medical Group or any previous operator of the Medical Business was a member for which the Medical Group could be liable). (b) The Medical Group is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code"). (c) The Medical Group has provided the Management Company with true and complete copies of all Federal, state and foreign Returns of the Medical Group for the calendar years ending December 31, 1995 and 1996. (d) For purposes of this Agreement, "Tax" means any of the Taxes and "Taxes" means, with respect to any person or entity, (i) all federal, state, local and foreign income taxes (including any tax on or based upon net income, or gross income, or income as specially defined, or earnings, or profits, or selected items of income, earnings or profits) and all Federal, state, local and foreign gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties or other Federal, state, local and foreign taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) on such person or entity and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of being a `transferee' (within the meaning of Section 6901 of the Code or any other applicable law) of another person or entity or a member of an affiliated or combined group. -43- 6.8 Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Medical Group, threatened against the Medical Group or any Partner or Principal in connection with the Medical Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Medical Group, its assets or affecting the Medical Business. The Medical Group has delivered to the Management Company all documents and correspondence relating to matters referred to in said Schedule 6.8. 6.9 Compliance; Governmental Authorizations. The Medical Group, all Partners and Principals, and the Medical Business shall have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Medical Group and all Partners and Principals have all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Medical Business, the lack of which would have a material adverse effect on the Medical Group's ability to operate the Medical Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Medical Group has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Medical Group, threatened to revoke or limit any thereof. To the best knowledge of the Medical Group, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 6.10 Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 6.10, all of the accounts receivable owing to the Medical Group in connection with the Medical Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Medical Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Medical Group, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 6.10, as of the date hereof, there -44- is (i) no account debtor or note debtor of the Medical Business delinquent in its payment by more than 60 days, (ii) no account debtor or note debtor of the Medical Business who or which has refused to pay its obligations for any reason or is the subject of a bankruptcy proceeding and (iii) no account receivable or note receivable of the Medical Business pledged to any third party. (b) All accounts payable and notes payable by the Medical Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 6.10, there is no account payable or note payable past due or delinquent in its payment. 6.11 Labor Relations; Employees. Schedule 6.11 contains a true and complete list of the persons employed by the Medical Group as of the date hereof (the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and the Medical Business are not delinquent in payments to any of the Employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Employees; (b) upon termination of the employment of any of the Employees, neither the Medical Group, the Medical Business nor the Management Company will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Medical Group or in connection with the Medical Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Medical Group, threatened against or involving the Medical Group or Medical Business; (e) there is no collective bargaining agreement covering any of the Employees; and (f) to the best knowledge of the Medical Group, no Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Medical Group or the Medical Business. -45- 6.12 Employee Benefit Plans. (a) Schedule 6.12 identifies each `employee benefit plan', as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Medical Group, any Partner, or the Medical Business, on one hand, and any Employee or former employee of the Medical Group or of a Partner in connection with the Medical Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Medical Group or any Partner, or in connection with the Medical Business for the benefit of any Employee or former employee of the Medical Group or any Partner, or in connection with the Medical Business under which the Medical Group, any Partner, any affiliate of the Medical Group, or the Medical Business has any present or future obligation or liability (the "Employee Plans"). The Medical Group has provided the Management Company with true and complete age, salary, service and related data for Employees of the Medical Group and in connection with the Medical Business. (b) Schedule 6.12 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Medical Group or in connection with the Medical Business. 6.13 Insurance. Schedule 6.13 contains a list of all policies of professional liability (medical malpractice), general liability, theft, fidelity, fire, product liability, errors and omissions, health and other property and casualty forms of insurance held by the Medical Group covering the assets, properties or operations of the Medical Group and the Medical Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither -46- the Medical Group nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Medical Group or the Medical Business. 6.14 Real Property. Schedule 6.14 sets forth an accurate and complete legal description of the entire right, title and interest of the Medical Group in and to all real property, together with all buildings, facilities, fixtures and improvements located on such real property, owned or leased by the Medical Group (the "Real Property"), together with an accurate description of the title insurance policy or other evidence of title issued with respect thereto, the most current survey of such real property and a description of the use thereof. Other than the Real Property, the Medical Group has no other interest (leasehold or otherwise) in real property used, held for use or intended to be used in the Medical Business. The Medical Group has a valid leasehold interest in all Real Property leased by the Medical Group. 6.15 Burdensome Restrictions. Except as set forth on Schedule 6.15, neither the Medical Group nor the Medical Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Medical Group or the Medical Business (or any material part thereof). 6.16 Disclosure. Neither the Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Management Company by or on behalf of the Medical Group in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 6.16, there have been no events or transactions, or information which has come to the attention of the Medical Group, which, as they relate directly to the Medical Group or the Medical Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Medical Group and the Medical Business. -47- SECTION 7. Representations and Warranties of the Management Company. The Management Company represents and warrants to the Medical Group, as of the date hereof, as follows: 7.1 Organization, Good Standing and Power. The Management Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement and each of the other Transaction Documents, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. 7.2 Authority. The execution, delivery and performance of the Transaction Documents, and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action on the part of the Management Company. The Transaction Documents to which it is a party have been duly and validly executed and delivered by the Management Company, and such Transaction Documents are valid and binding obligations of the Management Company, enforceable in accordance with their respective terms except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of the Transaction Documents, nor the consummation by the Management Company of the transactions contemplated thereby, nor compliance by the Management Company with any provision thereof, will (a) conflict with or result in a breach of any provisions of the Certificate of Incorporation or By-laws of the Management Company, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Management Company is a party or by which it or any of its properties or assets is or may be bound or (c) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Management Company or any of its properties or assets. -48- 7.3 Issuance of Common Stock. The Management Company has taken all action necessary or appropriate to duly authorize the creation, issuance and sale of the common stock to be issued hereunder. Such shares of common stock, when issued, sold and delivered, as provided for herein and in the Restricted Stock Agreement, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership of the shares. The issuance of such shares of common stock will not violate any preemptive or similar right of any person. 7.4 Issued and Outstanding Stock. Set forth in Schedule 7.4 is an accurate and complete list of the number and class of issued and outstanding shares of stock of the Management Company as of the date specified therein. Each of the outstanding shares of capital stock has been duly and validly authorized and issued, is fully paid and non-assessable. 7.5 Permits, Authorizations, Consents, Approvals, Notifications, and Filings. Except as provided in Schedule 7.5, to the best of the Management Company's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Management Company of this Agreement or the consummation by the Management Company of the transactions contemplated hereby. 7.6 Financial Information. Schedule 7.6 contains (a) the unaudited statements of assets, liabilities and stockholders' equity of the Management Business as at the date set forth therein (the "Management Company Balance Sheet"; and the date thereof being referred to as the "Management Company Balance Sheet Date"), and the related unaudited statements of revenue and expenses for the periods then ended (including the notes thereto and other financial information included therein) (collectively, the "Unaudited Financial Statements"). The Unaudited Financial Statements (i) were prepared in accordance with the books and records of the Management Business, (ii) fairly present the financial position of the Management Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the date thereof. -49- 7.7 Absence of Undisclosed Liabilities. Except as set forth on Schedule 7.7, as of the Management Company Balance Sheet Date, (a) the Management Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Management Company Balance Sheet, (b) all liability reserves established by the Management Business on the Management Company Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Management Company Balance Sheet. 7.8 Absence of Changes. Except as set forth on Schedule 7.8, since the Management Company Balance Sheet Date, the Management Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Management Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Management Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Management Business other than such items created or incurred in the ordinary course of the Management Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Management Business outside the ordinary course of the Management Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); -50- (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Management Business except in the ordinary course of the Management Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Management Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Management Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which the Management Business, such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Management Business; (i) any general uniform increase in the compensation of employees of the Management Company or the Management Business (including, without limitation, any increase pursuant to any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Management Company or the Management Business; (j) any change in the accounting methods or practices followed in connection with the Management Business or any change in depreciation or amortization policies or rates theretofore adopted; -51- (k) any agreement or commitment relating to the sale of any material fixed assets of the Management Business; (l) any other transaction relating to the Management Business other than in the ordinary course of the Management Business and consistent with past practice; or (m) any agreement or understanding, whether in writing or otherwise, for the Management Business to take any of the actions specified in items (a) through (l) above. 7.9 Tax Matters. (a) Except as set forth on Schedule 7.9, (i) all Taxes relating to the Management Business required to be paid through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed in connection with the Management Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Management Company prior to the date hereof (collectively, "Management Company Returns") have been duly filed; (ii) as of the time of filing, the Management Company Returns correctly reflected in all material respects (and, as to any Management Company Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Management Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Management Business that have been shown as due and payable on the Management Company Returns have been timely paid and filed or adequate provisions made to the books and records of the Management Business; (iv) in connection with the Management Business (A) the Management Company has made provision on the Management Company Balance Sheet for all Taxes payable for any periods that end on or before the Management Company Balance Sheet Date for which no Management Company Returns have yet been filed and for any periods that begin on or before the Management Company Balance Sheet Date and end after the Management Company Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Management Company Balance Sheet Date and (B) provision has been made for all Taxes payable for any -52- periods that end on or before the date hereof for which no Management Company Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Management Business, and there are no pending tax audits of any Management Company Returns relating to the Management Business; and (vi) no deficiency or addition to Taxes, interest or penalties for any Taxes relating to the operation of the Management Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Management Company or any previous operator of the Management Business was a member for which the Management Company could be liable). (b) The Management Company is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Code. 7.10 Litigation, Etc. Except as set forth on Schedule 7.10, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Management Company, threatened against the Management Company or in connection with the Management Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Management Company its assets or affecting the Management Business. 7.11 Compliance; Governmental Authorizations. The Management Company and the Management Business have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Management Company has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Management Business, the lack of which would have a material adverse effect on the Management Company's ability to operate the Management Business after the date hereof on substantially the same basis as presently operated, and such licenses and permits are in full force -53- and effect. To the best knowledge of the Management Company, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 7.12 Accounts and Notes Payable. All accounts payable and notes payable by the Management Company to third parties arose in the ordinary course of business, and there is no account payable or note payable which is delinquent. 7.13 Employees. Except as set forth on Schedule 7.13, the Management Company is not delinquent in payments to any of the Management Company employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof. 7.14 Employee Benefit Plans. The Management Company is not delinquent in its payments or otherwise in default under any `employee benefit plan', as defined in Section 3(3) of ERISA. 7.15 Insurance. The Management Company has obtained such policies of insurance as are usual and customary for businesses of the type conducted by the Management Company. All such policies of insurance are valid and enforceable policies, and all premiums with respect thereto are currently paid. The Management Company has not been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Management Company or the Management Business. 7.16 Real Property. The Management Company has a valid leasehold interest in all real property leased by the Management Company. 7.17 Burdensome Restrictions. Neither the Management Company nor the Management Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Management Company or the Management Business (or any material part thereof). -54- 7.18 Disclosure. Neither the Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Medical Group by or on behalf of the Management Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 7.18, there have been no events or transactions, or information which has come to the attention of the Management Company, which, as they relate directly to the Management Company or the Management Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Management Company and the Management Business. SECTION 8. Operations Committee. 8.1 Formation and Operation of the Operations Committee. (a) The Management Company and the Medical Group shall establish an Operations Committee responsible for directing the Management Company in connection with the development of certain specific management and administrative policies for the overall operation of the Medical Group. The business of the Operations Committee shall be conducted in accordance with the policies and procedures described in Section 8.4 hereof. (b) The Operations Committee shall consist of four (4) members. The Medical Group shall designate two (2) members of the Operations Committee, each of whom shall be a physician in the Medical Group, and the Management Company shall designate two (2) members of the Operations Committee. 8.2 Authoritative Functions of the Operations Committee. The Operations Committee shall perform the following functions, and the decisions of the Operations Committee with respect to such functions shall be binding on the Management Company and the Medical Group: (a) Approve the annual budgets for: (i) Billings and Collections (ii) Medical Group Costs -55- (iii) Management Company Operating Costs (which, in the absence of approval by the Operations Committee, shall be increased by one percent (1.0%) over the total amount approved for the preceding period) (b) Approve costs and expenses that exceed the Management Company Operating Costs Budget. (c) Establish parameters and criteria with respect to the establishment and maintenance of relationships with institutional providers and payors and managed care contracts (except with respect to the establishment of professional fees). (d) Establish parameters and criteria with respect to: (i) Billings (ii) Claims submission (iii) Collections of fees (iv) Delinquent account collection policies (v) Turnover of delinquent accounts to outside collection agencies (vi) Write-offs of account balances (vii) Claim review requests (viii) "Insurance only" and other courtesy write-off policies (ix) Lien account collection policies (x) Student Athlete account policies (e) Approve the acquisition, replacement, relocation, or other disposition of Medical Equipment and FF&E, approve the integration of new technologies into the professional practice of the Medical Group as contemplated by Section 3.13 hereof, and approve the renovation and expansion of any offices of the Medical Group ("Tenant Improvements"); provided, however, that the approval of the Management Company also -56- shall be required prior to (i) the acquisition of any Medical Equipment or FF&E (including any Medical Equipment or FF&E relating to the integration of new technologies into the professional practice of the Medical Group) if and to the extent that the aggregate cost of such items in any calendar year exceeds five percent (5%) of the Management Fee for such year, (ii) the undertaking of any Tenant Improvements relating to patient care facilities that cost more than $10,000 in the aggregate at any one of the Medical Group's office locations in any calendar year, or (iii) the undertaking of any other Tenant Improvements. (f) Establish parameters and criteria for off-site storage of files and records of the Medical Group. (g) Approve any change in the insurance carrier that provides professional liability coverage to the Medical Group. (h) Approve all New Physician Start-Up Costs in accordance with Section 5.7 hereof. 8.3 Advisory Functions of the Operations Committee. The Operations Committee shall review, evaluate and make recommendations to the Medical Group and the Management Company with respect to the following matters: (a) Identification of physician subspecialties required for the efficient operation of the Medical Group; advice regarding all Medical Personnel employment and recruitment contracts to be utilized by the Medical Group. (b) Development of long-term strategic planning objectives for the Medical Group. -57- (c) Public relations, advertising, and other marketing of Medical Group services, including design of exterior signs. (d) The establishment of fees for professional services and ancillary services rendered by the Medical Group. (e) Access and quality issues pertaining to ancillary services. (f) Insurance limits and insurance coverage of the Medical Group and the Management Company, as such coverage may relate to Medical Group operations and activities. (g) Any matters arising in connection with the operations of the Medical Group that are not specifically addressed in this Agreement and as to which the Management Company or the Medical Group requests consideration by the Operations Committee. The recommendations of the Operations Committee with respect to the matters described in this Section 8.3 are intended for the advice and guidance of the Management Company and the Medical Group, and except as provided herein, the Operations Committee does not have the power to bind the Management Company or the Medical Group. Where discretion with respect to any matters is vested in the Management Company or the Medical Group under the terms of this Agreement, the Management Company or the Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Operations Committee. The Management Company and the Medical Group shall, however, take such recommendations of the Operations Committee into account in good faith in the exercise of such discretion. 8.4 Committee Policies and Procedures. (a) The Medical Group shall designate one of its members to act as Chairman of the Committee, and the Management Company shall designate one of its members to act as -58- Vice Chairman. Each party may substitute or change its designated Operations Committee members at any time upon notice to the other party, and any Operations Committee member may designate his or her own substitute at any meeting without notice. Each member shall have one vote and shall have the right to grant his or her proxy to another member of the Operations Committee. The Chairman, if present, shall preside at all meetings of the Operations Committee. In the absence of the designated Chairman, the Vice Chairman shall preside. The only powers of the Chairman and the Vice Chairman that differ from those of the other members of the Operations Committee shall be to call and preside over meetings in accordance with this Section 8.4. (b) The Operations Committee may hold meetings without call or formal notice at such times and places as a quorum of its members may from time to time determine. A meeting of the Operations Committee also may be called by at least two (2) members of the Operations Committee or by the Chairman or Vice Chairman thereof upon at least three (3) days' written notice to the other members of the Operations Committee. Such notice requirement shall be deemed waived with respect to any member of the Operations Committee who attends such meeting. Meetings may be held in person or by telephone. The Operations Committee also may act by written consent as provided in Section 8.4(c). Minutes shall be kept of all formal actions taken by the Operations Committee. (c) No action of the Operations Committee shall be effective unless authorized by the vote of the four (4) members of the Operations Committee present or represented by proxy at the applicable meeting. A quorum of the Operations Committee shall be the four (4) members, in person, by telephone, or by proxy, and a quorum must remain for the duration of the meeting. The Operations Committee may establish such procedures to act by written consent, without a meeting, as the Operations Committee determines are advisable, provided that all four (4) members (in person or by proxy) must sign any written consent. SECTION 9. Obligations of the Medical Group. The Medical Group shall perform the following obligations during the Term: -59- 9.1 Compliance with Laws. The Medical Group shall provide professional services to patients in compliance at all times with ethical standards, laws and regulations to which they are subject. The Medical Group shall verify, with the assistance of the Management Company, that each physician and other Medical Personnel associated with the Medical Group for the purpose of providing medical care to patients of the Medical Group is appropriately licensed. The Medical Group shall monitor the quality of medical care practiced by physicians and other health care personnel associated with the Medical Group. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician by any payor, patient, state or federal regulatory agency or any other person or entity, the Medical Group shall immediately inform the Management Company of such action and its underlying facts and circumstances. 9.2 Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts. The Medical Group shall have the exclusive control over the choice of vendors and products utilized with respect to all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, medical supplies and allografts. 9.3 Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group shall have exclusive control over the choice of specific physicians and facilities to be utilized by the Medical Group with respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical professionals and facilities; provided, however, that the foregoing shall not limit the provisions of Section 3.4(b) hereof. 9.4 Insurability. The Medical Group shall cooperate with the Management Company in (i) ensuring that its Medical Personnel are insurable or (ii) instituting proceedings to terminate within two business days any Medical Personnel who is not insurable or who loses his or her insurance eligibility. The Medical Group shall notify the Management Company in writing of any change in the insurance status of any Medical Personnel within two days after the Medical Group receives notice of any such change. The Medical Group shall require all Medical Personnel to participate in an on-going risk management program. -60- 9.5 Medicare. The Medical Group shall cause all physicians to be participating providers and accept assignment under Medicare. 9.6 Billing. The Medical Group's Medical Personnel shall be responsible for providing the appropriate current CPT4 coding with respect to the fee tickets prepared by such Medical Personnel. 9.7 Medical Personnel Hiring. The Medical Group shall have the ultimate control over and responsibility for the hiring, compensation, supervision, evaluation and termination of its Medical Personnel; provided, however, that at the request of the Medical Group, the Management Company shall consult with the Medical Group regarding such matters. 9.8 Continuing Education. The Medical Group and its Medical Personnel shall be solely responsible for ongoing membership in professional associations and continuing professional education. The Medical Group shall ensure that its Medical Personnel participate in such continuing professional education as is necessary for such physician or professional to remain current in his or her field of medical practice. SECTION 10. Certain Covenants. 10.1 Change of Control. During the Term of this Agreement, the Medical Group shall not enter into any single transaction (or group of related transactions undertaken pursuant to a common plan) involving the admission of new partners, transfer of any partnership interest in the Medical Group, or reorganization or restructuring of the Medical Group, if in any such case the effect would be to transfer a majority of the ownership interest in the Medical Group, without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. 10.2 Legend on Securities. During the Term of this Agreement, any certificate or similar evidence representing an equity interest in the Medical Group issued by the Medical Group shall bear the following legend: -61- "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF JULY 1, 1997, BETWEEN SUN VALLEY ORTHOPAEDIC SURGEONS, AN ARIZONA GENERAL PARTNERSHIP, BONE, MUSCLE AND JOINT, INC., A DELAWARE CORPORATION, AND THE INDEMNIFYING PARTIES (AS DEFINED THEREIN)." 10.3 Non-Disclosure of Confidential Information. Neither the Management Company nor the Medical Group, nor their respective employees, consultants or agents, nor any Partner or Principal, shall, at any time after the execution and delivery hereof, directly or indirectly disclose any Confidential or Proprietary Information relating to the other party hereto to any person, firm, corporation, association or other entity, nor shall either party, or any of their respective employees, consultants or agents, or any Partner or Principal, make use of any of such Confidential or Proprietary Information for its, his or her own purposes or for the benefit of any person, firm, corporation or other entity except the parties hereto or any subsidiary or affiliate thereof. The foregoing obligation shall not apply to any information which a party hereto can establish to have (a) become publicly known without breach of this Agreement by it or them, (b) to have been given to such party by a third party who is not obligated to maintain the confidentiality of such information, or (c) is disclosed to a third party with the prior written consent of the other party hereto. 10.4 Confidential or Proprietary Information. The term "Confidential or Proprietary Information" means all information known to a party hereto, or to any of its employees, officers, directors, consultants, or agents, or to any Partner or Principal, which relates to the Transaction Documents, patient medical and billing records, trade secrets, books and records, supplies, pricing and cost information, marketing plans, strategies and forecasts. Nothing contained herein shall prevent a party hereto from furnishing Confidential or Proprietary Information pursuant to a direct order of a court of competent jurisdiction. -62- SECTION 11. Records. 11.1 Medical Records. Upon termination of this Agreement, the Medical Group shall retain all patient medical records maintained by the Medical Group or the Management Company in the name of the Medical Group. 11.2 Management Business Records. All books and records relating in any way to the operation of the Management Business which are not patient medical records shall at all times be the property of the Management Company. The Medical Group shall, upon its written request, be entitled to copies of any such records relating to the Management Services performed by the Management Company. 11.3 Access to Records Following Termination. (a) Following the termination of this Agreement, the Medical Group shall grant (to the extent permitted by law) to the Management Company, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, reasonable access (which shall include making photocopies) to the patient medical records described in Section 11.1 hereof and any other pertinent information regarding the Medical Group during the Term. Prior to accessing such patient medical records, the Management Company shall obtain any required patient authorization. (b) Following the termination of this Agreement, the Management Company shall provide to the Medical Group, promptly upon the Medical Group's written request, photocopies of the Management Business records described in Section 11.2 hereof, and shall grant to the Medical Group, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, any other pertinent information regarding the Management Company during the Term. SECTION 12. Insurance and Indemnity. 12.1 Professional Liability Insurance. During the Term, the Management Company shall, to the extent permitted by applicable law, and subject to approval by the Operations Committee if required by Section 8.2(g) hereof, procure and maintain comprehensive -63- professional liability insurance providing for (a) general liability coverage and (b) medical malpractice coverage, in each case with limits of not less than $1,000,000 per claim and not less than $3,000,000 in the aggregate (or such higher amounts as may be necessary to comply with any applicable regulatory or contractual requirement), covering the Medical Group and each of the Medical Personnel of the Medical Group, including coverage for claims made after the date hereof relating to events or occurrences at any time prior thereto. The Management Company shall be designated as an additional insured under all such insurance policies. The parties hereto acknowledge that the Management Company is procuring the malpractice insurance referenced herein to ensure that the Management Company has protection in the event it is sued as a result of an act or omission of an employee of the Medical Group. The Management Company shall pay the premiums for such general and medical malpractice liability coverage, which payments shall be considered Management Company Operating Costs under this Agreement, subject to recoupment by the Management Company in accordance with Section 5 hereof); provided, however, that if any additional premium is charged for adding the Management Company as an additional insured under any such policy, the cost thereof shall be considered Management Company corporate overhead and therefore not subject to recoupment by the Management Company. 12.2 Life Insurance. The Management Company shall obtain a $500,000 life insurance policy for each duly licensed physician who is a Partner or Principal.. The Management Company shall be designated as the beneficiary under such policies. The premiums for such policies shall be paid by the Management Company and shall not be included as Management Company Operating Costs or otherwise charged to the Medical Group. 12.3 Indemnification by Medical Group. The Medical Group shall indemnify, hold harmless and defend the Management Company, its officers, directors, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Medical Group Services, including without limitation the performance of such services prior to the date hereof, (ii) any other acts or omissions of the -64- Medical Group or its Medical Personnel, including without limitation any such acts or omissions that occurred prior to the date hereof, (iii) the untruth or inaccuracy of any representation or warranty of the Medical Group contained in this Agreement (including any Schedule) or in any of the other Transaction Documents or any certificate delivered by the Medical Group in connection herewith, or (iv) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Medical Group and/or the Medical Personnel and/or their respective agents and/or subcontractors (other than the Management Company) during the Term. 12.4 Indemnification by Certain Individuals. Each of the Medical Personnel who currently is or hereinafter becomes a Partner or Principal (each, an "Indemnifying Party") shall, on a several basis, indemnify, hold harmless and defend the Management Company, its officers, directors, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of medical services by the Indemnifying Party, (ii) any other acts or omissions by the Indemnifying Party, (iii) any breach or failure to perform any obligation under any of the Transaction Documents by the Indemnifying Party and/or his or her agents during the Term. Each new Partner and Principal shall execute a written statement agreeing to be bound by this Section 12.4. 12.5 Indemnification by Management Company. The Management Company shall indemnify, hold harmless and defend the Medical Group, the Partners, Principals, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Management Services, (ii) any other acts or omissions of the Management Company or its employees, including without limitation any such acts or omissions that occurred prior to the date hereof, (iii) the untruth or inaccuracy of any representation or warranty of the Management Company contained in this Agreement (including any Schedule) or in any of the other Transaction Documents or any certificate -65- delivered by the Management Company in connection herewith, or (iv) any breach of or failure to perform any obligation under this Agreement or the Transaction Documents by the Management Company and/or its employees and/or their respective agents and/or subcontractors (other than the Medical Group) during the Term. 12.6 Notice and Control of Litigation. If any claim is asserted in writing against any person entitled to indemnification (each, an "Indemnitee") under Section 12.3, 12.4, or 12.5, the Indemnitee shall give notice to the entity or person required to provide such indemnification (each, an "Indemnitor") within thirty (30) days of receipt of such written assertion of such claim. The Indemnitor shall have the right to defend the claim and control the defense, settlement and prosecution of any litigation. If the Indemnitor exercises its right to undertake its defense of the claim, the Indemnitee shall have the right to participate fully in such defense at its own expense. All parties shall cooperate in the defense of such claims. Should the Indemnitee fail to notify the Indemnitor within the time period specified above, the right to indemnification shall terminate and be of no further force and effect with respect to the subject matter of the required notice. SECTION 13. Termination. 13.1 Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement, including without limitation the reporting requirements specified in the last sentence of Section 3.5 of this Agreement, and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter -66- diligently prosecute such action to completion, or (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice. 13.2 Termination by Management Company. The Management Company may terminate this Agreement effective immediately by giving written notice of termination to the Medical Group (a) in the event of a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical Group shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Medical Group shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Medical Group by the Management Company or the Medical Group does not thereafter diligently prosecute such action to completion, (c) in the event that any of the representations and warranties made by the Medical Group in Section 6 is untrue or misleading in any material respect, provided that the Management Company shall have previously given written notice to the Medical Group describing in reasonable detail the nature of the item in question and the Medical Group shall not have cured such matter within thirty (30) days of such notice, or (d) in the event the Medical Group is excluded from the Medicaid or Medicare program by action taken by the agency (or its representative) that operates such program (including any voluntary termination from such program under threat of action by any such agency or representative) based on a breach or violation (or alleged breach or violation) of the rules, regulations, or other requirements governing such program. 13.3 Termination by Medical Group or Management Company. The Medical Group and the Management Company shall each have the right to terminate this Agreement effective immediately by giving written notice of termination to the other party pursuant to Section 27 of this Agreement. -67- 13.4 Effect of Termination. (a) Upon the termination of this Agreement in accordance with the terms hereof, neither party hereto shall have any further obligation or liability to the other party hereunder, except as provided in Section 5.3(b), Section 13.5, and Section 26 hereof, and except to pay in full and satisfy any and all outstanding obligations of the parties accruing through the effective date of termination. In order to accomplish the foregoing, the Annual Medical Group Compensation Amount described in Section 5.3(b) shall be calculated on or before the end of the fourth month following the termination date, rather than on or before April 30 as specified in Section 5.3(b), and the computation made under such section shall be made with respect to the portion of the year ending on the termination date (if the termination date is other than December 31). In making such computation, all Collections during January, February, and March of such year shall be excluded, and all Collections during the three-month period following termination shall be included. Additionally, any payment required under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days after the date by which the foregoing calculation is to be made, rather than on May 15. (b) Upon termination of this Agreement, the Management Company agrees to deliver to the Medical Group upon request by the Medical Group, a Financing Statement amending the terms of any Financing Statement filed with the Secretary of State of the state in which the principal place of business of the Medical Group is located, excluding from the collateral thereunder any accounts receivable generated after the date of termination of this Agreement. 13.5 Repurchase of Assets. Promptly following termination of this Agreement for any reason, the Medical Group shall have the option, exercisable at any time prior to such termination or within thirty (30) days after such termination, to purchase, assume, and accept from the Management Company, at such price and upon such terms as may be agreed upon by the parties -- or, if the parties are unable to agree, at fair market value, determined in the manner set forth below -- all of the following items which are used in connection with the professional practice and related activities of the Medical Group and which, in the case of items -68- (a), (b), (c) and (d), are physically located in any of the offices of the Medical Group, subject to any required consent from any third party having an interest therein: (a) the Medical Equipment owned by the Management Company; (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Management Company; (c) the Management Company's rights and interests in any equipment leased by the Management Company, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; (d) the supplies owned by the Management Company; (e) the Management Company's rights and interests under all of the Office Leases, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; and (f) the deposits of the Management Company relating to the Medical Group. Fair market value of the above described assets shall be determined by an independent appraiser mutually agreed upon by the Medical Group and the Management Company; provided, however, that if the Medical Group and the Management Company are unable to agree upon such an appraiser, each of the parties shall select an appraiser and the two appraisers thus selected shall select a third appraiser. All of the appraisers shall appraise the assets, and for purposes of determining the purchase price, the highest and lowest appraisals shall be disregarded, and the remaining appraisal shall be used. 13.6 Phase II. For purposes of this Agreement, the commencement date of "Phase II" means the earlier of the following: -69- (a) the date on which the Management Company files a Preliminary Prospectus for the initial public offering of its stock with the Securities and Exchange Commission; or (b) the first day of the month next following the first period of twelve (12) consecutive calendar months for which Aggregate Group Collections ("AGC") equals or exceeds Sixty-Five Million Dollars ($65,000,000), where AGC means the sum of the following: (i) the Collections of the Medical Group; provided, however, that with respect to any physician who joins the Medical Group after the date hereof and before the end of the third month of the above- described twelve-month period, the collections attributable to such physician for purposes of this computation shall be computed by determining the amount of such collections commencing on the first day of the fourth month after the physician begins performing professional services for or with the Medical Group and ending on the last day of the above-described twelve (12) month period, and then annualizing the amount thus determined; plus (ii) the aggregate amount of the total actual collections of all other medical groups which have entered into management services agreements ("MSAs") with the Management Company (including any such agreement that is to become operational upon the consummation of the Management Company's IPO); provided, however, that with respect to any physician who joins any such medical group during the first three months of the above-described twelve-month period, the collections attributable to such physician for purposes of this computation shall be computed by determining the amount of such collections commencing on the first day of the fourth month after the physician begins performing professional -70- services for or with such medical group and ending on the last day of the above-described twelve-month period, and then annualizing the amount thus determined; provided, further, that in the event any MSA between the Management Company and a medical group provides for a management fee that is other than ten percent (10.0%) of gross collections, then the amount of collections attributable to such medical group for purposes of this computation shall be adjusted by multiplying the actual amount of collections by a fraction, the numerator of which is equal to such management fee percentage figure and the denominator of which is ten (10). For example, if the MSA for another medical group provides for a management fee of five percent (5.0%) of the medical group's collections, then the actual amount of such collections shall be adjusted by multiplying such actual amount by 5/10, or 1/2. For purposes of this computation, any portion of the management fee payable in respect of Professional Practice Cost Savings (as described in Schedule VI) or similar formulations applicable to any other medical group shall be ignored. SECTION 14. Rescission/Disengagement. 14.1 Seventh Anniversary of Agreement. Effective as of the seventh anniversary (the "Effective Date") of the date hereof, the Medical Group, at its option, may rescind this Agreement and disengage itself from further participation in, and from all of its obligations under, this Agreement, pursuant to the terms and conditions set forth in Section 14.2 hereof. 14.2 Rescission/Disengagement by Medical Group. (a) Notice and Effective Date. The option conferred under Section 14.1 hereof may be exercised by the Medical Group by giving written notice of rescission/disengagement to the Management Company not less than thirty (30) days prior to the Effective Date, subject to the Medical Group's compliance with the provisions of Sections 14.2(c) and 14.2(d) below. -71- (b) Effect of Rescission/Disengagement. The effect of the rescission/ disengagement by the Medical Group pursuant to the provisions of this Section 14.2 shall be identical to the effect of termination as described in Section 13.4 of this Agreement. (c) Repurchase of Assets. Within thirty (30) days following the Effective Date of the rescission/disengagement by the Medical Group, the Management Company shall, subject to the prior receipt of any required landlord and third party consents, sell, transfer, convey, and assign to the Medical Group, and the Medical Group shall purchase, assume, and accept from the Management Company, the property described in Section 13.5 of this Agreement, in accordance with the terms set forth in Section 13.5. (d) Repayment of Consideration. On or before the Effective Date of the rescission/disengagement, the Medical Group shall deliver to the Management Company the following: (i) Cash Consideration: The Medical Group shall not be obligated to return any of the cash consideration received by the Medical Group or by the Eligible Parties from the Management Company upon execution of this Agreement. (ii) Stock of the Management Company: All shares of stock of the Management Company received by the Eligible Parties shall be returned and redelivered to the Management Company. In the event any portion of the shares to be returned and redelivered shall have been previously disposed of by any of the Eligible Parties, the Fair Market Value (as defined in the Restricted Stock Agreement) of such portion, determined as of the Effective Date, shall be payable to the Management Company by cashier's check or by wire transfer of good funds delivered to a depository institution designated by the Management Company. (e) Management Fee. The Management Company shall have no obligation to return to the Medical Group any portion of the Management Fees paid by the Medical Group under the terms of this Agreement. -72- 14.3 Waiver of Rescission/Disengagement Right. Notwithstanding anything contained herein to the contrary, the parties hereto expressly agree and acknowledge that if the Medical Group shall fail to deliver the notice of rescission/disengagement referenced in Section 14.2 hereof within the time period specified in Section 14.2, then the Medical Group shall be deemed to have expressly and irrevocably waived its right to rescind and/or disengage from the Management Services Agreement pursuant to the applicable provisions of Sections 14.1 and 14.2 hereof. 14.4 Continuation of Management Fees. The parties hereto acknowledge that in the event this Agreement is terminated or rescinded (or the parties disengage) pursuant to the provisions of Section 13 or Section 14 hereof, the Management Company shall be entitled to all Management Fees otherwise payable hereunder for all services provided to the Medical Group through and including the date of such termination, rescission, or disengagement. This provision shall survive any such termination, rescission, or disengagement, and for purposes thereof, the parties agree that the transfer of funds provided for in Section 5.1 hereof shall continue until such time as the Management Company has collected all Management Fees to which it is entitled. SECTION 15. Non-Competition. In consideration of the premises contained herein and the consideration to be received hereunder, and in consideration of and as an inducement to the Management Company to consummate the transactions contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition provisions attached hereto as Schedule VIII, (b) agrees to require each of the Eligible Parties to execute the Stockholder Non-Competition Agreement executed by the Medical Group and the Management Company concurrently herewith (the "Stockholder Non-Competition Agreement"), and (c) agrees to require each person who after the date hereof becomes entitled to receive shares (or options to receive shares) in the Management Company in connection with his or her performance of services for the Medical Group, to execute an agreement substantially identical to the Stockholder Non-Competition Agreement. -73- SECTION 16. Obligations of the Management Company. 16.1 No Practice of Medicine. The Medical Group and the Management Company acknowledge that certain federal and state statutes severely restrict or prohibit the Management Company from providing medical services. Accordingly, during the Term, the Management Company shall not provide or otherwise engage in services or activities which constitute the practice of medicine, as defined in applicable state or federal law, except in compliance therewith. 16.2 No Interference with Professional Judgment. Without in any way limiting Section 16.1 hereof, during the Term, the Management Company shall not interfere with the exercise of professional judgment by any physician or other licensed health care professional who is a Partner or Principal, or who is an employee or contractor of the Medical Group, nor shall the Management Company interfere with, control, direct, or supervise any physician or other licensed health care professional in connection with the provision of professional medical services. The foregoing shall not preclude the Management Company from assisting in the development of professional protocols and monitoring compliance with policies and procedures that have been instituted in accordance with this Agreement. 16.3 Compensation Committee. The Management Company shall establish a compensation committee (the "Compensation Committee") which is comprised of members of the Board of Directors of the Management Company who are not employees of the Management Company, and the compensation payable to the five (5) most highly compensated management employees of the Management Company shall be subject to the approval of the Compensation Committee; provided, however, that the obligations under this Section 16.3 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.4 Budgets. The Board of Directors of the Management Company shall establish budgets for the expenses of the Management Company, and the approval of the Board of Directors shall be required in connection with any expenses in excess of any such approved budget; provided, however, that the obligations under this Section 16.4 shall become null and -74- void upon the consummation of an initial public offering of the Management Company's common stock. 16.5 Contracts with Venture Capital Firms. The Management Company shall not enter into any consulting agreement or other contract or arrangement with any venture capital firm (or affiliate thereof) providing financing to the Management Company under which compensation will be payable to any such venture capital firm (or affiliate thereof); provided, however, that the obligations under this Section 16.5 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.6 Convertible Preferred Stock. The Management Company shall not sell any common stock or take any other action the effect of which sale or other action would be to give a holder of convertible preferred stock the right to convert any number of shares of convertible preferred stock into a greater number of shares of common stock; provided, however, that the obligations under this Section 16.6 shall become null and void upon the consummation of an initial public offering of the Management Company's common stock. 16.7 Initial Public Offering. The Management Company shall not authorize an initial public offering of its common stock for less than Four Dollars ($4.00) per share (appropriately adjusted to reflect any stock dividends, stock splits, or similar transaction). Without waiving or limiting any other right or remedy available to the Medical Group for breach of this covenant by the Management Company, in the event of an initial public offering of the Management Company's common stock at less than Four Dollars ($4.00) per share, if the Medical Group so elects by written notice to the Management Company, such initial public offering shall not be considered as the initial public offering of the Management Company's common stock for any purpose under this Agreement or any of the other Transaction Documents. The Management Company shall disclose this provision to any potential underwriter in connection with the initial public offering of the Management Company's common stock. -75- SECTION 17. Assignment. 17.1 Generally. The Management Company shall have the right to assign its rights and delegate its obligations hereunder to any affiliate and to assign its rights hereunder to any lending institution from which the Management Company or any affiliate obtains financing for security purposes or as collateral. Except as set forth in this Section 17, neither the Management Company nor the Medical Group shall have the right to assign its respective rights or delegate its respective obligations hereunder without the prior written consent of the other; provided, however, that after the consummation of an initial public offering of the Management Company's common stock, the Medical Group's consent shall not be required in connection with a sale of all or substantially all of the stock or assets of the Management Company or the merger, consolidation, or reorganization of the Management Company. 17.2 Assignment to Partners. Notwithstanding the provisions of Section 17.1 hereof, the Medical Group shall have the right to assign all of its rights and delegate all of its obligations, to the extent that such rights and obligations relate to any particular Partner, to such Partner (or to a professional medical corporation of which such Partner is the sole shareholder), provided that such Partner (or professional corporation) enters into a new Management Services Agreement with the Management Company substantially in the form of this Agreement, together with such related agreements, documents, and instruments as may be necessary or appropriate, pursuant to which such Partner (or professional corporation) assumes all of the obligations to which such Partner was bound as a Partner under this Agreement and the other Transaction Documents. SECTION 18. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed sufficient if personally delivered, sent by nationally-recognized overnight courier, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: -76- If to the Management Company: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. If to the Medical Group: Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, and (c) in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 19. Benefits of Agreement. This Agreement shall bind and inure to the benefit of any successors to or permitted assigns of the Management Company and of the Medical Group. -77- SECTION 20. Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall lie in any Federal or state court located in the State of California. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the nonexclusive jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. SECTION 21. Headings. Section headings are used for convenience only and shall in no way affect the construction of this Agreement. SECTION 22. Entire Agreement; Amendments. This Agreement and the various exhibits hereto and thereto, contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by the Medical Group and the Management Company; provided, however, that in the case of any amendment affecting Section 12.4, the signatures of all of those persons who have agreed to such provision as indicated on the signature page hereof, and all of those persons who hereafter sign a written agreement agreeing to be bound by the terms of Section 12.4 hereof, shall also be required in order for such amendment to be effective. SECTION 23. Severability. The provisions of this Agreement shall be deemed severable, and if any portion shall be held invalid, illegal or unenforceable for any reason, the remainder of this Agreement shall be effective and binding upon the parties. -78- SECTION 24. Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 25. Waivers. Any party to this Agreement may, by written notice to the other party, waive any provision of this Agreement. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 26. Survival of Termination. Notwithstanding anything contained herein to the contrary, Sections 3.3(f), 3.6 (to the extent provided in the last sentence thereof), 11, 12, 13.4, 13.5, 14, 15(a), 18, 19, 20, 23, 25, 27 and this Section 26 shall survive any expiration or termination of this Agreement. SECTION 27. Contract Modification for Prospective Legal Events. In the event any state or Federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that the structure of this Agreement may be in violation of such laws or regulations, the Medical Group and the Management Company shall amend this Agreement as necessary to avoid such violation. To the maximum extent possible, any such amendment shall preserve the underlying economic and financial arrangements between the Medical Group and the Management Company. If an amendment is not possible, either party shall have the right to terminate this Agreement. Any dispute between the parties hereto arising under this Section 27 with respect to whether this Agreement violates any state or Federal laws or regulations shall be jointly submitted by the parties and finally settled by binding arbitration in Los Angeles, California, pursuant to the arbitration rules of the National Health Lawyers Association Alternative Dispute Resolution Service. Arbitration shall take place before one arbitrator appointed in accordance with such rules. The governing law of the arbitration shall be the law set forth in Section 21. Any decision rendered by the arbitrator shall clearly set forth the factual and legal basis for such decision. The decision rendered by the arbitrator shall be non-appealable and enforceable in any court having jurisdiction thereof. The administrative costs -79- of the arbitration and the arbitrator fees shall be equally borne by the parties. Each party shall pay its own legal costs and fees in connection with such arbitration. * * * -80- IN WITNESS WHEREOF, the parties have duly executed this Management Services Agreement as of the date first above written. SUN VALLEY ORTHOPAEDIC SURGEONS By: ROBERT O. WILSON, M.D., P.C.,General Partner By: /s/Robert O. Wilson, M.D. -------------------------------------- Robert O. Wilson, M.D., President By: /s/JON EDWIN GELSEY, M.D. ------------------------------------------ JON EDWIN GELSEY, M.D., General Partner By: /s/MARTIN G. STERUSKY, M.D. ------------------------------------------ MARTIN G. STERUSKY, M.D., General Partner By: /s/ROBERT WALDRIP, M.D. ------------------------------------------ ROBERT WALDRIP, M.D., General Partner BONE, MUSCLE AND JOINT, INC. By: /s/Naresh Nagpal, M.D. ------------------------------------------ Naresh Nagpal, M.D., President ACCEPTED AND AGREED AS TO AND SECTION 12.4 INDEMNIFYING PARTIES /s/Robert O. Wilson, M.D. - --------------------------------- Robert O. Wilson, M.D. /s/Jon Edwin Gelsey, M.D. - --------------------------------- Jon Edwin Gelsey, M.D. /s/Martin G. Sterusky, M.D. - --------------------------------- Martin G. Sterusky, M.D. /s/Robert Waldrip, M.D. - --------------------------------- Robert Waldrip, M.D. -81- APPROVAL BY PRINCIPAL The undersigned individual (who is the sole shareholder of a professional corporation which is a Partner in the Medical Group) hereby agrees, individually, to those provisions contained in this Agreement which by their terms are expressly applicable to "Principals." /s/Robert O. Wilson, M.D. - --------------------------------- Robert O. Wilson, M.D. -82- EX-10.38 11 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT BETWEEN BONE, MUSCLE AND JOINT, INC. AND SUN VALLEY ORTHOPAEDIC SURGEONS Effective as of July 1, 1997 TABLE OF CONTENTS ----------------- Article Page - ------- ---- 1. Transfer of Purchased Assets, Assumption of Liabilities and Related Matters........................................................ 2 1.1 Transfer of Assets............................................. 2 1.2 Assets Not Being Transferred................................... 2 1.3 Liabilities Being Assumed...................................... 2 1.4 Liabilities Not Being Assumed.................................. 3 1.5 Instruments of Conveyance and Transfer, Etc.................... 3 1.6 Right of Endorsement, Etc...................................... 3 1.7 Further Assurances............................................. 4 1.8 Assignment of Leases........................................... 4 2. Purchase Price; Allocation.............................................. 5 2.1 Purchase Price; Payment........................................ 5 2.2 Allocation of Purchase Price................................... 5 2.3 Accounts Receivable Payment.................................... 5 3. Representations and Warranties.......................................... 6 3.1 Representations and Warranties of the Seller................... 6 3.2 Representations and Warranties of the Buyer.................... 9 4. Conditions of Closing................................................... 10 4.1 Conditions of Each Party's Obligations......................... 10 4.2 Conditions of Obligations of the Buyer......................... 11 4.3 Conditions of Obligations of the Seller........................ 12 4.4 Related Agreements............................................. 13 5. Closing................................................................. 14 5.1 Closing Date................................................... 14 5.2 Closing Transactions........................................... 14 5.3 Post-Closing Obligations....................................... 15 6. Indemnification......................................................... 15 6.1 Definitions.................................................... 15 6.2 Indemnification Generally...................................... 17 6.3 Assertion of Claims............................................ 17 6.4 Notice and Defense of Third Party Claims....................... 17 6.5 Survival of Representations, Warranties and Covenants.......... 19 7. Non-Competition......................................................... 19 8. Repurchase of Assets.................................................... 19 -i- 9. Amendment, Modification and Waiver..................................... 19 10. Miscellaneous.......................................................... 20 10.1 Transfer Taxes, Etc........................................... 20 10.2 Entire Agreement.............................................. 20 10.3 Descriptive Headings.......................................... 20 10.4 Notices....................................................... 20 10.5 Counterparts.................................................. 21 10.6 Bulk Sales Compliance......................................... 21 10.7 Governing Law; Jurisdiction................................... 21 10.8 Attorneys' Fees............................................... 22 10.9 Benefits of Agreement......................................... 22 10.10 Pronouns...................................................... 22 SCHEDULES - --------- 1.1(a) - Medical Equipment 1.1(b) - Furniture, Furnishings, Trade Fixtures, and Office Equipment 1.1(c) - Equipment Leases 1.1(d) - Supplies 1.1(e) - Accounts Receivable 1.1(f) - Office Leases 1.1(g) - Deposits 1.1(h) - Additional Items 2.2 - Allocation of Purchase Price 3.1(c) - Claims 3.1(d) - Litigation EXHIBITS - -------- Exhibit A - Bill of Sale Exhibit B - Financing Statement -ii- Definitions ----------- The following terms which may appear in more than one Section of this Agreement are defined at the following pages: Term Page - ---- ---- A/R Collections ........................................................... 5 A/R Initial Payment Amount ................................................ 5 Accounts Receivable ....................................................... 2 Affiliate ................................................................. 15 Agreement ................................................................. 1 Assignment of Office Lease ................................................ 13 Assumed Obligations ....................................................... 3 Business Day .............................................................. 21 Buyer .................................................................. 1 Buyer Indemnification Event ............................................... 15 Buyer Indemnified Persons ................................................. 16 Claims .................................................................. 7 Closing .................................................................. 14 Closing Date .............................................................. 14 Consent of Landlord ....................................................... 13 Determination Date ........................................................ 5 Excluded Assets ........................................................... 2 Excluded Obligations ...................................................... 3 Indemnified Persons ....................................................... 16 Indemnifying Person ....................................................... 16 Losses .................................................................. 16 Management Services Agreement ............................................. 1 Medical Equipment Master Lease ............................................ 14 Medical Group Governance Documents ........................................ 6 Office Sublease ........................................................... 13 Partner .................................................................. 1 Permitted Liens ........................................................... 8 Principal ................................................................. 1 Provider Account Agreement ................................................ 13 Purchase Price ............................................................ 5 Purchased Assets .......................................................... 2 Related Agreements ........................................................ 11 Restricted Stock Agreement ................................................ 13 Seller .................................................................. 1 Seller Indemnification Event .............................................. 16 Seller Indemnified Persons ................................................ 17 Statement of Allocation ................................................... 5 Stockholder Non-Competition Agreement ..................................... 13 Subject Business .......................................................... 1 -iii- ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (the "Agreement") is entered into as of July 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Buyer"), and SUN VALLEY ORTHOPAEDIC SURGEONS, an Arizona general partnership (the "Seller"). A. The Seller is an Arizona general partnership comprised of individual physicians and Arizona professional corporations, and is engaged in the business (the "Subject Business") of providing orthopedic medical and surgical services and related medical and ancillary services to patients. (Each partner in the Medical Group is referred to herein as a "Partner," and each shareholder of a professional corporation that is a Partner is referred to herein as a "Principal.") B. The Buyer is engaged in the business of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Seller and the Buyer are entering into a Management Services Agreement (the "Management Services Agreement"), pursuant to which the Buyer will furnish to the Seller management, administrative, and related services. D. The Seller desires to sell, transfer, convey and assign to the Buyer, and the Buyer desires to purchase from the Seller, certain of the assets, properties, interests in properties and rights of the Seller used in the Subject Business upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements hereinafter set forth, the parties hereby agree as follows: -1- 1. Transfer of Purchased Assets, Assumption of Liabilities and Related Matters. 1.1 Transfer of Assets. On the terms and subject to the conditions of this Agreement, at the Closing (as hereinafter defined), the Seller shall sell, transfer, convey and assign to the Buyer, and the Buyer shall purchase, assume, and accept from the Seller, the following assets, properties, interests in properties and rights of the Seller (the "Purchased Assets"), as the same shall exist immediately prior to the Closing, free and clear of all Claims (as defined below) (except Permitted Liens (as defined below)): (a) the medical equipment owned by the Seller and listed on Schedule 1.1(a); (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Seller and listed on Schedule 1.1(b); (c) the Seller's rights and interests under any equipment leases identified on Schedule 1.1(c), subject to the Buyer's assumption of the obligations accruing thereunder as provided in Section 1.3; (d) the supplies described on Schedule 1.1(d); (e) the accounts receivable described on Schedule 1.1(e) (the "Accounts Receivable"); (f) the Seller's rights and interests under the office leases identified in Schedule 1.1(f), subject to the Buyer's assumption of the obligations accruing thereunder as provided in Section 1.3; (g) the deposits identified on Schedule 1.1(g); and (h) any additional items identified on Schedule 1.1(h). 1.2 Assets Not Being Transferred. All assets, properties, interests in properties, and rights of the Seller not expressly identified in Section 1.1 or the schedules referenced therein (the "Excluded Assets") are expressly excluded from the assets of the Seller being sold, assigned, or otherwise transferred to the Buyer. 1.3 Liabilities Being Assumed. Except as otherwise provided herein and subject to the terms and conditions of this Agreement, simultaneously with the sale, transfer, -2- conveyance and assignment to the Buyer of the Purchased Assets, the Buyer shall assume, and hereby agrees to pay when due, those liabilities accruing after the Closing Date under any equipment leases identified in Schedule 1.1(c) and under any office lease identified in Schedule 1.1(f) (the "Assumed Obligations"). 1.4 Liabilities Not Being Assumed. The Buyer is not assuming any liabilities or obligations of the Seller (fixed or contingent, known or unknown, matured or unmatured) whatsoever other than the Assumed Obligations. For convenience of reference, all liabilities and obligations of the Seller not being assumed by the Buyer are collectively referred to as the "Excluded Obligations." 1.5 Instruments of Conveyance and Transfer, Etc. At the Closing, the Seller shall deliver (or cause to be delivered) to the Buyer such deeds, bills of sale, endorsements, assignments and other good and sufficient instruments of sale, transfer, conveyance and assignment as shall be necessary to sell, transfer, convey and assign to the Buyer, in accordance with the terms hereof, title to the Purchased Assets, free and clear of all Claims (except Permitted Liens), including, without limitation, the items required to be delivered by Seller pursuant to Section 5.2 hereof. Simultaneously therewith, the Seller shall take all steps as may be reasonably required to put the Buyer in possession and operating control of the Purchased Assets. 1.6 Right of Endorsement, Etc. Effective upon the Closing, the Seller hereby constitutes and appoints the Buyer, its successors and assigns, the true and lawful attorney-in-fact of the Seller with full power of substitution, in the name of the Buyer, or the name of the Seller, on behalf of and for the benefit of the Buyer, to collect all accounts receivable assigned to the Buyer as provided herein, to endorse, without recourse, checks, notes and other instruments received in payment of such accounts receivable in the name of the Seller, and to execute in the name of the Seller such financing statements, continuation statements, and other documentation as may be necessary or appropriate to evidence, protect, or perfect the Buyer's interest in and with respect to such accounts receivable, and to institute and prosecute, in the name of the Seller or otherwise, all proceedings which the Buyer may deem proper in order to assert or enforce -3- any claim, right or title of any kind in or to the Purchased Assets (other than the Accounts Receivable), to defend and compromise any and all actions, suits or proceedings in respect of any of the Purchased Assets (other than the Accounts Receivable) and to do all such acts and things in relation thereto as the Buyer may deem advisable. The foregoing powers are coupled with an interest and shall be irrevocable by the Seller, directly or indirectly, whether by the dissolution of the Seller or in any manner or for any reason. 1.7 Further Assurances. The Seller shall pay or cause to be paid to the Buyer promptly any amounts which shall be received by the Seller after the Closing which constitute Purchased Assets, including all amounts paid to the Seller on account of the Accounts Receivable. The Seller shall, at any time and from time to time after the Closing, upon the reasonable request of the Buyer, execute, acknowledge, deliver and file, or cause to be executed, acknowledged, delivered, and filed, and perform or cause to be performed, all such further acts, transfers, conveyances, assignments or assurances as may reasonably be required for better selling, transferring, conveying, assigning and assuring to the Buyer, or for aiding and assisting in the collection of or reducing to possession by the Buyer, any of the assets, properties, interests in properties or rights being purchased by the Buyer hereunder. Any expenses incurred in connection with the foregoing shall be borne equally by the Buyer and the Seller. 1.8 Assignment of Leases. Anything contained in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement or attempted agreement to assign any office or equipment lease if an attempted assignment thereof, without the consent of any other party thereto, would constitute a breach thereof or in any way affect the rights of the Buyer or the Seller thereunder. The Seller shall use its best efforts, and the Buyer shall cooperate with the Seller, to obtain the consent of any such third party to the assignment thereof to the Buyer. If such consent is not obtained, the Seller shall cooperate with the Buyer in any arrangements reasonably necessary or desirable to provide for the Buyer the benefits (together with the obligations to perform) thereunder. -4- 2. Purchase Price; Allocation. 2.1 Purchase Price; Payment. The purchase price (the "Purchase Price") to be paid for the Purchased Assets shall consist of the following: (a) the sum of One Hundred Six Thousand Five Hundred Sixty-Four Dollars and Seventy-Five Cents ($106,564.75); and (b) the sum of Three Hundred Seven Thousand Dollars ($307,000) (the "A/R Initial Payment Amount"), subject to adjustment in accordance with Section 2.3. 2.2 Allocation of Purchase Price. The Purchase Price shall be allocated among the Purchased Assets in a statement (the "Statement of Allocation") reflecting the allocation set forth in Schedule 2.2 attached hereto. The A/R Initial Payment Amount represents the parties' best estimate, as of the date of this Agreement, of the total collectible amount of the accounts receivable assigned under this Agreement. The parties shall complete their respective tax returns for the period which includes the Closing Date in a manner that is consistent with the Statement of Allocation. 2.3 Accounts Receivable Payment. The portion of the Purchase Price specified in Section 2.1(b) is subject to adjustment as follows: (a) Within fifteen (15) days after the date which occurs one year after the date hereof (the "Determination Date"), the Buyer shall furnish to the Seller a statement setting forth the amount of collections received by the Buyer in payment of the Accounts Receivable as of the Determination Date (the "A/R Collections"), including detail of write-offs of any of the Accounts Receivable, the remaining outstanding balance of the Accounts Receivable, and any other detail relating thereto as the Seller may reasonably request. If the amount of A/R Collections exceeds the A/R Initial Payment Amount, the Buyer shall promptly pay to the Seller an amount equal to the amount of such excess. If the A/R Initial Payment Amount exceeds the amount of the A/R Collections, the Seller shall promptly pay to the Buyer an amount equal to such excess. -5- (b) Commencing with the month next following the month in which the Determination Date occurred, the Buyer shall pay to the Seller on a monthly basis, within fifteen (15) days after the end of each month, an amount equal to the actual amount of collections received by the Buyer during the prior month in respect of any of the then-outstanding Accounts Receivable, such payments to continue until the Accounts Receivable have been collected in full or agreed by the parties to be written off. It is the intention of the parties that an amount equal to any and all payments received by the Buyer in respect of the Accounts Receivable be paid by the Buyer to the Seller. (c) All payments by patients and third party payors shall be accounted for on a first-in-first-out basis unless any such payment is identified as a payment in respect of a particular invoice or otherwise is designated as payment of a particular invoice or for a particular service. 3. Representations and Warranties. 3.1 Representations and Warranties of the Seller. The Seller hereby represents and warrants to the Buyer, as of the date hereof, as follows: (a) Organization; Good Standing; Qualification and Power. The Seller is a general partnership duly organized, validly existing and in good standing under the laws of the State of Arizona and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement, a Bill of Sale in the form attached hereto as Exhibit A (the "Bill of Sale"), and a Financing Statement in the form attached hereto as Exhibit B (the "Financing Statement") (collectively, the "Transaction Documents"), to perform its obligations thereunder, and to consummate the transactions contemplated thereby. The Seller has delivered to the Buyer a true and correct copy of its partnership agreement, including all amendments thereto (the "Medical Group Governance Documents") as in effect on the date hereof. (b) Authority. The execution, delivery and performance of the Transaction Documents, and the consummation of the transactions contemplated hereby and -6- thereby have been duly and validly authorized by all necessary corporate action on the part of the Seller. The Transaction Documents have been duly and validly executed and delivered by the Seller and constitute legal, valid and binding obligations of the Seller enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance by the Seller of the Transaction Documents, nor the consummation by the Seller of the transactions contemplated thereby, nor compliance by the Seller with any provision thereof will (i) conflict with or result in a breach of any provision of the Medical Group Governance Documents, (ii) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Seller is a party or by which it or any of its respective properties or assets may be bound or (iii) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Seller or any of its respective properties or assets. No permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Seller of the Transaction Documents or the consummation of the transactions contemplated thereby. (c) Title to Assets, Properties, Interests in Properties and Rights and Related Matters. (i) The Seller has good and valid title to all of the Purchased Assets, free and clear of all security interests, judgments, liens, pledges, claims, charges, escrows, encumbrances, easements, options, rights of first refusal, rights of first offer, mortgages, indentures, security agreements or other agreements, arrangements, contracts, commitments, understandings or obligations, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, "Claims"), of any kind or character, except for (i) those Claims set forth on Schedule 3.1(c) and (ii) Permitted Liens. -7- (ii) There does not exist any condition which materially interferes with the economic value or use (consistent with the Seller's past practice) of any tangible personal property included in the Purchased Assets and such property is in good operating condition and repair, reasonable wear and tear excepted. (iii) The Seller has the complete and unrestricted power and the unqualified right to sell, transfer, convey and assign the Purchased Assets, and the Transaction Documents are sufficient to sell, transfer, convey and assign to the Buyer all right, title and interest of the Seller in and to the Purchased Assets, free and clear of all Claims (other than Permitted Liens) and to vest in the Buyer good and valid title thereto. (iv) As used in this Agreement, "Permitted Liens" shall mean (i) any lien for current taxes not yet due and payable, and (ii) liens of carriers, warehousemen, mechanics and materialmen created in the ordinary course of the Subject Business for amounts not yet due and payable which do not materially detract from the value or impair the use of any property or assets. (d) Litigation. Except as set forth on Schedule 3.1(d), there are no (i) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Seller, threatened against the Seller, against any Partner or Principal in connection with the Subject Business, or against the Purchased Assets or the Subject Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (ii) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Seller or affecting the Purchased Assets or the Subject Business. The Seller has delivered to the Buyer all documents and correspondence relating to matters referred to in said Schedule 3.1(d). (e) Compliance; Governmental Authorizations. The Seller has complied in all material respects with all applicable Federal, state, local or foreign laws, ordinances, regulations and orders. The Seller has all Federal, state, local and foreign -8- governmental licenses and permits necessary in the conduct of the Subject Business the lack of which would have a material adverse effect on the Buyer's ability to operate the Subject Business after the Closing on substantially the same basis as presently operated, such licenses and permits are in full force and effect, no violations are or have been recorded in respect of any thereof and no proceeding is pending or threatened to revoke or limit any thereof. None of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. (f) Disclosure. Neither this Agreement (including the Exhibits and Schedules attached hereto) nor any other document, certificate or written statement furnished to the Buyer by or on behalf of the Seller in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. 3.2 Representations and Warranties of the Buyer. The Buyer represents and warrants to the Seller, as of the date hereof, as follows: (a) Organization, Good Standing and Power. The Buyer (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted, to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby, and (iii) is duly qualified and in good standing to do business in all jurisdictions in which the failure to be so qualified and in good standing to do business could reasonably be expected to have a material adverse effect on the business, assets, operations, results of operations or affairs of the Buyer. (b) Authority. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary corporate action on the part of the Buyer. This Agreement has been duly and validly executed and delivered by the Buyer, and constitutes the valid and binding obligation of the Buyer, enforceable in accordance with its terms except as enforcement -9- may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance by the Buyer of this Agreement, nor the consummation by the Buyer of the transactions contemplated hereby, nor compliance by the Buyer with any provision hereof, will (i) conflict with or result in a breach of any provisions of the Certificate of Incorporation or By-laws of the Buyer, (ii) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Buyer is a party or by which it or any of its properties or assets is or may be bound or (iii) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Buyer or any of its properties or assets. No permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Buyer of this Agreement or the consummation by the Buyer of the transactions contemplated hereby. (c) Disclosure. Neither this Agreement (including the Exhibits and Schedules attached hereto) nor any other document, certificate or written statement furnished to the Seller by or on behalf of the Buyer in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. 4. Conditions of Closing. 4.1 Conditions of Each Party's Obligations. The obligations of the Seller to sell the Purchased Assets, and of the Buyer to purchase the Purchased Assets, are subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived) by the Seller and the Buyer: (a) Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any governmental -10- agency or authority necessary for the consummation of the transactions contemplated hereby shall have been filed, occurred or been obtained. (b) Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of transactions contemplated hereby shall have been issued by any Federal or state court and remain in effect. Each party agrees to use its best efforts to have any such injunction or order lifted. (c) Legislation. No Federal, state, local or foreign statute, rule or regulation shall have been enacted which prohibits, restricts or delays the consummation of the transactions contemplated by this Agreement or any of the conditions to the consummation of such transactions. (d) Related Agreements. Each of the related agreements identified in Section 4.4 hereof (collectively, the "Related Agreements") shall have been fully executed and delivered prior to or at the Closing by all of the parties required to execute and deliver such agreements. 4.2 Conditions of Obligations of the Buyer. The obligation of the Buyer to purchase the Purchased Assets is subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived) by the Buyer: (a) Representations and Warranties. The representations and warranties of the Seller set forth in Section 3.1 shall in each case be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made at and as of the Closing. (b) Performance of Obligations. The Seller shall have performed all obligations required to be performed by it under this Agreement prior to and at the Closing. (c) Authorization. All action necessary to authorize the execution, delivery and performance of this Agreement by the Seller and the consummation of the -11- transactions contemplated hereby and thereby shall have been duly and validly taken by the Seller and the Seller shall have full power and right to consummate the transactions contemplated hereby and thereby. (d) Consents and Approvals. The Seller shall have delivered to the Buyer duly executed copies of (i) consents to the assignment of any office leases and equipment leases listed on Schedules 1.1(c) and 1.1(f) and (ii) all other approvals, if any, required by this Agreement or the Schedules, in each case in form and substance satisfactory to the Buyer and counsel to the Buyer. (e) Government Consents, Authorizations, Etc. All consents, authorizations, orders or approvals of, and filings or registrations with, any Federal, state, local or foreign governmental commission, board or other regulatory body which are required for or in connection with the execution and delivery by the Seller of this Agreement and the consummation by the Seller of the transactions contemplated hereby shall have been obtained or made. 4.3 Conditions of Obligations of the Seller. The obligation of the Seller to sell the Purchased Assets to the Buyer is subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived) by the Seller: (a) Representations and Warranties. The representations and warranties of the Buyer set forth in Section 3.2 shall in each case be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing. (b) Performance of Obligations. The Buyer shall have performed all obligations required to be performed by it under this Agreement prior to and at the Closing. -12- (c) Authorization. All action necessary to authorize the execution, delivery and performance of this Agreement by the Buyer and the consummation of the transactions contemplated hereby shall have been duly and validly taken by the Buyer. (d) Consents and Approvals. The Seller shall have received duly executed copies of (i) consents to the assignment of any office leases and equipment leases listed on Schedules 1.1(c) and 1.1(f) and (ii) all other approvals, if any, required by this Agreement or the Schedules, in each case in form and substance satisfactory to the Seller and counsel to the Seller. (e) Government Consents, Authorizations, Etc. All consents, authorizations, orders or approvals of, and filings or registrations with, any Federal, state, local or foreign governmental commission, board or other regulatory body which are required for or in connection with the execution and delivery by the Buyer of this Agreement and the consummation by the Buyer of the transactions contemplated hereby shall have been obtained or made. 4.4 Related Agreements. The Related Agreements referred to in this Agreement consist of the following, all of which are entered into as of the date hereof: (a) the Management Services Agreement, entered into by and between the parties hereto; (b) the Stockholder Non-Competition Agreement, entered into by and among the Seller, the Buyer, and the Eligible Parties (the "Stockholder Non-Competition Agreement"); (c) the Restricted Stock Agreement, entered into by and between the Buyer and the Eligible Parties (the "Restricted Stock Agreement"); (d) the Provider Account Agreement, entered into by and between the Seller, the Buyer, the Seller's bank, and the Buyer's lender (the "Provider Account Agreement"); (e) an Assignment of Office Lease ("Assignment of Office Lease") and an Office Sublease ("Office Sublease"), together with Consent of Landlord ("Consent of -13- Landlord"), relating to each of the medical offices identified in Schedule 1.1(f), entered into by and between the parties hereto; and (f) the Medical Equipment Master Lease, entered into by and between the parties hereto (the "Medical Equipment Master Lease"). 5. Closing. 5.1 Closing Date. The closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall be deemed to have taken place at 12:01 a.m. on July 1, 1997 (the "Closing Date"), irrespective of the actual date(s) and time(s) that all of the documents required hereunder are executed and delivered. 5.2 Closing Transactions. At the Closing, the parties shall take the actions and deliver the documents identified in this Section 5.2. The Closing shall not be deemed to have taken place, and the transactions contemplated by this Agreement shall not be deemed to have been consummated, unless all of the closing transactions identified in this Section 5.2 have been completed or waived in writing by the parties. (a) Each of the parties shall deliver to the other a fully executed copy of the Management Services Agreement; (b) Each of the parties shall deliver to the other a fully executed copy of the Stockholder Non-Competition Agreement; (c) Each of the parties shall deliver to the other a fully executed copy of the Restricted Stock Agreement; (d) Each of the parties shall deliver to the other a fully executed copy of the Provider Account Agreement; (e) Each of the parties shall deliver to the other a fully executed copy of each Assignment of Office Lease, each Office Sublease, and each Consent of Landlord relating to each of the premises identified in Schedule 1.1(f); (f) Each of the parties shall deliver to the other a fully executed copy of the Medical Equipment Master Lease; -14- (g) The Seller shall deliver to the Buyer fully executed copies of the Authorization and Approval by Partners and Resolutions of Corporate Partners presented for signature herewith; (h) The Seller shall deliver to the Buyer an executed copy of the Bill of Sale; (i) The Seller shall deliver to the Buyer a fully executed copy of the Financing Statement; (j) The Buyer shall instruct its bank to wire immediately available funds for credit to Seller's bank account, for the Purchase Price as specified in Section 2.1 hereof and for the Additional Consideration, if any, specified in Schedule III, Section C, of the Management Services Agreement. 5.3 Post-Closing Obligations. Within fifteen (15) days after the Closing Date, the Buyer shall deliver to the Seller stock certificates issued in the names of the Eligible Parties as required by the Restricted Stock Agreement. 6. Indemnification. 6.1 Definitions. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate", as to any person, means any other person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such person. (b) "Buyer Indemnification Event" shall mean the following: (i) (A) the untruth, inaccuracy or breach of any representation or warranty of the Seller contained in this Agreement, any Schedule or Exhibit attached hereto or any certificate delivered by the Seller in connection herewith (or any facts or circumstances constituting any such untruth, inaccuracy or breach) or (B) the breach of any agreement or covenant of the Seller contained in this Agreement; -15- (ii) the assertion against the Buyer or any Buyer Indemnified Person of any liability or obligation arising from, relating to, or in any way connected with the operation of the Subject Business prior to the Closing; (iii) the assertion against the Buyer or any Buyer Indemnified Person of any Excluded Obligation; and (iv) any non-compliance by the Seller with any state "bulk sales laws" to the extent that such laws may be applicable to the transactions contemplated hereby. (c) "Buyer Indemnified Persons" shall mean and include the Buyer and its officers, directors, and employees. (d) "Indemnified Persons" shall mean the Buyer Indemnified Persons or the Seller Indemnified Persons, as the case may be. (e) "Indemnifying Person" shall mean the Buyer or the Seller. (f) "Losses" shall mean any and all losses, claims, damages, liabilities, expenses (including reasonable attorneys' and accountants' fees), assessments, tax deficiencies and taxes (including interest or penalties thereon) sustained, suffered or incurred by any Indemnified Person arising from any matter which is the subject of indemnification under Section 6.2. (g) "Seller Indemnification Event" shall mean (i) the untruth, inaccuracy or breach of any representation or warranty of the Buyer contained in this Agreement, any Schedule or Exhibit attached hereto or any certificate delivered by the Buyer in connection herewith (or any facts or circumstances constituting any such untruth, inaccuracy or breach) or (ii) the breach of any agreement or covenant of the Buyer contained in this Agreement. -16- (h) "Seller Indemnified Persons" shall mean and include the Seller, the Partners, the Principals, and Seller's employees. 6.2 Indemnification Generally. (a) Buyer Indemnification. The Seller shall indemnify, defend and hold harmless the Buyer Indemnified Persons, and each of them, from and against any and all Losses resulting from Buyer Indemnification Events. (b) Seller Indemnification. The Buyer shall indemnify, defend and hold harmless the Seller Indemnified Persons, and each of them, from and against any and all Losses resulting from Seller Indemnification Events. 6.3 Assertion of Claims. No claim, demand, suit or cause of action shall be brought under Section 6.2 unless the Indemnified Persons, or any of them, give the Indemnifying Person written notice of the existence of any such claim, demand, suit or cause of action, stating with particularity the nature and basis of said claim, and the amount thereof, to the extent known, and providing to the extent reasonably available all written documentation relating thereto. Such written notice shall be delivered to the Indemnifying Person as soon as practicable upon receipt of actual knowledge of such claim, demand, suit or cause of action; provided, however, that the failure to provide such written notice shall not affect the Indemnified Persons' right to indemnification hereunder if failure to provide such written notice does not materially adversely affect the Indemnifying Person. Upon the giving of such written notice as aforesaid, the Indemnified Persons, or any of them, shall have the right to commence legal proceedings subsequent to the applicable survival date, if any, for the enforcement of their rights under Section 6.2. 6.4 Notice and Defense of Third Party Claims. (a) In the event any action, suit or proceeding is brought by a third party against an Indemnified Person, with respect to which an Indemnifying Person may have liability under Section 6.2, the action, suit or proceeding shall, upon the written agreement of the Indemnifying Person that it is obligated with respect to such action, suit or proceeding, be -17- defended (including all proceedings on appeal or for review which counsel for the defendant shall deem appropriate) and, unless otherwise provided below, controlled by such Indemnifying Person. The Indemnified Persons shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Persons unless (i) the employment of such counsel shall have been authorized in writing by the Indemnifying Person in connection with the defense of such action, suit or proceeding, (ii) the Indemnifying Person shall fail actively and diligently to defend such action, suit or proceeding, (iii) the Indemnified Persons shall have reasonably concluded that such action, suit or proceeding involves to a significant extent matters beyond the scope of the indemnity agreement contained in Section 6.2 or (iv) the Indemnified Persons shall have reasonably concluded that there may be one or more legal or equitable defenses available to the Indemnified Persons which are different from or additional to those available to the Indemnifying Person, in any of which events the Indemnifying Person shall not have the right to direct the defense of such action, suit or proceeding on behalf of the Indemnified Persons and that portion of any fees and expenses of counsel related to matters covered by the indemnity agreement and contained in Section 6.2 shall be borne by the Indemnifying Person. The Indemnified Persons shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not they are so represented. The Indemnifying Person shall make available to the Indemnified Persons and their attorneys and accountants all books and records of the Indemnifying Person relating to such action, suit or proceeding and the parties hereto agree to render to each other such assistance as they may reasonably require of each other in order to ensure the proper and adequate defense of any such action, suit or proceeding. (b) The Indemnifying Person shall not make any settlement of any action, suit or proceeding without the written consent of the Indemnified Persons, which consent shall not be unreasonably withheld; provided, however, that in the event the Indemnified Persons refuse to consent to a settlement acceptable to the Indemnifying Person which is capable of settlement by the payment of money only and the Indemnifying Persons shall demonstrate to the reasonable satisfaction of the Indemnified Persons their ability to pay such amount, the Indemnifying Person may pay the amount of the proposed settlement to the Indemnified Persons -18- and shall thereupon be released from any further liability with respect to such action, suit or proceeding. 6.5 Survival of Representations, Warranties and Covenants. The representations and warranties of the Seller contained in Section 3.1 and the representations and warranties of the Buyer contained in Section 3.2 shall survive the Closing and shall terminate forty-five (45) days following the first anniversary of the Closing Date; provided, however, that the representations and warranties of the Seller set forth in Sections 3.1(a), 3.1(b), 3.1(c) and 3.1(e), and the representations and warranties of the Buyer set forth in Sections 3.2(a) and 3.2(b), shall survive the Closing and remain in full force and effect until the expiration of the statute of limitations, if any, applicable to the matters set forth therein (and indefinitely if none). 7. Non-Competition. The parties hereby acknowledge that they have entered into an agreement regarding non-competition, as set forth in Section 15 of the Management Services Agreement (identified at Recital C hereof). 8. Repurchase of Assets. The Purchased Assets, except for the Accounts Receivable, are subject to repurchase by the Seller from the Buyer upon termination of the Management Services Agreement in accordance with Section 13.5 of the Management Services Agreement. 9. Amendment, Modification and Waiver. This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by each of the parties. The waiver by one party of the performance of any covenant, condition or promise shall not invalidate this Agreement, nor shall it be considered as a waiver by such party of any other covenant, condition or promise. The delay in pursuing any remedy or in insisting upon full performance for any breach or failure of any covenant, condition or promise shall not prevent a party from later pursuing any remedies or insisting upon full performance for the same or any similar breach or failure. -19- 10. Miscellaneous. 10.1 Transfer Taxes, Etc. The Seller and the Buyer shall each pay one-half (1/2) of all sales, use and excise taxes and all registration, recording or transfer taxes which may be payable in connection with the transactions contemplated by this Agreement. 10.2 Entire Agreement. This Agreement (including the recitals hereof and the Schedules and the Exhibits attached hereto), together with the related agreements referenced herein, contains the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements, representations, warranties and understandings, either oral or written, between the parties with respect thereto. 10.3 Descriptive Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provisions of this Agreement. 10.4 Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by telecopier (if an addressee has set forth a telecopy number below), sent by nationally-recognized overnight courier or sent by certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Buyer, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: President Facsimile: (561) 391-1389 with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region Facsimile: (818) 995-8959 -20- and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. Facsimile: (310) 286-7821 if to the Seller, to: Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 Facsimile: (602) 974-5655 or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such communication shall be deemed to have been given (i) when delivered if personally delivered or sent by telecopier, (ii) on the Business Day after dispatch if sent by nationally-recognized, overnight courier and (iii) on the fifth Business Day after dispatch, if sent by mail. As used herein, "Business Day" means a day that is not a Saturday, Sunday or a day on which banking institutions in California are not required to be open. 10.5 Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 10.6 Bulk Sales Compliance. The Buyer hereby waives compliance by the Seller with the provisions of the "bulk sales laws" of any state which may be applicable to the transactions contemplated hereby; provided, however, that the Seller shall indemnify the Buyer in connection with such noncompliance to the extent provided in Article 6 hereof. 10.7 Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the -21- application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall exclusively lie in any federal or state court located in the State of California. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. 10.8 Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy, shall be apportioned between the parties as ordered in the discretion of the court. 10.9 Benefits of Agreement. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Anything contained herein to the contrary notwithstanding, this Agreement shall not be assignable by any party without the consent of the other parties hereto, and any purported assignment without such consent shall be null and void. 10.10 Pronouns. As used herein, all pronouns shall include the masculine, feminine, neuter, singular and plural thereof whenever the context and facts require such construction. -22- IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on its behalf effective as of the day and year first above written. BONE, MUSCLE AND JOINT, INC. ("Buyer") By: /s/ Naresh Nagpal ------------------------------------------ Naresh Nagpal, M.D., President SUN VALLEY ORTHOPAEDIC SURGEONS ("Seller") By: ROBERT O. WILSON, M.D., P.C., General Partner By: /s/ Robert O. Wilson, M.D. ------------------------------------ Robert O. Wilson, M.D., President By: /s/ Jon Edwin Gelsey, M.D. ------------------------------------------- JON EDWIN GELSEY, M.D., General Partner By: /s/ Martin G. Sterusky ------------------------------------------- MARTIN G. STERUSKY, M.D., General Partner By: /s/ Robert Waldrip ------------------------------------------- ROBERT WALDRIP, M.D., General Partner APPROVAL BY PRINCIPAL - --------------------- The undersigned individual (who is the sole shareholder of a professional corporation which is a Partner in the Medical Group) hereby agrees, individually, to those provisions contained in this Agreement which by their terms are expressly applicable to "Principals." /s/ Robert O. Wilson, M.D. - --------------------------------- Robert O. Wilson, M.D. -23- EX-10.39 12 RESTRICTED STOCK AGREEMENT RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of July 1, 1997, by and between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and each of the individuals identified on the signature page hereof (each, a "Stockholder," and collectively, the "Stockholders"), with reference to the following facts. A. This Agreement is entered into in connection with that certain Management Services Agreement effective as of the date hereof (the "Management Services Agreement") by and among the Company, Sun Valley Orthopaedic Surgeons (the "Medical Group"), and the Indemnifying Parties thereto. B. Concurrently herewith, Robert O. Wilson, M.D. ("Wilson") is entering into a separate Restricted Stock Agreement (which agreement is substantially identical to this Agreement), under which Wilson is the Stockholder, and Wilson therefore shall not be considered to be a Stockholder under this Agreement. C. Certain capitalized terms used herein are defined in paragraph 5 below. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Company and each Stockholder agree as follows: 1. Purchase and Sale of Restricted Stock. (a) The Company shall issue to each Stockholder the number of shares specified opposite the Stockholder's name in Schedule A attached hereto (the "Restricted Stock") of the common stock of the Company, par value $0.001 per share (the "Common Stock"), pursuant to Section 4 and Schedule III of the Management Services Agreement. (b) In connection with the issuance of the Restricted Stock hereunder, each Stockholder severally represents and warrants to the Company that: (i) the Restricted Stock to be issued to the Stockholder pursuant to this Agreement shall be acquired for the Stockholder's own account, for investment only and not with a view to, or intention of, distribution thereof in violation of the 1933 Act, or any applicable state securities laws, and the Restricted Stock will not be disposed of in contravention of the 1933 Act or any applicable state securities laws; (ii) the Stockholder has generally such knowledge and experience in business and financial matters and with respect to investments in securities of privately held companies so as to enable the Stockholder to understand and evaluate the risks and benefits of his or her investment in the Restricted Stock; -1- (iii) the Stockholder has no need for liquidity in his or her investment in the Restricted Stock and is able to bear the economic risk of his or her investment in the Restricted Stock for an indefinite period of time and understands that the Restricted Stock has not been registered or qualified under the 1933 Act or any applicable state securities laws, by reason of the issuance of the Restricted Stock in a transaction exempt from the registration and qualification requirements of the 1933 Act or such state securities laws and, therefore, cannot be sold unless subsequently registered or qualified under the 1933 Act or such state securities laws or an exemption from such registration or qualification is available; (iv) the Stockholder understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Stockholder) promulgated under the 1933 Act, depends on satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts; (v) the Stockholder is an individual (A) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000 or (B) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and the full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year; or the Stockholder otherwise meets the requirements to be considered an accredited investor, as defined under the 1933 Act; and (vi) the Stockholder has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Restricted Stock and has had full access to or been provided with such other information concerning the Company as he or she has requested. (c) This Agreement constitutes the legal, valid and binding obligation of the Stockholder, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Stockholder does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Stockholder is a party or any judgment, order or decree to which the Stockholder is subject. (d) As an inducement to the Company to issue the Restricted Stock to the Stockholder and as a condition thereto, each Stockholder acknowledges and agrees that: (i) neither the issuance of the Restricted Stock to the Stockholder nor any provision contained herein shall affect the right of the Company to terminate the Management Services Agreement; and -2- (ii) the Company shall provide the Stockholder with substantially the same information regarding the Company that the Company regularly discloses to its other stockholders. 2. Vesting of the Restricted Stock. (a) Except as otherwise provided in paragraph 2(b) hereof, the Restricted Stock with respect to each Stockholder shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in paragraph 2(c) below) by the Stockholder, or (iii) the Stockholder has not died or become permanently disabled:
Anniversary Cumulative Number of Cumulative Number Cumulative Number of of the Date Shares of Restricted of Shares of Restricted Shares of Restricted of this Stock Vested Stock Vested Stock Vested Agreement (As to Dr. Gelsey) (As to Dr. Sterusky) (As to Dr. Waldrip) --------- ------------------ -------------------- ------------------- First 29,591 18,808 29,187 Second 38,625 27,346 38,356 Third 47,658 35,885 47,524 Fourth 56,692 44,423 56,692
In the event that the Restricted Stock does not vest at the end of any year under this Agreement based on Cessation of Active Practice by the Stockholder, the Restricted Stock may nonetheless become vested in any subsequent year in which a Cessation of Active Practice does not occur. In such case, vesting of the Restricted Stock shall be postponed by one year for each year that a Cessation of Active Practice has occurred. For example, if there is a Cessation of Active Practice during the second year, the Stockholder would be vested as to 25% of the Restricted Stock as of the end of the second year, and if there is no Cessation of Active Practice during the following three years, the Restricted Stock would become vested as to a cumulative 50%, 75%, and 100%, respectively, at the end of the third, fourth, and fifth years, respectively, under this Agreement. Shares of the Restricted Stock which have become vested are referred to herein as "Vested Shares" and all other shares of the Restricted Stock are referred to herein as "Unvested Shares." (b) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with paragraph 2(a) above, the number of Unvested Shares scheduled to become Vested Shares pursuant to paragraph 2(a) above during the eighteen-month period immediately following the date of death shall immediately become Vested Shares. (c) For purposes of this Agreement, "Cessation of Active Practice" means a physician Stockholder's failure (other than by reason of death or permanent disability) to engage in the practice of medicine with the Medical Group on a regular basis, including the performance -3- of orthopedic surgical procedures on a regular basis (except in the case of any Stockholder who did not practice surgery on a regular basis immediately prior to the date hereof). (d) If the Stockholder is insured under a disability insurance policy, the determination under such policy as to whether the Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto for purposes of this Agreement. If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (e) Transfer of Restricted Stock to the Medical Group. (i) For purposes of this paragraph 2(e), each of the following shall constitute a "Stockholder Termination Event": (A) Cessation of Active Practice by the Stockholder; (B) Death of the Stockholder; or (C) Permanent disability of the Stockholder. (ii) In the event of a Stockholder Termination Event, the Stockholder shall transfer (or cause to be transferred) to the Medical Group all of the Unvested Shares of Restricted Stock held by the Stockholder (or by the Stockholder's permitted transferee(s)), pursuant to the terms and conditions set forth in this paragraph 2(e). (iii) The Medical Group shall accept such Unvested Shares and shall pay to the Stockholder (or to the Stockholder's permitted transferee(s)) an amount determined by multiplying the number of such Unvested Shares by the Original Value (as defined in this Agreement). Such shares shall be delivered and such sum shall be paid in full in cash not later than sixty (60) days after the date of the Stockholder Termination Event. (iv) A portion of the shares received by the Medical Group pursuant to this paragraph 2(e) shall be held by the Medical Group as Vested Shares, and a portion shall be held as Unvested Shares. The number of such shares to be held as Vested Shares shall be determined by dividing the amount paid by the Medical Group pursuant to paragraph 2(e)(iii) by the Fair Market Value (as hereinafter defined) per share. The remainder of such shares shall be Unvested Shares. Any such Vested Shares may be held, transferred, or sold at the discretion of the Medical Group. Any Unvested Shares may be transferred only in accordance with paragraph 2(e)(v), and such shares may become Vested Shares only as provided in paragraph 2(e)(v). (v) The Medical Group shall not sell or otherwise transfer any Unvested Shares to any person or entity, except to one or more physician employees, independent contractors, or partners in the Medical Group who prior to the receipt of such shares from the Medical Group had not acquired any shares of the Company. As -4- a condition to any such sale or transfer, such physician(s) shall enter into a Restricted Stock Agreement with the Company substantially in the form of this Agreement, effective as of the date of transfer of such shares. Any such sale or transfer to any such physician(s) shall be subject to such additional terms and conditions as may be agreed upon by the Medical Group and such physician(s). 3. Repurchase of Restricted Stock. (a) Except as provided in paragraph 3(g), in the event of a Repurchase Event, as defined in paragraph 3(b) below, the Company may elect to repurchase the Restricted Stock (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's permitted transferees) pursuant to the terms and conditions set forth in this paragraph 3 (the "Repurchase Option"). (b) Each of the following shall constitute a "Repurchase Event": (i) Termination of the Management Services Agreement for any reason whatsoever on or before the fourth anniversary of the date of this Agreement; (ii) Termination of the Management Services Agreement by the Medical Group pursuant to Section 13.1(d) thereof (based on failure of the Company to consummate an initial public offering of its Common Stock within forty-eight (48) months after the Commencement Date under the Management Services Agreement). (c) The repurchase price for each Unvested Share shall be equal to the Original Value of such share. (d) The repurchase price for each Vested Share shall be the Fair Market Value for such share. (e) The Company may elect to repurchase all or a portion of the Restricted Stock by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that if the Company elects to repurchase less than all of the Restricted Stock, the Company shall repurchase all of the Unvested Shares and may purchase that number of Vested Shares as the Company may, in its discretion, determine. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be acquired, the aggregate consideration to be paid for such shares, and the time and place for the closing of the transaction. If the Repurchase Event giving rise to the Company's election to repurchase consists of the termination of the Management Services Agreement, and if the number of shares of Restricted Stock that the Company has elected to repurchase is less than the total number of shares of Restricted Stock held by all of the Stockholders, the Company shall purchase the shares of Restricted Stock pro rata according to the number of shares of Restricted Stock held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). (f) The closing of the repurchase of Restricted Stock pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the -5- delivery of the Repurchase Notice. The Company shall pay for Restricted Stock to be purchased pursuant to the Repurchase Option by delivery of (i) the Company's check or wire transfer of funds, (ii) a subordinated note or notes payable in up to five equal annual installments beginning on the first anniversary of the closing of such purchase and bearing interest (payable quarterly) at a rate per annum equal to the greater of either the prime rate announced from time to time by The Chase Manhattan Bank (National Association) plus 1/2% or the "applicable Federal rate" (as defined in Section 1274(d) of the Internal Revenue Code) in effect from time to time, or (iii) both (i) and (ii), in the aggregate amount of the repurchase price for such shares; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to the Management Services Agreement, the total of such sums may be offset by the Company against any amounts owed by the Company to the Stockholder pursuant to the Restricted Stock Agreement, such offset amount to be allocated pro rata among all of the Stockholders. Any notes issued by the Company pursuant to this paragraph 3(f) shall be subject to the restrictive covenants, if any, to which the Company is subject at the time of such repurchase. The Company shall be entitled to require the signature of the Stockholder to be guaranteed and to receive representations and warranties from the Stockholder regarding (A) the Stockholder's power, authority and legal capacity to enter into such sale and transfer valid right, title and interest in such Restricted Stock, (B) the Stockholder's ownership of such Restricted Stock and the absence of any liens, pledges, and other encumbrances on such Restricted Stock and (C) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (g) Notwithstanding anything to the contrary set forth in this paragraph 3, in the event of a Repurchase Event consisting of the termination of the Management Services Agreement by the Medical Group pursuant to Section 13.1 of the Management Services Agreement, or in the event of termination of the Management Services Agreement by either party in accordance with Section 27 thereof (pursuant to Section 13.3), the Company shall have the obligation (rather than the option) to purchase all of the Restricted Stock acquired by the Stockholder pursuant to this Agreement, and the repurchase price shall be paid in full in cash not later than sixty (60) days after the date of termination of the Management Services Agreement; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to the Management Services Agreement, the total of such sums may be offset by the Company against any amounts owed by the Company to the Stockholders pursuant to the Restricted Stock Agreement, such offset amount to be allocated pro rata among all of the Stockholders. (h) [Intentionally omitted.] (i) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Stock by the Company shall be subject to applicable restrictions, if any, contained in Federal law or in the Delaware General Corporation Law. Notwithstanding anything to the contrary contained in this Agreement, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Stock hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions. -6- (j) In the event that Restricted Stock is repurchased pursuant to this paragraph 3, the Stockholder and his or her successors and assigns shall take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner. 4. Transfer Restriction; Legend. (a) Except as otherwise expressly provided in paragraph 3, the Stockholder shall sell or transfer or agree to sell or transfer ("Sale" or "Sell") Restricted Stock only in accordance with the following procedures; provided, however, that with respect to this paragraph 4(a), Restricted Stock, at any point in time, shall be limited to Vested Shares and at no time shall the Stockholder have the right to sell Unvested Shares; provided, further, that the restrictions on transfers of Vested Shares set forth in this paragraph 4 shall expire, and shall be of no further force or effect, upon the consummation of initial public offering of the Company's Common Stock pursuant to the 1933 Act: (b) In the event that the Stockholder receives a bona fide offer from a third party (the "Prospective Stockholder") to purchase all or any portion of the Restricted Stock owned by the Stockholder, the Stockholder shall deliver to the Company a written notice (the "Offer Notice"), which shall be irrevocable for a period of fifteen (15) business days after delivery thereof (the "Offer Period"), offering (the "Offer") all of the Restricted Stock proposed to be Sold by the Stockholder to the Prospective Stockholder at the purchase price and on the terms of the proposed Sale to the Prospective Stockholder (such Offer Notice shall include the foregoing information, a copy of the Prospective Stockholder's bona fide offer and all other relevant terms of the proposed Sale, including the identification of the Prospective Stockholder). The Company shall have the right and option, for a period of fifteen (15) business days after delivery of the Offer Notice, to repurchase all of the Restricted Stock so offered at the purchase price and on the terms stated in the Offer Notice. Such acceptance shall be made by delivering a written notice to the Stockholder within said fifteen (15) business-day period. (c) Sales of Restricted Stock under the terms of paragraph 4(b) above shall be made on a mutually satisfactory business day within fifteen (15) business days after the expiration of the Offer Period. Delivery of certificates or other instruments evidencing such Restricted Stock duly endorsed for transfer shall be made on such date against payment of the purchase price therefor. (d) If the Company fails to purchase the Restricted Stock offered for Sale pursuant to the Offer Notice, then at any time within sixty (60) business days after the expiration of the Offer Period the Stockholder may Sell all or any part of the Restricted Stock so offered for Sale on terms no more favorable than the terms stated in the Offer Notice; provided, however, that the Stockholder shall not, under any circumstances, Sell any Restricted Stock to the Prospective Stockholder if the Board of Directors of the Company, in its sole discretion, determines in good faith that the Prospective Stockholder is a competitor, or an Affiliate of a competitor, of the Company or that such Prospective Stockholder's ownership of Restricted Stock would be contrary to the best interests of the Company. In the event that the Restricted Stock is not Sold by the Stockholder to the Prospective Stockholder during such period, the right of the Stockholder to Sell such remaining Restricted Stock to the Prospective Stockholder shall expire and the obligations of the Stockholder pursuant to this paragraph 4 shall be reinstated. -7- (e) Any transferee of Restricted Stock (other than the Company) shall, as a condition to such transfer, agree to be bound by all of the provisions of this Agreement applicable to the Stockholder. (f) The certificates representing the Restricted Stock will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT EFFECTIVE AS OF JULY 1, 1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." (g) The Stockholder shall have the right to participate on a pro rata basis (based on the number of shares owned, whether preferred or common, held by the Stockholder and by any other shareholders who hold the same rights that are conferred by this paragraph 4(g), including members of other physician groups), in any proposed sale of stock (whether preferred or common) in the Company by Naresh Nagpal, M.D. to any unaffiliated third party; provided, however, that this paragraph 4(g) shall become null and void upon the consummation of an initial public offering of the Company's Common Stock pursuant to the 1933 Act. 5. Definitions. (a) "Affiliate" means, with respect to any Person, any of (a) a director, officer or partner of such Person and (b) any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (b) "Fair Market Value" of each share of Restricted Stock means the average of the closing prices of the sales of the Common Stock on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any given day, the average of the last bid and asked prices on all such exchanges at the end of such day, or, if on any given day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq Stock Market National Market System ("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common Stock is not quoted in Nasdaq, the average of the bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the Fair Market Value is being determined and the 20 consecutive trading days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair Market Value shall be that value jointly determined by the Stockholder and the Company, provided that if they cannot -8- so agree, such value shall be determined by a mutually acceptable investment banking or other qualified firm of national or regional reputation, retained jointly by the Company and the Medical Group, and all fees, expenses and other charges of such firm incurred in connection with such determination of Fair Market Value shall be borne and shared equally by the Company and the Medical Group. In the event that the parties are unable to agree upon such an investment banking or other qualified firm within ten (10) days after the date on which either party may initially propose such a firm, a qualified firm shall be selected in the following manner: First, the Stockholder shall send a list of names of four such firms, arranged in order of the Stockholder's preference, by written notice to the Company within seven (7) days after the expiration of the above referenced 10-day period. If the Stockholder does not furnish such a list to the Company within such time period, the Company may, within the next seven (7) days following expiration of such earlier seven-day period, submit a list of names of four such firms to the Stockholder. Second, the Company (or the Stockholder, as applicable) shall select, within seven (7) days after receipt of the above-referenced list, one of the firms identified on such list and shall give written notice thereof to the other party. If the recipient of such list does not make any such selection, the firm identified as the first choice on such list shall be deemed agreed to by the parties. (c) "Internal Revenue Code" means the Internal Revenue of Code of 1986, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. (d) "Original Value" of each share of Restricted Stock purchased hereunder will be equal to Twenty Cents ($0.20) (as proportionately adjusted for all subsequent stock splits, stock dividends and other recapitalizations). (e) "Person" shall be construed broadly and shall include, without limitation, an individual, a partnership, an investment fund, a limited liability corporation or partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. (f) "Public Sale" means any sale of Restricted Stock to the public pursuant to an offering registered under the 1933 Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the 1933 Act. (g) "Restricted Stock" has the meaning set forth in paragraph 1(a). The Restricted Stock will continue to be Restricted Stock in the hands of any holder other than the Stockholder (except for the Company and except for transferees in a Public Sale), and except as otherwise provided herein, each such other holder of the Restricted Stock will succeed to all rights and obligations attributable to the Stockholder as the holder of the Restricted Stock hereunder. The Restricted Stock will also include shares of the Company's capital stock issued -9- with respect to the Restricted Stock by way of a stock split, stock dividend or other recapitalization. (h) "1933 Act" means the Securities Act of 1933, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. 6. Indemnification. (a) The Company shall indemnify, defend and hold harmless each Stockholder against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Company contained in this Agreement. (b) Each Stockholder, severally, shall indemnify and hold harmless the Company against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of such Stockholder contained in this Agreement. 7. General Provisions. (a) Transfers in Violation of Agreement. Any sale, transfer, assignment or other disposition (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) (a "Transfer") or attempted Transfer of any Restricted Stock in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Restricted Stock as the owner of such stock for any purpose. (b) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (c) Entire Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. -10- (d) Relationship Among Stockholders. No Stockholder shall have any responsibility for any breach of this Agreement by any other Stockholder or for any representations, warranties, acts or omissions of any other Stockholder. Each Stockholder is entering into this Agreement for and on behalf of such Stockholder only, and no partnership, joint venture, unincorporated association, or any other legal entity is intended to be formed by or among the Stockholders as a result of or in connection with this Agreement. The parties have chosen to execute a single instrument for convenience only, and this Agreement shall be construed as separate and several agreements between the Company and each of the respective Stockholders for all purposes. This Agreement may be executed in separate counterparts. (e) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Stockholder, the Company and their respective successors, assigns, heirs, representatives and estate, as the case may be (including subsequent holders of Restricted Stock); provided that the rights and obligations of the Stockholder under this Agreement shall not be assignable except in connection with a permitted transfer of Restricted Stock hereunder. (f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any choice of law or conflicting provision or rule (whether of the State of California, or any other jurisdiction), that would cause the laws of any jurisdiction other than the State of California to be applied. In furtherance of the foregoing, the internal law of the State of California will control the interpretation and construction of this agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. (g) Jurisdiction. (i) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any California state court or Federal court of the United States of America sitting in the State of California, and any appellate court thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such California state court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction. (ii) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any California state or Federal court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. -11- (h) Remedies. Each of the parties to this Agreement shall be entitled to enforce its rights under this Agreement specifically to recover damages and costs (including reasonable attorneys' fees) for any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or other injunctive relief (without posting any bond or deposit) in order to enforce or prevent any violations of the provisions of this Agreement. (i) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and the Stockholder and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall be construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Agreement or any provision hereof. (j) Notices. Any notice provided for in this Agreement must be in writing and must be either personally delivered, transmitted via telecopier, mailed by first class mail (postage prepaid and return receipt requested) or sent by reputable overnight courier service (charges prepaid) to the recipient at the address below indicated or at such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder and received when delivered personally, when received if transmitted via telecopier, five days after deposit in the U.S. mail and one business day after deposit with a reputable overnight courier service. If to the Company, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Facsimile: (561) 391-1389 with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region Facsimile: (818) 995-8959 and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. Facsimile: (310) 286-7821 -12- If to the Stockholder, to: [Name of Stockholder] Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 Facsimile: (602) 974-5655 with a copy to: Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 Facsimile: (602) 974-5655 (k) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the State of California, the time period for giving notice or taking action shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (l) Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the losing party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. (m) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (n) Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (o) Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa. * * * -13- IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement effective as of the date first written above. COMPANY ------- BONE, MUSCLE AND JOINT, INC. By: /s/ N Nagpal --------------------------------- Naresh Nagpal, M.D., President STOCKHOLDERS /s/ Jon Edwin Gelsey, M.D. ------------------------------------ Jon Edwin Gelsey, M.D. /s/ Martin G. Sterusky ------------------------------------ Martin G. Sterusky, M.D. /s/ Robert Waldrip ------------------------------------ Robert Waldrip, M.D. MEDICAL GROUP - ------------- ACCEPTED AND AGREED AS TO PARAGRAPHS 2(e) and 5(b) SUN VALLEY ORTHOPAEDIC SURGEONS By: ROBERT O. WILSON, M.D., P.C., General Partner By: /s/ Robert O. Wilson, M.D ------------------------------------------ Robert O. Wilson, M.D., President By: /s/ Jon Edwin Gelsey, M.D. --------------------------------------------- JON EDWIN GELSEY, M.D., General Partner By: /s/ Martin G. Sterusky --------------------------------------------- MARTIN G. STERUSKY, M.D., General Partner By: /s/ Robert Waldrip --------------------------------------------- ROBERT WALDRIP, M.D., General Partner ACCEPTED AND AGREED AS TO SECTION 4(g) /s/ N Nagpal - ------------------------------------ NARESH NAGPAL, M.D. -14- EX-10.40 13 STOCKHOLDER NON-COMPETITION AGREEMENT STOCKHOLDER NON-COMPETITION AGREEMENT THIS STOCKHOLDER NON-COMPETITION AGREEMENT (the "Agreement") is entered into as of July 1, 1997, by and between SUN VALLEY ORTHOPAEDIC SURGEONS, an Arizona general partnership (the "Medical Group"), each of the individuals identified on the signature page hereof (each, a "Stockholder," and collectively, the "Stockholders"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation ("BMJ"), with reference to the following facts: A. The Medical Group is a general partnership comprised of individual physicians and Arizona professional corporations, and is engaged in the business of providing orthopedic medical and surgical services and related medical and ancillary services (the "Medical Services") to the general public. (Each partner in the Medical Group is referred to herein as a "Partner," and each shareholder of a professional corporation that is a Partner is referred to herein as a "Principal.") B. Each Stockholder is a Partner, Principal or other person identified as an Eligible Party in the Management Services Agreement entered into as of the date hereof (the "Management Services Agreement"). C. BMJ is a corporation engaged in the business of providing management, administrative, financial, marketing, information technology, and related services to medical groups and related facilities. D. The Medical Group and BMJ, under the terms of the Management Services Agreement, have agreed to cause the Stockholders to execute this Agreement. E. Each Stockholder is acquiring stock in BMJ in connection with the execution of the Management Services Agreement, pursuant to a Restricted Stock Agreement entered into by and among the Stockholders and BMJ, effective as of the date hereof (the "Restricted Stock Agreement"). F. Concurrently herewith, Robert O. Wilson, M.D., P.C. and Robert O. Wilson, M.D. ("Wilson") are entering into a separate Stockholder Non-Competition Agreement with the Management Company (which agreement is substantially identical to this Agreement), under which Wilson is the Stockholder, and Wilson therefore shall not be considered to be a Stockholder under this Agreement. NOW, THEREFORE, in consideration of and as an inducement to BMJ's entering into the Management Services Agreement, the Restricted Stock Agreement, and the other agreements related thereto, and in consideration of each Stockholder's status as a Partner or Principal, or other interest in the Medical Group, each Stockholder hereby severally agrees with the Medical Group and BMJ as follows: 1 1. Definition. For all purposes of this Agreement, "Competitive Business" shall mean any business that provides (i) orthopedic medical and surgical services and related medical and ancillary services to the general public, or (ii) administrative, billing, collection, financial, marketing, information technology and operational services to professional medical groups relating to such groups' provision of the professional medical and related services described in clause (i), (iii) any other services provided by BMJ, or (iv) any other business proposed to be conducted by BMJ if such business has been approved by the Board of Directors of BMJ and BMJ has allocated human resources or financial resources to such proposed business. 2. Agreement Not to Compete or Interfere with Business. (a) Each Stockholder acknowledges that (i) he or she is receiving benefits from the purchase of securities from BMJ pursuant to the Restricted Stock Agreement, (ii) the Medical Group and its affiliates conduct their business primarily in Sun City West, Arizona, and (iii) due to the highly competitive nature of the Medical Group's and BMJ's businesses, the value and goodwill of the Medical Group's and BMJ's businesses would be substantially impaired if the Stockholder engaged in a Competitive Business. Accordingly, each Stockholder hereby agrees that, during the period commencing on the date hereof and ending two years after the earliest of (i) the expiration of the Management Services Agreement, (ii) the termination of the Management Services Agreement by BMJ pursuant to Section 13.2 thereof, (iii) rescission! disengagement by the Medical Group pursuant to Section 14 thereof, or (iv) the effective date of the Stockholder's resignation or termination of employment with the Medical Group or sale, transfer, or other disposition of all or substantially all of the Stockholder's equity interest in the Medical Group, he or she will not, except as otherwise provided herein -- (A) engage, directly or indirectly, in any Competitive Business at any location within twenty-five (25) miles of any Medical Group office (the "Restricted Territory"), whether such engagement shall be as an employee, officer, director, owner, partner, advisor, consultant, stockholder or other participant in any Competitive Business (or in any similar capacity in which the Stockholder derives an economic benefit from a Competitive Business); (B) assist others in engaging in any Competitive Business within the Restricted Territory in the manner described in the foregoing clause (A); (C) solicit, entice or induce any Partner or Principal, or any employee or independent contractor of the Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ to terminate his or her employment or contract with any of the foregoing or to engage in any Competitive Business within the Restricted Territory; (D) solicit, entice or induce any vendor, customer or distributor of the Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ to 2 terminate or materially diminish its relationship with the Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ; (E) enter into a contractual or other relationship with a provider of management services which provides a range of management services which is substantially similar to that which is provided by BMJ; or (F) otherwise knowingly damage, disparage or interfere with the Medical Group, BMJ, any affiliate of the Medical Group, or any subsidiary of BMJ; provided, however, that nothing contained in this Agreement shall prohibit any Stockholder from owning in the aggregate less than one percent (1.0%) of a class of publicly-traded securities issued by any Competitive Business. (b) The Stockholder has carefully considered the nature and extent of the restrictions set forth herein and acknowledges that the same are reasonable with respect to scope, duration and territory. It is the desire and intent of the parties that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision without any action by any party shall be deemed amended to delete therefrom or to modify the provisions thereof so as to restrict (including, without limitation, a reduction in duration, geographical area or prohibited business activity) the portion adjudicated to be invalid or unenforceable, such deletion or modification to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made, and such deletion or modification to be made only to the extent necessary to cause the provision as amended to be valid and enforceable. (c) The Medical Group and BMJ acknowledge and agree that a Stockholder shall have no further obligation pursuant to this Agreement in the event that (i) the Medical Group terminates the Management Services Agreement pursuant to Section 13.1 thereof, (ii) either party to the Management Services Agreement terminates such agreement pursuant to Section 13.3 thereof, or (iii) the Medical Group terminates, without cause, the Stockholder's right to conduct his, her or its professional practice with the Medical Group (unless such termination is not permitted under any applicable agreement with the Medical Group) and such termination is approved by BMJ. (d) BMJ shall consult with the Medical Group in connection with the identification and selection of additional medical groups and physicians with whom BMJ may contract and regarding the development of New Ancillary Services within twenty-five (25) miles of the Medical Group's principal office. 3. Confidentiality. (a) Each Stockholder acknowledges and agrees that certain information he or she has received or will receive from the Medical Group and its affiliates or from BMJ 3 constitutes the confidential and proprietary trade secrets of the Medical Group or of BMJ and that the Stockholder's non-disclosure thereof is essential to this Agreement and a condition to the Stockholder's use and possession thereof. The Stockholder shall retain in strict confidence any and all such confidential information received from the Medical Group ("Medical Group Confidential Information") or from BMJ ("BMJ Confidential Information") (collectively, "Confidential Information") and under no circumstances shall the Stockholder distribute or in any way disseminate Confidential Information, directly or indirectly, to any third party or use Confidential Information for the Stockholder's personal benefit without the prior written consent of the Medical Group (in the case of Medical Group Confidential Information) or without the prior written consent of BMJ (in the case of BMJ Confidential Information). (b) Notwithstanding the above, the Stockholder shall have no liability to the Medical Group or its affiliates or to BMJ with respect to Confidential Information which: (i) was generally known and available in the public domain at the time it was disclosed or becomes generally known and available in the public domain through no fault of the Stockholder; (ii) is disclosed with the prior written consent of the Medical Group or its affiliate or BMJ; (iii) becomes known to the Stockholder from a source other than the Medical Group or its affiliates without breach of this Agreement by the Stockholder and otherwise not in violation of the Medical Group's or its affiliates' rights; or (iv) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; provided, however, that the Stockholder shall provide prompt, advance notice thereof to enable the Medical Group or its affiliate to seek a protective order or otherwise prevent such disclosure. (c) The Stockholder agrees to indemnify the Medical Group, its affiliates, and BMJ for any damages the same may suffer as a result of the Stockholder's or his or her agents' failure to abide by the provisions of this Section 3. (d) The rights and obligations of the parties under this Section 3 shall survive for five (5) years following the expiration or termination of this Agreement. 4. Acknowledgment. Each Stockholder acknowledges that the provisions of this Agreement are not designed to prevent the Stockholder from earning a living or fostering his or her own career. The provisions of this Agreement are designed to prevent any third party from gaining unfair advantage from the Stockholder's knowledge of confidential and proprietary information relating to the Medical Group or BMJ or otherwise damaging or interfering with the business of the Medical Group or BMJ or from his or her participation in any Competitive Business. The Stockholder further acknowledges receiving sufficient consideration under the Restricted Stock 4 Agreement to compensate him or her for any losses he or she may suffer or incur as a result of losing any employment or other professional opportunity as a result of entering into and performing any obligations under this Agreement. 5. Survival; Remedies. Each Stockholder's covenants under this Agreement shall survive termination of the Stockholder's status as a Partner or Principal, and/or the Stockholder's employment with the Medical Group. Each Stockholder acknowledges that a breach by the Stockholder of this Agreement will cause irreparable and material loss and damage to the Medical Group and/or BMJ and that a remedy at law for any breach or threatened breach of the provisions of this Agreement would be inadequate and therefore agrees that either the Medical Group or BMJ shall be entitled to injunctive relief; provided, however, that nothing contained herein shall be construed as prohibiting the Medical Group or BMJ from pursuing any other remedies available for any such breach or threatened breach. 6. Benefits of Agreement. This Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of either the Medical Group or BMJ by reorganization, merger or consolidation or otherwise and any assignee of all or substantially all of the business and properties of the Medical Group or BMJ. 7. Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. In addition, if any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 8. Notices. All notices or other communications required or permitted hereunder shall be in writing and sufficient if (a) delivered personally, (b) sent by nationally-recognized overnight courier or (c) sent by certified mail, postage prepaid, return receipt requested, addressed as follows: 5 If to the Medical Group, to: Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 If to a Stockholder, to: [Name of Stockholder] Sun Valley Orthopaedic Surgeons 14506 West Granite Valley Drive, #205 Sun City West, Arizona 85375 If to BMJ, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President with a copy to: Bone, Muscle and Joint, Inc. 15300 Ventura Boulevard, Suite 507 Sherman Oaks, California 91403 Attention: Glenn Cozen, Vice President, Western Region and to: Saphier and Heller Law Corporation 1900 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Michael D. Saphier, Esq. or, in each case, to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such communication shall be deemed to have been given (a) when delivered, if personally delivered, (b) on the business day after dispatch, if sent by nationally-recognized overnight courier and (c) on the third business day after dispatch, if sent by mail. 9. Relationship Among Stockholders. No Stockholder shall have any responsibility for any breach of this Agreement by any other Stockholder or for any representations, warranties, acts, or omissions of any other Stockholder. Each Stockholder is entering into this Agreement for and on behalf of such 6 Stockholder only, and no partnership, joint venture, unincorporated association, or any other legal entity is intended to be formed by or among the Stockholders as a result of or in connection with this Agreement. The parties have chosen to execute a single instrument for convenience only, and this Agreement shall be construed as separate and several agreements between the Medical Group, BMJ, and each of the respective Stockholders for all purposes. This Agreement may be executed in separate counterparts. 10. Entire Agreement; Amendments; Prior Agreements. The foregoing, together with any related provisions of any other agreement entered into in connection herewith, is the entire agreement of the parties with respect to the subject matter hereof and may not be amended, supplemented, canceled or discharged except by a written instrument executed by both parties hereto. This Agreement supersedes any and all prior agreements among the parties hereto with respect to the matters covered hereby. 11. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 12. Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the losing party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. 13. Headings. The headings of the sections of this Agreement have been inserted for convenience only and shall not be deemed to be part of this Agreement. * * * 7 IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. SUN VALLEY ORTHOPAEDIC SURGEONS By: ROBERT O. WILSON, M.D., P.C., General Partner By: /s/ Robert O. Wilson, M.D. ------------------------------------------ Robert O. Wilson, M.D., President By: /s/ Jon Edwin Gelsey, M.D. --------------------------------------------- JON EDWIN GELSEY, M.D., General Partner By: /s/ Martin G. Sterusky, M.D. --------------------------------------------- MARTIN G. STERUSKY, M.D., General Partner By: /s/ Robert Waldrip --------------------------------------------- ROBERT WALDRIP, M.D., General Partner BONE, MUSCLE AND JOINT, INC. By: /s/ Naresh Nagpal --------------------------------------------- Naresh Nagpal, M.D., President STOCKHOLDERS /s/ /s/ Jon Edwin Gelsey, M.D. - ------------------------------ Jon Edwin Gelsey, M.D. /s/ /s/ Martin G. Sterusky - ------------------------------ Martin G. Sterusky, M.D. /s/ /s/ Robert Waldrip - ------------------------------ Robert Waldrip, M.D. 8 EX-10.41 14 MANAGEMENT SERVICES AGREEMENT EXECUTION COPY ================================================================================ MANAGEMENT SERVICES AGREEMENT BETWEEN BONE, MUSCLE AND JOINT, INC. AND FISHMAN AND STASHAK, M.D.'S, P.A. Effective as of June 1, 1997 ================================================================================ ATTACHMENTS SCHEDULES - --------- SCHEDULE I -- New Ancillary Services -- Exceptions SCHEDULE II -- Management Company Operating Cost Budget SCHEDULE III -- Equity Participation SCHEDULE IV -- Draw Date and Draw Percentage SCHEDULE V -- Management Fee -- Applicable Percentage SCHEDULE VI -- Professional Practice Cost Savings SCHEDULE VII -- Computation Example SCHEDULE VIII -- Non-Competition SCHEDULE 1.5 -- Future Affiliations SCHEDULE 6.2 -- Equity Investments SCHEDULE 6.3 -- Consents SCHEDULE 6.4 -- Financial Information SCHEDULE 6.5 -- Absence of Undisclosed Liabilities SCHEDULE 6.6 -- Absence of Changes SCHEDULE 6.7 -- Tax Matters SCHEDULE 6.8 -- Litigation, Etc. SCHEDULE 6.10 -- Accounts Receivable; Accounts Payable SCHEDULE 6.11 -- Labor Relations; Employees SCHEDULE 6.12 -- Employee Benefit Plans SCHEDULE 6.13 -- Insurance SCHEDULE 6.15 -- Burdensome Restrictions SCHEDULE 6.16 -- Disclosure SCHEDULE 7.2 -- Consents SCHEDULE 7.4 -- Financial Information SCHEDULE 7.5 -- Absence of Undisclosed Liabilities SCHEDULE 7.6 -- Absence of Changes SCHEDULE 7.7 -- Litigation, Etc. SCHEDULE 7.9 -- Employees SCHEDULE 7.11 -- Burdensome Restrictions EXHIBITS - -------- EXHIBIT A -- Asset Purchase Agreement EXHIBIT B -- Restricted Stock Agreement EXHIBIT C -- Stockholder Non-Competition Agreement THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into as of July 3, 1997, (the "Signature Date"), effective June 1, 1997, by and between FISHMAN AND STASHAK, M.D.'S, P.A., a Florida professional association (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), with reference to the following facts: A. The Medical Group is engaged in the business (the "Medical Business") of providing orthopedic medical and surgical services and related medical and ancillary services to the general public. B. The Management Company is a corporation engaged in the business (the "Management Business") of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Management Company and the Medical Group are entering into an Asset Purchase Agreement (the "Asset Purchase Agreement"), in the form of Exhibit A attached hereto, pursuant to which the Management Company is acquiring substantially all of the assets of the Medical Group. D. The Management Company and the Medical Group desire to enter into this Management Services Agreement, pursuant to which, among other things, the Management Company will render certain management and administrative services to the Medical Group. NOW, THEREFORE, the Medical Group and the Management Company hereby agree as follows: SECTION 1. Retention of the Management Company. 1.1. Retention. The Medical Group hereby retains the Management Company to provide all of the management and related services identified or referenced in Section 3 hereof and as otherwise required by this Agreement (collectively, the "Management Services"), and the Management Company hereby accepts such retention and agrees to provide such services, upon the terms and subject to the conditions set forth herein. 1.2. Exclusivity. During the term of this Agreement, the Management Company shall be the exclusive provider of all management and administrative services utilized by the Medical Group; provided, however, that the Medical Group may contract directly with or otherwise engage individuals or companies for the provision of accounting, legal, consulting, or other professional or advisory services (provided that such services shall be in addition to, and not in replacement of, the services to be provided by the Management Company hereunder), all in the sole discretion of the Medical Group and at the sole cost of the Medical Group. 1.3. Relationship of Parties. Notwithstanding anything contained herein to the contrary, (a) the Management Company and the Medical Group intend to act and perform as independent contractors, and the provisions hereof are not intended to create any partnership, joint venture, or employment relationship between the parties, and (b) the Management Company is hereby engaged solely to provide management and administrative services to the Medical Group and shall not interfere with, control, direct, or supervise the Medical Group or any medical professional employed by the Medical Group in connection with the provision of professional medical services. -2- 1.4. No Referral Obligation. The parties agree that the benefits to the Medical Group hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral, purchase, or any other arrangement for the provision of any item or service to or for any of the Medical Group's patients in or from any medical facility or laboratory or from any other entity owned, operated, controlled, or managed by the Management Company. 1.5. Future Affiliations. The Management Company shall not at any time prior to June 1, 1998, without the prior written consent of the Medical Group (which consent shall not be unreasonably withheld), enter into any discussions with respect to, or otherwise solicit a management services agreement with any of the physicians or medical practices listed on Schedule 1.5 attached hereto. The Medical Group hereby represents that it was, immediately prior to the date hereof, in active discussion with each of such physicians and/or medical practices regarding a possible affiliation between the Medical Group and such physicians and medical practices, respectively. SECTION 2. Term. Provided that the Closing under the Asset Purchase Agreement shall have occurred as provided therein, and subject to such start-up procedures as the parties may agree upon for purposes of facilitating the transition of responsibilities required by this Agreement, the performance of services under this Agreement shall commence as of June 1, 1997 (the "Commencement Date") and shall expire on the fortieth anniversary of the Commencement Date unless terminated earlier pursuant to the terms hereof (the "Base Term"). The Base Term of this Agreement shall be automatically extended for successive terms (each, an "Additional Term," and together with the Base Term, the -3- "Term") of five years each, unless either party delivers to the other party, not less than six (6) months nor more than nine (9) months prior to the expiration of the then-current Term, written notice of such party's intention not to so extend the Term of this Agreement. SECTION 3. Management Services. 3.1. Management Services Generally. (a) The Management Company shall be the sole and exclusive manager and administrator of all day-to-day business functions for the Medical Group, subject to the provisions of Section 1.2 hereof. The Management Company shall provide all of the management and administrative services reasonably required by the Medical Group in connection with the provision of any and all of the Medical Group Services (as hereinafter defined) and as otherwise provided in this Agreement, including without limitation the services described in Sections 3.2 through 3.17 hereof. (b) Without limiting the generality of the provisions of Section 3.1(a), and subject to the further provisions of this Agreement, the Management Services shall include such management and administrative services as may be reasonably required in connection with (i) all of the offices (including New Medical Offices, as hereinafter defined) of the Medical Group, and (ii) all professional services and all ancillary services furnished by the Medical Group. (c) Additionally, the full range of Management Services as described in this Agreement shall be applicable with respect to the items identified as Medical Group Costs in Section 5.7 hereof, except that such Medical Group Costs shall be paid by the Medical Group rather than by the Management Company. Accordingly, the Management Company shall provide accounting, bookkeeping, and related services with respect to all such costs. -4- (d) The Management Company may enter into such contracts and agreements with outside services and suppliers as the Management Company shall reasonably deem necessary in connection with the provision of the Management Services, and, to the extent permitted by applicable law, such contracts and agreements shall, except as otherwise expressly provided in this Agreement, be in the name of the Management Company; provided, however, that without the prior approval of the Operations Committee (as hereinafter defined), the Management Company shall not enter into any agreement pursuant to which an unaffiliated third party will perform substantially all of the duties of the Management Company set forth in Section 3.6(a) hereof. The Management Company shall have no authority, directly or indirectly, to perform, and shall not perform or enter into any agreement to perform, Medical Group Services or any other medical function required by law to be performed by a licensed physician or by any other licensed health care professional. (e) The Management Company shall comply in all material respects with all applicable material Federal, state and local laws, regulation, and ordinances in connection with the provision of the Management Services hereunder. 3.2. Premises. (a) The Medical Group, as of the Commencement Date, leases premises and provides medical services at the following locations: 1411 N. Flagler Drive West Palm Beach, Florida 33401 (b) A New Medical Office (as hereinafter defined) may be opened only upon the agreement of the Medical Group and the Management Company. The capital costs and start-up costs reasonably required in connection with the opening of any New Medical Office shall be borne as set forth in Section 5 hereof. -5- The premises of any New Medical Office shall be leased by the Management Company, in the Management Company's name, and the Medical Group shall, subject in each instance to the terms of any such lease, have the right to use the premises of any such New Medical Office solely for the provision of Medical Group Services in accordance with the terms of this Agreement. In connection therewith, the Medical Group agrees in all instances to abide by all of the terms and provisions of all such leases. Notwithstanding anything to the contrary contained in this Agreement, the Management Company may, in its sole discretion, determine to permanently close any New Medical Office if such office is not, after 12 months of operation, profitable (as determined in the sole discretion of the Management Company). (c) Except as set forth in Sections 3.2(a) or (b) above, the closing or relocation of any offices of the Medical Group shall be subject to agreement by the Medical Group and the Management Company. (d) The services to be provided by the Management Company with respect to the premises leased in accordance with this Section 3.2 shall include, without limitation, the negotiation and renegotiation of leases, communication with the landlords of the respective premises, identification of potential new locations for Medical Group offices, financial analysis relating to the opening, closing, and relocation of any offices, arrangement of necessary repairs, maintenance and improvements, procurement of property insurance, arrangement of telephone and other utility services, and hazardous waste disposal, and all other reasonably necessary or appropriate services related to all of the offices of the Medical Group. (e) The Management Company also shall provide all necessary or appropriate leasehold improvements to each of the premises, subject to prior approval as provided in Section 8.2 hereof. -6- (f) The Medical Group acknowledges that the Management Company makes no warranties or representations, expressed or implied, regarding the condition of any of the leased premises. 3.3. Equipment. (a) During the Term, the Management Company shall provide to the Medical Group the diagnostic and therapeutic medical equipment reasonably required by the Medical Group in connection with the provision of Medical Group Services (collectively, the "Medical Equipment"). The Management Company shall acquire (or lease), at its cost, all Medical Equipment, and the Management Company shall retain ownership of (or the leasehold interest with respect to) all Medical Equipment. As used herein, the term Medical Equipment shall not include medical equipment used in connection with a New Ancillary Service (as hereinafter defined). (b) The Management Company also shall provide to the Medical Group all furniture, furnishings, trade fixtures, and office equipment reasonably required in connection with the provision of Medical Group Services pursuant to this Agreement (collectively, "FF&E"). The Management Company shall acquire, at its cost, all FF&E, and the Management Company shall retain ownership of all FF&E. As used herein, the term FF&E does not include furniture, furnishings, trade fixtures, and office equipment used in connection with a New Ancillary Service. (c) The Medical Equipment and the FF&E are sometimes referred to collectively as the "Equipment." The acquisition, replacement, relocation, or other disposition of any Equipment shall require prior approval as provided in Section 8.2 hereof. (d) The Medical Group's right to use the Equipment shall be subordinate to the rights of any unaffiliated third -7- party to which the Management Company elects, in its sole discretion, to grant any security interest, mortgage, lien or other encumbrance in or on the Equipment. The Medical Group shall use the Equipment only in connection with its provision of the Medical Group Services, and the Medical Group shall not alter, repair, augment, or remove the Equipment from the premises of the Medical Group without the prior written consent of the Management Company and any lessor thereof, which approval may be granted or withheld in the Management Company's or such lessor's sole discretion. To the extent the Equipment is utilized by the Medical Group in the provision of Medical Group Services, the Medical Group shall have the right to exercise reasonable control over the use of such Equipment. (e) From time to time, and as reasonably requested by the Medical Group, the Management Company shall use reasonable efforts to cause the Equipment manufacturer or its authorized agent to provide service and maintenance for the Equipment as needed to maintain the Equipment in an operable condition, so that all such Equipment shall function continuously (subject to interruptions not reasonably avoidable) in accordance with the manufacturer's specifications and so that all conditions imposed by the manufacturer to maintaining the continued effectiveness of any warranty on such Equipment shall be satisfied. The Management Company shall take all reasonable steps to provide that all necessary service and maintenance is obtained in a prompt and timely manner, so as to minimize the amount of time that any of the Equipment is not available for usage by or for patients of the Medical Group. (f) THE MEDICAL GROUP ACKNOWLEDGES THAT THE MANAGEMENT COMPANY MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER RELATING TO THE EQUIPMENT PROVIDED TO THE MEDICAL GROUP PURSUANT TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE DESIGN CONDITION OF THE EQUIPMENT, THE CONFORMANCE THEREOF TO THE PROVISIONS AND -8- SPECIFICATIONS OF ANY PURCHASE ORDER RELATING THERETO, OR THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE. Nothing in this Agreement shall be construed to affect or limit in any way the professional discretion of the Medical Group to select and use any Equipment acquired by the Management Company in accordance with the terms of this Agreement insofar as such selection or use constitutes or might constitute the practice of medicine. 3.4. New Ancillary Services. (a) For purposes of this Agreement, "New Ancillary Services" means the technical component (but not the professional component) of the following, except as set forth in Schedule I: (i) Physical therapy; (ii) Magnetic resonance imaging and/or other imaging services (except diagnostic radiology); (iii) Outpatient surgery; (iv) Densitometry; and (v) Other revenue-producing services generally recognized as ancillary services, but excluding the following: (A) Any services provided on a regular basis by the Medical Group immediately prior to the Commencement Date, including without limitation (1) plain film and other diagnostic radiology (if any) and (2) ultrasound for pediatric patients; and (B) Any service performed in connection with new Medical Equipment acquired to -9- replace existing Medical Equipment so long as the new Medical Equipment performs substantially the same functions as the replaced Medical Equipment. New Ancillary Services do not include the sale or provision of (or services rendered in connection with) prosthetics, prosthetic devices, orthotics, braces, splints, appliances, crutches, casts, or any other supplies or similar items which are billable to patients or payors, all of which are to be included in the scope of Medical Group Services. (b) New Ancillary Services may be established only upon agreement of the Medical Group and the Management Company. Such agreement shall be memorialized in a written agreement executed by the parties (or in a written amendment to this Agreement) under which the Management Company agrees to provide all of the Management Services described in this Section 3 in connection with such New Ancillary Service, and for which the Management Company shall be compensated as described in Section 5.8 of this Agreement, except as may otherwise be agreed upon by the parties. 3.5. Administration, Finance and Accounting. The Management Company shall provide or arrange for the provision of all administrative, financial, and accounting functions necessary for the operation of the Medical Group, including, without limitation, the following (if applicable): (a) Creation and maintenance of bank accounts. (b) Deposits of receipts. -10- (c) Preparing accounts receivable summary reports, including various analyses of delinquent accounts. (d) Receiving appropriate approvals as required by the Medical Group's articles of incorporation (the "Articles of Incorporation") and its bylaws (the "Bylaws") prior to distribution of payments to outside parties; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Articles of Incorporation or Bylaws. (e) Disbursement of payables, including payables of the Medical Group; provided, however, that payables of the Medical Group shall be paid from an account of the Medical Group and not from any of the Management Company's bank accounts, and all checks drawn on any Medical Group account shall be signed by a partner in the Medical Group or another authorized representative of the Medical Group. (f) Negotiation of vendor contracts. (g) Performing monthly accounting functions, including bank reconciliations, maintenance of books and records, and preparation of financial statements. (h) Analyzing financial data as reasonably requested by physicians. (i) Analyzing potential New Medical Office locations, and coordinating all functions associated with opening New Medical Office locations. -11- (j) Preparing monthly financial and medical practice statistics reports by satellite office and by physician, and the Management Company shall use its reasonable efforts to have such reports available, with respect to any given month, 20 days after the end of such month. (k) Providing from the Medical Group's bank account(s) monthly draws to physicians and professional corporations pursuant to service agreements, monthly profit and loss distributions, and quarterly bonus calculations; provided, however, that the Management Company shall not be responsible for or liable with respect to interpretations of the Articles of Incorporation or Bylaws; provided, further, that all checks drawn on any Medical Group bank account shall be signed by a partner in the Medical Group or other authorized representative of the Medical Group. (l) Calculating physicians' and Medical Group's annual earnings based on the Medical Group's profit and loss distribution formulas. (m) Ongoing day-to-day communication with the managing partner (or other manager of the Medical Group) and assisting such person in fulfilling his responsibilities. (n) Preparing agendas and information packages for Medical Group meetings. (o) Developing budgets and long-term strategies for the Medical Group, including an initial long-term plan and capital expenditures budget -12- and the Management Company shall use its reasonable efforts to have such plan and budget delivered to the Medical Group within 180 days and 90 days, respectively, after the Commencement Date. (p) Coordinating payroll processing and payroll tax payments. (q) Providing ongoing personnel FTE analysis. (r) Sponsoring employee benefit plans and providing administrative services relating thereto for the Medical Personnel (as hereinafter defined), provided that if the Medical Group elects not to participate in the employee benefit plans established by the Management Company, the Management Company shall not be required to perform the services set forth in this clause (r). (s) Coordinating recruitment, interviewing, and hiring of new physicians approved by the Medical Group, in its sole discretion. (t) Implementing Medical Group fee schedule increases and/or decreases. (u) Coordinating depositions and court appearances. (v) Assisting in the coordination of call schedules. (w) Assisting in the coordination of coverage of athletic team events. (x) Acting as liaison to hospital administration, physical therapy, surgery center, MRI, and other ancillary services entities. -13- (y) Cooperating with outside accountants in preparing various schedules and providing other information. (z) Interacting with legal counsel as necessary. 3.6. Billing and Collection. (a) The Medical Group acknowledges that ownership of all Accounts (as hereinafter defined) is transferred by the Medical Group to the Management Company as provided in greater detail in Section 5.1 of this Agreement. In order to facilitate the collection of the Accounts, the Management Company shall (i) bill patients and third party payors in the Medical Group's name; (ii) collect accounts receivable resulting from such billing; (iii) receive payments and prepayments from the Medical Group's patients, Blue Cross and Blue Shield organizations, insurance companies, health care plans, Medicare, Medicaid, HMOs, and any and all other third party payors; (iv) take possession of and deposit into such bank (the "Medical Group Bank") as the Medical Group designates, in an account established by the Medical Group in the name of the Medical Group (the "Medical Group Collections Account"), any and all checks, insurance payments, cash, cash equivalents and other instruments received for Medical Group Services; and (v) initiate with the consent of the Medical Group, which consent may be withheld by the Medical Group in its sole and absolute discretion, legal proceedings in the name of the Medical Group to collect any Accounts and monies owed to the Medical Group, to enforce the rights of the Medical Group as a creditor under any contract or in connection with the rendering of any service, and to contest adjustments and denials by governmental agencies (or their fiscal intermediaries) as third-party payors. (b) From time to time at the Management Company's request, the Medical Group shall make available to the Management Company one or more authorized partners or other authorized -14- signatories (the "Authorized Partners") of the Medical Group to sign any letters, checks, instruments or other documents (the "Documents") on behalf of the Medical Group that are necessary for the Management Company to take the actions specified in this Section 3.6 and to perform its duties under this Agreement. If the Management Company notifies the Medical Group that an Authorized Partner is not signing the Documents in a timely manner, the Management Company shall not be liable for any failure to perform its duties hereunder or for any failure to take the actions specified herein or to perform the Management Services to the extent caused by the failure of an Authorized Partner to sign the Documents in a timely manner. (c) The Management Company shall submit all bills and manage the billing process on a timely basis in accordance with the terms of this Agreement and applicable law. (d) Without limiting the generality of the foregoing, the Management Company shall bill patients, bill and submit claims to third party payors, perform appropriate coding for each bill, and collect all fees for professional and other services rendered and for items supplied to patients by the Medical Group, all in a timely manner and in accordance with parameters and criteria established by the Operations Committee (as hereinafter defined). Additionally, the Management Company shall provide the following services which are currently being provided by or on behalf of the Medical Group: (i) Receive and collect from patients at the time of visit all appropriate payments and pre-payments, including co-pays, deductibles, payments for non-covered medical services, and deposits for surgeries (if applicable), and shall obtain all appropriate insurance and other information required. (ii) Submit claims utilizing electronic billing submission, whenever appropriate. -15- (iii) Perform delinquent account collection calls and other appropriate follow-up mechanics for delinquent accounts of all insurance classifications, all in a timely fashion as determined by the Operations Committee. (iv) Turn over to outside collection agencies all delinquent accounts satisfying the criteria established by the Operations Committee. The Management Company shall also follow-up on the performance of the outside collection agencies and make changes, if necessary, and shall reconcile each account turned over to the summary data provided by the collection agency. (v) Write-off account balances according to criteria approved by the Operations Committee. (vi) Prepare claim reviews in accordance with criteria approved by the Operations Committee. (vii) Bill workers' compensation medical services at rates equal to the most recently approved Florida workers' compensation fee schedule. (viii) Apply "insurance only" and other courtesy write-offs in compliance with Operations Committee policy. (ix) With respect to discounted fee-for-service contracts with Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), the Management Company shall determine that payments received from PPOs and HMOs are in compliance with their respective contracts with the Medical Group. (x) With respect to capitation fee contracts with HMOs, the Management Company shall: -16- (A) Follow-up to ensure that payments to the Medical Group are made on a timely basis; and (B) Review and audit enrollment data provided by the HMO to ensure that the Medical Group is being compensated for the proper number of lives enrolled. (xi) With respect to lien accounts, the Management Company shall: (A) Ensure that appropriate documents are signed and agreed to initially as between the Medical Group, attorney and patient; (B) Follow-up on a regular basis as to the status of the account; and (C) Apply the policies of the Operations Committee in resolving open account balances. (xii) With respect to student athlete accounts, the Management Company shall coordinate insurance and other information in compliance with the policy of the Operations Committee. (xiii) With respect to amounts withheld by payors in compliance with contracts between the payor and the Medical Group, the Management Company shall follow-up on a timely basis to ensure that withheld amounts are returned to the Medical Group, if warranted, and to ensure that amounts not returned are verified and audited for appropriateness. -17- (xiv) Coordinate the timely payment of refunds to patients and third party payors when appropriate. (xv) Ensure that revenues related to depositions, record review and court appearances are accounted for, monitored, followed-up, and ultimately collected. 3.7. Administrative Personnel. (a) The Management Company shall retain and provide or arrange for the retention and provision of the following non-medical personnel necessary for the conduct of the Medical Group's business operations (collectively, "Administrative Personnel"): (i) Administration; (ii) Accounting; (iii) Billing and Collection; (iv) Secretarial; (v) Transcription; (vi) Appointments; (vii) Switchboard; (viii) Medical Records; (ix) Chart Preparation; (x) Historians; (xi) Clinic Support; and (xii) Marketing. (b) The Management Company shall determine and pay the salaries and fringe benefits of the Administrative Personnel, and shall provide other personnel services related to the Administrative Personnel, including, but not limited to, -18- scheduling, determining personnel policies, administering continuing education benefits, and payroll administration. (c) With respect to each applicable new employee in Administrative Personnel, the Management Company shall, as reasonably necessary, verify educational and employment experience, licensure, and insurability. (d) The Management Company shall attempt, consistent with sound business practices, to honor Medical Group requests with regard to the retention or assignment of specific Administrative Personnel to the Medical Group. In the event that the Management Company receives a complaint from the Medical Group that any of the Administrative Personnel is interfering with or disrupting the provision of Medical Group Services by the Medical Group, the Management Company will use reasonable efforts to attempt to promptly remedy any such complaint. If any such complaint is not remedied to the reasonable satisfaction of the Medical Group, then the Management Company shall remove such Administrative Personnel, if requested by the Medical Group, from the Medical Group's facilities, if and to the extent such action by the Management Company will not violate any applicable law. (e) All of the services provided by the Management Company under this Section 3.7, including the obligations set forth in Section 3.7(d), shall be performed in compliance with all applicable laws. 3.8. Technical Personnel; Leased Employees. (a) Subject to the conditions set forth in this Section 3.8, the Management Company shall employ or contract with, or shall arrange for, and shall provide to the Medical Group as leased employees, such Technical Personnel (as defined below) as may reasonably be necessary for the conduct of the Medical Business. -19- (b) For purposes of this Agreement, "Technical Personnel" means nurses, medical assistants, x-ray technicians, other technicians, and other personnel who perform diagnostic tests or other services that are covered by Medicare or by other third party payors when performed by an employee of a physician under the physician's supervision. (c) The Medical Group shall have the right to exercise, and shall exercise, such supervision and control over the activities of the Technical Personnel as may be necessary for the Technical Personnel to be considered leased employees under the Medicare program and under applicable law. Without limiting the generality of the foregoing, the Medical Group shall: (i) have the right to have any Technical Personnel terminated from employment; (ii) furnish the Technical Personnel with the equipment and supplies needed by the Technical Personnel for their work; (iii) provide the Technical Personnel with any necessary training; (iv) instruct the Technical Personnel regarding their activities performed for the Medical Group; (v) establish the hours of work for the Technical Personnel; (vi) approve vacation time and other time off from work; and (vii) provide that degree of supervision as is required by Medicare and by other third party payors to satisfy applicable conditions for coverage thereunder. -20- (d) With respect to each of the Technical Personnel, the Management Company shall verify or arrange for the verification of educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and Federal commissions. 3.9. Medical Personnel Recruiting. (a) The Management Company shall, upon request by the Medical Group, assist the Medical Group in recruiting Medical Personnel. The Medical Group shall be solely responsible for the selection and retention of Medical Personnel, provided that any such Medical Personnel shall possess all of the licensure required under applicable Federal and state law for such individual to perform his or her duties. "Medical Personnel" means: (i) Physicians (including fellows and residents, if any) providing professional medical services who are employees or independent contractors of the Medical Group; and (ii) Physician assistants, nurse practitioners, and other health care professionals who provide services that are billable to patients or third party payors under the name of such health care professional (as distinguished from services that are billable under the name of the supervising physician). (b) With respect to each of the Medical Personnel, the Management Company shall verify educational and employment experience, licensure and insurability, and shall review and provide the Medical Group with copies of any complaints contained in public files with applicable state and Federal sanctioned commissions. -21- 3.10. Inventory and Supplies. The Management Company shall order and purchase inventory and supplies on behalf of the Medical Group, and such other ordinary or appropriate materials as the Management Company and the Medical Group may mutually agree is necessary for the Medical Group to carry out its Medical Group Services. Inventory and supplies shall include, but not be limited, to: (a) Medical supplies; (b) Office supplies; (c) Postage; (d) Computer forms and supplies; (e) Printing and stationary supplies; (f) Printer supplies; and (g) Linen and laundry supplies. 3.11. Taxes. The Management Company shall provide the Medical Group with access to all information necessary for the Medical Group to prepare its tax returns. The Management Company shall have no responsibility for: (a) The payment of the Medical Group's taxes; or (b) The preparation of any income tax returns for the Medical Group. 3.12. Information Systems Management. (a) The Management Company shall provide or arrange for the provision of management information systems services to be utilized by the Medical Group. These services shall include, but not be limited to, ongoing maintenance and -22- improvement of the information systems used by the Medical Group in connection with the provision of the following services: (i) Accounts receivable - Billing/Insurance/ Collections; (ii) On-line appointment scheduling; (iii) Internal e-mail; (iv) On-line transcription; (v) Faxing subsystem; (vi) Electronic claims submission; (vii) Patient flow monitoring system; (viii) Authorization module; (ix) Prescription module; (x) X-ray tracking system; (xi) Voice mail; (xii) Paperless medical records; and (xiii) Bar code chart tracking system. (b) The services provided by the Management Company shall protect the confidentiality of patient medical records to the extent required by applicable law or the Medical Group's payor agreements; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. 3.13. Use of New Technologies in the Practice of Medicine. The Management Company shall utilize reasonable efforts to promote the integration of new technologies into the professional practice of the Medical Group, including, without -23- limitation, the use of satellite and other telecommunications services that permit the provision of remote consultations, virtual operations, and other professional services; provided, however, that the foregoing shall be subject to the terms of Section 8.2(e) hereof. 3.14. Public Relations; Marketing and Advertising. The Management Company shall develop and implement community outreach programs and public relations programs designed to educate the patient population regarding the Medical Group, the availability of its medical services, and the availability in terms of any managed care programs in which the Medical Group participates. The Management Company also shall develop and implement marketing and advertising programs as reasonably required to promote and expand the Medical Business, subject to any approved budgets. These programs shall be developed in such manner as the Management Company deems practical, and shall be conducted in compliance with applicable laws and regulations governing advertising by the medical profession. Any promotional materials created solely for the purpose of marketing the services provided by the Medical Group and the use of any individual physician's name in any promotional materials shall require the consent of the Medical Group or such physician, as the case may be. 3.15. Insurance. The Management Company shall, to the extent permitted by applicable law, provide the insurance coverage described in Section 12.1, and may obtain the insurance described in Section 12.2 of this Agreement. 3.16. Files and Records. (a) To the extent permitted by applicable law, the Management Company shall supervise and maintain custody of all -24- files and records relating to the operation of the business of the Medical Group, including, without limitation, accounting, billing, collection, or patient medical records. The management of all files and records shall be in compliance with applicable state and Federal statutes. Patient medical records shall at all times be and remain the property of the Medical Group and shall be located at a location that is readily accessible for patient care. The Management Company shall preserve the confidentiality of patient medical records and use information contained in such records only for the limited purposes necessary to perform the Management Services set forth herein; provided, however, that in no event shall a breach of such confidentiality be deemed a default under this Agreement if the Management Company acted reasonably and in good faith to protect such confidentiality. (b) The Management Company shall provide all off-site storage of files and records as required and in conjunction with policies established by the Operations Committee. The Management Company shall provide the Medical Group with all requested off-site files and records on a timely basis, consistent with the policies of the Medical Group in effect immediately prior to the Commencement Date. Any change in such policies shall be subject to the approval of the Operations Committee. (c) In the event of termination of this Agreement, the Management Company shall deliver to the Medical Group at no charge a copy of the books and records of the Medical Group in the Management Company's possession. In the event any physician of the Medical Group terminates his affiliation with the Medical Group during the Term, the Management Company shall, within 30 days after receipt of written instructions from the Medical Group, deliver to such physician a copy of the books and records pertaining to the Medical Group Services provided by such physician during the five years prior to such physician's departure from the Medical Group; provided that the Management -25- Company shall not be obligated to return any books and records pertaining to Medical Group Services provided prior to the Commencement Date. 3.17. Managed Care Contracts. The Management Company shall solicit, negotiate and administer all managed care contracts on behalf of the Medical Group based on parameters and criteria established by the Operations Committee. Such services shall be performed by the Management Company as agent of the Medical Group, and all managed care contracts shall be subject to the Medical Group's prior approval of any such contract. The Management Company shall prepare cost forecasts and other analyses as reasonably requested by the Medical Group in order to allow the Medical Group to make an informed decision with respect to each proposed contract. 3.18. Budgets. The Management Company shall prepare, for the review and approval of the Operations Committee, annual operating budgets (the "Budgets") reflecting in reasonable detail projected Billings, Collections, Medical Group Costs, and Management Company Operating Costs (all as hereinafter defined); provided, however, that the Medical Group shall provide the Management Company with a proposed Budget covering the initial three-month period under this Agreement. The initial Budget, which shall be applicable to the period commencing on the Commencement Date and ending three (3) months thereafter, is attached hereto as Schedule II. All other budgets shall be on a calendar year basis. The Management Company shall prepare and submit to the Operations Committee all subsequent Budgets on or before December 15 of the year immediately preceding the calendar year for which any Budget is applicable. -26- 3.19. Force Majeure. The Management Company shall not be liable to the Medical Group for failure to perform any of the services required herein in the event of strikes, lock-outs, calamities, acts of God, unavailability of supplies, changes in applicable law or regulations or other events over which the Management Company has no control for so long as such events continue and for a reasonable time thereafter. SECTION 4. Consideration. In consideration of the Medical Group's entering into this Agreement, the Management Company shall provide to the equity owners and employees of the Medical Group to whom the Medical Group instructs the Management Company to issue shares of Common Stock (the "Eligible Parties"), the consideration set forth opposite such person's name on Schedule III in the amounts designated by the Medical Group. SECTION 5. Costs, Compensation, and Other Payments. 5.1. Ownership of Accounts; Security. The Medical Group hereby transfers to the Management Company ownership of all accounts receivable and other rights to payment arising from the provision by the Medical Group of orthopedic medical and surgical services and related medical services to the general public during the Term (the "Accounts"); provided, however, that the right to payment of Medicaid and Medicare receivables shall remain with the Medical Group in accordance with applicable Federal and state law. The Management Company shall have the right to grant to any lender (the "Lender") a first priority lien and security interest in and with respect to the Accounts, together with all books, records, computer information and other general intangibles relating thereto (collectively, the "Collateral"), as security for the obligations of the Management Company to the Lender. The Medical -27- Group shall cooperate with the Lender as reasonably requested in the event the Lender seeks to enforce its rights and remedies under its agreement with the Management Company, including granting the Lender access, to the extent permitted by law, to all books and records associated with the Collateral. Neither the Management Company nor the Lender shall be required to give the Medical Group any notice in connection with any loan or related financing arrangements affecting the Accounts or other Collateral. 5.2. Bank Accounts. The Medical Group shall instruct the Medical Group Bank to transfer, on a daily basis, all funds in the Medical Group Collections Account (less the amount necessary to avoid the payment of bank charges or fees relating to the failure to maintain a minimum balance in the Medical Group Collections Account) to a bank (the "Management Company Bank") designated by the Management Company, for credit to an account in the Management Company's name (the "Operating Account"). 5.3. Medical Group Compensation. (a) Monthly Draw. (i) On each Draw Date (as hereinafter defined) during the Term hereof, the Management Company shall distribute to the Medical Group an amount equal to a percentage (the "Draw Percentage") of the Medical Group's total Billings (as hereinafter defined) for Medical Group Services provided during the previous month (the "Monthly Draw"). The Draw Date and the initial Draw Percentage are as set forth on Schedule IV, and the Draw Percentage shall be adjusted as provided in Section 5.3(a)(ii). (ii) Commencing May 15, 1998, and effective May 15 of each year thereafter, the Draw Percentage shall be -28- adjusted to equal a fraction, the numerator of which is the Annual Medical Group Compensation Amount (as hereinafter defined) for the previous year, and the denominator of which is the total amount of Billings for the previous year. (b) Annual Settlement. (i) On or before April 30 of each year beginning 1998, the Management Company shall determine the compensation (the "Annual Medical Group Compensation Amount") earned by the Medical Group with respect to the prior calendar year in accordance with the following calculation: (A) The total Collections for all Medical Group Services rendered during such year, minus (B) the sum of the following: (1) the Management Fee earned by the Management Company for the previous calendar year; and (2) the Authorized Management Company Operating Costs (as hereinafter defined) incurred by the Management Company during such year. (ii) If the Annual Medical Group Compensation Amount thus determined exceeds (the "Annual Shortfall") the total of the twelve (12) Monthly Draws paid by the Management Company to the Medical Group during the previous calendar year (the "Annual Draw Amount"), the Management Company shall pay to the Medical Group on or before May 15, an amount equal to the Annual Shortfall. If the Annual -29- Medical Group Compensation is less (the "Annual Overpayment") than the Annual Draw Amount, the Management Company shall withhold from the Monthly Draw otherwise payable to the Medical Group, during each of the following six (6) months, an amount equal to one-sixth (1/6) of such Annual Overpayment. (iii) With respect to this Section 5.3(b), for purposes of determining the total Collections for all Medical Group Services provided during any calendar year or portion thereof during the Term, all Collections during January, February, and March of such year shall be deemed to be for Medical Group Services rendered during the previous calendar year, and all Collections during April through December shall be deemed to be for Medical Group Services rendered during the calendar year in which such Collections were received. The foregoing shall also apply with respect to determining the Management Fee earned by the Management Company for the previous calendar year, for purposes of this Section 5.3(b). (iv) Notwithstanding anything to the contrary set forth herein, the first period for which the annual settlement described in this Section 5.3(b) shall be applicable is the period commencing on the Commencement Date and ending on December 31, 1997. (c) For purposes of this Agreement: (i) "Billings" means, for any applicable period, the gross charges of the Medical Group for all Medical Group Services furnished during such period. (ii) "Collections" means, for any applicable period, all cash or cash equivalents received during such period, net of refunds paid during such period, for Medical Group Services. -30- (iii) "Medical Group Services" means the following services rendered by, through, or on behalf of the Medical Group: all professional services rendered by or under the supervision of any of the Medical Personnel (including professional services rendered in connection with New Ancillary Services); all plain film and other diagnostic radiology services rendered by or under the supervision of any of the Medical Personnel; all other ancillary services (other than New Ancillary Services); all ultrasound for pediatric patients; all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, and other items and supplies that are billable to patients or to third party payors; depositions, record review services, court appearances, and independent medical exams; and all other services provided on a regular basis by the Medical Group immediately prior to the Commencement Date (except as set forth below). (iv) It is the intent of the parties that Billings, Collections, and Medical Group Services not include any of the following: (A) New Ancillary Services (excluding professional services rendered by Medical Personnel in connection therewith, which professional services are included under Section 5.3(c)(iii) above); (B) interest income; (C) royalties payable to any Medical Group physician for medical inventions; (D) fees payable under consulting agreements entered into by Medical Group physicians; -31- (E) revenues from presentations, publications, medical directorships, service as the head of a hospital department, and endorsements; (F) proceeds from the sale of any capital assets of the Medical Group; and (G) any income from investments. Notwithstanding anything to the contrary contained therein, any revenues received by any Billable Medical Personnel (as hereinafter defined) from any source set forth in clause (E) above, shall be included in Billings, Collections and Medical Group Services if the revenues from Medical Group Services generated by such Billable Medical Personnel during any year are materially reduced by the Billable Medical Personnel's participation in such activity. (v) For illustrative purposes only, an example of the computation of the Annual Settlement is set forth on Schedule VII attached hereto. 5.4. Management Fee. (a) The compensation payable to the Management Company for the provision of Management Services under this Agreement (the "Management Fee"), which the Management Company may disburse from time to time at its discretion, shall be equal to (i) the sum of (A) an amount equal to the Applicable Percentage (as hereinafter defined) of Collections, (B) an amount equal to sixty-six and two-thirds percent (66-2/3%) of the Professional Management Cost Savings (as hereinafter defined) and (C) any amounts owed to the Management Company pursuant to Section 5.11 hereof, if any, less (ii) an amount equal to the Medical Group's pro rata portion of the Specialty Care Network -32- Profit (as hereinafter defined) for such period, if any, based on the number of claims generated by the Medical Group through the specialty care network owned or operated by the Management Company during the applicable period; provided, however, that in the event the Applicable Percentage of Collections shall equal an amount that is less than $500,000 for any calendar year ending on or before December 31, 2003, the Management Fee for such period shall, notwithstanding anything to the contrary contained herein, equal $500,000 plus the amounts described in clauses (ii) and (iii) above (the "Guaranteed Minimum Fee"). The Management Fee shall not include any Professional Medical Cost Saving (as hereinafter defined), but all of such savings will accrue for the benefit of the Medical Group. For illustrative purposes only, an example of the computation of the Management Fee is set forth on Schedule VII attached hereto. (b) For purposes of this Section 5.4, the following terms have the meanings set forth below: (i) "Applicable Percentage" has the meaning set forth on Schedule V; (ii) "Professional Management Cost Savings" means the Professional Practice Cost Savings described in Section A.1 of Schedule VI; (iii) "Professional Medical Cost Savings" means the Professional Practice Cost Savings described in Section A.2 of Schedule VI. (iv) "Professional Practice Cost Savings" means the cost savings determined in the manner described on Schedule VI; and (v) "Specialty Care Network Profit" means the excess of the fee(s) received by the Management Company over the costs incurred by the Management Company, each in -33- connection with its ownership and/or operation of a specialty care network. 5.5. Management Company Costs. (a) The Management Company shall pay all Management Company Operating Costs and all Excluded Costs (collectively, the "Management Company Costs"). All Management Company Costs shall be incurred in the name of the Management Company, and not in the name of the Medical Group, except as specifically approved by the Medical Group. Management Company Costs shall not include any costs or expenses incurred prior to the Commencement Date. (b) The Management Company shall provide to the Medical Group, upon reasonable request by the Medical Group from time to time, supporting documentation and other backup detail relating to any or all of the Management Company Costs. (c) For purposes of this Agreement, "Management Company Operating Costs" means all operating costs and expenses incurred in connection with the provision of the Management Services, including, without limitation, those costs and expenses set forth in the Budget, except that any costs and expenses defined as Medical Group Costs in Section 5.7 hereof, and any Excluded Costs (as hereinafter defined) shall not be deemed Management Company Operating Costs. To the extent that the Medical Group and the Management Company mutually determine that an expenditure not included in the Budget needs to be incurred in connection with the provision of Management Services hereunder, such expenditure shall be included in Management Company Operating Costs for purposes of this Agreement. "Excluded Costs" means all of the following costs and expenses incurred in connection with the provision of the Management Services hereunder: (i) New Medical Office Start-Up Costs; -34- (ii) the cost of any FF&E provided by the Management Company to the Medical Group, including the capital costs associated with any information systems technology implemented by the Management Company (subject to the provisions of Section 8.2(e) hereof); provided that the costs associated with the maintenance of such technology shall be an expense included in the Budget and shall be deemed an Authorized Management Company Operating Cost for purposes of this Agreement; (iii) depreciation, amortization, and interest; and (iv) corporate overhead of the Management Company ("Corporate Overhead") except to the extent that all of the following conditions are satisfied, as determined by the Operations Committee: (A) The Corporate Overhead is incurred in lieu of a pre-existing Management Company Operating Cost; (B) The amount of such Corporate Overhead does not exceed the amount of the Management Company Operating Costs being eliminated; and (C) The Corporate Overhead is allocated to the Medical Group and to all other medical groups utilizing such Corporate Overhead on a pro rata basis. Any Corporate Overhead with respect to which all of the above conditions are satisfied shall be considered Management Company Operating Costs. -35- (d) For purposes of this Agreement, "Authorized Management Company Operating Costs" means all Management Company Operating Costs incurred in any year reduced by any or all of the following, as applicable: (i) any costs that exceed the applicable Management Company Operating Costs Budget which are not approved by the Operations Committee; (ii) any costs with respect to which the Medical Group has reasonably requested supporting documentation or other backup detail which has not been furnished by the Management Company or which does not reasonably establish the appropriateness of such costs; and (iii) any costs that have been determined pursuant to an audit under Section 5.9 not to have been reasonably incurred in connection with the Management Services required to be provided under this Agreement. 5.6. New Medical Office Start-Up Costs. (a) The Management Company shall pay, to the extent provided herein, all New Medical Office Start-Up Costs incurred in connection with the establishment of any New Medical Office. The Management Company shall create a separate division (the "New Office Division") for purposes of accounting for the income, costs, profits, and losses of any New Medical Office. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Medical Office. Notwithstanding anything to the contrary contained herein, Corporate Overhead shall not be included in determining the costs and expenses associated with any New Medical Office. At the end of the New Medical Office Start-Up Period (as hereinafter defined), (i) the Management Company shall be reimbursed for all of the Management Company Operating Costs -36- incurred by the Management Company for each New Medical Office, (ii) the Management Company shall be entitled to receive the aggregate Management Fee as described in Section 5.4 and (iii) the Medical Group shall be entitled to receive the Annual Medical Group Compensation Amount for such new Medical Office, in each case, as if such New Medical Office had been any other office of the Medical Group during the New Medical Office Start-Up Period; provided, however, that notwithstanding the foregoing, if the aggregate Collections for such New Medical Office during the New Medical Office Start-Up Period is equal to or less than the New Medical Office Start-Up Costs associated with such New Medical Office during the New Medical Office Start-up Period, then (A) the Management Company and the Medical Group shall not be entitled to receive the Management Fee, the Annual Medical Group Compensation Amount, as applicable, or any reimbursement for Management Company Operating Costs and (B) the Management Company shall be responsible for the deficit, if any, associated with such New Medical Office. (b) Except to the extent provided in Section 5.6(a) above, the billings, collections, costs and expenses relating to any New Medical Office shall not, during the New Medical Office Start-Up Period, be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, Ancillary Services, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.8, or 5.7, respectively. (c) All Medical Equipment utilized at any New Medical Office shall be acquired by the Management Company and provided to the Medical Group in accordance with the terms of Section 3.3 hereof. (d) For purposes of this Agreement, "New Medical Office" means any office of the Medical Group other than those offices located in the premises identified in Section 3.2(a) hereof. -37- (e) For purposes of this Agreement, "New Medical Office Start-Up Costs" means the following costs incurred in connection with the establishment of a New Medical Office during the New Medical Office Start-Up Period: all Management Company Operating Costs and all costs associated with the development of such New Medical Office other than Medical Group Costs, provided that, the costs incurred in connection with any New Physician (as hereinafter defined) shall be borne in accordance with the provisions of Section 5.11 hereof. (f) For purposes of this Agreement, "New Medical Office Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of a New Medical Office and ending on the last day of the calendar month in which a period of twelve (12) months has elapsed from and after the date on which the New Medical Office first opened for the treatment of patients. In the event that the New Medical Office is profitable (as determined by the Management Company) as of the end of the New Medical Office Start-Up Period, at all times thereafter such New Medical Office shall, for all purposes of this Agreement, be treated as any other office of the Medical Group. 5.7. Medical Group Costs. Except as otherwise provided in this Agreement, the Medical Group shall pay all of the costs specified in this Section 5.7 (the "Medical Group Costs"). All Medical Group Costs shall be incurred in the name of the Medical Group, and not in the name of the Management Company, and shall be paid from an account of the Medical Group and not from any bank account of the Management Company. The Medical Group Costs are as follows: (a) compensation of all Medical Personnel that (i) are authorized to directly bill patients, Medicare, Medicaid and third party payors and (ii) are employed directly by the Medical -38- Group (such persons being referred to herein as the "Billable Medical Personnel"); (b) any applicable fringe benefits for all Medical Personnel, including, but not limited to, payroll taxes, workers' compensation, health insurance (including drug coverage), dental insurance, disability insurance, life insurance, 401(k) retirement plan, business buy-out disability insurance and continuing education; and (c) the cost of any items which are not required to be provided by the Management Company under this Agreement and/or which were ordered, purchased, or incurred by the Medical Group directly, including but not limited to the cost of accounting, legal, consulting, or other professional or advisory services, business meetings, and business taxes. 5.8. New Ancillary Services Costs. (a) Any agreement by the parties to establish a New Ancillary Service as described in Section 3.4 of this Agreement shall (unless otherwise agreed by the parties) incorporate the following: (i) The Management Company shall create a separate division ("Ancillary Division") for purposes of accounting for the income, costs, profits, and losses of any New Ancillary Service. The Management Company shall utilize generally accepted accounting principles in determining and accounting for the profits and losses related to the operations of each New Ancillary Service. Notwithstanding anything to the contrary contained herein, Corporate Overhead shall not be included in determining the costs and expenses associated with any New Ancillary Service. -39- (ii) Profits and/or losses of any Ancillary Division shall be divided equally between the Medical Group and the Management Company, and all distributions to the Medical Group and to the Management Company shall be made in equal amounts to each from available cash (after payment of all currently due obligations incurred in connection with such New Ancillary Division, including, without limitation, any principal and interest amounts then due and payable under Section 5.8(a)(iv) below, and after retention of reasonable reserves) derived from the operation of such Ancillary Division. (iii) All diagnostic and therapeutic equipment utilized in connection with any New Ancillary Service ("New Ancillary Service Medical Equipment") shall be acquired by the Management Company and shall be provided to the Medical Group on terms substantially similar to those set forth in Section 3.3 hereof. (iv) The Management Company shall pay all of the Ancillary Service Start-Up Costs (as hereinafter defined). Beginning with the month following the expiration of the Ancillary Service Start-Up Period (as hereinafter defined), the Management Company shall be entitled to recoup all of the Ancillary Service Start-Up Costs previously paid by the Management Company in sixty (60) equal monthly installments of principal, plus interest on the unrecouped portion of such costs at the prevailing prime rate as set forth in the Wall Street Journal or at the actual rate paid by the Management Company with respect to any part of such costs that have been financed by the Management Company, if applicable. (v) The Management Company shall provide, in connection with any New Ancillary Service, the full range of management services described in this Agreement. -40- (vi) The billings, collections, costs and expenses relating to any New Ancillary Service shall not be included in the computations of Medical Group Compensation, the Management Fee, Management Company Costs, New Medical Office Start-Up Costs, or Medical Group Costs as described in Sections 5.3, 5.4, 5.5, 5.6, or 5.7, respectively. (b) For purposes of this Section 5.8, "Ancillary Service Start-Up Period" means the period commencing on the date that any costs are incurred in connection with the establishment of the New Ancillary Service, which date shall not be prior to the date of the agreement establishing such New Ancillary Service, and ending on the earlier to occur of (i) the last day of the first period of two (2) consecutive calendar months for which the New Ancillary Service shows a profit (as determined by the Management Company) or (ii) the last day of the twelfth month after the establishment of such New Ancillary Service. (c) For purposes of this Section 5.8, "Ancillary Service Start-Up Costs" means the total of all of the following costs incurred in connection with the establishment of a New Ancillary Service during the Ancillary Service Start-Up Period (whether such costs would otherwise be considered Management Company Costs or Medical Group Costs): (i) Any lease payments for New Ancillary Service Medical Equipment; (ii) All costs of acquiring furniture, fixtures, and office equipment; (iii) All initial occupancy costs, if any, including but not limited to prepaid rent, and tenant improvements; -41- (iv) All costs related to the acquisition of materials and supplies related to the provision of such New Ancillary Service; and (v) All ongoing costs of the New Ancillary Service, including but not limited to personnel (other than the Billable Medical Personnel) and related benefits, the cost of operating any equipment utilized in providing the service, supplies, insurance, rent, repairs and maintenance, outside services, telephone, taxes, utilities, storage and other ordinary ongoing expenses of providing the New Ancillary Service. 5.9. Review and Audit of Books and Records. Each of the parties shall have the right, during ordinary business hours and upon reasonable notice, to review and make copies of, or to audit through a qualified certified public accountant approved by the other party (which approval shall not be unreasonably withheld), the books and records of the other party relating to the billing, collection, and disbursement of fees, and the determination of costs, under this Agreement. Any such review or audit shall be performed at the cost of the requesting party; provided, however, that in the event that such review or audit requested by the Medical Group discloses a discrepancy indicating that the Medical Group has actually been underpaid by an amount in excess of three and one-half (3 1/2%) percent, but not more than five percent (5%), of the total amount of Medical Group Compensation otherwise payable to the Medical Group for the period covered by the audit (the "Audit Compensation Amount"), the Management Company shall pay up to $5,000.00 of the costs of such audit, and if the audit reveals an underpayment in excess of five percent (5%) of the Audit Compensation Amount, the entire cost of the audit shall be borne by the Management Company. All documents and other information -42- obtained in the course of such review or audit shall be held in strict confidence. 5.10 Start-Up Period. Consistent with the provisions of Section 2 of this Agreement, the parties acknowledge and agree that, in order to facilitate the transition of responsibilities hereunder, certain requirements and procedures agreed to under this Agreement may be implemented, in whole or in part and at any time during the period commencing on the Commencement Date and ending 90 days thereafter (subject to extension by agreement of the Medical Group and the Management Company), rather than being fully implemented immediately on the Commencement Date. Accordingly, the parties further agree that the Management Fee and Monthly Draw payable in respect of the Management Services and the Medical Group Services applicable to such period of time shall be computed, and any appropriate adjustments shall be made, such that no material financial advantage or disadvantage shall accrue to either party as a result of implementing such requirements and procedures over the course of such start-up period rather than immediately on the Commencement Date. 5.11. New Physician Compensation Costs. (a) Notwithstanding anything contained herein to the contrary, upon the Management Company's receipt of a written request from the Medical Group within three (3) business days after the New Physician Start Date (as hereinafter defined) the Management Company shall, during the period beginning on the New Physician Start Date and ending on the Physician Breakeven Date (as hereinafter defined), be responsible for the payment of all New Physician Compensation (as hereinafter defined); provided, however, that if the Management Company does not receive such written request within the specified time period, the Medical Group shall be responsible for such compensation. In the event -43- the Management Company pays the New Physician Compensation pursuant to the preceding sentence, the Management Company shall, notwithstanding anything to the contrary contained in this Agreement, receive, in consideration therefor, sixty six and two-thirds percent (66 2/3%) of all Collections generated by such New Physician for those Medical Group Services performed by such New Physician, and such amounts shall not be included in determining Collections for purposes of this Agreement. The remaining thirty three and one-third percent (33 1/3%) of such Collections shall belong to the Medical Group), and such amounts shall not be included in determining Collections for purposes of this Agreement. As of the Physician Breakeven Date, the New Physician Compensation shall be payable by, and become the responsibility of, the Medical Group in accordance with Section 5.7 hereof, and all of the Billings and Collections generated by such New Physician thereafter shall be considered Billings and Collections for purposes of this Agreement. In the event that the Medical Group pays the New Physician Compensation as of the Physician Start Date, all Billings and Collections generated by such New Physician shall be considered Billings and Collections for purposes of this Agreement. (b) "New Physician" means, any physician who, at any time after the Commencement Date, becomes affiliated with or employed by the Medical Group; provided that if such physician becomes affiliated with or employed by the Medical Group pursuant to a transaction between the Management Company and such physician or a medical group with which such physician is affiliated in which the Management Company acquires any assets or accounts receivable from such physician or such medical group or pays any other consideration to such physician or such medical group in connection with such physician's affiliation or employment with the Medical Group and/or the Management Company, then such physician shall not be deemed to be a New Physician for purposes of this Agreement. -44- (c) "Physician Breakeven Date" means, with respect to any New Physician, the date on which the Collections generated by such New Physician during the period beginning on the New Physician Start Date and ending on the date of determination first equal or exceed (i) the aggregate amount of New Physician Compensation paid to such New Physician for the foregoing period plus (ii) that portion of the Medical Group Costs and Management Company Costs associated with such New Physician and/or the Medical Group Services provided by such New Physician. (d) "New Physician Compensation" means, with respect to any New Physician and for any period in question, the amount of compensation (wages and otherwise) payable to such New Physician by the Medical Group. (e) "Physician Start Date" means, with respect to any New Physician, the date such New Physician becomes affiliated with or employed by the Medical Group. SECTION 6. Representations and Warranties of the Medical Group The Medical Group hereby represents and warrants to the Management Company, as of the Signature Date, as follows: 6.1. Organization; Good Standing; Qualification and Power. The Medical Group is a professional association duly organized, validly existing, and in good standing under the laws of the State of Florida and has all requisite power and authority to own, lease, and operate its properties, to carry on its business as now being conducted and as proposed to be conducted, to enter into this Agreement, the Asset Purchase Agreement, the Assignments of Lease, and the Stockholder Non-Competition Agreements (as hereinafter defined) (collectively, the "Medical Group Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions -45- contemplated hereby and thereby. The Medical Group has delivered to the Management Company a true and correct copy of its Articles of Incorporation and its Bylaws, each as in effect on the date hereof. 6.2. Equity Investments. Except as set forth on Schedule 6.2, the Medical Group currently has no subsidiaries, nor does the Medical Group currently own any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture, or other entity. 6.3. Authority. The execution, delivery and performance of this Agreement and the other Medical Group Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Medical Group. This Agreement and the other Medical Group Transaction Documents have been duly and validly executed and delivered by the Medical Group and constitute the legal, valid and binding obligations of the Medical Group enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of this Agreement or any other Medical Group Transaction Document by the Medical Group nor the consummation by the Medical Group of the transactions contemplated hereby or thereby, nor compliance by the Medical Group with any provision hereof or thereof will conflict with or result in a breach of any provision of the formation documents of the Medical Group, cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions -46- or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Medical Group is a party or by which the Medical Group or any of its properties or assets may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Medical Group or any of its properties or assets or the Medical Business. Except as provided on Schedule 6.3, to the best of the Medical Group's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Medical Group of this Agreement or any other Medical Group Transaction Document or the consummation of the transactions contemplated hereby and thereby. 6.4. Financial Information. Schedule 6.4 contains the Medical Group's internal statements of assets, liabilities and partners' equity of the Medical Business at March 31, 1997 (the "Balance Sheet"; and the date thereof being referred to as the "Balance Sheet Date"), and the related internal statements of revenue and expenses for the three-month period then ended (including the notes thereto and other financial information included therein) (collectively, the "Internal Financial Statements"), and (b) the compiled financial statements of the Medical Business for the periods ended December 31, 1996, December 31, 1995, and December 31, 1994 (the "Review Financial Statements"). The Internal Financial Statements and the Review Financial Statements (i) are in accordance with the books and records of the Medical Business, (ii) fairly present the financial position of the Medical Business as of the dates thereof, (iii) have been prepared in accordance with generally accepted accounting principles consistently applied throughout -47- the periods covered thereby, and (iv) are true, correct and complete in all material respects as of the dates thereof. 6.5. Absence of Undisclosed Liabilities. Except as set forth on Schedule 6.5, as of the Balance Sheet Date, the Medical Business did not have any material liability of any nature (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Balance Sheet, all liability reserves established by the Medical Business on the Balance Sheet were adequate and there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Balance Sheet. 6.6. Absence of Changes. Except as set forth on Schedule 6.6, since the Balance Sheet Date, the Medical Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets (including, without limitation, levels of working capital and the components thereof), liabilities, operations, results of operations, earnings, business or prospects of the Medical Business; (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Medical Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or -48- commitment entered into, by the Medical Business other than such items created or incurred in the ordinary course of the Medical Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Medical Business outside the ordinary course of the Medical Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any tangible or intangible asset of the Medical Business except in the ordinary course of the Medical Business and consistent with past practice; (f) any write-off as uncollectible of any accounts receivable in connection with the Medical Business or any portion thereof in excess of $5,000 in the aggregate exclusive of all normal contractual adjustments from third party payors; (g) except for all normal contractual adjustments from third party payors, any account receivable in connection with the Medical Business in an amount greater than $10,000 which (i) has become delinquent in its payment by more than 90 days, (ii) has had asserted against it any claim, refusal to pay or right of set-off, (iii) an account debtor has refused to pay for any reason or with respect to which such account debtor has become insolvent or bankrupt or (iv) has been pledged to any third party; (h) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Medical Business; (i) any general uniform increase in the compensation of employees of the Medical Group or the Medical Business (including, without limitation, any increase pursuant to -49- any bonus, pension, profit-sharing, deferred compensation arrangement or other plan or commitment) or any increase in compensation payable to any officer, employee, consultant or agent thereof, or the entering into of any employment contract with any officer or employee, or the making of any loan to, or the engagement in any transaction with, any officer of the Medical Group or the Medical Business; (j) any change in the accounting methods or practices followed in connection with the Medical Business or any change in depreciation or amortization policies or rates theretofore adopted; (k) any agreement or commitment relating to the sale of any material fixed assets of the Medical Business; (l) any other transaction relating to the Medical Business other than in the ordinary course of the Medical Business and consistent with past practice; or (m) any agreement or understanding, whether in writing or otherwise, for the Medical Business to take any of the actions specified in items (a) through (l) above. 6.7. Tax Matters. (a) Except as set forth on Schedule 6.7, (i) all Taxes (as hereinafter defined) relating to the Medical Business required to be paid by the Medical Group through the date hereof have been paid and all returns, declarations of estimated Tax, Tax reports, information returns and statements required to be filed by the Medical Group in connection with the Medical Business prior to the date hereof (other than those for which extensions shall have been granted prior to the date hereof) relating to any Taxes with respect to any income, properties or operations of the Medical Group prior to the date hereof (collectively, "Returns") have been duly filed; (ii) as of the -50- time of filing, the Returns correctly reflected in all material respects (and, as to any Returns not filed as of the date hereof, will correctly reflect in all material respects) the facts regarding the income, business, assets, operations, activities and status of the Medical Business and any other information required to be shown therein; (iii) all Taxes relating to the operations of the Medical Business that have been shown as due and payable by the Medical Group on the Returns have been timely paid and filed or adequate provisions made to the books and records of the Medical Business; (iv) in connection with the Medical Business (x) the Medical Group has made provision on the Balance Sheet for all Taxes payable by the Medical Group for any periods that end on or before the Balance Sheet Date for which no Returns have yet been filed and for any periods that begin on or before the Balance Sheet Date and end after the Balance Sheet Date to the extent such Taxes are attributable to the portion of any such period ending on the Balance Sheet Date and (y) provision has been made for all Taxes payable by the Medical Group for any periods that end on or before the date hereof for which no Returns have then been filed and for any periods that begin on or before the date hereof and end after such date to the extent such Taxes are attributable to the portion of any such period ending on such date; (v) no tax liens have been filed with respect to any of the assets of the Medical Business, and there are no pending tax audits of any Returns relating to the Medical Business; and (vi) no deficiency or addition to Taxes, interest or penalties applicable to the Medical Group for any Taxes relating to the operation of the Medical Business has been proposed, asserted or assessed in writing (or any member of any affiliated or combined group of which the Medical Group or any previous operator of the Medical Business was a member for which the Medical Group could be liable). (b) The Medical Group is not a foreign person within the meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Code. -51- (c) The Medical Group has provided the Management Company with true and complete copies of all Federal, state and foreign Returns of the Medical Group for the calendar years ending December 31, 1996 and 1995. (d) For purposes of this Agreement, "Tax" means any of the Taxes and "Taxes" means, with respect to any person or entity, (i) all Federal, state, local and foreign income taxes (including any tax on or based upon net income, or gross income, or income as specially defined, or earnings, or profits, or selected items of income, earnings or profits) and all Federal, state, local and foreign gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties or other Federal, state, local and foreign taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) on such person or entity and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of being a `transferee' (within the meaning of Section 6901 of the Code or any other applicable law) of another person or entity or a member of an affiliated or combined group. 6.8. Litigation, Etc. Except as set forth on Schedule 6.8, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Medical Group, threatened against the Medical Group or in connection with the Medical Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (b) judgments, decrees, injunctions or orders -52- of any court, governmental department, commission, agency, instrumentality or arbitrator against the Medical Group, its assets or affecting the Medical Business. The Medical Group has delivered to the Management Company all documents and correspondence relating to matters referred to in said Schedule 6.8. 6.9. Compliance; Governmental Authorizations. The Medical Group and the Medical Business have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Medical Group has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Medical Business, the lack of which would have a material adverse effect on the Medical Group's ability to operate the Medical Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Medical Group has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Medical Group, threatened to revoke or limit any thereof. To the best knowledge of the Medical Group, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. To the best knowledge of the Medical Group, neither the Medical Group nor any of the Medical Personnel employed by the Medical Group is now or in the last four years has been the subject of or involved in any investigation by any Federal, state or local regulatory agency related to its or his Medicare, Medicaid or other third party payor billing practices. 6.10. Accounts Receivable; Accounts Payable. (a) Except as set forth on Schedule 6.10, all of the accounts receivable owing to the Medical Group in connection -53- with the Medical Business as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of the Medical Business, the amounts of which are actually due and owing, and as of the date hereof, to the best knowledge of the Medical Group, there are no claims, refusals to pay or other rights of set-off against any thereof. Except as set forth on Schedule 6.10, as of the date hereof, there is no account receivable or note receivable of the Medical Business pledged to any third party. The Medical Group has provided the Management Company with an accounts receivable aging report dated as of June 25, 1997 that is true and complete as of the date thereof. (b) All accounts payable and notes payable by the Medical Business to third parties arose in the ordinary course of business and, except as set forth in Schedule 6.10, there is no account payable or note payable past due or delinquent in its payment. 6.11. Labor Relations; Employees. Schedule 6.11 contains a true and complete list of the persons employed by the Medical Group as of the date hereof (the "Employees"). Except as set forth on Schedule 6.11, (a) the Medical Group and the Medical Business are not delinquent in payments to any of the Employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them to the date hereof or amounts required to be reimbursed to the Employees; (b) upon termination of the employment of any of the Employees, neither the Medical Group, the Medical Business nor the Management Company will by reason of anything done prior to the date hereof, or by reason of the consummation of the transactions contemplated hereby, be liable for any excise taxes pursuant to Section 4980B of the Code or to any of the Employees for severance pay or any other payments; (c) there is no unfair labor practice complaint against the Medical -54- Group or in connection with the Medical Business pending before the National Labor Relations Board or any comparable state, local or foreign agency; (d) there is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of the Medical Group, threatened against or involving the Medical Group or Medical Business; (e) there is no collective bargaining agreement covering any of the Employees; and (f) to the best knowledge of the Medical Group, no Employee or consultant is in violation of any (i) employment agreement, arrangement or policy between such person and any previous employer (private or governmental) or (ii) agreement restricting or prohibiting the use of any information or materials used or being used by such person in connection with such person's employment by or association with the Medical Group or the Medical Business. 6.12. Employee Benefit Plans. (a) Schedule 6.12 identifies each 'employee benefit plan', as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other written or oral plans, programs, policies or agreements involving direct or indirect compensation (including any employment agreements entered into between the Medical Group or the Medical Business and any Employee of the Medical Group or in connection with the Medical Business, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently or previously maintained or entered into by the Medical Group or in connection with the Medical Business for the benefit of any Employee or former employee of the Medical Group or in connection with the Medical Business under which the Medical Group, any affiliate thereof or the Medical Business has any present or future obligation or liability (the "Employee Plans"). The Medical Group has provided the Management Company with true and complete salary, service and related data for Employees of the Medical Group and in connection with the Medical Business. -55- (b) Schedule 6.12 lists each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits currently maintained by the Medical Group or in connection with the Medical Business. (c) Except as set forth on the Schedule 6.12; (i) each Employee Plan has been operated and administered in compliance with ERISA, the Code and in accordance with the provisions of all other applicable Federal and state laws; (ii) all reporting and disclosure obligations imposed under ERISA and the Code have been satisfied with respect to each Employee Plan; (iii) to the best knowledge of the Medical Group, no breaches of fiduciary duty or prohibited transactions have occurred with respect to any Employee Plan; and (iv) all reporting, disclosure and bonding obligations have been satisfied with respect to each Employee Plan. (d) The Medical Group has made available to the Management Company a true and complete copy of each Employee Plan and a true and complete copy of each of the following documents, prepared in connection with such Employee Plan; (i) each trust or other funding arrangement, (ii) the two most recently filed Annual Reports (Form 5500), including attachments, for each Employee Plan, and (iii) the most recently received IRS determination letter. 6.13. Insurance. Schedule 6.13 contains a list of all policies of professional liability (medical malpractice), general liability, theft, fidelity, fire, product liability, errors and omissions, -56- health and other property and casualty forms of insurance held by the Medical Group covering the assets, properties or operations of the Medical Group and the Medical Business (specifying the insurer, amount of coverage, type of insurance, policy number and any pending claims thereunder). All such policies of insurance are valid and enforceable policies and are outstanding and duly in force and all premiums with respect thereto are currently paid. Neither the Medical Group nor its predecessor in interest has, during the last five fiscal years, been denied or had revoked or rescinded any policy of insurance relating to the assets, properties or operations of the Medical Group or the Medical Business. 6.14. Real Property. The Medical Group has a valid leasehold interest in all real property leased by the Medical Group. True and complete copies of all leases to which the Medical Group is a party or by which the Medical Group leases space have been delivered to the Management Company. The Medical Group does not own any real property. 6.15. Burdensome Restrictions. Except as set forth on Schedule 6.15, neither the Medical Group nor the Medical Business is bound by any oral or written agreement or contract which by its terms prohibits or restricts it from conducting the Medical Group or the Medical Business (or any material part thereof). 6.16. Disclosure. Neither the Medical Group Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Management Company by or on behalf of the Medical Group in connection with the transactions contemplated hereby contains any -57- untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. Except as set forth on Schedule 6.16, there have been no events or transactions, or information which has come to the attention of the Medical Group, which, as they relate directly to the Medical Group or the Medical Business, could reasonably be expected to have a material adverse effect on the business, operations, affairs, prospects or condition of the Medical Group and the Medical Business. SECTION 7. Representations and Warranties of the Management Company. The Management Company represents and warrants to the Medical Group, as of the Signature Date, as follows: 7.1. Organization, Good Standing and Power. The Management Company (a) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (b) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted, to execute and deliver this Agreement and each of the Asset Purchase Agreement, the Restricted Stock Agreements (as hereinafter defined), the Assignments of Lease, and the Stockholder Non-Competition Agreements (collectively, the "Management Company Transaction Documents"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. 7.2. Authority. The execution, delivery and performance of this Agreement and the other Management Company Transaction Documents, and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary -58- corporate action on the part of the Management Company. This Agreement and each Management Company Transaction Document has been duly and validly executed and delivered by the Management Company, and this Agreement and each such Management Company Transaction Document is the valid and binding obligation of the Management Company, enforceable in accordance with its respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance of this Agreement or any other Management Company Transaction Document, nor the consummation by the Management Company of the transactions contemplated hereby or thereby, nor compliance by the Management Company with any provision hereof or thereof, will (a) conflict with or result in a breach of any provisions of the Amended and Restated Certificate of Incorporation or the Bylaws of the Management Company, (b) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Management Company is a party or by which it or any of its properties or assets is or may be bound (with respect to which defaults or other rights all requisite waivers or consents shall have been obtained at or prior to the date hereof) or (c) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Management Company or any of its properties or assets. Except as set forth on Schedule 7.2, to the best of the Management Company's knowledge, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Management Company of this Agreement or any other Management Transaction Document or the consummation by the -59- Management Company of the transactions contemplated hereby or thereby. 7.3. Capitalization. (a) The total authorized capital of the Management Company consists of 20,000,000 shares of common stock, of which [7,702,474] shares are issued and outstanding, and 7,444,024 shares of preferred stock, of which (i) 999,999 of Series A Convertible Preferred Stock, (ii) 2,000,001 shares of Series B Convertible Preferred Stock, (iii) 254,999 shares of Series C Convertible Preferred Stock, (iv) 188,072 shares of Series D Convertible Preferred Stock, and (v) 533,335 shares of Series E Convertible Preferred Stock are issued and outstanding. Each of the outstanding shares of capital stock has been duly and validly authorized and issued, is fully paid for and non-assessable, and was issued in compliance with all applicable Federal and state securities laws. (b) The Management Company has taken all action necessary or appropriate to duly authorize the creation, issuance and sale of the common stock to be issued hereunder. Such shares of common stock, when issued, sold and delivered, as provided for herein and in the Restricted Stock Agreements, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership of the shares. The issuance of such shares of common stock will not violate any preemptive or similar right of any person. 7.4. Financial Information. Schedule 7.4 contains (a) the unaudited statements of assets, liabilities and stockholders' equity of the Management Business at March 31, 1997 (the "Management Company Balance Sheet"; and the date thereof being referred to as the "Management Company Balance Sheet Date"), and the related unaudited statements of revenue and expenses for the periods then ended -60- (including the notes thereto and other financial information included therein) (collectively, the "Unaudited Financial Statements"). The Unaudited Financial Statements (i) were prepared in accordance with the books and records of the Management Business, (ii) fairly present the financial position of the Management Business as of the dates thereof, and (iii) are true, correct and complete in all material respects as of the date thereof. 7.5. Absence of Undisclosed Liabilities. Except as set forth on Schedule 7.5, as of the Management Company Balance Sheet Date, (a) the Management Business did not have any material liability of any nature required to be disclosed on a balance sheet (matured or unmatured, fixed or contingent, known or unknown) which was not provided for or disclosed on the Management Company Balance Sheet, (b) all liability reserves established by the Management Business on the Management Company Balance Sheet were adequate and (c) there were no loss contingencies (as such term is used in Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975) which were not adequately provided for or disclosed on the Management Company Balance Sheet. 7.6. Absence of Changes. Except as set forth on Schedule 7.6, since the Management Company Balance Sheet Date, the Management Business has been operated in the ordinary course and consistent with past practice and there has not been: (a) any material adverse change in the condition (financial or otherwise), assets, liabilities, operations, results of operations, earnings, business or prospects of the Management Business; -61- (b) any damage, destruction or loss (whether or not covered by insurance) in an aggregate amount exceeding $25,000 affecting any asset or property of the Management Business; (c) any obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) created or incurred, or any transaction, contract or commitment entered into, by the Management Business other than such items created or incurred in the ordinary course of the Management Business and consistent with past practice; (d) any payment, discharge or satisfaction of any claim, lien, encumbrance, liability or obligation by the Management Business outside the ordinary course of the Management Business (whether absolute, accrued, contingent or otherwise and whether due or to become due); (e) any license, sale, transfer, pledge, mortgage or other disposition of any material tangible or intangible asset of the Management Business except in the ordinary course of the Management Business and consistent with past practice; (f) any cancellation of any debts or claims of, or any amendment, termination or waiver of any rights of material value to, the Management Business; (g) any change in the accounting methods or practices followed in connection with the Management Business or any change in depreciation or amortization policies or rates theretofore adopted; (h) any other transaction relating to the Management Business other than in the ordinary course of the Management Business and consistent with past practice; or -62- (i) any agreement or understanding, whether in writing or otherwise, for the Management Business to take any of the actions specified in items (a) through (h) above. 7.7. Litigation, Etc. Except as set forth on Schedule 7.7, there are no (a) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Management Company, threatened against the Management Company or in connection with the Management Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, which, if adversely determined, could have a material adverse effect on the Management Company or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Management Company its assets or affecting the Management Business. 7.8. Compliance; Governmental Authorizations. The Management Company and the Management Business shall have complied in all material respects with all applicable material Federal, state, local or foreign laws, ordinances, regulations and orders. The Management Company has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Management Business, the lack of which would have a material adverse effect on the Management Company's ability to operate the Management Business after the date hereof on substantially the same basis as presently operated, such licenses and permits are in full force and effect, the Management Company has not received any notice indicating that any violations are or have been recorded in respect of any thereof, and no proceeding is pending or, to the best knowledge of the Management Company, threatened to revoke or limit any -63- thereof. To the best knowledge of the Management Company, none of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. 7.9. Employees. Except as set forth on Schedule 7.9, the Management Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other compensation for any services performed by them through the date hereof. 7.10. Insurance. The Management Company has obtained such policies of insurance as are usual and customary for businesses of the type conducted by the Management Company. All such policies of insurance are valid and enforceable policies, and all premiums with respect thereto are currently paid. 7.11. Burdensome Restrictions. Except as set forth on Schedule 7.11, neither the Management Company nor the Management Business is bound by any oral or written agreement or contract which by its terms prohibits it from conducting the Management Company or the Management Business (or any material part thereof). 7.12. Disclosure. Neither the Management Company Transaction Documents (including the Exhibits and Schedules attached thereto) nor any other document, certificate or written statement furnished to the Medical Group by or on behalf of the Management Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. -64- SECTION 8. Operations Committee. 8.1. Formation and Operation of the Operations Committee. The Management Company and the Medical Group shall establish a committee (the "Operations Committee") responsible for directing the Management Company in connection with the development of certain specific management and administrative policies for the overall operation of the Medical Group. The Operations Committee shall consist of six (6) members. The Medical Group shall designate three (3) members of the Operations Committee, each of whom shall be a physician in the Medical Group, and the Management Company shall designate three (3) members of the Operations Committee. The business of the Operations Committee shall be conducted in accordance with the policies and procedures described in Section 8.4 hereof. 8.2. Authoritative Functions of the Operations Committee. The Operations Committee shall perform the following functions, and the decisions of the Operations Committee with respect to such functions shall be binding on the Management Company and the Medical Group: (a) Approve the annual budgets for: (i) Billings and Collections; (ii) Medical Group Costs; (iii) Capital expenditures to be made by the Management Company in fulfillment of its obligations hereunder; (iv) Management Company Operating Costs (which, in the absence of approval by the Operations Committee, shall be increased -65- by five percent (5.0%) over the total amount approved for the preceding period) (b) Approve costs and expenses that exceed the Management Company Operating Costs Budget. (c) Establish parameters and criteria with respect to the establishment and maintenance of relationships with institutional providers and payors and managed care contracts (except with respect to the establishment of professional fees). (d) Establish parameters and criteria with respect to: (i) Billings (ii) Claims submission (iii) Collections of fees (iv) Delinquent account collection policies (v) Turnover of delinquent accounts to outside collection agencies (vi) Write-offs of account balances (vii) Claim review requests (viii) "Insurance only" and other courtesy write-off policies (ix) Lien account collection policies (x) Student Athlete account policies (e) Approve the acquisition, replacement, relocation, or other disposition of Medical Equipment and FF&E, approve the integration of new technologies into the professional practice of the Medical Group as contemplated by Section 3.11 hereof, and approve the -66- renovation and expansion of any offices of the Medical Group ("Tenant Improvements"); provided, however, that the approval of the Management Company also shall be required prior to (i) the acquisition of any Equipment (including any Medical Equipment, FF&E or other items relating to or necessary in connection with the integration of new technologies into the professional practice of the Medical Group) if and to the extent that the aggregate cost of such items in any calendar year exceeds five percent (5%) of the Management Fee for the prior year (or, with respect to the first year of the Term, the projected Management Fee for such year), (ii) the undertaking of any Tenant Improvements relating to patient care facilities that cost more than $10,000 in the aggregate at any one of the Medical Group's office locations in any calendar year, or (iii) the undertaking of any other Tenant Improvements. (f) Establish parameters and criteria for off-site storage of files and records of the Medical Group. 8.3. Advisory Functions of the Operations Committee. The Operations Committee shall review, evaluate and make recommendations to the Medical Group and the Management Company with respect to the following matters: (a) Identification of physician subspecialties required for the efficient operation of the Medical Group; advice regarding all Medical Personnel employment and recruitment contracts to be utilized by the Medical Group. -67- (b) Development of long-term strategic planning objectives for the Medical Group. (c) Public relations, advertising, and other marketing of Medical Group Services, including design of exterior signs. (d) The establishment of fees for professional services and ancillary services rendered by the Medical Group. (e) Access and quality issues pertaining to ancillary services. (f) Insurance limits and insurance coverage of the Medical Group and the Management Company, as such coverage may relate to Medical Group operations and activities. (g) Any matters arising in connection with the operations of the Medical Group that are not specifically addressed in this Agreement and as to which the Management Company or the Medical Group requests consideration by the Operations Committee. The recommendations of the Operations Committee with respect to the matters described in this Section 8.3 are intended for the advice and guidance of the Management Company and the Medical Group, and except as provided herein, the Operations Committee does not have the power to bind the Management Company or the Medical Group. Where discretion with respect to any matters is vested in the Management Company or the Medical Group under the terms of this Agreement, the Management Company or the Medical Group, as the case may be, shall have ultimate responsibility for the exercise of such discretion, notwithstanding any recommendation of the Operations Committee. The Management Company and the Medical Group shall, however, take such -68- recommendations of the Operations Committee into account in good faith in the exercise of such discretion. 8.4. Committee Policies and Procedures. (a) The Medical Group shall designate one of its members to act as Chairman of the Committee, and the Management Company shall designate one of its members to act as Vice Chairman. Each party may substitute or change its designated Operations Committee members at any time upon notice to the other party, and any Operations Committee member may designate his or her own substitute at any meeting without notice. Each member shall have one vote and shall have the right to grant his or her proxy to another member of the Operations Committee. The Chairman, if present, shall preside at all meetings of the Operations Committee. In the absence of the designated Chairman, the Vice Chairman shall preside. The only powers of the Chairman and the Vice Chairman that differ from those of the other members of the Operations Committee shall be to call and preside over meetings in accordance with this Section 8.4. (b) The Operations Committee may hold meetings without call or formal notice at such times and places as a quorum of its members may from time to time determine. A meeting of the Operations Committee also may be called by at least two (2) members of the Operations Committee or by the Chairman or Vice Chairman thereof upon at least three (3) days' written notice to the other members of the Operations Committee. Such notice requirement shall be deemed waived with respect to any member of the Operations Committee who attends such meeting. Meetings may be held in person or by telephone. The Operations Committee also may act by written consent as provided in Section 8.4(c). Minutes shall be kept of all formal actions taken by the Operations Committee. (c) No action of the Operations Committee shall be effective unless authorized by the vote of four (4) or more -69- members of the Operations Committee present or represented by proxy at the applicable meeting. A quorum of the Operations Committee shall be four (4) members, in person, by telephone, or by proxy, and a quorum must remain for the duration of the meeting. The Operations Committee may establish such procedures to act by written consent, without a meeting, as the Operations Committee determines are advisable, provided that all six (6) members (in person or by proxy) must sign any written consent. SECTION 9. Obligations of the Medical Group. The Medical Group shall have the following obligations during the Term: 9.1. Compliance with Laws. The Medical Group shall provide professional services to patients in compliance at all times with those ethical standards, laws and regulations to which they are subject. The Medical Group shall verify, with the assistance of the Management Company, that each physician and other Medical Personnel associated with the Medical Group for the purpose of providing medical care to patients of the Medical Group is licensed by the State of Florida. The Medical Group shall monitor the quality of medical care practiced by physicians and other health care personnel associated with the Medical Group. In the event that any disciplinary actions or medical malpractice actions are initiated against any such physician by any payor, patient, state or Federal regulatory agency or any other person or entity, the Medical Group shall promptly inform the Management Company of such action and its underlying facts and circumstances. 9.2. Use of Facility. The Medical Group shall use and occupy any Facility (as defined below) exclusively for the practice of medicine, and shall comply with all applicable Federal, state and local rules, -70- ordinances and standards of medical care. The medical practice or practices conducted at any Facility described in clause (i) of the definition of the term "Facility" shall be conducted solely by Medical Personnel associated with the Medical Group, and no other physician or medical practitioner shall be permitted to use or occupy any Facility described in clause (i) below without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. The term "Facility" shall mean (i) any medical facility or laboratory controlled, managed or operated by the Management Company or (ii) any hospital at which any Medical Personnel practices medicine or maintains admitting privileges. 9.3. Choice of Braces, Splints, Appliances, Medical Supplies, and Allografts. The Medical Group shall have the exclusive control over the choice of vendors and products utilized with respect to all prosthetics, prosthetic devices, orthotics, braces, splints, appliances, medical supplies and allografts. 9.4. Choice of Radiologists, Anesthesiologists, Hospitals, Physical Therapy, MRI, and Other Medical Professionals and Facilities. The Medical Group shall have exclusive control over the choice of specific physicians and facilities to be utilized by the Medical Group with respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and other medical professionals and facilities; provided, however, that the foregoing shall not be considered New Ancillary Services or New Medical Offices, as the case may be, unless the parties have agreed thereto in accordance with Section 3.4(b) or 3.2(b), as the case may be. -71- 9.5. Insurability. The Medical Group shall cooperate with the Management Company in (i) ensuring that its Medical Personnel are insurable under commercially available malpractice insurance policies or (ii) instituting proceedings to terminate within thirty business days any Medical Personnel who is not so insurable or who loses his or her malpractice insurance eligibility unless the Medical Group makes (within such 30-day period) other arrangements reasonably appropriate under the circumstances and reasonably acceptable to the Management Company. The Medical Group shall notify the Management Company in writing of any change in the insurance status of any Medical Personnel within two days after the Medical Group receives notice of any such change. The Medical Group shall require all Medical Personnel to participate in an on-going risk management program. 9.6. Medicare. The Medical Group shall cause all physicians to be participating providers and accept assignment under Medicare. 9.7. Accounts Receivable; Billing. From the Commencement Date, the Medical Group acknowledges and agrees that all Accounts of the Medical Group or its Medical Personnel shall be the property of the Management Company hereunder and the Medical Group and the Medical Personnel hereby transfer and assign all of their right, title and interest to such Accounts to the Management Company; provided, however, that the right to payment of Medicaid and Medicare receivables shall remain with the Medical Group in accordance with applicable Federal law. The Medical Group's Medical Personnel shall be responsible for providing the appropriate current CPT4 coding with respect to the fee tickets prepared by such Medical Personnel. -72- 9.8. Medical Personnel Hiring. The Medical Group shall have the ultimate control over and responsibility for the hiring, compensation, supervision, evaluation and termination of its Medical Personnel; provided, however, that at the request of the Medical Group, the Management Company shall consult with the Medical Group regarding such matters. 9.9. Continuing Education. The Medical Group and its Medical Personnel shall be solely responsible for ongoing membership in professional associations and continuing professional education. The Medical Group shall ensure that its Medical Personnel participate in such continuing professional education as is necessary for such physician or professional to remain current in his or her field of medical practice. 9.10. Clinical Research. The Medical Group shall have the ultimate control over and responsibility for any clinical research program pertaining to patients of the Medical Group. This shall include but not be limited to research personnel interviewing, hiring, termination, compensation, day-to-day supervision, and assignment of responsibilities and projects. However, the Medical Group will cooperate with and take direction from the Management Company in its nationwide efforts to provide an effective disease management information system and outcome studies programs. SECTION 10. Certain Covenants. 10.1. Change of Control. During the Term of this Agreement, the Medical Group shall not enter into any single transaction (or group of related transactions undertaken pursuant to a common plan) involving the -73- admission of new stockholders, transfer of ownership interests, or reorganization or restructuring of the Medical Group, if in any such case the effect would be to transfer a majority of the ownership interest in the Medical Group, without the prior written consent of the Management Company, which consent shall not be unreasonably withheld or delayed. 10.2. Legend on Securities. During the Term of this Agreement, any certificate or similar evidence representing an equity interest in the Medical Group issued by the Medical Group shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF JUNE 1, 1997, BETWEEN FISHMAN & STASHAK, M.D.'S, P.A., A FLORIDA PROFESSIONAL ASSOCIATION, AND BONE, MUSCLE AND JOINT, INC., A DELAWARE CORPORATION." Nothing herein shall be construed as requiring the Medical Group to issue any certificate or other evidence representing an equity interest in the Medical Group, if such has not been issued prior to the date hereof. -74- SECTION 11. Records. 11.1. Medical Records. Upon termination of this Agreement, the Medical Group shall retain all patient medical records maintained by the Medical Group or the Management Company in the name of the Medical Group. 11.2. Management Business Records. All books and records relating in any way to the operation of the Management Business which are not patient medical records shall at all times be the property of the Management Company. The Management Company shall maintain custody of such records, and the Medical Group shall, upon its written request, be entitled to copies of any such records relating to the Management Services performed by the Management Company. 11.3. Access to Records Following Termination. Following the termination of this Agreement, the Medical Group shall grant (to the extent permitted by law) to the Management Company, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, reasonable access (which shall include making photocopies) to the patient medical records described in Section 11.1 hereof and any other pertinent information regarding the Medical Group during the Term. Prior to accessing such patient medical records, the Management Company shall obtain any required patient authorization. Following the termination of this Agreement, the Management Company shall provide to the Medical Group, promptly upon the Medical Group's written request, photocopies of the Management Business records described in Section 11.2 hereof, and -75- shall grant to the Medical Group, for the purpose of preparing for any actual or anticipated legal proceeding or for any other reasonable purpose, any other pertinent information regarding the Management Company during the Term. SECTION 12. Insurance and Indemnity. 12.1. Professional Liability Insurance. During the Term, the Management Company shall, to the extent permitted by applicable law, procure and maintain for the benefit of itself and the Medical Group comprehensive professional liability insurance providing for (a) general liability coverage and (b) medical malpractice coverage with limits of not less than $250,000 per claim and with aggregate policy limits of not less than $750,000 covering the Medical Group and each of the Medical Personnel of the Medical Group (or such higher amounts as may be necessary to comply with any regulatory requirement and/or contractual requirement to which such Medical Personnel or the Medical Group may be subject), including coverage for claims made after the Commencement Date relating to events or occurrences at any time prior thereto. The parties hereto acknowledge that the Management Company is procuring the malpractice insurance referenced herein to ensure that the Management Company has protection in the event it is sued as a result of an act or omission of an employee of the Medical Group. The Management Company shall pay the premiums for such general and medical malpractice liability coverage, and the Management Company shall be designated as a co-beneficiary under such insurance policies. 12.2. Life Insurance. The Management Company may, at its option, obtain a $500,000 life insurance policy for each duly licensed physician partner in or equity owner of the Medical Group. The Management Company shall be designated as the beneficiary under any such -76- policies. The premiums for such policies shall be paid by the Management Company and shall not be included as Management Company Operating Costs or otherwise charged to the Medical Group. 12.3. Indemnification by Medical Group. The Medical Group shall indemnify, hold harmless and defend the Management Company, its officers, directors, shareholders, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Medical Group Services, including without limitation the performance of such services prior to the Commencement Date, (ii) any other acts or omissions of the Medical Group and its Medical Personnel, including without limitation any such acts or omissions that occurred prior to the Commencement Date, or (iii) any breach of or failure to perform any obligation under this Agreement or the Medical Group Transaction Documents (which, for purposes hereof, shall be deemed to include the Restricted Stock Agreement to be signed by the Management Company and each partner, stockholder or employee of the Medical Group receiving stock of the Management Company, in the form of Exhibit B attached hereto (the "Restricted Stock Agreement")) by the Medical Group and/or the Medical Personnel and/or their respective agents and/or subcontractors (other than the Management Company) during the Term. 12.4. Indemnification by Management Company. The Management Company shall indemnify, hold harmless and defend the Medical Group, its officers, directors, shareholders, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, -77- causes of action and expenses (including reasonable attorneys' fees and expenses), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of (i) the performance of Management Services, (ii) any other acts or omissions of the Management Company and its employees or (iii) any breach of or failure to perform any obligation under this Agreement or the Management Company Transaction Documents by the Management Company and/or its agents, employees and/or subcontractors (other than the Medical Group) during the Term. SECTION 13. Termination. 13.1. Termination by Medical Group. The Medical Group may terminate this Agreement effective immediately by giving written notice of termination to the Management Company (a) in the event of the filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the Management Company or upon other action taken or suffered, voluntarily or involuntarily, under any Federal or state law for the benefit of debtors by the Management Company, except for the filing of a petition in involuntary bankruptcy against the Management Company which is dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) in the event the Management Company shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Management Company shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Management Company by the Medical Group or the Management Company does not thereafter diligently prosecute such action to completion; provided, however, that the Management Company shall have only 10 days after written notice to cure a default arising as a result of its failure to pay the Monthly Draw pursuant to Section 5.3(a) or any other monetary obligation owed to the -78- Medical Group hereunder, (c) in the event that any of the representations and warranties made by the Management Company in Section 7 is untrue or misleading in any material respect, provided that the Medical Group shall have previously given written notice to the Management Company describing in reasonable detail the nature of the item in question and the Management Company shall not have cured such matter within thirty (30) days of such notice, or (d) the Management Company shall have been sanctioned in writing by the Health Care Finance Administration for any violation of the Social Security Act, the Health Care Quality Improvement Act or any similar Federal law in a final, nonappealable proceeding and such sanction prevents the Management Company from fulfilling its obligations hereunder in accordance with all applicable law. 13.2. Termination by Management Company. The Management Company may terminate this Agreement effective immediately by giving written notice of termination to the Medical Group (a) in the event of a Bankruptcy Event relating to the Medical Group, (b) in the event the Medical Group shall default in any material respect in the performance of any duty or obligation imposed upon it by this Agreement and the Medical Group shall not have taken reasonable action commencing curing of such default within thirty (30) days after written notice thereof has been given to the Medical Group by the Management Company or the Medical Group does not thereafter diligently prosecute such action to completion; provided, however, that the Medical Group shall have only 10 days after written notice to cure a default arising as a result of its failure to pay any monetary obligation owed to the Management Company hereunder, (c) in the event that any of the representations and warranties made by the Medical Group in Section 6 is untrue or misleading in any material respect, provided that the Management Company shall have previously given written notice to the Medical Group describing in reasonable detail the nature of the item in question and the -79- Medical Group shall not have cured such matter within thirty (30) days of such notice, or (d) in the event the Medical Group is excluded from the Medicaid or Medicare program for any reason and the Medical Group has not successfully appealed such exclusion within 120 days after the effectiveness thereof. 13.3. Termination by Medical Group or Management Company. The Medical Group and the Management Company shall each have the right to terminate this Agreement effective immediately by giving written notice of termination to the other party pursuant to Section 27 of this Agreement. 13.4. Effect of Termination. (a) Upon the termination of this Agreement in accordance with the terms hereof, neither party hereto shall have any further obligation or liability to the other party hereunder, except as provided in Sections 3.15(c), 5.3(b) (as modified by Section 13.4(b) below), 13.5 and 26 hereof, and except to pay in full and satisfy any and all outstanding obligations of the parties accruing through the effective date of termination. (b) Upon the termination of this Agreement, the Annual Medical Group Compensation Amount described in Section 5.3(b) shall be calculated on or before the end of the fourth month following the termination date, rather than on or before April 30 as specified in Section 5.3(b), and the computation made under such Section shall be made with respect to the portion of the year ending on the termination date (if the termination date is other than December 31). In making such computation, all Collections during January, February, and March of such year shall be excluded, and all Collections during the three-month period following termination shall be included. All Collections during the three-month period following termination shall continue to be owned by the Management Company (and the Medical -80- Group shall immediately forward any amounts received in connection therewith to the Management Company) and all Collections thereafter shall be owned by the Medical Group. Any payment required under the terms of Section 5.3(b)(ii) shall be made within fifteen (15) days after the date by which the foregoing calculation is to be made, rather than on May 15. 13.5. Repurchase of Assets. Promptly following termination of this Agreement for any reason, the Management Company shall sell, transfer, convey, and assign to the Medical Group, and the Medical Group shall purchase, assume, and accept from the Management Company, at such price and upon such terms as may be agreed upon by the parties -- or, if the parties are unable to agree, at fair market value, determined in the manner set forth below -- all of the following items which are used in connection with the professional practice and related activities of the Medical Group and which, in the case of items (a), (b), (c) and (d), are physically located in any of the offices of the Medical Group, subject to any required consent from any third party having an interest therein but otherwise free and clear of any liens, claims or encumbrances; provided that any leased equipment or property shall be assigned to the Medical Group subject to the applicable lease agreement and any liens granted thereunder: (a) the Medical Equipment owned by the Management Company; (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Management Company; (c) the Management Company's rights and interests in any equipment leased by the Management Company, subject to the Medical Group's assumption of the obligations accruing -81- thereunder after the date of termination of this Agreement; (d) the supplies owned by the Management Company; (e) the Management Company's rights and interests under all of the Office Leases, subject to the Medical Group's assumption of the obligations accruing thereunder after the date of termination of this Agreement; and (f) the deposits of the Management Company relating to the Medical Group. Fair market value of the above described assets shall be determined by an independent appraiser mutually agreed upon by the Medical Group and the Management Company; provided, however, that if the Medical Group and the Management Company are unable to agree upon such an appraiser, each of the parties shall select an appraiser and the two appraisers thus selected shall select a third appraiser. All of the appraisers shall appraise the assets, and for purposes of determining the purchase price, the highest and lowest appraisals shall be disregarded, and the remaining appraisal shall be used. Notwithstanding anything contained herein to the contrary, the consideration payable by the Medical Group to the Management Company under this Section 13.5 shall be reduced by the aggregate amount, if any, payable by the Management Company to the Stockholders (as such term is defined in the Restricted Stock Agreements). SECTION 14. Rescission. 14.1. Rescission By Medical Group. (a) In the event that the Management Company has not consummated an initial public offering of its Common Stock under the Securities Act of 1933, as amended, by December 1, 1998, the Medical Group may, in its sole discretion at any time -82- during the period beginning December 1, 1998 and ending January 31, 1999 (such period being referred to herein as the "Rescission Period"), rescind (the "Rescission Option") this Agreement and disengage itself from its obligations under this Agreement. The Medical Group may exercise its Rescission Option during the Rescission Period by giving 30 days' prior written notice (the "Rescission Notice") to the Management Company and by complying with the other provisions contained in this Section 14.1. The effective date (the "Rescission Effective Date") of the rescission shall be the date of such Rescission Notice. (b) Effect of Rescission. In the event that the Medical Group exercises its Rescission Option pursuant to this Section 14.1, the procedures set forth in Section 13.4 of this Agreement shall apply. (c) Repurchase of Assets. Within 30 days following the Rescission Effective Date the Management Company shall, subject to the prior receipt of any required landlord and third party consents, transfer, convey and assign to the Medical Group, and the Medical Group shall purchase, assume and accept from the Management Company the property described in Section 13.5 hereof according to the terms set forth in such Section. (d) Repayment of Consideration. On or before the Rescission Effective Date, the Medical Group shall deliver to the Management Company the cash consideration received by the Medical Group from the Management Company pursuant to this Agreement and the Asset Purchase Agreement less the aggregate amount of the Management Fees paid to the Management Company hereunder; provided, however, that the portion of such consideration attributed to the A/R Amount (as defined in the Asset Purchase Agreement), as adjusted pursuant to Section 2.3 thereof, shall not be returned to the Management Company. (e) Stock of Management Company. The Medical Group shall cause each physician receiving capital stock of the -83- Management Company as of the date hereof to, and each such physician shall, return and deliver to the Management Company the stock certificates representing shares of common stock of the Management Company issued to each such physician pursuant to a Restricted Stock Agreement. In the event any portion of such shares shall have been previously transferred by any such physician, any transferee of such physician shall, and the physician shall cause such transferee to, deliver the certificate(s) representing such shares to the Management Company. Certificates delivered pursuant to this Section 14.1(e) shall be duly endorsed for transfer to the Management Company. 14.2. Waiver of Rescission Option. Notwithstanding anything contained herein to the contrary, the parties hereto expressly agree and acknowledge that if the Medical Group shall fail to deliver the Rescission Notice prior to the end of the Rescission Period, then the Medical Group shall be deemed to have expressly and irrevocably waived its right to rescind this Agreement and to disengage itself from its obligations hereunder. 14.3. Discontinuation of Management Fees The parties hereto acknowledge that in the event this Agreement is rescinded pursuant to the provisions of Article 14 hereof, the Management Company shall not be entitled to any Management Fees otherwise payable hereunder for Medical Group Services provided by the Medical Group from the date on which the Rescission Notice is delivered through and including the Rescission Effective Date. SECTION 15. Non-Disclosure of Confidential Information. 15.1. Non-Disclosure. (a) Neither the Management Company nor the Medical Group, nor their respective employees, stockholders, consultants -84- or agents shall, at any time after the execution and delivery hereof, directly or indirectly disclose any Confidential or Proprietary Information relating to the other party hereto to any person, firm, corporation, association or other entity, nor shall either party, or their respective employees, stockholders, consultants or agents make use of any of such Confidential or Proprietary Information for its or their own purposes or for the benefit of any person, firm, corporation or other entity except the parties hereto or any subsidiary or affiliate thereof. The foregoing obligation shall not apply to any information which a party hereto can establish to have (a) become publicly known without breach of this Agreement by it or them, (b) to have been given to such party by a third party who is not obligated to maintain the confidentiality of such information, or (c) is disclosed to a third party with the prior written consent of the other party hereto. Nothing contained herein shall be construed to prevent any party hereto from disclosing any Confidential or Proprietary Information of any other party to its professional advisers for purposes of evaluating, negotiating or otherwise assisting such party in connection with the transactions contemplated by this Agreement; provided that such party shall be liable to such other party for the disclosure by any of its professional advisers of such other party's Confidential or Proprietary Information, unless such information falls within one of the categories set forth in clauses (a), (b) or (c) of the preceding sentence. (b) For purposes of this Section 14, the term "Confidential or Proprietary Information" means all information known to a party hereto, or to any of its employees, stockholders, officers, directors or consultants, which relates to the Transaction Documents, patient medical and billing records, trade secrets, books and records, supplies, pricing and cost information, marketing plans, strategies and forecasts. Nothing contained herein shall prevent a party hereto from -85- furnishing Confidential or Proprietary Information pursuant to a direct order of a court of competent jurisdiction. SECTION 16. Non-Competition. In consideration of the premises contained herein and the consideration to be received hereunder, and in consideration of and as an inducement to the Management Company to consummate the transactions contemplated hereby, the Medical Group hereby (a) agrees to the Non-Competition covenants attached hereto as Schedule VIII and (b) agrees to require each of the physicians receiving capital stock of the Management Company as of the date hereof, and each person who after the date hereof becomes entitled to receive stock (or options to receive stock) in the Management Company in connection with his or her performance of services for the Medical Group, to execute a Stockholder Non-Competition Agreement substantially in the form attached hereto as Exhibit C. SECTION 17. Obligations of the Management Company. 17.1. No Practice of Medicine. During the Term, the Management Company shall not provide or otherwise engage in services or activities which constitute the practice of medicine, as defined in applicable state or Federal law, except in compliance therewith. 17.2. No Interference with Professional Judgment. Without in any way limiting Section 16.1 hereof, during the Term, the Management Company shall not interfere with the exercise of professional judgment by any physician or other licensed health care professional who is a partner, employee, or contractor of the Medical Group, nor shall the Management Company interfere with, control, direct, or supervise any physician or other licensed health care professional in connection with the provision of Medical Group Services. The foregoing shall not -86- preclude the Management Company from assisting in the development of professional protocols and monitoring compliance with policies and procedures that have been instituted in accordance with this Agreement. SECTION 18. Assignment. The Management Company shall have the right to assign its rights and delegate its obligations hereunder to any affiliate and to assign its rights hereunder to any lending institution from which the Management Company or any affiliate obtains financing for security purposes or as collateral. Except as set forth in the preceding sentence, neither the Management Company nor the Medical Group shall have the right to assign their respective rights and delegate their respective obligations hereunder without the prior written consent of the other party; provided, however, that after the consummation of an initial public offering of the Management Company's common stock, the Medical Group's consent shall not be required in connection with any assignment by the Management Company arising out of or in connection with a sale of all or substantially all of the stock or assets of the Management Company or the merger, consolidation, or reorganization of the Management Company. SECTION 19. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed sufficient if personally delivered, telecopied (with original sent by mail), sent by nationally-recognized overnight courier, or by registered or certified mail, return receipt requested and postage prepaid, addressed as follows: -87- If to the Management Company: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Telecopier: (561) 391-1389; with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Jeffrey S. Held, Esq. Telecopier: (212) 408-2420; and If to the Medical Group: Fishman and Stashak, M.D.'s, P.A. 1411 North Flagler Drive Suite 8800 West Palm Beach, Florida 33401 Attention: Eric S. Fishman, M.D. Telecopier: (561) 659-9009; with a copy to: Moore & Menkhaus, P.A. 4800 North Federal Highway Suite 210A Boca Raton, Florida 33431 Attention: David Menkhaus, Esq. Telecopier: (561) 393-6541; or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such notice or communication shall be deemed to have been received (a) in the case of personal delivery and telecopier, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the next business day after the date when sent, and (c) in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. -88- SECTION 20. Benefits of Agreement. This Agreement shall bind and inure to the benefit of any successors to or permitted assigns of the Management Company and the Medical Group. SECTION 21. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought by any party hereto pursuant to this Agreement shall lie exclusively in any Federal or state court located in Palm Beach County, Florida or the Southern District of Florida. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. SECTION 22. Headings. Section headings are used for convenience only and shall in no way affect the construction of this Agreement. SECTION 23. Entire Agreement; Amendments. This Agreement, the exhibits and schedules hereto and the Amendatory Agreement dated as of the Signature Date among the Medical Group, the Management Company, Eric Fishman, M.D., and Gerald Stashak, M.D., contain the entire understanding of the -89- parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by all of the parties against whom enforcement is sought. SECTION 24. Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all reasonable costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. SECTION 25. Counterparts. This Agreement may be executed in counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 26. Waivers. Any party to this Agreement may, by written notice to the other party, waive any provision of this Agreement. The waiver by any party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. SECTION 27 Survival of Termination. Notwithstanding anything contained herein to the contrary, Sections 3.3(f), 11, 12.3, 12.4, 13, 14, 15, 16, 19, 20, 21, 23, 24 and this Section 27 shall survive any expiration or termination of this Agreement. -90- SECTION 28. Contract Modification for Prospective Legal Events. In the event any state or Federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that the structure of this Agreement may be in violation of such laws or regulations, the Medical Group and the Management Company shall amend this Agreement as necessary to avoid such violation. To the maximum extent possible, any such amendment shall preserve the underlying economic and financial arrangements between the Medical Group and the Management Company. If an amendment is not possible, either party shall have the right to terminate this Agreement. Any dispute between the parties hereto arising under this Section 28 with respect to whether this Agreement violates any state or Federal laws or regulations shall be jointly submitted by the parties and finally settled by binding arbitration in Florida, pursuant to the arbitration rules of the National Health Lawyers Association Alternative Dispute Resolution Service. Arbitration shall take place before one arbitrator appointed in accordance with such rules. The governing law of the arbitration shall be the law set forth in Section 21. Any decision rendered by the arbitrator shall clearly set forth the factual and legal basis for such decision. The decision rendered by the arbitrator shall be non-appealable and enforceable in any court having jurisdiction thereof. The administrative costs of the arbitration and the arbitrator fees shall be equally borne by the parties. Each party shall pay its own legal costs and fees in connection with such arbitration. * * * * * -91- IN WITNESS WHEREOF, the parties have duly executed this Management Services Agreement as of the date first above written. FISHMAN AND STASHAK, M.D.'S, P.A. By: ______________________________ Eric S. Fishman, M.D. President By: ______________________________ Gerald T. Stashak, M.D. Secretary BONE, MUSCLE AND JOINT, INC. By: ______________________________ Name: Title: Acknowledged and Agreed to (as to Sections 4, 9.7, 12.2, 14, 15 and 16): ______________________________ Eric S. Fishman, M.D. ______________________________ Gerald T. Stashak, M.D. -92- EXECUTION COPY AMENDMENT NO. 1 TO THE MANAGEMENT SERVICES AGREEMENT dated as of September 10, 1997, between FISHMAN AND STASHAK, M.D.'S, P.A., a Florida professional association (the "Medical Group"), and BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"). Reference is made to the Management Services Agreement effective as of June 1, 1997 (the "Management Services Agreement"), between the Medical Group and the Management Company, pursuant to which the Management Company has agreed to provide the Medical Group with certain management, administrative and other related services in connection with the Medical Business (as defined in the Management Services Agreement). The parties hereto desire to amend the Management Services Agreement in accordance with the terms hereinafter set forth. NOW, THEREFORE, in consideration for the mutual agreements contained in this Amendment No. 1 and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Medical Group and the Management Company hereby agree as follows: SECTION 1. All capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. SECTION 2. Section 5.1 of the Management Services Agreement is hereby amended by inserting the following at the end of the second sentence thereof ", and the Medical Group shall execute a financing statement (the "Financing Statement") for the benefit of the Management Company evidencing the foregoing transfer of the Accounts and perfecting the Management Company's ownership interests therein". SECTION 3. Section 13.1(b) of the Management Services Agreement is hereby amended by adding at the end thereof "and shall have no cure period with respect to a breach of the covenant set forth in Section 17.3 hereof; provided further, however, that if the Medical Group intends to terminate this Agreement due to the Management Company's default under Section 17.3, the Medical Group must so notify the Management Company by January 31, 1999 in order for such termination to be effective," SECTION 4. Section 13.4 of the Management Services Agreement is hereby amended in accordance with the following: (a) by adding at the end of paragraph (a) thereof "; provided that in the event this Agreement is terminated by the Medical Group as a result of the Management Company's breach of its covenant in Section 17.3 hereof, those provisions set forth in Section 13.6 shall also apply." (b) by inserting after "Section 5.3(b)" in the fifth line of paragraph (b) thereof "; provided, however, that if such termination is as a result of the Management Company's breach of its covenant in Section 17.3 hereof, such calculation shall be made on the effective date of such termination as specified in Section 13.6". (c) by adding at the end of such Section a new paragraph (c) to read in its entirety as follows: "(c) Upon termination of this Agreement, the Management Company agrees to deliver to the Medical Group upon request by the Medical Group, an executed Financing Statement amending the terms of any Financing Statement previously filed with the Secretary of State of the state in which the principal place of business of the Medical Group is located, excluding from the collateral thereunder any Accounts generated after the date of termination of this Agreement; provided that if such termination is due to the Management Company's breach of its covenant in Section 17.3 hereof, the Financing Statement shall release all of the Accounts. In addition to the foregoing, the Management Company shall, within 30 days after final resolution of the settlement described in Section 5.3(b) of this Agreement, deliver to the Medical Group upon request by the Medical Group an additional Financing Statement terminating any Financing Statement filed with respect to the Medical Group's Accounts." SECTION 5. Section 13 of the Management Services Agreement is hereby amended by adding at the end thereof a new Section 13.6 to read in its entirety as follows: "13.6. Effect of Termination Resulting from Failure to Publicly Report. In the event that the Medical Group terminates this Agreement due to the Management Company's breach of its covenant set forth in Section 17.3 hereof, the Medical Group shall deliver to the Management Company an amount equal to $874,750. The Medical Group shall also cause each physician affiliated with the Medical Group who received shares of capital stock of the Management Company in connection with the execution and delivery of this Agreement to, and each such physician -2- shall, return and deliver to the Management Company the certificates representing all of such shares of capital stock. Certificates delivered pursuant to this Section 13.6 shall be duly endorsed for transfer to the Management Company. The effective date of a termination of this Agreement as a result of the Management Company's breach of its covenant set forth in Section 17.3 shall be January 31, 1999 and, accordingly, both parties hereto shall continue to perform their obligations under this Agreement (including, without limitation, the performance of Management Services and the payment of the Management Fee) through and including such date. SECTION 6. Section 14 of the Management Services Agreement is hereby amended and restated in its entirety to read as follows: "Section 14. [Intentionally Omitted]" SECTION 7. Section 17 of the Management Services Agreement is hereby amended by adding a new Section 17.3 thereto, to read in its entirety as follows: "17.3 Covenant to Develop a Public Company. The Management Company shall use its best efforts (a) to cause the Management Company to become a public reporting company under the Securities Exchange Act of 1934, as amended, and (b) to have the Management Company's common stock quoted on the NASDAQ OTC Bulletin Board or listed on the NASDAQ Small Cap or National Market or on the New York Stock Exchange or American Stock Exchange, by December 1, 1998 . To the best knowledge of the Management Company, there are no facts or circumstances currently existing which (a) would prevent the Management Company from becoming a public reporting company within such time period or (b) are inconsistent with the Management Company's fulfillment of the foregoing covenant. The parties hereto acknowledge that breach of this covenant by the Management Company shall be a material breach of this Agreement." SECTION 8. Section 23 of the Management Services Agreement is hereby amended and restated in its entirety to read as follows: "Section 23. Entire Agreement; Amendments. This Agreement and the exhibits and schedules hereto contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, -3- amended, extended, waived, discharged or terminated except by a written agreement signed by all of the parties against whom enforcement is sought." SECTION 9. The Management Services Agreement is hereby amended by adding a new Section 29, to read in its entirety as follows: "Section 29. Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction." SECTION 10. Schedule III of the Management Services Agreement is hereby amended and restated in its entirety to read as set forth on Annex I attached hereto. SECTION 11. Except as expressly provided in this Amendment No. 1, the Management Services Agreement remains in full force and effect in accordance with its terms. SECTION 12. This Amendment No. 1 may be executed in more than one counterparts, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. SECTION 13. This Amendment No. 1 shall by governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * -4- IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment No. 1 to the Management Services Agreement as of the date first above written. FISHMAN AND STASHAK, M.D.'S, P.A. By: _________________________________ Name: Title: BONE, MUSCLE AND JOINT, INC. By: __________________________________ Name: Title: -5- EX-10.42 15 ASSET PURCHASE AGREEMENT EXECUTION COPY =============================================================================== ASSET PURCHASE AGREEMENT BETWEEN BONE, MUSCLE AND JOINT, INC. AND FISHMAN AND STASHAK, M.D.'S, P.A. Effective as of June 1, 1997 =============================================================================== TABLE OF CONTENTS PAGE ---- ARTICLE I TRANSFER OF PURCHASED ASSETS, ASSUMPTION OBLIGATIONS AND RELATED MATTERS............................ 2 1.1. Transfer of Assets......................................... 2 1.2. Assets Not Begin Transferred............................... 3 1.3. Liabilities Being Assumed.................................. 3 1.4. Liabilities Not Being Assumed.............................. 3 1.5. Instruments of Conveyance and Transfer, Etc. .............. 4 1.6. Right of Endorcement, Etc. ................................ 4 1.7. Further Assurances......................................... 5 1.8. Assignment of Leases....................................... 6 1.9. Condition of Purchased Assets.............................. 6 ARTICLE II PURCHASE PRICE: ALLOCATION................................. 6 2.1. Purchase Price; Payment.................................... 6 2.2. Allocation of Purchase Price............................... 7 2.3. Accounts Receivable Payment................................ 7 ARTICLE III REPRESENTATION AND WARRANTIES.............................. 9 3.1. Representations and Warranties of the Seller............... 9 3.2. Representations and Warranties of the Buyer................ 12 ARTICLE IV CONDITIONS TO CLOSING...................................... 15 4.1. Conditions to Each Party's Obligations..................... 15 4.2. Conditions to Obligations of the Buyer..................... 15 4.3. Conditions to Obligations of the Seller.................... 17 4.4. Related Agreements......................................... 17 ARTICLE V CLOSING.................................................... 18 5.1. Date....................................................... 18 5.2. Closing Transactions....................................... 18 ARTICLE VI INDEMNIFICATION............................................ 20 6.1. Definitions................................................ 20 6.2. Indemnification Generally.................................. 22 6.3. Assertion of Claims........................................ 22 -i- 6.4. Notice and Defense of Third Party Claims................... 23 6.5. Survival of Representations, Warranties and Covenants...... 24 ARTICLE VII NON-COMPETITION............................................ 25 ARTICLE VIII REPURCHASE OF ASSETS....................................... 25 ARTICLE IX AMENDMENT, NOTIFICATION AND WAIVER......................... 25 ARTICLE X MISCELLANEOUS.............................................. 26 10.1. Transfer Taxes, Etc. ...................................... 26 10.2. Entire Agreement........................................... 26 10.3. Descriptive Headings....................................... 26 10.4. Notices.................................................... 26 10.5. Counterparts............................................... 28 10.6. Bulk Sales Compliance...................................... 28 10.7. Governing Law; Jurisdiction................................ 29 10.8. Attorney's Fees............................................ 29 10.9. Benefits of Agreement...................................... 29 10.10. Pronouns................................................... 29 -ii- EXHIBITS - -------- Exhibit A - Bill of Sale Exhibit B - Assignment and Assumption Agreement SCHEDULES - --------- 1.1(a) - Medical Equipment 1.1(b) - Furniture, Furnishings, Trade Fixtures, and Office Equipment 1.1(c) - Equipment Leases 1.1(d) - Supplies 1.1(e) - Accounts Receivable 1.1(f) - Deposits 1.1(g) - Additional Items 2.2 - Allocation of Purchase Price 3.1(c) - Claims 3.1(d) - Litigation Definitions The following terms which may appear in more than one Section of this Agreement are defined at the following pages: TERM PAGE A/R Amount.................................................................. 7 A/R Balance................................................................. 7 A/R Collections............................................................. 7 A/R Shortfall............................................................... 8 Accounts Receivable......................................................... 2 Affiliate................................................................... 20 Assignment and Assumption Agreement......................................... 4 Assumed Obligations......................................................... 3 Bill of Sale................................................................ 4 bulk sales laws............................................................. 21 Business Day................................................................ 27 Buyer....................................................................... 1 Buyer Indemnification Event................................................. 20 Buyer Indemnified Persons................................................... 21 Bylaws...................................................................... 9 Certificate of Incorporation................................................ 9 Claims...................................................................... 10 Closing..................................................................... 18 Closing Date................................................................ 18 Collections................................................................. 35 Determination Date.......................................................... 7 Excluded Assets............................................................. 3 Excluded Obligations........................................................ 3 Final Statement............................................................. 8 Indemnified Persons......................................................... 21 Indemnifying Person......................................................... 21 Losses...................................................................... 21 Management Services Agreement............................................... 1 Permitted Liens............................................................. 11 Purchase Price.............................................................. 6 Purchased Assets............................................................ 2 Related Agreements.......................................................... 15 Seller...................................................................... 1 Seller Indemnification Event................................................ 21 Seller Indemnified Persons.................................................. 22 Signature Date.............................................................. 1 Statement of Allocation..................................................... 7 Subject Business............................................................ 1 Threshold Month............................................................. 7 THIS ASSET PURCHASE AGREEMENT is entered into as of July 3, 1997 (the "Signature Date"), effective as of June 1, 1997 , between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Buyer"), and FISHMAN AND STASHAK, M.D.'S, P.A., a Florida professional association (the "Seller"). A. The Seller is engaged in the business (the "Subject Business") of providing orthopedic medical and surgical services and related medical and ancillary services to patients. B. The Buyer is engaged in the business of providing management, administrative, financial, marketing, information technology, and related services to professional medical organizations. C. Concurrently herewith, the Seller and the Buyer are entering into a Management Services Agreement (the "Management Services Agreement"), pursuant to which the Buyer will furnish to the Seller management, administrative, and related services. D. The Seller desires to sell, transfer, convey and assign to the Buyer and the Buyer desires to purchase from the Seller, certain of the assets, properties, interests in properties and rights of the Seller used in the Subject Business upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements hereinafter set forth, the parties hereby agree as follows: ARTICLE I TRANSFER OF PURCHASED ASSETS, ASSUMPTION OF LIABILITIES AND RELATED MATTERS 1.1. Transfer of Assets. On the terms and subject to the conditions of this Agreement, at the Closing (as hereinafter defined), the Seller shall sell, transfer, convey and assign to the Buyer, and the Buyer shall purchase, assume, and accept from the Seller, the following assets, properties, interests in properties and rights of the Seller (the "Purchased Assets"), as the same shall exist immediately prior to the Closing, free and clear of all Claims (as defined below) (except Permitted Liens (as defined below)): (a) the medical equipment owned by the Seller and listed on Schedule 1.1(a); (b) the furniture, furnishings, trade fixtures, and office equipment owned by the Seller and listed on Schedule 1.1(b); (c) the Seller's rights and interests under the equipment leases identified on Schedule 1.1(c), subject to the Buyer's assumption of the obligations accruing thereunder as provided in Section 1.3; (d) the supplies described on Schedule 1.1(d); (e) the accounts receivable described on Schedule 1.1(e) (the "Accounts Receivable") (subject to applicable law and in accordance with Section 1.6 hereof); (f) the deposits identified on Schedule 1.1(f); and (g) any additional items identified on Schedule 1.1(g). -2- 1.2. Assets Not Being Transferred. All assets, properties, interests in properties, and rights of the Seller not expressly identified in Section 1.1 or the Schedules referenced therein (the "Excluded Assets") are expressly excluded from the assets of the Seller being sold, assigned, or otherwise transferred to the Buyer. 1.3. Liabilities Being Assumed. Except as otherwise provided herein and subject to the terms and conditions of this Agreement, simultaneously with the sale, transfer, conveyance and assignment to the Buyer of the Purchased Assets, the Buyer shall assume, and hereby agrees to pay when due, those liabilities accruing after the Closing Date under the equipment leases identified in Schedule 1.1(c) (the "Assumed Obligations"); provided, however, that any and all obligations and liabilities arising under any such lease as of or prior to the Closing Date and any and all obligations and liabilities arising out of or in connection with the Seller's breach of any such lease shall, in each case, remain the obligations and liabilities of the Seller. 1.4. Liabilities Not Being Assumed. The Buyer is not assuming any liabilities or obligations of the Seller (fixed or contingent, known or unknown, matured or unmatured) whatsoever other than the Assumed Obligations. For convenience of reference, all liabilities and obligations of the Seller not being assumed by the Buyer are collectively referred to as the "Excluded Obligations." The Seller hereby agrees to pay all Excluded Obligations as and when such Excluded Obligations become due. -3- 1.5. Instruments of Conveyance and Transfer, Etc. At the Closing, the Seller shall deliver (or cause to be delivered) to the Buyer such deeds, bills of sale, endorsements, assignments and other good and sufficient instruments of sale, transfer, conveyance and assignment as shall be necessary to sell, transfer, convey and assign to the Buyer, in accordance with the terms hereof, title to the Purchased Assets, free and clear of all Claims (except Permitted Liens), including, without limitation, the delivery of a Bill of Sale (the "Bill of Sale") substantially in the form of Exhibit A attached hereto and the delivery of an Assignment and Assumption Agreement (the "Assignment and Assumption Agreement") substantially in the form of Exhibit B attached hereto. Simultaneously therewith, the Seller shall take all steps as may be reasonably required to put the Buyer in possession and operating control of the Purchased Assets. 1.6. Right of Endorsement, Etc. Effective upon the Closing, the Seller hereby constitutes and appoints the Buyer, its successors and assigns, the true and lawful attorney-in-fact of the Seller with full power of substitution, in the name of the Buyer, or the name of the Seller, on behalf of and for the benefit of the Buyer, to collect all Accounts Receivable assigned to the Buyer as provided herein, to endorse, without recourse, checks, notes and other instruments received in payment of such Accounts Receivable in the name of the Seller, and to institute and prosecute, in the name of the Seller or otherwise, all proceedings which the Buyer may deem proper in order to assert or enforce any claim, right or title of any kind in or to the Purchased Assets (provided that the Buyer shall not, without the consent of the Seller, initiate any such proceeding to collect on Accounts Receivable acquired hereunder), to defend and compromise any and all actions, suits or proceedings in respect of any of the Purchased Assets and to -4- do all such acts and things in relation thereto as the Buyer may deem advisable. The foregoing powers are coupled with an interest and shall be irrevocable by the Seller, directly or indirectly, whether by the dissolution of the Seller or in any manner or for any reason; provided, however that notwithstanding anything to the contrary contained herein, collections of Medicare and Medicaid Accounts Receivable shall first be deposited into the Medical Group Collections Account (as defined in the Management Services Agreement) and shall thereafter be transferred to an account designated by the Management Company in accordance with the procedures outlined in Section 5.1 of the Management Services Agreement. Notwithstanding anything contained herein to the contrary, the power of attorney granted to the Management Company in this Section 1.6 shall be terminated upon the termination of the Management Services Agreement. 1.7. Further Assurances. The Seller shall pay or cause to be paid to the Buyer promptly any amounts which shall be received by the Seller after the Closing which constitute Purchased Assets, including all amounts paid to the Seller on account of the Accounts Receivable. The Seller shall, at any time and from time to time after the Closing, upon the reasonable request of the Buyer, execute, acknowledge, deliver and file, or cause to be done, executed, acknowledged, delivered or filed, all such further acts, transfers, conveyances, assignments or assurances as may reasonably be required for better selling, transferring, conveying, assigning and assuring to the Buyer, or for aiding and assisting in the collection of or reducing to possession by the Buyer, any of the assets, properties, interests in properties or rights being purchased by the Buyer hereunder. Any reasonable expenses incurred in connection with the foregoing shall be borne by the Seller. -5- 1.8. Assignment of Leases. Anything contained in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement or attempted agreement to assign any office lease or equipment lease if an attempted assignment thereof, without the consent of any other party thereto, would constitute a breach thereof or in any way affect the rights of the Buyer or the Seller thereunder. The Seller shall use its best efforts, and the Buyer shall cooperate with the Seller, to obtain the consent of any such third party to the assignment thereof to the Buyer. If such consent is not obtained, the Seller shall cooperate with the Buyer in any arrangements reasonably necessary or desirable to provide for the Buyer the benefits (together with the obligations to perform) thereunder. 1.9. Condition of Purchased Assets. The Buyer acknowledges that the Seller makes no representations or warranties, express or implied, as to any matter whatsoever relating to the Purchased Assets, except for the representations and warranties expressly set forth in this Agreement, and except as set forth expressly herein, the condition of the Purchased Assets shall be "as is" and "where is". ARTICLE II PURCHASE PRICE; ALLOCATION 2.1. Purchase Price; Payment. The purchase price (the "Purchase Price") to be paid for the Purchased Assets shall equal the sum of the following amounts: (a) $1,952,257; and -6- (b) $950,000 (the "A/R Amount"), subject to adjustment in accordance with Section 2.3, which amount is a good faith estimate of the aggregate face value of all Accounts Receivable outstanding as of the Closing Date and set forth on Schedule 1.1(e). 2.2. Allocation of Purchase Price. The Purchase Price shall be allocated among the Purchased Assets in a statement (the "Statement of Allocation") reflecting the allocation set forth in Schedule 2.2 attached hereto. The parties shall complete their respective tax returns for the period which includes the Closing Date in a manner that is consistent with the Statement of Allocation. 2.3. Accounts Receivable Payment. The portion of the Purchase Price specified in Section 2.1(b) is subject to adjustment and shall be paid or repaid as follows: (a) In the event that the aggregate amount of collections received by the Buyer in payment of the Accounts Receivable (the "A/R Collections"), at any point prior to June 30, 1998 (the "Determination Date"), exceeds the A/R Amount (such excess amount being referred to herein as an "A/R Balance"), the Buyer shall pay to the Seller on the last day of the month occurring after the month in which the Buyer first determines such A/R Balance exists (such month in which the Buyer determines that an A/R Balance occurred being referred to as the "Threshold Month") an amount equal to the A/R Balance that had accrued through the last day of the Threshold Month and, on the last day of each month occurring thereafter through and including the Determination Date, the Buyer shall pay to the Seller an amount, if any, equal to the A/R Balance as of the last day of the previous month, less, in each case, the aggregate amount previously paid pursuant to this sentence. The Buyer shall -7- deliver to the Seller, within 30 days after delivery of the Final Statement (as hereinafter defined), a check in an amount, if any, equal to the A/R Balance as of the Determination Date less the total amount of all payments made to the Seller prior to such date pursuant to this Section 2.3(a). Within thirty (30) days after the Determination Date, the Buyer shall furnish to the Seller a statement (the "Final Statement") setting forth the A/R Collections, including detail of write-offs of any of the Accounts Receivable, the remaining outstanding balances of the Accounts Receivable, and any other detail relating thereto as the Seller may reasonably request. If, as of the Determination Date, the A/R Collections are less than the A/R Amount (such deficit being referred to herein as the "A/R Shortfall"), the Seller shall pay the A/R Shortfall to the Buyer by check in six equal monthly installments (the first payment due 10 days after delivery of the Final Statement). The parties hereto acknowledge and agree that after delivery of the Final Statement and payment in full of the A/R Balance or A/R Shortfall, as the case may be, neither party shall have any other obligation to the other party with respect to the Accounts Receivable, except that all remaining uncollected Accounts Receivable shall be turned over to the Seller for disposition in such manner as the Seller, in its sole discretion, shall determine. Notwithstanding anything to the contrary contained herein, in the event that the Management Services Agreement is terminated prior to the Determination Date, such date of termination shall be deemed the Determination Date for purposes of this Section 2.3(a). (b) All payments by patients and third party payors shall be accounted for on a first-in-first-out basis unless any such payment is identified as a payment in respect of a particular invoice or otherwise is designated as payment of a particular invoice or for a particular service. -8- ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1. Representations and Warranties of the Seller. The Seller hereby represents and warrants to the Buyer, as of the Signature Date hereof, as follows: (a) Organization; Good Standing; Qualification and Power. The Seller is a professional association duly formed, validly existing and in good standing under the laws of the State of Florida and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, to execute and deliver this Agreement, the Bill of Sale and the Assignment and Assumption Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The Seller has delivered to the Buyer a true and correct copy of its articles of incorporation (the "Articles of Incorporation") and its bylaws (the "Bylaws"), each as in effect on the date hereof. (b) Authority. The execution, delivery and performance of this Agreement, the Bill of Sale and the Assignment and Assumption Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Seller. This Agreement, the Bill of Sale and the Assignment and Assumption Agreement have been duly and validly executed and delivered by the Seller and constitute legal, valid and binding obligations of the Seller enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance by the Seller of this Agreement, the Bill of Sale or the Assignment and Assumption -9- Agreement nor the consummation by the Seller of the transactions contemplated hereby or thereby, nor compliance by the Seller with any provision hereof or thereof will (i) conflict with or result in a breach of any provision of the Articles of Incorporation or Bylaws of the Seller, (ii) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Seller is a party or by which it or any of its respective properties or assets may be bound or (iii) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Seller or any of its respective properties or assets. Except as set forth on Schedule 3.1(b), no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Seller of this Agreement, the Bill of Sale or the Assignment and Assumption Agreement or the consummation of the transactions contemplated hereby or thereby. (c) Title to Assets, Properties, Interests in Properties and Rights and Related Matters. (i) The Seller has good and valid title to all of the Purchased Assets, free and clear of all security interests, judgments, liens, pledges, claims, charges, escrows, encumbrances, easements, options, rights of first refusal, rights of first offer, mortgages, indentures, security agreements or other agreements, arrangements, contracts, commitments, understandings or obligations, whether written or oral and whether or not relating in any way to credit or the borrowing of money (collectively, "Claims"), of any kind or character, except for (i) those Claims set forth on Schedule 3.1(c) and (ii) Permitted Liens. -10- (ii) There does not exist any condition which materially interferes with the economic value or use (consistent with the Seller's past practice) of any tangible personal property included in the Purchased Assets and such property is in good operating condition and repair, reasonable wear and tear excepted. (iii) The Seller has the complete and unrestricted power and the unqualified right to sell, transfer, convey and assign, and the Seller is hereby selling, transferring conveying and assigning to the Buyer, the Purchased Assets free and clear of all Claims except the Permitted Liens. (iv) As used in this Agreement, "Permitted Liens" shall mean (A) any lien for current taxes not yet due and payable, (B) liens of carriers, warehousemen, mechanics and materialmen created in the ordinary course of the Subject Business for amounts not yet due and payable which do not materially detract from the value or impair the use of any property or assets, (C) in the case of Purchased Assets, liens incurred in the ordinary course of the Subject Business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits and (D) statutory landlord liens securing rents not yet due and payable. (d) Litigation. Except as set forth on Schedule 3.1(d), there are no (i) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Seller, threatened against the Seller, the Purchased Assets or the Subject Business, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (ii) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Seller or -11- affecting the Purchased Assets or the Subject Business. The Seller has delivered to the Buyer all documents and correspondence relating to matters referred to in said Schedule 3.1(d). (e) Compliance; Governmental Authorizations. To the best of its knowledge, the Seller has complied in all material respects with all applicable Federal, state, local or foreign laws, ordinances, regulations and orders. The Seller has all Federal, state, local and foreign governmental licenses and permits necessary in the conduct of the Subject Business the lack of which would have a material adverse effect on the Seller's ability to operate the Subject Business after the Closing Date on substantially the same basis as presently operated, such licenses and permits are in full force and effect, no violations are or have been recorded in respect of any thereof and no proceeding is pending or, to the Seller's best knowledge, threatened to revoke or limit any thereof. None of such licenses and permits shall be affected in any material respect by the transactions contemplated hereby. (f) Disclosure. Neither this Agreement (including the Exhibits and Schedules attached hereto), the Bill of Sale, the Assignment and Assumption Agreement nor any other document, certificate or written statement furnished to the Buyer by or on behalf of the Seller in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. 3.2. Representations and Warranties of the Buyer. The Buyer represents and warrants to the Seller, as of the Signature Date hereof, as follows: (a) Organization, Good Standing and Power. The Buyer (i) is a corporation duly organized, validly existing and -12- in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority to own, lease and operate its properties, to carry on its business as now being conducted, to execute and deliver this Agreement and the Assignment and Assumption Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. (b) Authority. The execution, delivery and performance of this Agreement and the Assignment and Assumption Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of the Buyer. This Agreement and the Assignment and Assumption Agreement have been duly and validly executed and delivered by the Buyer, and constitute legal, valid and binding obligations of the Buyer, enforceable in accordance with their respective terms except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. Neither the execution, delivery or performance by the Buyer of this Agreement or the Assignment and Assumption Agreement nor the consummation by the Buyer of the transactions contemplated hereby or thereby, nor compliance by the Buyer with any provision hereof or thereof, will (i) conflict with or result in a breach of any provisions of the Certificate of Incorporation or By-laws of the Buyer, (ii) cause a default (with due notice, lapse of time or both), or give rise to any right of termination, cancellation or acceleration, under any of the terms, conditions or provisions of any material note, bond, lease, mortgage, indenture, license or other instrument, obligation or agreement to which the Buyer is a party or by which it or any of its properties or assets is or may be bound or (iii) violate any law, statute, rule or regulation or order, writ, judgment, injunction or decree of any court, administrative agency or governmental body applicable to the Buyer or any of its properties or assets. Except as set forth on Schedule 3.2(b), no -13- permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required in connection with the execution, delivery or performance by the Buyer of this Agreement or the Assignment and Assumption Agreement or the consummation by the Buyer of the transactions contemplated hereby or thereby. (c) Litigation. Except as set forth on Schedule 3.2(d), there are no (i) actions, suits, claims, investigations or legal or administrative or arbitration proceedings pending or, to the best knowledge of the Buyer, threatened against the Buyer, whether at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality or (ii) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against the Buyer. The Buyer has delivered to the Seller all documents and correspondence relating to matters referred to in said Schedule 3.2(d), if any. (d) Compliance; Governmental Authorizations. To the best of its knowledge, the Buyer has complied in all material respects with all applicable Federal, state, local or foreign laws, ordinances, regulations and orders. (e) Disclosure. Neither this Agreement (including the Exhibits and Schedules attached hereto), the Assignment and Assumption Agreement nor any other document, certificate or written statement furnished to the Seller by or on behalf of the Buyer in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. -14- ARTICLE IV CONDITIONS TO CLOSING 4.1. Conditions to Each Party's Obligations. The obligations of the Seller to sell the Purchased Assets, and of the Buyer to purchase the Purchased Assets, are subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived by the Seller or the Buyer, as applicable): (a) Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the transactions contemplated hereby shall have been issued by any Federal or state court and remain in effect. (b) Legislation. No Federal, state, local or foreign statute, rule or regulation shall have been enacted which prohibits, restricts or delays the consummation of the transactions contemplated by this Agreement or any of the conditions to the consummation of such transactions. (c) Related Agreements. Each of the related agreements identified in Section 4.4 hereof (collectively, the "Related Agreements") shall have been fully executed and delivered prior to or at the Closing by all of the parties required to execute and deliver such agreements. 4.3. Conditions to Obligations of the Buyer. The obligation of the Buyer to purchase the Purchased Assets is subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived) by the Buyer: -15- (a) Representations and Warranties. The representations and warranties of the Seller set forth in Section 3.1 shall in each case be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date. (b) Performance of Obligations. The Seller shall have performed all obligations required to be performed by it under this Agreement prior to and at the Closing. (c) Authorization. All action necessary to authorize the execution, delivery and performance of this Agreement, the Bill of Sale and the Assignment and Assumption Agreement by the Seller and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Seller and the Seller shall have full power and right to consummate the transactions contemplated hereby and thereby. (d) Consents and Approvals. The Seller shall have delivered to the Buyer duly executed copies of (i) consents to the assignment of the equipment leases listed on Schedule 1.1(c) and (ii) all other approvals, if any, required by this Agreement or the Schedules, in each case in form and substance satisfactory to the Buyer and counsel to the Buyer. (e) Government Consents, Authorizations, Etc. All consents, authorizations, orders or approvals of, and filings or registrations with, any Federal, state, local or foreign governmental commission, board or other regulatory body which are required for or in connection with the execution and delivery by the Seller of this Agreement, the Bill of Sale and the Assignment and Assumption Agreement and the consummation by the Seller of the transactions contemplated hereby and thereby shall have been obtained or made. -16- 4.3. Conditions to Obligations of the Seller. The obligation of the Seller to sell the Purchased Assets to the Buyer is subject to the satisfaction of the following conditions unless waived in writing (to the extent such conditions can be waived) by the Seller: (a) Representations and Warranties. The representations and warranties of the Buyer set forth in Section 3.2 shall in each case be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date. (b) Performance of Obligations. The Buyer shall have performed all obligations required to be performed by it under this Agreement prior to and at the Closing. (c) Authorization. All action necessary to authorize the execution, delivery and performance of this Agreement and the Assignment and Assumption Agreement by the Buyer and the consummation of the transactions contemplated hereby and thereby shall have been duly and validly taken by the Buyer. (d) Government Consents, Authorizations, Etc. All consents, authorizations, orders or approvals of, and filings or registrations with, any Federal, state, local or foreign governmental commission, board or other regulatory body which are required for or in connection with the execution and delivery by the Buyer of this Agreement and the Assignment and Assumption Agreement and the consummation by the Buyer of the transactions contemplated hereby and thereby shall have been obtained or made. 4.4. Related Agreements. The Related Agreements referred to in this Agreement consist of the following: -17- (a) the Management Services Agreement between the parties hereto; (b) the Restricted Stock Agreements between the Buyer and each of the physicians receiving capital stock of the Buyer as of the date hereof, respectively; (c) the Stockholder Non-Competition Agreements among the Seller, the Buyer, and each of the physicians receiving capital stock of the Buyer as of the date hereof, respectively; (d) the Bill of Sale executed by the Seller; and (e) the Assignment and Assumption Agreement between the Seller and the Buyer. ARTICLE V CLOSING 5.1. Date. The closing (the "Closing") for the consummation of the transactions contemplated by this Agreement shall be deemed to have taken place at 12:01 a.m. on June 1, 1997 (the "Closing Date"), irrespective of the actual date(s) and time(s) that all of the documents required hereunder are executed and delivered. 5.2. Closing Transactions. At the Closing, the parties shall take the actions and deliver the documents identified in this Section 5.2. The Closing shall not be deemed to have taken place, and the transactions contemplated by this Agreement shall not be deemed to have been consummated, unless all of the closing transactions identified in this Section 5.2 have been completed or waived in writing by the parties. -18- (a) The Seller shall deliver to the Buyer an executed copy of the Bill of Sale; (b) Each of the parties shall execute and deliver to the other a copy of the Assignment and Assumption Agreement; (c) The Buyer shall deliver to the Seller the Purchase Price payable by cashier's check or wire transfer of funds to an account designated in writing by the Seller; (d) Each of the parties shall execute and deliver to the other a fully executed copy of the Management Services Agreement; (e) The Seller shall deliver Restricted Stock Agreements to the Buyer executed by each of the physicians receiving capital stock of the Buyer as of the date hereof, respectively, and the Buyer shall execute and deliver to the Seller Restricted Stock Agreements for each of the physicians receiving capital stock of the Buyer as of the date hereof, respectively; (f) The Buyer shall deliver to the physicians receiving capital stock of the Buyer as of the date hereof stock certificates issued in their respective names as required under the terms of the Restricted Stock Agreements; and (g) The Seller shall deliver to the Buyer Stockholder Non-Competition Agreements executed by each of the physicians receiving capital stock of the Buyer as of the date hereof. -19- ARTICLE VI INDEMNIFICATION 6.1. Definitions. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate", as to any person, means any other person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such person. (b) "Buyer Indemnification Event" shall mean the following: (i) (A) the untruth, inaccuracy or breach of any representation or warranty of the Seller contained in this Agreement, any Schedule or Exhibit attached hereto, the Bill of Sale, the Assignment and Assumption Agreement or any certificate delivered by the Seller in connection herewith (or any facts or circumstances constituting any such untruth, inaccuracy or breach) or (B) the breach of any agreement or covenant of the Seller contained in this Agreement, the Bill of Sale, or the Assumption or Assignment Agreement; (ii) the assertion against the Buyer or any Buyer Indemnified Person of any liability or obligation arising from, relating to, or in any way connected with the operation of the Subject Business at any time prior to the Closing; (iii) the assertion against the Buyer or any Buyer Indemnified Person of any liability or obligation arising from, relating to, or in any way connected with any Excluded Obligation; and -20- (iv) any non-compliance by the Seller with the "bulk sales laws" of Florida to the extent that such laws are in effect and may be applicable to the transactions contemplated hereby. (c) "Buyer Indemnified Persons" shall mean and include the Buyer, its Affiliates and their respective officers, directors, and employees. (d) "Indemnified Persons" shall mean the Buyer Indemnified Persons or the Seller Indemnified Persons, as the case may be. (e) "Indemnifying Person" shall mean the Buyer or the Seller, as the case may be. (f) "Losses" shall mean any and all losses, claims, damages, liabilities, expenses (including reasonable attorneys' and accountants' fees), assessments, tax deficiencies and taxes (including interest or penalties thereon) sustained, suffered or incurred by any Indemnified Person arising from any matter which is the subject of indemnification under Section 6.2. (g) "Seller Indemnification Event" shall mean (i) the untruth, inaccuracy or breach of any representation or warranty of the Buyer contained in this Agreement, any Schedule or Exhibit attached hereto, the Assignment and Assumption Agreement or any certificate delivered by the Buyer in connection herewith (or any facts or circumstances constituting any such untruth, inaccuracy or breach) or (ii) the breach of any agreement or covenant of the Buyer contained in this Agreement or the Assignment and Assumption Agreement, including, without limitation, the assertion against the Seller or any Seller Indemnified Person of any liability or obligation arising from, relating to, or in any way connected with any Assumed Obligation. -21- (h) "Seller Indemnified Persons" shall mean and include the Seller and its equity owners, directors, officers and employees. 6.2. Indemnification Generally. (a) The Seller shall indemnify, defend and hold harmless the Buyer Indemnified Persons, and each of them, from and against any and all Losses resulting from Buyer Indemnification Events. (b) The Buyer shall indemnify, defend and hold harmless the Seller Indemnified Persons, and each of them, from and against any and all Losses resulting from Seller Indemnification Events. (c) The parties hereto agree that in the event of a conflict between the terms of this Article VI and the terms of the Management Services Agreement, the terms and provisions of the Management Services Agreement shall prevail. 6.3. Assertion of Claims. No claim, demand, suit or cause of action shall be brought under Section 6.2 unless the Indemnified Persons, or any of them, give the Indemnifying Person written notice of the existence of any such claim, demand, suit or cause of action, stating with particularity the nature and basis of said claim, and the amount thereof, to the extent known, and providing to the extent reasonably available all written documentation relating thereto. Such written notice shall be delivered to the Indemnifying Person as soon as practicable upon receipt of actual knowledge of such claim, demand, suit or cause of action; provided, however, that the failure to provide such written notice shall not affect the Indemnified Persons' right to indemnification hereunder if failure to provide such written notice does not materially adversely affect the Indemnifying -22- Person. Upon the giving of such written notice as aforesaid, the Indemnified Persons, or any of them, shall have the right to commence legal proceedings subsequent to the applicable survival date, if any, for the enforcement of their rights under Section 6.2. 6.4. Notice and Defense of Third Party Claims. (a) In the event any action, suit or proceeding is brought by a third party against an Indemnified Person, with respect to which an Indemnifying Person may have liability under Section 6.2, the action, suit or proceeding shall, upon the written agreement of the Indemnifying Person that it is obligated with respect to such action, suit or proceeding, be defended (including all proceedings on appeal or for review which counsel for the defendant shall deem appropriate) and, unless otherwise provided below, controlled by such Indemnifying Person. The Indemnified Persons shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Persons, unless (i) the employment of such counsel shall have been authorized in writing by the Indemnifying Person in connection with the defense of such action, suit or proceeding, (ii) the Indemnifying Person shall fail actively and diligently to defend such action, suit or proceeding, or (iii) the Indemnified Persons shall have reasonably concluded that there may be one or more legal or equitable defenses available to the Indemnified Persons which are different from or additional to those available to the Indemnifying Person, in any of which events the Indemnifying Person shall not have the right to direct the defense of such action, suit or proceeding on behalf of the Indemnified Persons and that portion of any fees and expenses of counsel related to matters covered by the indemnity agreement and contained in Section 6.2 shall be borne by the Indemnifying Person. The Indemnified Persons shall be kept fully informed of such action, suit or proceeding at all stages thereof whether or not they are -23- so represented. The Indemnifying Person shall make available to the Indemnified Persons and their attorneys and accountants all books and records of the Indemnifying Person relating to such action, suit or proceeding and the parties hereto agree to render to each other such assistance as they may reasonably require of each other in order to ensure the proper and adequate defense of any such action, suit or proceeding. (b) The Indemnifying Person shall not make any settlement of any action, suit or proceeding without the written consent of the Indemnified Persons, which consent shall not be unreasonably withheld; provided, however, that in the event the Indemnified Persons refuse to consent to a settlement acceptable to the Indemnifying Person which is capable of settlement by the payment of money only and the Indemnifying Persons shall demonstrate to the reasonable satisfaction of the Indemnified Persons their ability to pay such amount, the Indemnifying Person may pay the amount of the proposed settlement to the Indemnified Persons and shall thereupon be released from any further liability with respect to such action, suit or proceeding. 6.5. Survival of Representations, Warranties and Covenants. The representations and warranties of the Seller contained in Section 3.1 and the representations and warranties of the Buyer contained in Section 3.2 shall survive the Closing and shall terminate forty-five (45) days following the second anniversary of the Closing Date; provided, however, that the representations and warranties of the Seller set forth in Sections 3.1(a), 3.1(b), 3.1(c) and 3.1(e), and the representations and warranties of the Buyer set forth in Sections 3.2(a) and 3.2(b), shall survive the Closing and remain in full force and effect until the expiration of the statute of limitations, if any, applicable to the matters set forth therein (and indefinitely, if none). -24- ARTICLE VII NON-COMPETITION The parties hereby acknowledge that they have entered into an agreement regarding non-competition, as set forth in Section 16 of the Management Services Agreement. ARTICLE VIII REPURCHASE OF ASSETS The Purchased Assets, except for the Accounts Receivable, are subject to repurchase by the Seller from the Buyer upon termination or rescission of the Management Services Agreement in accordance with Section 13.5 or Section 14.1, respectively, of the Management Services Agreement. ARTICLE IX AMENDMENT, MODIFICATION AND WAIVER This Agreement shall not be altered or otherwise amended except pursuant to an instrument in writing signed by each of the parties. The waiver by one party of the performance of any covenant, condition or promise shall not invalidate this Agreement, nor shall it be considered as a waiver by such party of any other covenant, condition or promise. The delay in pursuing any remedy or in insisting upon full performance for any breach or failure of any covenant, condition or promise shall not prevent a party from later pursuing any remedies or insisting upon full performance for the same or any similar breach or failure. -25- ARTICLE X MISCELLANEOUS 10.1. Transfer Taxes, Etc. The Seller shall pay all sales, use and excise taxes and all registration, recording or transfer taxes which may be payable in connection with the transactions contemplated by this Agreement. 10.2. Entire Agreement. This Agreement (including the recitals hereof and the Schedules and the Exhibits attached hereto), together with the Related Agreements referenced herein and the Amendatory Agreement dated as of the Signature Date among Buyer, Seller, Eric Fishman, M.D., and Gerald Stashak, M.D., contain the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersede all prior agreements, representations, warranties and understandings, either oral or written, between the parties with respect thereto. 10.3. Descriptive Headings. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provisions of this Agreement. 10.4. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by telecopier, nationally-recognized overnight courier, or certified mail, postage prepaid, return receipt requested, addressed as follows: -26- (a) if to the Buyer, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: President Telecopier: (561) 391-1389; with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Jeffrey S. Held, Esq. Telecopier: (212) 408-2420; and (b) if to the Seller, to: Fishman and Stashak, M.D.'s, P.A. 1411 North Flagler Drive Suite 8800 West Palm Beach, Florida 33401 Attention: Eric S. Fishman, M.D. Telecopier: (561) 659-9009; with a copy to: Moore & Menkhaus, P.A. 4800 North Federal Highway Suite 210A Boca Raton, Florida 33431 Attention: David Menkhaus, Esq. Telecopier: (561) 393-6541; or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such communication shall be deemed to have been given (i) when delivered if personally delivered or sent by telecopier, (ii) on the Business Day after dispatch if sent by nationally-recognized, overnight courier and (iii) on the fifth Business Day after dispatch, if sent by mail. As used herein, "Business Day" means a day that is not a Saturday, Sunday or a day on which banking institutions in the state of Florida are not required to be open. -27- 10.5. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 10.6. Bulk Sales Compliance. The Buyer hereby waives compliance by the Seller with the provisions of the "bulk sales laws" of any state which may be in effect and applicable to the transactions contemplated hereby; provided, however, that the Seller shall indemnify the Buyer in connection with such noncompliance to the extent provided in Article 6 hereof. 10.7. Governing Law; Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida without giving effect to the laws and principles thereof, or of any other jurisdiction, which would direct the application of the laws of another jurisdiction. The parties to this Agreement agree that jurisdiction and venue in any action brought pursuant to this Agreement by any party hereto shall lie exclusively in any Federal or state court located in Palm Beach County, State of Florida. By execution and delivery of this Agreement, the parties hereto irrevocably submit to the jurisdiction of such courts for themselves and in respect of their property with respect to such action. The parties hereto irrevocably agree that venue would be proper in such court, and hereby waive any objection that such court is an improper or inconvenient forum for the resolution of such action. The parties hereto shall act in good faith and shall refrain from taking any actions to circumvent or frustrate the provisions of this Agreement. -28- 10.8. Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. 10.9. Benefits of Agreement. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Anything contained herein to the contrary notwithstanding, this Agreement shall not be assignable by any party without the consent of the other party hereto, and any purported assignment without such consent shall be null and void. 10.10. Pronouns. As used herein, all pronouns shall include the masculine, feminine, neuter, singular and plural thereof whenever the context and facts require such construction. * * * * -29- IN WITNESS WHEREOF, each of the parties hereto has caused this Asset Purchase Agreement to be executed on its behalf effective as of the day and year first above written. BONE, MUSCLE AND JOINT, INC. By: /s/ ---------------------------- Name: Title: Vice President FISHMAN AND STASHAK, M.D.'S, P.A. By: /s/ Eric S. Fishman, M.D. ---------------------------- Name: Eric S. Fishman, M.D. Title: President By: /s/ Gerald T. Stashak, M.D. ---------------------------- Name: Gerald T. Stashak, M.D. Title: Secretary EXECUTION COPY AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT dated as of September 10, 1997 (the "Amendment"), between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), and FISHMAN AND STASHAK, M.D.'S, P.A. (the "Medical Group"). Reference is made to the Asset Purchase Agreement (the "Asset Purchase Agreement"), between the Management Company and the Medical Group, effective as of June 1, 1997. Capitalized terms used but not defined herein have the meanings ascribed thereto in the Asset Purchase Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein, in the Management Services Agreement and the Amendatory Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Section 10.2 of the Asset Purchase Agreement is hereby amended in its entirety to read as follows: "10.2. Entire Agreement. This Agreement (including the recitals hereof and the Schedules and Exhibits attached hereto) contains the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements, representations, warranties and understandings, either oral or written, between the parties with respect thereto." 1. Except as expressly provided in this Amendment, the Asset Purchase Agreement remains in full force and effect in accordance with its terms. 2. This Amendment may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. 3. This Amendment shall be governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * IN WITNESS WHEREOF, the undersigned have caused this Amendment No. 1 to the Asset Purchase Agreement to be duly executed as of the date and year first above written. BONE, MUSCLE AND JOINT, INC. By: _____________________________ Name: Title: FISHMAN AND STASHAK, M.D.'S, P.A. By: _____________________________ Eric S. Fishman, M.D. President By: _____________________________ Gerald T. Stashak, M.D. Secretary EX-10.43 16 RESTRICTED STOCK AGREEMENT EXECUTION COPY RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is entered into as of July 3, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and the individual identified on the signature page hereto (the "Stockholder"), with reference to the following facts. Certain capitalized terms used herein are defined in Section 6 below. A. This Agreement is entered into in connection with and concurrently with that certain Management Services Agreement dated as of the date hereof and effective as of June 1, 1997 (the "Management Services Agreement"), between the Company and Fishman and Stashak, M.D.'s, P.A. (the "Medical Group"). B. This Agreement is being entered into concurrently with substantially identical Restricted Stock Agreements between the Company and the other partners in or equity owners or employees of the Medical Group identified on Schedule A attached hereto (such individuals and their Permitted Transferees are referred to herein collectively as the "Stockholders"). NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Purchase and Sale of Restricted Shares; Representations and Warranties of Stockholder. (a) Upon execution of this Agreement, the Company shall, pursuant to Section 4 and Schedule III of the Management Services Agreement, issue to the Stockholder that number of shares (such shares together with those shares hereafter acquired pursuant to the terms hereof, are referred to herein as the "Restricted Shares") of common stock, $.001 par value (the "Common Stock"), of the Company set forth opposite the Stockholder's name on Schedule A attached hereto. The aggregate shares of Common Stock issued to the Stockholders are referred to collectively herein as "Restricted Stock." Simultaneously with the execution and delivery hereof, the Company is delivering to the Stockholder the certificate(s) representing the Restricted Shares. (b) In connection with the issuance of the Restricted Shares hereunder, the Stockholder represents and warrants to the Company that: (i) the Restricted Shares to be issued to the Stockholder pursuant to this Agreement shall be acquired for the Stockholder's own account, for investment only and not with a view to, or intention of, distribution thereof in violation of the 1933 Act, or any applicable state securities laws, and the Restricted Shares will not be disposed of in contravention of the 1933 Act or any applicable state securities laws; (ii) the Stockholder has generally such knowledge and experience in business and financial matters and with respect to investments in securities of privately held companies so as to enable the Stockholder to understand and evaluate the risks and benefits of his or her investment in the Restricted Shares; (iii) the Stockholder has no need for liquidity in his or her investment in the Restricted Shares and is able to bear the economic risk of his or her investment in the Restricted Shares for an indefinite period of time and understands that the Restricted Shares have not been registered or qualified under the 1933 Act or any applicable state securities laws, by reason of the issuance of the Restricted Shares in a transaction exempt from the registration and qualification requirements of the 1933 Act or such state securities laws and, therefore, cannot be sold unless subsequently registered or qualified under the 1933 Act or such state securities laws or an exemption from such registration or qualification is available; (iv) the Stockholder understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to the Stockholder) promulgated under the 1933 Act, depends on satisfaction of various conditions and that, if applicable, Rule 144 may only afford the basis for sales under certain circumstances and only in limited amounts; (v) the Stockholder is an individual (A) whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000 or (B) who had an income in excess of $200,000 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000 in each of those years (in each case including foreign income, tax exempt income and the full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year; or the Stockholder otherwise meets the requirements to be considered an accredited investor, as defined under the 1933 Act; and (vi) the Stockholder has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Restricted Shares and has had full access to or been provided with such other -2- information concerning the Company as he or she has requested. (c) This Agreement constitutes the legal, valid and binding obligation of the Stockholder, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Stockholder does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Stockholder is a party or any judgment, order or decree to which the Stockholder is subject. (d) As an inducement to the Company to issue the Restricted Shares to the Stockholder and as a condition thereto, the Stockholder acknowledges and agrees that: (i) neither the issuance of the Restricted Shares to the Stockholder nor any provision contained herein shall affect the right of the Company to terminate the Management Services Agreement in accordance with its terms; and (ii) the Company shall only be obligated to provide to the Stockholder substantially the same information regarding the Company that the Company regularly discloses to its other shareholders. 2. Vesting of the Restricted Shares. (a) Except as otherwise provided in Section 2(b) below, the Restricted Shares shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in Section 2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently disabled (as described in Section 3(d)(iv)), and (iv) the Stockholder has not died: Anniversary Date Percentage of of this Agreement Restricted Shares Vested ----------------- ------------------------ First 25% Second 25% Third 25% Fourth 25% For purposes of this Agreement, "Anniversary Date of this Agreement" means June 1 of each year after 1997. Restricted Shares which have become vested are referred to herein as "Vested Shares" and all other Restricted Shares are referred to herein as "Unvested Shares." -3- (b) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with Section 2(a) above, the number of Unvested Shares, if any, that would have become Vested Shares during the 12-month period immediately following the date of death had such death not occurred shall be deemed Vested Shares as of the date of death. (c) For purposes of this Agreement, "Cessation of Active Practice" means a physician Stockholder's failure (other than by reason of death), throughout any twelve-month period (the "Determination Period") ending on the day before any of the vesting dates described in Section 2(a) hereof, to engage in the practice of medicine with the Medical Group on a regular basis, including the performance of orthopedic surgical procedures on a regular basis (except in the case of any Stockholder who did not practice surgery on a regular basis immediately prior to the date hereof), such that (i) the Stockholder was engaged in patient care activities for less than seventy-five percent (75%) of the time that the Stockholder had been engaged in such activities during the twelve-month period immediately preceding the date hereof, and (ii) the Stockholder generated billings that were less than seventy-five percent (75%) of the amount of billings generated by the Stockholder during the twelve-month period immediately preceding the date hereof. Notwithstanding anything to the contrary contained herein, for purposes of making the determination described in clauses (i) and (ii) above with respect to the Stockholder for any Determination Period, the activities and billings of the Stockholder shall be aggregated with the activities and billings of Dr. Robert Green, for so long as Dr. Green continues to be employed by the Medical Group. 3. Repurchase of Restricted Shares. (a) In the event of the termination of the Management Services Agreement pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth anniversary of the date hereof, the Company shall have the right (but not the obligation) (the "Repurchase Option"), to be exercised in its sole discretion, to repurchase all or any portion of the Restricted Shares (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's Permitted Transferees) pursuant to the terms and conditions set forth in this Section 3. (b) The Company may elect to repurchase all or any portion of the Restricted Shares by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that if the Company elects to repurchase less than all of the Restricted Shares, the Company shall first repurchase Unvested Shares and then repurchase that number of Vested Shares, if any, as the -4- Company may, in its sole discretion, elect. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be repurchased, the aggregate consideration to be paid for such shares, and the time and place for the closing of the transaction. The purchase price payable for each Unvested Share shall equal the Original Value of such share and the purchase price payable for each Vested Share shall equal the Fair Market Value of such share. If the Company decides to repurchase Restricted Shares from any Stockholder pursuant to this Section 3(b), then the Company must purchase that number of Restricted Shares which it has elected to repurchase from all of the Stockholders pro rata according to the number of shares of Restricted Stock held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest whole share). (c) The closing of the repurchase of Restricted Shares pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the delivery of the Repurchase Notice. The Company shall pay for the Restricted Shares to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the repurchase price for such shares; provided, however, that in the event the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to Section 13.5 or 14.1 of the Management Services Agreement, the total amount of such sums may be offset by the Company against any amounts owed by the Company to the Stockholder pursuant to this Agreement (if such Stockholder is, at such time, an equity owner of or partner in the Medical Group), such offset amount to be allocated pro rata among all of the Stockholders who at such time hold equity of or are partners in the Medical Group. The Company's payment under this Section 3(c) shall be subject to the terms and provisions of any financing agreement, if any, to which the Company is a party, its certificate of incorporation and the operation of law. The Company shall be entitled to receive representations and warranties from the Stockholder regarding (i) the Stockholder's power, authority and legal capacity to enter into such sale and to transfer valid right, title and interest in such Restricted Shares, (ii) the Stockholder's ownership of such Restricted Shares and the absence of any liens, pledges, and other encumbrances on such Restricted Shares and (iii) the absence of any violation, default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (d) In the event of the Cessation of Active Practice, the death or permanent disability of the Stockholder -5- (the "Reallocation Event"), the following provisions shall apply. (i) Such Stockholder or the estate (in the case of death) of such Stockholder shall transfer to the remaining Stockholders, if any, all of the Unvested Shares (not Vested Shares) held by such Stockholder (such transfer to be made pro rata according to the number of shares of Restricted Stock (vested and unvested) held by all of the Stockholders at the time of the Reallocation Event). Such Unvested Shares shall be transferred for no consideration and the stock certificate(s) representing those shares shall be delivered to the Company, no later than sixty (30) days after the Cessation of Practice, death or disability of the Stockholder, duly endorsed for transfer in accordance with this Section 3(d). The Company shall within thirty (30) days thereafter issue and deliver to each of such remaining Stockholders a certificate representing that number of shares of Restricted Stock which such Stockholder is entitled to receive pursuant to this Section 3(d). The Unvested Shares acquired by the remaining Stockholders shall remain subject to the vesting schedule set forth in Section 2(a) hereof. (ii) Notwithstanding anything contained herein to the contrary, in the event that the Management Fee (as defined in the Management Services Agreement) for the 12-month period immediately following the Reallocation Event is less than ninety percent (90%) of the greater of (A) the Management Fee for the 12-month period immediately preceding the Reallocation Event (the "Preceding Period") and (B) the Management Fee for the 12-month period prior to the Preceding Period, the Company shall have the right (but not the obligation), to be exercised in its sole discretion, to repurchase from each of those remaining Stockholders who acquired shares pursuant to Section 3(d)(i) above all or any portion of such shares of Restricted Stock. In the event the Company elects to repurchase such shares, which shares shall be deemed Unvested Shares for the purposes of this Section 3(d)(ii) and Section 3(d)(iii) below, the Company shall do so within 60 days after its determination that such circumstance exists in accordance with the provisions of Section 3(d)(iii) below. (iii) In the event that there are no remaining Stockholders to whom the Unvested Shares may be transferred in accordance with Section 3(d)(i) above, the Company shall repurchase all of the Unvested Shares of the Stockholder pursuant to the following terms. The repurchase price for each Unvested Share shall be equal to the Original Value of such share, and such repurchase price shall be paid in full in cash not later than sixty (60) days after the date on -6- which the Company determines that such Reallocation Event has occurred. (iv) For purposes of this Section 3(d), if the Stockholder is insured under a disability insurance policy, the determination under such policy as to whether the Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto for purposes of this Section 3(d). If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (v) Nothing contained in this Section 3(d) shall be construed to eliminate or reduce the right of the Company to repurchase shares of Restricted Stock (whether vested or unvested) from any Stockholder in accordance with the terms and provisions of Section 3(a). (e) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Shares by the Company under this Section 3 shall be subject to applicable restrictions, if any, contained in its certificate of incorporation, any financing agreement to which the Company is a party, Federal law or in the Delaware General Corporation Law and, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Shares hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so. (f) In the event that any Restricted Shares are repurchased pursuant to this Section 3, the Stockholder and his or her successors and assigns shall, at the Company's expense, take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner. 4. Transfer Restriction; Legend. Except as otherwise expressly provided in Section 3 and except for Permitted Transfers, the Stockholder may not sell or transfer or agree to sell or transfer ("Sale" or "Sell") any Restricted Shares unless such Sale shall be in accordance with the procedures set forth in this Section 4; provided, however, that with respect to this Section 4, Restricted Shares, at any point in time, shall be limited to Vested Shares and at no time shall the Stockholder have the right to Sell Unvested Shares (except as provided in Sections 3(b) and 3(d) hereof): (a) In the event that the Stockholder receives a bona fide offer from a third party (the "Prospective -7- Stockholder") to purchase all or any part of the Restricted Shares owned by the Stockholder, the Stockholder shall deliver to the Company a written notice (the "Offer Notice"), which shall be irrevocable for a period of fifteen (15) business days after delivery thereof (the "Offer Period"), offering (the "Offer") all of the Restricted Shares proposed to be Sold by the Stockholder to the Prospective Stockholder at the purchase price and on the terms of the proposed Sale to the Prospective Stockholder (such Offer Notice shall include the foregoing information, a copy of the Prospective Stockholder's bona fide offer and all other relevant terms of the proposed Sale, including the identification of the Prospective Stockholder). The Company shall have the right and option, for a period of fifteen (15) business days after delivery of the Offer Notice, to repurchase all of the Restricted Shares so offered at the purchase price and on the terms stated in the Offer Notice. Such acceptance shall be made by delivering a written notice to the Stockholder within said fifteen (15) business-day period. (b) Sales of Restricted Shares under the terms of Section 4(a) above shall be made on a mutually satisfactory business day within fifteen (15) business days after the expiration of the Offer Period. Delivery of certificates or other instruments evidencing such Restricted Shares duly endorsed for transfer shall be made on such date against payment of the purchase price therefor. (c) If the Company fails to purchase all of the Restricted Shares offered for Sale pursuant to the Offer Notice, then at any time within sixty (60) business days after the expiration of the Offer Period the Stockholder may Sell all or any part of the remaining Restricted Shares so offered for Sale on terms no more favorable to the Prospective Stockholder than the terms stated in the Offer Notice; provided, however, that the Stockholder shall not, under any circumstances, Sell any Restricted Shares to the Prospective Stockholder if the Board of Directors of the Company, in its sole discretion, determines in good faith that the Prospective Stockholder is a competitor, or an Affiliate of a competitor, of the Company or that such Prospective Stockholder's ownership of such Restricted Shares would be contrary to the best interests of the Company. In the event that all of such Restricted Shares are not Sold by the Stockholder to the Prospective Stockholder during such period, the right of the Stockholder to Sell such Restricted Shares to the Prospective Stockholder shall expire and the obligations of the Stockholder pursuant to this Section 4 shall be reinstated. (d) Any Permitted Transferee (other than the Company) shall, as a condition to such transfer, (i) agree to be bound by all of the provisions of this Agreement applicable to the Stockholder and shall evidence such agreement by executing and delivering to the Company a joinder to this Agreement in form and substance satisfactory to the Company, and (ii) if such -8- transferee is an equity owner or employee of the Medical Group, execute a noncompetition agreement in form and substance satisfactory to the Company (if such transferee is not, as of the date of such transfer, a party to such an agreement with the Company). (e) The certificate(s) representing the Restricted Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS. ADDITIONALLY, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS, TRANSFER RESTRICTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A RESTRICTED STOCK AGREEMENT DATED AS OF JULY 3, 1997, BETWEEN THE STOCKHOLDER AND BONE, MUSCLE AND JOINT, INC. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE." (f) The restrictions on transfers of Vested Shares set forth in this Section 4 shall expire, and shall be of no further force or effect, upon the consummation of the initial public offering of the Company's Common Stock pursuant to the 1933 Act. 5. Registration Rights. (a) Piggyback Registration. If the Company, at any time after that date which is six months after the consummation of the initial public offering of the Common Stock, proposes for any reason to register Primary Shares or Other Shares under the Securities Act (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto), it shall promptly give written notice to the Stockholders of its intention so to register the Primary Shares or Other Shares and, upon the written request, given within 15 days after delivery of any such notice by the Company, of any Stockholder to include in such registration Registrable Shares held by such Stockholder (which request shall specify the number of Registrable Shares proposed to be included in such registration), the Company shall use its best efforts to cause all such Registrable Shares to be included in such registration on the same terms and conditions as the securities otherwise being sold in such registration; provided, however, that if the managing underwriter advises the Company in writing that the inclusion of all Registrable Shares requested by the Stockholders to be included in such -9- registration, together with the inclusion of all Other Shares, would interfere with the successful marketing (including pricing) of Primary Shares proposed to be registered by the Company, then the number of Primary Shares, Registrable Shares and Other Shares proposed to be included in such registration shall be included in the following order: (i) first, the Primary Shares; (ii) second, the Venture Capital Shares requested to be included in such registration by the Venture Capitalists; (iii) third, the Lender Securities requested to be included in such registration by the Lenders; and (iv) fourth, the Other Shares and the Registrable Shares requested to be included in such registration by the Stockholders and the holders of Other Shares (pro rata based on the number of Other Shares and Registrable Shares held by such holders of Other Shares and Registrable Shares). (b) Condition to Registration Obligations. The Corporation shall not be obligated to effect the registration of the Registrable Shares pursuant to Section 5(a) above unless the Stockholder executes a power of attorney, custody arrangement and other documents customary in such transactions and reasonably required by the managing underwriter thereof prior to the filing of the registration statement. (c) Holdback Agreement. If the Company at any time shall register shares of Common Stock under the Securities Act for sale to the public and includes in such registration any Registrable Shares beneficially owned by the Stockholder, the Stockholder shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Restricted Shares (other than those Registrable Shares included in such registration) without the prior written consent of the Company for a period designated in writing by the underwriters managing such offering to the Company (and the Company will so notify the holders of Registrable Shares), which period shall not begin more than 10 days prior to the effectiveness of the registration statement pursuant to which such public offering shall be made and shall not last more than 180 days after the effective date of such registration statement. -10- (d) Indemnification. (i) In connection with any registration of Registrable Shares under the Securities Act pursuant to this Agreement, the Stockholder shall indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall sign such registration statement, each underwriter, broker or other person acting on behalf of the holders of Registrable Shares and each person who controls any of the foregoing persons within the meaning of the Securities Act with respect to any statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or such underwriter through an instrument duly executed by such holder of Registrable Shares specifically for use in connection with the preparation of such registration statement, preliminary prospectus, final prospectus, amendment, supplement or document. (ii) In connection with any registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless the Stockholder against any losses, claims, damages or liabilities (or actions in respect thereof), to which the Stockholder may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or state securities or "blue sky" laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration or qualification under such state securities or blue sky laws; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, preliminary prospectus, -11- final prospectus, amendment, supplement or document incident to registration or qualification of any Registrable Shares in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by the Stockholder. (e) Information by Stockholder. In the event the Stockholder elects to sell Registrable Shares pursuant to Section 5(a) above, the Stockholder shall furnish to the Company such written information regarding the Stockholder and the distribution proposed by the Stockholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 5. 6. Definitions. (a) "Affiliate" means, with respect to any Person, (a) any director, officer or equity owner of such Person and (b) any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (b) "Fair Market Value" of each share of Restricted Stock means the average of the closing prices of the sales of the Common Stock on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any given day, the average of the last bid and asked prices on all such exchanges at the end of such day, or, if on any given day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq Stock Market National Market System ("Nasdaq") as of 4:00 P.M., New York time, or, if on any given day the Common Stock is not quoted in Nasdaq, the average of the bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which the Fair Market Value is being determined and the 20 consecutive trading days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in Nasdaq or the over-the-counter market, the Fair Market Value shall be that value jointly determined by the Stockholder and the Company, provided that if they cannot so agree, such value shall be determined by a mutually acceptable investment banking or other qualified firm of national or regional reputation, retained jointly by the Company and the Medical Group, and all fees, expenses and other charges of such firm incurred in connection with such determination of Fair Market Value shall be borne and -12- shared equally by the Company and the Medical Group. In the event that the parties are unable to agree upon such an investment banking or other qualified firm within ten (10) days after the date on which either party may initially propose such a firm, a qualified firm shall be selected in the following manner: First, the Stockholder shall send a list of four such firms, arranged in order of the Stockholder's preference, by written notice to the Company within seven (7) days after the expiration of the above referenced 10-day period. If the Stockholder does not furnish such list to the Company within the required time period, the Company may, within seven (7) days following expiration of the initial seven-day period, submit a list of four such firms to the Stockholder. Second, the Company (or the Stockholder, as applicable) shall select, within seven (7) days after receipt of the above-referenced list, one of the firms identified on such list and shall give written notice thereof to the other party. If the recipient of such list does not make any such selection, the firm identified as the first choice on such list shall be deemed acceptable and agreeable to each of the parties. (c) "Internal Revenue Code" means the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. (d) "Lender Securities" means the shares of Common Stock or any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock and securities received in respect thereof, which are held by a Lender and which have not theretofore been sold to the public pursuant to a registration under the Securities Act or pursuant to Rule 144. (e) "Lender" means any Person that has loaned (prior to the date hereof) or may lend (at any time hereafter) funds to the Company and in connection with such lending has obtained or may obtain registration rights. (f) "Original Value" of each share of Restricted Stock purchased hereunder will be equal to seventy-five cents ($.75) (as proportionately adjusted for all subsequent stock splits, stock dividends and other recapitalizations). (g) "Other Shares" means at any time those issued and outstanding shares of Common Stock that do not constitute Primary Shares or Registrable Shares. (h) "Person" shall be construed broadly and shall include, without limitation, an individual, a partnership, an investment fund, a limited liability corporation or partnership, -13- a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. (i) "Permitted Transferee" means, as to the Stockholder, any transferee who acquires the Restricted Shares pursuant to a Permitted Transfer or any other transfer made in accordance with the provisions of this Agreement. (j) "Permitted Transfer" means, as to the Stockholder, (i) any sale or transfer of Vested Shares to (A) the spouse or lineal descendants of such Stockholder or (B) a trust for the benefit of any of the foregoing and (ii) any sale or transfer of Vested Shares or Unvested Shares to any other Stockholder, or any physician who, as of the date of such transfer, is an equity owner in the Medical Group. (k) "Primary Shares" means at any time the authorized but unissued shares of Common Stock or shares of Common Stock held by the Company in its treasury. (l) "Public Sale" means any sale of Restricted Stock to the public pursuant to an offering registered under the 1933 Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the 1933 Act. (m) "Registrable Shares" means the shares of Common Stock or any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock and any securities received in respect thereof, which are held by the Stockholders and which have not theretofore been sold to the public pursuant to a registration statement under the Securities Act or pursuant to Rule 144; provided that, unvested shares shall not under any circumstance be Registrable Shares. (n) "Restricted Shares" has the meaning set forth in Section 1(a). The Restricted Shares will continue to be Restricted Shares in the hands of any holder other than the Stockholder (except for the Company and except for transferees in a Public Sale), and except as otherwise provided herein, each such other holder of the Restricted Shares will succeed to all rights and obligations attributable to the Stockholder as the holder of the Restricted Shares hereunder. The Restricted Shares will also include shares of the Company's capital stock issued with respect to the Restricted Stock by way of a stock split, stock dividend or other recapitalization. (o) "Venture Capitalists" means Naresh Nagpal and those venture capital firms that have acquired, prior to the date hereof, and may acquire, at any time hereafter, securities -14- of the Company and in connection with such acquisition have obtained or may obtain registration rights. (p) "Venture Capital Shares" means the shares of Common Stock or any other securities which by their terms are exercisable or exchangeable for or convertible into Common Stock and any securities received in respect thereof, which are held by a Venture Capitalist and which have not theretofore been sold to the public pursuant to a registration statement under the Securities Act or pursuant to Rule 144. (q) "1933 Act" means the Securities Act of 1933, as the same may be amended or supplemented from time to time, or any successor statute, and the rules and regulations thereunder, as the same are from time to time in effect. 7. Indemnification. (a) The Company shall indemnify, defend and hold harmless the Stockholder against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Company contained in this Agreement. (b) The Stockholder shall indemnify and hold harmless the Company against all liability, loss or damage, together with all reasonable costs and expenses related thereto (including reasonable legal fees and expenses), relating to or arising from the untruth, inaccuracy or breach of any of the representations, warranties or agreements of the Stockholder contained in this Agreement. 8. General Provisions. (a) Transfers in Violation of Agreement. Any sale, transfer, assignment or other disposition (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) (each, a "Transfer") or attempted Transfer of any Restricted Shares in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Restricted Shares as the owner of such stock for any purpose. (b) Binding Effect of Management Services Agreement. The Stockholder hereby agrees to be bound by the provisions of Section 14 of the Management Services Agreement, which provisions such Stockholder has reviewed. (c) Severability. It is the desire and intent of the parties hereto that the provisions of this Agreement be -15- enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (d) Entire Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (e) Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. (f) Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Stockholder, the Company and their respective successors, permitted assigns, heirs, representatives and estate, as the case may be (including subsequent holders of Restricted Stock); provided, however, that the rights and obligations of the Stockholder under this Agreement shall not be assignable except in connection with a Permitted Transfer of Restricted Shares hereunder. (g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to any choice of law or conflicting provision or rule (whether of the State of Florida or any other jurisdiction), that would cause the laws of any jurisdiction other than the State of Florida to be applied. In furtherance of the foregoing, the internal law of the State of Florida will control the interpretation and construction of this agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. -16- (h) Jurisdiction. Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any Florida state court or Federal court of the United States of America sitting in Palm Beach County, Florida, and any appellate court thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such Florida state court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (i) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any Florida state or Federal court. Each of the parties hereto irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (j) Remedies. Each of the parties to this Agreement shall be entitled to enforce its rights under this Agreement specifically to recover damages and costs (including reasonable attorneys' fees) for any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for the Company in the event of a breach of the provisions of this Agreement by the Stockholder and that the Company may, in its sole discretion, apply to any court of law or equity of competent jurisdiction for specific performance and/or other injunctive relief (without posting any bond or deposit) in order to enforce or prevent any violations of the provisions of this Agreement. (k) Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Company and the Stockholder and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall be construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Agreement or any provision hereof; provided, however, that the Company may amend, without the Stockholder's consent, Schedule A hereto upon consummation of a Permitted Transfer of shares hereunder to reflect the then current ownership of the Restricted Stock. -17- (l) Notices. Any notice provided for in this Agreement must be in writing and must be either personally delivered, transmitted via telecopier, mailed by first class mail (postage prepaid and return receipt requested) or sent by nationally-recognized overnight courier service (charges prepaid) to the recipient at the address below indicated or at such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder and received when delivered personally, when received if transmitted via telecopier, five days after deposit in the U.S. mail and one business day after deposit with a nationally-recognized overnight courier service. (i) If to the Company, to: Bone, Muscle and Joint, Inc. 4800 North Federal Highway, Suite 104D Boca Raton, Florida 33431 Attention: Naresh Nagpal, M.D., President Telephone: (561) 391-1311 Telecopier: (561) 391-1389; with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza, 41st Floor New York, New York 10112 Attention: Jeffrey S. Held, Esq. Telephone: (212) 408-2417 Telecopier: (212) 408-2420; and (ii) If to the Stockholder, to his or her address set forth on the signature page hereto beneath his or her name; with copies to: Fishman and Stashak, M.D.'s, P.A. 1411 North Flagler Drive Suite 8800 West Palm Beach, Florida 33401 Attention: Eric S. Fishman, M.D. Telephone: (561) 659-9000 Telecopier: (561) 659-9009; and Moore & Menkhaus, P.A. 4800 North Federal Highway Suite 210A Boca Raton, Florida 33431 Attention: David Menkhaus, Esq. Telephone: (561) 394-7910 Telecopier: (561) 393-6541. -18- (m) Business Days. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or holiday in the State of Florida, the time period for giving notice or taking action shall be automatically extended to the business day immediately following such Saturday, Sunday or holiday. (n) Attorneys' Fees. In the event of any dispute or controversy arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party all costs and expenses, including attorneys' fees and accountants' fees, incurred in connection with such dispute or controversy. (o) Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (p) Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. (q) Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa. * * * * -19- IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement effective as of the date first written above. COMPANY BONE, MUSCLE AND JOINT, INC. By: ----------------------------- Name: Title: STOCKHOLDER ----------------------------- Signature ----------------------------- Printed Name Address for notices: ----------------------------- ----------------------------- ------------------------------ MEDICAL GROUP ACCEPTED AND AGREED AS TO PARAGRAPHS 3(a) and 5(b) FISHMAN AND STASHAK, M.D.'S, P.A. By: - ------------------------------ Name: Title: EXECUTION COPY AMENDMENT NO. 1 TO THE RESTRICTED STOCK AGREEMENT dated as of September 10, 1997, between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Company"), and the individual identified on the signature page hereof (the "Stockholder"). Reference is made to the Restricted Stock Agreement entered into as of July 3, 1997 (the "Restricted Stock Agreement"), pursuant to which the Stockholder acquired shares (the "Restricted Shares") of the common stock of the Company, par value $0.001 per share (the "Common Stock"). The parties hereto desire to amend certain of the provisions of the Restricted Stock Agreement relating to the vesting of the Restricted Shares and the transferability thereof. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. All capitalized terms used but not defined herein have the meanings ascribed in the Restricted Stock Agreement. SECTION 2. Section 2 to the Restricted Stock Agreement is hereby amended in its entirety, to read as follows: "2. Vesting of the Restricted Shares. (a) Except as otherwise provided in Section 2(b) below, the Restricted Shares shall become vested in accordance with the following schedule, if, as of each such date, (i) the Management Services Agreement has not been terminated, (ii) there has not been a Cessation of Active Practice (as defined in paragraph 2(c) below) by the Stockholder, (iii) the Stockholder has not become permanently disabled (as described in Section 3(a)(iii) below), and (iv) the Stockholder has not died: Anniversary Date Percentage of of this Agreement Restricted Stock Vested ----------------- ----------------------- First 25% Second 25% Third 25% Fourth 25% For purposes of this Agreement, "Anniversary Date of this Agreement" means June 1 of each year after 1997. Restricted Shares which have become vested are referred to herein as "Vested Shares" and all other Restricted Shares are referred to herein as "Unvested Shares." (b) Notwithstanding the foregoing, in the event of the death of the Stockholder, in addition to any shares that have vested in accordance with paragraph 2(a) above, the number of Unvested Shares, if any, that would have become Vested Shares during the 12-month period immediately following the date of death had such death not occurred shall be deemed Vested Shares as of the date of death. (c) For purposes of this Agreement, "Cessation of Active Practice" means the Stockholder's resignation from or termination of employment with the Medical Group (other than by reason of death or permanent disability)." SECTION 3. Section 3 to the Restricted Stock Agreement is hereby amended in its entirety, to read as follows: "3. Forfeiture and Repurchase of Restricted Shares. (a) In the event of the Cessation of Active Practice by or the death or permanent disability of the Stockholder (the "Forfeiture Event"), the following provisions shall apply. (i) The Stockholder or the estate (in the case of death) of the Stockholder shall transfer to the Medical Group, all of the Unvested Shares held by the Stockholder. Such Unvested Shares shall be transferred for no consideration from the Company and the stock certificate(s) representing those shares shall be delivered to the Company, no later than thirty (30) days after the Forfeiture Event, duly endorsed for transfer in accordance with this Section 3(a). The Company shall, within thirty (30) days after its receipt of a joinder to this Agreement executed by the Medical Group, issue and deliver to the Medical Group a certificate representing the Unvested Shares. Such Unvested Shares shall continue to vest according to the vesting schedule set forth in Section 2(a) above. (ii) The Medical Group shall not Sell (as hereinafter defined) any Unvested Shares to any person or entity, other than to one or more physician employees or equity owners of the -2- Medical Group, who prior to the receipt of such shares from the Medical Group had not acquired any shares of the Company's Common Stock pursuant to the Management Services Agreement between the Company and the Medical Group. As a condition to any such Sale, the transferee shall execute and deliver to the Company a Restricted Stock Agreement in substantially the form of this Agreement, effective as of the date of transfer of such shares. Any Unvested Shares distributed according to this Section 3(a) shall be subject to a vesting schedule identical to the schedule set forth in Section 2(a) hereof. (iii) For purposes of this Agreement, if the Stockholder is insured under a disability insurance policy, the determination under such policy as to whether such Stockholder's condition constitutes a permanent disability shall be binding on the parties hereto. If the Stockholder is not insured under a policy of disability insurance, such determination shall be made by an independent qualified physician proposed by the Medical Group, subject to the approval of the Company, which approval shall not be unreasonably withheld. (b) In the event of the termination of the Management Services Agreement pursuant to Section 13 thereof (the "Repurchase Event") on or before the fourth anniversary of the Commencement Date (as defined therein), the Company shall have the right (but not the obligation) (the "Repurchase Option"), to be exercised in its sole discretion, to repurchase all or any portion of the Restricted Shares (whether vested or unvested and whether held by the Stockholder or one or more of the Stockholder's Permitted Transferees) pursuant to the terms and conditions set forth in this Section 3. (i) The Company may elect to repurchase all or any portion of the Restricted Shares by delivering written notice (the "Repurchase Notice") to the Stockholder within ninety (90) days after the Repurchase Event; provided, however, that, if the Company elects to repurchase less than all of the Restricted Shares, the Company shall first repurchase Unvested Shares and then repurchase that number of Vested Shares, if any, as the Company may, in its sole discretion, elect. The Repurchase Notice shall set forth the number of Unvested Shares and Vested Shares to be repurchased, the aggregate consideration to be paid for such shares, and the time and place for -3- the closing of the transaction. The purchase price payable for each Unvested Share shall equal the Original Value for such share and the purchase price payable for each Vested Share shall equal the Fair Market Value for such share. If the Company decides to repurchase Restricted Shares from any Stockholder pursuant to this Section 3(b), then the Company must purchase that number of Restricted Shares which it has elected to repurchase from all of the Stockholders pro rata according to the number of shares of Restricted Shares held by all of the Stockholders at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest whole share). (ii) The closing of the repurchase of Restricted Shares pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice, which date shall not be more than sixty (60) days nor less than five (5) days after the delivery of the Repurchase Notice. The Company shall pay for Restricted Shares to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the repurchase price for the shares; provided, however, that in the event that the Medical Group is obligated to pay to the Company any sums in connection with the repurchase of assets by the Medical Group pursuant to Section 13.5 of the Management Services Agreement, the total amount of such sums may be offset by the Company against any amounts owed by the Company to the Stockholders pursuant to this Agreement (if such Stockholder is, at such time, an equity owner of or partner in the Medical Group), such offset amount to be allocated pro rata among all of the Stockholders who at such time hold equity of or are partners in the Medical Group. The Company's payment under this Section 3(b) shall be subject to the terms and provisions of any financing agreement, if any, to which the Company is a party, its certificate of incorporation and the operation of law. The Company is entitled to receive representations and warranties from the Stockholder regarding (x) the Stockholder's power, authority and legal capacity to enter into such sale and to transfer valid right, title and interest in such Restricted Shares, (y) the Stockholder's ownership of such Restricted Shares and the absence of any liens, pledges, and other encumbrances on such Restricted Shares and (z) the absence of any violation, -4- default, or acceleration of any agreement or instrument pursuant to which the Stockholder or the Stockholder's assets are bound resulting from such sale. (c) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Restricted Shares by the Company under this Section 3 shall be subject to applicable restrictions, if any, contained in its certificate of incorporation, any financing agreement to which the Company is a party, Federal law or in the Delaware General Corporation Law and, if any such restrictions prohibit or otherwise delay the repurchase of Restricted Shares hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so. (d) In the event that any Restricted Shares are repurchased pursuant to this Section 3, the Stockholder and his or her successors and assigns shall, at the Company's expense, take all reasonable steps to obtain all required third-party, governmental and regulatory consents and approvals and take all other reasonable actions necessary to facilitate consummation of such repurchase in a timely manner." SECTION 4. Section 8(b) of the Restricted Stock Agreement is hereby amended by deleting "Section 14" on the third line thereof and inserting "Section 13.6" in lieu thereof. SECTION 5. This Amendment No. 1 shall be deemed effective as of July 3, 1997. Except as expressly provided in this Amendment No. 1, the Restricted Stock Agreement remains in full force and effect in accordance with its terms. SECTION 6. This Amendment No. 1 may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. SECTION 7. This Amendment No. 1 shall by governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * -5- IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Restricted Stock Agreement effective as of the date first written above. COMPANY ------- BONE, MUSCLE AND JOINT, INC. By: --------------------------- STOCKHOLDER ----------- --------------------------- Gerald T. Stashak, M.D. EX-10.45 17 AMENDATORY AGREEMENT BONE, MUSCLE AND JOINT, INC. 4800 N. Federal Highway, Suite 104D Boca Raton, Florida 33431 July 3, 1997 Fishman and Stashak, M.D.'s, P.A. 1411 N. Flagler Drive, Suite 8800 West Palm Beach, Florida 33401 Amendatory Agreement -------------------- Dear Sirs: Reference is made to the Management Services Agreement (the "Management Services Agreement"), and the Asset Purchase Agreement (the "Asset Purchase Agreement"), each dated as of the date hereof and effective as of June 1, 1997, between Bone, Muscle and Joint, Inc. (the "Company"), and Fishman and Stashak, M.D.'s, P.A. (the "Medical Group"). Capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. 1. Notwithstanding anything to the contrary contained in Section 4 and Schedule III of the Management Services Agreement or Sections 2.1 and 5.2(c) of the Asset Purchase Agreement, on the date hereof the Company will pay by wire transfer of funds to the account(s) designated by the Medical Group an amount equal to $2,297,102 and will issue to Eric Fishman, M.D., Gerald Stashak, M.D. and Practice Solutions, Inc., 93,243, 93,243 and 3,806 shares of the Company's common stock, $.001 par value (the "Common Stock"), in fulfillment of its obligations under such Sections and Schedule; provided, however, that if Chaim Arlosoroff, M.D. becomes an equity owner of the Medical Group and executes a Restricted Stock Agreement and Stockholder Non-Competition Agreement at any time on or before August 1, 1997, the Company will pay the remaining consideration, $605,155 to the Medical Group (pursuant to the Asset Purchase Agreement) and an aggregate of 50,130 shares of its Common Stock (pursuant to the Management Services Agreement) to Eric Fishman, M.D., Gerald Stashak, M.D., Practice Solutions, Inc. and such other physician equity owners or employees of the Medical Group as the Medical Group shall designate in writing to the Company (which writing will also set forth the allocation of such shares of Common Stock); provided further, however, that such designation shall allot 15,000 shares to Dr. Arlosoroff. Any such other physician equity owners or employees of the Medical Group shall execute an Restricted Stock Agreement in the form of agreement previously executed by Drs. Fishman and Stashak and a Stockholder Non-Competition Agreement in a form satisfactory to the Company. In connection with the execution of such agreements by Dr. Arlosoroff, the Company will increase the consideration payable under the Management Services Agreement by 7,500 shares of its Common Stock and such shares will be issued simultaneously with the issuance referenced in the proviso of the preceding sentence. The parties to the Management Services Agreement and the parties to the Asset Purchase Agreement agree that in the event the foregoing occurs and as a condition to the fulfillment of their respective obligations under this Section 1, the parties shall execute and deliver an amendment to each such agreement in the form of Exhibit A hereto; provided, however, that if the foregoing does not take place, the parties to each such agreement shall execute and deliver amendments in the form of Exhibit B hereto (which shall, among other things, decrease the Base Year Collections). 2. In addition to the foregoing, the Company hereby agrees that in the event that (a) each of Mark Rubenstein, M.D. and Robert Green, M.D., physician employees of the Medical Group, executes and delivers a Restricted Stock Agreement and Stockholder Noncompetition Agreement to the Company by August 1, 1997 and (b) the Medical Group directs the Company in writing to issue and deliver to such physician 10,000 shares of the Company's Common Stock issuable pursuant to Schedule III of the Management Services Agreement, the Company will increase the stock consideration payable to the Medical Group by 5,000 and 5,000 shares, respectively, of its Common Stock. In connection with the foregoing and as a condition thereto, the parties to the Management Services Agreement shall execute and deliver an amendment thereto in the form of Exhibit C attached hereto. 3. None of the parties hereto, nor their respective employees, stockholders, consultants or agents shall, at any time after the execution and delivery of this Amendatory Agreement, directly or indirectly disclose the terms of this agreement to any person, firm, corporation, association or other entity without the prior written consent of the other parties hereto. Nothing contained herein shall be construed to prevent any party hereto from disclosing the terms of this agreement to his or its professional advisers for purposes of evaluating, negotiating or otherwise assisting such party in connection with the transactions contemplated by this Amendatory Agreement; provided that such party shall be liable to the other parties for the disclosure by any of its professional advisers of such information in violation of the preceding sentence. -2- If the foregoing meets with your satisfaction, please acknowledge our agreement by signing in the space indicated below and returning a copy of this letter to the undersigned. Very truly yours, Bone, Muscle and Joint, Inc. By: /s/ Randal J. Farwell _____________________________ Name: Randal J. Farwell Title: VP Agreed to and Acknowledged: Fishman and Stashak, M.D.'s, P.A. By: /s/ Eric S. Fishman, MD __________________________ Eric S. Fishman, M.D. President By: /s/ Gerald T. Stashak, MD __________________________ Gerald T. Stashak, M.D. Secretary /s/ Eric S. Fishman, Pres - ----------------------------- Eric S. Fishman, M.D. /s/ Gerald T. Stashak, MD - ----------------------------- Gerald T. Stashak, M.D. -3- EXHIBIT A AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT and ASSET PURCHASE AGREEMENT dated as of July __, 1997 (the "Amendment"), between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), and FISHMAN AND STASHAK, M.D.'S, P.A. (the "Medical Group"). Reference is made to the Management Services Agreement (the "Management Services Agreement") and to the Asset Purchase Agreement (the "Asset Purchase Agreement"), each between the Management Company and the Medical Group, dated as of July 3, 1997, and effective as of June 1, 1997. Capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. Execution and delivery of this Amendment is a condition to the Management Company's performance of its obligations set forth in Section 1 of that certain Amendatory Agreement dated as of July 3, 1997 (the "Amendatory Agreement"), among the Management Company, the Medical Group, Eric Fishman, M.D., and Gerald Stashak, M.D. NOW THEREFORE, in consideration of the mutual covenants contained herein, in the Management Services Agreement and the Amendatory Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Section 23 of the Management Services Agreement is hereby amended in its entirety to read as follows: "SECTION 23. Entire Agreement; Amendments. This Agreement and the exhibits and schedules hereto contain the entire understanding of the parties with respect to its subject matter, and neither this Agreement nor any part of it may in any way be altered, amended, extended, waived, discharged or terminated except by a written agreement signed by all of the parties against whom enforcement is sought." 2. Schedule III to the Management Services Agreement is amended and restated in its entirety to read as set forth in Annex I attached hereto. 3. Section 10.2 of the Asset Purchase Agreement is hereby amended in its entirety to read as follows: "10.2. Entire Agreement. This Agreement (including the recitals hereof and the Schedules and Exhibits attached hereto) contains the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements, representations, warranties and understandings, either oral or written, between the parties with respect thereto." 4. Except as expressly provided in this Amendment, the Management Services Agreement and the Asset Purchase Agreement remain in full force and effect in accordance with their respective terms. 5. This Amendment may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. 6. This Amendment shall be governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * IN WITNESS WHEREOF, the undersigned have caused the Amendment to be duly executed as of the date and year first above written. BONE, MUSCLE AND JOINT, INC. By:_____________________________ Name: Title: FISHMAN AND STASHAK, M.D.'S, P.A. By:_____________________________ Eric S. Fishman, M.D. President By:_____________________________ Gerald T. Stashak, M.D. Secretary ANNEX I SCHEDULE III Equity Participation In connection with the execution and delivery of this Agreement, the Management Company is paying an aggregate consideration to the Medical Group of 247,922 shares of Common Stock of the Management Company (the "Practice Compensation"). In order to accomplish the foregoing, the Company is entering into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to which each such Eligible Party shall receive the number of shares set forth in such agreement (which amount will be designated by the Medical Group in writing to the Management Company). A portion of the stock consideration (an aggregate of 4,808 shares of Common Stock) is being paid to an advisor of the Medical Group in accordance with the schedule below. The Medical Group shall indemnify and defend the Management Company from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses) arising out of or in connection with any claim by any of the Eligible Parties or any other person with respect to such allocation of shares. The Practice Compensation has been determined based upon the assumption that the Medical Group will achieve aggregate Collections for the calendar year ending December 31, 1997 (the "Base Year") equal to $3,750,000 (the "Base Year Collections"). On or before October 31, 1998, the Management Company will notify (the "Comparison Notice") the Medical Group of its actual aggregate Collections for the period beginning on the Commencement Date and ending on August 31, 1998 (the "Comparison Period"). In the event that the actual Collections for the Comparison Period are less than the Base Year Collections (the "Shortfall"), the Medical Group will be obligated to, and will cause the Eligible Parties to, return to the Management Company the number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Shortfall and dividing that number by $6.50. In the event that the actual Collections for the Comparison Period are greater than the Base Year Collections (the "Excess"), the Management Company will be obligated to issue to the Medical Group the additional number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Excess and dividing that number by $6.50. If there is an Excess and the Management Company is required to issue additional shares of Common Stock to the Medical Group, such shares will be allocated to the Eligible Parties as the Medical Group may direct in writing within 30 days after receipt of the Comparison Notice and such allocation shall be made according to the proportions set forth in such written notice; provided that if the Medical Group fails to so notify the Management Company, the Excess shall be allocated equally between Dr. Fishman and Dr. Stashak. EXHIBIT B AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT and ASSET PURCHASE AGREEMENT dated as of August 1, 1997 (the "Amendment"), between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), and FISHMAN AND STASHAK, M.D.'S, P.A. (the "Medical Group"). Reference is made to the Management Services Agreement (the "Management Services Agreement") and to the Asset Purchase Agreement (the "Asset Purchase Agreement"), each between the Management Company and the Medical Group, dated as of July 3, 1997, and effective as of June 1, 1997. Capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. As of the date hereof Chaim Arlosoroff, M.D., has not executed and delivered a Restricted Stock Agreement or Stockholder Non-Competition Agreement. As a result thereof, the parties hereto are executing and delivering this Amendment pursuant to the terms and provisions set forth in Section 1 of that certain Amendatory Agreement dated as of July 3, 1997 (the "Amendatory Agreement"), among the Management Company, the Medical Group, Eric Fishman, M.D., and Gerald Stashak, M.D. NOW THEREFORE, in consideration of the mutual covenants contained herein, in the Management Services Agreement and the Amendatory Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Schedule III to the Management Services Agreement is hereby amended in its entirety to read as set forth on Annex I attached hereto. 2. Section 2.1 of the Asset Purchase Agreement is hereby amended in its entirety to read as follows: "2.1. Purchase Price; Payment. The purchase price (the "Purchase Price") to be paid for the Purchased Assets shall equal the sum of the following amounts: (a) $1,691,947; and (b) $950,000 (the "A/R Amount"), subject to adjustment in accordance with Section 2.3, which amount is a good faith estimate of the aggregate face value of all Accounts Receivable outstanding as of the Closing Date and set forth on Schedule 1.1(e)." 3. Except as expressly provided in this Amendment, the Management Services Agreement and the Asset Purchase Agreement remain in full force and effect in accordance with their respective terms. 4. This Amendment may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. 5. This Amendment shall be governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * IN WITNESS WHEREOF, the undersigned have caused the Amendment to be duly executed as of the date and year first above written. BONE, MUSCLE AND JOINT, INC. By:_____________________________ Name: Title: FISHMAN AND STASHAK, M.D.'S, P.A. By:_____________________________ Eric S. Fishman, M.D. President By:_____________________________ Gerald T. Stashak, M.D. Secretary ANNEX I SCHEDULE III Equity Participation In connection with the execution and delivery of this Agreement, the Management Company is paying an aggregate consideration to the Medical Group of 190,292 shares of Common Stock of the Management Company (the "Practice Compensation"). In order to accomplish the foregoing, the Company is entering into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to which each such Eligible Party shall receive the number of shares set forth in such agreement (which amount will be designated by the Medical Group in writing to the Management Company). A portion of the stock consideration (an aggregate of 4,808 shares of Common Stock) is being paid to an advisor of the Medical Group in accordance with the schedule below. The Medical Group shall indemnify and defend the Management Company from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses) arising out of or in connection with any claim by any of the Eligible Parties or any other person with respect to such allocation of shares. Eligible Party Common Stock Proportions -------------- ------------ ----------- Eric S. Fishman, M.D. 93,243 50% Gerald T. Stashak, M.D. 93,243 50% Advisor Common Stock ------- ------------ Practice Solutions, Inc. 3,806 ============ Grand Total 190,292 The Practice Compensation has been determined based upon the assumption that the Medical Group will achieve aggregate Collections for the calendar year ending December 31, 1997 (the "Base Year") equal to $2,910,000 (the "Base Year Collections"). On or before October 31, 1998, the Management Company will notify (the "Comparison Notice") the Medical Group of its actual aggregate Collections for the period beginning on the Commencement Date and ending on August 31, 1998 (the "Comparison Period"). In the event that the actual Collections for the Comparison Period are less than the Base Year Collections (the "Shortfall"), the Medical Group will be obligated to, and will cause the Eligible Parties to, return to the Management Company the number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Shortfall and dividing that number by $6.50. In the event that the actual Collections for the Comparison Period are greater than the Base Year Collections (the "Excess"), the Management Company will be obligated to issue to the Medical Group the additional number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Excess and dividing that number by $6.50. If there is an Excess and the Management Company is required to issue additional shares of Common Stock to the Medical Group, such shares will be allocated to the Eligible Parties as the Medical Group may direct in writing within 30 days after receipt of the Comparison Notice and such allocation shall be made according to the proportions set forth in such written notice; provided that if the Medical Group fails to so notify the Management Company, the Excess shall be allocated equally between Dr. Fishman and Dr. Stashak. EXHIBIT C AMENDMENT NO. 2 TO MANAGEMENT SERVICES AGREEMENT dated as of July __, 1997 (the "Amendment"), between BONE, MUSCLE AND JOINT, INC., a Delaware corporation (the "Management Company"), and FISHMAN AND STASHAK, M.D.'S, P.A. (the "Medical Group"). Reference is made to the Management Services Agreement dated as of July 3, 1997, and effective as of June 1, 1997 (the "Management Services Agreement"). Capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. Execution and delivery of this Amendment is a condition to the Management Company's performance of its obligations set forth in Section 2 of that certain Amendatory Agreement dated as of July 3, 1997 (the "Amendatory Agreement"), among the Management Company, the Medical Group, Eric Fishman, M.D., and Gerald Stashak, M.D. NOW THEREFORE, in consideration of the mutual covenants contained herein, in the Management Services Agreement and the Amendatory Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Schedule III to the Management Services Agreement is amended and restated in its entirety to read as set forth in Annex I attached hereto. 2. Except as expressly provided in this Amendment, the Management Services Agreement remains in full force and effect in accordance with their respective terms. 3. This Amendment may be executed in more than one counterpart, and by the parties hereto in separate counterparts, and each such counterpart shall constitute an original instrument, but all such counterparts taken together shall constitute one and the same Amendment. 4. This Amendment shall be governed by, construed and interpreted in accordance with the laws of the State of Florida. * * * * IN WITNESS WHEREOF, the undersigned have caused the Amendment to be duly executed as of the date and year first above written. BONE, MUSCLE AND JOINT, INC. By:_____________________________ Name: Title: FISHMAN AND STASHAK, M.D.'S, P.A. By:_____________________________ Eric S. Fishman, M.D. President By:_____________________________ Gerald T. Stashak, M.D. Secretary ANNEX I SCHEDULE III Equity Participation In connection with the execution and delivery of this Agreement, the Management Company is paying an aggregate consideration to the Medical Group of 257,922 shares of Common Stock of the Management Company (the "Practice Compensation"). In order to accomplish the foregoing, the Company is entering into a Restricted Stock Agreement with each of the Eligible Parties, pursuant to which each such Eligible Party shall receive the number of shares set forth in such agreement (which amount will be designated by the Medical Group in writing to the Management Company). A portion of the stock consideration (an aggregate of 4,808 shares of Common Stock) is being paid to an advisor of the Medical Group in accordance with the schedule below. The Medical Group shall indemnify and defend the Management Company from and against any and all liabilities, losses, damages, claims, causes of action and expenses (including reasonable attorneys' fees and expenses) arising out of or in connection with any claim by any of the Eligible Parties or any other person with respect to such allocation of shares. The Practice Compensation has been determined based upon the assumption that the Medical Group will achieve aggregate Collections for the calendar year ending December 31, 1997 (the "Base Year") equal to $3,750,000 (the "Base Year Collections"). On or before October 31, 1998, the Management Company will notify (the "Comparison Notice") the Medical Group of its actual aggregate Collections for the period beginning on the Commencement Date and ending on August 31, 1998 (the "Comparison Period"). In the event that the actual Collections for the Comparison Period are less than the Base Year Collections (the "Shortfall"), the Medical Group will be obligated to, and will cause the Eligible Parties to, return to the Management Company the number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Shortfall and dividing that number by $6.50. In the event that the actual Collections for the Comparison Period are greater than the Base Year Collections (the "Excess"), the Management Company will be obligated to issue to the Medical Group the additional number of shares (rounded to the nearest whole number) of Common Stock determined by taking six times 15% of the Excess and dividing that number by $6.50. If there is an Excess and the Management Company is required to issue additional shares of Common Stock to the Medical Group, such shares will be allocated to the Eligible Parties as the Medical Group may direct in writing within 30 days after receipt of the Comparison Notice and such allocation shall be made according to the proportions set forth in such written notice; provided that if the Medical Group fails to so notify the Management Company, the Excess shall be allocated equally between Dr. Fishman and Dr. Stashak. EX-10.61 18 TRI-PARTY AGREEMENT BONE, MUSCLE AND JOINT, INC. 4800 N. Federal Highway Suite 104D Boca Raton, Florida 33431 April 30, 1997 South Texas Spinal Clinic, P.A. 7614 Louis Pasteur Suite 300 San Antonio, Texas 78229 Tri-Party Agreement Dear Sirs: Reference is made to the Management Services Agreement dated as of December 23, 1996, between Bone, Muscle and Joint, Inc. (the "Company"), and South Texas Spinal Clinic, P.A. (the "Medical Group"). Capitalized terms used but not defined herein have the meanings ascribed thereto in the Management Services Agreement. In connection with the provision of Management Services under the Management Services Agreement, the Company proposes to enter into a loan agreement (the "Loan Agreement") with HCFP Funding, Inc. ("HCFP"). In order to effectuate the financing provided under the Loan Agreement, HCFP has requested that the Company and the Medical Group enter into an amendment (the "Amendment") to the Management Services Agreement, substantially in the form attached hereto as Annex I. To induce the Medical Group to enter into the Amendment, the Company hereby agrees to, and does by its signature hereon, instruct HCFP to deliver to the Medical Group, for so long as the Management Services Agreement and the Loan Agreement are in effect, the Semi-Monthly Draw, if any, payable by the Company to the Medical Group under the Management Services Agreement. HCFP is hereby instructed to deliver the Semi-Monthly Draw by wire transfer of funds to an account designated by the Medical Group on the first day and the fifteenth day of each month (or the business day immediately following, if such date occurs on a day on which HCFP is not open for business). The Company and, by its signature below, the Medical Group hereby acknowledge that HCFP's performance in accordance with the foregoing instructions is subject to the terms and conditions of the Loan Agreement with respect to the extension of credit to the Company by HCFP. In addition to the foregoing, HCFP agrees (by its countersignature hereto) to deliver to the Medical Group a copy South Texas Spinal Clinic, P.A. April 30, 1997 Page 2 of any notice of default under the Loan Agreement (a "Default Notice") sent by HCFP to the Company. HCFP's obligation set forth in the preceding sentence shall in no event serve to modify the obligations of the Company or the rights of HCFP under the Loan Agreement. The parties hereto acknowledge that in the event the Medical Group receives a Default Notice from HCFP or does not receive the Semi-Monthly Draw on the applicable Draw Date, the Medical Group shall have the right (to be exercised in its sole discretion) to terminate the Management Services Agreement by written notice to the Company (with a copy to HCFP), which notice must be delivered no later than 15 days prior to the Termination Date (as hereinafter defined). Such termination shall be effective as of the date (the "Termination Date") that is 30 days after the last Draw Date on which the Medical Group received its Draw. In the event of such termination, the Company's rights set forth in Section 3.19(a) of the Management Services Agreement with respect to any Accounts generated after the Termination Date shall be revoked. South Texas Spinal Clinic, P.A. April 30, 1997 Page 2 If the foregoing meets with your approval, please sign this letter in the space provided below and return a copy of this letter to me via facsimile and the original via regular mail. Very truly yours, Bone, Muscle and Joint, Inc. By: -------------------------------- David H. Fater Executive Vice President and Chief Financial Officer Acknowledged and Agreed to by each of the following: HCFP Funding, Inc. By: ----------------------------- Name: Title: Address for Notices: 2 Wisconsin Circle Suite 320 Chevy Chase, Maryland 20815 South Texas Spinal Clinic, P.A. By: ----------------------------- Dr. Gilbert Meadows, M.D. President Address for Notices: 7614 Louis Pasteur Suite 300 San Antonio, Texas 78229 EX-23.2 19 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our reports as follows in Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-35759) and related Prospectus of BMJ Medical Management, Inc. dated November 6, 1997. Report on Finacial Statements Date of Report - -------------------------------------------------------------------------------- BMJ Medical Management, Inc. June 4, 1997 Orthopaedic Associates of Bethlehem, Inc. May 28, 1997, except for Note 13, as to which the date is August 14, 1997 Southern California Orthopedic Institute Medical May 23, 1997 Group, a California General Partnership South Texas Spinal Clinic, P.A. June 5, 1997 Tri-City Orthopedic Surgery Medical Group, Inc. May 17, 1997 Lauderdale Orthopaedic Surgeons May 21, 1997 Fishman and Stashak, M.D.'s, P.A. d/b/a/ Gold Coast July 9, 1997 Orthopedics Sun Valley Orthopaedic Surgeons, an Arizona General July 18, 1997 Partnerahip Orthopaedic Surgery Associates, P.A. October 10, 1997 Broward Institute of Orthopaedic Specialties, P.A. September 5, 1997 /s/ Ernst & Young LLP West Palm Beach, Florida November 6, 1997 -----END PRIVACY-ENHANCED MESSAGE-----