SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
(which will hereafter change its name to
MedCath Physician Management, Inc.
d/b/a Pima Heart Management)
June 30, 1997
TABLE OF CONTENTS
TO THE
SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
JUNE 30, 1997
Page
ARTICLE I RELATIONSHIP OF THE PARTIES.........................................1
SECTION 1.1 Independent Relationship................................1
SECTION 1.2 Responsibilities of the Parties.........................2
SECTION 1.3 Patient Referrals.......................................2
SECTION 1.4 Independence of Practice................................2
ARTICLE II DEFINITIONS............. ..........................................3
ARTICLE III FACILITIES TO BE PROVIDED BY MANAGER..............................7
SECTION 3.1 Facilities..............................................7
ARTICLE IV DUTIES OF THE POLICY BOARD.........................................8
SECTION 4.1 Formation and Operation of the Policy Board.............8
SECTION 4.2 Duties and Responsibilities of the Policy Board.........8
ARTICLE V ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER...................9
SECTION 5.1 Performance of Management Functions.....................9
SECTION 5.2 Financial Planning Goals...............................10
SECTION 5.3 Audits and Statements..................................11
SECTION 5.4 Inventory and Supplies.................................11
SECTION 5.5 Management Services and Administration.................12
SECTION 5.6 Executive Director.....................................16
SECTION 5.7 Personnel..............................................16
SECTION 5.8 Events Excusing Performance............................17
SECTION 5.9 Compliance with Applicable Laws........................17
SECTION 5.10 Quality Assurance.....................................17
SECTION 5.11 Ancillary Services....................................17
ARTICLE VI OBLIGATIONS OF PRACTICE...........................................17
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SECTION 6.1 Professional Services..................................17
SECTION 6.2 Medical Practice.......................................18
SECTION 6.3 Physician Employees....................................18
SECTION 6.4 Professional Insurance Eligibility.....................19
SECTION 6.5 Fees for Professional Services.........................19
SECTION 6.6 Name. .................................................19
SECTION 6.7 Material Decisions.....................................19
SECTION 6.8 Employment of Physician Shareholders...................20
SECTION 6.9 Life Insurance.........................................21
SECTION 6.10 Profit Sharing Plan...................................21
ARTICLE VII RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES.....................23
SECTION 7.1 Restrictive Covenants by Practice......................23
SECTION 7.2 Restrictive Covenants By Current Physician
Shareholders and Physician Employees...................23
SECTION 7.3 Restrictive Covenants by Future Physician Employees....24
SECTION 7.4 Physician Shareholder and Physician Employee
Liquidated Damages.....................................25
SECTION 7.5 Development of Exclusive Ventures......................25
SECTION 7.6 Restrictive Covenants by Manager.......................26
SECTION 7.7 Enforcement............................................26
ARTICLE VIII FINANCIAL ARRANGEMENTS..........................................27
SECTION 8.1 Management Fees........................................27
SECTION 8.2 Collection of Management Fee...........................27
SECTION 8.3 Limited Guaranty Agreement.............................28
SECTION 8.4 Fees Due from New Physicians...........................28
SECTION 8.5 Amounts Due Physician Shareholder Upon Retirement......28
ARTICLE IX RECORDS...........................................................28
SECTION 9.1 Patient Records........................................28
SECTION 9.2 Records Owned by Manager...............................29
SECTION 9.3 Access to Records......................................29
ARTICLE X INSURANCE AND INDEMNITY............................................29
SECTION 10.1 Insurance to be Maintained by Practice................29
SECTION 10.2 Insurance to be Maintained by Manager.................29
SECTION 10.3 Tail Insurance Coverage...............................29
SECTION 10.4 Additional Insureds...................................30
SECTION 10.5 Indemnification.......................................30
SECTION 10.6 Rules Regarding Indemnification.......................30
SECTION 10.7 Offset ...............................................31
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ARTICLE XI TERM AND TERMINATION .............................................31
SECTION 11.1 Term of Agreement.....................................31
SECTION 11.2 Extended Term.........................................32
SECTION 11.3 Termination by Practice...............................32
SECTION 11.4 Termination by Manager................................33
SECTION 11.5 Actions after Termination.............................33
SECTION 11.6 Closing of Repurchase by Practice and
Effective Date of Termination.........................34
ARTICLE XII GENERAL PROVISIONS...............................................35
SECTION 12.1 Assignment............................................35
SECTION 12.2 Whole Agreement, Modification.........................35
SECTION 12.3 Notices...............................................35
SECTION 12.4 Binding on Successors.................................36
SECTION 12.5 Waiver of Provisions..................................36
SECTION 12.6 Governing Law.........................................36
SECTION 12.7 Severability..........................................36
SECTION 12.8 Additional Documents..................................36
SECTION 12.9 Attorneys' Fees.......................................37
SECTION 12.10 Time is of the Essence...............................37
SECTION 12.11 Confidentiality......................................37
SECTION 12.12 Contract Modifications for Prospective
Legal Events.........................................37
SECTION 12.13 Remedies Cumulative; Survivability...................38
SECTION 12.14 Language Construction................................38
SECTION 12.15 No Obligation to Third Parties.......................38
SECTION 12.16 Communications.......................................38
SECTION 12.17 Counterpart Executions; Facsimiles...................38
SECTION 12.18 Arbitration..........................................39
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SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the 30th day of June,
1997 by and between PIMA HEART ASSOCIATES, P.C., an Arizona corporation (which
will hereafter change its name to MedCath Physician Management, Inc., d/b/a Pima
Heart Management) ("Manager") and PIMA HEART PHYSICIANS, P.C., an Arizona
professional corporation ("Practice"), is binding upon execution and shall be
effective as of the Closing Date (as defined in the Share Exchange Agreement).
RECITALS:
WHEREAS, Practice is a group medical practice with offices in Tucson,
Arizona which provides medical care to the general public;
WHEREAS, Manager is in the business of owning certain assets of and
managing and administering medical clinics, and providing support services to
and furnishing medical practices with the necessary facilities, equipment,
personnel, supplies and support staff while recognizing that each such practice,
through its physicians, must retain sole responsibility for the medical care of
its patients and thereby respecting the physician-patient relationship which
shall be maintained strictly between the physicians of such a practice and their
patients; and
WHEREAS, Practice desires to obtain the services of Manager in performing
such management functions so as to permit the physicians of Practice to devote
their efforts on a concentrated and continuous basis to the rendering of medical
services to their patients;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice hereby agrees to purchase the management and support
services herein described and Manager agrees to provide such services on the
terms and conditions provided in this Agreement.
ARTICLE I
RELATIONSHIP OF THE PARTIES
SECTION 1.1 Independent Relationship.
Practice and Manager intend to act and perform as independent contractors,
and the provisions hereof shall not create any partnership, joint venture,
agency or employment relationship between the parties. Notwithstanding the
authority granted to Manager herein, Manager and Practice agree that Practice
shall retain the authority to direct the medical, professional, and ethical
aspects of Practice's medical practice. Each party shall be solely responsible
for and shall comply with all state and federal laws applicable to that party
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes.
SECTION 1.2 Responsibilities of the Parties.
1.2.1 As more specifically set forth herein, Manager shall serve in a
fiduciary capacity and shall provide Practice with offices and facilities,
equipment, supplies, support personnel, and management and financial advisory
services.
1.2.2 Manager's tax preparation, tax planning and other business matters
relating solely to Manager shall remain the sole responsibility of Manager.
1.2.3 As more specifically set forth herein, Practice shall be responsible
for the recruitment and hiring of physicians and the medical, professional and
ethical aspects of the Practice. Manager shall neither exercise control over nor
interfere with the physician-patient relationship or the medical decision-making
process, all of which shall be maintained strictly between the physicians of
Practice and their patients.
1.2.4 With respect to the Practice, except as specifically provided herein,
tax preparation, tax planning, physician compensation, employee benefits
(pension, welfare, and fringe), and investment planning (and expenses relating
solely to these internal business matters) for the Practice and individual
Physician Shareholders shall remain the sole responsibility of Practice and the
individual Physician Shareholders.
SECTION 1.3 Patient Referrals.
1.3.1 The parties agree that the performance of Manager's obligations to
Practice hereunder are not predicated upon, do not require, are not payment for,
and are not in any way contingent upon the admission, referral or any other
arrangement for the provision of any item or service offered by Manager to any
of Practice's patients in any facility or laboratory controlled, managed or
operated by Manager or Manager's affiliates.
1.3.2 The parties agree that the performance of Practices' obligations to
Manager hereunder are not predicated upon, do not require, are not payment for,
and are not in any way contingent upon the admission, referral or any other
arrangement for the provision of any item or service offered by Practice to
patients in any facility or laboratory controlled, managed or operated by
Practice, Manager or their affiliates.
SECTION 1.4 Independence of Practice.
Manager and Practice agree that Practice, as an independent
contractor, is a separate organization that retains the authority to direct the
medical, professional, and ethical aspects of its medical practice, including
but not limited to physician-patient relationships and medical decisions.
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ARTICLE II
DEFINITIONS
Many of the capitalized words and phrases used in this Agreement are
defined below. Some defined terms used in this Agreement are not listed below,
but are defined in the Section in which they are first used because they are
better understood in that context.
2.1 "Adjustments" means any adjustments for uncollectible accounts,
contractual adjustments, discounts, Medicare, and Medicaid disallowances,
worker's compensation, employee/dependent health care benefit programs,
professional courtesies extended in conformity with the historical customs
of Practice and other activities that do not generate a collectible fee by
Practice.
2.2 "Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control
with such Person, (ii) any Person directly or indirectly owning or
controlling twenty five percent (25%) or more of any class of outstanding
voting equity interests of such Person or of any Person which such Person
directly or indirectly owns or controls twenty five percent (25%) or more
of any class of voting equity interests, (iii) any officer, director,
general partner or trustee of such Person, or any Person of which such
Person is an officer, director, general partner or trustee, or (iv) any
Person who is an officer, director, general partner, trustee or holder of
twenty five percent (25%) or more of the voting equity interests of any
Person described in clauses (i) through (iii) of this sentence. Practice
and Manager are not Affiliates.
2.3 "Agreement" means this Service Agreement between Practice and
Manager.
2.4 "Ancillary Revenues" means (a) all fees or revenues actually
recorded each month by or on behalf of Practice which are not Physician
Services Revenues or Capitation Revenues, or revenues from sources
expressly set forth on Schedule 7.1 attached hereto plus (b) revenues from
capitation allocated to Ancillary Revenues which are not otherwise included
in Capitation Revenues or Physician Services Revenues.
2.5 "Capitation Revenues" means all revenue, from managed care
organizations or other payors when payment is made periodically on a per
member basis for the partial or total medical care needs of a patient plus
related patient co-payments made by such patients and all incentive bonuses
including those from HMO's, hospitals and others related to the foregoing.
2.6 "Executive Director" means that individual hired by Manager
pursuant to Section 5.6 hereof to manage all of the day-to-day
administrative, operating and business functions of Practice.
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2.7 "GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination. For
purposes of this Agreement, GAAP shall be applied in a manner consistent
with the historic practices used by Parent.
2.8 "Manager Account" means the bank account of Manager described in
Section 5.5.2(ii).
2.9 "Manager Expenses" means, in addition to those expenses identified
elsewhere herein, all operating and non-operating expenses of Manager
directly incurred in the operation of Practice, including, without
limitation:
(i) Salaries, employee and fringe benefits (except as otherwise
provided in Section 6.10), and other direct costs of all employees of
Manager working exclusively at the Practice;
(ii) Direct costs of all employees or consultants of Manager
(including Affiliates of Manager) or Practice engaged by the Executive
Director with Policy Board approval, which approval shall not be
unreasonably withheld, to provide services at or in connection with
Practice; provided, however, only that portion of such employee's or
consultant's costs without xxxx-up by Manager for any reason,
including, but not limited to, overhead expenses of Parent or Manager,
that is allocable to work performed at or for the benefit of Practice
will be a Manager Expense;
(iii) Obligations of Manager under leases or subleases directly
relating to the operation of Practice;
(iv) Personal property and intangible taxes assessed against
Manager's assets utilized solely in the management of Practice,
commencing on the date of this Agreement;
(v) The amount of interest on all advances made by Manager to
provide financing or working capital to cover Manager Expenses,
Physician Expenses, Practice Surplus and the Management Fee (interest
expense will be charged for funds borrowed from outside sources as
well as from Manager; in the latter case, interest charges will be
computed at a floating rate that is equal to the prime rate of
interest charged by NationsBank, or its successor, plus one-half (1/2)
percentage point) per annum;
4
(vi) Malpractice insurance expenses to the extent provided in
Article X hereof;
(vii) Other expenses incurred by Manager in carrying out its
obligations under this Agreement in accordance with the budget
adopted, or otherwise approved, by the Policy Board;
(viii) Payment of interest on indebtedness incurred by Manager or
its Affiliates for the direct and sole use or benefit of Practice; and
(ix) Amortization or depreciation or write-off of assets acquired
by Manager for the sale, use and direct benefit of Practice to the
extent the Practice has not already been charged for the principal
amount of such assets.
The term "Manager Expenses" shall not include and the following expenses
shall be paid by Manager without any contribution by Practice (A) any corporate
overhead charges, other than the kind of items listed above, of Parent or
Manager; (B) any federal or state income taxes of Manager; and (C) any expenses
which are expressly designated herein as Physician Expenses which are expenses
or responsibilities directly of Practice.
2.10 "Net Practice Revenues" means the sum of Ancillary Revenues,
Capitation Revenues and Physician Services Revenues, provided however,
notwithstanding anything herein to the contrary, revenues from the sources
expressly set forth on Schedule 7.1 shall not be included in Net Practice
Revenues.
2.11 "Operating Account" means the bank account of Practice established as
described in Section 5.5.2.
2.12 "Parent" means MedCath Incorporated, the sole shareholder of Manager.
2.13 "Patient Records" means all personal, medical and other information
collected or maintained by Practice or Manager related to or regarding the care
or treatment of or provision of services to a patient.
2.14 "Person" means any natural person, partnership, trust, estate,
association, limited liability company, corporation, custodian, nominee,
governmental instrumentality or agency, body politic or any other entity in its
own or any representative capacity.
2.15 "Physician Employees" means those individuals who are employees of
Practice who, under applicable rules or regulations, should remain as employees
thereof (rather than become employed by Manager) in order for the Practice to
maximize its third party reimbursement for the services of such employees.
2.16 "Physician Expenses" means interest on debts of Practice approved by
the Policy Board (exclusive however of principal and interest due with respect
to the Bank
5
Loan) and Professional Compensation paid by Practice as set forth in Section 6.3
and paid by Practice to, independent contractors providing professional services
for or on behalf of the Practice, exclusive in all events, however, of
Professional Compensation paid by Practice with respect to any Physician
Shareholder. It is acknowledged and agreed, however, that the following expenses
to the extent not provided otherwise in Section 6.10(f) (collectively, "Extra
Expenses") shall not constitute Physician Expenses and shall instead by paid by
the Physician Shareholders out of Practice Surplus: (i) all contributions
allocable to any participant under any pension or profit-sharing plan qualified
under Section 401(a) of the Code sponsored or maintained by the Practice to the
extent provided in Section 6.10; (ii) all costs relating to sponsoring,
maintaining, and operating any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit program,
sponsored or maintained by the Practice to the extent provided in Section 6.10;
(iii) all administrative expenses incurred by the Practice in sponsoring,
maintaining, and operating any plan, program, or arrangement as set forth above
in (i) or (ii) to the extent provided in Section 6.10; (iv) expenses of the
Practice listed on Schedule 2.16; (v) all accounts payable of Pima Heart
Associates, P.C. in excess of $30,000.00 and arising prior to the Closing Date
as set forth in Section 5.06 of the Share Exchange Agreement; and (vi) the
accrued pension plan contributions in an amount of at least $135,921.00 as shown
on Schedule 5.06 to the Share Exchange Agreement.
2.17 "Physician Services Revenues" means (a) all fees actually recorded
each month (net of related Adjustments), by or on behalf of Practice as a result
of professional medical services personally furnished to patients by Physician
Employees and other fees or income generated in their capacity as professionals
whether rendered in an inpatient or outpatient setting, relating to the term of
this Agreement excluding however revenue from those sources expressly listed on
Schedule 7.1, plus (b) revenues from capitation allocated to Physician Services
Revenues which are not otherwise included in Capitation Revenues or Ancillary
Revenues.
2.18 "Physician Shareholders" means those physicians who are shareholders
of Practice.
2.19 "Policy Board" means the board composed of members as established
pursuant to Section 4.1.
2.20 "Practice Account" means the bank account of Practice established as
described in Section 5.5.2(ii).
2.21 "Practice Surplus" means an amount equal to (a) Net Practice Revenue
minus Manager Expenses minus Physician Expenses for the applicable period,
multiplied by (b) [ ]%. For purposes of calculating Practice Surplus,
amounts collected after the date hereof which arose from services performed
prior to the effective date of this Agreement shall be included in Practice
Surplus and shall not be subject to the Management Fee. It is acknowledged and
agreed that principal and interest due with
[ ] These portions have been omitted and filed separately with the Commission
pursuant to request for confidential treatment.
6
respect to the Bank Loan as well as payment of the Extra Expenses
shall be paid by the Physician Shareholders from Practice Surplus.
2.22 "Professional Compensation" means salary and wages, employee
and fringe benefits (except as otherwise provided in Section 6.10),
and related expenses and taxes involving certain licensed health care
personnel, all as further set forth in Section 6.3.1. Professional
Compensation due to Physician Shareholders shall be paid solely from
Practice Surplus.
2.23 "Related Party" means (a) with respect to any individual,
such individual's spouse, any descendants (whether natural, adopted or
in the process of adoption), any sibling, a spouse of any descendant
or sibling, any ancestor, any trust twenty-five percent (25%) or more
of the beneficial interests of which are owned by such individuals or
any of them, and any corporation, association, partnership or limited
liability company twenty-five (25%) or more of the equity interests of
which are owned by those above-described individuals or trusts, (b)
with respect to any trust, the owners of twenty-five (25%) or more of
the beneficial interests of such trust, and (c) with respect to any
corporation, association, partnership or limited liability company,
the owners of twenty-five percent (25%) or more of the outstanding
equity interests in such entity.
2.24 "Share Exchange Agreement" means that Share Exchange
Agreement between Practice and Parent to which this Agreement is an
exhibit.
2.25 "Territory" means the geographic region described in
Schedule 2.25.
ARTICLE III
FACILITIES TO BE PROVIDED BY MANAGER
SECTION 3.1 Facilities.
Upon the effective date of this Agreement, Manager hereby agrees to provide
the offices and facilities more fully described in Exhibit 3.1 hereto to
Practice. Manager shall be responsible for all occupancy expenses, including but
not limited to, all costs of repairs, maintenance and improvements, utility
(telephone, electric, gas, water) expenses, normal janitorial services, refuse
disposal and all other costs and expenses reasonably incurred in conducting the
operation of Practice during the term of this Agreement, including, but not
limited to, related real or personal property lease cost payments and expenses,
taxes and insurance. All such costs and expenses shall be Manager Expenses.
Nothing contained herein is intended to require Manager to provide the foregoing
services if such services are required to be provided by the landlord under a
lease for a specific property, including leases under which Practice or an
Affiliate of Practice is the landlord. Manager shall consult with Practice
regarding the condition, suitability, use and need for offices, facilities and
improvements. The Policy Board shall determine any changes to the office and
facility locations of Practice.
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ARTICLE IV
DUTIES OF THE POLICY BOARD
SECTION 4.1 Formation and Operation of the Policy Board.
The parties shall establish a Policy Board which shall be responsible for
developing management and for administrative policies for the overall operation
of Practice. The Policy Board shall consist of five (5) members. Manager shall
designate, in its sole discretion, one (1) member of the Policy Board and
Practice shall designate, in its sole discretion, four (4) members of the Policy
Board. Except as may otherwise be provided, the act of a majority of the members
of the Policy Board shall be the act of the Policy Board.
SECTION 4.2 Duties and Responsibilities of the Policy Board.
The Policy Board shall have the following duties and obligations:
4.2.1 Capital Improvements and Expansion.
Any renovation and expansion plans and capital equipment expenditures
and the financing thereof with respect to Practice shall be reviewed and
approved by the Policy Board and shall be based upon economic feasibility,
physician support, productivity and then current market conditions. If
Manager agrees to loan money to the Practice specifically for such
expansion or capital equipment, then Manager shall have the right to
approve of such decisions.
4.2.2 Annual Budgets. All annual capital and operating budgets
prepared by Manager, as set forth in Section 5.2, shall be subject to the
review, modification and approval of the Policy Board, and to final
approval of Practice.
4.2.3 Advertising. All advertising and other marketing of the services
performed at Practice, other than advertising or marketing programs
historically implemented by Practice within the budget approved by the
Policy Board shall be subject to the prior review and approval of the
Policy Board and final approval of Practice.
4.2.4 Patient Fees. As a part of the annual operating budget, in
consultation with Practice and Manager, the Policy Board shall review and
adopt the fee schedule for all physician and ancillary services rendered by
Practice subject to final approval of Practice.
4.2.5 Ancillary Services. The Policy Board shall approve Practice
provided ancillary services based upon the pricing, access to and quality
of such services.
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4.2.6 Provider and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health
care providers and payors and approval of managed care contracts shall be
made by the Policy Board in consultation with Practice.
4.2.7 Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives for presentation to, and approval by, the
Practice.
4.2.8 Financing. All loans, leases and other financing obtained or
proposed to be obtained for the benefit of Practice for any reason shall be
subject to the review and approval of the Policy Board.
4.2.9 Physician Hiring. The Policy Board shall determine the number
and type of physicians required for the efficient operation of Practice,
provided Practice shall have the final authority over physician hiring and
termination and engage in such hiring and termination without Policy Board
approval. The approval of the Policy Board shall be required for any
variations to, or any exceptions from, the restrictive covenants which must
be included in any physician employment contract in conformance with
Article VII hereof.
4.2.10 Executive Director. The selection and retention of the
Executive Director pursuant to Section 5.6 by Manager shall be subject to
the reasonable approval of the Policy Board. If Practice is dissatisfied
with the services provided by the Executive Director, Practice shall refer
the matter to the Policy Board. Manager and the Policy Board shall each in
good faith determine whether the performance of the Executive Director
could be brought to acceptable levels through counsel and assistance, or
whether the Executive Director should be terminated. Manager shall have the
ultimate authority to terminate the Executive Director.
4.2.11 Grievance Referrals. The Policy Board shall consider and make
final decisions regarding grievances pertaining to matters not specifically
addressed in this Agreement as referred to it by Practice's governing body.
ARTICLE V
ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER
SECTION 5.1 Performance of Management Functions.
Beginning with the effective date of this Agreement, Manager shall, as a
fiduciary of the Practice, provide or arrange for the services set forth in this
Article V and otherwise as set forth in this Agreement, the cost of all of which
shall be included in Manager Expenses. Manager is hereby expressly authorized to
perform its services hereunder in whatever manner it deems reasonably
appropriate to meet the day-to-day requirements of Practice operations in
accordance
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with the decisions of the Policy Board, including, without limitation,
performance of some of the business office functions at locations other than
Practice. Practice will not act in a manner which would prevent Manager from
efficiently managing the day-to-day operations of Practice in a business-like
manner. Notwithstanding the foregoing, Manager may not assign its obligations
hereunder or contract with a third party for the performance of substantially
all of its obligations hereunder except as expressly permitted by Section 12.1
below.
SECTION 5.2 Financial Planning Goals.
5.2.1 Preparation of Budgets. Annually and at least thirty (30) days
prior to the commencement of each fiscal year of Practice, Manager shall
prepare and deliver to the Policy Board for its review, modification and
approval an operational and capital budget for such fiscal year ("Annual
Budget"), setting forth an estimate of the operating revenues and expenses
associated with the provision of professional services by Practice
(including, without limitation, all costs associated with the premises used
by Practice, equipment, supplies, services, and personnel provided by
Manager to Practice pursuant to this Agreement, and all compensation costs
associated with Practice and Practice personnel) and sources and uses of
capital expenditures. Such budget shall separately address Physician
Expenses, Manager Expenses, Practice Surplus, and Capital Expenditures.
Manager Expenses shall be in line with historical expenses of Practice and
shall be reasonable and customary for Practice and shall include reasonable
reserves for the repayment of principal on all borrowings of Practice. Any
non-budgeted expenses shall be reviewed and approved by the Policy Board.
Any such non-budgeted expense in excess of $5,000 per year undertaken by
Practice without approval by the Policy Board (except for emergency
circumstances necessary to permit Practice to function to fulfill its
patient responsibilities) shall be deducted from Practice Surplus. Manager
shall use its best efforts to perform its duties and obligations under this
Agreement such that the actual revenues, costs, and expenses associated
with the provision of professional services during any applicable period of
Practice's fiscal year shall be consistent with and within the limits
established by the Annual Budget. Manager shall prepare and submit to the
Policy Board for its review, modification and approval, and the Policy
Board shall thereafter adopt, an Annual Budget for the current fiscal year
as soon as practicable. Manager shall specify the targeted profit margin
for Practice which shall be reflected in the Annual Budget. In the event
that the Policy Board does not approve any such Annual Budget, then the
Annual Budget for the previous year shall be used until the Policy Board,
using its best efforts, approves a new Annual Budget.
5.2.2 Service Development. Manager realizes that Practice has
opportunities to provide new services and utilize new technologies that
will require capital expenditures and Manager anticipates that such
opportunities may include new and replacement equipment as may be
economically justified and medically necessary. Development of new services
will depend on, among other factors, physician composition, anticipated
volume, reimbursement and number of physicians, physician support, Practice
performance, and appropriate physician specialty mix, be subject to the
requirements of
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any applicable leases and subleases, and will require Policy Board approval
as a precondition to any capital expenditure.
5.2.3 Capital Investment. Subject to the terms hereof, Manager shall
be responsible for obtaining loans to fund all capital expenditures
approved by the Policy Board. Sources of capital, including working
capital, for such funds shall be determined by the Policy Board and may be
(i) borrowings from Manager or its Affiliates (at the rate set forth in
Article II at subparagraph (v) of the definition of Manager Expenses) all
of which loans from Manager or its Affiliates are subject to the Manager's
approval or (ii) borrowings, leases or other financing methods through
independent third-party financial institutions in accordance with Section
4.2(h) hereof which Manager may use its commercially reasonable best
efforts to obtain. It is acknowledged and agreed that the payment of
interest on any such indebtedness shall constitute Manager Expenses.
Manager shall use reasonable efforts to make funds available for borrowing
by Practice but Manager assumes no obligation to itself loan the funds to
Practice.
In the event Practice obtains a commitment for financing a particular
project or capital expenditure at a rate less than that obtained or charged
by Manager hereunder, and on other terms no less favorable than those
obtained by or available to Manager, and the Policy Board approves such
alternate financing, the project will be financed with such alternate
financing or the excess interest of the financing obtained or provided by
Manager will not be charged to the Practice as a Manager Expense or other
expense.
SECTION 5.3 Audits and Statements.
Manager shall cause annual financial statements for the operation of
Practice to be prepared and Manager shall cause the financial statements of
Manager to be included in the audited financial statements of Parent by a
certified public accountant selected by Manager in connection with the audit of
the financial statements of Parent. Manager shall cause a copy of the financial
statements of Manager to be delivered to Practice for its examination. All
financial statements shall be prepared in accordance with GAAP on a consistent
basis and the cost thereof shall be a Manager Expense. Manager shall prepare
monthly unaudited financial statements containing a balance sheet and statements
of income from Practice operations, which shall be delivered to Practice within
thirty (30) days after the close of each calendar month. In addition, Practice
shall be solely responsible for the cost of the preparation and any audit of the
financial statements or tax returns of Practice. Upon the request of Practice,
Manager shall provide Practice with a detailed listing of all Manager Expenses.
SECTION 5.4 Inventory and Supplies.
Manager shall order and purchase inventory and supplies, and such other
ordinary, necessary or appropriate materials of a quality consistent with the
past customary course of conduct and manner of operating Practice, the cost of
which shall be a Manager Expense. Returns and credits shall reduce Manager
Expense. The Policy Board may periodically review
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Manager's past purchases of inventory and supplies, and cause Manager to change
the amount and type of purchase in the future. Manager shall use reasonable
efforts to obtain the best price possible for inventory and supplies and shall
work with Parent to obtain volume discounts.
SECTION 5.5 Management Services and Administration.
5.5.1 Practice hereby appoints Manager as its sole and exclusive
manager and administrator of all day-to-day business functions and Manager
hereby accepts such appointment subject to the terms of this Agreement. The
purpose and intent of this Service Agreement is to relieve the Physician
Employees to the maximum extent possible of the administrative, accounting,
personnel and business aspects of the medical practice; Manager assumes
responsibility and is delegated all necessary authority to perform these
functions in accordance with the general standards approved by the Policy
Board. Manager agrees that Practice and only Practice will perform or have
authority with respect to the medical functions of its medical practice.
Manager will have no authority, directly or indirectly, to perform or
direct or control the performance of any medical functions. Manager may,
however, advise Practice as to the relationship between its performance of
medical functions and the overall administrative and business functioning
of its medical practice. All clinical personnel performing patient care
services shall be subject to the professional direction and supervision of
Practice in the performance of medical functions and shall not be subject
to any direction or control by, or liability, to, Manager, except as may be
specifically authorized by Practice.
5.5.2 (i) Manager shall, in compliance with all applicable state and
federal rules and regulations and on behalf of Practice, xxxx patients and
collect the professional fees for medical and other services rendered or
performed by Practice and by its Physician Employees. Practice hereby
appoints Manager for the term hereof to be its true and lawful
attorney-in-fact, for the following purposes: (A) to xxxx patients in
Practice's name and on its behalf; (B) to collect accounts receivable
resulting from such billing in Practice's name and on its behalf; (C) to
receive payments and prepayments from Blue Shield, insurance companies,
from health care plans, Medicare, Medicaid and all other third party
payors; (D) to take possession of, endorse in the name of Practice (and/or
in the name of an individual physician providing services on behalf of
Practice), and deposit only in the Practice Account any notes, checks,
money orders, insurance payments and other instruments received in payment
of accounts receivable and/or for professional or other services of
Practice; and (E) to initiate the institution of legal proceedings in the
name of Practice to collect any accounts and monies owed to Practice in
accordance with policies and procedures adopted by the Policy Board, to
enforce the rights of Practice as creditors under any contract or in
connection with the rendering of any service, and to contest adjustments
and denials by governmental agencies (or their fiscal intermediaries) as
third-party payors. All Adjustments shall be made in a reasonable manner
consistent with past customary course of conduct of Practice subject to any
final adjustments required by auditors under Section 5.3 as approved by the
Policy Board.
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(ii) Practice shall establish and control a bank account at a
bank (the "Bank") acceptable to Manager and Practice (the "Practice
Account"). In connection herewith and throughout the term of this
Agreement, Practice hereby appoints Manager as Practice's true and
lawful agent and attorney-in-fact, and grants Manager a special power
of attorney and Manager hereby accepts such special power of attorney
and appointment, to deposit in the Practice Account all funds, fees,
and revenues generated by Practice and collected by Manager. Practice
shall execute any and all additional documents required by the Bank
where the Practice Account is held to effectuate the power of attorney
granted herein. Practice shall not make withdrawals from the Practice
Account. Practice also agrees to establish this account with the Bank
under terms which provide that the balance of the Practice Account at
the close of each working day is transferred to a bank account of
Manager (the "Manager Account") at the same financial institution by
means to be designated by Manager. Practice shall not revoke such
daily transfer to Manager's Account unless Manager is in breach of
this Agreement which breach is not cured within thirty (30) days
following written notice thereof, provided however, if Manager's
breach relates to Manager's failure to pay funds when due to Practice,
Manager shall only have ten (10) days to cure such breach. Manager may
pay from funds in the Manager Account all Manager Expenses and the
Management Fee as provided under the terms of this Agreement. Practice
shall establish a second account in the name of Practice (the
"Operating Account") to which Manager shall be a signatory and to
which Manager shall deposit from time to time out of the Practice
Account or the Manager Account (to the extent available) amounts
sufficient to enable Manager to pay from that account, on behalf of
Practice, Physician Expenses and Practice Surplus to be paid by
Practice as Professional Compensation as provided under the terms of
this Agreement and principal payments on debts of Practice which were
approved by the Policy Board, when such principal repayments are due.
Any interest accruing to the funds transferred to the Manager's
Account shall constitute Net Practice Revenue.
If the balance in the Practice Account after subtraction of
reserves for repayment of debts (to the extent the debts are not then
being repaid) is insufficient to satisfy the obligations and
liabilities of Practice at a particular point in time, disbursements
from the Practice Account shall be made in the following priority:
(A) Payments or deposits of payroll and withholding taxes on
compensation of Practice and other amounts withheld from
Practice;
(B) Payments of interest and principal on debts of Practice
other than the Bank Loan that were approved by the Policy Board
and by Manager to the extent then due;
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(C) Payments of Manager Expenses;
(D) Payments of other Physician Expenses;
(E) Payments of Management Fee attributable to collections
by Practice from physicians pursuant to Section 7.4; and
(F) Pro Rata between the Management Fee (to the extent not
paid pursuant to E above) and Practice Surplus provided that all
Practice Surplus otherwise available to Physician Shareholders
shall instead first be applied towards (1) the repayment of the
principal and interest on Bank Loan and (2) to the repayment of
any advances or loans made by Manager to Practice to pay Manager
Expenses or Practice Expenses prior to the date the Bank Loan is
repaid.
(iii) Manager will use its reasonable efforts to arrange for
a third party commercial lender to provide a working capital line
of credit to Practice if needed, or, subject to Manager's
approval, Manager shall provide such line of credit, to enable
Manager or Practice as provided herein, to pay Manager Expenses,
Physician Expenses, Management Fee and Practice Surplus when due
(subject however to the obligation to repay agreed upon working
capital advances or other third party financing) and in
accordance with the Annual Budget. In the event any such advances
are provided by Manager or any of its Affiliates, such advances
shall bear interest at the "prime rate" plus 1/2% per annum
except as otherwise provided herein. The obligation of Practice
to repay any such advances to Manager or its Affiliates shall be
evidenced by one or more promissory notes and shall be secured in
accordance with the terms of a Security Agreement in a form
proposed by Manager granting a security interest in the
post-effective date accounts receivable of Practice to Manager.
Interest on such advances shall be paid monthly. Prior to making
advances hereunder, the Policy Board and Manager shall agree upon
the term over which such principal amounts shall be repaid to
Manager, including the priority of the utilization of Net
Practice Revenues for the repayment of such loans. In addition,
Practice shall cooperate with Manager and execute all necessary
documents in connection with the pledge of such accounts
receivable either to Manager, Manager's lenders or any other
lender providing such financing to Practice.
5.5.3 Manager shall supervise and, to the extent necessary, maintain
custody of all files and records relating to the operation of Practice,
including but not limited to accounting, billing, patient medical records,
collection records, and personnel records. Patient medical records shall at
all times be and remain the property of Practice and shall be located at
Practice facilities so that they are readily accessible for patient care.
The management of all files and records shall comply with applicable state
and federal statutes. Manager shall use its reasonable efforts consistent
with the past operation of Practice to preserve the confidentiality of
patient medical records and use information contained in such records only
for the limited purpose necessary to perform the services
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set forth herein; provided, however, in no event shall a breach of said
confidentiality be deemed a default under this Agreement. Manager shall at
Practice's request, require confidentiality agreements from Manager's
employees in a form approved by Practice.
5.5.4 Manager shall supply to Practice necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication
services, medical transcribing services and any other ordinary, necessary
or appropriate service for the operation of Practice.
5.5.5 Manager shall provide the data necessary for Practice to prepare
its annual income tax returns and financial statements. Manager personnel
shall continue to provide the preparatory work currently provided by
Practice personnel. Except as provided above, Manager shall have no
responsibility for the preparation of Practice's federal or state income
tax returns or the payment of such income taxes and such costs shall not be
Manager Expenses or Physician Expenses, and shall be borne solely by
Practice. Manager shall permit Practice and its agents to examine and copy
all records relating to the business of Practice including those of Manager
and Parent.
5.5.6 Manager shall assist Practice in recruiting additional
physicians, carrying out such administrative functions as may be
appropriate such as advertising for and identifying potential candidates,
checking credentials, and arranging interviews. Practice shall interview
and make the ultimate decision as to the employment of any physician to
become associated with Practice. Candidate screening and interviewing
procedures shall be consistent with the past operation of Practice or as
otherwise adopted by the Policy Board. All physicians recruited by Manager
and accepted by Practice shall be the sole employees of Practice, to the
extent such physicians are hired as employees. Any expenses incurred in the
recruitment of physicians, including, but not limited to, employment agency
fees, relocation and interviewing expenses shall be budgeted Manager
Expenses. Such expenses shall be pre-approved by the Executive Director.
5.5.7 Subject to Policy Board approval of any proposed contract,
Manager shall, at the Policy Board's request, negotiate and administer all
managed care contracts on behalf of Practice and shall consult with
Practice on all professional or clinical matters relating thereto. At the
discretion of the Policy Board, Manager shall have no involvement in the
negotiation and administration of certain managed care contracts.
5.5.8 Subject to the provisions of Section 5.3, Section 5.5.5(e) and
this Section 5.5.8, Manager shall arrange for legal and accounting services
related to Practice operations, the expense for which has been incurred
traditionally in the ordinary course of business, including the cost of
enforcing any physician contract containing restrictive covenants, but any
cost and all other aspects of malpractice suits against Practice shall be
governed by Article X hereof. Policy Board shall designate the attorneys to
act on behalf of Practice or in its name, unless the Policy Board fails to
actively enforce, or retain and direct its attorneys to enforce, all
noncompetition covenants of the Physician Employees in which event Manager
may retain attorneys for such purpose.
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5.5.9 Manager shall provide for the proper cleanliness of and around
all Practice facilities and for the proper handling and disposal of all
waste generated thereof in compliance with applicable federal and state
regulations, and maintenance and cleanliness of the equipment, furniture
and furnishings located upon such premises.
5.5.10 Manager shall make payment for the cost of professional
licensure fees, board certification fees, medical staff dues, and national
organization fees required to maintain professional licenses, all as
historically paid by Practice in accordance with its past operation and
policies.
5.5.11 Manager shall regularly, and in no event less than monthly,
report to Practice the actual versus budgeted revenues and expenses of
Practice, including an explanation of variances.
SECTION 5.6 Executive Director.
Subject to the provisions of Section 4.2.10, Manager shall hire an
Executive Director to manage and administer all of the day-to-day business
functions of Practice on behalf of Manager and for the benefit of Practice.
Manager shall determine the salary and fringe benefits, of the Executive
Director consistent with the budget adopted by the Policy Board. At the
direction, supervision and control of Manager, the Executive Director, subject
to the terms of this Agreement, shall implement the policies established by the
Policy Board and shall generally perform the duties and have the
responsibilities of a medical practice administrator. The Executive Director
shall be responsible for organizing the agenda for the meetings of the Policy
Board referred to in Article IV.
SECTION 5.7 Personnel.
Manager shall provide non-physician professional support and administrative
personnel, clerical, secretarial, bookkeeping and collection personnel
reasonably necessary for the conduct of Practice operations. Subject to the
Annual Budget, Manager shall determine and cause the salaries and fringe
benefits of all such personnel to be paid. Such personnel shall be under the
direction, supervision and control of Manager, with any such personnel
performing patient care services or having patient contact being subject to the
professional supervision and direction of Practice. Practice shall consult with
Manager if Practice is dissatisfied with the services of any person. Manager
shall in good faith determine whether the performance of that employee could be
brought to acceptable levels through counsel and assistance or whether such
employee should be suspended, reprimanded, or terminated. Practice may hire
directly a director for managed care who shall be an employee of Practice. All
of Manager's obligations regarding staff shall be governed by the overriding
principle and goal of providing high quality medical care consistent with the
past practice of Practice. Employee assignments shall be made to assure
consistent and continued rendering of high quality medical support services and
to ensure prompt availability and accessibility of individual medical support
personnel to physicians in order to develop consistent, familiar and routine
working relationships between individual physicians and
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individual members of the medical support personnel. Manager shall maintain
established working relationships wherever possible and Manager shall make
every effort consistent with sound business practices to honor the specific
requests of Practice with regard to the assignment of its employees.
Manager shall provide administrative services such as scheduling, personnel
policies and payroll administration for Physician Employees. Manager shall
maintain a working environment which complies with all applicable laws,
including rules and regulations providing for employee discipline for
illegal discrimination or harassment of Physician Employees.
SECTION 5.8 Events Excusing Performance.
So long as Manager or Practice uses its commercially reasonable best
efforts, Manager shall not be liable to Practice, and Practice shall not be
liable to Manager, for failure to perform any of the services required herein in
the event of strikes, lockouts, calamities, acts of God, unavailability of
supplies or other events over which neither Manager nor Practice has control for
so long as such events continue, and for a reasonable period of time thereafter,
provided that nothing herein shall relieve the Practice and Physician
Shareholder from their obligations in Section 6.8 or Article VII.
SECTION 5.9 Compliance with Applicable Laws.
Manager shall comply in all material respects with all applicable federal,
state and local laws, regulations and restrictions in performing its obligations
under this Agreement.
SECTION 5.10 Quality Assurance.
Manager shall assist Practice in fulfilling its obligations to its patients
to maintain a high quality of medical and professional services.
SECTION 5.11 Ancillary Services.
Manager shall provide its services hereunder in connection with the
operation of such ancillary services as approved by the Policy Board or as may
be offered or in existence on the effective date hereof.
ARTICLE VI
OBLIGATIONS OF PRACTICE
SECTION 6.1 Professional Services.
Practice shall provide professional services to patients in compliance at
all times with ethical standards, laws and regulations applying to the medical
profession. Practice shall ensure that each of its physicians providing medical
care to patients in the State of Arizona is licensed by the State of Arizona. In
the event that any disciplinary actions or medical malpractice actions
17
are initiated against any such physician, Practice shall immediately inform
Manager of such action and the underlying facts and circumstances. Practice
shall carry out a program to monitor the quality of medical care which it
provides.
SECTION 6.2 Medical Practice.
Manager shall not interfere with the physician-patient relationship between
Practice's physicians and their patients. Practice shall use and occupy the
facilities provided by Manager exclusively for the operation of its Practice,
and shall comply with all applicable local rules, ordinances and all standards
of medical care. It is expressly acknowledged by the parties that the medical
practice or practices conducted at Practice shall be conducted solely by
physicians associated with Practice, and no other physician or medical
practitioner shall be permitted to use or occupy the facilities of the Practice
without the prior written consent of the Policy Board.
SECTION 6.3 Physician Employees.
6.3.1 Practice shall employ all licensed health care personnel, including
physicians, nurses, vocational nurses and physician assistants, as Practice
deems reasonably necessary and appropriate, subject to the Annual Budget, for
Practice's operation of its medical practice and provision of professional
services, each of whom shall be subject to the applicable provisions of this
Agreement, and all of whom shall be Physician Employees. Practice shall have the
sole responsibility for paying the Professional Compensation of all such
personnel, and for withholding and paying, as required by law, any sums for
income tax, unemployment insurance, social security, or any other withholding
pursuant to any applicable law or governmental requirements (collectively,
"Professional Compensation") provided that Manager shall administer and
discharge such responsibilities from funds available pursuant to Section 8.1 as
set forth in Article V. Manager shall, in the name of and on behalf of Practice,
establish and administer and pay when due the compensation with respect to such
professional personnel and, on behalf of Practice and out of funds available in
the Operating Account, ensure that proper tax withholdings from such
compensation are made and timely remitted to the appropriate governmental
entities. Each physician retained by Practice shall at all times hold and
maintain a valid and unlimited license to practice in the State of Arizona
subject to waiver by Policy Board. Practice shall enter into and maintain with
each Physician Shareholder a written agreement which shall include, without
limitation, the provisions of Section 7.2 hereof. Practice shall ensure that
each of its Physician Employees participates in such continuing medical
education as is consistent with past practice.
Consistent with the historical operation of the Practice, the Practice
Surplus, or any other forms of revenue earned by the Practice, will not be
accumulated by the Practice in any material amount. It is acknowledged and
agreed that Practice Surplus will be depleted through the payment of
Professional Compensation, principal and interest due with respect to the Bank
Loan, and Extra Expenses.
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6.3.2 Practice, through its Physician Employees, shall continuously
and uninterruptedly, during the term hereof, during normal business hours
and on such days as businesses of like nature in the area are open for
business, provide services in a manner calculated to produce the maximum
volume of revenue which is consistent with the professional obligations of
Practice and the individual health care providers and in the best interest
of Practice's patients. Except as otherwise provided in this Agreement,
Practice shall use reasonable efforts to have the work load, patient load
and criteria for its Physician Employees, taken as a whole, remain
substantially the same as their historical practice during the immediate
past three (3) years.
6.3.3 Practice and the Physician Shareholders shall take all actions
necessary, including without limitation adjusting Professional Compensation
of physicians on at least a quarterly basis, to ensure from time to time
that the Professional Compensation paid, distributed or provided to the
Physician Shareholders under their employment agreements or otherwise, in
the aggregate, never exceeds Practice Surplus.
SECTION 6.4 Professional Insurance Eligibility.
Practice shall cooperate in the obtaining and retaining of professional
liability insurance by assuring that its Physician Employees are insurable, and
by participating in an on-going risk management program.
SECTION 6.5 Fees for Professional Services.
Practice shall be solely responsible for legal, accounting and other
professional services fees incurred and retained by Practice, and not approved
by the Policy Board, except as set forth in Article V herein.
SECTION 6.6 Name.
As part of this Agreement, Manager hereby licenses its rights to Practice
the use of the name "Pima Heart Associates" or "Pima Heart Physicians" in
connection with the operation of Practice for a period of five (5) years.
SECTION 6.7 Material Decisions.
In addition to any other rights of Manager in this Agreement, the following
actions or decisions shall be made or taken, directly or indirectly, by Practice
or the Physician Shareholders only with the consent of Manager (which consent
shall not unreasonably be withheld with respect to subparagraphs (d) or (f)):
(a) Entering into any merger unless Practice is the surviving entity
and after which the Physician Shareholders immediately prior to the date of
the closing of such merger own at least fifty-one percent (51%) of the
capital stock of Practice after the closing;
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(b) Entering into any sale or series of related sales by Practice or
by the Physician Shareholders of the capital stock of Practice during the
term of this Agreement to any party who is not a Physician Shareholder as
of the date hereof, provided such sales may be made to individual
physicians who become full-time employees of Practice in the ordinary
course of Practice's operations and business but only if the Physician
Shareholders as of the date hereof continue to own in the aggregate at
least fifty-one percent (51%) of the Capital Stock of Practice thereafter;
(c) Entering into any agreement or consummating any transaction for
the sale of any of the material assets of Practice;
(d) Paying money or other property by Practice for a majority of the
capital stock or all or substantially all of the assets constituting a
business of any person or entity unless made for investment purposes only;
(e) Paying compensation, benefits or distributions, directly or
indirectly, of any type or nature to any Physician Shareholder until all
amounts due as Physician Expenses, Manager Expenses and Management Fee
currently due and payable have been paid in full;
(f) Deviating from the collection policies generally followed by
Practice prior to the date hereof with respect to any patient account or
other amount due for Practice's services;
(g) Entering into any new relationship or agreement with a Physician
Shareholder or an Affiliate of or a Related Party to a Physician
Shareholder or continuing any existing relationship or agreement with any
such Person to the extent such relationship or agreement is not fully
reflected in a written contract that has been provided to Manager as of the
date hereof; and
(h) All decisions or matters involving commitments of funds or loans
from Manager or its Affiliates.
SECTION 6.8 Employment of Physician Shareholders.
Practice and each of the Physician Shareholders agree that each of the
Physician Shareholders shall be employed by Practice in accordance with the
terms of his employment agreement with Practice dated as of the date hereof or
entered into to be effective as of the effective date of this Agreement, the
term of which employment shall not be less than five (5) years from the
effective date hereof (whether or not he remains an owner of Practice), unless
attributable to the termination of an employment agreement upon the death or
disability of the Physician Shareholder. Notwithstanding the foregoing, Manager
and the other parties agree that (x) after three (3) years from the Effective
Date, up to three (3) Physician Shareholders, who prior to their retiring are
designated in writing by the Practice as a "retiring physician" for
20
purposes of this Section 6.8, may terminate their employment with the Practice
and such termination shall not be a breach of this Agreement as long as such
Physician Shareholders have fully retired from the practice of medicine and all
other professional medical duties and (y) (i) up to one (1) Physician
Shareholder in the aggregate at any one time during the first year after the
Closing Date, (ii) up to an aggregate of two (2) Physician Shareholders at any
one time during the second through fifth years after the Closing Date may elect
part-time status in accordance with Practice's policies and (iii) during the
fourth and fifth years after the Closing Date, the Practice may elect, upon
prior written notice to Manager to reduce the potential number of retiring
physicians and replace each retiring physician position which is eliminated with
a position for an additional part-time physician; provided however, at no time
during the fourth and fifth years after the Closing Date shall there be more
than an aggregate at any one time of five (5) retiring and part-time physicians,
and there shall never be more than three (3) retiring physicians in the
aggregate prior to the fifth anniversary of the Closing Date. All such Physician
Shareholders shall remain subject to their noncompetition covenants set forth in
their Employment Agreement no less than for the remainder of such five (5) year
period plus one (1) year thereafter.
SECTION 6.9 Life Insurance.
Practice shall cause each of its physician employees to and the Physician
Shareholders shall cooperate fully with any efforts by Manager to obtain
insurance policies on the life of any such physicians under which Manager would
be the owner and beneficiary. Manager will be solely responsible for the costs
of any such insurance and such costs shall not be Manager Expenses or other
expense deductible from Net Practice Surplus.
SECTION 6.10 Profit Sharing Plan.
(a) Practice shall sponsor or maintain a profit-sharing plan that is
intended to be qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), which contains (i) a salary reduction,
elective contribution feature which qualifies as a cash or deferred
arrangement within the meaning of Section 401(k) of the Code and (ii) an
employer matching contribution provision within the meaning of Section
401(m) of the Code ("Practice Qualified Plan"). The employer matching
contribution provision in the Practice Qualified Plan shall match elective
contributions at a rate, and in the aggregate amount, that is at least
equivalent to the employer matching contribution provision contained in the
MedCath Incorporated 401(k) Profit-Sharing Plan and Trust ("MedCath Plan").
(b) All contributions to the Practice Qualified Plan made on behalf
of, or with respect to, any participant thereunder (including, without
limitation, Physician Shareholders, Physician Employees who are not
Physician Shareholders, and Manager employees who are treated as Practice
employees because they are "leased employees" within the meaning of Section
414(n) of the Code with respect to the Practice), shall be paid solely by
the Physician Shareholders from Practice Surplus; provided, however, that
any elective contributions to the Practice Qualified Plan by Physician
Employees that are not Physician Shareholders shall be considered
Professional Compensation and any
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elective contributions to the Practice Qualified Plan by any Manager
employees who are treated as Practice employees because they are "leased
employees" within the meaning of Section 414(n) of the Code with respect to
the Practice shall be considered a Manager Expense.
(c) In addition to the Practice Qualified Plan, Practice shall be
solely responsible for any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit program,
it chooses to sponsor or maintain for the benefit of Practice employees
(including, without limitation, Physician Shareholders, Physician Employees
who are not Physician Shareholders, and any Manager employees who are
treated as Practice employees because they are "leased employees" within
the meaning of Section 414(n) of the Code). The costs relating to
sponsoring and maintaining any such plans, programs, or arrangements shall
be paid solely by the Physician Shareholders from Practice Surplus.
(d) Unless such expenses are, pursuant to its terms and applicable
law, expenses of such plans or of individual participants, the compensation
of counsel, accountants, corporate trustees, investment managers, and other
agents and service providers necessary in the administration of the
Practice Qualified Plan and any other employee benefit plan, program, or
arrangement adopted and maintained by Practice shall be an Extra Expense,
and shall not be a Physician Expense, a Manager Expense, or an expense of
or borne by Manager. Similarly, unless such expenses are, pursuant to its
terms and applicable law, expenses of such plans or of individual
participants, all such expenses necessary in the administration of the
MedCath Plan and any other employee benefit plan, program, or arrangement
adopted and maintained by Manager shall be a Manager Expense to the extent
such expenses are allocable to Manager employees who are providing services
to Practice on a substantially full-time basis.
(e) From and after the Closing, employees of the Manager who were
employed by Practice (or its predecessors) shall be credited under all of
Manager's employee benefit plans, programs, or arrangements with service,
for eligibility and vesting purposes, equal to the service credited to them
for such purposes under the terms of the corresponding employee benefit
plan, program, or arrangement of the Practice (or its predecessors).
(f) Notwithstanding anything else in this Agreement to the contrary,
all contributions (i.e., employee elective contributions, employer matching
contributions, and discretionary nonelective employer contributions) to the
MedCath Plan made on behalf of, or with respect to, any participant
thereunder who is a Manager employee providing services to Practice on a
substantially full-time basis shall be considered a Manager Expense.
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ARTICLE VII
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that Parent paid a substantial amount in connection
with this Agreement and Manager will incur substantial costs in providing the
premises, personnel, management, equipment, supplies and other goods and
services being provided hereunder and that the services to be provided by
Manager shall be feasible only if Practice operates an active medical practice
to which the physicians associated with Practice devote their full time and
attention. To that end, subject to Section 7.5.2 hereof:
SECTION 7.1 Restrictive Covenants by Practice.
During the term of this Agreement, Practice and the physicians in the
Practice shall not, directly or indirectly, either as a shareholder, partner,
member, manager or otherwise establish, operate or provide physician services at
any medical office, clinic or other health care facility providing services,
including but not limited to ancillary services, substantially similar to those
provided by Practice pursuant to this Agreement anywhere within the Territory or
within the Arizona counties of Pima, Pinal, Cochise and Santa Xxxx unless the
proceeds of such services inure to the benefit of the Practice and all revenues
therefrom shall constitute Net Practice Revenue except for revenue from sources
expressly set forth on Schedule 7.1. Additionally, during the term of this
Agreement and for a period of twelve (12) months following the termination
hereof prior to the 40th anniversary of the date hereof for any reason other
than due to a default by Manager, Practice and the physicians in the Practice
(except to the extent such physicians are no longer employed by Practice and are
not subject to any restrictive covenants herein or in their Employment
Agreement), shall not, directly or indirectly, enter into any agreement or
arrangement similar to this Agreement with any other person or party (whether in
a single transaction or series of related transactions) or sell substantially
all the assets of Practice or sell or issue ownership interests (whether through
a sale, merger or otherwise) in Practice except to individual physicians who
become full-time employees of Practice in the ordinary course of Practice's
operations and business. Notwithstanding anything to the contrary in this
Agreement, the Practice and the physicians in the Practice may continue to
provide any physician or related services to any medical office, clinic, or
other health care facility, if such services or facilities are listed on
Schedule 7.1, the revenue from which shall constitute Net Practice Revenue
except as expressly set forth on Schedule 7.1.
SECTION 7.2 Restrictive Covenants By Current Physician Shareholders
and Physician Employees.
7.2.1 Practice shall obtain and enforce formal written agreements from
its current Physician Shareholders pursuant to which the Physician
Shareholders agree not to within the Territory or within fifty (50) miles
of any office or location where Practice maintains an office in which such
physician had provided services prior to termination of employment,
directly or indirectly, whether as a shareholder, partner, employee,
director, consultant, agent or otherwise (i) establish, operate or provide
physician services at any
23
medical office, hospital, clinic or outpatient and/or ambulatory treatment
or diagnostic facility providing services, including but not limited to
ancillary services, substantially similar to those provided by Practice
except as an employee of Practice or as set forth on Schedule 7.1, or (ii)
solicit or employ any employee or consultant of Practice or of Manager, in
all cases during the term of their employment and for a period of twelve
(12) months after any termination of employment with Practice for any
reason (unless this Agreement has been terminated as of such date in
accordance with the terms of this Agreement as a result of a default
hereunder by Manager). Practice also shall use its reasonable best efforts
to obtain appropriate restrictive covenants from physicians who are not
Physician Shareholders.
7.2.2 In addition to the other restrictions in this Article VII, the
Physician Shareholders hereby agree with Manager (and all future physicians
who become shareholders of Practice shall be required to agree in writing)
and shall enter into a similar covenant with Practice, which Practice
agrees to fully enforce, that for a period of twelve (12) months after any
termination of employment with Practice (unless this Agreement has been
terminated as of such date in accordance with the terms of this Agreement
as a result of a default hereunder by Manager) that they shall neither
accept employment to practice medicine or become a consultant for the
purpose of providing such medical services from or with any other party or
entity, or group of affiliated parties or entities (a "New Employer") if at
least fifty-one percent (51%) of the then current Physician Shareholders of
Practice within any twelve (12) month period accept employment or enter
into any consulting or other similar arrangement with such New Employer at
the same time or in a series of related circumstances, nor engage in any
other transaction which is substantially similar to that described in this
sentence (a "Group Departure") unless such New Employer or the Physician
Shareholders personally assume all liabilities and obligations of Practice
to Manager under Article VIII with respect to such Physician Shareholders
and under other provisions herein related to such obligations and
liabilities plus any amount due from Practice to Manager under Section
5.5(b)(iii).
7.2.3 The covenants of the Physician Shareholders and the Physician
Employees above are hereafter referred to as the "Restrictive Covenants".
SECTION 7.3 Restrictive Covenants by Future Physician Employees.
Unless otherwise agreed to in writing by Manager, Practice shall obtain and
enforce formal agreements from each of its future Physician Employees (and
future Physician Shareholders who are not currently Physician Employees), which
contain the restrictions and covenants set forth in Section 7.2.
24
SECTION 7.4 Physician Shareholder and Physician Employee Liquidated
Damages.
After the fifth (5th) anniversary of the date hereof, the Physician
Shareholders and Physician Employees may be released from their Restrictive
Covenants with the written consent of Manager by paying liquidated damages in an
amount as follows:
For Physician Shareholders and Physician Employees who are physicians
employed by Practice on the date of this Agreement and for physicians who are
shareholders or employees of Practice in the future, "Liquidated Damages" means
an amount with respect to the physician equal to the greater of (a) such
physician's Form W-2 taxable compensation paid by Practice to him for the most
recently ended calendar year, and (b) the average of such physician's Form W-2
taxable compensation paid by Practice to him for the three most recently ended
calendar years.
Such payment of Liquidated Damages or any recovery for breach shall be made
to Manager by Practice simultaneously with the physician being released from the
restrictive covenants (if consented to in writing by Manager) or any collection
of a judgment. Such payment shall be first applied to all costs incurred by
Manager or Practice in the enforcement of the restrictive covenants for that
departing physician and in recruiting a replacement physician for that departing
physician. The remainder, if any, shall become an additional Management Fee to
be paid to Manager pursuant to Article VIII hereof.
Manager shall be entitled to designate which remedies shall be sought by
Practice for breaches of restrictive covenants or such employment agreements and
Practice shall diligently pursue those remedies.
SECTION 7.5 Development of Exclusive Ventures.
7.5.1 Exclusive of ventures which exist as of June 30, 1997 and are
listed on Schedule 7.5.2, during the term of this Agreement (the "Exclusive
Period") subject to applicable law, Manager, Practice and the Physician
Shareholders, including any future shareholders of Practice may discuss and
explore the feasibility of acquiring or developing in the Territory (i) a
hospital (either a general acute care hospital or a specialty heart
hospital), and/or (ii) a cardiac catheterization lab, (collectively the
"Exclusive Ventures"). Subject to applicable law, each such Exclusive
Venture shall be owned by a joint venture, which in turn would be owned by
Manager, Practice, Physician Shareholders and other area physicians in
mutually agree upon ownership percentages. Each Exclusive Venture would be
managed by Manager or its designee for a management fee which would not
exceed reasonable management fees which are paid to other parties for
managing similar facilities or activities in bona fide transactions
involving unrelated persons or entities. Capital shall be contributed to
the joint venture on a pro rata basis by Manager or its designee, on the
one hand, and Practice and/or the Physician Shareholders on the other hand,
in accordance with their ownership percentages. No additional payment would
be due to Manager, Practice or the Physician Shareholders in connection
with the development or ownership of any Exclusive Venture other than pro
rata
25
distributions to them from the joint venture. All material decisions and
determinations to be made hereunder with respect to the development,
ownership and operation of any such Exclusive Venture, subject to
applicable law, shall be made by mutual consent of Manager and/or its
designee on the one hand, and a majority of the Physician Shareholders
owning an interest in the Exclusive Venture (directly or indirectly), on
the other hand. Manager, Practice and the Physician Shareholders agree to
cooperate and negotiate with one another in good faith with respect to the
development or acquisition of the Exclusive Venture and to enter into all
such additional agreements and to take all such additional actions as are
reasonably necessary or appropriate to fulfill the purpose and intent of
this Section 7.5.
In the event that health care counsel of Manager, which is reasonably
acceptable to Practice, advises that the legal entity owning any such
health care facility or service should be owned only by Practice, the
Physician Shareholders or Affiliates thereof, then the parties hereto shall
instead, to the extent consistent with applicable laws and regulations,
enter into a management and service agreement which will provide Manager
with substantially all of the benefits which it would have received had it
been legally entitled to be an owner of such facility or service.
7.5.2 During the Exclusive Period, Practice agrees that it will not,
directly or indirectly, develop or acquire an interest in any Exclusive
Venture not formed as of the date of this Agreement and listed on Schedule
7.5.2, and each Physician Shareholder agrees that he will not develop or
acquire an interest in any Exclusive Venture in the Territory as long as
such Physician Shareholder is a shareholder or employee of Practice and for
a period of two (2) years thereafter, other than through a joint venture
between Manager or its designee, on the one hand, and Practice and/or the
Physician Shareholders on the other hand, as provided in (a) above.
SECTION 7.6 Restrictive Covenants by Manager.
As long as Manager is managing Practice in accordance with the terms of
this Agreement, Manager shall not manage the medical practice of any other
cardiologist or group of cardiologists within the Territory without the prior
written consent of Practice, provided that nothing in this Section 7.6 shall
restrict Manager or its Affiliates from managing the medical practices of any of
the physicians listed on Schedule 7.6 or of any other physician who hereafter
becomes associated with such medical practices as long as the majority of the
physicians employed by such other medical practice are physicians listed on
Schedule 7.6. Manager shall be entitled to continue to manage any such medical
practice which meets the criteria set forth above even if, over time, physicians
on Schedule 7.6 withdraw from such practice or new physicians not listed on
Schedule 7.6 join such medical practice.
SECTION 7.7 Enforcement.
Manager, Practice and the Physician Shareholders acknowledge and
agree that since a remedy at law for any breach or attempted breach of the
provisions of this Article VII shall be
26
inadequate, either party shall be entitled to specific performance and
injunctive or other equitable relief in case of any such breach or attempted
breach, in addition to whatever other remedies may exist by law. All parties
hereto also waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such injunctive or other equitable relief.
If any provision of Article VII relating to the restrictive period, scope of
activity restricted and/or the territory described therein shall be declared by
a court of competent jurisdiction to exceed the maximum time period, scope of
activity restricted or geographical area such court deems reasonable and
enforceable under applicable law, the time period, scope of activity restricted
and/or area of restriction held reasonable and enforceable by the court shall
thereafter be the restrictive period, scope of activity restricted and/or the
territory applicable to the restrictive covenant provisions in this Article VII.
The invalidity or non-enforceability of this Article VII in any respect shall
not affect the validity or enforceability of the remainder of this Article VII
or of any other provisions of this Agreement.
ARTICLE VIII
FINANCIAL ARRANGEMENTS
SECTION 8.1 Management Fees.
Practice and Manager agree that the compensation set forth in this Article
VIII is being paid to Manager in consideration of the substantial commitment
made by Manager hereunder and that such fees are fair and reasonable. Manager
shall be paid as its management fee for each fiscal year of Practice during the
term of this Agreement (the "Management Fee") an amount equal to all Net
Practice Revenues for the fiscal year subject however to the obligation of
Manager to pay to Practice an amount equal to all Physician Expenses and all
Practice Surplus for the fiscal year, provided, however, it is acknowledged and
agreed that Practice Surplus shall not actually be paid to the Physician
Shareholders until the Bank Loan is paid in full. Also due to Manager as
"Management Fees" is any Liquidated Damages amount collected by Practice from a
Physician Shareholder or Physician Employee pursuant to Article VII or any
amount collected in lieu thereof pursuant to an arbitration or judicial
proceeding addressing the application of the Restrictive Covenants.
The amount of Management Fee due to Manager each month shall be determined
using the accrual method of accounting. It is acknowledged and agreed that the
amounts actually available for distribution to the parties in accordance with
the other terms of this Agreement shall be subject in all events to Section
5.5.2(ii).
SECTION 8.2 Collection of Management Fee.
The Management Fees to be paid to Manager under this Article VIII shall be
payable monthly within forty-five (45) days after the end of each month provided
that after six (6) months from the date hereof, such fee shall be due within
thirty (30) days after the end of each month
27
based upon the previous month's operating results of Practice. Adjustments to
the estimated payments shall be made to reconcile actual amounts due under this
Article VIII, by the end of the following month during each calendar quarter.
Upon preparation of annual financial statements, final adjustments to the
Management Fee for the fiscal year shall be made, including any modification
resulting from a change in the amount of Adjustments after comparing collections
to xxxxxxxx of the Practice for such period, and any additional payments owing
to Manager or Practice shall then be made. Any audit adjustments shall be
reflected in the calculation for the fourth quarter. Operating results shall be
prepared on a consistent basis in accordance with GAAP. Amounts due to Manager
pursuant to Article VII shall be paid to Manager immediately upon receipt by
Practice.
SECTION 8.3 Limited Guaranty Agreement.
Each existing and any future Physician Shareholder shall execute the
Limited Guaranty Agreement attached hereto as Exhibit 8.3.
SECTION 8.4 Fees Due from New Physicians.
Net Practice Revenues shall include, without limitation, all revenue
resulting from physicians who are first hired or retained by Practice after the
date hereof.
SECTION 8.5 Amounts Due Physician Shareholder Upon Retirement.
In the event that a Physician Shareholder as of the date hereof hereafter
fully retires from the practice of medicine in accordance with the policies of
Practice (and the Practice first so certifies in writing to Manager) and such
Physician Shareholder at no time is in violation of his obligations under
Article VII hereof or under the Liquidated Damages Agreement entered into as of
the date hereof, then such Physician Shareholder shall be entitled to receive
from Manager the portion of the actual collected net proceeds of the accounts
receivable owned by Manager as of the Closing Date which arose from services
rendered prior to the Closing Date in accordance with Schedule 8.5. Such amounts
shall be paid to such retiring Physician Shareholder in eighteen (18) equal
monthly payments following his retirement.
ARTICLE IX
RECORDS
SECTION 9.1 Patient Records.
All Patient Records maintained by or for Practice shall be and remain
the property of the Practice. Upon termination of this Agreement, Practice shall
retain all patient medical records maintained by Practice or Manager in the name
of Practice. Practice shall, at its option at no additional cost to Practice, be
entitled to retain copies of financial and accounting records of Manager
relating to all services performed by Practice.
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SECTION 9.2 Records Owned by Manager.
All records relating in any way to the operation of Practice which are not
the property of Practice under the provisions of Section 9.1 above, shall at all
times be the property of Manager but Practice shall be entitled to copies of all
such records.
SECTION 9.3 Access to Records.
During the term of this Agreement, and thereafter, Practice or its designee
shall have reasonable access in Tucson, Arizona during normal business hours to
Practice's and Manager's financial records which relate to Practice, including,
but not limited to, records of collections, expenses and disbursements as kept
by Manager in performing Manager's obligations under this Agreement, and
Practice may copy any or all such records.
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 Insurance to be Maintained by Practice.
Throughout the term of this Agreement, Practice shall maintain
comprehensive professional liability insurance with limits of not less than
$1,000,000 per claim and with aggregate policy limits of not less than
$3,000,000 for Practice and an excess liability policy in the amount of not less
than $5,000,000, with such carrier as is approved by the Policy Board.
Malpractice premiums, deductibles and such accruals shall be a Manager Expense.
Practice shall be responsible for all liabilities in excess of the limits of
such policies. Manager shall have the option, with Policy Board approval, of
providing such professional liability insurance through an alternative program,
provided such program meets the requirements of the Insurance Commissioner of
the State of Arizona.
SECTION 10.2 Insurance to be Maintained by Manager.
Throughout the term of this Agreement, Manager will provide and maintain,
as a Manager Expense, comprehensive professional liability insurance for all
professional employees of Manager, if any, with limits and with such carrier as
provided above and comprehensive general liability and property insurance
covering Practice premises and operations with limits and with such carrier as
determined reasonable by Manager in its national program.
SECTION 10.3 Tail Insurance Coverage.
Practice will cause each individual physician who becomes associated with
Practice after the date hereof to enter into an agreement with Practice that
upon termination of such physician's relationship with Practice, for any reason,
and in the event tail insurance is not provided for such physician under
Practice's insurance policies, tail insurance coverage will be purchased by the
29
individual physician; provided however, in the event that such physician's
relationship with Practice is terminated due to death or disability or due to an
uncured event of default by Practice under its agreement for the services of
such physician, then Practice, rather than such physician, shall pay the costs
of such tail insurance. Such provisions may be contained in employment
agreements, restrictive covenant agreements or other agreements entered into by
Practice and the individual physicians, and Practice hereby covenants with
Manager to enforce such provisions relating to the tail insurance coverage or to
provide such coverage at the expense of Practice. The Policy Board may determine
to provide coverage for such a physician as a Manager Expense on a physician by
physician basis. The Policy Board may also decide to require other categories of
physicians currently employed by Practice to provide tail coverage upon
termination of employment with Practice.
SECTION 10.4 Additional Insureds.
Practice and Manager agree to use their reasonable efforts to have each
other named as an additional insured on the other's respective professional
liability insurance programs.
SECTION 10.5 Indemnification.
(a) Practice shall indemnify, hold harmless and defend Manager, its
officers, directors, shareholders and employees, from and against any and
all liability, loss, damage, claim, causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly,
by or as a result of the performance of medical services or the performance
of any intentional acts, negligent acts or omissions by Practice and/or its
shareholders, agents, employees and/or subcontractors (other than Manager,
Parent or their agents) during the term hereof.
(b) Manager shall indemnify, hold harmless and defend Practice, its
officers, shareholders, directors and employees, from and against any and
all liability, loss, damage, claim causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly,
by or as a result of the performance of any intentional acts, negligent
acts or omissions by Manager and/or its shareholders, agents, employees
and/or subcontractors (other than Practice) during the term of this
Agreement.
SECTION 10.6 Rules Regarding Indemnification.
The obligations and liabilities of each indemnifying party hereunder with
respect to claims resulting from the assertion of liability by the other party
or third parties shall be subject to the following terms and conditions:
10.6.1 The indemnified party shall give prompt written notice to the
indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreement contained in Section
30
10.5 hereof, stating the nature and basis of said claims and the amounts
thereof, to the extent known. If written notice is not given to the
indemnifying party within thirty (30) days from receipt of notice of the
claim to be indemnified, or such shorter time as shall otherwise prejudice
the rights of the indemnifying party, and in sufficient detail to apprise
the indemnifying party of the nature of the claim (in each instance taking
into account the facts and circumstances known by the indemnified party
with respect to such claim), the indemnifying party shall not be liable to
the party seeking indemnification. The indemnifying party shall have the
right, at its option, to compromise or defend, at its own expense and by
its own counsel, any claim involving the asserted liability of the party
seeking indemnification. If any indemnifying party shall undertake to
compromise or defend any such asserted liability, it shall promptly notify
the party seeking indemnification of its intention to do so, and the party
seeking indemnification agrees to cooperate fully with the indemnifying
party and its counsel in the compromise of, or defense against, any such
asserted liability. All costs and expenses incurred in connection with such
cooperation shall become by the indemnifying party. In any event, the
indemnified party shall have the right, at its own expense and by its own
counsel to participate in the defense of such asserted liability.
10.6.2 The indemnified party shall not make any settlement of any
claims without the written consent of the indemnifying party, which consent
shall not be unreasonably withheld or delayed.
SECTION 10.7 Offset
10.7.1 Manager is hereby authorized upon ten (10) days prior written notice
to Practice to offset or apply any funds of Practice or the Physician
Shareholders which Manager holds from time to time or which Manager owes to
Practice or to the Physician Shareholders against or to any amounts owed by
Practice or a Physician Shareholder to Manager under this Agreement or to
MedCath Incorporated under the Share Exchange Agreement; provided however, if
within ten (10) days of such written notice Practice objects thereto, such funds
shall be placed with an escrow agent pursuant to a mutually acceptable escrow
agreement until any dispute with respect thereto is finally resolved through
binding arbitration.
ARTICLE XI
TERM AND TERMINATION
SECTION 11.1 Term of Agreement.
This Agreement shall commence on the date hereof and shall expire on the
40th anniversary hereof unless earlier terminated pursuant to the terms hereof
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SECTION 11.2 Extended Term.
Unless earlier terminated as provided for in this Agreement, the term of
this Agreement shall be automatically extended for additional terms of five (5)
years each, unless Manager delivers to Practice, or Practice delivers to
Manager, not less than six (6) months prior to the expiration of the preceding
term, written notice of intention not to extend the term of this Agreement. If
the preceding sentence would result in this Agreement being in violation of any
applicable law or would render this Agreement void or unenforceable, such
sentence shall be void and of no further force or effect.
SECTION 11.3 Termination by Practice.
Practice may terminate this Agreement as follows:
11.3.1 In the event or the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Manager, or
upon other action taken or suffered, voluntarily or involuntarily, under
any federal or state law for the benefit of debtors by Manager, except for
the filing of a petition in involuntary bankruptcy against Manager which is
dismissed within ninety (90) days thereafter, Practice may give notice of
the immediate termination of this Agreement; or
11.3.2 In the event Manager shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement and such default shall continue for a period of forty-five (45)
days after written notice thereof has been given to Manager by Practice or
Manager shall fail to remit any material payments due as provided in
Article VIII hereof and such failure to remit shall continue for a period
of fifteen (15) days after written notice thereof, Practice may terminate
this Agreement. Termination of this Agreement pursuant to this subsection
(b) by Practice shall require the affirmative vote of Physician
Shareholders holding at least seventy-five (75%) of the ownership of
Practice.
11.3.3 During the twenty-four (24) month period commencing as of the
date hereof, Practice shall have the right to terminate this Agreement in
the event that due to its entering into this Agreement with Manager,
Practice loses managed care contracts which in the aggregate represent
thirty percent (30%) or more of the Practice's revenues for the trailing
twelve (12) months and such contracts are not replaced within the following
six (6) months by contracts or fee for service work generating an
equivalent amount of revenue, provided that Practice shall have no right to
terminate this Agreement if such contracts are lost due to Physicians
leaving the Practice, failing to comply with the terms of this Agreement or
failing to use their best efforts for the benefit of the Practice.
32
SECTION 11.4 Termination by Manager.
Manager may terminate this Agreement as follows:
11.4.1 In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Practice, or
upon other action taken or suffered, voluntary or involuntarily, under any
federal or state law for the benefit of debtors by Practice, except for the
filing of a petition in involuntary bankruptcy against Practice which is
dismissed within ninety (90) days thereafter, Manager may give notice of
the immediate termination of this Agreement;
11.4.2 In the event Practice shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of forty-five (45)
days after written notice thereof has been given to Practice by Manager,
Manager may give notice of the immediate termination of this Agreement;
11.4.3 In the event that on or before the fifth anniversary of this
Agreement more than four (4) or more physicians employed by Practice during
the prior twelve (12) months cease for any reason (other than death or
disability) to be employed by Practice.
SECTION 11.5 Actions after Termination.
Upon termination of this Agreement by either party for any reason or upon
expiration of this Agreement, Practice and the Physician Shareholders jointly
and severally agree to:
(i) Purchase from Manager at book value all intangible assets set
forth on the Opening Balance Sheet, or otherwise on the balance sheet of
Manager and relating to Practice, all as adjusted through the last day of
the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of
intangibles;
(ii) Purchase from Manager any real estate owned by Manager and used
exclusively for the operation of Practice's medical practice at the
appraised value thereof. In the event of any repurchase of such real
property, the appraised value shall be determined by Manager and Practice
each selecting a duly qualified appraiser, who in turn will agree on a
third appraiser. This agreed upon appraiser shall perform the appraisal
which shall be binding on both parties. In the event either party fails to
select an appraiser within fifteen (15) days of the selection of an
appraiser by the other party, the appraiser selected by the other party
shall make the selection of the third-party appraiser;
(iii) Purchase from Manager at book value all improvements, additions
or leasehold improvements which have been made by Manager and which are
used solely for the operation or management of the Practice;
(iv) Assume all debt and all contracts, payables and leases which are
obligations of Manager and which are used solely for the operation or
management of the Practice; and
(v) Purchase from Manager at book value all of the equipment of
Manager used solely by Manager or Practice for the benefit of Practice
including all replacements and additions thereto made by Manager pursuant
to the performance of its obligations under this Agreement, and all other
assets, including [inventory, accounts receivable] and supplies, tangibles
and intangibles, set forth on the balance sheet of Manager as of the date
it begins to provide services to Practice hereunder, as adjusted through
the last day of the month most recently ended prior to the date of such
termination in accordance with GAAP to reflect operations of Practice,
depreciation, amortization and other adjustments of assets shown on the
Opening Balance Sheet and all other assets owned or used by Manager
exclusively in connection with the operation of Practice.
(vi) In the event this Agreement is terminated pursuant to Section
11.3.3, then Practice and its Physician Shareholders, jointly and
severally, shall pay and deliver to Manager Five Hundred Thousand and Six
(500,006) shares of MedCath's Common Stock (even though its value may
substantially exceed $7,000,000.00), less the aggregate amount paid to
Manager under Article VIII excluding amounts paid as Manager Expenses,
Physician Expenses and Practice Surplus and Liquidated Damages paid
pursuant to the terms of this Agreement since the date of this Agreement.
SECTION 11.6 Closing of Repurchase by Practice and Effective Date of
Termination.
Practice and the Physician Shareholders shall pay cash for the repurchased
assets. The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Manager assumed by Practice and Physician Shareholders.
Practice and any physician associated with Practice shall execute such documents
as may be required to assume the liabilities set forth in Section 11.5 and to
remove Manager from any liability with respect to such repurchased assets and
with respect to any such property leased or subleased by Manager. Manager will
execute and deliver such documents as are customary in asset sales with general
warranties of title, and such assets shall be in no worse condition than when
delivered to Manager by Practice, normal wear and tear excepted, and such
documents to be executed and delivered by Manager shall be similar to the
documents executed by Practice in connection with the asset sale to Parent. The
closing date for the repurchase shall be determined by Practice, but shall in no
event occur later than 150 days from the date of the notice of termination. The
termination of this Agreement shall become effective upon the closing of the
sale of the assets. Manager shall have the right, in its sole and absolute
discretion, to waive the repurchase requirements herein, in which event, the
termination of this Agreement shall become effective upon the execution and
delivery of such waiver notice. From and after any termination, each party shall
provide the other party with reasonable access to books and records then owned
by it to permit such requesting party to satisfy reporting and contractual
obligations which may be required of it.
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ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Assignment.
Manageri shall have the right to assign its rights hereunder to any Person
that is an Affiliate of or Related Party to Manager and to any lending
institution, for security purposes or as collateral, from which Parent or
Manager obtains financing, or to any purchaser of substantially all of the
assets of Parent. Except as set forth above, neither Manager nor Practice shall
have the right to assign their respective rights and obligations hereunder
without the written consent of the other party. For purposes of this paragraph,
the sale or transfer of twenty percent (20%) or more of the outstanding stock in
Manager shall be deemed an assignment of this Agreement. Notwithstanding the
foregoing, the Manager shall have the right to assign all or any portion of this
Agreement without the prior consent of Practice to (x) a purchaser of
substantially all of the assets of Parent that also purchases all of Parent's
interests in and to Manager or to (y) Arizona Medical Development Company, LLC,
an Arizona limited liability company.
SECTION 12.2 Whole Agreement, Modification.
This Agreement constitutes the entire agreement between the parties. There
are no other agreements or understandings, written or oral between the parties
regarding this Agreement, the Exhibits and the Schedules, other than as set
forth herein. This Agreement shall not be modified or amended except by a
written document executed by both parties to this Agreement, and such written
modification(s) shall be attached hereto.
SECTION 12.3........Notices.
All notices required or permitted by this Agreement shall be in
writing and shall be addressed as follows:
To Manager: MedCath Physician Management, Inc.
0000 Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx, Xxxxx Xxxxxxxx 00000
Attn: President
With a copy to: Xxx X. Xxxxxxxx, Esq.
Xxxxx & Xxx Xxxxx, PLLC
000 X. Xxxxx Xxxxxx, Xxxxx 00
Xxxxxxxxx, Xxxxx Xxxxxxxx 00000-0000
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To Practice: Pima Heart Physicians, P.C.
000 X. Xxxxxxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxx 00000
Attn: Chief Executive Officer
With a copy to: Xxxx X. Xxxxxx, Esq.
Bonn, Luscher, Xxxxxx & Xxxxxxx
000 Xxxxx Xxxxxx Xxxxxx
Xxxxxxx, Xxxxxxx 00000
or to such other address as either party shall notify the other.
SECTION 12.4 Binding on Successors.
Subject to Section 12.1, this Agreement shall be binding upon the parties
hereto, and their successors, assigns, heirs and beneficiaries.
SECTION 12.5 Waiver of Provisions.
Any waiver of any terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.
SECTION 12.6 Governing Law.
The validity, interpretation and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State of Arizona.
The parties acknowledge that Manager is not authorized or qualified to engage in
any activity which may be construed or deemed to constitute the practice of
medicine. To the extent any act or service required of Manager in this Agreement
should be construed or deemed, by any governmental authority, agency or court to
constitute the practice of medicine, the performance of said act or service by
Manager shall be deemed waived and forever unenforceable and the provisions of
Section 12.12 shall be applicable.
SECTION 12.7 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 12.8 Additional Documents.
Each of the parties hereto agrees to execute any document or documents that
may be requested from time to time by the other party to implement or complete
such party's obligations pursuant to this Agreement.
36
SECTION 12.9 Attorneys' Fees.
If legal action is commenced by either party to enforce or defend its
rights under this Agreement, the prevailing party in such action shall be
entitled to recover its costs and reasonable attorneys' fees in addition to any
other relief granted.
SECTION 12.10 Time is of the Essence.
Time is hereby expressly declared to be of the essence in this Agreement.
SECTION 12.11 Confidentiality.
Except for disclosure to its attorneys, accountants, bankers, underwriters
or lenders, or as necessary or desirable for conduct of business, including
negotiations with other acquisition candidates, neither party hereto shall
disseminate or release to any third party any information regarding any
provision of this Agreement, or any financial information regarding the other
(past, present or future) that was obtained by the other in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without the other party's written approval; provided, however, the
foregoing shall not apply to information which (i) is generally available to the
public other than as a result of a breach of confidentiality provisions, (ii)
becomes available on a non-confidential basis from a source other than the other
party, or its affiliates or agents, which source was not itself bound by a
confidentiality agreement, or (iii) which is required to be disclosed by law,
including securities laws or pursuant to court order. Notwithstanding the
foregoing, Practice may disclose information it deems advisable to its physician
employees provided such physician employees are advised of the confidential
nature of such information and agree to keep such information confidential as
provided herein. Manager shall be a third party beneficiary of such agreements.
SECTION 12.12 Contract Modifications for Prospective Legal Events.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision or regulatory agency or legal counsel in such a
manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, Practice and Manager shall amend this Agreement as
necessary to eliminate such violation. To the maximum extent possible, any such
amendment shall preserve the underlying economic and financial arrangements and
other obligations between Practice and Manager. To the extent the parties cannot
agree on any such amendment or changes, the matter shall be submitted to binding
arbitration upon the request of either party and through the arbitration process
an equitable modification shall be implemented based on all of the facts and
circumstances or the Agreement will terminate.
37
SECTION 12.13 Remedies Cumulative; Survivability.
No remedy set forth in this Agreement or otherwise conferred upon or
reserved to any party shall be considered exclusive of any other remedy
available to any party, but the same shall be distinct separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient. Pursuit of any remedy set forth in this Agreement shall not
preclude pursuit of any other remedy provided in this Agreement or any other
remedy provided for in this Agreement constitute a waiver of any amount due from
a defaulting party under this Agreement or of any damages accruing by reason of
the violation of any of its terms, provisions and covenants. No waiver of any
violation shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Agreement, and forbearance to enforce one or more of the remedies provided
on an event of default shall not be deemed or construed to constitute a waiver
of such default or of any other remedy provided for in this Agreement. The
termination of this Agreement shall not affect the remedies and rights of a
party hereunder with respect to a breach of this Agreement occurring on or
before such termination.
SECTION 12.14 Language Construction.
The language in all parts of this Agreement shall be construed, in all
cases, according to its fair meaning, and not for or against either party
hereto. The parties acknowledge that each party and its counsel have reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
SECTION 12.15 No Obligation to Third Parties.
None of the obligations and duties of Manager or Practice under this
Agreement shall in any way or in any manner be deemed to create any obligation
of Manager or of Practice to, or any rights in, any person or entity not a party
to this Agreement.
SECTION 12.16 Communications.
Practice and Manager agree that good communication between the parties is
essential to the successful performance of this Agreement, and each pledges to
communicate fully and clearly with the other on matters relating to the
successful operation of Practice.
SECTION 12.17 Counterpart Executions; Facsimiles.
This Agreement may be executed in any number of counterparts with the same
effect as if all of the parties had signed the same document. Such executions
may be transmitted to the parties by facsimile and such facsimile execution
shall have the full force and effect of an original signature. All fully
executed counterparts, whether original executions or facsimile executions or a
combination, shall be construed together and shall constitute one and the same
agreement.
38
SECTION 12.18 Arbitration.
The parties hereto agree that any dispute between them other than an action
or proceeding for injunctive or other equitable relief, shall be resolved by
binding arbitration. Such arbitration shall be conducted by the American
Arbitration Association in accordance with its then existing commercial rules
applicable to such disputes. Such arbitration shall be conducted in Tucson,
Arizona. The decision of such arbitrators shall be final and binding upon the
parties hereto and may be enforced by a court with applicable authority.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s) effective as of the day and year first above
written.
39
EXECUTION PAGE
TO THE
SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
JUNE 30, 1997
PRACTICE:
PIMA HEART PHYSICIANS, P.C.
By: /s/ Xxxxxxxx X. Xxxxxxx
--------------------------
Title:
MANAGER:
PIMA HEART ASSOCIATES, P.C.
By: /s/ Xxxxx X. Xxxxx
--------------------
Title:
40
The Physician Shareholders of Practice hereby execute this Agreement for
purposes of acknowledging and agreeing to be bound by the terms of Sections 5.5,
6.3, 6.7, 6.8, 6.9, Article VII, Sections 8.3, 10.7, 11.5 and 11.6 hereof.
/s/ Xxxxxxx X. Xxxxx
--------------------
Xxxxxxx X. Xxxxx, M.D.
/s/ Xxxx X. Xxxxxx
------------------
Xxxx X. Xxxxxx, M.D.
/s/ Xxxxxxxx X. Xxxxxxxxx
-------------------------
Xxxxxxxx X. Xxxxxxxxx, M.D.
/s/ Xxxxx X. Xxxxx
------------------
Xxxxx X. Xxxxx, M.D.
/s/ Xxxxx X. Xxxxxxx
-----------------------------------------
Xxxxx X. Xxxxxxx, M.D.
/s/ Xxxxxx X. Xxxxxx
-----------------------------------------
Xxxxxx X. Xxxxxx, M.D.
/s/ Xxxxxx Xxxxx- Xxxxx
-----------------------------------------
Xxxxxx Xxxxx-Xxxxx, M.D.
/s/ Xxxx X. Xxxxxxxxx
-----------------------------------------
Xxxx X. Xxxxxxxxx, M.D.
/s/ Xxxxxxx X. Xxxxxxxxxx
-----------------------------------------
Xxxxxxx X. Xxxxxxxxxx, M.D.
/s/ Xxx X. Xxxxxxx
-----------------------------------------
Xxx X. Xxxxxxx, M.D.
41
/s/ Xxxxxxxx X. Xxxxxxx
-----------------------------------------
Xxxxxxxx X. Xxxxxxx, M.D.
/s/ Xxxxxxxx X. Xxxxxx
-----------------------------------------
Xxxxxxxx X. Xxxxxx, M.D.
/s/ Xxxxxxx X. Winter
-----------------------------------------
Xxxxxxx X. Winter, M.D.
42
Schedule 2.25
Territory shall mean Pima, Pinal, Cochise and Santa Xxxx counties, Arizona.
43
Schedule 7.6
1. All cardiologists associated with Pima Heart Physicians, P.C. or Pima Heart
Associates, P.C. whether now or hereafter;
2. All cardiologists who as of _________ directly or indirectly have an
ownership interest in MedCath of Tucson, L.L.C. or CCT, L.L.C.
Schedule 8.5
Each Physician Shareholder as of the Closing Date shall be entitled to receive
[ ]% of amounts due to Physician Shareholders upon retirement under Section
8.5 of the Service Agreement.
[ ] These portsion have been omitted and filed separately with the Commission
pursuant to request for confidential treatment.
