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
Xxxxxxxx....................................................................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 Xxxxxxx X. Xxxx, 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:
0000 Xxxxxx Xxxx
Xxxxxxxxx, Xxxxxxxxxx 00000
-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 xxxx
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 xxxx patients, xxxx and submit claims to third party payors,
perform appropriate coding for
-12-
each xxxx, 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) Xxxx 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 Xxxxxxxx, 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
Xxxxxxxx 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 Xxxxxxxx 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) "Xxxxxxxx" 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 Xxxxxxxx,
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; Xx. Xxxx'x collections for
services rendered in connection with his professional
practice in La Jolla, California; Xx. Xxxxxxxx'x
collections for services rendered at the IMC
occupational medicine clinic; or Xx. Xxxxxxx'x
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 xxxxxxxx, 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 Xxxxx X. Xxxx, M.D. and Xxxxx X.
Xxxxxxxx, 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) Xxxxxxxx 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) Xxxxxxxx
(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 Xxxxxx Xxxxxx,
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 Xxxxxx Xxxxxx,
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 Xxxxxx Xxxxxx, 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 Xx. Xxxxxx 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. Xxxxxx Xxxxxx, 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.
0000 Xxxxx Xxxxxxx Xxxxxxx, Xxxxx 000X
Xxxx Xxxxx, Xxxxxxx 00000
Attention: Xxxxxx Xxxxxx, M.D., President
with a copy to:
Bone, Muscle and Joint, Inc.
00000 Xxxxxxx Xxxxxxxxx, Xxxxx 000
Xxxxxxx Xxxx, Xxxxxxxxxx 00000
Attention: Xxxxx Xxxxx, Vice President, Western Region
and to:
Xxxxxxx and Xxxxxx Law Corporation
1900 Avenue of the Stars, Xxxxx 0000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxxx X. Xxxxxxx, Esq.
If to the Medical Group:
Tri-City Orthopaedic Surgery
Medical Group, Inc.
0000 Xxxxxx Xxxx
Xxxxxxxxx, Xxxxxxxxxx 00000
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/Xxxxx X. Xxxx
---------------------------------------
Xxxxx X. Xxxx, M.D., President
BONE, MUSCLE AND JOINT, INC.
By: /s/Xxxxxx Xxxxxx
---------------------------------------
Xxxxxx Xxxxxx, M.D., President
and Chief Executive Officer
ACCEPTED AND AGREED AS TO
SECTION 12.4
INDEMNIFYING PERSONS
/s/XXXXXXX XXXXXXX
--------------------------------
XXXXXXX XXXXXXX, M.D.
/s/XXXXX X. XXXX
--------------------------------
XXXXX X. XXXX, M.D.
/s/XXXXX X. XXXXXXXX
--------------------------------
XXXXX X. XXXXXXXX, M.D.
/s/XXXXXX XXXX
--------------------------------
XXXXXX XXXX, M.D.
/s/XXXXXXX X. XXXX
--------------------------------
XXXXXXX X. XXXX, M.D.
/s/XXXXXXX X. XXXXXXX
--------------------------------
XXXXXXX X. XXXXXXX, M.D.
/s/XXXXX XXXXX
--------------------------------
XXXXX XXXXX, M.D.
[Signatures Continued]
-77-
ACCEPTED AND AGREED
AS TO SECTION 16.6
/s/XXXXXX XXXXXX
----------------------------------------
XXXXXX XXXXXX, M.D.
DELPHI VENTURES III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/Xxxxxx X. Xxxxxxx
------------------------------------
Xxxxxx X. Xxxxxxx, Managing Member
DELPHI BIOINVESTMENTS III, L.P.
By: DELPHI MANAGEMENT PARTNERS
III, L.L.C., its General Partner
By: /s/Xxxxxx X. Xxxxxxx
------------------------------------
Xxxxxx X. Xxxxxxx, Managing Member
OAK INVESTMENT PARTNERS VI, LIMITED
PARTNERSHIP
By: OAK ASSOCIATES VI, LIMITED
PARTNERSHIP, its General Partner
By: /s/Xxx X. Xxxxxx
------------------------------------
Xxx X. Xxxxxx, Managing Partner
OAK VI AFFILIATES FUND,
LIMITED PARTNERSHIP
By: OAK VI AFFILIATES, LLC,
its General Partner
By: /s/Xxx X. Xxxxxx
------------------------------------
Xxx X. Xxxxxx, 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/ Xxxxx X. Xxxx, MD
-----------------------------------
Xxxxx X. Xxxx, M.D., President
BONE, MUSCLE AND JOINT, INC.
By:
-----------------------------------
Xxxxxx Xxxxxx, M.D., President
and Chief Executive Officer
4
