<PAGE> 1
SCHEDULE 14A
(RULE 14-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14 OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
PHYSICIANS' SPECIALTY CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.001 per share ("Common Stock"), of
Physicians' Speciality Corp.
(2) Aggregate number of securities to which transaction applies:
9,472,688 shares of Common Stock (includes 307,978 shares of Common
Stock issuable upon exercise of options)
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$10.50 per share in cash-out merger plus the difference between $10.50
and the exercise price of each option subject to exercise.
(4) Proposed maximum aggregate value of transaction:
$99,463,224
(5) Total fee paid:
$19,893
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PHYSICIANS' SPECIALTY CORP.
1150 LAKE HEARN DRIVE
SUITE 640
ATLANTA, GEORGIA 30342
, 1999
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of
Physicians' Specialty Corp. ("Physicians' Specialty" or the "Company") to be
held on , 1999, at 10:00 a.m., local time, at the offices of King &
Spalding, located at 191 Peachtree Street, Atlanta, Georgia. The purpose of the
Special Meeting is to consider and vote upon a merger that, if approved and
subsequently consummated, will result (i) in the public stockholders of
Physicians' Specialty (other than stockholders who have perfected their
appraisal rights and certain members of management and their affiliates,
affiliated physicians and employees) receiving $10.50 in cash per share for
their shares of Physicians' Specialty common stock, $.001 par value ("Common
Stock"), and (ii) in certain members of management and their affiliates,
affiliated physicians and employees receiving $10.50 in cash per share for a
portion of the shares of Physicians' Specialty Common Stock held by them and
shares of common stock of the surviving corporation on a share-for-share basis
for their remaining shares. The acquiror of Physicians' Specialty, TA MergerCo,
Inc., a newly formed Delaware corporation, was organized at the direction of TA
Associates, Inc. on behalf of certain of its affiliates for the purpose of
acquiring all of the Physicians' Specialty Common Stock held by the public
stockholders.
A Special Committee of the Board of Directors of Physicians' Specialty,
consisting of three independent directors, was formed to consider and evaluate
the merger. The Special Committee has unanimously recommended to the Board of
Directors of Physicians' Specialty that the merger, the merger agreement and
related transactions be approved. In connection with its evaluation of the
merger, the Special Committee engaged The Robinson-Humphrey Company, LLC to act
as its financial advisor. Robinson-Humphrey has rendered its opinion dated June
12, 1999 that, based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion, the cash merger consideration of
$10.50 per share to be received in the merger is fair from a financial point of
view to the public stockholders of Physicians' Specialty. The written opinion of
Robinson-Humphrey, dated June 12, 1999, is attached as Appendix B to the
enclosed Proxy Statement and should be read carefully and in its entirety by the
stockholders.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVE THAT THE TERMS OF
THE MERGER AGREEMENT ARE ADVISABLE, FAIR AND IN THE BEST INTERESTS OF
PHYSICIANS' SPECIALTY AND THE COMPANY'S PUBLIC STOCKHOLDERS AND UNANIMOUSLY
RECOMMEND THAT THE STOCKHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT.
Approval of the merger at the Special Meeting will require the affirmative
vote of holders of a majority of the outstanding shares of Common Stock entitled
to vote at the Special Meeting. Certain members of management and certain
affiliated physicians, who, as of the record date, beneficially owned
approximately 40% of the outstanding shares of Physicians' Specialty Common
Stock, have agreed to vote their shares for approval of the merger.
The accompanying Proxy Statement provides you with a summary of the proposed
merger agreement and additional information about the parties involved and their
interests. If the merger agreement is approved by the holders of the Common
Stock, the closing of the merger will occur after the Special Meeting as soon as
all of the other conditions to closing the merger are satisfied.
PLEASE GIVE ALL THIS INFORMATION YOUR CAREFUL ATTENTION. WHETHER OR NOT YOU
PLAN TO ATTEND, IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL
MEETING. A FAILURE TO VOTE WILL COUNT AS A VOTE AGAINST THE MERGER. ACCORDINGLY,
YOU ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND RETURN IT IN THE ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND. THIS
WILL NOT PREVENT YOU FROM VOTING YOUR SHARES IN PERSON IF YOU SUBSEQUENTLY
CHOOSE TO ATTEND.
Sincerely,
Ramie A. Tritt, M.D.
Chairman of the Board and President
<PAGE> 3
PHYSICIANS' SPECIALTY CORP.
1150 LAKE HEARN DRIVE
SUITE 640
ATLANTA, GEORGIA 30342
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
---------------------
Notice is hereby given that a Special Meeting of Stockholders of
Physicians' Specialty Corp., a Delaware corporation (the "Company"), will be
held on , 1999 at 10:00 a.m., local time, at the offices of King &
Spalding, located at 191 Peachtree Street, Atlanta, Georgia, for the following
purposes:
(1) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated June 14, 1999 (the "Merger Agreement"),
pursuant to which TA MergerCo, Inc., a newly formed Delaware corporation
("MergerCo"), will be merged with and into the Company and each stockholder
of the Company (other than stockholders who are entitled to and have
perfected their appraisal rights, MergerCo and certain members of
management and their affiliates, affiliated physicians and employees) will
become entitled to receive $10.50 in cash for each outstanding share of
common stock, $.001 par value, of the Company (the "Common Stock") owned
immediately prior to the effective time of the Merger. A copy of the Merger
Agreement is attached as Appendix A to and is described in the accompanying
Proxy Statement.
(2) If a motion to adjourn the Special Meeting is properly brought, to
vote upon the adjournment of the Special Meeting.
(3) To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors has determined that only holders of Common Stock of
record at the close of business on , 1999, will be entitled to notice
of, and to vote at, the Special Meeting or any adjournment or adjournments
thereof. A form of proxy and a Proxy Statement containing more detailed
information with respect to the matters to be considered at the Special Meeting
accompany and form a part of this notice.
By order of the Board of Directors,
Ramie A. Tritt, M. D.
Chairman of the Board and President
Atlanta, Georgia
, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. PLEASE DO NOT
SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF THE MERGER NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
Any stockholder shall have the right to seek appraisal of his or her shares
upon compliance with the procedures set forth in Section 262 of the Delaware
General Corporation Law. See "RIGHTS OF DISSENTING STOCKHOLDERS" in the Proxy
Statement that accompanies this notice and the full text of Section 262 of the
Delaware General Corporation Law, which is attached as Appendix C and is
described in the accompanying Proxy Statement.
<PAGE> 4
PHYSICIANS' SPECIALTY CORP.
1150 LAKE HEARN DRIVE
SUITE 640
ATLANTA, GEORGIA 30342
---------------------
PROXY STATEMENT
---------------------
THE PROXY STATEMENT IS DATED , 1999 AND WAS
FIRST MAILED TO STOCKHOLDERS ON , 1999.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL HAPPEN IN THE MERGER?
A: Upon consummation of the Merger, TA MergerCo, Inc. ("MergerCo") will be
merged with and into Physicians' Specialty with Physicians' Specialty being
the surviving corporation. All stockholders (the "Public Stockholders") of
Physicians' Specialty, other than Physicians' Specialty, its subsidiaries,
MergerCo, certain members of management, Bock, Benjamin & Co. Partners,
L.P., an affiliate of Gerald R. Benjamin, certain employees and affiliated
physicians and those stockholders who exercise their appraisal rights, will
receive a cash payment for their outstanding shares of Common Stock. Certain
members of management, Bock, Benjamin & Co. Partners, L.P., affiliated
physicians and employees will receive a cash payment for certain of their
shares and certain of their shares will be converted into shares in the
surviving corporation on a share-for-share basis. Physicians' Specialty
Common Stock held by Physicians' Specialty, its subsidiaries and MergerCo
will be canceled. Each share of Common Stock of MergerCo will be converted
into one share of common stock of the Surviving Corporation, and each share
of convertible participating preferred stock and redeemable preferred stock
of MergerCo will be converted into one share of convertible participating
preferred stock and redeemable preferred stock, respectively, in the
Surviving Corporation. After the Merger, Physicians' Specialty will become a
privately held company principally owned by the following individuals
(including certain of their affiliates) and entities or their assigns
(collectively with MergerCo, the "Investor Group") as set forth below:
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OF
OWNERSHIP OF REDEEMABLE
COMMON PERCENTAGE PREFERRED PERCENTAGE
STOCK (%)(1) STOCK (%)(1)
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
THE TA INVESTORS
TA/Advent VIII, L.P............................. 1,951,413(2) 34.0% 16,705 60.1%
TA/Atlantic and Pacific IV, L.P................. 1,219,755(2) 21.2 10,442 37.6
TA Executives LLC............................... 37,021(2) 0.6 317 1.1
TA Investors LLC................................ 39,295(2) 0.7 336 1.2
THE MANAGEMENT SPONSORS
Richard D. Ballard.............................. 62,765 1.1%
Gerald R. Benjamin(3)........................... 52,214 0.9
Robert A. DiProva............................... 22,721 0.4
Lawrence P. Kraska.............................. 33,755 0.6
Ramie A. Tritt, M.D............................. 1,402,875 24.4
THE PHYSICIAN INVESTORS
27 affiliated physicians........................ 472,980 8.2%
</TABLE>
(1) The table above assumes that the Management Sponsors, their affiliates and
the Physician Investors exchange 2,047,310 shares of Physicians' Specialty
Common Stock for Surviving Corporation common stock and that employees
exchange approximately 11,500 shares of Physicians' Specialty Common Stock
for Surviving Corporation common stock.
(2) The number of shares of common stock beneficially owned by the TA Investors
includes the number of shares of common stock into which convertible
participating preferred stock of the Surviving Corporation will be
convertible.
(3) Includes 27,500 shares of common stock of the Surviving Corporation to be
held by Bock, Benjamin & Co. Partners, L.P. Gerald R. Benjamin is a
principal of the general partner of Bock, Benjamin & Co. Partners, L.P.
<PAGE> 5
In addition, employees of Physicians' Specialty holding stock options will
be permitted to exchange shares received by them upon exercise of such options
for common stock in the surviving corporation.
Q: WHY IS PHYSICIANS' SPECIALTY BEING ACQUIRED?
A: The Board of Directors and the Special Committee each believes that the
acquisition of Physicians' Specialty is in the best interests of Physicians'
Specialty and the Public Stockholders and that as a private company,
Physicians' Specialty will have greater operating flexibility and an
improved ability to attract and retain management and to consummate
acquisitions. To review the background and reasons for the Merger in greater
detail, see pages through .
Q: WHY WAS THE SPECIAL COMMITTEE FORMED?
A: Because it appeared that certain directors of Physicians' Specialty would
have actual or potential conflicts of interest in evaluating the Merger, the
Physicians' Specialty Board of Directors appointed a Special Committee of
disinterested directors to review and evaluate the proposed transaction. The
Special Committee has determined that the Merger Agreement is advisable,
fair and in the best interests of the Public Stockholders and recommended to
the full Board of Physicians' Specialty that it approve, adopt and declare
advisable the Merger Agreement and the transactions contemplated thereby.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive $10.50 in cash, without interest, for each share of
Physicians' Specialty Common Stock held by you. This is the "Cash Merger
Consideration." For example: If you own 100 shares of Physicians' Specialty
Common Stock, upon completion of the Merger you will receive $1,050 in cash.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the Merger during the fourth quarter of 1999.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The receipt of the Cash Merger Consideration by you will be a taxable
transaction for federal income tax purposes. To review the tax consequences
to you in greater detail, see pages through .
YOUR TAX CONSEQUENCES WILL DEPEND ON YOUR PERSONAL SITUATION. YOU SHOULD
CONSULT YOUR TAX ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF
THE MERGER TO YOU.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to vote to approve and adopt the Merger Agreement, which
provides for the acquisition of Physicians' Specialty by MergerCo. After the
Merger, Physicians' Specialty will become a privately held company and you
will no longer own an equity interest in Physicians' Specialty.
THE PHYSICIANS' SPECIALTY BOARD AND SPECIAL COMMITTEE HAVE UNANIMOUSLY
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT ARE ADVISABLE, FAIR AND IN THE
BEST INTERESTS OF PHYSICIANS' SPECIALTY AND THE PUBLIC STOCKHOLDERS AND
RECOMMEND VOTING FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting.
Approval of the proposal requires the affirmative vote of a majority of the
outstanding shares of Physicians' Specialty Common Stock. Therefore, a failure
to vote or a vote to abstain will have the same legal effect as a vote against
the Merger Agreement.
ii
<PAGE> 6
The Special Meeting will take place on , 1999, at 10:00 a.m.,
local time, at the offices of King & Spalding, located at 191 Peachtree Street,
Atlanta, Georgia. You may attend the Special Meeting and vote your shares in
person, rather than voting by proxy. In addition, you may withdraw your proxy up
to and including the time it is voted at the Special Meeting and either change
your vote or attend the Special Meeting and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares of Common Stock only if you provide
instructions on how to vote. You should instruct your broker how to vote
your shares, following the directions your broker provides. If you do not
provide instructions to your broker, your shares will not be voted. This
will have the same effect as voting your shares against the proposal to
approve and adopt the Merger Agreement.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, we will send you written instructions for
exchanging your Common Stock certificates for the Cash Merger Consideration.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would like
to ask any additional questions about the Merger, you should contact:
Richard D. Ballard, Chief Executive Officer
Physicians' Specialty Corp.
1150 Lake Hearn Drive
Suite 640
Atlanta, Georgia 30342
Telephone: (404) 256-7535
You should note that Mr. Ballard, as well as the other executive officers
of Physicians' Specialty, are participants in the Merger as Management Sponsors
and have interests in the Merger that are different from, or in addition to,
yours as a Physicians' Specialty stockholder.
iii
<PAGE> 7
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT AND OTHER STATEMENTS MADE FROM TIME TO TIME BY
PHYSICIANS' SPECIALTY, MERGERCO OR THEIR AFFILIATES OR REPRESENTATIVES CONTAIN
FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF, OR CURRENT EXPECTATIONS OF PHYSICIANS' SPECIALTY AND MERGERCO
AND MEMBERS OF THEIR RESPECTIVE MANAGEMENT TEAMS, AS WELL AS THE ASSUMPTIONS ON
WHICH SUCH STATEMENTS ARE BASED. SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING
STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT OF PHYSICIANS'
SPECIALTY AND MERGERCO THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS
DETAILED HEREIN AND: (I) THE INABILITY OF THE COMPANY TO PREDICT THE OUTCOME OF
THE LITIGATION DESCRIBED HEREIN OR ITS IMPACT ON THE MERGER; (II) THE COMPANY'S
LIMITED OPERATING HISTORY; (III) THE COMPANY'S ACQUISITION STRATEGY; (IV) THE
COMPANY'S DEPENDENCE ON AFFILIATED PHYSICIANS; (V) THE ADVERSE AFFECT ON THE
COMPANY'S ABILITY TO OBTAIN ADDITIONAL FUNDS AND THE INCREASE IN THE COMPANY'S
VULNERABILITY TO ECONOMIC OR BUSINESS DOWNTURNS AS A RESULT OF SUBSTANTIAL
INDEBTEDNESS AND REDUCED CASH AVAILABILITY; (VI) REDUCTIONS IN REIMBURSEMENT BY
THIRD PARTY PAYORS; (VII) INTENSE COMPETITION IN THE PHYSICIAN PRACTICE
MANAGEMENT INDUSTRY; AND (VIII) VARIOUS GOVERNMENT REGULATIONS.
iv
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... i
WHO CAN HELP ANSWER YOUR QUESTIONS.......................... iii
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION............................................... iv
SUMMARY..................................................... 1
Effects of the Merger..................................... 1
The Companies............................................. 1
The Special Meeting....................................... 1
Record Date; Voting Power................................. 2
Vote Required............................................. 2
Recommendations........................................... 2
Opinion of Financial Advisor.............................. 3
Terms of the Merger Agreement............................. 3
Share Ownership of Physicians' Specialty following the
Merger................................................. 4
Accounting Treatment...................................... 5
Financing of the Merger................................... 5
Conflicts of Interest..................................... 6
Litigation Relating to the Merger......................... 7
Appraisal Rights.......................................... 7
Market Information........................................ 8
Selected Consolidated Financial Data...................... 9
Unaudited Pro Forma Consolidated Financial Statements..... 10
Unaudited Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1998................... 11
Unaudited Pro Forma Consolidated Statement of Operations
for the Six Months Ended June 30, 1999................. 12
Unaudited Pro Forma Consolidated Balance Sheet as of June
30, 1999............................................... 13
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. 14
Consolidated Ratios of Earnings to Fixed Charges and Book
Value Per Share........................................ 16
SPECIAL FACTORS............................................. 17
Background of the Merger.................................. 17
The Special Committee's and the Board's Recommendation.... 23
Projections............................................... 28
Consolidated Projected Recapitalization Model
(Unaudited)............................................ 30
Opinion of Financial Advisor.............................. 30
Purpose and Reasons of the Management Sponsors, the TA
Investors and TA Associates for the Merger............. 36
Position of the Management Sponsors, the TA Investors and
TA Associates as to Fairness of the Merger............. 37
Conflicts of Interest..................................... 38
Litigation Relating to the Merger......................... 44
Certain Effects of the Merger............................. 45
Financing of the Merger................................... 45
Conduct of Physicians' Specialty Business After the
Merger................................................. 46
Risk that the Merger will not be Consummated.............. 46
THE SPECIAL MEETING......................................... 48
Date, Time, and Place of the Special Meeting.............. 48
Matters to Be Considered at the Special Meeting...........
Proxy Solicitation........................................ 48
Record Date and Quorum Requirement........................ 48
Voting Procedures......................................... 48
</TABLE>
v
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Voting and Revocation of Proxies.......................... 49
Effective Time of the Merger and Payment for Shares....... 49
Other Matters to Be Considered............................ 49
THE MERGER.................................................. 50
Terms of the Merger Agreement............................. 50
Estimated Fees and Expenses of the Merger................. 58
RIGHTS OF DISSENTING STOCKHOLDERS........................... 58
ACCOUNTING TREATMENT........................................ 61
FEDERAL INCOME TAX CONSEQUENCES............................. 61
BUSINESS OF THE COMPANY..................................... 63
General Development of Business........................... 63
Industry Segments......................................... 63
Description of Business................................... 63
Health Care Industry Overview............................. 64
Affiliated Practices...................................... 66
Ambulatory Surgery Centers, Sleep Diagnostic Laboratories,
and Diagnostic Imaging Centers......................... 67
Company Operations........................................ 68
Information Systems....................................... 68
Competition............................................... 69
Medical Advisory Board.................................... 70
Affiliation Agreements.................................... 71
Acquisition of ENT Practices since January 1, 1998........ 73
Capitated Managed Care Contracts; Network Development and
Management............................................. 75
Capitated Agreements with Third Party Payors.............. 76
Government Regulation..................................... 77
Liability and Insurance................................... 80
Employees................................................. 81
Properties................................................ 81
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 82
General................................................... 82
Management Services Agreements............................ 82
Capitated Management Contracts............................ 83
Results of Operations..................................... 84
Liquidity and Capital Resources........................... 87
Year 2000................................................. 89
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 91
CERTAIN INFORMATION CONCERNING MERGERCO AND THE INVESTOR
GROUP..................................................... 92
Mergerco.................................................. 92
TA Investors.............................................. 92
Management Sponsors....................................... 93
PURCHASES OF COMMON STOCK BY CERTAIN PERSONS................ 94
INDEPENDENT PUBLIC ACCOUNTANTS.............................. 94
STOCKHOLDER PROPOSALS....................................... 95
OTHER MATTERS............................................... 95
WHERE YOU CAN FIND MORE INFORMATION......................... 95
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 96
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- Agreement and Plan of Merger.................. A-1
APPENDIX B -- Opinion of The Robinson-Humphrey Company,
LLC....................................................... B-1
APPENDIX C -- Section 262 of the Delaware General
Corporation Law........................................... C-1
</TABLE>
vi
<PAGE> 10
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. For a more complete
understanding of the Merger and for a more complete description of the legal
terms of the Merger, you should read this entire document carefully, as well as
the additional documents to which we refer you, including the Merger Agreement.
See "Where You Can Find More Information" (page ).
EFFECTS OF THE MERGER
Pursuant to the Merger Agreement, MergerCo will be merged with and into
Physicians' Specialty with Physicians' Specialty being the surviving corporation
(the "Surviving Corporation"). As a result of the Merger, the Company will be
owned principally by the Investor Group, and Physicians' Specialty Common Stock
will no longer be publicly traded. The Public Stockholders will no longer be
stockholders of Physicians' Specialty and they will not participate in the
potential growth of Physicians' Specialty or bear the risk of any decreases in
the value of Physicians' Specialty Common Stock. Instead, the Public
Stockholders will have the right to receive $10.50 in cash, without interest,
for each share of Common Stock held (other than shares in respect of which
appraisal rights have been perfected under Delaware law). The Investor Group
will have the opportunity to benefit from any future earnings and growth of
Physicians' Specialty and will bear the risk of any decrease in the value. In
addition, the Management Sponsors have interests in the Merger as employees
and/or directors which are different from, or in addition to, yours as a
Physicians' Specialty stockholder. To review these interests, see "-- Conflicts
of Interest" and "Special Factors -- Conflicts of Interest."
THE COMPANIES
PHYSICIANS' SPECIALTY CORP.
1150 Lake Hearn Drive
Suite 640
Atlanta, Georgia 30342
(404) 256-7535
Physicians' Specialty provides comprehensive practice management services
to physician practices and health care providers specializing in the treatment
and management of diseases and disorders of the ear, nose, throat and head and
neck, known as ENT, including specialists practicing in the fields of allergy,
audiology, oral surgery, plastic surgery, pulmonology and sleep medicine.
TA MERGERCO, INC.
c/o TA Associates, Inc.
125 High Street, Suite 2500
Boston, Massachusetts 02110
(617) 574-6700
MergerCo was organized at the direction of TA Associates on behalf of
certain private investment funds managed by TA Associates for the sole purpose
of effecting the Merger. The private investment funds include TA/Advent VIII
L.P., TA/Atlantic and Pacific IV, L.P., TA Executives Fund LLC, and TA Investors
LLC and their assignees. MergerCo is not expected to have significant assets or
liabilities (other than those arising in connection with the Merger) or to
engage in any activities (other than those incident to its formation and the
Merger).
THE SPECIAL MEETING (PAGE )
The Special Meeting will be held on , 1999, at 10:00 a.m., local
time, at the offices of King & Spalding, located at 191 Peachtree Street,
Atlanta, Georgia. At the Special Meeting, Physicians' Specialty stockholders
will be asked to consider and vote upon a proposal to approve and adopt the
Merger
1
<PAGE> 11
Agreement. The stockholders also may be asked to vote on adjournment of the
Special Meeting if a motion to adjourn the Special Meeting is properly brought.
RECORD DATE; VOTING POWER (PAGE )
Holders of record of Physicians' Specialty Common Stock at the close of
business on , 1999 (the "Record Date") are entitled to notice of and
to vote at the Special Meeting and any adjournment or adjournments of the
Special Meeting. As of such date, there were shares of Common
Stock issued and outstanding held by approximately holders of
record. Each holder of record of Common Stock on the Record Date is entitled to
one vote for each share then held on any matter that may properly come before
the Special Meeting.
VOTE REQUIRED (PAGE )
Approval and adoption of the Merger Agreement by the Physicians' Specialty
stockholders will require the affirmative vote of the holders of a majority of
the outstanding shares of Physicians' Specialty Common Stock entitled to vote at
the Special Meeting. Accordingly, a failure to vote or a vote to abstain will
have the same legal effect as a vote against the Merger Agreement. The
Management Sponsors, their affiliates and the Physician Investors, who as of the
record date for the Special Meeting, beneficially owned approximately 40% of the
outstanding shares of Physicians' Specialty Common Stock, have agreed to vote
their shares for approval and adoption of the Merger Agreement. The Merger has
not been structured to require approval of a majority of stockholders not
affiliated with Physicians' Specialty or the Investor Group.
A "no" vote on the enclosed proxy card will be a vote against approval and
adoption of the Merger Agreement. If Physicians' Specialty does not receive
"yes" votes from a majority of the outstanding shares of Common Stock, the
Merger Agreement will not be approved and you will continue to own shares in a
publicly traded company.
Subject to the Merger Agreement, which requires that the Special Meeting be
held as soon as practicable, the stockholders may also be asked to vote on
adjournment of the Special Meeting for the purpose of soliciting additional
proxies in favor of the Merger Agreement.
A stockholder who gives a proxy with respect to voting on the Merger
Agreement may revoke it at any time before it is voted at the Special Meeting by
(i) filing with the Secretary of Physicians' Specialty an instrument revoking
it, (ii) submitting a duly executed proxy bearing a later date or (iii) voting
in person at the Special Meeting.
RECOMMENDATIONS (PAGE )
The full Physicians' Specialty Board of Directors formed the Special
Committee to review and evaluate the proposed transaction because it appeared
that certain of the directors would have actual or potential conflicts of
interest in evaluating the transaction. The Special Committee unanimously
recommended that the Physicians' Specialty Board approve, adopt and declare
advisable the Merger, the Merger Agreement and the transactions contemplated
thereby (together with the Merger, the "Transactions"). Following the unanimous
recommendation of the Special Committee, the Physicians' Specialty Board
unanimously determined that the Merger, the Merger Agreement and the
transactions contemplated thereby were advisable, fair and in the best interests
of Physicians' Specialty and the Public Stockholders and recommended that the
stockholders approve the Merger, the Merger Agreement and the transactions
contemplated thereby. The Special Committee and the Physicians' Specialty Board
recommend that the Physicians' Specialty stockholders vote "For" the approval
and adoption of the Merger Agreement. You also should refer to the reasons that
the Special Committee and the Physicians' Specialty Board considered in
determining whether to approve and adopt the Merger Agreement on pages
.
2
<PAGE> 12
OPINION OF FINANCIAL ADVISOR (PAGE )
The Robinson-Humphrey Company, LLC ("Robinson-Humphrey"), a nationally
recognized investment banking firm, which served as financial advisor to the
Special Committee, has rendered an opinion dated June 12, 1999 to the Special
Committee that the Cash Merger Consideration is fair from a financial point of
view to the Public Stockholders of Physicians' Specialty. A copy of the fairness
opinion, setting forth the information reviewed, assumptions, limitations and
qualifications made, and matters considered, is attached to this Proxy Statement
as Appendix B. You should read the fairness opinion of Robinson-Humphrey in its
entirety.
TERMS OF THE MERGER AGREEMENT (PAGE )
The Merger Agreement is attached to this Proxy Statement as Appendix A. You
are encouraged to read the Merger Agreement in its entirety. It is the legal
document that governs the Merger.
General. The Merger Agreement provides that MergerCo will be merged with
and into Physicians' Specialty, with Physicians' Specialty being the Surviving
Corporation. As a result of the Merger, the Public Stockholders of Physicians'
Specialty will be entitled to receive $10.50 in cash, without interest, for each
share of Physicians' Specialty Common Stock they own.
Conditions to the Merger. The completion of the Merger depends upon the
satisfaction of a number of conditions, including:
- approval of the Merger Agreement by the holders of a majority of the
outstanding shares of Physicians' Specialty Common Stock;
- debt financing from senior and subordinated lenders having been obtained
in amounts and on substantially the same terms as set forth in two
financing commitment letters received in connection with the Merger;
- there not having occurred any change or changes concerning the Company
and its subsidiaries, taken as a whole, which would, individually or in
the aggregate, reasonably be expected to have a material adverse effect
on the business, results of operation or condition (financial or
otherwise) of the Company and its subsidiaries taken as a whole (a
"Company Material Adverse Effect"); and
- the holders of no more than 5% of the outstanding shares of Physicians'
Specialty Common Stock having taken all required actions to assert
appraisal rights under Section 262 of the DGCL and not having withdrawn
or otherwise permitted to lapse such appraisal rights or demands
therefor.
Each party may, at its option, waive the satisfaction of any condition to
such party's obligations under the Merger Agreement. If Physicians' Specialty or
any other party waives a condition to its obligations to perform under the
Merger Agreement, Physicians' Specialty will resolicit stockholder approval only
if such waiver reduces the amount or changes the form of consideration to be
received by Physicians' Specialty Public Stockholders, or is otherwise required
by applicable law. EVEN IF THE STOCKHOLDERS APPROVE THE MERGER AGREEMENT, THERE
CAN BE NO ASSURANCE THAT THE MERGER WILL BE CONSUMMATED.
Solicitation. The Merger Agreement provides that neither Physicians'
Specialty nor its subsidiaries nor any of their respective officers, directors,
employees or representatives shall be permitted, directly or indirectly, to
initiate, solicit or encourage (including by way of furnishing non-public
information) or take any action to facilitate, any inquiries or the making of
any proposal that constitutes an Acquisition Proposal (as defined in the Merger
Agreement); to participate in discussions or negotiations regarding an
Acquisition Proposal; or to enter into any agreements, definitive or otherwise,
regarding an Acquisition Proposal. Physicians' Specialty may, however, upon
receipt of a non-solicited Acquisition Proposal at any time prior to the
approval of the Merger Agreement by the Physicians' Specialty stockholders,
furnish non-public information with respect to Physicians' Specialty and its
subsidiaries to the person making such proposal and may participate in
discussions with such party if the Board of Directors of Physicians' Specialty
determines based on the advice of independent legal counsel that failure to do
so would be
3
<PAGE> 13
inconsistent with its fiduciary duties and determines based on advice of its
financial advisors such Acquisition Proposal is likely to lead to a transaction
(a "Superior Acquisition Proposal") more favorable to the stockholders from a
financial point of view than the Merger. Physicians' Specialty will advise
MergerCo promptly after it receives an indication of interest, inquiry or
proposal from a third party regarding an Acquisition Proposal and of the status
of material developments in the negotiations with respect to the Acquisition
Proposal or the taking of actions not otherwise permitted under the Merger
Agreement with respect to such Acquisition Proposal.
Termination. Either Physicians' Specialty or MergerCo may terminate the
Merger Agreement under certain circumstances, including if:
- both parties consent in writing;
- the Merger is not completed before November 30, 1999;
- legal restraints or prohibitions prevent the consummation of the Merger;
- the Physicians' Specialty stockholders do not approve the Merger
Agreement; or
- the other party breaches in a material manner any of its representations,
warranties or covenants under the Merger Agreement and such breach is not
cured within 15 days following notice.
In addition, Physicians' Specialty may terminate the Merger Agreement in
connection with entering into a definitive agreement to effect a Superior
Acquisition Proposal in accordance with the terms of the Merger Agreement, and
MergerCo may terminate the Merger Agreement if the Physicians' Specialty Board
withdraws, or adversely modifies, its approval or recommendation of the Merger
Agreement or the Merger or if Physicians' Specialty enters into any agreement
concerning an Acquisition Proposal.
Fees and Expenses. Physicians' Specialty and MergerCo will pay their own
fees, costs and expenses incurred in connection with the Merger Agreement.
Physicians' Specialty will pay MergerCo a termination fee equal to $3.5 million
plus up to $750,000 of MergerCo's out-of-pocket fees and expenses if Physicians'
Specialty terminates the Merger Agreement because it has entered into a
definitive agreement concerning an Acquisition Proposal or if either party
terminates the Merger Agreement because of the failure to obtain the required
stockholder approval and the Company under certain circumstances enters into a
definitive agreement regarding an Acquisition Proposal within 12 months of
termination. Physicians' Specialty will pay MergerCo's out-of-pocket fees and
expenses (not to exceed $750,000) if MergerCo terminates the Merger Agreement
because the Board has withdrawn or adversely modified its recommendation of the
Merger or because Physicians' Specialty has entered into a definitive agreement
concerning an Acquisition Proposal. Each of MergerCo and Physicians' Specialty
agrees to pay the other party's fees and expenses (not to exceed $750,000) upon
the termination of the Merger Agreement based on a material breach of any
representation, warranty or covenant that such party has under the Merger
Agreement.
Employee Options. All employees holding options to purchase Physicians'
Specialty Common Stock will be given the opportunity to exercise their options
and to request that some or all of the shares received by them upon exercise of
their options be converted into shares of common stock of the Surviving
Corporation on a share for share basis. As of June 30, 1999, there were options
outstanding to purchase an aggregate of 1,524,940 shares of Common Stock, of
which 1,422,960 have an exercise price per share of less than $10.50. Of the
1,422,960 options having an exercise price per share of less than $10.50,
1,194,940 are held by the Management Sponsors and will be subject to a cashless
exercise immediately prior to the Merger pursuant to the terms of an Option
Exercise and Termination Agreement entered into by the Management Sponsors. At
or prior to the effective time of the Merger, each option then outstanding to
purchase Physicians' Specialty Common Stock will vest and become fully
exercisable.
SHARE OWNERSHIP OF PHYSICIANS' SPECIALTY FOLLOWING THE MERGER (PAGE )
The TA Investors. The exact amount of the TA Investors' investment in
MergerCo is dependent upon the exact number of shares of Physicians' Specialty
Common Stock exchanged by the Management
4
<PAGE> 14
Sponsors, their affiliates, the Physician Investors and other employees for
shares of Surviving Corporation common stock. Assuming that the Management
Sponsors, their affiliates and the Physician Investors exchange 2,047,310 shares
of Physicians' Specialty Common Stock for Surviving Corporation common stock
(and that other employees exchange approximately 11,500 shares), the TA
Investors will contribute approximately $32.8 million to MergerCo (which will
consist of cash and shares of Physicians' Specialty Common Stock acquired
directly by the TA Investors from the Management Sponsors, their affiliates and
the Physician Investors for $10.50 per share in cash immediately prior to such
contribution) in exchange for approximately 27,800 shares of redeemable
preferred stock of MergerCo and approximately 3.2 million shares of convertible
participating preferred stock of MergerCo, which shares will be converted into a
like number of shares of Surviving Corporation redeemable preferred stock and
convertible participating preferred stock in the Merger. Upon consummation of
the Merger, the TA Investors and their assigns (including Allied Capital
Corporation, the subordinated debt lender, to which the TA Investors will
transfer approximately 97,000 shares of convertible participating preferred
stock) will own approximately 57% of the shares of Surviving Corporation common
stock on a fully diluted basis (assuming the exercise of all rights to acquire,
and the conversion of all securities and promissory notes convertible into,
Surviving Corporation common stock). See "-- Unaudited Pro Forma Consolidated
Financial Statements."
The Management Sponsors and the Physician Investors. In the Merger, the
Management Sponsors, their affiliates and the Physician Investors will exchange
an aggregate of 2,047,310 shares of Physicians' Specialty Common Stock for a
like number of shares of Surviving Corporation common stock. Upon consummation
of the Merger, the Management Sponsors, their affiliates and the Physician
Investors will own approximately 36% of the outstanding shares of Surviving
Corporation common stock on a fully diluted basis (assuming the exercise of all
rights to acquire, and the conversion of all securities and promissory notes
convertible into, Surviving Corporation common stock). Determinations have not
yet been made by other employees as to the number, if any, of shares of
Physicians' Specialty Common Stock such employees will exchange for Surviving
Corporation common stock.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization for accounting
purposes.
FINANCING OF THE MERGER (PAGE )
The total amount of funds necessary to consummate the Transactions is
expected to be approximately $89.2 million. These funds are expected to come
from the following sources:
- an equity investment by the TA Investors of approximately $32.8 million;
- borrowings by the Surviving Corporation of approximately $41.0 million
under a new $60.0 million credit facility;
- an investment by a subordinated lender of $15.0 million in exchange for
subordinated debentures and warrants to purchase Surviving Corporation
common stock (in addition to a $1.0 million equity investment that is
included in the $32.8 million investment described above); and
- the Company's surplus cash in the amount of approximately $403,000.
In addition, the Management Sponsors, their affiliates and Physician
Investors will exchange approximately 2,047,310 shares of Common Stock having an
aggregate value of $21.6 million (based on a price of $10.50 per share) for
common stock in the Surviving Corporation.
Physicians' Specialty and TA Associates have received a financing letter
from First Union National Bank ("First Union") for a revolving credit facility
in the amount of $60.0 million, of which approximately $41.0 million will be
used to finance the consummation of the Merger and the related transactions. In
addition, Physicians' Specialty and TA Associates have received a financing
letter from Allied Capital Corporation ("Allied") under which Allied has
committed to invest $15.0 million in exchange for subordinated debentures
together with warrants to purchase Surviving Corporation common stock and to
5
<PAGE> 15
invest an additional $1.0 million in exchange for convertible participating
preferred stock. These financing letters are subject to the satisfaction of
numerous conditions, including the satisfaction of certain financial tests.
CONFLICTS OF INTEREST (PAGE )
The Management Sponsors. The Management Sponsors have interests in the
Merger as employees and/or directors that are different from, or in addition to,
yours as a Physicians' Specialty stockholder. The Management Sponsors and their
affiliates will continue to have an equity interest in the Surviving Corporation
and the ultimate value of this interest could exceed the $10.50 per share to be
received by the Public Stockholders in the Merger.
As of the date of execution of the Merger Agreement, the Management
Sponsors beneficially owned 28.3% of the Company's issued and outstanding Common
Stock. Following consummation of the Merger, the Management Sponsors will
beneficially own 27.4% of the outstanding shares of common stock of the
Surviving Corporation on a fully diluted basis. In addition, following
consummation of the Merger, the Management Sponsors will receive approximately
$8.1 million in cash as consideration for their shares of Common Stock purchased
by the TA Investors pursuant to the Merger. Further, it is expected that the
Management Sponsors who were members of management prior to the Merger will
continue as management of the Surviving Corporation. The Board of Directors of
the Surviving Corporation following the Merger will be comprised of Dr. Tritt
and Messrs. Ballard and Benjamin (the designees of the Company's management),
Richard Tadler and David S.B. Lang (the designees of the TA Investors) and up to
two outside directors to be determined at a later time. In addition, if the
Merger is consummated, options to purchase common stock of the Surviving
Corporation may be made available to the Management Sponsors and amendments to
the existing Employment Agreements of certain of the Management Sponsors will
become effective. The amended agreements would extend the terms of such
Management Sponsors' existing Employment Agreements, increase Messrs. Ballard
and Kraska's base salaries $50,000 and $30,000, respectively, above their
present levels, and reduce certain severance benefits the Management Sponsors
(other than Mr. DiProva) would otherwise have been entitled to receive upon
termination after a change of control of the Company. Also, certain
indemnification arrangements and directors' and officers' liability insurance
for existing directors and officers of Physicians' Specialty will be continued
by Physicians' Specialty after the Merger.
Advisory and Consulting Agreements. Pursuant to a letter agreement dated
January 13, 1999, the Company retained Premier HealthCare ("PHC"), a division of
Bock, Benjamin & Co., an entity in which Mr. Benjamin is chief executive officer
and holds a 25% beneficial ownership interest, to provide advisory services and
assist the Company and its Board in the consummation of a leveraged
recapitalization transaction. In connection with its engagement of PHC,
Physicians' Specialty agreed to reimburse PHC's out-of-pocket expenses and pay a
success fee to PHC equal to (A) 1.25% of the total consideration paid in
connection with any consummated transaction, which shall include indebtedness
for borrowed money and the value of any options assumed less (B) a credit not to
exceed $150,000 for any fees payable by the Company to other investment banking
firms in connection with any consummated transaction. Upon consummation of the
Merger, PHC will receive a net fee of approximately $1.25 million under the
letter agreement. The Company also agreed to indemnify PHC against certain
liabilities. In addition, the Company and PHC are parties to a separate
agreement which provides for fees to be paid to PHC upon consummation of certain
transactions by the Company in which PHC has performed advisory services. PHC
will not receive any fee pursuant to this agreement as a result of the
consummation of the Merger. These arrangements are discussed in further detail
elsewhere in this Proxy Statement. See "SPECIAL FACTORS -- Conflicts of
Interests."
The Special Committee. Upon consummation of the Merger, the members of the
Special Committee will be entitled to receive $10.50 per share in cash, without
interest, for each share of Common Stock that they will receive upon the
exercise of stock options which will vest upon consummation of the Merger. In
addition, each member received an aggregate amount of $13,500 in connection with
meetings of the
6
<PAGE> 16
Special Committee, paid pursuant to the Board's policy for compensation of
directors. The members of the Special Committee believe that the foregoing
arrangements do not affect their independence or impartiality.
Projections. In connection with the Merger, one material factor evaluated
by the Special Committee and the Board was the projections of the Company's
performance prepared by management on which the initial recapitalization model
prepared by PHC and the recapitalization model developed by Robinson-Humphrey
were based. These projections reflect a slower rate of acquisition activity and
related growth for the Company than realized prior to 1999. The Special
Committee and the Board also considered conflicts of interest in connection with
management's preparation of these projections, but concluded, having considered
its discussions with Robinson-Humphrey, the Management Sponsors and other
officers and employees of the Company, that management's assumptions underlying
the projections as set forth in the recapitalization models prepared by PHC and
Robinson-Humphrey were reasonable.
LITIGATION RELATING TO THE MERGER (PAGE )
As of the date of this Proxy Statement, Physicians' Specialty is aware of
one lawsuit, Chill v. Physicians' Specialty Corp., et al. (C.A. No. 17244NC),
that has been filed as a purported class action in the Chancery Court for New
Castle County, Delaware on behalf of all holders of Physicians' Specialty Common
Stock excluding the defendants and their related or affiliated entities. The
lawsuit names as defendants Physicians' Specialty, six of the Company's seven
directors (including the three members of the Special Committee) and TA
Associates, Inc.
The lawsuit alleges, among other things, that the directors of Physicians'
Specialty have breached their fiduciary duties to the Company's stockholders by
approving the Merger. In particular, the lawsuit alleges that members of the
Board of Directors suffer from conflicts of interest that made it impracticable
for the Board of Directors to conduct a "bona fide" market check or auction of
the Company prior to approval of the Merger. The lawsuit also alleges that the
announcement of the Merger was timed to place an artificial lid on the market
price of Physicians' Specialty Common Stock. The lawsuit seeks, among other
things, preliminary and permanent injunctive relief prohibiting consummation of
the Merger, unspecified damages, attorneys' fees and other relief. Physicians'
Specialty believes the lawsuit has no merit and intends to contest this lawsuit
vigorously.
APPRAISAL RIGHTS (PAGE )
Any stockholder of Physicians' Specialty who does not vote in favor of the
proposal to approve and adopt the Merger Agreement and who complies strictly
with the applicable provisions of Section 262 ("Section 262") of the Delaware
General Corporation Law (the "DGCL") is entitled to exercise his appraisal
rights to be paid cash for the "fair value" for such holder's shares of Common
Stock. To perfect these appraisal rights with respect to the Merger, you must
follow the required procedures precisely. The applicable provisions of Section
262 are attached to this Proxy Statement as Appendix C.
7
<PAGE> 17
MARKET INFORMATION
The Physicians' Specialty Common Stock is traded on The Nasdaq National
Market ("Nasdaq") (symbol: ENTS). The following table sets forth the high and
low sales prices for each quarterly period for the two most recent fiscal years
and for the current fiscal year to date.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
First quarter............................................. $ 8 1/4 $7 1/4
Second quarter............................................ 7 5/8 5
Third quarter............................................. 11 5 1/2
Fourth quarter............................................ 13 3/4 8 1/4
1998:
First quarter............................................. 12 8 7/16
Second quarter............................................ 11 1/2 8 1/8
Third quarter............................................. 8 3/4 5 3/4
Fourth quarter............................................ 8 3/8 6 1/4
1999:
First quarter............................................. 8 1/2 6 1/4
Second quarter............................................ 9 5/8 5 5/8
</TABLE>
On June 11, 1999, the last trading day prior to the announcement of the
execution of the Merger Agreement, the high, low and closing sales prices per
share of Common Stock as reported by Nasdaq were $8 7/8, $8 1/2, and $8 3/4,
respectively. On , 1999, the last trading day prior to printing of
this Proxy Statement, the high, low and closing sales prices per share of Common
Stock as reported by Nasdaq were $ , $ , and $ ,
respectively.
The Company has never paid any cash dividends on its Common Stock. Under
the Merger Agreement, the Company has agreed not to pay any dividends on the
Common Stock prior to the closing of the Merger. Under the Company's current
senior credit facility, the distribution of dividends is restricted.
In March, 1997, Physicians' Specialty completed its initial public offering
of 2,200,000 shares of Common Stock. The offering price per share was $8, and
the net proceeds received by Physicians' Specialty were approximately
$14,275,000. In May, 1998, Physicians' Specialty completed an underwritten
public offering of 2,307,537 shares of Common Stock. The offering price per
share was $8.50, and the net proceeds received by Physicians' Specialty were
approximately $16,520,000.
8
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
Certain selected consolidated historical financial data derived from the
audited financial statements of the Company are set forth below with respect to
the period from inception to December 31, 1996 and the fiscal years ended
December 31, 1997 and December 31, 1998. Selected financial data for the six
months ending June 30, 1998 and June 30, 1999 are based on unaudited financial
statements. The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company, related notes, and other
financial information included in this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FISCAL YEARS ENDED SIX MONTHS ENDED
(JULY 31, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER 31, ----------------------- -----------------------
1996 1997 1998 1998 1999
--------------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Net revenue................................ $ 51 $ 24,488 $ 61,601 $ 26,218 $ 44,642
Expenses:
Provider claims, salaries, wages and
benefits............................... 47 16,747 38,339 17,454 29,352
General and administration............... 357 4,371 13,141 4,820 8,008
Depreciation and amortization............ 2 377 1,850 686 1,373
-------- ---------- ---------- ---------- ----------
Operating expenses......................... 406 21,495 53,330 22,960 38,733
-------- ---------- ---------- ---------- ----------
Operating income (loss).................... (355) 2,993 8,271 3,258 5,909
-------- ---------- ---------- ---------- ----------
Net income (loss).......................... (355) 2,060 5,010 2,081 3,462
======== ========== ========== ========== ==========
Earnings per share (loss)
Basic.................................... $ (0.64) $ 0.42 $ 0.62 $ 0.29 $ 0.38
Diluted.................................. $ (0.64) $ 0.42 $ 0.60 $ 0.27 $ 0.37
Weighted average shares outstanding
Basic.................................... 522,894 4,868,035 8,021,914 7,106,869 9,168,388
Diluted.................................. 522,894 4,966,778 8,434,583 7,640,821 9,391,427
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------- AT JUNE 30,
1996 1997 1998 1999
----- ------- ------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 123 $ 5,352 $ 4,926 $ 1,407
Working capital (deficit)................................... (473) 10,469 18,388 15,801
Total assets................................................ 613 30,598 63,685 74,358
Total liabilities........................................... 505 912 11,314 23,208
Stockholders equity (deficit)............................... (10) 25,114 47,808 51,150
</TABLE>
9
<PAGE> 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Physicians' Specialty, MergerCo and the TA Investors have entered into the
Merger Agreement, which provides that MergerCo will be merged with and into
Physicians' Specialty with Physicians' Specialty being the Surviving
Corporation. In connection with the Merger, each stockholder of Physicians'
Specialty (other than stockholders who are entitled to and have perfected their
appraisal rights, Physicians' Specialty and its subsidiaries, MergerCo, the
Management Sponsors and their affiliates, the Physician Investors and certain
employees) will be entitled to receive $10.50 in cash for each outstanding share
of common stock. The Management Sponsors and certain of their affiliates, the
Physician Investors and certain other employees will receive a cash payment for
certain of their shares and certain of their shares will be converted into
common stock of the Surviving Corporation. In addition, each share of common
stock of MergerCo, each share of convertible participating preferred stock of
MergerCo and each share of redeemable preferred stock of MergerCo outstanding
immediately prior to the consummation of the Merger will be converted into one
share of common stock of the Surviving Corporation, one share of convertible
participating preferred stock of the Surviving Corporation and one share of
redeemable preferred stock of the Surviving Corporation, respectively. In order
to consummate the Merger, Physicians' Specialty and TA Associates have received
financing letters from First Union for a $60 million revolving credit facility
and from Allied for $15 million of subordinated debt and $1 million of equity.
These financing letters are subject to the satisfaction of numerous conditions,
including the satisfaction of certain financial tests.
The following table sets forth certain unaudited pro forma consolidated
financial statements for Physicians' Specialty for the fiscal year ended
December 31, 1998 and the quarter ended March 31, 1999 and reflects the pro
forma effect of the Merger and the acquisition of the tangible assets of
Physicians' Domain, Inc..
The selected unaudited pro forma consolidated statements of operations for
the fiscal year ended December 31, 1998 and for the six months ended June 30,
1999, give pro forma effect to the Merger as if it had occurred January 1, 1998.
The unaudited pro forma consolidated statement of operations for the fiscal year
ended December 31, 1998 also gives pro forma effect to the acquisition of the
stock of three corporations which were successors to physician practices
affiliated with Physicians' Domain, Inc. on May 27, 1998, as if such acquisition
had occurred on January 1, 1998. The unaudited pro forma consolidated balance
sheet as of June 30, 1999 gives pro forma effect to the Merger as if it had
occurred on June 30, 1999. The unaudited pro forma financial statements assume
that no dissenting stockholders successfully exercise their appraisal rights. If
dissenting stockholders successfully exercise appraisal rights and the Delaware
Chancery Court determines that the "fair value" of the shares held by the
dissenting stockholders is greater than $10.50 per share, then the pro forma
balance sheet would reflect increased borrowings under the credit agreement to
reflect the increased purchase price. In addition, the pro forma statement of
operations would reflect increased interest expense as a result of the increased
borrowings. The unaudited pro forma consolidated financial statements do not
purport to be indicative of the results of operations or financial position of
Physicians' Specialty that would have actually been obtained had the Merger been
completed as of the assumed dates and for the periods presented, or which may be
obtained in the future. The unaudited pro forma consolidated financial
statements should be read in conjunction with the separate historical
consolidated financial statements of Physicians' Specialty, and the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company which are included in this Proxy Statement.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
10
<PAGE> 20
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PHYSICIANS' UNAUDITED PRO FORMA PRO FORMA PRO FORMA
ACTUAL DOMAIN, INC.(F) COMBINED ADJUSTMENTS COMBINED ADJUSTMENTS
----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net patient service
revenues.......... $54,889,930 $4,446,000 $59,335,930 $59,335,930
Capitation
revenues.......... 4,916,424 -- 4,916,424 4,916,424
Management fees..... 1,164,418 -- 1,164,418 1,164,418
Earnings in
unconsolidated
subsidiary........ 630,415 -- 630,415 630,415
----------- ---------- ----------- -----------
Net Revenues...... 61,601,187 4,446,000 66,047,187 66,047,187
----------- ---------- ----------- -----------
EXPENSES:
Provider claims,
wages and
benefits.......... 38,339,351 1,808,000 40,147,351 40,147,351
General and
administrative.... 13,140,889 1,640,000 14,780,889 14,780,889
Depreciation and
amortization...... 1,849,864 72,000 1,921,864 170,210(G) 2,092,074
----------- ---------- ----------- --------- -----------
Operating
expenses........ 53,330,104 3,520,000 56,850,104 170,210 57,020,314
----------- ---------- ----------- --------- -----------
OPERATING INCOME..... 8,271,083 926,000 9,197,083 (170,210) 9,026,873
OTHER INCOME
(EXPENSE)........... (54,169) -- (54,169) (160,050)(H) (214,219) $(6,259,561)(A)(B)(E)
----------- ---------- ----------- --------- ----------- -----------
PRETAX INCOME........ 8,216,914 926,000 9,142,914 (330,260) 8,812,654 (6,259,561)
PROVISION FOR INCOME
TAXES............... 3,206,794 7,000 3,213,794 223,141(C) 3,436,935 (2,441,229)(C)
----------- ---------- ----------- --------- ----------- -----------
NET INCOME........... 5,010,120 919,000 5,929,120 (553,401) 5,375,719 (3,818,332)
DIVIDENDS ON
PREFERRED STOCK..... -- -- (1,668,000)(D)
----------- ---------- ----------- --------- ----------- -----------
NET INCOME AVAILABLE
TO COMMON
STOCKHOLDERS........ $ 5,010,120 $ 919,000 $5,929,120 (553,401) $5,375,719 $(5,486,332)
=========== ========== =========== ========= =========== ===========
Earnings per share
Basic............... $ 0.62
===========
Diluted............. $ 0.60
===========
Weighted average
common shares
outstanding
Basic............... 8,021,914
===========
Diluted............. 8,434,583
===========
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
REVENUES:
Net patient service
revenues.......... $59,335,930
Capitation
revenues.......... 4,916,424
Management fees..... 1,164,418
Earnings in
unconsolidated
subsidiary........ 630,415
-----------
Net Revenues...... 66,047,187
-----------
EXPENSES:
Provider claims,
wages and
benefits.......... 40,147,351
General and
administrative.... 14,780,889
Depreciation and
amortization...... 2,092,074
-----------
Operating
expenses........ 57,020,314
-----------
OPERATING INCOME..... 9,026,873
OTHER INCOME
(EXPENSE)........... (6,473,780)
-----------
PRETAX INCOME........ 2,553,093
PROVISION FOR INCOME
TAXES............... 995,706
-----------
NET INCOME........... 1,557,387
DIVIDENDS ON
PREFERRED STOCK..... (1,668,000)
-----------
NET INCOME AVAILABLE
TO COMMON
STOCKHOLDERS........ $ (110,613)
===========
Earnings per share
Basic............... $ (0.05)
===========
Diluted............. $ (0.05)
===========
Weighted average
common shares
outstanding
Basic............... 2,058,789
===========
Diluted............. 5,741,103
===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
11
<PAGE> 21
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Net patient service revenues................. $40,295,853 $40,295,853
Capitation revenue........................... 2,674,114 2,674,114
Management fees.............................. 904,054 904,054
Earnings in unconsolidated subsidiary........ 768,305 768,305
----------- -----------
Net Revenues.............................. 44,642,326 44,642,326
----------- -----------
EXPENSES:
Provider claims, wages and benefits.......... 29,352,940 29,352,940
General and administrative................... 8,007,521 8,007,521
Depreciation and amortization................ 1,372,536 1,372,536
----------- -----------
Operating expenses........................ 38,732,997 38,732,997
----------- -----------
OPERATING INCOME............................... 5,909,329 5,909,329
OTHER INCOME (EXPENSE)......................... (233,964) $(2,863,108)(B) (3,097,072)
----------- ----------- -----------
PRETAX INCOME.................................. 5,675,365 (2,863,106) 2,812,257
PROVISION FOR INCOME TAXES..................... 2,213,155 (1,116,612)(C) 1,096,543
----------- ----------- -----------
NET INCOME..................................... 3,462,210 (1,746,496) 1,715,714
DIVIDENDS ON PREFERRED STOCK................... -- (834,000)(D) (834,000)
----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS.... $ 3,462,210 $(2,580,496) $ 881,714
=========== =========== ===========
Earnings per share
Basic........................................ $ 0.38 $ 0.43
=========== ===========
Diluted...................................... $ 0.37 $ 0.30
=========== ===========
Weighted Average Shares Outstanding
Basic........................................ 9,168,388 2,058,789
=========== ===========
Diluted...................................... 9,391,427 5,741,103
=========== ===========
</TABLE>
See notes to unaudited pro forma consolidated financial statements
12
<PAGE> 22
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 1,407,338 $ (402,871)(A) $ 1,004,467
Accounts receivable, net........................ 20,080,599 20,080,599
Notes receivable................................ 1,647,662 1,647,662
Prepayments and other........................... 1,263,960 1,263,960
----------- ------------ ------------
Total current assets.................... 24,399,559 (402,871) 23,996,688
PROPERTY AND EQUIPMENT, net....................... 11,300,104 11,300,104
INTANGIBLE ASSETS, net............................ 31,211,198 -- 31,211,198
PROMISSORY NOTE RECEIVABLE........................ 2,152,000 2,152,000
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY........... 4,803,864 4,803,864
OTHER ASSETS...................................... 491,749 1,546,539(E) 2,038,288
----------- ------------ ------------
TOTAL ASSETS............................ $74,358,474 $ 1,143,668 $ 75,502,142
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings under credit agreement............... $ 861,058 $ (861,058)(A) $ --
Notes payable................................... 522,000 522,000
Due to physicians............................... 702,539 702,539
Accounts payable and accrued expenses........... 6,127,647 6,127,647
Deferred income taxes........................... 385,184 385,184
----------- ------------
Total current liabilities............... 8,598,428 (861,058) 7,737,370
----------- ------------
BORROWINGS UNDER REVOLVING CREDIT FACILITY........ -- 41,000,000(A) 41,000,000
BORROWINGS UNDER SUBORDINATED DEBENTURE........... -- 15,000,000(A) 15,000,000
SUBORDINATED SELLER NOTES......................... 8,860,034 8,860,034
BORROWINGS UNDER CREDIT AGREEMENT................. 5,750,000 (5,750,000)(A) --
----------- ------------ ------------
Total long-term debt.................... 14,610,034 50,250,000 64,860,034
----------- ------------ ------------
Total liabilities....................... 23,208,462 49,388,942 72,597,404
----------- ------------ ------------
REDEEMABLE PREFERRED STOCK........................ -- 27,800,000(A) 27,800,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock................................... -- 5,000,000(A) 5,000,000
Common stock...................................... 9,172 (7,113)(A) 2,059
Additional paid-in capital........................ 41,147,398 (41,147,398)(A) --
Treasury Stock.................................... (184,272) 184,272(A) --
Retained earnings................................. 10,177,714 (40,075,035)(A) (29,897,321)
----------- ------------ ------------
Total stockholders' equity (deficit).... 51,150,012 (76,045,274) (24,895,262)
Total liabilities and stockholders'
equity (deficit)...................... $74,358,474 $ 1,143,668 $ 75,502,142
=========== ============ ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
13
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
This transaction will be accounted for as a recapitalization for accounting
purposes. No goodwill is generated from the transaction but there are
adjustments and reductions from the equity accounts of the Company.
- ---------------
(A) These adjustments record (i) the borrowing under the First Union revolving
credit facility, (ii) the borrowing under the Allied Capital subordinated
debenture, (iii) the equity contribution (see "The Transactions,"
"Capitalization" and "Description of Preferred Stock"), and (iv) the use of
a portion of the net proceeds to purchase 7,484,931 of outstanding shares of
Physicians' Specialty Common Stock and to repay the existing credit
facility. The table below reflects the financing transactions:
<TABLE>
<S> <C>
Sources of cash
First Union revolving credit facility..................... $41,000,000
Allied Capital Subordinated Debenture..................... 15,000,000
Preferred shares -- redeemable............................ 27,800,000
Preferred shares -- convertible........................... 5,000,000
Cash...................................................... 402,871
-----------
$89,202,871
Uses of cash
Purchase of outstanding shares of common stock............ $78,591,813
Repayment of existing indebtedness........................ 6,611,058
Transaction fees and expenses............................. 4,000,000
-----------
$89,202,871
</TABLE>
The adjustments to common stock, additional paid-in capital, and retained
earnings record the impact of the cash payment for the shares of outstanding
Common Stock at $10.50 per share and the purchase of convertible participating
preferred and redeemable preferred stock. The Unaudited Pro Forma Consolidated
Balance Sheet reflects the mandatory redeemable preferred shares as "mezzanine
equity" of $27,800,000. The convertible participating preferred shares of
$5,000,000 are reflected in the equity section with the common stock adjusted to
reflect the remaining shares outstanding at par value based on number of shares
purchased. Under recapitalization accounting, the acquisition debt has been
recorded, and the offsetting amounts have been recorded to (a) reduce additional
paid-in capital ($41,147,398), (b) reduce common stock to an amount not less
than the par value ($7,113), (c) reduce retained earnings ($40,075,035) and (d)
reduce treasury shares ($184,272).
(B) Reflects the removal of interest expense under the Nationsbank Credit
Facility and the additional interest expense for the First Union Revolving
Credit Facility and the Allied Capital subordinated debenture incurred in
connection with this transaction computed at rates of 9% and 15.5% per
annum, respectively.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Interest expense on new financing:
First Union revolving credit facility..................... $3,690,000 $1,845,000
Allied Capital Subordinated Debenture..................... 2,325,000 1,162,500
Amortization of debt issuance costs......................... 321,429 160,715
Interest expense on historical debt repaid.................. (42,750) (288,049)
Amortization of debt issuance costs repaid.................. (34,118) (17,058)
Total adjustment.................................. $6,259,561 $2,863,108
</TABLE>
(C) Reflects the establishment of a provision for income taxes at an estimated
39% effective tax rate, which consists of a 34% statutory federal tax rate
and an average state statutory tax rate of 5%.
(D) Represents a 6% cumulative dividend on Redeemable Preferred Stock.
(E) Reflects the removal of debt issuance costs under the Nationsbank Credit
Facility and the additional amortization expense of debt issuance costs for
the First Union Revolving Credit Facility and the
14
<PAGE> 24
Allied Capital subordinated debenture computed at rates of 2.5% and 1.0% on
the total commitment amounts, respectively.
(F) In addition, the Company acquired the stock of three corporations
affiliated with Physicians' Domain, Inc., a White Plains, New York-based
practice management company, in a purchase combination. The unaudited pro
forma statement of operations for the fiscal year ended December 31, 1998
gives pro forma effect to the acquisition of the stock of three
corporations affiliated with of Physicians' Domain, Inc. on May 27, 1998,
as if such acquisition had occurred on January 1, 1998.
(G) Reflects the additional amortization expense of the $10.2 million of
goodwill recorded in connection with the acquisition of Physicians' Domain,
Inc.
(H) Reflects the additional interest expense for the $6.4 million in debt
incurred in connection with the acquisition of Physicians' Domain, Inc.
computed at a rate of 6.00%.
15
<PAGE> 25
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES AND BOOK VALUE PER SHARE
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges and book value per share of Physicians' Specialty
Common Stock for the years ended December 31, 1998 and 1997 and as at June 30,
1999. The following table also provides pro forma figures for the year ended
December 31, 1998 and as at June 30, 1999.
<TABLE>
<CAPTION>
AS OF THE AS OF THE PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED AS OF PRO FORMA AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1998 1999 1999
------------ ------------ ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges:(1)...................... 37.94 15.81 1.30 20.52 3.43
Book value per common share........ $ 5.16 $ 5.96 N/A $ 5.58 $(12.09)
</TABLE>
- ---------------
(1) For purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest) to income
before extraordinary items. Fixed charges consist of interest costs,
whether expensed or capitalized, and amortization of debt discounts and
issue costs, whether expensed or capitalized.
16
<PAGE> 26
SPECIAL FACTORS
BACKGROUND OF THE MERGER
In 1998, market valuations of publicly traded physician practice management
("PPM") companies deteriorated. The Company completed a follow-on equity
offering in May 1998 and was disappointed with the pricing of its Common Stock.
Shortly after the offering, an investment banker from one of the managing
underwriters of the offering approached management of the Company with a
proposal that Physicians' Specialty give consideration to consummating a
business combination with another PPM company so as to increase the Company's
market capitalization, thus allowing for a broader base of institutional
investors to establish positions in the Physicians' Specialty Common Stock. The
investment banker indicated that the Company's specialty focus and managed care
expertise might be attractive to three large PPM companies known to the
investment banker. After discussing the investment banker's proposal with the
Board, management authorized the investment banker, without a formal engagement,
to informally explore with these three PPM companies whether they might be
interested in a possible business combination. The investment banker was not
authorized to disclose the identity of the Company. The investment banker
reported that each of the three PPM companies approached indicated they were not
interested in pursuing a business combination.
During the third quarter of 1998, the Company's Board of Directors and the
management team were concerned about the overall deterioration of market
valuations of publicly traded PPM companies. The Board anticipated that, as a
result of the deterioration in market valuations, there would be a decrease in
physician practice acquisition activity and a related decrease in revenue growth
attributable to practice acquisitions. Although the Company continued to have
strong revenue growth and to meet consensus Wall Street analyst estimates, the
Company's stock price had declined from a price of $12.00 in March 1998, to a
low of $5.375 in the third quarter of 1998. Management believed that the
declining stock price was a result of negative investor sentiment toward PPM
companies and a difficult market for small capitalization stocks. The Company's
depressed stock price was having an adverse impact upon the Company's ability to
attract and retain qualified management and to utilize its Common Stock in
connection with acquisitions. Management was concerned about the resulting
detrimental effect on the Company's long-term business strategy which has been
to consolidate in select markets the management and delivery of ENT and related
specialty care largely through acquisitions.
Late in the third quarter of 1998, another PPM company ("Company No. 1")
approached senior management of the Company to discuss the Company's interest in
pursuing a business combination. Management reported this approach to the Board
of Directors. After careful consideration, the Board determined a merger with
Company No. 1 would be inconsistent with the Company's long-term business
strategy given Company No. 1's geographic focus, limited financial resources and
small market capitalization.
During the fourth quarter of 1998, Physicians' Specialty approached
Robinson-Humphrey and requested that a meeting be arranged with another PPM
company ("Company No. 2") to discuss a possible business combination
transaction. Robinson-Humphrey had not been retained as financial advisor by
either Physicians' Specialty or Company No. 2. Management authorized
Robinson-Humphrey to approach Company No. 2 and to inquire informally as to that
company's interest in pursuing a business combination with Physicians'
Specialty. After an introductory meeting held during the course of the
Robinson-Humphrey Healthcare Conference, Company No. 2 informed
Robinson-Humphrey that it was not able to consider pursuing a business
combination with Physicians' Specialty at that time. Shortly thereafter, Company
No. 2 disclosed that its Board of Directors had approved a merger with another
publicly traded PPM company.
In December 1998, management of the Company approached one of its
suppliers, a manufacturer and distributor of surgical products ("Company No.
3"), about its interest in exploring a business combination with the Company.
Company No. 3 subsequently indicated through its investment bankers that it had
no interest in pursuing a business combination with a PPM company.
17
<PAGE> 27
During the fourth quarter of 1998, the Company's senior management began to
receive unsolicited inquiries from private equity firms regarding the Company's
interest in pursuing a recapitalization of the Company. Dr. Ramie A. Tritt, the
Chairman of the Board and President of the Company, reported this development to
the full Board of Directors on November 4, 1998. The Board of Directors
encouraged Dr. Tritt to explore available alternatives that would provide
enhanced value to the Company's stockholders. The Board of Directors considered
the possibility of an acquisition of the Company which would involve an
investment by management as a potential transaction that might provide enhanced
value to the Company's stockholders. Because of the depressed market values of
the companies in the PPM industry and the lack of success the Company had
experienced over the previous months in exploring a strategic business
combination, the Board believed a transaction involving management and a
financial buyer was likely to be the best alternative to enhance stockholder
value. At the January 12, 1999 Board meeting, the Board discussed the strategic
alternatives available to the Company to enhance stockholder value, including a
merger with a strategic partner and a transaction involving management and a
financial buyer. The Board further discussed continuing to implement the
Company's long term business strategy. The Board did not make any determination
as to which strategic alternative to pursue. However, the Board believed that a
transaction involving management and a financial buyer could be attractive.
Accordingly, the Board of Directors decided to retain PHC, as financial advisor,
to seek and assist in the review of potential transactions, including a
transaction involving an investment by management. The Board discussed the
ownership interest held by Gerald R. Benjamin, the Company's Vice Chairman and
Secretary, in Bock, Benjamin & Co., the parent of PHC, and the potential
conflicts of interest, but determined that, because of its previous association
with the Company, its familiarity with the Company and its recognized standing
and expertise in the PPM and health care services sector, the retention of PHC
was advisable.
In light of the Company's unsuccessful attempts to pursue a strategic
business combination with PPM and health care device companies, PHC determined
that pursuing a leveraged recapitalization of the Company was the most viable
alternative to provide enhanced value to the Company's stockholders. As part of
its engagement, PHC performed various analyses and procedures as it deemed
appropriate to evaluate a potential transaction. These included (i) interviews
with senior management and a review of the Company's business plan and budgets,
(ii) an analysis of the equity capital markets and the PPM sector in particular;
(iii) an analysis of recent leveraged recapitalization transactions; (iv) an
analysis of the senior debt market and current terms being offered to health
care services companies; and (v) preparation of a detailed leveraged
recapitalization financial model. In addition, as part of its engagement, PHC
approached 11 private equity firms between January 12, 1999 and February 2, 1999
regarding their interest in sponsoring a leveraged recapitalization of
Physicians' Specialty. In choosing the private equity firms to be approached,
PHC selected those firms which it knew or confirmed to have (i) expertise in the
PPM or health care services sector, (ii) sufficient amounts of uncommitted
capital available to complete a leveraged recapitalization of the Company, and
(iii) a continuing interest in funding health care service investments in light
of the well-publicized difficulties being encountered by a number of PPM and
health care services companies. As discussed above, one of the private equity
firms approached by PHC had contacted the Company's senior management on an
unsolicited basis in the fourth quarter of 1998. PHC considered approaching four
additional firms, but determined not to approach them because of either
constraints on the minimum size of transactions these firms could pursue or
their unwillingness to consider additional healthcare services investments. Of
the 11 firms approached, nine firms received a confidential information package
from the Company and held meetings with members of the Company's senior
management team. At the end of this process, PHC received proposals from three
of the firms contacted (including TA Associates).
The first proposal was presented by a California-based private equity firm
and contemplated a leveraged recapitalization of the Company with management and
affiliated physicians retaining approximately 2.3 million shares of Physicians'
Specialty Common Stock. The proposal contemplated that the Company shares held
by the public would have been acquired at $11.1875 per share. The proposal
contemplated the private equity firm investing approximately $22 million in the
form of redeemable preferred stock. Such preferred stock would have carried a 9%
cumulative dividend. Pro-forma Company
18
<PAGE> 28
debt at closing would have been approximately $71 million, with a resulting
pro-forma debt to equity ratio of 5.5:1. PHC suggested to the California firm
that it would be necessary, given the healthcare debt marketplace, for the firm
to restructure its proposal to decrease the level of leverage. The California
firm declined to revise its proposal in response to PHC's suggestion. The
private equity firm's proposal was received on January 27, 1999, on which date
the closing price of Physicians' Specialty Common Stock was $8.3125.
The second proposal received by PHC on behalf of the Company was provided
by a New York-based leveraged buy-out firm. This proposal contemplated the
acquisition of all of the Physicians' Specialty Common Stock held by the Public
Stockholders at a price of $9.00 per share, with management and affiliated
physicians retaining all of their Physicians' Specialty shares. In response to
this proposal, PHC sought to negotiate a higher purchase price from the New York
firm. The New York firm, however, refused to entertain discussions regarding an
increase in purchase price without assurances that PHC would deal with it
exclusively. On February 25, 1999, the date on which this proposal was received
from the leveraged buy-out firm, the closing price of Physicians' Specialty
Common Stock was $6.50.
The third proposal was from TA Associates. TA Associates had been contacted
by PHC in January to determine its interest in exploring a healthcare services
equity investment. On January 15, 1999, after PHC had determined that TA
Associates had a potential interest in exploring such an investment, the
Company's management made a presentation concerning the Company to TA
Associates. On January 25, 1999, PHC received TA Associates' initial proposal of
$10.50 per share on behalf of the Company. The TA Associates proposal required
that a substantial amount of shares of Physicians' Specialty Common Stock held
by management and affiliated physicians be invested in the Surviving
Corporation. On January 25, 1999, the closing price of the Physicians' Specialty
Common Stock was $8.125. The following day TA Associates revised its proposal
downward to a price range of $9.50 to $9.75 per share for the Physicians'
Specialty Common Stock, citing that it had omitted to include the Company's
subordinated seller notes and contingent notes when developing its initial
proposal. Additionally, on January 26, 1999, TA Associates sent PHC a
preliminary due diligence list. Over a two week period negotiations proceeded
between TA Associates and PHC. PHC countered the revised proposal from TA
Associates with a price of $11.1875 per share. During this period, TA Associates
and senior management of the Company met on one occasion to discuss the
strategic direction of the Company. TA Associates indicated to PHC that a price
of $10.00 per share was the most it could justify in light of a deteriorating
senior debt market for health care services companies. PHC indicated that a
price of $10.50 per share would be required in order for PHC to present a
transaction to the Company's Board of Directors. TA Associates agreed to
increase its offer to $10.50 per share but indicated that, in order to justify
the $10.50 price, its proposed redeemable preferred stock investment, having a
$27.8 million liquidation preference, would be required to carry a 6% cumulative
dividend. The final proposal from TA Associates was received on March 1, 1999,
on which date the closing price of the Physicians' Specialty Common Stock was
$6.50.
On March 3, 1999, the Company's Board of Directors met to review the
analyses prepared by PHC and the proposals received by PHC on behalf of the
Company. Of the three proposals received, the Board of Directors determined that
the first proposal was subject to financing conditions that were unachievable in
a deteriorating lending environment for health care service companies and the
second did not provide for adequate value for the Public Stockholders. The final
proposal from TA Associates as presented to the Company's Board on March 3, 1999
contemplated a leveraged recapitalization of Physicians' Specialty with the
Public Stockholders receiving $10.50 per share in cash. The proposal
contemplated that senior management and certain affiliated physicians would
participate in the proposed acquisition and have a continuing equity interest in
the Company. After discussing the process that had been undertaken by PHC and
the TA Associates proposal, the Board determined that the proposal from TA
Associates warranted further consideration. The Board was concerned that,
although the Company continued to meet consensus Wall Street analyst estimates,
its financial performance was not being reflected in its stock price. The
Company's stock price was a result, in the Board's view, of the overall
deterioration in market valuations of publicly traded companies in the PPM
industry generally. Based on currently available information, the Board had no
expectation that the PPM industry was likely to improve or that the Company's
stock price
19
<PAGE> 29
was likely to increase. Further, the Board was concerned that the market price
of the Physicians' Specialty Common Stock could decline further as a result of
negative investor sentiment toward PPM companies, anticipated decreases in
acquisition activity and an associated slow down in revenue growth attributable
to acquisitions, and large sales of Common Stock by institutional holders and
affiliated physicians, with respect to whom restrictions on public resale of
stock recently had or soon would lapse. The Board determined that it should
consider alternatives which would permit the Public Stockholders to realize the
value of Physicians' Specialty Common Stock held by them. The Board believed
that it was appropriate for the Company to pursue the recapitalization
alternative presented by the TA Associates proposal, as the alternative most
likely to enhance stockholder value given the Company's lack of success in its
pursuit of other strategic alternatives. Given the potential conflicts of
interest embodied in the TA Associates proposal, at the March 3 Board meeting
the Board of Directors formed the Special Committee consisting of Sidney
Kirschner, Edward D. Casas, M.D., and Steven Posar, M.D., three members of the
Board of Directors who are not employed by the Company or any of the Company's
affiliated physician practices and who will not own equity interests in or be
employed by the Surviving Corporation, to consider the fairness to the Company's
stockholders of the proposed transaction and to report its determination
regarding the fairness of the proposal from TA Associates to the full Board of
Directors. The Special Committee was authorized to conduct negotiations with TA
Associates regarding the terms of the proposed transaction and to determine
whether to accept or reject the proposed transaction. Further, the Special
Committee was authorized to solicit, as necessary, and evaluate any alternative
proposals. In making its determinations, the Special Committee was authorized to
establish such procedures, review such information, engage such financial
advisors and legal counsel as it deemed reasonable and necessary.
The Special Committee retained the law firm of King & Spalding as its legal
counsel. Thereafter, the Special Committee and its legal counsel discussed the
procedures to be followed in analyzing the offer from TA Associates. As part of
this discussion, King & Spalding advised the Special Committee as to the Special
Committee's legal responsibilities and the legal principles applicable to, and
the legal consequences of, actions taken by the Special Committee with respect
to the offer by TA Associates.
On March 10, 1999, the Special Committee met to interview two investment
banks to serve as financial advisor to the Special Committee. On March 17, the
Special Committee engaged Robinson-Humphrey to serve as its financial advisor
for the purpose of reviewing strategic alternatives available to the Company,
reviewing contacts and negotiations the Company had regarding a merger or sale
of the Company, advising and assisting the Special Committee in negotiations
with TA Associates and rendering an opinion to the Board as to the fairness,
from a financial point of view, to the Public Stockholders of the consideration
payable in the Merger. The Special Committee instructed Robinson-Humphrey to
commence its investigation and analysis of the proposal received from TA
Associates. In addition to reviewing the financial terms of the proposal from TA
Associates, the Special Committee requested that Robinson-Humphrey review the
process undertaken by PHC and the Company in connection with the TA Associates
proposal.
During the period from March 17 to March 24, 1999, Robinson-Humphrey
reviewed certain financial and other information concerning the Company,
assessed certain other strategic alternatives available to the Company, met with
certain members of the Company's management team and PHC and met telephonically
with TA Associates to discuss the proposal from TA Associates.
On March 24, 1999, the Special Committee met telephonically with
Robinson-Humphrey and King & Spalding to discuss the preliminary review and
analyses performed by Robinson-Humphrey. Representatives of Robinson-Humphrey
discussed with the Special Committee its preliminary findings in connection with
its investigation of the Company, its assessment of available strategic
alternatives, its review of the process undertaken by PHC, and how the proposed
purchase price of $10.50 per share compared with: (i) valuations of other
publicly traded PPM companies, (ii) valuations in other merger and acquisition
transactions in the PPM sector, (iii) premiums paid in other merger and
acquisition transactions since January 1997, and (iv) historical trading
patterns of the Company's Common Stock. Upon receiving this preliminary analysis
from Robinson-Humphrey of the proposed transaction, the Special Committee
concluded not to respond with a specific price counteroffer to the TA Associates
proposal at that time.
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Instead the Special Committee determined that, although it believed the $10.50
price to be attractive, it would be advisable for Robinson-Humphrey to talk with
TA Associates to attempt to negotiate a higher price per share than $10.50 in
cash.
At the March 24 Special Committee Meeting, the Special Committee considered
and discussed with Robinson-Humphrey the advisability of contacting other
potential acquirors regarding their interest in pursuing a transaction with the
Company. In connection with its review of available strategic alternatives,
Robinson-Humphrey identified three categories of companies that might have a
strategic interest in effecting a business combination with the Company that
could provide greater value to the Company's stockholders than the TA Associates
proposal. These included other PPM companies, operators of specialty health care
facilities and manufacturers of ENT related devices. After reviewing the current
market valuation, trading multiples, and the recent financial performance and
strategic objectives of publicly traded PPMs, Robinson-Humphrey informed the
Special Committee that the probability of another PPM being able to acquire or
merge with the Company at a valuation in excess of the TA Associates' proposal
was low. With respect to its analysis of operators of specialty health care
facilities, Robinson-Humphrey informed the Special Committee that given the
losses that several large operators of specialty health care facilities had
incurred in connection with the ownership of physician practices, the likelihood
of receiving a superior proposal from one of these entities in the current
industry environment was also low. In analyzing the opportunity to pursue a
transaction with an ENT related device manufacturer, Robinson-Humphrey reviewed
with the Special Committee the Company's prior discussions with Company No. 3, a
leading manufacturer of ENT related devices. A primary reason for Company No.
3's rejection of the proposed business combination with Physicians' Specialty
was its concern that affiliation with select physician practices could be viewed
negatively by its customer base. Given that one of the leading ENT device
manufacturers had rejected the transaction because of concerns over conflicts of
interest and that other medical device companies were likely to share this
concern, Robinson-Humphrey informed the Special Committee that the likelihood
that another medical device company would be interested in a transaction was
very low.
In connection with its review of the process undertaken by PHC,
Robinson-Humphrey reviewed with PHC the list of private equity firms contacted
by PHC and the responses received from each firm contacted. After reviewing
these responses as well as considering its own knowledge of the private equity
market, Robinson-Humphrey advised the Special Committee that PHC had contacted
an adequate and sufficient representation of the leading private equity firms
that were most likely to have an interest in pursuing a recapitalization of the
Company. Finally, Robinson-Humphrey advised the Special Committee that any
contact with other potential acquirors might cause TA Associates to withdraw its
proposal. After considering Robinson-Humphrey's assessment and analysis, the
Special Committee determined that, given the difficult market for PPM companies
and the discussions conducted by the Company in the third and fourth quarters of
1998 with respect to potential business combinations with strategic buyers, it
was unlikely that a strategic buyer would be interested in acquiring Physicians'
Specialty at a price in excess of $10.50 per share. In addition, the Special
Committee determined after consultation with Robinson-Humphrey that PHC had
contacted the financial buyers that appeared most likely to be interested in
acquiring Physicians' Specialty during its process. Further, based upon input
from Robinson-Humphrey, the members of the Special Committee were concerned that
if they contacted other bidders at this time, TA Associates would withdraw its
proposal which the Special Committee believed to be attractive.
Subsequent to the March 24 Special Committee meeting, Robinson-Humphrey, as
authorized, approached TA Associates to discuss a price higher than $10.50. TA
Associates informed Robinson-Humphrey that in light of the extensive purchase
price negotiations which had taken place with PHC and the deteriorating senior
debt market for health care services companies, it was unwilling to increase its
bid above $10.50 per share in cash. In addition, TA Associates informed
Robinson-Humphrey that in order to proceed with due diligence and document
preparation TA Associates required an agreement from the Company to provide an
exclusivity period and expense reimbursement. Robinson-Humphrey reported these
conversations to the Special Committee. As a result of the analysis presented at
the March 24 Special Committee meeting and the position taken by TA Associates,
upon inquiry, Robinson-Humphrey informed
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<PAGE> 31
the Special Committee that it did not recommend soliciting indications of
interest from any third party with respect to the purchase of all or a part of
the Company's business. The Special Committee continued to believe the $10.50
price to be attractive, concluded that $10.50 was the highest price TA
Associates would pay and authorized Robinson-Humphrey and King & Spalding to
negotiate the terms of an exclusivity and expense reimbursement letter. On April
5, 1999, the Special Committee and TA Associates executed a letter agreement
that provided that (i) the Company would negotiate exclusively with TA
Associates regarding a merger or business combination involving the Company
through May 15, 1999 and (ii) the Company would reimburse TA Associates for its
reasonable fees and expenses incurred in connection with a potential transaction
involving the Company up to an initial cap of $100,000, which was increased to
$200,000 with the consent of the Special Committee. The exclusivity period was
extended several times by the Special Committee to facilitate the continuing
negotiation of the terms of the Merger Agreement and the financing commitments.
During the period from April 5 to June 10, 1999, TA Associates conducted a
due diligence review of the Company which included engaging KPMG Peat Marwick to
perform certain financial due diligence and engaging the law firm of Goodwin
Procter & Hoar LLP to perform certain legal due diligence. During this same
period, representatives from TA Associates and the Company's management met with
various banks and non-bank lenders to arrange the financing for the proposed
transaction.
At the April 30, 1999 meeting, the Special Committee discussed the progress
of the proposed transaction including the due diligence investigation by TA
Associates and its advisors. The Special Committee also reviewed with King &
Spalding the preliminary draft of the Merger Agreement that had been provided by
legal counsel for TA Associates. The terms of the Merger Agreement and related
documents continued to be negotiated by the Special Committee and its advisors
and TA Associates and its advisors through June 10, 1999.
On June 12, 1999, the Special Committee, together with representatives of
Robinson-Humphrey and King & Spalding, met telephonically to consider further
the $10.50 per share cash offer by TA Associates and the Merger Agreement. A
draft of the Robinson-Humphrey opinion and related analyses and other materials
had been delivered to the Special Committee members and the other directors
prior to the meeting. Representatives of King & Spalding reviewed again with the
members of the Special Committee their legal duties in connection with the
consideration of the offer. King & Spalding also reviewed with the Special
Committee the terms of the Merger Agreement and the terms of the commitment
letters for the debt financing for the Merger. At the meeting, Robinson-Humphrey
presented an analysis outlined in the materials distributed to the Special
Committee and the Board prior to the meeting of the $10.50 per share cash offer
and delivered an opinion that such consideration was fair, from a financial
point of view, to the Public Stockholders. The Special Committee discussed the
$10.50 per share cash offer in detail, and questioned Robinson-Humphrey
regarding certain aspects of its valuation methodologies and analyses. Based on
the opinion delivered by Robinson-Humphrey at the June 12 meeting and the
related analyses, the Special Committee's belief after discussions with
Robinson-Humphrey that it was unlikely that another proposal for a business
combination would be made that would provide greater value to the Public
Stockholders than the $10.50 per share cash price and the other factors
described below in " -- The Special Committee's and the Board's Recommendation,"
the Special Committee determined that the Merger, the Merger Agreement and the
other transactions contemplated thereby were advisable, fair and in the best
interests of Physicians' Specialty and the Public Stockholders and recommended
to the full Board of Directors that the Board accept the $10.50 per share cash
offer and that the Merger, the Merger Agreement and the transactions
contemplated thereby be approved, adopted and declared advisable. Immediately
after the Special Committee meeting on June 12, 1999, the Board of Directors of
the Company met to receive the report of the Special Committee. At this meeting,
Mr. Kirschner, Chairman of the Special Committee, gave the report of the Special
Committee in which the Special Committee unanimously recommended to the Board of
the Directors of the Company that the Board accept the $10.50 per share cash
offer and approve, adopt and declare advisable the Merger, the Merger Agreement
and the transactions contemplated thereby. At the Board meeting,
Robinson-Humphrey also summarized its presentation given to the Special
Committee on June 12, 1999 for the full Board of Directors of the
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<PAGE> 32
Company. After hearing the recommendations of the Special Committee, the Board
of Directors unanimously determined that the Merger, the Merger Agreement and
the transactions contemplated thereby were advisable, fair and in the best
interests of Physicians' Specialty and the Public Stockholders and approved the
Merger Agreement.
On June 14, 1999, prior to the opening of trading on Nasdaq, the Company
issued a press release announcing that based on the recommendation of the
Special Committee, the Board of Directors had approved the TA Associates' merger
proposal of $10.50 per share in cash.
A copy of the written materials provided by Robinson-Humphrey and
distributed to the Special Committee prior to the June 12, 1999 meeting has been
filed as an exhibit to the Schedule 13E-3 and is available for inspection and
copying at the principal executive offices of the Company during its regular
business hours by any stockholder or any representative of a stockholder who has
been so designated in writing. A copy of such materials shall be provided to any
stockholder or any representative of a stockholder who has been so designated in
writing upon written request and at the expense of the requesting stockholder or
representative. In addition, these materials are available to the public at the
Internet World Wide Web Site maintained by the Commission at http:/www.sec.gov.
For additional information on where to obtain copies of these materials, see
"Where You Can Find More Information."
On June 25, 1999, TA Associates, Inc., TA Associates VIII LLC, TA MergerCo,
Inc., and TA/Advent VIII, L.P., as a group, and Dr. Tritt, individually, each
made a Schedule 13D filing with the Commission disclosing that Physicians'
Specialty had entered into the Merger Agreement with the TA Investors and that
Dr. Tritt, as well as certain other stockholders of the Company, had entered
into a voting agreement pursuant to which such stockholders agreed, among other
things, to (i) vote their shares of Physician's Specialty Common Stock in favor
of approval and adoption of the Merger Agreement and (ii) abide by certain
restrictions on the transfer of shares of Physicians' Specialty Common Stock
owned by each such stockholder.
THE SPECIAL COMMITTEE'S AND THE BOARD'S RECOMMENDATION
The full Board of Directors formed the Special Committee, comprised of
disinterested directors, to review and evaluate the proposed Transactions
because it appeared that certain of the directors would have actual or potential
conflicts of interest in evaluating the Transactions. As discussed above under
"-- Background of the Merger", the Special Committee unanimously recommended
that the Board approve, adopt and declare advisable the Merger, the Merger
Agreement and the transactions contemplated thereby. Following the unanimous
recommendation of the Special Committee, the Board concurred in the analyses and
findings of the Special Committee after considering the same material factors
evaluated by the Special Committee in connection with the Merger, as described
below. The Board subsequently approved and declared advisable, fair and in the
best interests of Physicians' Specialty and the Public Stockholders the Merger,
the Merger Agreement and the transactions contemplated thereby and recommended
that the stockholders of the Company approve the Merger, the Merger Agreement
and the transactions contemplated thereby. In connection with their
recommendations, the Special Committee and the Board each adopted the analyses
and findings of the Special Committee's financial advisor, Robinson-Humphrey.
See "-- Opinion of Financial Advisor." The Special Committee and the Board
recommend that the stockholders vote "For" the approval of the Merger Agreement.
The Special Committee met on nine occasions between March 5, 1999 and June
12, 1999, in person or by telephone conference, to consider developments
relating to the possible recapitalization of the Company. The Special Committee
was assisted in its deliberations by its financial advisor, Robinson-Humphrey,
and its legal counsel, King & Spalding. At a meeting held June 12, 1999, the
Special Committee determined that the Merger, the Merger Agreement, and the
transactions contemplated thereby were advisable, fair and in the best interests
of the Public Stockholders of the Company and recommended that the full Board
approve and adopt the Merger, the Merger Agreement and the transactions
contemplated thereby.
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The material factors the Special Committee evaluated in connection with the
Merger are described below. These factors also were evaluated by the Board.
Except for paragraph (ix) and as otherwise as noted below, the Special Committee
considered the following factors to be positive factors supporting its
determination that the Merger is advisable, fair and in the best interests of
the Public Stockholders. In arriving at its decision, the Special Committee
considered:
(i) The Special Committee's view that the market price of the Common
Stock has not reflected, and for an indefinite period of time would not
reflect, the value that may be inherent in the Company's business strategy
due to the negative investor sentiment towards PPM companies and a
difficult market for small capitalization stocks, particularly in the
health care industry. The Special Committee was concerned that the market
price of the Common Stock could decline further as a result of negative
investor sentiment toward PPM companies, anticipated decreases in
acquisition activity and an associated slow down in revenue growth
attributable to acquisitions, and large sales of Common Stock by
institutional holders and affiliated physicians, with respect to whom
restrictions on public resale of stock recently had or soon would lapse.
The Special Committee noted that in spite of the Company's ability
consistently to meet Wall Street analyst estimates, the closing price of
the Company's Common Stock on March 1, 1999, the date of the final TA
Associates proposal, was $6.50 per share a decrease of 18.75% from the
Company's initial public offering price of $8.00 per share on March 27,
1997. The Special Committee believed that the Company's stock price was
having and would continue to have an adverse impact upon the Company's
ability to attract and retain qualified management. Equity incentives have
been a significant component of compensation packages provided by the
Company to attract qualified management. In addition, equity incentives
constitute significant factors in the retention of management. The Company
has focused on equity incentives in its compensation packages because only
minimal cash bonuses and base salary increases have been recommended to and
approved by the Board since the Company's inception. The Special Committee
was concerned that the effectiveness of equity incentives had been
adversely impacted by the market value of the Common Stock and would be
further impacted by any further decreases in such market value, and that
with the reduction in value, the equity incentives no longer would be
effective tools in enabling the Company to retain and attract management.
Additionally, the Special Committee was concerned that, given the market
price of the Common Stock, any additional equity incentives which the
Company might use to retain and attract key members of management would
have further adverse effects on the market price of the Common Stock.
Management had informed the Board of Directors of its concern that it could
not effectively recruit senior management without significantly increasing
base salaries. However, the Special Committee was concerned that increasing
base salaries and providing cash bonuses as an alternative to providing
equity incentives, which would result in decreased reportable earnings,
could cause further decline in the price of the Company's Common Stock. The
Special Committee also believed that the Company's stock price was having
and would continue to have an adverse impact upon the Company's ability to
utilize its Common Stock in connection with acquisitions. The Company's
business strategy has been to consolidate in select markets the management
and delivery of ENT and related specialty care largely through
acquisitions. The Company's stock price had made acquisitions more
expensive and dilutive to earnings, and thus had a detrimental effect on
management's ability to execute the Company's business strategy of
consolidation. In this regard, the Special Committee considered that the
Company may be managed more effectively as a private company not subject to
pressures from Public Stockholders and market professionals to grow
earnings per share consistently. The Special Committee believed that, as a
private company, the Company would have greater flexibility to consider
business strategies that have long-term benefits (including acquisitions
which are often dilutive in the short-term), but that would adversely
impact earnings per share and the market price of the Physicians' Specialty
Common Stock in the short-term if the Company remained public. The Special
Committee believed that, as a private company, the Company would have more
flexibility in establishing compensation packages which could attract and
retain qualified management and that being a private company would
facilitate the Company's ability to complete acquisitions, including
acquisitions which are not initially accretive, in pursuit of its long-term
business strategy. The Special Committee considered the potential negative
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<PAGE> 34
impacts of being a private company on its ability to use shares for
acquisitions and to attract management personnel and concluded that such
impacts would not adversely affect the Company's ability to obtain a fair
value for the Public Stockholders.
(ii) The belief of the Special Committee that the Merger represents a
more desirable alternative than continuing to operate the Company as a
public company. In this connection, the Special Committee gave
consideration to rejecting the TA Associates' proposal in favor of
maintaining the Company's independence and enabling the Public Stockholders
to share in the Company's future earnings and growth potential. However,
the Special Committee believed that continuing to operate the Company as a
publicly traded company would subject the Company and its stockholders to
the risk of delays in the implementation or execution of the Company's
business strategy which focuses primarily on the consolidation in select
markets of the management and delivery of ENT and related specialty care
largely through acquisitions. Physicians were reluctant to accept the
Company's Common Stock as acquisition currency, particularly in light of
declines in the price of stock of other PPM companies received by
physicians upon the sales of their practices. In addition, the depressed
market price of the Physicians' Specialty Common Stock was making
acquisitions more expensive. Management was concerned about the adverse
impact on the Company's earnings of acquisitions initially dilutive to
earnings. As a private company, Physicians' Specialty would have greater
flexibility in structuring acquisitions and in pursuing acquisitions which
might not initially be accretive to earnings. After evaluating such risks
(including the factors described under item (i) above), the Special
Committee concluded that, while the Company's business strategy could
ultimately prove successful, the risk that the negative investor sentiment
towards PPM companies will continue to adversely impact the performance of
the Common Stock justifies a recapitalization of the Company. As
alternatives to the Merger, the Special Committee considered continuing to
operate the Company as an independent entity and the inquiries of other
companies that are described above under "-- Background of the Merger."
(iii) Information with respect to the financial condition, results of
operations, and business of the Company. The Special Committee focused in
particular on the projections prepared by the Company's management, which
reflected decreased acquisition activity, and accordingly lower rates of
revenue and operating income growth for future periods than had been
realized prior to fiscal year 1999.
(iv) The scope of efforts to effect a transaction for the Company,
including the number and identity of potential parties from which
indications of interest were received. In this connection, the Special
Committee considered that Physicians' Specialty had made inquiries of the
likely strategic partners for Physicians' Specialty and that none of those
inquiries led to a definitive proposal to effect a business combination
with Physicians' Specialty or reasonable prospects that a definitive
proposal would be forthcoming. In addition, the Special Committee
considered the extensive process undertaken by PHC in which PHC approached
11 private equity firms regarding their interest in sponsoring a leveraged
recapitalization of Physicians' Specialty. The Special Committee determined
that based upon the inquiries made of strategic partners and the extensive
process undertaken by PHC to locate a financial partner, it was unlikely
that another bidder would make a definitive proposal to effect a business
combination with the Company, or that if such a proposal were made, it
would result in a transaction that would provide greater value to the
Public Stockholders. In making this determination, the Special Committee
relied in part on the advice of, and information provided by,
Robinson-Humphrey. In addition, the Special Committee considered that
Robinson-Humphrey had reported that TA Associates would withdraw its bid if
its proposal were used to attempt to generate other bids from third
parties.
(v) Robinson-Humphrey's written opinion delivered to the Special
Committee on June 12, 1999, that the $10.50 per share in cash to be
received by the Public Stockholders was fair to such holders from a
financial point of view. The Special Committee and the Board adopted the
analyses and findings of Robinson-Humphrey in their determination that the
Merger is fair from a financial point of view to the Public Stockholders.
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<PAGE> 35
(vi) The proposed terms and conditions of the Merger Agreement. In
particular, the Special Committee considered the fact that the termination
fees and expense reimbursement obligations provided in the Merger Agreement
(without which the Special Committee believed the TA Investors would not
have entered into the Merger Agreement) are reasonable and would not have
the effect of unreasonably discouraging competing bids and that, subject to
the satisfaction of certain conditions, the Board would be able to withdraw
or modify its recommendation to the stockholders regarding the Merger and
enter into an agreement with respect to a more favorable transaction with a
third party, if such a transaction became available prior to the
consummation of the Merger.
(vii) The market price of the Common Stock, which as recently as April
12, 1999 had traded at $5.625 per share, its lowest price, and the premium
over such prices (as well as over the $8.75 per share market price on June
11, 1999) represented by the $10.50 per share in cash to be received by the
Public Stockholders in the Merger. In addition, the Special Committee
considered Robinson-Humphrey's analyses of the premiums paid in comparable
selected healthcare transactions which indicated that the average premiums
paid over the target stock prices one trading day prior to the announcement
date, one week prior to the announcement date, and four weeks prior to the
announcement date were 8.9%, 11.8% and 22.3%, respectively. The
consideration payable to the Public Stockholders pursuant to the Merger
Agreement represented a premium being paid over the Physicians' Specialty
Common Stock prices one trading day prior to the date of announcement of
the Merger, one week prior to such date, and four weeks prior to such date,
of 20%, 18.3%, and 21.7%, respectively. In connection with its
consideration of these factors, the Special Committee considered that the
premium represented by the $10.50 per share price was attractive. The
Special Committee noted that market valuations of PPM companies, including
the Company, had deteriorated. Notwithstanding the Special Committee's view
that the market had failed to adequately reflect the value of the
Physicians' Specialty Common Stock, the Special Committee believed that,
based on the premium represented by the $10.50 per share price and the
other analyses performed by Robinson-Humphrey, the Merger was fair to the
Public Stockholders. Accordingly, the Special Committee concluded that the
depressed market value of the Physicians' Specialty Common Stock did not
benefit the Investor Group.
(viii) The financial ability and willingness of TA Associates to
consummate the Merger. The Merger Agreement conditions MergerCo's
obligations to consummate the Merger on MergerCo's having obtained
financing for the Merger on terms satisfactory to MergerCo. In this
connection, the Special Committee reviewed commitment letters for debt
financing supplied by First Union and Allied. In addition, the Special
Committee, through its financial and legal advisors, discussed the proposed
financing with the TA Investors and the lenders. Based on the foregoing,
the Special Committee did not view as substantial the risk that the
financing condition of the Merger Agreement would not be satisfied.
(ix) Actual or potential conflicts of interest to which certain
officers and directors of the Company and their affiliates are subject in
connection with the Merger, as follows:
- The Special Committee considered that the Management Sponsors, their
affiliates and the Physician Investors will own shares of common stock
in the Surviving Corporation, representing approximately 36% of the
Surviving Corporation's initial aggregate equity on a fully diluted
basis. The Special Committee also considered that the Surviving
Corporation will reserve approximately 5% of the common stock of the
Surviving Corporation on a fully diluted basis for the grant of
options to management employees and affiliated physicians on a
prospective basis. The Special Committee further considered that
certain of the Management Sponsors will be parties to employment
agreements with the Surviving Corporation after the Merger, and that
certain of the Management Sponsors will receive increased base
salaries under amended employment agreements.
- The Special Committee considered that the TA Investors required each
of the Management Sponsors, their affiliates and the Physician
Investors to exchange a substantial portion of his or
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<PAGE> 36
her equity investment in the Company for an investment in the
Surviving Corporation. The Special Committee considered that the
rollover of a substantial portion of the current equity investment of
the Management Sponsors and the Physician Investors in the Company
would indicate a sufficient level of confidence in the Company's
prospects that could be deemed inconsistent with the Special
Committee's assessment of the risks associated with the Company's
future.
- The Special Committee considered that upon consummation of the Merger,
pursuant to letter agreement dated January 13, 1999, PHC will receive
a net fee of approximately $1.25 million in consideration for
providing services to the Company and the Board in connection with the
Transactions.
- The Special Committee considered the foregoing conflicts of interest
in connection with management's preparation of the Company projections
(See "-- Projections"), on which the initial model prepared by PHC and
the recapitalization model developed by Robinson-Humphrey were based
and which reflect a slower rate of acquisition activity and related
growth for the Company than realized prior to 1999. The Special
Committee concluded, having considered its discussions with
Robinson-Humphrey, the Management Sponsors and other officers and
employees of the Company as described above, that management's
assumptions underlying the projections as set forth in the initial
model prepared by PHC and in the subsequent recapitalization model
prepared by Robinson-Humphrey were reasonable. For a discussion of
PHC's conflicts of interest, see "-- Conflicts of Interest -- Advisory
and Consulting Agreements." If the projections had been prepared based
on historical growth rates, the projections would have reflected
higher levels of EBITDA and operating income. As discussed above,
however, the Special Committee concluded that such growth rates were
no longer attainable.
The Special Committee did not assign relative weights to the factors it
considered, and it did not consider any relative weighting to be necessary in
reaching its fairness determination.
The Special Committee noted that approximately 40% of the outstanding
shares of the Company's Common Stock are held by persons who have agreed to vote
their shares of Common Stock for approval and adoption of the Merger Agreement,
including the Management Sponsors, their affiliates and certain affiliated
physicians. The Special Committee also considered that the obligation of the
Company to consummate the Merger is not conditioned upon the favorable vote of a
majority of the Public Stockholders. Notwithstanding the absence of such a
voting requirement, the Special Committee believes that the procedure that was
followed in determining the purchase price to be paid to the stockholders of the
Company was fair to the Public Stockholders. As described above, the Board of
Directors (three of whom are members of the Management Sponsors) appointed as
the only members of the Special Committee three non-employee directors who were
independent of the Management Sponsors and the Physician Investors and who would
not have a continuing equity interest in the Company following the Merger. The
Board of Directors granted the Special Committee exclusive authority on behalf
of the Board of Directors to review, evaluate and negotiate the transaction
proposed by TA Associates and the Special Committee exercised that authority in
good faith. The Merger Agreement negotiated by the Special Committee contains
provisions that would enable the Board of Directors to withdraw or modify its
recommendation to the stockholders regarding the Merger and to enter into an
agreement with respect to a more favorable transaction with a third party and
contains provisions (without which the Special Committee believes TA Associates
would not have entered into the Merger Agreement) imposing upon the Company a
liquidated damages fee and expense reimbursement obligations that, in the view
of the Special Committee, are reasonable and would not have the effect of
unreasonably discouraging competing bids. Further, the stockholders of the
Company may dissent from the Merger and be paid cash for the "fair value" of
their shares as determined in accordance with Delaware law. Thus, although the
Merger is not structured to require approval of a majority of the unaffiliated
stockholders, the Special Committee nevertheless believes, as of the date of
this Proxy Statement and for the reasons set forth above, the Merger is
procedurally fair to the Public Stockholders.
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In considering the fairness of the Merger, the Special Committee and the
Board considered that the closing of the Merger is contingent upon the Company's
complying with certain financial tests and ratios (the "Financing Tests"), which
are conditions to the obligations of First Union and Allied (the "Banks") to
provide financing pursuant to their financing letters. The Special Committee and
the Board believe that the Company will be able to satisfy the Financing Tests
and that the Merger, the Merger Agreement and the transactions contemplated
thereby are advisable, fair and in the best interest of the Company's Public
Stockholders, even though the Financing Tests are conditions to the Banks'
obligations to provide financing.
In considering the fairness of the Merger, the Special Committee and the
Board did not consider such factors as the Company's net book value or
liquidation value, which are not believed to be indicative of the value of the
Company as a going concern. The Company's tangible net book value per share and
net book value per share as of December 31, 1998 were $2.55 and $5.67,
respectively, on a fully diluted basis, both substantially below the $10.50
purchase price per share of Common Stock to be paid MergerCo in the Merger. The
Special Committee further believes the Company's liquidation value, which takes
into account the appreciated value of the Company's assets, also would be
substantially below $10.50 per share.
Based on the foregoing, the Special Committee unanimously decided to
recommend approval and adoption of the $10.50 per share cash offer, determined
that the Merger, the Merger Agreement and the transactions contemplated thereby
were advisable, fair and in the best interests of Physicians Specialty and the
Public Stockholders. The Board unanimously approved the Merger Agreement on June
12, 1999, and determined that the Merger Agreement is advisable, fair and in the
best interests of Physicians' Specialty and the Public Stockholders. The Special
Committee is unaware of any development since its June 12, 1999 meeting that
would affect its June 12, 1999 determination, and, accordingly, the Special
Committee reconfirms, as of the date of this Proxy Statement, its determination
that the Merger, the Merger Agreement and the transactions contemplated thereby
are advisable, fair and in the best interests of Physicians' Specialty and the
Public Stockholders. Based on the foregoing, the Board also reconfirms, as of
the date of this Proxy Statement, its determination that the Merger, the Merger
Agreement and the transactions contemplated thereby are advisable, fair and in
the best interests of Physicians Specialty and the Public Stockholders. THE
BOARD AND THE SPECIAL COMMITTEE RECOMMEND THAT THE STOCKHOLDERS APPROVE THE
MERGER AGREEMENT.
PROJECTIONS
As part of the Board of Directors' review of a potential recapitalization
of the Company, the Board requested that PHC, as part of its engagement, prepare
a detailed leveraged recapitalization financial model based on certain
assumptions about the performance of the Company provided by the Company's
management. This initial model made certain assumptions about indebtedness
levels and interest expense in connection with a hypothetical recapitalization
of the Company and was delivered by PHC to seven of the private equity firms
contacted, including TA Associates. The initial model was subsequently updated
by PHC with minor modifications and delivered to Robinson-Humphrey and the
Special Committee. After receipt of TA Associates' final proposal with respect
to the Transactions, Robinson-Humphrey developed a recapitalization model (the
"Recapitalization Model") based on management's assumptions (which assumptions
are set forth in the Recapitalization Model through the Operating Income line
item) to reflect such proposal. As part of the Special Committee's review of the
Merger Agreement, the Special Committee reviewed the Recapitalization Model. No
other projections were prepared in connection with the Transactions or reviewed
by the Board, the Special Committee or Robinson-Humphrey.
The Company does not, as a matter of course, publicly disclose projections
as to future revenues or earnings. The Recapitalization Model was not prepared
with a view to public disclosure and is included in the Proxy Statement only
because such information was considered by the Special Committee and the Board
of Directors in connection with entering into the Merger Agreement. Accordingly,
it is expected that there will be differences between actual and projected
results, and actual results may be materially different than those set forth
below. The Recapitalization Model was not prepared with a view to compliance
with the published guidelines of the Commission regarding projections, nor was
it prepared in
28
<PAGE> 38
accordance with the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections. These forward-looking statements reflect numerous assumptions made
by the Company's management. In addition, factors such as industry performance,
general business, economic, regulatory, and market and financial conditions, all
of which are difficult to predict, may cause the Recapitalization Model or the
underlying assumptions to be inaccurate. Accordingly, there can be no assurance
that the results set forth in the Recapitalization Model and management's
assumptions will be realized, and actual results may be materially greater or
less than those contained in the Recapitalization Model.
The inclusion of the Recapitalization Model herein should not be regarded
as an indication that the TA Investors, the Special Committee, the Board of
Directors, the Company or any of their respective financial advisors considered
or consider the Recapitalization Model to be a reliable prediction of future
events, and the Recapitalization Model should not be relied upon as such. None
of the Special Committee, the Board of Directors, the Company, the TA Investors,
or any of their financial advisors intends to update or otherwise revise the
Recapitalization Model to reflect circumstances existing after the date when
made or to reflect the occurrence of future events even in the event that any or
all of the assumptions underlying the Recapitalization Model are shown to be in
error.
29
<PAGE> 39
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED PROJECTED RECAPITALIZATION MODEL
(UNAUDITED)
<TABLE>
<CAPTION>
PROJECTED FISCAL YEARS ENDING DECEMBER 31,(1)
-------------------------------------------------------------
INCOME STATEMENT 1999 2000 2001 2002 2003
- ---------------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Revenues.......................... $ 95,311 $ 137,200 $ 178,000 $ 218,800 $ 259,600
Operating Expenses
Provider Claims, Wages, Benefits.... 58,025 82,413 106,966 131,447 155,856
General and Administrative.......... 21,128 30,328 39,323 48,356 57,430
--------- ---------- ---------- ---------- ----------
Total operating expenses.... 79,153 112,741 146,289 179,803 213,286
EBITDA................................ 16,158 24,459 31,711 38,997 46,314
Depreciation and Existing
Amortization........................ 2,046 2,842 4,096 5,358 6,629
Amortization of Goodwill (25 Years)... 1,022 1,863 2,220 2,583 2,892
Amortization of Transaction Costs (20
Years).............................. 29 200 200 200 200
--------- ---------- ---------- ---------- ----------
Operating Income...................... $ 13,061 $ 19,554 $ 25,196 $ 30,876 $ 36,593
Interest Expense:
Revolving Facility.................. 1,055.4 3,774.5 4,003.5 3,886.5 3,412.2
Bank Term Loan...................... 0.0 0.0 0.0 0.0 0.0
New Subordinated Notes (7 year)..... 452.0 1,847.5 1,912.2 1,979.1 2,048.4
Seller Notes........................ 790.7 1,000.3 1,428.6 1,823.3 2,184.3
Other Interest Expense/(Income)..... (40.0) (40.0) (40.0) (40.0) (40.0)
--------- ---------- ---------- ---------- ----------
Net Cash Interest Expense... 2,258.1 6,582.3 7,304.2 7,648.9 7,604.9
Income Before Income
Taxes..................... 10,802.4 12,972.1 17,891.0 23,226.8 28,988.0
Income Taxes.......................... 4,299.4 5,162.9 7,120.6 9,244.3 11,537.2
Cumulative Effect of Accounting Change
and Minority Interests.............. 0.0 0.0 0.0 0.0 0.0
--------- ---------- ---------- ---------- ----------
Net Income Before Preferred
Dividend............................ 6,503.0 7,809.2 10,770.4 13,982.5 17,450.8
Subordinated Debt PIK Dividend........ 131.3 529.6 548.1 567.3 587.2
Redeemable Preferred PIK Dividend..... 417.0 1,693.0 1,794.6 1,902.3 2,016.4
Net income available to
common.................... $ 5,954.8 $ 5,586.6 $ 8,427.6 $ 11,512.9 $ 14,847.2
========= ========== ========== ========== ==========
Assumed number of Affiliated
Physicians at Year End........... 130 178 226 274 322
</TABLE>
- ------------------------
(1) For year ended December 31, 1999, the line items from net revenues through
operating income were based on an operating forecast prepared by the
Company's management. For the years ended December 31, 2000 through December
31, 2003, the line items from net revenues through operating income were
obtained from PHC reflecting Company management's assumptions as part of
PHC's recapitalization model dated March 8, 1999. For the years ended
December 31, 1999 through 2003, the line items from interest expense through
net income were developed by Robinson-Humphrey to reflect the capital
structure in the TA Associates proposal and assume a transaction being
consummated on September 30, 1999.
OPINION OF FINANCIAL ADVISOR
General. Pursuant to an engagement letter dated as of March 17, 1999, the
Special Committee retained The Robinson-Humphrey Company, LLC
("Robinson-Humphrey") to act as its financial advisor in connection with the
consideration of the possible recapitalization and merger of the Company with a
new entity to be formed by the TA Investors. On June 12, 1999, at a meeting of
the Special Committee to consider the proposed Merger, Robinson-Humphrey
delivered a written opinion to the Special Committee
30
<PAGE> 40
that, as of such date, the Cash Merger Consideration to be received in the
proposed Merger was fair, from a financial point of view, to the Public
Stockholders. Robinson-Humphrey was selected as the Special Committee's
financial advisor because of its previous association and familiarity with the
Company, and its operations and standing as a nationally recognized investment
banking firm which is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate,
and other opinions. Based on these qualifications, the Special Committee
selected Robinson-Humphrey as its financial advisor after interviewing a
competing investment banking firm.
The full text of the written opinion of Robinson-Humphrey, dated June 12,
1999, which sets forth the assumptions made, procedures followed, other matters
considered and limits of the review by Robinson-Humphrey, appears as Appendix B
to this Proxy Statement. The Company's stockholders are urged to read this
opinion in its entirety. Robinson-Humphrey's opinion is addressed to the Special
Committee, is directed only to the fairness, from a financial point of view, of
the Merger Consideration to be received in the proposed Merger by the Public
Stockholders, and does not constitute a recommendation as to how any stockholder
should vote in relation to the Merger. This summary of the opinion of
Robinson-Humphrey is qualified in its entirety by reference to the full text of
such opinion.
Material and Information Considered with Respect to the Merger. In
arriving at its opinion, Robinson-Humphrey reviewed and analyzed: (1) a draft of
the Merger Agreement, (2) publicly available information concerning the Company
which Robinson-Humphrey believed to be relevant to its inquiry, (3) financial
and operating information with respect to the business, operations and prospects
of the Company furnished to Robinson-Humphrey by the Company, (4) a trading
history of the Company's Common Stock from March 20, 1997 to the present and a
comparison of that trading history with those of other companies which
Robinson-Humphrey deemed relevant, (5) the proposals and responses, as
communicated to Robinson-Humphrey, that resulted from the discussions that PHC
held with various potential acquirors and investors, (6) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies which Robinson-Humphrey deemed relevant, (7) a
comparison of the financial terms of the Merger with the financial terms of
certain other recent transactions which Robinson-Humphrey deemed relevant, and
(8) certain historical data relating to acquisitions of publicly traded
companies, including percentage premiums paid in such acquisitions. In addition,
Robinson-Humphrey held discussions with the management of the Company concerning
its business, operations, assets, present condition and future prospects and
undertook such other studies, analyses and investigations as Robinson-Humphrey
deemed appropriate. Further, Robinson-Humphrey reviewed other potential
strategic alternatives available to the Company.
In rendering its opinion, Robinson-Humphrey assumed and relied upon the
accuracy and completeness of the financial and other information used by
Robinson-Humphrey in arriving at its opinion without independent verification.
With respect to the financial projections provided by the Company,
Robinson-Humphrey assumed in its opinion that such projections had been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of the Company as to the future financial
performance of the Company. Robinson-Humphrey reviewed the financial projections
and the assumptions underlying such projections. In connection with its review
of these financial projections, it discussed and reviewed with management: (i)
the Company's prospective acquisition pipeline; (ii) the Company's internal
growth initiatives; (iii) published analyst estimates; and (iv) overall industry
growth forecasts. In arriving at its opinion, Robinson-Humphrey did not conduct
a physical inspection of the properties and facilities of the Company and did
not make or obtain any evaluations or appraisals of the assets or liabilities of
the Company. In addition, Robinson-Humphrey was not authorized to solicit, and
did not solicit, any indications of interest from any third party with respect
to the purchase of all or a part of the Company's business. Robinson-Humphrey's
opinion is necessarily based upon market, economic and other conditions as they
may have existed and could be evaluated as of June 12, 1999.
31
<PAGE> 41
The following is a summary of the material factors considered and principal
financial analyses performed by Robinson-Humphrey to arrive at its opinion.
Certain of the financial analyses summarized below include information presented
in tabular format. The tables should be read together with the text of each
summary. Considering the data set forth below without considering the full
narrative description of the financial analyses, including the methodologies and
assumptions underlying the analyses, could create a misleading or incomplete
view of Robinson-Humphrey's analyses.
Analysis of Selected Public Companies. Robinson-Humphrey compared selected
financial data and market information for the Company with the other publicly
traded companies which it considered to focus solely on physician practice
management. This group of 12 other publicly traded PPMs included three
multi-specialty PPMs and nine single-specialty PPMs as follows:
<TABLE>
<CAPTION>
MULTI-SPECIALTY SINGLE-SPECIALTY
PHYSICIAN PRACTICE MANAGEMENT COMPANIES PHYSICIAN PRACTICE MANAGEMENT COMPANIES
--------------------------------------- ---------------------------------------
<S> <C>
- - MedPartners, Inc. - American Oncology Resources
- - Promedco Management Co. - American Physician Partners
- - PhyCor, Inc. - Ameripath, Inc.
- Omega Health Systems Inc.
- Pediatrix Medical Group, Inc.
- Physician Reliance Network
- Response Oncology Inc.
- Specialty Care Network, Inc.
- Vision Twenty One, Inc.
</TABLE>
For each of the comparable companies in both categories, Robinson-Humphrey
reviewed the market value of equity of the company, based upon its closing stock
price on June 11, 1999, as a multiple of: (i) its net income for the twelve
month period ended March 31, 1999, (ii) its annualized first quarter ended March
31, 1999 net income and (iii) its projected net income for the year ended
December 31, 1999 as provided by First Call Research Network as of June 8, 1999.
Robinson-Humphrey also reviewed each company's total firm value (current market
value of equity plus all debt outstanding less any cash held by the company) as
a multiple of revenues, earnings before interest and taxes ("EBIT") and earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the latest
twelve months ended March 31, 1999 and for annualized first quarter ended March
31, 1999. This analysis indicated the following equity value and total firm
valuation multiples as compared to the implied multiples for the Company:
<TABLE>
<CAPTION>
MULTIPLES FOR
IMPLIED MULTIPLES FOR PHYSICIANS' SPECIALTY
SELECTED COMPANIES IMPLIED BY
---------------------- CASH MERGER
MEAN RANGE CONSIDERATION
----- ------------- ---------------------
<S> <C> <C> <C>
MARKET VALUE OF EQUITY TO:
Multi-Specialty PPMs
Latest Twelve Months Earnings Per Share.... 8.0x 6.5x - 9.6x 16.4x
Annualized Q1 1999 Earnings Per Share...... 10.3x 6.3x - 14.3x 14.6x
Estimated Calendar 1999 Earnings Per
Share................................... 13.7x 5.8x - 24.1x 13.3x
Single-Specialty PPMs
Latest Twelve Months Earnings Per Share.... 14.5x 7.7x - 26.9x 16.4x
Annualized Q1 1999 Earnings Per Share...... 15.4x 7.3x - 29.7x 14.6x
Estimated Calendar 1999 Earnings Per
Share................................... 11.1x 6.8x - 19.6x 13.3x
</TABLE>
32
<PAGE> 42
<TABLE>
<CAPTION>
MULTIPLES FOR
IMPLIED MULTIPLES FOR PHYSICIANS' SPECIALTY
SELECTED COMPANIES IMPLIED BY
---------------------- CASH MERGER
MEAN RANGE CONSIDERATION
----- ------------- ---------------------
<S> <C> <C> <C>
TOTAL FIRM VALUE TO:
Multi-Specialty PPMs
Latest Twelve Months Revenue............... 0.8x 0.7x - 1.0x 1.6x
Latest Twelve Months EBITDA................ 6.9x 4.6x - 10.5x 9.4x
Latest Twelve Months EBIT.................. 11.8x 7.7x - 19.5x 11.7x
Annualized Q1 1999 Revenue................. 1.2x 0.5x - 1.6x 1.3x
Annualized Q1 1999 EBITDA.................. 6.0x 2.2x - 9.5x 8.0x
Annualized Q1 1999 EBIT.................... 9.1x 6.3x - 19.7x 10.0x
Single-Specialty PPMs
Latest Twelve Months Revenue............... 1.2x 0.6x - 1.6x 1.6x
Latest Twelve Months EBITDA................ 7.2x 5.0x - 11.1x 9.4x
Latest Twelve Months EBIT.................. 11.0x 6.5x - 17.5x 11.7x
Annualized Q1 1999 Revenue................. 1.2x 0.5x - 1.6x 1.3x
Annualized Q1 1999 EBITDA.................. 6.0x 2.2x - 9.5x 8.0x
Annualized Q1 1999 EBIT.................... 9.1x 6.3x - 19.7x 10.0x
</TABLE>
In arriving at its opinion, Robinson-Humphrey noted that for each category
of valuation multiple, the multiple implied by the Merger Consideration was
within the current range of multiples for publicly traded PPM companies, and
that for 15 of the 18 categories of valuation multiples analyzed, the multiple
implied by the Merger Consideration was above the mean for its respective
category. Accordingly, this analysis, viewed in light of the other analyses
undertaken, supported Robinson-Humphrey's opinion.
Analysis of Selected Merger and Acquisition
Transactions. Robinson-Humphrey reviewed the purchase prices and implied
transaction multiples in the following seven proposed, pending or completed
merger and acquisition transactions announced since January 1, 1997 having
transaction values greater than $25.0 million in the specialty managed care and
PPM sectors of the healthcare services industry.
<TABLE>
<CAPTION>
TARGET ACQUIROR
------ --------
<S> <C>
- - AHI Healthcare Systems Inc. - FPA Medical Management Inc.
- - InPhyNet Medical Management - MedPartners, Inc.
- - MedCath Inc. - Kohlberg, Kravis & Roberts
- Welsh, Carson, Anderson & Stowe
- - Physician Reliance Network Inc. - American Oncology Resources
- - Team Health (MedPartners) - Madison Dearborn Partners
- - Sheridan Healthcare, Inc. - Vestar Capital Partners
- - Concentra Managed Care - Welsh, Carson, Anderson & Stowe
</TABLE>
Robinson-Humphrey calculated (i) the equity purchase price (purchase price
of target's common stock multiplied by total shares and shares equivalent
outstanding) in the selected transactions as a multiple of the target's most
recent generally accepted accounting principles ("GAAP") shareholder's equity
and latest twelve months net income and (ii) total firm value (equity purchase
price plus all debt outstanding less any cash held by the company) in the
selected transactions as multiples of the latest twelve months revenues, EBITDA
and EBIT. All multiples were based on publicly available information
33
<PAGE> 43
at the time of announcement of the relevant transaction. With respect to the
calculation of equity purchase price to shareholder's equity, Robinson-Humphrey
noted that a number of PPM companies acquired in recent years had taken special
accounting charges that had significantly reduced shareholders's equity. As a
result of the impact of these special accounting charges on shareholders'
equity, in arriving at its opinion, Robinson-Humphrey placed limited emphasis on
comparing the multiples of purchase price to shareholder's equity that were paid
in precedent transactions with the multiple of purchase price to shareholder's
equity that is implied by the Merger Consideration. Robinson-Humphrey believed
that placing a limited emphasis on the comparison of multiples of purchase price
to shareholder's equity was justifiable because the extraordinary reductions in
shareholders' equity had inflated the multiples for these companies relative to
Physicians' Specialty which had taken no special accounting charges. This
analysis indicated the following implied adjusted market value and equity market
value multiples for the selected transactions, as compared to the implied
multiples for the Company based on the Cash Merger Consideration:
<TABLE>
<CAPTION>
IMPLIED MULTIPLES FOR MULTIPLES FOR
SELECTED COMPANIES PHYSICIANS' SPECIALTY
---------------------- IMPLIED BY
MEAN RANGE CASH MERGER CONSIDERATION
----- ------------- -------------------------
<S> <C> <C> <C>
EQUITY PURCHASE PRICE TO:
Shareholders' Equity.................. 2.6x 1.5x - 3.9x 2.0x
Latest Twelve Months Net Income....... 22.5x 11.9x - 36.9x 17.5x
TOTAL FIRM VALUE TO:
Latest Twelve Months Revenue.......... 1.4x 0.8x - 2.5x 1.6x
Latest Twelve Months EBITDA........... 9.4x 7.1x - 11.1x 9.4x
Latest Twelve Months EBIT............. 13.5x 10.5x - 19.6x 11.7x
</TABLE>
In arriving at its opinion, Robinson-Humphrey noted that for each category
of valuation multiple, the multiple implied by the Merger Consideration was
within the current range of multiples paid in the comparable merger and
acquisition transactions analyzed. Accordingly, this analysis, viewed in light
of the other analysis undertaken, supported Robinson-Humphrey's opinion.
Analysis of Premiums Paid. Robinson-Humphrey analyzed the premiums paid in
685 transactions having values between $25 and $300 million, 24 healthcare
services transactions having values between $25 and $300 million effected since
January 1, 1997, based on the target company's stock price one day, one week and
four weeks prior to public announcement of the transaction. Robinson-Humphrey
also analyzed 115 leveraged buyout and privatization transactions effected since
January 1, 1996, based on the target company's stock price one day, one week and
four weeks prior to public announcement of the transaction.
34
<PAGE> 44
This analysis indicated the following premiums in the selected transactions, as
compared to the implied premiums in the proposed Merger one day, one week and
four weeks prior to the public announcement.
<TABLE>
<CAPTION>
PREMIUM ONE PREMIUM ONE PREMIUM ONE
DAY WEEK MONTH
PRIOR TO PRIOR TO PRIOR TO
ANNOUNCEMENT ANNOUNCEMENT ANNOUNCEMENT
-------------- -------------- --------------
MEAN RANGE MEAN RANGE MEAN RANGE
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Selected Transactions (1).................... 23.2% (98.5)% 29.1% (82.2)% 34.4% (92.9)%
-250.3% -265.8% -282.7%
Selected Healthcare Transactions (2)......... 8.9% (86.7)% 11.8% (82.2)% 22.3% (92.2)%
-54.0% -60.4% -100.0%
Selected LBO and Privatization Transactions
(3)........................................ 20.5% (99.5)% 24.6% (99.4)% 30.1% (99.2)%
-132.0% -169.8% -176.2
MERGER PREMIUM IMPLIED FOR PHYSICIANS'
SPECIALTY TRANSACTION...................... 20.0% 18.3% 21.7%
</TABLE>
- ---------------
(1) 685 transactions having values between $25 and $300 million effected since
January 1, 1997
(2) 24 healthcare services transactions having values between $25 and $300
million effected since January 1, 1997
(3) 115 leveraged buyout and privatization transactions effected since January
1, 1996
In arriving at its opinion, Robinson-Humphrey noted that the premium being
offered for the Company's stock was within the range of premiums paid in
transactions for each period analyzed. In addition, Robinson-Humphrey indicated
that the most relevant category for comparison was the group of 24 healthcare
services transactions having value between $25 million and $300 million
completed since January 1, 1997. When compared to this group of healthcare
transactions, the premium implied by the Merger Consideration was either near or
above the mean for each period analyzed. Accordingly, this analysis, viewed in
light of the other analysis undertaken, supported Robinson-Humphrey's opinion.
The summary set forth above does not purport to be a complete description
of the analyses performed by Robinson-Humphrey. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description.
In performing its analysis, Robinson-Humphrey made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company. No company, transaction or business used in such analyses as a
comparison is identical to the Company or the proposed Merger, nor is an
evaluation of the results of those analyses entirely mathematical; rather, the
analyses involve complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the merger, public
trading or other values of the companies, business segments or transactions
being analyzed. However, as described above, there were no material components
of Robinson-Humphrey's analyses that, viewed in the light of the other analyses
undertaken, did not support its opinion.
Robinson-Humphrey is a nationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements, and valuations
for corporate and other purposes. The Special Committee selected
Robinson-Humphrey because of its previous association and familiarity with the
Company and its operations and standing as a nationally recognized investment
banking firm. Robinson-Humphrey maintains a market in the Physicians' Specialty
Common Stock and regularly publishes research reports regarding the businesses
and securities of the Company and other publicly traded companies in the
healthcare industry. In the ordinary course of business, Robinson-Humphrey and
its affiliates may actively trade or hold the securities and other instruments
and obligations of the Company for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
35
<PAGE> 45
The type and amount of consideration payable in the proposed Merger was
determined through negotiation between the Special Committee and TA Associates.
Although Robinson-Humphrey provided financial advice to the Special Committee
during the course of negotiations, the decision to enter into the Merger was
solely that of the Board of Directors and Special Committee. Robinson-Humphrey's
advice, opinion and financial analyses were only one of many factors considered
by the Board of Directors and Special Committee in their evaluation of the
proposed Merger and should not be viewed as determinative of the views of the
Board, Special Committee or management with respect to the Merger Consideration
or the Merger.
In connection with the Special Committee's engagement of Robinson-Humphrey,
the Company paid Robinson-Humphrey a retainer fee of $50,000 at the time of
engagement and a fee of $250,000 in connection with the preparation and delivery
of its fairness opinion. Further, if the Merger is consummated, an additional
contingent fee equal to 0.125% of the aggregate consideration, including
liabilities assumed, estimated at $98,000, will be paid to Robinson-Humphrey.
The Company has also agreed to reimburse Robinson-Humphrey for its out-of-pocket
expenses incurred in connection with the engagement and to indemnify
Robinson-Humphrey against certain liabilities, including certain liabilities
under the federal securities laws. Robinson-Humphrey has not provided investment
banking services to the Company, but participated in the underwriting syndicate
in the Company's initial public offering in March 1997 and its follow-on public
offering in May 1998. No investment banking fees have been paid by the Company
to Robinson-Humphrey prior to this engagement. Although Robinson-Humphrey
participated in the negotiation of the Merger Agreement and a portion of
Robinson-Humphrey's fee is contingent on the consummation of the Merger,
Robinson-Humphrey does not believe a conflict of interest exists with respect to
its representation of the Special Committee and delivery of its opinion.
PURPOSE AND REASONS OF THE MANAGEMENT SPONSORS, THE TA INVESTORS AND TA
ASSOCIATES FOR THE MERGER
The purpose of the Management Sponsors, the TA Investors and TA Associates
for engaging in the transactions contemplated by the Merger Agreement is to
acquire ownership of the Company. The Management Sponsors, the TA Investors and
TA Associates believe that as a private company Physician's Specialty will have
greater ability to grow through acquisitions using its stock as currency and to
attract and retain qualified management. This assessment by the Management
Sponsors, the TA Investors and TA Associates is based upon publicly available
information regarding the Company, the TA Investors' due diligence investigation
of the Company and experience in investing in companies in the PPM industry and
the Management Sponsors' understanding of and familiarity with the Company's
business. The Management Sponsors, the TA Investors and TA Associates determined
that it was an appropriate time to make their proposal to Physician's Specialty
to engage in the transactions contemplated by the Merger Agreement based on
recent developments in the PPM industry and the competitive position of the
Company. The proposed acquisition of Physician's Specialty by the Investor Group
has been structured as a recapitalization in order to, among other things,
provide for the acquisition of the Physician's Specialty Common Stock held by
the Public Stockholders in connection with the transfer of the ownership of
Physician's Specialty from the current stockholders to the Investor Group, to
facilitate the required financing for the Transactions, and to preserve the
corporate identity of Physician's Specialty. While the Management Sponsors, the
TA Investors and TA Associates believe that there will be significant
opportunities associated with their investment in the Company, the Management
Sponsors, the TA Investors and TA Associates also understand that the investment
involves substantial risks.
As a result of the Merger, the TA Investors and their assigns will acquire,
for an investment of approximately $32.8 million, approximately 57% of the
equity interest in the Surviving Corporation on a fully diluted basis (assuming
the exercise of all rights to acquire, and the conversion of all securities and
promissory notes convertible into, common stock in the Surviving Corporation);
the Management Sponsors, their affiliates and the Physician Investors will
acquire, following the exchange of approximately 2,047,310 shares of Common
Stock for shares of common stock of the Surviving Corporation, approximately 36%
of the equity interest in the Surviving Corporation on a fully diluted basis.
The Management Sponsors, their affiliates and the Physician Investors also will
receive an amount per share in
36
<PAGE> 46
cash equal to the Cash Merger Consideration for the remainder of their
investment in the Company on the same terms as other stockholders. The exchange
by the Management Sponsors, their affiliates and the Physician Investors of a
portion of their equity interest in Physician's Specialty Common Stock for an
equity interest in the Surviving Corporation will, among other things, enable
the Merger to be accounted for as a recapitalization for accounting purposes.
POSITION OF THE MANAGEMENT SPONSORS, THE TA INVESTORS AND TA ASSOCIATES AS TO
FAIRNESS OF THE MERGER
Each member of the Management Sponsors, the TA Investors and TA Associates
has considered the analyses and findings of the Special Committee and the Board
(described in detail in "--The Special Committee's and the Board's
Recommendation") with respect to the fairness of the Merger to the Public
Stockholders of the Company. As of the date of this Proxy Statement, based upon
(i) the reasons set forth under "-- The Special Committee's and the Board's
Recommendation," which were made known to the Management Sponsors and the TA
Investors subsequent to the Special Committee's determination that the Merger
was fair to and in the best interests of the Public Stockholders of the Company,
(ii) the TA Investors' review of publicly available information regarding the
Company, (iii) the TA Investors' due diligence investigation of the Company, and
(iv) the Management Sponsors' understanding of and familiarity with the
Company's business, each member of the Management Sponsors and the TA Investors
and TA Associates has adopted the analyses and findings of the Special Committee
and the Board with respect to the fairness of the Merger and believes that the
Merger, the Merger Agreement, and the transactions contemplated thereby are fair
and in the best interests of the Company's Public Stockholders; provided that no
opinion is expressed as to the fairness to any stockholder making an investment
in the Surviving Corporation. No member of the Management Sponsors, the TA
Investors or TA Associates makes any recommendation as to how the Company's
stockholders should vote on the Merger Agreement. The TA Investors and TA
Associates have financial interests in the Merger and the Management Sponsors
have financial and employment interests in the Merger. See "-- Conflicts of
Interest."
Each member of the Management Sponsors, the TA Investors and TA Associates
considered the fact that approximately 40% of the outstanding shares of the
Company's Common Stock are held by persons who have agreed to vote their shares
of Common Stock for approval and adoption of the Merger Agreement, including the
Management Sponsors, their affiliates and certain affiliated physicians. Each
member of the Management Sponsors, the TA Investors and TA Associates also
considered that the obligation of the Company to consummate the Merger is not
conditioned upon the favorable vote of a majority of the Public Stockholders.
Notwithstanding the absence of such a voting requirement, each member of the
Management Sponsors, the TA Investors and TA Associates believes that the
procedure that was followed in determining the purchase price to be paid to the
stockholders of the Company was fair to the Public Stockholders. As described
above under "-- The Special Committee's and the Board's Recommendation," the
Board of Directors (three of whom are members of the Management Sponsors)
appointed as the only members of the Special Committee three non-employee
directors who were independent of the Management Sponsors and who would not have
a continuing equity interest in the Company following the Merger. The Board of
Directors granted the Special Committee exclusive authority on behalf of the
Board to review, evaluate and negotiate the transaction proposed by TA
Associates and the Special Committee exercised that authority in good faith. The
Merger Agreement negotiated by the Special Committee contains provisions that
would enable the Board of Directors to withdraw or modify its recommendation to
the stockholders regarding the Merger and to enter into an agreement with
respect to a more favorable transaction with a third party and contains
provisions (without which TA Associates would not have entered into the Merger
Agreement) imposing upon the Company a liquidated damages fee and expense
reimbursement obligations that, in the view of TA Associates, are reasonable and
would not have the effect of unreasonably discouraging competing bids. Further,
the stockholders of the Company may dissent from the Merger and be paid cash for
the "fair value" of their shares as determined in accordance with Delaware law.
Thus, although the Merger is not structured to require approval of a majority of
the unaffiliated stockholders, each member of the Management Sponsors, the TA
Investors and TA Associates agree with and adopt the analyses and findings of
the Special Committee and the Board with respect to the procedural fairness of
the Merger Agreement to the Public
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<PAGE> 47
Stockholders and believes that, as of the date of this Proxy Statement and for
such reasons, the Merger is procedurally fair to the Public Stockholders.
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the Merger,
stockholders should be aware that certain officers and directors of Physicians'
Specialty have interests in connection with the Merger which may present them
with actual or potential conflicts of interest as summarized below. The Special
Committee and the Board were aware of these interests and considered them among
the other matters described under "-- The Special Committee's and the Board's
Recommendation." The Special Committee considered the Management Sponsors'
conflicts of interest to be a negative factor in its determination that the
Merger Agreement is advisable, fair and in the best interests of the Public
Stockholders.
Post-Merger Ownership and Control of the Surviving Corporation. It is
anticipated that immediately after the Merger the following individuals and
entities will beneficially own the number of shares of common stock and
redeemable preferred stock of the Surviving Corporation shown in the following
table.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP OF OWNERSHIP OF
COMMON REDEEMABLE
STOCK PERCENTAGE(%)(1) PREFERRED STOCK PERCENTAGE(%)(1)
------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
TA/Advent VIII, L.P................. 1,951,413(2) 34.0% 16,705 60.1%
TA/Atlantic and Pacific IV, L.P..... 1,219,755(2) 21.2% 10,442 37.6%
TA Executives LLC................... 37,021(2) 0.6% 317 1.1%
TA Investors LLC.................... 39,295(2) 0.7% 336 1.2%
Richard D. Ballard.................. 62,765 1.1%
Gerald R. Benjamin (3).............. 52,214 0.9%
Robert A. DiProva................... 22,721 0.4%
Lawrence P. Kraska.................. 33,755 0.6%
Ramie A. Tritt, M.D................. 1,402,875 24.4%
27 affiliated physicians............ 472,980 8.2%
</TABLE>
- ---------------
(1) The table above assumes that the Management Sponsors, their affiliates and
the Physician Investors exchange 2,047,310 shares of Physicians' Specialty
Common Stock for Surviving Corporation common stock and that employees
exchange approximately 11,500 shares of Physicians' Specialty Common Stock
for Surviving Corporation common stock.
(2) The number of shares of common stock beneficially owned by the TA Investors
includes the number of shares of common stock into which convertible
participating preferred stock of the Surviving Corporation will be
convertible.
(3) Includes 27,500 shares of common stock of the Surviving Corporation to be
held by Bock, Benjamin & Co. Partners, L.P. Gerald R. Benjamin is a
principal of the general partner of Bock, Benjamin & Co. Partners, L.P.
Voting Agreement. Pursuant to a Voting Agreement dated as of June 14, 1999
(the "Voting Agreement"), the Management Sponsors, their affiliates and the
Physician Investors agreed with MergerCo to vote (or cause to be voted) at the
Special Meeting all of the shares of Physicians' Specialty Common Stock (the
"Voting Shares") owned by them in favor of the proposal to approve the Merger
Agreement and the Merger. The Management Sponsors, their affiliates and
Physician Investors also agreed (i) not to sell, tender, transfer, pledge,
encumber, assign or otherwise dispose of any Voting Shares, or deposit any
Voting Shares into a voting trust or enter into a voting agreement or
arrangement with respect to voting any Voting Shares, or grant any proxy or
power of attorney with respect thereto and (ii) to take such other actions and
execute such other agreements as may be reasonably necessary to effectuate the
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<PAGE> 48
intent of the Voting Agreement. The Voting Shares represent approximately 40% of
the outstanding shares of Physicians' Specialty Common Stock.
The Voting Agreement will terminate upon the earlier of the consummation of
the Merger or the termination of the Merger Agreement without consummation of
the Merger.
The Management Sponsors. Following consummation of the Merger, it is
expected that the Management Sponsors who were members of management prior to
the Merger will continue as management of the Surviving Corporation. The Board
of Directors of the Surviving Corporation following the Merger will be comprised
of Dr. Tritt and Messrs. Ballard and Benjamin (the designees of the Company's
management), Richard Tadler and David S.B. Lang (the designees of the TA Funds)
and up to two outside directors to be determined at a later time. It is
anticipated that immediately after the Merger the Management Sponsors and their
affiliates will beneficially own the number of shares of common stock of the
Surviving Corporation set forth in the table above.
Prior to the closing of the Merger, all outstanding options to purchase
Common Stock held by the Management Sponsors will be either exercised or
terminated in accordance with the terms of the Stock Option Exercise and
Termination Agreement (the "Option Exercise Agreement") entered into between the
Company and each of the Management Sponsors holding options. Pursuant to the
terms of the Option Exercise Agreement, the Management Sponsors will exercise
all of their outstanding options with an exercise price below $10.50 (the "In
the Money Options"). Options with an exercise price in excess of $10.50 will be
terminated by the Company. Conversion of the In the Money Options into Common
Stock will be effectuated through a cashless exercise of the options. The
Company will issue to each Management Sponsor an amount of Common Stock equal to
(i) the number of shares of Common Stock issuable upon the exercise of the In
the Money Options by such Management Sponsor minus (ii) the quotient of the
aggregate exercise price of such In the Money Options divided by $10.50.
The Management Sponsors, their affiliates and the Physician Investors have
entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with
the TA Investors, whereby immediately prior to the consummation of the Merger,
1,873,919 shares of Common Stock held by the Management Sponsors (including
shares of Common Stock acquired through the exercise of In the Money Options),
their affiliates and the Physician Investors will be sold to the TA Investors at
a purchase price of $10.50 per share. The Management Sponsors, their affiliates
and the Physician Investors have also entered into a Rollover Agreement (the
"Rollover Agreement"), whereby they have agreed that pursuant to the terms of
the Merger Agreement, 2,047,310 shares of Common Stock held by them (including
shares of Common Stock acquired through the exercise of In the Money Options)
will be treated as "Recapitalization Shares" under the Merger Agreement and
converted into an equal number of shares of common stock of the Surviving
Corporation. Pursuant to the terms of the Merger Agreement, such shares will not
be entitled to receive Cash Merger Consideration upon consummation of the
Merger. See "THE MERGER -- Merger Consideration."
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<PAGE> 49
The following table sets forth information as of the date of this Proxy
Statement as to the shares of Common Stock beneficially owned or to be received
upon the exercise of stock options by Management Sponsors and their affiliates
for which cash payments will be received upon consummation of the Merger and the
number of shares of Surviving Corporation common stock to be owned by such
individuals and entities immediately after the Merger.
<TABLE>
<CAPTION>
SURVIVING CORPORATION
SHARES SOLD AMOUNT OF CASH COMMON STOCK
MANAGEMENT SPONSOR FOR CASH TO BE RECEIVED TO BE RECEIVED
- ------------------ ----------- -------------- ---------------------
<S> <C> <C> <C>
Ramie A. Tritt, M.D.(1)............................ 396,001 $4,158,010.50 1,402,875
Bock, Benjamin & Co. Partners, L.P................. 266,448 2,797,704.00 27,500
Richard D. Ballard(2).............................. 41,843 439,351.50 62,765
Gerald R. Benjamin(3).............................. 16,476 172,998.00 24,714
Robert A. DiProva(4)............................... 34,081 357,850.50 22,721
Lawrence P. Kraska(5).............................. 22,504 236,292.00 33,755
------- ------------- ---------
Totals................................... 777,353 $8,162,206.50 1,574,330
======= ============= =========
</TABLE>
- ---------------
(1) Includes shares to be received upon the cashless exercise of 50,000 options
and 200,000 options granted to Dr. Tritt in March 1998 and November 1998,
respectively.
(2) Includes shares to be received upon the cashless exercise of 179,968
options, 40,000 and 150,000 options granted to Mr. Ballard before the
Company's initial public offering, in March 1998 and in November 1998,
respectively.
(3) Includes shares to be received upon the cashless exercise of 40,000 options
and 150,000 options granted to Mr. Benjamin in March 1998 and November 1998,
respectively.
(4) Includes shares to be received upon the cashless exercise of 119,980
options, 30,000 options and 50,000 options granted to Mr. DiProva before the
Company's initial public offering, in March 1998 and in November 1998,
respectively.
(5) Includes shares to be received upon the cashless exercise of 59,992 options,
50,000 options and 125,000 options granted to Mr. Kraska before the
Company's initial public offering, in March 1998 and November 1998,
respectively.
The stock options which will be exercised by the Management Sponsors
immediately prior to the consummation of the Merger were awarded as compensation
in accordance with the Company's overall executive compensation policy. The
stock options were not granted to the Management Sponsors in anticipation of the
Merger.
General Terms of Employment Agreements with the Management Sponsors. As a
condition to the TA Investors' entering into the Merger Agreement, Richard D.
Ballard, Gerald R. Benjamin, Lawrence P. Kraska and Ramie A. Tritt, M.D. have
entered into amended employment agreements (the "Amended Employment Agreements")
with the Company, effective upon consummation of the Merger, which extend the
terms of their existing employment agreements and reduce certain severance
benefits they would otherwise have been entitled to receive upon termination
after a change of control of the Company. The principal terms (other than those
described directly below (See "-- Change of Control Payments to Management
Sponsors")) of the Amended Employment Agreements are as follows:
- Each agreement has an initial term extending until March 26, 2002,
with the term automatically renewing for successive additional one
year terms thereafter unless terminated.
- Each agreement provides for compensation consisting of base salary
and a potential annual cash bonus of up to 50% of base salary, based
on the Company's meeting certain approved milestones relating to
such matters as practice acquisitions, pre-tax profit margins,
consolidated operating income levels, consummation of follow-on
financings and management team development.
40
<PAGE> 50
- Each agreement provides for participation in the Company's group
medical, 401k and any other benefit plans adopted by the Company.
One of the Management Sponsors, Mr. DiProva, has declined to enter into an
amended employment agreement. The terms of Mr. DiProva's employment agreement
are substantially similar to the terms of the Amended Employment Agreements,
except for certain differences in severance benefits upon termination after a
change of control (as described below) and except for the initial term, which
expires March 26, 2000.
The initial base salaries for Messrs. Ballard, Benjamin, DiProva and
Kraska, and Dr. Tritt with the Surviving Corporation will be $200,000, $150,000,
$120,000, $160,000, and $350,000, respectively. The potential annual cash
bonuses of each Management Sponsor pursuant to each of their employment
agreements would be at the discretion of the Compensation Committee of the Board
of Directors.
In addition, the Surviving Corporation will reserve approximately 5% of its
common stock on a fully diluted basis for the grant of options to purchase
common stock in the Surviving Corporation to the Management Sponsors, other
management employees and affiliated physicians on a prospective basis.
Change in Control Payments to the Management Sponsors. The consummation of
the Merger would constitute a "change in control" of the Company under the
Management Sponsors' currently effective employment agreements. Under the
Management Sponsors currently effective employment agreements, the Management
Sponsors are entitled to severance payments upon any termination of employment
by the Company following such "change in control." Specifically, the employment
agreements between the Company and each of Messrs. Ballard, Benjamin, DiProva
and Kraska and Dr. Tritt provide that in the event the Company terminates their
respective employment following a change in control, they are each entitled to a
lump sum payment in an amount equal to two times their respective taxable
compensation received during the most recently concluded fiscal year of the
Company. The amounts payable under these employment agreements to Messrs.
Ballard, Benjamin, DiProva and Kraska and Dr. Tritt upon consummation of the
Merger would be $300,000, $270,000, $240,000, $300,000 and $700,000,
respectively. In addition, the currently effective employment agreements provide
that in the event Messrs. Ballard, Benjamin, DiProva, Kraska or Dr. Tritt
terminate their respective employment following a change in control, they are
entitled to, for a period of 12 months, their prior base salary with the
Company, less any salary or other amount they are paid by any other person
during that 12 month period (with the exception that the amounts payable to
Messrs. Benjamin and Dr. Tritt shall not be reduced by any salary or amounts
paid to Mr. Benjamin by Bock, Benjamin & Co. or to Dr. Tritt by Atlanta Ear,
Nose and Throat Associates, P.C.). In connection with the execution of the
Merger Agreement, however, the employment agreements with Messrs. Ballard,
Benjamin and Kraska and Dr. Tritt were amended, effective upon consummation of
the Merger. The Amended Employment Agreements between the Company and Messrs.
Ballard, Benjamin and Kraska and Dr. Tritt provide that in the event the Company
terminates their employment within 90 days following a change in control
occurring after the Merger, they are entitled to, for a period of 18 months,
their prior base salary with the Company, less any salary or other earned income
amounts that they are paid by any other person during that 18 month period. In
the event the Company terminates their employment more than 90 days following a
change in control occurring after the Merger, their period of severance payment
is reduced to 12 months. For purposes of the Amended Employment Agreements, the
Merger would not constitute a change of control. Messrs. Ballard, Benjamin and
Kraska and Dr. Tritt have thus effectively waived any rights they might
otherwise have to change of control payments based on the consummation of the
Merger.
Stockholders' Agreement, Registration Rights Agreement and Right of First
Offer Agreement. Members of the Investor Group have entered into a stockholders
agreement (the "Stockholders Agreement") that restricts the ability of members
to transfer the shares of capital stock of Physicians' Specialty to be owned by
them and creates certain other rights and obligations with respect to such
shares. Under the Stockholders Agreement, the Surviving Corporation has a right
of first refusal in the event that a Management Sponsor, any of its affiliates
or any Physician Investor wishes to sell shares of Surviving Corporation common
stock, or, in the event that the Surviving Corporation does not exercise its
right of
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<PAGE> 51
first refusal, any nontransferring stockholder who holds at least 2.5% of the
outstanding shares of Surviving Corporation common stock held by the Investor
Group in the aggregate will have the opportunity to participate in such right of
first refusal. The Stockholders Agreement also provides that the Management
Sponsors, their affiliates and Physician Investors will have the opportunity to
participate in certain sales by one or more TA Investors of more than 50% of the
Surviving Corporation common stock then held by such TA Investors. In addition,
the Management Sponsors and their affiliates have entered into a registration
rights agreement (the "Registration Rights Agreement") pursuant to which the TA
Investors, the Management Sponsors and their affiliates who are parties to such
agreement will have the right to participate, or "piggy-back," in equity
offerings initiated by the Surviving Corporation that are registered under the
Securities Act, subject to the approval of the underwriters involved with any
such equity offering and other customary terms and conditions. Pursuant to the
terms of the Registration Rights Agreement, the Management Sponsors, their
affiliates and the TA Investors will also have the right to compel Physicians'
Specialty to register their securities after certain "triggering events,"
including: the redemption for cash of all of Physicians' Specialty's redeemable
preferred stock then outstanding; the sale, transfer or other disposition of at
least 50% of the convertible participating preferred stock held by TA Investors
as of the effective date of the Merger; or a "qualified public offering" (as
defined in Physicians' Specialty's Amended and Restated Certificate of
Incorporation, to be adopted upon consummation of the Merger). Dr. Tritt, the
Company and the TA Investors entered into a right of first offer agreement (the
"Right of First Offer Agreement") pursuant to which the TA Investors granted to
Dr. Tritt a right of first offer to purchase shares of capital stock held by the
TA Investors in the event of a proposed transfer by the TA Investors within one
year of the effective date of the Merger of such shares which would not satisfy
certain conditions.
The foregoing summaries of the Stock Purchase Agreement, the Rollover
Agreement, the Amended Employment Agreements, the Voting Agreement, the
Stockholders Agreement, the Registration Rights Agreement and the Right of First
Offer Agreement are qualified in their entirety by reference to the actual terms
of such agreements, which are filed as exhibits to the Company's Schedule 13E-3.
Special Committee. Members of the Special Committee, which met on nine
occasions from March 5, 1999 through June 12, 1999, each received compensation
in connection with these committee meetings in the aggregate amount of $13,500,
paid pursuant to the Board's policy for compensation of directors for attendance
at committee meetings in the amount of $1,500 per meeting. Members of the
Special Committee will be entitled to certain indemnification rights and to
directors' and officers' liability insurance which will be continued by
Physicians' Specialty following the Merger as provided for by the Merger
Agreement for the current and former officers and directors of Physicians'
Specialty. (See "-- Indemnification and Insurance"). Under the terms of Option
Exercise Agreements to be executed by members of the Special Committee, the
options held by the members of the Special Committee with an exercise price in
excess of $10.50 will be terminated and each Special Committee member will be
entitled to exercise such member's In the Money Options in a cashless exercise
immediately prior to the Effective Time on the same basis as other holders of
Physicians' Specialty stock options who sign Option Exercise Agreements. The
shares for which such options are exercised will be converted into the right to
receive the Cash Merger Consideration.
Upon the cashless exercise of their respective stock options, Mr. Kirschner
will own 3,958 shares of Common Stock, Dr. Casas will own 4,815 shares of Common
Stock and Dr. Posar will own 3,958 shares of Common Stock. Upon consummation of
the Merger, these shares will be canceled in exchange for the Cash Merger
Consideration. Accordingly, upon consummation of the Merger, the members of the
Special Committee will receive the following cash payments: Mr. Kirschner will
receive $41,562, Dr. Casas will receive $50,562 and Dr. Posar will receive
$41,562.
Advisory and Consulting Agreements. Pursuant to a letter agreement dated
January 13, 1999, the Company retained PHC to provide advisory services and
assist the Company and its Board in the consummation of a leveraged
recapitalization transaction. In connection with its engagement of PHC,
Physicians' Specialty agreed to reimburse PHC's out-of-pocket expenses and to
pay a success fee to PHC equal to (A) 1.25% of the total consideration paid in
connection with any consummated transaction, which
42
<PAGE> 52
shall include indebtedness for borrowed money and the value of any options
assumed less (B) a credit not to exceed $150,000 for any fees payable by the
Company to other investment banking firms in connection with any consummated
transaction. Upon consummation of the Merger, PHC will receive a net fee of
approximately $1.25 million under the letter agreement. The Company also agreed
to indemnify PHC against certain liabilities.
In May 1997, the Company entered into an agreement with PHC, which
agreement was amended in March 1998, pursuant to which PHC will assist the
Company as a financial advisor in connection with acquisitions and similar
transactions. The agreement provides that in the event that the Company
completes any transaction in which PHC performed advisory services, PHC will
receive a fee equal to (i) its out-of-pocket expenses and (ii) 5% of the initial
$1 million of Transaction Value (as defined below), 4% of the next $1 million of
Transaction Value, 3% of the next $1 million of Transaction Value, 2% of the
next $1 million of Transaction Value and 1% of the amount of Transaction Value
in excess of $4 million. "Transaction Value" is defined under the agreement as
the product of (i) the pro-forma annual management fee to be derived by the
Company in connection with the proposed transaction and (ii) 7.5. Pursuant to
the agreement, the fee to be paid to PHC for a particular transaction will be
reduced by any finder's fee payable by the Company to a third party, which has
been approved by PHC, and the aggregate fee to be paid to PHC in any given year
will be reduced by the product of (i) $12,500 and (ii) the number of months in
any year in which Mr. Benjamin is employed by the Company (the "Reduction
Amount"). During 1998, based on Mr. Benjamin's 1998 base salary, the Reduction
Amount was approximately $115,000. The agreement may be terminated by either
party upon 90 days written notice to the other. PHC will not receive any fee
pursuant to this agreement as a result of the consummation of the Merger.
During the year ended December 31, 1998, Physicians' Specialty paid an
aggregate of approximately $893,000 to PHC, consisting of (i) $197,000 for
consulting services in connection with the Company's public offering in May
1998, and (ii) approximately $696,000 (net of $115,000, the amount of salary
paid to Mr. Benjamin by Physicians' Specialty during 1998) for consulting
services in connection with the acquisition of assets or equity of physician
practices and ancillary acquisitions. During the first quarter of 1999,
Physicians' Specialty paid to PHC approximately $207,000 (net of $37,500, the
amount of salary paid to Mr. Benjamin by Physicians' Specialty during the first
quarter of 1999) for advisory services in connection with the acquisition of
assets of certain physician practices and other acquisitions during the period.
In addition, pursuant to the Stock Purchase Agreement, Bock, Benjamin & Co.
Partners, L.P. will sell 266,448 shares of Physicians' Specialty Common Stock to
the TA Investors in exchange for consideration in an aggregate amount of
$2,797,704 and pursuant to the Rollover Agreement will convert its remaining
27,500 shares of Common Stock (approximately 10% of the Common Stock
beneficially owned by Bock, Benjamin & Co. Partners, L.P. as of the date of this
Proxy Statement) into shares of common stock in the Surviving Corporation.
Projections. In connection with the Merger, one material factor evaluated
by the Special Committee and the Board was the projections of the Company's
performance prepared by management on which the initial recapitalization model
prepared by PHC and the recapitalization model developed by Robinson-Humphrey
were based. These projections reflect a slower rate of acquisition activity and
related growth for the Company than realized prior to 1999. The Special
Committee and the Board also considered conflicts of interest in connection with
management's preparation of these assumptions, but concluded, having considered
its discussions with Robinson-Humphrey, the Management Sponsors and other
officers and employees of the Company, that management's assumptions underlying
the projections as set forth in the recapitalization models prepared by PHC and
Robinson-Humphrey were reasonable.
Other Employees. Each employee holding options to purchase Physicians'
Specialty Common Stock will be given the opportunity pursuant to an Option
Exercise Agreement to exercise in a cashless exercise such employee's In the
Money Options and to request that some or all of the shares received by such
employee upon exercise of such options be converted into shares of common stock
of the Surviving
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<PAGE> 53
Corporation on a share for share basis. As of June 30, 1999, there were options
outstanding to purchase an aggregate of 1,524,940 shares of Common Stock, of
which 1,422,960 have an exercise price per share of less than $10.50. At or
prior to the Effective Time, each option then outstanding to purchase
Physicians' Specialty Common Stock will vest and become fully exercisable.
Indemnification and Insurance. The Merger Agreement provides that the
Company's current and former directors and officers will be indemnified by the
Surviving Corporation, to the fullest extent permitted under the DGCL, against
any costs, expenses, losses, claims, damages, liabilities, or judgments, or
amounts paid in settlement with the approval of the indemnifying party in
connection with any threatened or actual claim, action, suit, proceeding, or
investigation based in whole or in part on, or arising in whole or in part out
of, or pertaining to the fact that such person is or was a director or officer
of Physicians' Specialty or any of its subsidiaries, whether pertaining to any
matter existing or occurring at or prior to the consummation of the Merger, and
whether asserted or claimed prior to, or at or after such time. In addition, the
Surviving Corporation is required to maintain in effect, for a period of six
years after the Effective Time, Physicians' Specialty's policies of directors'
and officers' liability insurance (provided that the Surviving Corporation may
substitute therefor policies of at least the same amounts and comparable
coverage). However, in no event will the Surviving Corporation be required to
pay premiums for such insurance in excess of $150,000.
Robinson-Humphrey. In the ordinary course of Robinson-Humphrey's business,
Robinson-Humphrey and its affiliates actively trade in the equity securities of
the Company for their own account and for the accounts of their customers and,
accordingly, may at any time hold a long or a short position in such securities.
In addition, Robinson-Humphrey participated in the underwriting syndicate in the
Company's initial public offering in March 1997 and its follow-on public
offering in May 1998. Robinson-Humphrey believes that the foregoing arrangements
do not affect its ability to independently and impartially deliver an opinion to
the Special Committee that the Cash Merger Consideration to be received in the
proposed Merger is fair from a financial point of view to the Public
Stockholders.
Leases. The Company leases one clinical location from Dr. Tritt. The lease
is for approximately 23,000 square feet and provides for monthly rental payments
of approximately $47,000, subject to annual increases. The Company also leases
one clinical location from Eastside Physicians Center, L.P., a Georgia limited
partnership, of which Dr. Tritt is a limited partner. The lease is for
approximately 4,800 square feet and provides for monthly rental payments of
approximately $8,000, subject to annual increases. In addition, the Company has
entered into a lease with ENT 87th St., LLC, an entity in which a director of
the Company, Dr. Steven Sacks, has a substantial interest, for real property in
New York City, New York for a medical office for ENT Associates, LLP.
Credit Facility. NationsBank, N.A., a member of the syndicate for the
Company's $45 million amended and restated senior credit facility, which will be
repaid in connection with the Merger, is together with certain of its
affiliates, a principal stockholder of Physicians' Specialty.
LITIGATION RELATING TO THE MERGER
As of the date of this Proxy Statement, Physicians' Specialty is aware of
one lawsuit, Chill v. Physicians' Specialty Corp., et al. (C.A. No. 17244NC),
that has been filed as a purported class action in the Chancery Court for New
Castle County, Delaware on behalf of all holders of Physicians' Specialty Common
Stock excluding the defendants and their related or affiliated entities. The
lawsuit names as defendants Physicians' Specialty, six of the Company's seven
directors (including the three members of the Special Committee) and TA
Associates, Inc.
The lawsuit alleges, among other things, that the directors of Physicians'
Specialty have breached their fiduciary duties to the Company's stockholders by
approving the Merger. In particular, the lawsuit alleges that members of the
Board of Directors suffer from conflicts of interest that made it impracticable
for the Board of Directors to conduct a "bona fide" market check or auction of
the Company prior to approval of the Merger. The lawsuit also alleges that the
announcement of the Merger was timed to place an artificial lid on the market
price of Physicians' Specialty Common Stock. The lawsuit seeks, among
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other things, preliminary and permanent injunctive relief prohibiting
consummation of the Merger, unspecified damages, attorneys' fees and other
relief. Physicians' Specialty believes the lawsuit has no merit and intends to
contest this lawsuit vigorously.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, Physicians' Specialty will be owned principally
by the Investor Group. Following the Merger, the TA Investors will own
approximately 57% of the shares of Surviving Corporation common stock on a fully
diluted basis, and will own 27,800 shares of redeemable preferred stock of
Surviving Corporation. The Management Sponsors will beneficially own 27.4% of
the outstanding shares of Surviving Corporation common stock on a fully diluted
basis. In addition, the Management Sponsors will receive approximately $8.1
million in cash in consideration for their shares of Common Stock purchased by
the TA Investors pursuant to the Merger. The Public Stockholders will no longer
be stockholders of Physicians' Specialty, and therefore, will not participate in
the potential growth of Physicians' Specialty or bear the risk of any decreases
in the value of Physicians' Specialty. Instead, the Public Stockholders will
have the right to receive $10.50 in cash, without interest, for each share held
(other than shares in respect of which appraisal rights have been perfected
under Delaware law). An equity investment in Physicians' Specialty following the
Merger involves substantial risk resulting from the limited liquidity of any
such investment and the leverage resulting from the future borrowings that will
be required to purchase the Common Stock from the Public Stockholders and to
fund the capital expenditures and acquisitions necessary to execute the
Company's business strategy. Nonetheless, if Physicians' Specialty successfully
executes its business strategy, the value of such an equity investment could be
considerably greater than the original cost thereof. The Investor Group will
have the opportunity to benefit from any future earnings and growth of
Physicians' Specialty. For further discussion of the benefits of the Merger to
the Management Sponsors and the Board of Directors, see"-- Conflicts of
Interest." Also see "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION."
In addition, the Common Stock will no longer be traded on Nasdaq and price
quotations with respect to sales of shares in the public market will no longer
be available. The registration of the Common Stock under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), will terminate and the Company
will no longer be required to file reports pursuant to Section 15(d) of the
Exchange Act.
FINANCING OF THE MERGER
Generally. It is estimated that approximately $89.2 million will be
required to consummate the Transactions and pay related fees and expenses. This
sum will be provided by (i) a cash investment of up to approximately $32.8
million from currently available funds by the TA Investors, (ii) borrowings of
approximately $41.0 million of a new $60.0 million revolving credit facility,
(iii) a $15.0 million investment by Allied in exchange for $15.0 million of
subordinated debentures and warrants to purchase common stock of the Surviving
Corporation (in addition to a $1.0 million equity investment in exchange for
$850,000 of redeemable preferred stock and $150,000 of convertible preferred
stock, which is included in the $32.8 million investment in clause (i) above),
and (iv) the Company's surplus cash in the amount of approximately $403,000. In
addition, the Management Sponsors, their affiliates and the Physician Investors
will exchange 2,047,310 shares of Physicians' Specialty Common Stock having an
aggregate value of $21.6 million (based on a price of $10.50 per share) for
common stock of the Surviving Corporation. The TA Investors have committed under
the Merger Agreement to provide the equity financing to MergerCo, subject to
certain conditions set forth in the Merger Agreement. See "The Merger -- Terms
of the Merger Agreement."
Subordinated Debentures. Pursuant to the terms of a binding commitment
letter, Physicians' Specialty expects to receive $15.0 million from Allied in
exchange for issuing to Allied $15.0 million of subordinated debentures and
warrants to purchase common stock of the Surviving Corporation. The subordinated
debentures will mature seven years from the date of consummation of the Merger
(or up to an additional 6 months depending on the maturity of certain other debt
obligations of the Surviving
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Corporation); interest will accrue at the rate of 15.5% per annum, 12% of which
will be paid in cash and 3.5% in additional principal amount; and the
subordinated debentures will be unsecured and subordinate to a revolving bank
facility (described below) and any debt refinancing thereof. In addition, the
Surviving Corporation will be subject to customary covenants for this type of
financing including restrictions on affiliate transactions, indebtedness,
dividends, liens, stock repurchases, asset sales and acquisitions.
Credit Facility. Physicians' Specialty plans to draw down approximately
$41.0 million of a new $60.0 million revolving credit facility provided in a
binding commitment letter from First Union in order to consummate the Merger.
Borrowings under the revolving credit facility will be secured by a first
priority lien on and security interest in (a) 100% of the capital stock of each
subsidiary of the Surviving Corporation and (b) all of the assets of the
Surviving Corporation and its subsidiaries. The revolving credit facility will
terminate five years after the closing of the Merger. Interest on borrowings
under the revolving credit facility would, in the event a LIBOR pricing option
is exercised, range from 2.25% to 3.50% over LIBOR, and, in the event an
alternate base rate pricing option is exercised, range from 1.00% to 2.25% over
First Union's base lending rate.
The foregoing commitment letters are subject to numerous conditions,
including the preparation and execution of definitive loan agreements and
related documents, the absence of a material adverse change in the Company's
business, the receipt of a legal opinion from counsel to Physicians' Specialty,
the reasonableness of assumptions underlying financial projections provided to
the lenders, the accuracy of financial information provided to the lenders and
satisfaction of certain financial tests. In addition, the First Union and Allied
commitment letters will expire on November 30, 1999 if the Merger and related
transactions are not consummated by such date. First Union's commitment letter
provides that its commitment to provide the credit facility may be subject to
additional conditions contained in the definitive loan agreements. These
commitment letters are filed as exhibits to the Company's Schedule 13E-3.
CONDUCT OF PHYSICIANS' SPECIALTY BUSINESS AFTER THE MERGER
The Investor Group is continuing to evaluate the Company's business,
practices, operations, properties, corporate structure, capitalization,
management, and personnel and will discuss what changes, if any, will be
desirable. Subject to the foregoing, the Investor Group expects that the
day-to-day business and operations of the Surviving Corporation will be
conducted substantially as they are currently being conducted by Physicians'
Specialty. The Investor Group does not currently intend to dispose of any assets
of Physicians' Specialty, other than in the ordinary course of business.
Additionally, the Investor Group does not currently contemplate any material
change in the composition of the Company's current management or personnel,
although after the Merger the Board will consist of Dr. Tritt and Messrs.
Benjamin and Ballard (as designees of the Company's management), Richard Tadler
and David S. B. Lang (as designees of the TA Investors) and up to two outside
directors to be determined at a later time.
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to several conditions, including
receipt of the required approval of the Physicians' Specialty stockholders, the
absence of an injunction or other order prohibiting consummation of the
Transactions, the absence of a change resulting in a material adverse effect on
the business, results of operations, or condition (financial or otherwise) of
the Company and its subsidiaries taken as a whole, receipt of required debt
financing and holders of not more than 5% of the outstanding shares of
Physicians' Specialty Common Stock electing to demand appraisal rights. See "THE
MERGER -- Conditions to Consummation of the Merger." Although, as described in
"-- FINANCING OF THE MERGER," the Company and TA Associates have obtained
commitments for the required debt financing, these commitments contain several
conditions. Therefore, even if the required stockholder approval is obtained,
there can be no assurance that the Merger will be consummated.
EVEN IF THE STOCKHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT, THERE CAN
BE NO ASSURANCE THAT THE MERGER WILL BE CONSUMMATED.
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The Merger Agreement provides for the following payments in the event of
the termination of the Merger Agreement. Physicians' Specialty will pay MergerCo
a termination fee equal to $3.5 million plus up to $750,000 of MergerCo's
out-of-pocket fees and expenses if Physicians' Specialty terminates the Merger
Agreement because it has entered into a definitive agreement concerning an
Acquisition Proposal or if either party terminates the Merger Agreement because
of the failure to obtain the required stockholder approval and the Company under
certain circumstances enters into a definitive agreement concerning an
Acquisition Proposal within 12 months of termination. The Company will pay
MergerCo's out-of-pocket fees and expenses (not to exceed $750,000) if MergerCo
terminates the Merger Agreement because the Physicians' Specialty Board has
withdrawn or adversely modified its recommendation of the Merger or Physicians'
Specialty has entered into a definitive agreement concerning an Acquisition
Proposal. Each of MergerCo and Physicians' Specialty agrees to pay the other
party's fees and expenses (not to exceed $750,000) upon the termination of the
Merger Agreement based on a material breach of any representation, warranty or
covenant that such party has made under the Merger Agreement. No other
transaction is currently being considered by the Company as an alternative to
the Merger.
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THE SPECIAL MEETING
DATE, TIME, AND PLACE OF THE SPECIAL MEETING
The Special Meeting of Physicians' Specialty will be held on ,
1999, at 10:00 a.m., local time, at the offices of King & Spalding, located at
191 Peachtree Street, Atlanta, Georgia.
PROXY SOLICITATION
This Proxy Statement is being solicited by the Company. All expenses
incurred in connection with solicitation of the enclosed proxy will be paid by
the Company. Officers, directors and regular employees of the Company, who will
receive no additional compensation for their services, may solicit proxies by
telephone or personal call. The Company has requested brokers and nominees who
hold stock in their names to furnish this proxy material to their customers, and
the Company will reimburse such brokers and nominees for their related
out-of-pocket expenses. This Proxy Statement and the accompanying proxy card are
being mailed to stockholders on or about , 1999.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Company's stockholders will be asked to vote
upon a proposal to approve and adopt the Merger Agreement, which is attached as
Appendix A hereto. The Company's stockholders may also be asked to vote on
adjournment of the Special Meeting so that the Company may solicit additional
proxies if a motion to adjourn the Special Meeting is properly brought.
RECORD DATE AND QUORUM REQUIREMENT
The Common Stock is the only outstanding voting security of the Company.
The Board has fixed the close of business on , 1999 as the Record
Date for the determination of stockholders entitled to notice of, and to vote
at, the Special Meeting and any adjournment or adjournments thereof. At the
close of business on the Record Date, there were shares of Common Stock
issued and outstanding held by holders of record. Each holder of record
of Physicians' Specialty Common Stock at the close of business on the Record
Date is entitled to one vote for each share then held on each matter that may
properly come before the Special Meeting.
The holders of a majority of the outstanding shares entitled to vote at the
Special Meeting must be present in person or represented by proxy to constitute
a quorum for the transaction of business. Abstentions are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business.
VOTING PROCEDURES
Approval and adoption of the Merger Agreement will require the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting. The Management Sponsors, their
affiliates and certain affiliated physicians, who as of the Record Date,
beneficially owned approximately 40% of the outstanding shares of Physicians'
Specialty Common Stock, have agreed to vote their shares for approval and
adoption of the Merger Agreement. The Merger has not been structured to require
approval of a majority of stockholders not affiliated with Physicians' Specialty
or the Investor Group. A failure to vote or a vote to abstain will have the same
legal effect as a vote cast against approval. Brokers and, in many cases,
nominees will not have discretionary power to vote on the proposal to be
presented at the Special Meeting. Accordingly, beneficial owners of shares
should instruct their brokers or nominees how to vote. A broker non-vote will
have the same effect as a vote against the Merger Agreement.
Any proposal to adjourn the Special Meeting for the purpose of soliciting
additional proxies must be approved by a majority of the Company's stockholders
present in person or by proxy. Votes to abstain will constitute, in effect,
votes against such adjournment. If the Special Meeting is adjourned for any
purpose,
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at any subsequent reconvening of the Special Meeting, all proxies will be voted
in the same manner as such proxies would have been voted at the original
convening of the meeting (except for any proxies which have been revoked or
withdrawn), notwithstanding that they may have been voted on the same or any
other matter at a previous meeting.
Under Delaware law, holders of Physicians' Specialty Common Stock who do
not vote in favor of the proposal to approve and adopt the Merger Agreement and
who comply strictly with the notice requirements and other procedures of Section
262 are entitled to exercise their appraisal rights and to be paid cash for the
"fair value" of their shares as finally determined under such procedures. The
fair value may be more or less than the consideration to be received by other
stockholders of the Company under the terms of the Merger Agreement. Failure to
follow such procedures precisely may result in loss of appraisal rights. See
"RIGHTS OF DISSENTING STOCKHOLDERS."
VOTING AND REVOCATION OF PROXIES
A stockholder who gives a proxy may revoke it at any time before it is
voted at the Special Meeting by (i) filing with the Secretary of the Company an
instrument revoking it, (ii) submitting a duly executed proxy bearing a later
date or (iii) voting in person at the Special Meeting. Subject to such
revocation, all shares represented by each properly executed proxy received by
the Secretary of the Company will be voted in accordance with the instructions
indicated thereon, and if no instructions are indicated, will be voted to
approve and adopt the Merger Agreement and in such manner as the persons named
on the enclosed proxy card in their discretion determine upon such other
business as may properly come before the Special Meeting or any adjournment
thereof.
The shares represented by the accompanying proxy card and entitled to vote
will be voted if the proxy card is properly signed and received by the Secretary
of the Company prior to the Special Meeting.
EFFECTIVE TIME OF THE MERGER AND PAYMENT FOR SHARES
The effective time of the Merger, which shall be the date and time of
filing of a Certificate of Merger with the Secretary of State of the State of
Delaware (the "Effective Time"), is currently expected to occur as soon as
practicable after the Special Meeting, subject to approval and adoption of the
Merger Agreement at the Special Meeting and satisfaction or waiver of the terms
and conditions of the Merger Agreement. Detailed instructions with regard to the
surrender of Common Stock certificates, together with a letter of transmittal,
will be forwarded to stockholders by the Company's exchange agent,
(the "Exchange Agent"), promptly following the Effective Time. Stockholders
should not submit their certificates to the Exchange Agent until they have
received such materials. The Exchange Agent will send payment of the Cash Merger
Consideration to stockholders as promptly as practicable following receipt by
the Exchange Agent of their certificates and other required documents. No
interest will be paid or accrued on the cash payable upon the surrender of
certificates. Stockholders should not send any certificates at this time. See
"THE MERGER -- Conditions."
OTHER MATTERS TO BE CONSIDERED
The Company's Board of Directors is not aware of any other matters which
will be brought before the Special Meeting. If, however, other matters are
presented, proxies will be voted in accordance with the discretion of the
holders of such proxies.
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THE MERGER
TERMS OF THE MERGER AGREEMENT
General. The Merger Agreement provides that subject to satisfaction of
certain conditions, MergerCo will be merged with and into Physicians' Specialty,
and that following the Merger, the separate existence of MergerCo will cease and
Physicians' Specialty will continue as the Surviving Corporation. At the
Effective Time, and subject to the terms and conditions set forth in the Merger
Agreement, each share of issued and outstanding Common Stock (other than shares
as to which appraisal rights are properly perfected and not withdrawn, shares
held by the Company or any of its subsidiaries or by MergerCo, and shares held
at the Effective Time by the Management Sponsors, their affiliates and the
Physician Investors and certain shares held by employee option holders (the
"Recapitalization Shares")) will, by virtue of the Merger, be canceled and
converted into the right to receive $10.50 in cash, without interest (the "Cash
Merger Consideration"). As a result of the Merger, the Common Stock will no
longer be publicly traded and the equity of the Surviving Corporation will be
100% owned by the Investor Group.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this Proxy Statement and is
incorporated herein by reference. The discussion in this Proxy Statement of the
Merger and the summary description of the principal terms of the Merger
Agreement are subject to and qualified in their entirety by reference to the
more complete information set forth in the Merger Agreement.
Merger Consideration. Upon consummation of the Merger, each share of
Common Stock issued and outstanding immediately prior to the Effective Time
(excluding shares owned by the Company or any of its subsidiaries or by
MergerCo, the Recapitalization Shares and dissenting shares) will be converted
into the right to receive the Cash Merger Consideration, upon surrender and
exchange of the certificate or certificates which immediately prior to the
Effective Time evidenced Common Stock (the "Certificate(s)"). All such shares of
Common Stock, when converted (the "Shares"), will no longer be outstanding and
will automatically be canceled and retired and will cease to exist, and each
Certificate previously evidencing such Shares will thereafter represent only the
right to receive the Cash Merger Consideration.
As holders of Recapitalization Shares, the Management Sponsors and their
affiliates will in the aggregate have 1,574,330 shares of Common Stock converted
in the Merger into 1,574,330 shares of common stock of the Surviving
Corporation, and the Physician Investors, as holders of Recapitalization Shares,
will have in the aggregate 472,980 shares of Common Stock converted in the
Merger into 472,980 shares of common stock of the Surviving Corporation. In
addition, each share of convertible participating preferred stock and redeemable
preferred stock of MergerCo outstanding immediately prior to the Effective Time
(all of which shares are held by the TA Investors) will be converted into a
share of Convertible Participating Preferred Stock and Redeemable Preferred
Stock, respectively. As a result, upon consummation of the Merger, the TA
Investors and their assigns will hold approximately 3.2 million shares of
Convertible Participating Preferred Stock and 27,800 shares of Redeemable
Preferred Stock of the Surviving Corporation.
Payment for Shares. Within 30 days after the Effective Time, the Exchange
Agent will mail to each holder of record of a Certificate (other than
Physicians' Specialty or any of its subsidiaries or MergerCo or holders of
dissenting shares or Recapitalization Shares) a form of letter of transmittal
and instructions for use in effecting the surrender of the Certificate in
exchange for payment therefor. Within 30 days after surrender of a Certificate
for cancellation to the Exchange Agent, together with such duly executed letter
of transmittal, and any additional requested items, the holder of such
Certificate will be entitled to receive in exchange therefor cash in an amount
equal to the product of (x) the number of shares of Common Stock represented by
such Certificate and (y) the Cash Merger Consideration. Holders of Certificates
will not receive interest on the Cash Merger Consideration payable on their
shares of Common Stock after the Effective Time. Accordingly, holders of
Certificates are urged to promptly return their Certificates with a duly
executed letter of transmittal.
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Stock Options. Pursuant to the Company's 1996 Stock Option Plan, as
amended, and the 1996 Healthcare Professionals Stock Option Plan and resolutions
of the Physicians' Specialty Board of Directors, each outstanding option will
vest and become fully exercisable at or prior to the Effective Time. The Merger
Agreement provides that the Company will use its reasonable best efforts to
cause each holder of options to purchase Physicians' Specialty Common Stock to
enter into an Option Exercise Agreement. The Option Exercise Agreement will
provide for a cashless exercise of options which have an exercise price of less
than $10.50 per share and the termination and cancellation of options which have
an exercise price of greater than or equal to $10.50 per share. In addition, the
Merger Agreement required Physicians' Specialty to terminate, effective as of
June 30, 1999, the Physicians' Specialty 1997 Employee Stock Purchase Plan.
Transfer of Shares. At the Effective Time, the stock transfer books of
Physicians' Specialty will be closed and there will be no further transfer of
shares of Common Stock thereafter on the records of Physicians' Specialty. On or
after the Effective Time, any certificates presented to the Surviving
Corporation or the Exchange Agent for any reason will be canceled in return for
the Cash Merger Consideration.
Conditions to the Merger. Each party's respective obligation to effect the
Merger is subject to the satisfaction, prior to the Closing Date, of each of the
following conditions: (i) the Merger Agreement and the Transactions, including
the Merger, shall have been approved and adopted by the affirmative vote of the
holders of a majority of the outstanding shares of Physicians' Specialty Common
Stock to the extent required by the DGCL and the Physicians' Specialty
Certificate of Incorporation; (ii) all necessary approvals, authorizations and
consents of governmental or regulatory entities required to consummate the
Merger shall have been obtained and remain in full force and effect and all
waiting periods relating to such approvals, authorizations and consents shall
have expired or been terminated; (iii) no injunction, order, decree or ruling
nor any statute, rule or regulation shall be in effect which would make the
consummation of the Merger illegal or otherwise prevent or prohibit the
consummation of the Transactions including the Merger, or prohibit or limit the
ownership or operation by the Company or any of its subsidiaries of any portion
of its or their business, properties or assets which is material, or compel the
Company or any of its subsidiaries to dispose of or hold separate any portion of
the Company's or the subsidiaries' business, properties or assets which is
material; and (iv) any waiting period (and any extension thereof) applicable to
the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, shall have expired or been terminated.
The obligations of MergerCo and each of the TA Investors, who have agreed,
subject to certain limitations, to guarantee certain obligations of MergerCo
under the Merger Agreement, to effect the Merger are subject to the satisfaction
of the following conditions, unless waived by MergerCo and the TA Investors: (i)
there shall not have occurred a change which would reasonably be expected to
have a Company Material Adverse Effect; (ii) the representations and warranties
of Physicians' Specialty in the Merger Agreement, which are qualified by
materiality or Company Material Adverse Effect shall be true and correct as of
the closing of the Merger (the "Closing Date") as though made on and as of the
Closing Date (except to the extent such representations and warranties expressly
relate to a specific date, in which case such representations and warranties
shall be true and correct as of such date) and those other representations and
warranties of Physicians' Specialty in the Merger Agreement shall be true and
correct in all material respects as of the Closing Date as though made on and as
of the Closing Date (except to the extent such representations and warranties
expressly relate to a specific date in which case such representations and
warranties shall be true and correct in all material respects as of such date);
(iii) Physicians' Specialty shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement; (iv) debt
financing in amounts and substantially on the terms set forth in the existing
bank commitments shall have been obtained; (v) the holders of no more than 5% of
the outstanding shares of Physicians' Specialty Common Stock shall have taken
all required actions to assert appraisal rights under Section 262 of the DGCL
and not withdrawn or otherwise permitted to lapse such appraisal rights or
demands therefor; (vi) not less than 2,047,310 shares of Physicians' Specialty
Common Stock shall be subject to a Rollover Agreement which shall be in full
force
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and effect; (viii) the Amended Employment Agreements shall be in full force and
effect; (ix) amounts owing by Physicians' Specialty to NationsBank under the
existing credit facility shall have been repaid and releases of related liens
shall have been obtained pending receipt of amounts stated in payoff letters;
(x) all consents and approvals by third parties (A) identified as conditions to
closing and (B) that are required to prevent a breach of, default under, or
termination, change in the terms or conditions or modification of, any contract
or other agreement, where such breach, default, termination or change would have
a Company Material Adverse Effect, will have been obtained; and (xi) the
Commission shall not have disapproved of the statement made in this Proxy
Statement that the Merger will be treated as a recapitalization for accounting
purposes.
The obligations of Physicians' Specialty to effect the Merger are subject
to the satisfaction of the following conditions, unless waived by Physicians'
Specialty: (i) the representations and warranties of MergerCo contained in the
Merger Agreement which are qualified by materiality or MergerCo Material Adverse
Effect shall be true and correct as of the Closing Date as though made on and as
of the Closing Date (except to the extent such representations and warranties
expressly relate to a specific date, in which case such representations and
warranties shall be true and correct as of such date) and those other
representations and warranties of MergerCo in the Merger Agreement shall be true
and correct in all material respects as of the Closing Date as though made on
and as of the Closing Date (except to the extent such representations and
warranties expressly relate to a specific date in which case such
representations and warranties shall be true and correct in all material
respects as of such date); (ii) MergerCo shall have performed in all material
respects all obligations required to be performed by it at or prior to the
Closing Date; and (iii) the stock purchase between the TA Investors and the
Management Sponsors, their affiliates and the Physician Investors shall have
been consummated.
Subject to applicable law, the Merger Agreement may be amended by written
agreement of the parties to the Merger Agreement; provided, however, that, after
the Merger Agreement is approved by the Physicians' Specialty stockholders, no
such amendment or modification shall reduce the amount or change the form of
consideration to be received by the Physicians' Specialty stockholders. If
Physicians' Specialty or any other party waives a condition to its obligations
to perform under the Merger Agreement, Physicians' Specialty will resolicit
stockholder approval only if such waiver reduces the amount or changes the form
of consideration to be received by Physicians' Specialty Public Stockholders, or
is otherwise required by applicable law.
EVEN IF THE STOCKHOLDERS APPROVE THE MERGER, THERE CAN BE NO ASSURANCE THAT
THE MERGER WILL BE CONSUMMATED.
Representations and Warranties. Physicians' Specialty has made
representations and warranties in the Merger Agreement regarding, among other
things, its organization and good standing, authority to enter into the
Transactions, its capitalization, its financial statements, the absence of
certain changes in the business of Physicians' Specialty since December 31,
1998, the content and submission of forms and reports required to be filed by
Physicians' Specialty with the Commission, requisite governmental and other
consents and approvals, compliance with applicable laws, absence of litigation
against Physicians' Specialty, brokers and finders fees, requisite tax filings,
absence of defaults under material contracts, employee benefits, environmental
matters, healthcare compliance and intellectual property matters.
MergerCo has made representations and warranties in the Merger Agreement
regarding, among other things, its organization and good standing, its prior
activities, authority to enter into the Transactions, the requisite governmental
and other consents and approvals, and accuracy of information supplied by
MergerCo for submission on forms and reports required to be filed by Physicians'
Specialty with the Commission.
The TA Investors have made representations and warranties in the Merger
Agreement regarding, among other things, their organization and good standing,
authority to enter into the transaction, requisite governmental and other
consents and approvals, accuracy of information supplied by the TA Investors for
submission on forms and reports required to be filed by Physicians' Specialty
with the Commission, and certain financing commitments.
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The representations, warranties and agreements (other than Sections 7.4,
7.6, 7.7, 10.3 and 10.7) in the Merger Agreement or in any instrument delivered
pursuant to the Merger Agreement will expire at the Effective Time.
Covenants. In the Merger Agreement, Physicians' Specialty has agreed that
prior to the Effective Time, unless otherwise agreed to in writing by MergerCo
or as otherwise expressly contemplated or permitted by the Merger Agreement,
Physicians' Specialty and each of its subsidiaries will, among other things,
carry on its business in the ordinary course consistent with past practice,
including, without limitation, not declaring any dividend on its capital stock,
issuing any shares of capital stock or entering into certain transactions.
Solicitation of Acquisition Proposal. The Merger Agreement provides that
neither Physicians' Specialty nor its subsidiaries nor any of their respective
officers, directors, employees or representatives shall be permitted, directly
or indirectly, to initiate, solicit, encourage (including by way of furnishing
non-public information) or take any action to facilitate, any inquiries or the
making of any proposal that constitutes an Acquisition Proposal (as defined
below); to participate in discussions or negotiations regarding an Acquisition
Proposal; or to enter into any agreements, definitive or otherwise, regarding an
Acquisition Proposal. Physicians' Specialty may, however, upon receipt of a
non-solicited Acquisition Proposal at any time prior to the approval of the
Merger Agreement by the Physicians' Specialty stockholders, furnish non-public
information with respect to Physicians' Specialty and its subsidiaries to the
person making such proposal and may participate in discussions with such party
if the Board of Directors of Physicians' Specialty determines based on the
advice of independent legal counsel that failure to do so would be inconsistent
with its fiduciary duties and determines based on advice of its financial
advisors that such Acquisition Proposal is likely to lead to a Superior
Acquisition Proposal.
Physicians' Specialty will advise MergerCo promptly after it receives an
indication of interest, inquiry or proposal from a third party regarding an
Acquisition Proposal and of the status of material developments in the
negotiations with respect to the Acquisition Proposal or the taking of actions
not otherwise permitted under the Merger Agreement with respect to such
Acquisition Proposal.
As defined in the Merger Agreement, an "Acquisition Proposal" means any
proposed or actual (i) merger, consolidation or similar transaction involving
the Company, (ii) sale, lease or other disposition of any assets of the Company
or the Company's subsidiaries representing 15% or more of their consolidated
assets, (iii) issuance, sale or other disposition by the Company of securities
representing 15% or more of the votes associated with the outstanding securities
of the Company, (iv) tender or exchange offer in which any person shall acquire
or has the right to acquire beneficial ownership, or any group shall have been
formed which beneficially owns or has the right to acquire beneficial ownership
of, 15% or more of the outstanding shares of the Company's Common Stock, (v)
recapitalization, restructuring, liquidation, dissolution or other similar
transaction with respect to the Company or (vi) transaction which is similar in
form, substance or purpose to any of the foregoing transactions.
Indemnification and Insurance. The Merger Agreement provides that the
Company's current and former directors and officers will be indemnified by the
Surviving Corporation, to the fullest extent permitted under the DGCL, against
any costs, expenses, losses, claims, damages, liabilities or judgments, or
amounts paid in settlement with the approval of the indemnifying party in
connection with any threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on, or arising in whole or in part out
of, or pertaining to the fact that such person is or was a director or officer
of Physicians' Specialty or any of its subsidiaries, whether pertaining to any
matter existing or occurring at or prior to the Effective Time, and whether
asserted or claimed prior to, or at or after, the Effective Time. In addition,
the Surviving Corporation is required to maintain in effect, for a period of six
years after the Effective Time, Physicians' Specialty's policies of directors'
and officers' liability insurance (provided that the Surviving Corporation may
substitute therefor policies of at least the same amounts and comparable
coverage). However, in no event will the Surviving Corporation be required to
pay premiums for such insurance in excess of $150,000.
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<PAGE> 63
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the Merger by the stockholders of Physicians' Specialty: (a) by
mutual written consent of Physicians' Specialty and MergerCo; (b) by Physicians'
Specialty if MergerCo shall have breached in any material respect any of its
representations, warranties, covenants or other agreements (except where such
representations, warranties, covenants or other agreements are qualified by
materiality or MergerCo Material Adverse Effect, in which case MergerCo's breach
shall not be qualified as to materiality), which breach or failure to perform
has not been or cannot be cured within 15 days following the giving to MergerCo
of notice of such breach or failure, except for breaches which are not
reasonably likely to affect adversely MergerCo's ability to consummate the
Merger; (c) by MergerCo if Physicians' Specialty shall have breached in any
material respect any of its representations, warranties, covenants or other
agreements (except where such representations, warranties, covenants or other
agreements are qualified by materiality or Company Material Adverse Effect, in
which case the Company's breach shall not be qualified as to materiality), which
breach or failure to perform has not been or cannot be cured within 15 days
following the giving to MergerCo of notice of such breach; (d) by MergerCo or
Physicians' Specialty if any court or other governmental entity shall have
issued an injunction or other order, ruling or decree which permanently
restrains, enjoins or otherwise prohibits the Merger which shall have become
final and nonappealable; (e) by MergerCo or Physicians' Specialty if the Merger
shall not have occurred on or before November 30, 1999; (f) by MergerCo in the
event (i) the Physicians' Specialty Board shall have withdrawn or adversely
modified its approval or recommendation of the Merger or the Merger Agreement to
the Physicians' Specialty stockholders, or (ii) the Company shall have entered
into an agreement concerning an Acquisition Proposal; (g) by Physicians'
Specialty in connection with entering into a definitive agreement to effect a
Superior Acquisition Proposal; provided, however that Physicians' Specialty
shall not terminate the Merger Agreement in this manner without (i) providing
MergerCo at least five days prior written notice, which notice shall include in
reasonable detail the terms of the Superior Acquisition Proposal, and (ii)
making payments to MergerCo in accordance with Section 9.2 of the Merger
Agreement (as described below); or (h) by MergerCo or Physicians' Specialty if
the Merger and the Merger Agreement shall have been voted on by the Physicians'
Specialty stockholders, and the votes shall not have been sufficient to satisfy
the condition set forth in Section 8.1(a) of the Merger Agreement.
Fees and Expenses. Except as otherwise provided in Section 9.2 of the
Merger Agreement, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses; provided that the Company shall pay the reasonable
out-of-pocket costs of MergerCo and the TA Investors if the Merger is
consummated. Physicians' Specialty agrees to pay MergerCo a fee in immediately
available funds equal to $3.5 million plus the amount of all of MergerCo's
Designated Expenses (as defined below) (i) if the Company terminates the Merger
Agreement pursuant to Section 9.1(c)(i) of the Merger Agreement or (ii) either
the Company or MergerCo terminates the Merger Agreement pursuant to Section
9.1(b)(i) of the Merger Agreement and (A) prior to the Special Meeting, an
Acquisition Proposal shall have been made to the Company's Stockholders
generally or any person shall have publicly announced an Acquisition Proposal or
an intention to make an Acquisition Proposal or solicited proxies or consents in
opposition to the Merger, and (B) Physicians' Specialty shall have entered into
a definitive agreement on or before the first anniversary of the termination of
the Merger Agreement with respect to an Acquisition Proposal. MergerCo agrees to
pay Physicians' Specialty a fee in immediately available funds equal to the
amount of all of Physicians' Specialty's Designated Expenses if the Company
terminates the Merger Agreement pursuant to Section 9.1(c)(ii), and Physicians'
Specialty agrees to pay MergerCo a fee in immediately available funds equal to
the amount of all MergerCo's Designated Expenses if MergerCo terminates the
Merger Agreement pursuant to Section 9.1(d) of the Merger Agreement. All
Designated Expenses shall be paid within three days of termination. The term
"Designated Expenses" shall mean all out-of-pocket costs and expenses (not to
exceed $750,000) incurred in connection with the Merger Agreement and the
Transactions.
Terms of the Convertible Participating Preferred Stock and Redeemable
Preferred Stock. The following description of the Convertible Participating
Preferred Stock and the Redeemable Preferred Stock
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is qualified in its entirety by reference to the Amended and Restated
Certificate of Incorporation of the Surviving Corporation which will become
effective following the consummation of the Merger and which is attached as an
exhibit to the Merger Agreement (the "Certificate of Incorporation").
Convertible Participating Preferred Stock
Voting. For so long as the holders of shares of Convertible Participating
Preferred Stock hold at least 25% of the shares of such Convertible
Participating Preferred Stock issued in the original issuance, the holders will
be entitled to elect two directors to the Board of Directors of the Surviving
Corporation. In addition, each share of Convertible Participating Preferred
Stock will entitle the holder thereof to the number of votes equal to the number
of full shares of common stock of the Surviving Corporation into which such
shares of Convertible Participating Preferred Stock could be converted (as
described below) on the record date for the vote or written consent of
stockholders, if applicable, with appropriate adjustments for stock splits,
stock dividends, recapitalizations and the like. The holders of Convertible
Participating Preferred Stock will vote together with holders of common stock of
the Surviving Corporation as a single class upon all matters submitted to a vote
of stockholders, except those matters required to be submitted to a class or
series vote pursuant to the Certificate of Incorporation or by applicable law.
Dividends. The holders of Convertible Participating Preferred Stock will
be entitled to receive dividends out of funds legally available therefor at such
times and in such amounts as the Board of Directors of the Surviving Corporation
may determine in its sole discretion; provided, however, that no such dividend
may be declared or paid on any shares of Convertible Participating Preferred
Stock unless at the same time a dividend is declared or paid on all outstanding
shares of common stock of the Surviving Corporation and vice versa. The holders
of Convertible Participating Preferred Stock and common stock of the Surviving
Corporation shall share in any such dividends as if they constituted a single
class of stock with each holder of shares of Convertible Participating Preferred
Stock entitled to receive such dividends based on the number of shares of common
stock of the Surviving Corporation into which such shares of Convertible
Participating Preferred Stock are then convertible.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the Surviving Corporation and its subsidiaries, whether voluntary or involuntary
(a "Liquidation Event"), each holder of outstanding shares of Convertible
Participating Preferred Stock shall be entitled to receive out of the assets of
the Surviving Corporation available for distribution to stockholders and before
any amount shall be paid or distributed to the holders of common stock of the
Surviving Corporation or any other stock of the Surviving Corporation ranking
junior to the Convertible Participating Preferred Stock (collectively, "Junior
Stock"), an amount of cash equal to (i) $1.53 per share of Convertible
Participating Preferred Stock held by such holder (adjusted appropriately for
stock splits, stock dividends, recapitalization and similar events with respect
to the Convertible Participating Preferred Stock), plus (ii) any declared but
unpaid dividends to which such holder of outstanding shares of Convertible
Participating Preferred Stock is then entitled (the sum of clauses (i) plus (ii)
being the "Convertible Preferred Base Liquidation Amount"), plus (iii) any
Unredeemed Shares Interest (as defined below) (the sum of clauses (i), (ii) and
(iii) being the "Convertible Preferred Liquidation Preference Amount");
provided, however, that if upon any Liquidation Event the amounts payable with
respect to the Convertible Preferred Liquidation Preference Amount are not paid
in full, the holders of the Convertible Participating Preferred Stock shall
share ratably in any distribution of assets in proportion to the full respective
preferential amounts to which they are entitled; and provided further, however,
that if upon any Liquidation Event the holders of the outstanding shares of
Convertible Stock would receive more than the Convertible Liquidation Preference
Amount in the event their shares were converted into Common Stock immediately
prior to such Liquidation Event and such shares of common stock received a
liquidating distribution from the Corporation (after giving effect to the
preferential amounts payable to the holders of the Redeemable Preferred Stock),
then each holder of Convertible Participating Preferred Stock shall receive as a
distribution from the Corporation in connection with such Liquidation Event an
amount equal to the amount that would be paid if such holder's shares of
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Convertible Participating Preferred Stock were converted into common stock
immediately prior to such Liquidation Event, in lieu of the Convertible
Liquidation Preference Amount.
Redemption. At any one time on or after the sixth anniversary of the date
of original issuance of the Convertible Participating Preferred Stock, upon the
election of holders of not less than two-thirds of the outstanding Convertible
Participating Preferred Stock, the Surviving Corporation shall redeem all of the
outstanding shares of the Convertible Participating Preferred Stock at the
Convertible Preferred Redemption Price (as defined below). The Convertible
Preferred Redemption Price for each share of Convertible Stock redeemed shall be
the per share Convertible Liquidation Preference Amount. In addition, upon the
election of the holders of not less than two-thirds of the outstanding
Convertible Participating Preferred Stock, to have the Convertible Participating
Preferred Stock redeemed or otherwise to participate in connection with the
occurrence of any of the following events: (A) a merger or consolidation of the
Surviving Corporation with or into another corporation (with respect to which
less than a majority of the outstanding voting power of the surviving or
consolidated corporation is held by stockholders of the Surviving Corporation
immediately prior to such event), (B) the sale or transfer of all or
substantially all of the properties and assets of the Surviving Corporation, (C)
any purchase by any party (or group of affiliated parties) of shares of capital
stock of the Surviving Corporation (either through a negotiated stock purchase
or a tender for such shares, the effect of which is that such party (or group of
affiliated parties) that did not beneficially own a majority of the voting power
of the outstanding shares of capital stock of the Surviving Corporation
immediately after such purchase, (D) the redemption or repurchase of shares
representing a majority of the voting power of the outstanding shares of capital
stock of the Surviving Corporation or (E) a public offering not constituting a
qualified public offering (as defined in the Certificate of Incorporation) (each
an "Extraordinary Transaction"), then as a part of and as a condition to the
effectiveness of such Extraordinary Transaction, unless the holders of
Convertible Stock shall have elected to convert their shares of Convertible
Participating Preferred Stock into common stock in accordance with the voluntary
conversion provisions (described below) prior to the effective date of such
Extraordinary Transaction, the Surviving Corporation shall either redeem all of
the outstanding shares of Convertible Participating Preferred Stock for the
Convertible Redemption Price, if redemption is elected, or if the holders elect
to participate in the transaction, the Surviving Corporation shall take actions
that facilitate the holders of Convertible Participating Preferred Stock
receiving such Convertible Redemption Price as a preferential amount, in which
event the distribution to the holders of Convertible Participating Preferred
Stock of such preferential amount shall be deemed a Liquidation Event.
Notwithstanding the foregoing, if upon any Extraordinary Transaction the holders
of the outstanding shares of Convertible Participating Preferred Stock would
receive more than the Convertible Redemption Price in the event their shares
were converted into shares of common stock immediately prior to such
Extraordinary Transaction and such shares of common stock were purchased or
otherwise participated in such Extraordinary Transaction, then each holder of
Convertible Participating Preferred Stock shall receive from the Surviving
Corporation or the relevant purchaser, as applicable, upon the election by a
two-thirds interest to redeem or otherwise to participate in such Extraordinary
Transaction an amount equal to the amount per share that would be paid if the
shares of Surviving Corporation common stock receivable upon conversion of the
Convertible Participating Preferred Stock were being acquired in the
Extraordinary Transaction at the same price per share as is paid for other
shares of common stock, which amount shall be paid in the same form of
consideration as is paid to the holders of common stock, as if each share of
Convertible Participating Preferred Stock had been converted into the number of
Shares of common stock issuable upon the conversion of such share of Convertible
Participating Preferred Stock immediately prior to such Extraordinary
Transaction.
If the Surviving Corporation is prohibited under the DGCL from redeeming
all the outstanding shares of Convertible Participating Preferred Stock on the
date on which it is required to redeem the Convertible Participating Preferred
Stock, then it shall redeem such shares on a pro rata basis among the holders of
Convertible Participating Preferred Stock in proportion to the full respective
redemption amounts to which they are entitled to the extent possible and shall
redeem the remaining shares (the "Unredeemed Shares") as soon as the Surviving
Corporation is not prohibited from redeeming some or all of such shares under
the DGCL. Any Unredeemed Shares shall remain outstanding and entitled to all of
the rights and
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preferences of Convertible Participating Preferred Stock until they are
redeemed. The Surviving Corporation shall take such commercially reasonable
action as shall be necessary or appropriate to review and promptly remove any
impediment to its ability to redeem the Unredeemed Shares. In addition, from the
date on which the Surviving Corporation is first required to redeem the
Unredeemed Shares until such shares are redeemed, the applicable Convertible
Preferred Base Liquidation Amount will bear interest, payable in cash, at the
higher of 10% per annum or 4% over the prime rate as reported in the Wall Street
Journal on the Convertible Redemption Date, provided, however, that such
interest does not exceed the maximum permitted rate of interest under applicable
law ("Unredeemed Share Interest").
Conversion. Each holder of a share of Convertible Participating Preferred
Stock may, upon the written election of such holder, without any additional
consideration, convert such share of Convertible Participating Preferred Stock
into one fully paid and nonassessable share of common stock of the Surviving
Corporation, subject to adjustment. In addition, the holders of not less than
two-thirds of the outstanding shares of Convertible Participating Preferred
Stock may elect to convert all (but not less than all) of the outstanding
Convertible Stock without the payment of any additional consideration, or cause
all (but not less than all) of the outstanding shares of Convertible
Participating Preferred Stock to be automatically converted into common stock.
If the holders of shares of Convertible Participating Preferred Stock elect to
convert their shares of Convertible Preferred Stock, or if such shares are
automatically converted into shares of common stock at a time when there are any
declared but unpaid dividends or other amounts owed on or in respect of such
shares, the Surviving Corporation shall pay such amounts in full in cash in
connection with such conversion.
Redeemable Preferred Stock
Voting. Except to the extent required under the DGCL, the Redeemable
Preferred Stock is not entitled to vote on any matters.
Dividends. The holders of shares of Redeemable Preferred stock will be
entitled to receive, in preference to the holders of any and all other classes
of capital stock of the Surviving Corporation, out of any funds legally
available therefor, cumulative annual cash dividends subject to adjustment, or
at the option of the holders of not less than two-thirds of the outstanding
shares of Redeemable Preferred Stock, in shares of common stock of equivalent
value, at the per share rate per annum of six percent (6%).
Liquidation Preference. Upon any Liquidation Event, each holder of
Redeemable Preferred Stock will be entitled to receive, out of the assets of the
Surviving Corporation available for distribution to stockholders and before any
amount shall be paid or distributed to the holders of Common Stock or any other
stock ranking junior to the Redeemable Preferred Stock, an amount of cash equal
to $1,000 per share held by such holder, subject to adjustment, plus, any
accumulated but unpaid dividends (the "Redeemable Base Liquidation Amount"),
plus any interest accrued at the rate of the higher of 10% per annum or 4% over
the prime rate as reported in the Wall Street Journal on the Redeemable
Redemption Date (the sum of which is the "Redeemable Liquidation Preference
Amount"). If, upon any Liquidation Event, the amounts payable with respect to
the Redeemable Preferred Stock Liquidation Preference Amount are not paid in
full, the holders of the Redeemable Preferred Stock shall share ratably in any
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled.
Redemption. Immediately upon the closing of a "qualified public offering,"
the Surviving Corporation will automatically redeem all (and not less than all)
of the outstanding shares of Redeemable Preferred Stock at the Redeemable
Redemption Price in cash, unless the principal underwriter expressly and
reasonably requests, or causes the Surviving Corporation to request, that the
holders of Redeemable Preferred Stock waive the election to have all of such
holders' shares of Redeemable Preferred Stock redeemed for cash, with any
outstanding shares of Redeemable Preferred Stock exchangeable for any
combination or cash and notes of the Surviving Corporation ("Series A Notes"),
without any additional consideration. In addition, at any one time on or after
the sixth anniversary of the date of original issuance of the Redeemable
Preferred Stock, upon the election of not less than two-thirds of the
outstanding Redeemable Preferred Stock, the Surviving Corporation shall redeem
all (and not less than all) of the
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outstanding shares of Redeemable Preferred Stock at the Redeemable Redemption
Price. The Redeemable Redemption Price is the per share Redeemable Liquidation
Preference Amount. Upon the closing of an Extraordinary Transaction, if the
Redeemable Preferred Stock is acquired in such an Extraordinary Transaction on
terms giving effect to the preferential amount to which the Redeemable Preferred
Stock would be entitled in connection with a Liquidation Event and otherwise as
agreed to by the holders of not less than two-thirds of the voting power of the
Redeemable Preferred Stock, the Surviving Corporation shall redeem all (and not
less than all) of the outstanding shares of Redeemable Preferred Stock at the
Redeemable Redemption Price, payable in cash.
ESTIMATED FEES AND EXPENSES OF THE MERGER
Estimated fees and expenses incurred or to be incurred by the Surviving
Corporation are approximately as follows:
<TABLE>
<S> <C>
Advisory fees and expenses (1).............................. $
Lender fees and expenses (2)................................
Legal fees and expenses (3).................................
Accounting fees and expenses................................
Exchange Agent fees and expenses............................
Securities and Exchange Commission filing fee...............
Printing and mailing costs..................................
Miscellaneous expenses......................................
Total.............................................
</TABLE>
- ---------------
(1) Includes the fees and expenses of Robinson-Humphrey and PHC.
(2) Includes the fees and expenses of First Union National Bank and Allied
Capital Corporation
(3) Includes the estimated fees and expenses of counsel for the Company, the
Special Committee, the TA Investors and the Management Sponsors.
RIGHTS OF DISSENTING STOCKHOLDERS
Holders of shares of the Physicians' Specialty Common Stock are entitled to
appraisal rights under Section 262 of the DGCL provided that they comply with
the conditions established by Section 262. Section 262 is reprinted in its
entirety as Appendix C to this Proxy Statement. All references in Section 262
and in this summary to a "stockholder" are to the record holder of the shares of
the Physicians' Specialty Common Stock as to which appraisal rights are
asserted. A person having a beneficial interest in shares of Physicians'
Specialty Common Stock that are held of record in the name of another person,
such as a broker or nominee, must act promptly to cause the record holder to
properly follow the steps summarized below and in a timely manner to perfect
whatever appraisal rights the beneficial owner may have.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Appendix C.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO
WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH
HEREIN AND THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Each stockholder electing to demand the appraisal of his shares must
deliver to the Company, before the taking of the vote on the Merger Agreement at
the Special Meeting, a written demand for appraisal of his shares of Physicians'
Specialty Common Stock. The demand must reasonably inform the Company of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of the shares of Physicians' Specialty Common Stock held by him.
This written demand for appraisal of the shares of Physicians' Specialty Common
Stock must be in addition to and separate from any proxy or vote against the
Merger Agreement. Voting against, abstaining from voting, or failing to vote on
the Merger
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Agreement will not constitute a demand for appraisal within the meaning of
Section 262. Any stockholder electing to demand his appraisal rights will not be
entitled to appraisal rights under Section 262 if such stockholder has either
voted in favor of the proposal to approve and adopt the Merger Agreement or
consented thereto in writing. Additionally, a stockholder will not be entitled
to appraisal rights under Section 262 if the stockholder does not continuously
hold through the Effective Time his shares of Physicians' Specialty Common Stock
with respect to which he demands appraisal.
A demand for appraisal must be executed by or for the stockholder of
record. If the shares of Physicians' Specialty Common Stock are owned of record
in a fiduciary capacity, such as by a trustee, guardian, or custodian, such
demand must be executed by the fiduciary. If the shares of Physicians' Specialty
Common Stock are owned of record by more than one person, as in a joint tenancy
or tenancy in common, such demand must be executed by or for all joint owners.
An authorized agent, including an agent for two or more joint owners, may
execute the demand for appraisal for a stockholder of record; however, the agent
must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner.
If a stockholder holds shares of Physicians' Specialty Common Stock through
a broker who in turn holds the shares through a central securities depository
nominee such as Cede & Co., a demand for appraisal of such shares must be made
by or on behalf of the depository nominee and must identify the depository
nominee as record holder.
A record owner, such as a broker, who holds shares of Physicians' Specialty
Common Stock as a nominee for others, may exercise appraisal rights with respect
to the shares of Physicians' Specialty Common Stock held for all or less than
all beneficial owners of shares of Physicians' Specialty Common Stock as to
which such person is the record owner. In such case, the written demand must set
forth the number of shares of Physicians' Specialty Common Stock covered by such
demand. Where the number of shares of Physicians' Specialty Common Stock is not
expressly stated, the demand will be presumed to cover all shares of Physicians'
Specialty Common Stock outstanding in the name of such record owner. Beneficial
owners who are not record owners and who intend to exercise appraisal rights
should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights before the date of
the Special Meeting.
A stockholder who elects to exercise appraisal rights must mail or deliver
his or her written demand to the Secretary of the Company at 1150 Lake Hearn
Drive, Suite 640, Atlanta, Georgia 30342. The written demand for appraisal
should specify the stockholder's name and mailing address, the number of shares
of Physicians' Specialty Common Stock owned, and that the stockholder is thereby
demanding appraisal of his or her shares. Within ten days after the Effective
Time, the Company must provide notice of the Effective Time to all stockholders
who have complied with Section 262 and have not voted for or consented to
approval and adoption of the Merger Agreement.
Within 120 days after the Effective Time, either the Company or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court of Chancery (the "Delaware Chancery
Court"), with a copy served on the Company in the case of a petition filed by a
stockholder, demanding a determination of the fair value of the shares of
Physicians' Specialty Common Stock of the dissenting stockholders. If a petition
for an appraisal is timely filed, after a hearing on such petition, the Delaware
Chancery Court will determine which stockholders are entitled to appraisal
rights and will appraise the shares of Physicians' Specialty Common Stock owned
by such stockholders, determining the fair value of such shares of Physicians'
Specialty Common Stock, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest to be paid, if any, upon the amount determined to be the fair value. In
determining such fair value, the Delaware Chancery Court is to take into account
all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered and the "[f]air price
obviously requires consideration of all relevant factors involving the value of
a
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company." The Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which could be ascertained as of the date of the merger which throw any light on
future prospects of the merged corporation. Section 262 provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In Cede & Co. v. Technicolor, Inc., the Delaware
Supreme Court stated that such exclusion is a "narrow exclusion [that] does not
encompass known elements of value," but which rather applies only to the
speculative elements of value arising from such accomplishment or expectation.
In Weinberger, the Delaware Supreme Court construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered."
The Delaware Chancery Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings, and if any stockholder
fails to comply with such direction, the Delaware Chancery Court may dismiss the
proceedings as to such stockholder.
Within 120 days after the Effective Time, any stockholder who has
theretofore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of shares of Physicians' Specialty Common Stock not
voting in favor of the Merger Agreement and with respect to which demands for
appraisal were received by the Company and the number of holders of such shares.
Such statement must be mailed (i) within 10 days after the written request
therefor has been received by the Company or (ii) within 10 days after the
expiration of the period for the delivery of demands as described above,
whichever is later.
Stockholders who are considering whether to seek appraisal should have in
mind that, although the Company believes that the Cash Merger Consideration is
fair, the "fair value" of their shares of Physicians' Specialty Common Stock as
determined by the Delaware courts in an appraisal proceeding under Section 262
could be more than, the same as, or less than the Cash Merger Consideration to
be received by the Company's stockholders in the Merger, and that the opinion of
Robinson-Humphrey as to fairness, from a financial point of view, is not an
opinion as to fair value under Section 262. Moreover, the Company does not
anticipate offering more than the Cash Merger Consideration to any stockholder
exercising appraisal rights and reserves the right to assert in any appraisal
proceeding, that for purposes of Section 262, the "fair value" of a share
Physicians' Specialty Common Stock is less than the Cash Merger Consideration.
The cost of the appraisal proceeding may be determined by the Delaware Chancery
Court and taxed against the parties as the Delaware Chancery Court deems
equitable in the circumstances. However, costs do not include attorneys' and
expert witness fees. Upon application of a dissenting stockholder, the Delaware
Chancery Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of the Company's
Common Stock entitled to appraisal.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, from and after the Effective Time, be entitled to vote for any
purpose the shares of Physicians' Specialty Common Stock subject to such demand
or to receive payment of dividends or other distributions on such shares of
Physicians' Specialty Common Stock, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger Agreement by delivering a written withdrawal of his
demand for appraisal and acceptance of the Cash Merger Consideration; after this
period, the stockholder may withdraw his or her demand for appraisal only with
the consent of the Company. If no petition for appraisal is filed with the
Delaware Chancery Court within 120 days after the Effective Time, stockholders'
rights to appraisal shall cease, and all holders of shares of Physicians'
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Specialty Common Stock shall be entitled to receive the Cash Merger
Consideration as provided for in the Merger Agreement. Inasmuch as the Company
has no obligation to file such a petition, and has no present intention to do
so, any stockholder who desires such a petition to be filed is advised to file
it on a timely basis. No petition timely filed in the Delaware Chancery Court
demanding appraisal shall be dismissed as to any stockholder without the
approval of the Delaware Chancery Court, and such approval may be conditioned
upon such terms as the Delaware Chancery Court deems just.
ACCOUNTING TREATMENT
The Merger will be accounted for as a recapitalization for accounting
purposes.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Physicians' Specialty Common Stock. This discussion is based on currently
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the holders of Physicians' Specialty Common Stock as described
herein. Special tax consequences not described below may be applicable to
particular classes of taxpayers, including financial institutions,
broker-dealers, persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships, or foreign estates or
trusts as to the United States, persons who will own stock of Physicians'
Specialty (actually or constructively, under certain constructive ownership
rules in the Code) after the Merger, and holders who acquired their stock
through the exercise of an employee stock option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the Merger by holders of
Physicians' Specialty Common Stock will be a taxable transaction for federal
income tax purposes. Each holder's gain or loss per share of Physicians'
Specialty Common Stock will be equal to the difference between $10.50 and the
holder's basis in that particular share of the Common Stock. Such gain or loss
generally will be a capital gain or loss. In the case of individuals, trusts,
and estates, such capital gain will be subject to a maximum federal income tax
rate of 20% for shares of Physicians' Specialty Common Stock held for more than
12 months prior to the date of disposition.
A holder of Physicians' Specialty Common Stock may be subject to backup
withholding at the rate of 31% with respect to Cash Merger Consideration
received pursuant to the Merger, unless the holder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact or (b) provides a correct taxpayer identification number ("TIN"), certifies
as to no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. To prevent the
possibility of backup federal income tax withholding on payments made with
respect to shares of Physicians' Specialty Common Stock pursuant to the Merger,
each holder must provide the Exchange Agent with his correct TIN by completing a
Form W-9 or Substitute Form W-9. A holder of Physicians' Specialty Common Stock
who does not provide Physicians' Specialty with his or her correct TIN may be
subject to penalties imposed by the Internal Revenue Service (the "IRS"), as
well as backup withholding. Any amount withheld under these rules will be
creditable against the holder's federal income tax liability. Physicians'
Specialty (or its agent) will report to the holders of Physicians' Specialty
Common Stock and the IRS the amount of any "reportable payments," as defined in
Section 3406 of the Code, and the amount of tax, if any, withheld with respect
thereto.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND
IS BASED UPON PRESENT LAW. THE FOREGOING DISCUSSION DOES NOT DISCUSS TAX
CONSEQUENCES UNDER THE LAWS OF STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER
JURISDICTION OR TAX CONSEQUENCES TO CATEGORIES OF
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STOCKHOLDERS THAT MAY BE SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN PERSONS,
TAX-EXEMPT ENTITIES, INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, AND DEALERS IN
STOCKS AND SECURITIES. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO A
STOCKHOLDER WHO CONTINUES TO OWN STOCK OF THE COMPANY (ACTUALLY OR
CONSTRUCTIVELY) AFTER THE MERGER OR WHO ACQUIRED HIS OR HER SHARES OF
PHYSICIANS' SPECIALTY COMMON STOCK PURSUANT TO THE EXERCISE OF STOCK OPTIONS OR
OTHERWISE AS COMPENSATION. EACH HOLDER OF COMMON STOCK SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN SUCH TAX LAWS.
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BUSINESS OF THE COMPANY
GENERAL DEVELOPMENT OF BUSINESS
Physicians' Specialty provides comprehensive practice management services
to physician practices and health care providers specializing in the treatment
and management of diseases and disorders of the ear, nose, throat, head and
neck, known as ENT, including specialists practicing in the fields of allergy,
audiology, oral surgery, plastic surgery, pulmonology and sleep medicine.
Since January 1, 1998, Physicians' Specialty has acquired substantially all
of the non-medical assets and assumed certain liabilities of:
- four ENT physician practices in the metropolitan New York area with 33
physicians and 16 allied health care professionals with 11 clinical
offices;
- two ENT physician practices in the metropolitan Cleveland, Ohio area with
ten physicians and eight allied health care professionals with eight
clinical offices;
- four ENT physician practices in South Florida with five physicians and
four allied health care professionals with five clinical offices;
- one solo ENT physician practice in the metropolitan Atlanta area with one
clinical office;
- Preferred Diagnostic Services Inc., which operates 12 sleep diagnostic
laboratories in the metropolitan Atlanta area; and
- Computerized Tomography Center, Inc., which operates a diagnostic imaging
center in the metropolitan Atlanta area.
Physicians' Specialty also acquired minority limited partnership interests
in Atlanta Surgery Center Ltd., a limited partnership operating three
multi-specialty ambulatory surgery centers, and Marietta Outpatient Surgery,
Ltd., a limited partnership operating a multi-specialty ambulatory surgery
center.
Physicians' Specialty is currently affiliated with 92 physicians, one
dentist and 84 allied health care professionals operating 67 clinical locations
in Alabama, Florida, Georgia, Illinois, New Jersey, New York and Ohio.
Physicians' Specialty currently holds, manages and administers capitated
ENT managed care contracts covering an aggregate of approximately 363,000
enrollees of health maintenance organization plans of United HealthCare of
Georgia, Inc., United HealthCare of Alabama, Inc. and Cigna HealthCare of
Georgia, Inc. Physicians' Specialty believes it is the leading physician
practice management company focusing solely or substantially on affiliating with
and managing ENT physician practices.
Physicians' Specialty was incorporated in Delaware in July 1996. The
Company's executive offices are located at 1150 Lake Hearn Drive, Suite 640,
Atlanta, Georgia 30342. The Company's telephone number is (404) 256-7535 and its
fax number is (404) 256-1078.
INDUSTRY SEGMENTS
Physicians' Specialty operates in only one business segment.
DESCRIPTION OF BUSINESS
General
Physicians' Specialty provides comprehensive practice management services
to physician practices and health care providers specializing in the treatment
and management of ENT diseases and disorders, including specialists practicing
in the related fields of allergy, audiology, oral surgery, plastic surgery and
sleep medicine. Physicians' Specialty seeks to affiliate with physician
practices and health care
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professionals who provide high quality, cost effective medical and surgical
services to fee-for-service patients and capitated managed care enrollees.
Physicians' Specialty provides:
- financial and administrative management;
- enhancement of clinical operations;
- access to ancillary services; and
- network development and payor contracting services, including the
negotiation and administration of capitated arrangements.
HEALTH CARE INDUSTRY OVERVIEW
General. The health care delivery system in the United States has been
undergoing substantial change, largely in response to concerns over the quality
and escalating cost of health care. The growth in health care expenditures has
increased the demand by government and third party payors to control health care
costs.
Significant changes in the way physicians organize have been precipitated
and accelerated by:
- the emphasis on cost containment;
- the consolidation of the health care market in general;
- the increased market share of managed care companies;
- the transfer of risk from payors to providers;
- the focus on improving the quality of patient care; and
- reduced payments under government reimbursement programs.
Health care in the United States historically has been delivered by a
fragmented system of health care providers, including hospitals, individual
physicians and physician group practices. Compared to physician practice
management companies and larger group practices, individual physicians and small
group practices tend to have limited capacity for any of the following:
- ties to other health care providers, restricting their ability to
coordinate care across a variety of specialties;
- access to patients;
- capital to invest in new clinical equipment and technologies; and
- purchasing power with vendors of medical supplies.
Individual physicians and small group practices also typically lack the
negotiating leverage with payors and information systems necessary to manage
risk-sharing contracts.
In response to the foregoing factors, physicians are increasingly forming
larger group practices and affiliating with physician networks and physician
hospital organizations. Physicians are also affiliating with physician practice
management companies in order to gain greater access to:
- third party payor contracts;
- patient information and management systems;
- leverage with vendors and payors;
- capital resources; and
- ancillary services frequently unavailable to independent practitioners.
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In addition, many payors and their intermediaries, including governmental
entities and managed care companies, are increasingly looking to outside
providers of physician services to develop and maintain quality outcomes,
management programs and patient care data.
Several multi-specialty companies in the physician practice management
industry have discontinued physician practice management activities or divested
assets related to physician practice management or announced plans to do so.
Other physician practice management companies have completed or announced
transactions, including mergers, recapitalizations or other corporate
transactions, as a result of which they are no longer public companies. As a
result of these trends and the depressed stock prices of physician practice
management companies, Physicians' Specialty believes that physician practice
management companies may generally experience a decrease in practice acquisition
activity and an associated slow down in revenue growth attributable to practice
acquisitions. Consistent with the Company's market driven strategy, Physicians'
Specialty focuses primarily on practice and ancillary services acquisitions in
markets in which Physicians' Specialty already manages ENT practices and to a
lesser extent, in new markets.
Otolaryngology
Otolaryngology is the management of diseases and disorders of the ear,
nose, nasal passages, sinuses, larynx, mouth and throat, as well as structures
of the neck and face. An otolaryngologist is commonly referred to as an ENT
physician and provides some or all of the following subspecialty services:
- Pediatric Otolaryngology: the medical and surgical treatment of diseases
of the ear, nose and throat in children.
- Head and Neck Surgery: the medical and surgical treatment of cancerous
and noncancerous tumors in the head and neck, including thyroid and
parathyroid surgery.
- Rhinology: the medical and surgical treatment of disorders of the nose
and sinuses.
- Allergy: the medical treatment of inhalant allergies affecting the upper
respiratory system.
- Facial Plastic and Reconstructive Surgery: the treatment of cosmetic,
functional and reconstructive abnormalities of the face and neck.
- Otology/Neurotology: the medical and surgical treatment of diseases of
the ear, including traumatic and cancerous disorders of the external,
middle and inner ear, as well as the nerve pathways which affect hearing
and balance.
- Laryngology: the medical and surgical treatment of disorders of the
throat, including the voice.
ENT services in the United States are delivered largely through individual
and small single specialty group practices and, to a lesser extent,
multi-specialty clinics.
According to the American Academy of Otolaryngology-Head and Neck Surgery,
Inc., there were approximately 9,000 ENT physicians in the United States as of
December 31, 1997 and, based upon membership in the Academy, Physicians'
Specialty estimates that at least 70% of all ENT practices consist of individual
practitioners or small group practices (less than four physicians). According to
industry sources, ENT physicians and related specialists are increasingly
seeking to form larger group practices and affiliate with physician practice
management companies which understand the needs of ENT physicians and can
enhance practice performance.
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AFFILIATED PRACTICES
Physicians' Specialty is affiliated with 92 physicians, one dentist and 84
allied health care professionals operating 67 clinical offices in Alabama,
Florida, Georgia, Illinois, New Jersey, New York and Ohio. The following table
sets forth certain information concerning Physicians' Specialty's affiliated
practices as of June 30, 1999:
<TABLE>
<CAPTION>
ALLIED
AREAS HEALTH CARE OFFICE
MEDICAL GROUP LOCATION SERVED PHYSICIANS PROFESSIONALS LOCATIONS
------------- ------------------- ------------------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Atlanta Ear, Nose & Atlanta, Georgia Metropolitan Atlanta 31* 41 33
Throat
Associates, P.C
PSC Alabama Corp. Birmingham, Alabama Birmingham 2 1 1
Allatoona E.N.T & Cartersville, Cartersville 2 1 1
Facial Plastic Georgia
Surgery, P.C
Otolaryngology Chicago, Illinois Barington, Crystal Lake 4 3 3
Medical & and McHenry
Surgical
Associates, Ltd.
Ear, Nose & Throat Boca Raton, Florida Boca Raton, Pompano 13 11 9
Associates of Beach, West Palm Beach
South Florida P.A & Delray Beach
ENT Associates, LLP New York and Metropolitan New York 32 16 13
New Jersey
Cleveland Ear, Nose Cleveland, Ohio Metropolitan New York 9 11 7
& Throat Center,
Inc.
--- -- --
93* 84 67
=== == ==
</TABLE>
- ---------------
* Includes one dentist.
Atlanta Ear, Nose & Throat Associates, P.C. Physicians' Specialty believes
Atlanta ENT is the largest independent (non-academic) otolaryngology group
practice in the United States. Atlanta ENT consists of 31 ENT physicians, one
dentist, 29 audiologists, 11 physician assistants, one nurse practitioner and
one clinical esthetician with 29 clinical offices. Atlanta ENT offers a wide
range of ENT subspecialty services, including pediatric otolaryngology, head and
neck surgery, rhinology, facial plastic and reconstructive surgery, otology and
laryngology, to children and adults in the metropolitan Atlanta area. The
practice also provides audiology services, hearing aid sales, temporo-mandibular
joint diagnostics and snoring and sleep apnea laser surgical services. The
affiliated physicians at Atlanta ENT maintain privileges at 34 hospitals and
eight ambulatory surgical centers throughout metropolitan Atlanta. Ramie A.
Tritt, M.D., the Company's Chairman of the Board and President and a principal
stockholder of Physicians' Specialty, is the President and founder of Atlanta
ENT. Preferred Diagnostic Services, Inc. and Computerized Tomography Center,
Inc. are subsidiaries of Atlanta ENT.
PSC Alabama Corp. PSC Alabama Corp. is one of the Company's wholly-owned
subsidiaries and consists of two ENT physicians and one audiologist with one
clinical office. PSC Alabama Corp. provides a wide range of ENT subspecialty
services, including allergy testing and treatment, head and neck surgery,
rhinology, facial plastic and reconstructive surgery, otology, neurotology and
laryngology, to children and adults in the metropolitan Birmingham area.
Allatoona ENT & Facial Plastic Surgery, P.C. Allatoona ENT consists of two
ENT physicians and one audiologist with one clinical office. Allatoona ENT
provides a wide range of ENT subspecialty services, including allergy testing
and treatment, head and neck surgery, rhinology, facial plastic and
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reconstructive surgery, otology and laryngology, to children and adults in the
North Georgia area. The physicians at Allatoona ENT also have instituted a
hearing screening program for infants and newborns.
Otolaryngology Medical & Surgical Associates, Ltd. Otolaryngology Medical
& Surgical Associates, Ltd. consists of four ENT physicians and three clinical
audiologists with three clinical offices in the Barington, Crystal Lake and
McHenry suburbs of Chicago. Otolaryngology Medical & Surgical Associates
provides a wide range of ENT subspecialty services, including head and neck
surgery, rhinology, facial plastic and reconstructive surgery, otology and
laryngology, to children and adults in the metropolitan Chicago area. The
practice also provides audiology services, hearing aid sales and snoring and
sleep apnea surgical services. The affiliated physicians at Otolaryngology
Medical & Surgical Associates maintain privileges at three hospitals and one
ambulatory surgical center in metropolitan Chicago.
Ear, Nose & Throat Associates of South Florida, P.A. Ear, Nose & Throat
Associates of South Florida, P.A. consists of 13 ENT physicians and 11 clinical
audiologists with nine clinical offices in Boca Raton, Pompano Beach, Palm
Beach, Delray Beach, Hollywood, Fort Lauderdale and Lacahatchee, Florida. Ear,
Nose & Throat Associates of South Florida provides a wide range of ENT
subspecialty services, including allergy testing and treatment, head and neck
surgery, rhinology, facial plastic and reconstructive surgery, otology and
neurotology, to children and adults in the South Florida area. The practice also
provides audiology services, hearing aid sales and snoring and sleep apnea
surgical services. The affiliated physicians at Ear, Nose & Throat Associates of
South Florida maintain privileges at six hospitals and two ambulatory surgical
centers in South Florida.
ENT Associates, LLP. ENT Associates, LLP consists of 33 ENT physicians and
16 clinical audiologists with 10 clinical offices. ENT Associates provides a
wide range of ENT subspecialty services, including pediatric otolaryngology,
head and neck surgery, rhinology, facial plastic and reconstructive surgery,
otology and laryngology, to children and adults in the metropolitan New York
area. The practice also provides audiology services, hearing aid sales and
snoring and sleep apnea laser surgical services. The affiliated physicians at
ENT Associates maintain privileges at 15 hospitals throughout metropolitan New
York.
Cleveland Ear, Nose & Throat Center, Inc. Cleveland Ear, Nose & Throat
Center, Inc. ("Cleveland ENT") consists of nine ENT physicians and eleven
clinical audiologists with seven clinical offices. Cleveland ENT provides a wide
range of ENT subspecialty services, including pediatric otolaryngology, head and
neck surgery, rhinology, facial plastic and reconstructive surgery, otology and
laryngology, to children and adults in the metropolitan Cleveland area. The
practice also provides audiology services, hearing aid sales and snoring and
sleep apnea laser surgical services. The affiliated physicians at Cleveland ENT
maintain privileges at nine hospitals and four ambulatory surgical centers
throughout metropolitan Cleveland.
AMBULATORY SURGERY CENTERS, SLEEP DIAGNOSTIC LABORATORIES AND DIAGNOSTIC IMAGING
CENTERS
PSC Ambulatory Surgery, Ltd. and PSC Marietta Ambulatory Surgery, Ltd. PSC
Ambulatory Surgery, Ltd. and PSC Marietta Ambulatory Surgery, Ltd. are limited
partnerships of which a subsidiary of Physicians' Specialty is the sole general
partner and one of the Company's affiliated practices is the sole limited
partner. PSC Ambulatory Surgery owns a 17.5% limited partnership interest in
Atlanta Surgery Center, Ltd., the general partner of which is not affiliated
with Physicians' Specialty, and PSC Marietta Ambulatory Surgery, Ltd. owns a
12.5% limited partnership interest in Marietta Outpatient Surgery, Ltd., the
general partner of which is not affiliated with the Company. Atlanta Surgery
Center operates three multi-specialty ambulatory surgery centers, consisting of
14 operating rooms, in the metropolitan Atlanta area. Marietta Outpatient
Surgery operates a multi-specialty ambulatory surgery center, consisting of 8
operating rooms in the Marietta suburbs of Atlanta. The Company's affiliated
physicians, as well as other surgeons in the Atlanta area, utilize these surgery
centers for a variety of outpatient surgical procedures. In 1998, in excess of
28,000 cases were performed at these surgery centers.
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Preferred Diagnostic Services, Inc. Preferred Diagnostic Services, Inc.
operates 12 sleep diagnostic laboratories in the metropolitan Atlanta area.
Preferred Diagnostic Services provides testing for a variety of sleep disorders,
including severe snoring, sleep apnea and restless leg syndrome.
Computerized Tomography Center, Inc. Computerized Tomography Center, Inc.
operates a diagnostic imaging center in the Atlanta area. In 1998, in excess of
3,000 MRI and CT diagnostic imaging studies were performed at the Computerized
Tomography Center.
COMPANY OPERATIONS
Physicians' Specialty has a long term management services agreement with
each of its affiliated physician practices. Under the terms of a management
services agreement, Physicians' Specialty employs the practice's non-medical
personnel, provides offices for the practice and provides services in the areas
of practice management, information systems and negotiation and management of
payor contracts. The non-medical personnel, together with additional personnel
at the Company's headquarters, manage the day-to-day non-medical operations of
each affiliated practice, including providing administrative, bookkeeping,
scheduling and other routine services. This operating structure established by
the Company facilitates close cooperation between the Company and the affiliated
practice, while ensuring that the affiliated practice maintains clinical
autonomy.
Under the terms of the management services agreements, Physicians'
Specialty:
- assists the affiliated practices in strategic planning, preparation of
operating budgets and capital project analysis;
- coordinates group purchasing of supplies, inventory and insurance for the
practices;
- assists the affiliated practices in physician recruitment by introducing
physician candidates to the affiliated practices and advising the
affiliated practices in structuring employment arrangements; and
- provides or arranges for a variety of additional services relating to the
day-to-day non-medical operations of the affiliated practices, including:
- managing and monitoring each practice's billing levels, invoicing and
accounts receivable collection by payor type;
- accounting and payroll services and records; and
- cash management and centralized disbursements.
These services are designed to reduce the amount of time physicians spend
on administrative matters, thereby enabling the physicians to dedicate more of
their efforts toward the delivery of care.
The Company has similar management service agreements with Preferred
Diagnostic Services, Inc. and Computerized Tomography Center, Inc.
Physicians' Specialty establishes an advisory board at each affiliated
practice consisting of physicians of the affiliated practice and the Company's
management personnel whose responsibilities are advisory in nature. The advisory
board reviews, evaluates and makes recommendations to the officers of the
affiliated practice and Physicians' Specialty's officers with respect to
strategic and operational planning, physician employment and recruitment,
patient fees and collection policies, quality review and the establishment and
maintenance of relationships with managed care and other payors. Notwithstanding
recommendations of the advisory board, Physicians' Specialty has ultimate
control over all decisions relating to the non-medical operations of the
affiliated practice, and the affiliated practice has ultimate control over all
decisions relating to the practice of medicine. See "-- Affiliation Agreements."
INFORMATION SYSTEMS
Physicians' Specialty supports free-standing practice management systems
utilized by its affiliated practices to facilitate patient scheduling, billing
and collection, accounts receivable management, provider
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productivity analysis and certain cash disbursement functions. Rather than
replacing systems utilized by affiliated practices, Physicians' Specialty
generally integrates an affiliated practice's systems in order to streamline
consolidated financial reporting, accounts receivable management and
productivity analysis functions. Physicians' Specialty is also evaluating
patient electronic medical record systems for possible implementation at
affiliated practices. Physicians' Specialty believes that the use of an
electronic medical record system may enhance operating efficiency through
automation of many routine functions, as well as the capacity to link "procedure
specific" treatment protocols, thereby enhancing the physician's ability to
provide quality cost-effective patient care.
Physicians' Specialty believes that effective and efficient access to key
patient data is critical in controlling costs and improving quality outcomes in
connection with managing risk contracts. The Company's proprietary comprehensive
network administration and utilization management system designed specifically
for ENT practices provides effective and efficient access to key patient data
and performs the complex processing and analytical tasks required to manage risk
contracts effectively. The Company's system facilitates the automation of many
routine functions and provides affiliated physicians with Internet access to the
clinical and financial data necessary to issue and manage authorization for
surgeries, to track diagnosis, procedures and admissions and to perform outcome
studies, cost analysis, quality and utilization management and reviews.
The Company's system integrates the following functions:
- tracking referrals from primary care and other physicians;
- issuing and managing authorization for surgeries and tracking diagnoses,
procedures and admissions;
- processing claims for physician payment;
- providing extensive customized management reports, including diagnosis
and procedure utilization data; and
- maintaining support files.
Physicians' Specialty believes that this system provides it with a
competitive advantage in procuring, managing and administering risk contracts.
COMPETITION
The physician practice management industry is highly competitive. The
restructuring of the health care system is leading to rapid consolidation of the
existing highly fragmented health care delivery system into larger and more
organized groups and networks of health care providers. Physicians' Specialty
expects competition to increase as a result of consolidation and ongoing cost
containment pressures, among other factors. Physicians' Specialty competes with:
- physician practice management companies;
- hospitals;
- managed care companies;
- physician practices; and
- other competitors seeking to affiliate with physicians or provide
management services to physicians.
As compared to the Company, many of these competitors are:
- significantly larger;
- provide a wider variety of services;
- have greater experience in providing practice management services;
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- have longer established relationships with customers for these services;
and
- have access to substantially greater financial resources.
There can be no assurance that Physicians' Specialty will be able to
affiliate with a sufficient number of competent physicians and other health care
professionals to expand its business. Physicians' Specialty believes that the
quality of its management services, experience in procuring, managing and
administering capitated managed care contracts, the breadth of ENT medical and
surgical professional services provided by affiliated physicians and the utility
of its network management system position it to compete favorably for
affiliation with additional ENT and related specialty practices.
Physicians are facing the challenge of providing quality patient care while
experiencing rising costs, strong competition for patients and a general
reduction of reimbursement rates by both private and government payors.
Physicians' Specialty believes that competition for patients is dependent upon:
- the geographic coverage of affiliated practices;
- the reputation and referral patterns of affiliated physicians; and
- the breadth of ENT and related specialty medical and surgical
professional services provided by physicians practicing at Physicians'
Specialty's affiliated practices.
As a result, the Company's success is dependent upon its or its affiliated
practices' ability to recruit, train and retain qualified health care
professionals in new and existing markets. Physicians' Specialty faces
competition for these personnel from other health care providers, research and
academic institutions, government entities and other organizations. There can be
no assurance that sufficient numbers of qualified health care professionals can
be hired and retained. The inability to hire and retain such health care
professionals could have a material adverse effect on the Company's operations
and financial condition.
Concern over the rising cost of health care has led to the emergence and
increased prominence of managed care and a resulting increase in competition for
managed care contracts. The Company's ability to compete successfully for
managed care contracts may depend upon its ability to manage utilization under
such contracts and to increase the number of associated physicians and other
health care professionals included in the Company's provider networks.
MEDICAL ADVISORY BOARD
Physicians' Specialty has a medical advisory board whose responsibilities
include:
- reviewing the medical appropriateness of the Company's policies and
procedures with respect to disease management and utilization management
protocols and practice and surgery guidelines;
- consulting with it on acquisitions;
- reviewing the medical appropriateness of information systems utilized or
developed by Physicians' Specialty;
- evaluating new medical technologies to be utilized by affiliated
practices; and
- developing and coordinating the Company's sponsored managed care and
practice management seminars for ENT physicians.
The Company's advisory board consists of three affiliated ENT physicians,
including Dr. Tritt, the Company's Chairman of the Board and President, and
three non-affiliated ENT physicians.
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AFFILIATION AGREEMENTS
The relationship between Physicians' Specialty and its affiliated practices
and physicians is set forth in asset or stock acquisition agreements, management
services agreements and employment agreements.
Acquisition Agreements. Pursuant to acquisition agreements, Physicians'
Specialty acquires either substantially all of the assets utilized in a practice
or the equity of the practice, other than in either case certain excluded assets
such as employment agreements and patient charts, records and files, and assumes
certain liabilities of the practice group.
The practice remains liable for the payment of liabilities not assumed by
Physicians' Specialty under the acquisition agreement. Under the acquisition
agreements the medical practice and/or the stockholders of the practice agree
for a period of time following the closing of the acquisition, not to compete
with Physicians' Specialty within a specified geographic area, solicit patients
of the practice within such geographic area or solicit the Company's employees.
The acquisition agreements also contain representations and warranties and
indemnification provisions by each of the parties to the agreement.
Simultaneously with the closing of an acquisition, employment agreements
are entered into between the practice and each of its physicians, and
Physicians' Specialty enters into a management services agreement with the
practice.
Management Services Agreements. The Company's management services
agreements provide for the affiliated practice to:
- assign to Physicians' Specialty all of its non-governmental accounts
receivable and all of its rights and interest in the proceeds of its
governmental accounts receivable, or the revenue it receives, to the
extent permitted by applicable law;
- grant to Physicians' Specialty the right to collect and retain the
proceeds of the accounts receivable, or revenue, for its account to be
applied in accordance with the management services agreements; and
- grant to Physicians' Specialty the right to grant a security interest and
factor the accounts receivable to secure its borrowings under its credit
facility.
Physicians' Specialty generally retains a management fee equal to:
- a stipulated percentage of all revenue generated by or on behalf of
physicians at the affiliated practice, after adjustment for contractual
allowances, as payment for the services provided by Physicians' Specialty
and non-allocable costs incurred by it as a result of providing
management services; and
- an amount equal to all operating and capital expenses of the practice,
including depreciation, amortization and interest.
In New York, in order to comply with state law, the affiliated practice
reimburses Physicians' Specialty for the practice's operating and non-operating
expenses and pays Physicians' Specialty a fixed management fee.
Under the Company's management services agreements, Physicians' Specialty
is responsible for the payment of and incurs:
- operating expenses of the affiliated practice, including salaries and
benefits of non-medical employees of the practice, lease obligations for
office space and equipment and medical and office supplies; and
- the non-operating expenses of the affiliated practice.
Physicians' Specialty pays for all these expenses, including its fees, directly
out of the proceeds of the accounts receivable, or revenue, assigned to it by
the affiliated practice. The remaining net practice revenue is remitted to the
affiliated practice.
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The affiliated practice retains the responsibility for:
- compensating physician employees and physician assistants;
- paying insurance premiums and deductibles for professional liability
insurance policies;
- ensuring that affiliated physicians have the required licenses,
credentials, approvals and other certifications needed to perform their
duties; and
- complying with federal and state laws and regulations applicable to the
practice of medicine.
The affiliated practice also retains exclusive control over all aspects of the
practice of medicine and the delivery of medical services.
Under the management services agreements, Physicians' Specialty:
- acts as the exclusive manager and administrator relating to all
non-medical operations of the affiliated practice;
- bills patients, insurance companies and other third party payors and
collects, on behalf of the affiliated practice, the fees for professional
medical services and other services and products rendered or sold by the
affiliated practice;
- provides clerical, accounting, purchasing, payroll, bookkeeping and
computer services and personnel and information management services to
the affiliated practice;
- supervises and maintains custody of all files and records of the
affiliated practice;
- provides facilities, furniture and equipment for the affiliated practice;
- prepares all annual and capital operating budgets of the affiliated
practice;
- orders and purchases inventory and supplies as reasonably required by the
affiliated practice;
- provides financial and business assistance to the affiliated practice in
the negotiation, establishment, evaluation and administration of
contracts and relationships with managed care and other similar providers
and payors; and
- performs administrative services relating to the recruitment of
physicians for the affiliated practice.
The management services agreements have an initial term of 40 years, which
may be extended for separate and successive five year terms. The management
services agreements may be terminated by either party if the other party files a
petition in bankruptcy or other similar events occur or if the other party
defaults on the performance of a material duty or obligation, which default
continues without cure for a specified term after notice.
During the term of a management services agreement, the affiliated practice
agrees, with respect to management services, not to compete with Physicians'
Specialty within a specified geographic area. During the term of a management
services agreement and for a period following the termination of such agreement,
the affiliated practice also agrees not to solicit any of Physicians'
Specialty's employees or persons affiliated with Physicians' Specialty or to
contract with any entity for the provision of management services substantially
of the kind contemplated by the management services agreement. The affiliated
practice also agrees not to disclose certain confidential and proprietary
information relating to Physicians' Specialty and the affiliated practice.
Physician Employment Agreements. Physicians at the Company's affiliated
practices have employment agreements with their respective practice. Affiliated
physicians are compensated based upon either productivity or other negotiated
formulas agreed upon between the affiliated physician and the affiliated
practice. The affiliated practice may provide the affiliated physicians with
health, death and disability insurance and other benefits. Affiliated physicians
are obligated to obtain and maintain professional liability insurance coverage
which Physicians' Specialty may procure on behalf of the affiliated physicians.
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Generally, under the employment agreements, affiliated physicians agree not
to compete with the affiliated practice, not to solicit patients of the
affiliated practice and not to interfere with employees of the affiliated
practice for a certain period following the termination of such employment
agreement unless the agreement is terminated by the affiliated physician for
cause. However, in certain states, such as Alabama, certain types of restrictive
covenants, including non-competition covenants, are deemed to be unenforceable
against professionals, including physicians. In other states, these provisions
may be deemed to be unenforceable if a court determines that the duration of the
restriction, the territory covered by such restriction or the activities
restricted were unreasonable or otherwise violated public policy.
In addition, affiliated physicians agree:
- not to disclose any confidential and proprietary information of the
affiliated practice during the term of the agreement and for a certain
period following the termination of the agreement;
- to assign to the affiliated practice all revenue related to contracts
with managed care companies and to grant the affiliated practice the
right to enter into such contracts on behalf of the physicians; and
- to exercise independent professional and ethical judgment in all patient
care responsibilities.
The employment agreements with the affiliated physicians generally provide
for an initial term of five years. The agreements are automatically renewed for
successive one or two year terms unless an affiliated physician or the medical
practice elects not to renew the term by providing at least 90 days written
notice of such election or such agreement is otherwise terminated for cause or
the death or disability of an affiliated physician. The employment agreements
with the physicians of PSC Alabama Corp., one of the Company's wholly-owned
subsidiaries, provide for an initial term of six years and six months, which
will be automatically renewed for successive one or two year terms unless the
physician or PSC Alabama Corp. elects not to renew the agreement.
ACQUISITION OF ENT PRACTICES SINCE JANUARY 1, 1998
In May 1998, Physicians' Specialty acquired the stock of three corporations
that had been affiliated with Physicians' Domain, Inc., a White Plains, New York
based ENT physician practice management company, employing an aggregate of 20
physicians and 16 allied health care professionals with 11 clinical offices in
the metropolitan New York area.
In connection with this transaction, Physicians' Specialty:
- paid approximately $5.4 million in cash;
- discharged approximately $3.8 million of liabilities; and
- issued a note in the principal amount of approximately $6.4 million,
payable in May 2003.
The note accrues interest at a rate of 6.0% per annum, payable quarterly,
is secured by the fixed assets acquired by Physicians' Specialty in the
transaction and is subordinate to senior indebtedness, including borrowings
under the Company's credit facility. Physicians' Specialty also agreed to pay an
additional $500,000, in cash or shares of its common stock at its option, if
these practices achieve certain performance targets. Pursuant to the stock
purchase agreement, the New York physicians nominated one member to the
Company's Board of Directors, Steven H. Sacks, M.D.
Physicians' Specialty entered into a management services agreement with a
newly organized ENT practice employing the 20 ENT physicians that had been
affiliated with Physicians' Domain. The management services agreement provided
for a fixed annual management fee of approximately $2.1 million, plus
reimbursement of practice operating expenses. In March 1999, in connection with
an additional acquisition in the metropolitan New York area, the management
services agreement was amended and the fixed annual management fee was increased
to approximately $2.6 million. Under the management services agreement, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreement also provides for mutually
agreed increases in the fixed management fee
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upon Physicians' Specialty's management of ancillary business developed or
acquired or the acquisition of additional physician practices which become part
of the existing practice.
In October 1998, Physicians' Specialty acquired the assets of Cleveland
Ear, Nose and Throat Center, Inc., a ten physician ENT practice with eight
allied health care professionals and eight clinical offices in metropolitan
Cleveland, Ohio. Cleveland ENT had previously been affiliated with MedPartners,
Inc. Physicians' Specialty also entered into a management services agreement
with Cleveland ENT maintaining as a management fee the percentage of net income
structure which existed in the agreement between MedPartners and Cleveland ENT.
Under the terms of the transaction, Physicians' Specialty granted Cleveland ENT
the option to unwind the transaction by December 15, 1998 and repurchase all
Cleveland ENT non-medical assets acquired by the Company for a total cash
purchase price equal to the price paid by the Company to MedPartners for such
assets, plus amounts invested by the Company in Cleveland ENT. Physicians'
Specialty paid approximately $4.2 million consisting of cash and borrowings
under its credit facility, and Physicians' Specialty issued a $150,000
non-interest bearing contingent promissory note which is payable at its option
in cash or its Common Stock upon Cleveland ENT achieving certain performance
targets. Cleveland ENT did not exercise its option to unwind the transaction.
Physicians' Specialty amended the management services agreement with Cleveland
ENT to provide that, effective January 1, 1999, Physicians' Specialty would
receive a management fee equal to 12.5% of all net clinic revenue, after
adjustment for contractual allowances, generated by Cleveland ENT.
In January 1999, Physicians' Specialty entered into a financing arrangement
with the physicians at Cleveland ENT. Under the financing arrangement,
Physicians' Specialty loaned $1.475 million to the Cleveland physicians. The
loan bears interest at a rate of 6% per annum and matures on the earlier of
January 14, 2000, the termination of the management services agreement or the
termination of the employment of three or more of the Cleveland physicians.
Physicians' Specialty also granted the physicians the right and option to
require Physicians' Specialty to purchase from the physicians all of the common
stock of a newly organized corporate entity owned by the physicians, which holds
two corporate domain names. The option may be exercised by the physicians
between January 10, 2000 and March 1, 2000. If the physicians exercise the
option, Physicians' Specialty would be required to purchase the common stock for
approximately $2 million in cash and issue a subordinated promissory note in the
principal amount of $520,000. The cash portion of the purchase price would be
reduced by any amounts owed by the physicians to Physicians' Specialty pursuant
to the loan or any other obligations. The subordinated promissory note would
bear interest at a rate of 6% per annum and would be payable in four equal
annual installments commencing on the first anniversary of the date of issuance
of the note. Physicians' Specialty has also agreed to indemnify the physicians
for certain matters in connection with or arising out of this transaction.
Since January 1, 1998, Physicians' Specialty also has acquired:
- substantially all of the assets and assumed certain contractual
liabilities of four ENT physician practices in the metropolitan New York
area, four ENT physician practices in South Florida, one ENT physician
practice in the metropolitan Atlanta area and one ENT physician practice
in the metropolitan Cleveland area;
- minority limited partnership interests in Atlanta Surgery Center, Ltd., a
limited partnership operating three multi-specialty ambulatory surgery
centers, and Marietta Outpatient Surgery, Ltd., a limited partnership
operating a multi-specialty ambulatory surgery center;
- substantially all of the assets of Preferred Diagnostic Services, which
operates 12 sleep centers in the metropolitan Atlanta area; and
- substantially all of the assets of Computerized Tomography Center, Inc.,
which operates a diagnostic imaging center in the metropolitan Atlanta
area.
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In connection with these acquisitions, Physicians' Specialty:
- paid an aggregate of approximately $11.3 million in cash;
- issued an aggregate of 69,873 shares of common stock, valued at the time
of issuance at an aggregate of approximately $532,000:
- agreed to issue to four of the affiliated practices beginning in February
1999, an aggregate of 79,675 additional shares of common stock, valued at
the time of issuance at an aggregate of approximately $628,000;
- issued a subordinated convertible promissory note in the principal amount
of $250,000, accruing interest at a rate of 6% per annum and payable in
April 2000 in cash or Physicians' Specialty's common stock, at
Physicians' Specialty's option;
- issued subordinated promissory notes in the aggregate principal amounts
of approximately $1.525 million of which $1.4 million in notes accrue
interest at 6% per annum payable quarterly beginning in May 1999 with
five annual equal payments of principal beginning on February 1, 2000 and
of which a note in the principal amount of $125,000 accrues interest of
6% per annum payable quarterly beginning September 1999 with three equal
annual payments of principal beginning on June 30, 1999; and
- issued a non-interest bearing contingent subordinated promissory note in
the principal amount of $150,000. The payment of this note is contingent
upon the physicians or practice holding such note reaching certain
performance targets. This contingent note is payable by Physicians'
Specialty, at its option, in cash or shares of its common stock, valued
at the average closing price of the Company's common stock for the ten
trading days preceding the date of delivery of such shares.
CAPITATED MANAGED CARE CONTRACTS; NETWORK DEVELOPMENT AND MANAGEMENT
At December 31, 1998, the Company's Atlanta affiliated practices served as
the primary ENT provider network for three capitated managed care contracts for
United HealthCare of Georgia, Cigna HealthCare of Georgia and The Morgan Health
Group covering an aggregate of approximately 351,400 enrollees in the
metropolitan Atlanta area. At December 31, 1998, the Company's Birmingham,
Alabama affiliated ENT practice participated in an exclusive panel of ENT
physicians providing services for a capitated managed care contract for United
HealthCare of Alabama covering approximately 80,000 enrollees in the
metropolitan Birmingham area. The following table sets forth the covered lives
for each managed care contract as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITATED
COVERED
LIVES
---------
<S> <C>
United HealthCare of Georgia, Inc........................... 169,200
United HealthCare of Alabama, Inc........................... 79,694
Cigna HealthCare of Georgia, Inc............................ 114,571
The Morgan Health Group, Inc.*.............................. 67,629
-------
431,094
=======
</TABLE>
- ---------------
* Contract terminated effective June 16, 1999.
These managed care contracts are held, managed and administered by three of
the Company's wholly-owned subsidiaries. Through these subsidiaries, Physicians'
Specialty manages the existing provider networks, and performs quality and
utilization management under each contract. Physicians' Specialty receives a
pre-determined capitation fee per enrollee per month from the payors of the
managed care contracts in exchange for agreeing to arrange for the provision of
ENT medical and surgical professional services required by enrollees.
Physicians' Specialty has contracted with physicians at certain of its
affiliated practices and with non-affiliated physicians to provide these
services to enrollees. The physicians
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providing services are compensated by Physicians' Specialty on a discounted
fee-for-service or contract capitation basis. For the year ended December 31,
1998, approximately 8% of the Company's net revenue was attributable to ENT
medical and surgical professional services rendered pursuant to the Company's
managed care contracts.
Physicians' Specialty intends to develop or acquire additional ENT provider
networks in order to enter into exclusive managed care contracts with payors.
Physicians' Specialty expects that the networks will consist of affiliated
physicians and related specialists as well as non-affiliated physicians and
other health care providers engaged in ENT and related specialties who will
enter into network administration agreements with Physicians' Specialty. These
agreements will provide for Physicians' Specialty to manage the provider
network, negotiate managed care contracts and perform quality and utilization
management functions. Physicians' Specialty anticipates working with specialty
group practices in:
- developing capitated contract proposals;
- evaluating and assembling provider networks;
- negotiating contract rate schedules and exclusions;
- utilization and quality management; and
- developing provider compensation methodologies.
Physicians' Specialty also anticipates eventually tracking outcomes to
demonstrate the cost effectiveness of care being delivered in connection with
its managed care contracts. Physicians' Specialty believes the principal benefit
from including affiliated as well as non-affiliated physicians in Physicians'
Specialty's provider networks will be the expansion and diversification of
provider networks available to managed care enrollees, as increasingly required
by managed care companies.
CAPITATED AGREEMENTS WITH THIRD PARTY PAYORS
Under participation agreements between Physicians' Specialty and the
physicians providing services to managed care enrollees, the physicians must
follow administrative procedures established by Physicians' Specialty and the
managed care companies, such as:
- referring enrollees to participating providers;
- obtaining prior authorization for certain procedures; and
- participating in quality and utilization management programs.
Quality management includes the process established by Physicians'
Specialty and the payor to improve the quality of covered services. Utilization
management includes the process established to review whether certain health
care services provided to enrollees are in accordance with the requirements
established by Physicians' Specialty and the payor. Under the participation
agreements, the physicians are also required to obtain and maintain malpractice
and general liability insurance. The participation agreements may generally be
terminated by Physicians' Specialty without cause upon 60 to 90 days notice or
with cause upon 30 to 60 days notice and by a physician, with or without cause,
upon 60 days notice. The participation agreements also automatically terminate
upon the termination of the relevant capitated managed care contract.
The Company's subsidiaries hold capitated managed care contracts with
United HealthCare of Georgia, Cigna HealthCare of Georgia and United HealthCare
of Alabama which were entered into in 1991, 1992 and 1997, respectively. The
contract with United HealthCare of Georgia expires in November 1999. The
contract with Cigna HealthCare of Georgia provides for automatic annual
renewals. The contract with United HealthCare of Alabama expires in October 2000
and provides for automatic annual renewals. The managed care contracts with
Cigna and United HealthCare may be terminated by either party for cause,
including a material breach of the contract, generally upon 30 to 60 days notice
by the terminating party or without cause upon 90 to 120 days notice by the
terminating party generally following
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the initial term of the agreement. In March 1999, Physicians' Specialty received
notification from Cigna that Cigna was terminating its relationship with The
Morgan Health Group and was assuming The Morgan Health Group's responsibility
under the agreement for certain of the enrollees covered by Cigna effective May
1, 1999 and that future payments for such enrollees to be received by
Physicians' Specialty under the contract would be paid by Cigna. Additionally,
Physicians' Specialty terminated its contract with The Morgan Health Group
effective June 16, 1999.
GOVERNMENT REGULATION
The health care industry is highly regulated and Physicians' Specialty
cannot predict whether the regulatory environment in which Physicians' Specialty
operates will change significantly or adversely in the future. The regulation of
the health care industry, including scrutiny of the methods and levels of
payment to health care providers, is increasing on both the federal and state
levels. Physicians' Specialty believes that health care legislation, regulations
and interpretations will continue to change. Physicians' Specialty expects to
modify its agreements and operations from time to time as the business and
regulatory environments change. While Physicians' Specialty believes it will be
able to structure its agreements and operations in accordance with applicable
law, the lack of definitive interpretations of many statutory and regulatory
provisions means that there can be no assurance that Physicians' Specialty's
arrangements are in compliance with such provisions or will not be successfully
challenged.
Government Reimbursement Programs. Under the federal Medicare program,
payment for physician services, other than under Medicare risk contracts and
Medicare+Choice plans, is based on an annually adjusted fixed fee schedule known
as the Resource-Based Relative Value Scale ("RBRVS"). The Balanced Budget Act of
1997 modified the RBRVS system to adjust the per patient payments from the
Medicare program for certain physician services, and Physicians' Specialty
anticipates further modifications in the RBRVS system in the future.
Additionally, the Balanced Budget Act created the Medicare+Choice plan which
provides Medicare beneficiaries with the option to receive services through
managed care entities including HMOs and preferred provider organizations, and
payment for physician services under the Medicare+Choice plan may be on a
capitated basis as opposed to the RBRVS system.
This change of payment method may result in an overall decrease in
compensation for physician services under the Medicare program. Because
Physicians' Specialty anticipates that approximately 10% of its revenues will be
derived from government-funded health care programs, principally, Medicare and
Medicaid, Physicians' Specialty does not believe that such reductions will
result in a material adverse change in its results of operations. The Medicaid
program is a partially federal-funded, partially state-funded and state
administered program for the indigent. Payment to physicians under state
Medicaid programs is generally based upon fee schedules. However, some states
have authorized Medicaid HMOs, and payments for physician services under these
programs may be on a capitated basis.
Stark Legislation, Fraud and Abuse Laws and Similar Laws
Physicians' Specialty and its affiliated physicians are subject to a
variety of laws and regulations governing the referral of patients for certain
health services to entities with which the referring physician has a financial
relationship. Significant prohibitions against physician referrals were enacted
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as "Stark II," amended prior physician
self-referral legislation known as "Stark I" by dramatically enlarging the field
of physician-owned or physician-interested entities to which the referral
prohibitions apply. The Stark Law prohibits, subject to certain exceptions, a
physician, or a member of the physician's immediate family, from referring
Medicare or Medicaid patients or patients in federally funded health care
programs for "designated health services" to an entity with which the physician
has a financial relationship. The designated health services include clinical
laboratory services, radiology services, radiation therapy services, physical
and occupational therapy services, durable medical equipment, parenteral and
enteral nutrients, equipment and supplies, prosthetics, orthotics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. The Stark laws further imposes reporting requirements on any entity
providing covered items or services for which payment may be made under Medicare
or Medicaid.
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An entity is required to report information concerning the entity's ownership,
investment and compensation arrangements. The penalties for violating the Stark
laws include:
- substantial civil or criminal penalties;
- denial of payment; and
- exclusion from participation in the Medicare, Medicaid and federally
funded health care programs.
The Stark laws are broad and ambiguous; however, Physicians' Specialty
believes that its activities are not in violation of the Stark laws.
In addition, a number of states, including certain states in which
Physicians' Specialty operates or may operate in the future, have enacted
similar laws which apply to referrals made for services reimbursed by all
payors, and not simply Medicare, Medicaid or federally funded health care
programs. Physicians' Specialty believes that its activities are not in
violation of these laws. However, Physicians' Specialty cannot predict whether
future interpretations of these laws will require structural and organizational
modification of its affiliation structure in those states. Future legislation or
regulations could require Physicians' Specialty to modify the form of its
relationships with physician organizations. Moreover, the violation of the Stark
laws or similar state laws by Physicians' Specialty's affiliated physician
organizations could result in significant fines and loss of reimbursement which
could materially adversely affect the Company's operations and financial
condition.
Physicians' Specialty and its affiliated physicians are also subject to
federal and state fraud and abuse laws. These laws include the federal
anti-kickback statute, which prohibits, among other things, the offer, payment,
solicitation or receipt of any remuneration, directly or indirectly in return
for:
- the referral of patients for items or services that are paid for in whole
or in part by Medicare, Medicaid or federally funded programs; or
- arranging for the furnishing of items and services that are paid for in
whole or in part by Medicare, Medicaid or federally-funded programs.
The courts and the Office of Inspector General of The Department of Health
and Human Services have stated that the anti-kickback statute is violated if one
purpose, as opposed to a primary or sole purpose, of the arrangement is to
induce referrals. In April 1998, the Office of Inspector General of the
Department of Health and Human Services issued an advisory opinion which states
that a percentage fee based management arrangement between a physician practice
management company and a physician group could violate the federal anti-kickback
statute if one of the purposes of the arrangement is to compensate the
management company for its efforts to arrange for referrals for the group
through its services provided to the group, including marketing and advertising.
Violations of the anti-kickback statute are punishable by criminal or civil
penalties and/or exclusion of the provider from future participation in the
Medicare, Medicaid and federally-funded programs. The federal government has
published exemptions, or "safe harbors," for business transactions that will be
deemed not to violate the anti-kickback statute. Although satisfaction of the
requirements of these safe harbors provides protection from enforcement action
under the anti-kickback legislation, failure to meet the safe harbors does not
necessarily mean that the activity violates the statutory prohibitions. Rather,
the legality of a particular business arrangement will be assessed by comparing
the particular facts of the transaction to the proscriptions of the statute. In
addition, a number of states have enacted similar laws, which vary from state to
state, prohibiting remuneration or fee-splitting arrangements between health
care providers for the referral of patients to a particular provider, regardless
of the payor source.
Under separate statutes, including the Federal False Claims Act, submission
of claims for payment that are "not provided as claimed" may lead to:
- civil monetary penalties;
- criminal fines and imprisonment; and/or
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- exclusion from participation in the Medicare, Medicaid and
federally-funded health care programs.
Under the Federal False Claims Act, any person may bring suit alleging
false or fraudulent Medicare or Medicaid claims or other violations of the
statute and share in any amounts paid by the entity to the government in fines
or settlement. Such qui tam actions have increased significantly in recent years
and have increased the risk that a health care company will have to defend a
false claims action, pay fines or be excluded from participation in the Medicare
and/or Medicaid programs as a result of an investigation arising out of such an
action. Congress also enacted the Health Insurance Portability and
Accountability Act of 1996, which includes an expansion of certain fraud and
abuse provisions to health care programs. Due to the breadth of the statutory
provisions of the fraud and abuse laws and the absence of definitive regulations
or court decisions addressing the type of arrangements by which Physicians'
Specialty and its affiliated entities conduct and will conduct its or their
business, from time to time certain of the Company's practices may be subject to
challenge under these laws.
Physicians' Specialty has attempted to structure its business relationships
to comply with the Stark laws, the fraud and abuse laws and all other applicable
federal and state health care laws and regulations. However, there can be no
assurance that such laws and regulations will be interpreted in a manner
consistent with the Company's practices. There can be no assurance that
challenges under such laws or regulations or new laws or regulations will not
require Physicians' Specialty or its affiliated entities to change its or their
practices or will not have a material adverse effect on the Company's operations
and financial condition. Furthermore, the addition of ancillary services may
require Physicians' Specialty or its affiliated practices to alter its or their
operations to comply with applicable federal or state health care laws and
regulations.
Health Care Reform. Political, economic and regulatory influences are
continuously subjecting the health care industry in the United States to
fundamental change. On August 5, 1997, President Clinton signed the Balanced
Budget Act which contemplates savings of $115 billion in Medicare spending and
$13 billion in Medicaid spending over the five-year period from 1998 to 2002.
The savings will result primarily from reductions in reimbursements to providers
due to several factors, including but not limited to, alterations in the
methodology for calculating physician fee schedule payments, application of a
budget neutrality adjustment to prevent physician fees from increasing above a
certain aggregate amount, and expansion of options for Medicare delivery
including provider-sponsored organizations, HMOs, preferred provider
organizations and private fee-for-service plans. The Balanced Budget Act also
establishes more stringent sanctions for convictions of health care related
crimes including permanent exclusion from participation in the Medicare Program
after conviction of three health care related crimes and imposition of civil
monetary penalties for violations of the federal anti-kickback statute. Due to
the enactment of this health care reform and uncertain interpretation of these
reform measures by regulatory authorities, it is difficult to determine the
impact that this reform will have upon Physicians' Specialty and its affiliated
physicians, and there can be no assurances that these reform measures will not
have a material adverse effect on the Company's operations and financial
condition. In addition to federal health care reform, some states in which
Physicians' Specialty operates or may operate in the future are also considering
various health care reform proposals. Physicians' Specialty anticipates that
both federal and state governments will continue to review and assess
alternative health care delivery systems and payment methodologies, and that
additional reforms will likely occur in the future. Due to uncertainties
regarding the additional reforms and their enactment and implementation,
Physicians' Specialty cannot predict which, if any, reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company,
and there can be no assurance that the adoption of reform proposals will not
have a material adverse effect on the Company's operations and financial
condition. In addition, the actual announcement by competitors and third party
payors of their strategies to respond to such initiatives or reforms, could
produce volatility in the trading and market price of the Physicians' Specialty
Common Stock.
Other Licensing Requirements. Every state imposes licensing requirements
on individual physicians, and some regulate facilities operated and services
provided by physicians. In addition, many states require regulatory approval,
including certificates of need, before establishing certain types of health care
facilities, offering certain services, or making certain capital expenditures in
excess of statutory thresholds for health
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care equipment, facilities or services. To date, only one affiliated entity,
Computerized Tomography Center, Inc., is subject to certificate of need
requirements, and it currently holds a valid certificate of need which permits
it to operate a diagnostic imaging center. However, the addition of ancillary
services by one or more of the other affiliated healthcare providers or changes
in law or regulations could require licensure, certificates of need, or both.
There is no assurance that such required state regulatory approvals could be
obtained, or even if initially obtained, would not thereafter be withdrawn or
restricted. In connection with the expansion of its operations into new markets
and contracting with managed care companies, Physicians' Specialty and its
affiliated practices may become subject to compliance with additional
regulations. In addition, Physicians' Specialty and its affiliated practices are
subject to federal, state and local laws dealing with issues such as
occupational safety, employment, medical leave, insurance regulation, civil
rights and discrimination, medical waste and other environmental issues.
Increasingly, federal, state and local governments are expanding the regulatory
requirements for businesses, including medical practices. The imposition of
these regulatory requirements may have the effect of increasing operating costs
and reducing the profitability of the Company's operations.
Restrictions on Corporate Practice of Medicine and Unlawful Fee
Splitting. The laws of certain states in which Physicians' Specialty operates
or may operate in the future prohibit non-physician entities from practicing
medicine or from exercising control over the professional judgments or decisions
of physicians concerning the treatment and diagnosis of patients. Although
Physicians' Specialty has structured its affiliations with physician groups so
that the associated physicians maintain exclusive authority regarding the
delivery of medical care and exercise their independent professional judgment in
rendering medical decisions, there can be no assurance that these laws will be
interpreted in a manner consistent with the Company's practices or that other
laws or regulations will not be enacted in the future that could have a material
adverse effect on the Company's business.
In addition, the laws of certain states in which Physicians' Specialty
operates or may operate in the future prohibit certain practices such as
splitting fees with physicians or receiving fees for the referral of patients.
In Florida, the Board of Medicine has issued declaratory statements interpreting
Florida fee splitting statutes concerning the payment of percentage based fees
to physician practice management companies in return for the provision of
services to physician practices. These decisions are based upon the facts of the
particular case, and the Board of Medicine has determined that certain
percentage based fee arrangements violate Florida fee splitting statutes and
other percentage based fee arrangements do not violate the statutes. At this
time, further clarification is needed, and such clarification by the Board may
require Physicians' Specialty to revise its contracts with its affiliated
practices in a manner that could have adverse effects on the Company. Although
Physicians' Specialty has endeavored to structure its affiliations with
physician groups to comply with applicable state fee splitting laws and
anti-referral laws, there can be no assurance that these laws will be
interpreted in a manner consistent with the Company's practices or that other
laws or regulations will not be enacted in the future which could have a
material adverse effect on the Company's business. If a corporate practice of
medicine law or fee splitting statute is interpreted in a manner that is
inconsistent with Physicians' Specialty's practices, Physicians' Specialty would
be required to restructure or terminate its relationship with the applicable
physician group in order to bring its activities into compliance with such law.
The termination of, or failure by Physicians' Specialty to successfully
restructure, any such relationship could result in fines or a loss of revenue
that could have a material adverse effect on Physicians' Specialty's operations
and financial condition.
LIABILITY AND INSURANCE
The provision of health care services entails the risk of potential claims
of medical malpractice and similar claims. Physicians' Specialty does not engage
in the practice of medicine or have responsibility for compliance with
regulatory requirements directly applicable to physicians and requires
affiliated physicians performing medical services at its facilities to maintain
medical malpractice insurance. Nevertheless, Physicians' Specialty cannot
predict whether malpractice claims will be asserted against it directly in the
event that services or procedures performed at one of its facilities are alleged
to have resulted in injury or
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other adverse effects. In addition, in connection with the acquisition of assets
of affiliated practices, Physicians' Specialty has assumed certain of the stated
liabilities of such practices. Claims may be asserted against Physicians'
Specialty for events related to affiliated practices that occurred prior to the
Company's affiliation. Although Physicians' Specialty maintains liability
insurance that it believes will be adequate as to both risk and amounts,
successful malpractice claims could exceed the limits of the Company's insurance
and could have a material adverse effect on its operations and financial
condition. Moreover, a malpractice claim asserted against Physicians' Specialty
could be costly to defend, could consume management resources and could
adversely affect the Company's reputation and business, regardless of the merit
or eventual outcome of such claim. In addition, Physicians' Specialty cannot
predict whether it will be able to obtain such insurance on commercially
reasonable terms in the future or that any such insurance will provide adequate
coverage against potential claims.
In addition to the liability insurance maintained by it, Physicians'
Specialty is named as an additional insured on the professional liability
insurance policies held by Physicians' Specialty's affiliated physicians. Such
insurance would provide coverage, subject to policy limits in the event
Physicians' Specialty were held liable as a co-defendant in a lawsuit for
professional malpractice against an affiliated physician. In addition,
Physicians' Specialty is indemnified under the management services agreements by
the affiliated physician groups for liabilities resulting from the performance
of medical services.
EMPLOYEES
As of June 30, 1999, Physicians' Specialty had approximately 574 full-time
employees, including 2 physicians and 85 allied health care professionals. None
of Physicians' Specialty's employees are represented by a labor union and
Physicians' Specialty believes its relations with Physicians' Specialty's
employees are good.
PROPERTIES
Physicians' Specialty leases approximately 5,000 square feet of office
space for its executive offices in Atlanta, Georgia. The lease provides for
annual rent of approximately $90,000, subject to specified annual increases, and
expires in July 2002. Physicians' Specialty also leases the 60 facilities
currently used by the physicians at its affiliated practices. These leases have
varying remaining terms ranging from approximately one month to 13 years and
aggregate annual rent of approximately $3.0 million. Physicians' Specialty
believes that these facilities are suitable for its current and anticipated
needs and the current and anticipated needs of its affiliated practices.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Physicians' Specialty provides comprehensive management services to
physician practices and health care providers specializing in the treatment and
management of ENT diseases and disorders, including specialists practicing in
the related fields of allergy, audiology, oral surgery, plastic surgery,
pulmonology and sleep medicine. Physicians' Specialty is currently affiliated
with 92 physicians, one dentist and 84 allied health care professionals
operating 67 clinical locations in Alabama, Florida, Georgia, Illinois, New
Jersey, New York and Ohio. Physicians' Specialty is also affiliated with a sleep
diagnostic laboratory company operating 12 sleep diagnostic laboratories and
Physicians' Specialty owns minority equity interests in Atlanta Surgery Center,
which operates three multi-specialty ambulatory surgery centers containing 14
operating rooms, and Marietta Outpatient Surgery, which owns an ambulatory
surgery center containing eight operating rooms.
The Company's revenue is derived:
- from patient service revenue generated by physicians who are affiliated
or employed by the Company;
- from the Company's capitated managed care contracts;
- from earnings related to ambulatory surgery centers in which the Company
owns a minority interest; and
- from transitional management fees earned in conjunction with integration
of the Company's acquired affiliated practices.
Patient service revenue consists of gross charges, less allowances for bad
debts and contractual adjustments, generated by or on behalf of physicians
affiliated with Physicians' Specialty or practicing at Physicians' Specialty's
wholly-owned subsidiary, PSC Alabama Corp. Capitation revenue consists of fixed
monthly payments received by Physicians' Specialty directly from HMOs or payors
subcontracting with HMOs. Additionally, Physicians' Specialty records its
allocable share of earnings for its minority interests in Atlanta Surgery Center
and PSC Marietta Ambulatory Surgery Center, Inc. on the equity basis of
accounting.
MANAGEMENT SERVICES AGREEMENTS
The management services agreements delineate the responsibilities and
obligations of Physicians' Specialty and its affiliated practices. Under the
management services agreements, the affiliated practice assigns to Physicians'
Specialty all of its non-governmental accounts receivable and all of its right
and interest in the proceeds of its governmental accounts receivable and grants
to Physicians' Specialty the right to collect and retain the proceeds of the
accounts receivable for the Company's account to be applied under the terms of
the agreement. Physicians' Specialty is responsible for the payment of practice
expenses which include:
- operating expenses of the affiliated practice, including salaries and
benefits of non-medical employees of the practice, lease obligations of
office space and equipment, and medical and office supplies; and
- the non-operating expenses of the affiliated practice.
Physicians' Specialty pays for all such expenses directly out of the
proceeds of the accounts receivable, or revenue, assigned to it by the
affiliated practice. In addition, under the Company's management services
agreements, the Company retains, as a part of its management fee, a stipulated
percentage (generally between 12.5% and 15%) of all revenue (after adjustment
for contractual allowances) generated by or on behalf of physicians practicing
at such practice. Contractual allowances are
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the differences between the amounts customarily charged by physicians practicing
at such practice and the amounts received pursuant to negotiated fee schedules
from payors under managed care, governmental and indemnity arrangements.
Physicians' Specialty believes that such contractual allowances are not
currently expected to materially adversely affect its revenue. In New York, in
order to comply with state law, Physicians' Specialty is reimbursed for practice
expenses and is paid a fixed management fee of approximately $2.5 million per
year subject to annual increases after the fifth anniversary of the date of the
management services agreement, consistent with the annual percentage increase in
the consumer price index. Physicians' Specialty's management fees under future
management services agreements will be determined based upon negotiations
between Physicians' Specialty and future affiliating practices and may vary
significantly in the future.
CAPITATED MANAGEMENT CONTRACTS
Physicians' Specialty's managed care contracts require it to contract for
the provision of substantially all of the ENT medical and surgical professional
services required by the enrollees under the managed care contracts. Physicians'
Specialty has contracted with physicians, including those at Physicians'
Specialty's affiliated practices in Atlanta, North Georgia and Birmingham,
Alabama, to provide a substantial portion of the medical professional services
in exchange for compensation on a discounted fee-for-service or contract
capitation basis.
Physicians' Specialty incurs direct costs or provider claims based on
medical services provided by the participating physicians to the managed care
company's enrollees. As a result, if capitation amounts received by Physicians'
Specialty are reduced by the managed care companies or if enrollees covered by
capitated contracts require more frequent or more extensive care than is
anticipated, operating margins may be reduced or the revenue derived from such
contracts may be insufficient to cover the direct costs of the professional
services provided by associated physicians to enrollees under the contracts. As
a result, Physicians' Specialty may be required to adjust its rates paid to
participating physicians, and Physicians' Specialty's business, financial
condition and results of operations may be adversely affected, particularly if
Physicians' Specialty is unable to renegotiate compensation levels paid to
participating physicians under the participation agreements on a timely or
favorable basis or negotiate capitated managed care contracts on terms favorable
to it.
Prior to entering into a capitated managed care contract, Physicians'
Specialty analyzes the costs of managing such contracts including a study of the
number of lives to be covered, the geographic region to be covered and the
historical utilization patterns and the associated costs of enrollees.
Physicians' Specialty then determines the capitation fee necessary to generate
acceptable returns under the contract and negotiates the capitation rate with
the managed care company. Capitation fees are generally a fixed amount per
enrollee per month. Capitated managed care contracts frequently provide for
periodic renegotiation of capitation fees and adjustments based upon changes in
the number of enrollees under the contracts, changes in the types of
professional services to be provided under the contracts, and changes in the
geographic areas to be covered under the contracts.
To assist in monitoring and controlling direct costs or provider claims
under capitated managed care contracts held by it, Physicians' Specialty
utilizes its management information system, a comprehensive capitation
administration and utilization management system. Physicians' Specialty believes
the system enables it to effectively analyze clinical and cost data necessary to
monitor and control expenses and manage profitability under capitated
arrangements and to accurately anticipate the costs participating physicians
will incur in providing services under such contracts so that Physicians'
Specialty undertakes contracts which Physicians' Specialty can expect to realize
adequate profit margins or otherwise meet its objectives.
During the years ended December 31, 1997 and 1998, approximately 14.8% and
8% of Physicians' Specialty's net revenue, respectively, was derived from
capitated arrangements.
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RESULTS OF OPERATIONS
Comparison of First Six Months Results
Revenue. Net patient service revenue increased to $20,785,000 and
$40,296,000 for the three and six months ended June 30, 1999 as compared with
$12,780,000 and $23,580,000 for the same periods in 1998, representing increases
of $8,005,000 and $16,716,000 or 63% and 71%, respectively. The increase in
patient service revenue is primarily attributable to an increase in the number
of physicians affiliated with the Company to 92 physicians at June 30, 1999 as
compared with 68 physicians at June 30, 1998, an increase of 24 physicians or
35%. Patient service revenue generated by physicians who were affiliated with
the Company for both six month periods ended June 30, 1998 and 1999 increased on
average approximately 10% per physician. Capitation revenues increased to
$1,312,000 and $2,674,000 for the three and six months ended June 30, 1999 as
compared with $1,145,000 and $2,311,000 for the same periods in 1998
representing increases of $167,000 and $363,000 or 15% and 16%, respectively.
The increase in capitation revenues was primarily attributable to an increase in
the aggregate number of enrollees to approximately 358,000 at June 30, 1999 as
compared to approximately 320,000 at June 30, 1998, an increase of approximately
38,000 enrollees or 12%. Management fees increased to $561,000 and $904,000 for
the three and six months ended June 30, 1999 as compared with $288,000 and
$327,000 for the same periods in 1998 primarily as a result of transitional
management fees earned in conjunction with integration of the Company's acquired
affiliated practices. For the three and six months ended June 30, 1999,
Physicians' Specialty recorded as revenue earnings from its equity interests in
Atlanta Surgery Center and Marietta Surgery Center in the amount of $473,000 and
$768,000. This revenue is not included in the three and six months ended June
30, 1998. As a result of the foregoing factors, the Company's net revenue
increased to $23,131,000 and $44,642,000 for the three and six months ended June
30, 1999 as compared with $14,213,000 and $26,218,000 for the same periods in
1998, representing increases of $8,918,000 and $18,424,000 or 63% and 70%
respectively.
Provider Claims, Wages and Benefits. Provider claims, wages and benefits,
which includes physician compensation, increased to $15,270,000 and $29,353,000
for the three and six months ended June 30, 1999, as compared with $9,530,000
and $17,455,000 for the same periods in 1998 representing increases of
$5,740,000 and $11,898,000 or 60% and 68%, respectively. The dollar increase in
provider claims, wages and benefits is primarily attributable to the increase in
the number of affiliated physicians managed by the Company and the addition of
non-medical personnel at the Company's affiliated practices required to support
the increase in the number of affiliated physicians. As a percent of net
revenue, provider claims, wages and benefits decreased slightly to 66% for both
the three and six month periods ended June 30, 1999 as compared to 67% for the
same periods in 1998.
General and Administrative. General and administrative expenses increased
to $4,043,000 and $8,008,000 for the three and six months ended June 30, 1999 as
compared with $2,562,000 and $4,820,000 for the same periods in 1998,
representing increases of $1,481,000 and $3,188,000 or 58% and 66%,
respectively. These increases are primarily attributable to the addition of
personnel and greater support costs associated with the Company's expansion
during 1998. As a percent of net revenue, general and administrative expenses
were 18% for both the three and six months ended June 30, 1999 as compared to
18% for the same periods in 1998.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $686,000 and $1,373,000 for the three and six months ended June 30,
1999 as compared with $403,000 and $686,000 for the same periods in 1998,
representing increases of $283,000 and $687,000 or 70% and 100%, respectively,
These increases were primarily the result of the increases in intangible assets,
or goodwill, resulting from additional acquisitions and resulting increases in
amortization of intangible assets associated with these acquisitions, as well as
investments in equipment, leasehold improvements and management information
systems and resulting increases in depreciation of these assets. As a percent of
net revenue, depreciation and amortization expense remained at 3% for both the
three and six month periods ended June 30, 1999 as compared to 3% for the same
periods in 1998.
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Other Income (Expense). Other expense for the three and six months ended
June 30, 1999 was $219,000 and $234,000, respectively representing interest
expense related primarily to the subordinated seller notes and borrowings in
conjunction with the Company's $45,000,000 senior credit facility which was
offset by interest income earned on interest bearing promissory notes and the
short term investment of excess cash and cash equivalents. Other income for the
three and six months ended June 30, 1998 was $125,000 and $154,000, respectively
and was derived from interest income earned on the short term investment of cash
and cash equivalents net of amounts of interest paid primarily on the
subordinated seller notes.
Income Taxes. Income taxes were provided for at 39% effective tax rates
for the three and six month periods ended June 30, 1999 and 1998 respectively.
Net Income. As a result of the foregoing factors, net income increased to
$1,777,000 and $3,462,000 for the three and six months ended June 30, 1999 as
compared to $1,124,000 and $2,081,000 for the same periods in 1998, representing
increases of $653,000 and $1,381,000 or 58% and 66%, respectively.
Comparison of Year ended December 31, 1998 with Year ended December 31, 1997.
Overview. Physicians' Specialty was incorporated in July 1996 and did not
conduct any significant operations prior to the closing of its initial public
offering and initial acquisitions in March 1997. Accordingly, only nominal
revenues were recognized and general and administrative expenses were incurred
during the period from inception to March 1997. However, Physicians' Specialty
did incur various legal, accounting and auditing costs in connection with its
initial public offering and acquisitions during the period from inception
through December 31, 1996. In addition, the Company's results of operations for
its year ended December 31, 1997 represent less than a full year of business
operations.
In March 1998, the Emerging Issues Task Force of the FASB issued its
Consensus on Issue 97-2. EITF 97-2 addresses certain specific matters pertaining
to the physician practice management industry. EITF 97-2 is effective for
Physicians' Specialty for its year ended December 31, 1998. EITF 97-2 addresses
the ability of physician practice management companies to consolidate the
results of operations of physician practices with which it has an existing
contractual relationship. Physicians' Specialty has determined that its
contracts met the criteria of EITF 97-2 for consolidating the results of
operations of the related physician practices, and Physicians' Specialty has
adopted EITF 97-2 in its consolidated statement of operations for Physicians'
Specialty's year ended December 31, 1998. In addition, Physicians' Specialty has
adjusted its consolidated statement of operations for its year ended December
31, 1997 to conform with such consolidation.
The following table shows the percentage of net revenue represented by
various expense categories reflected in Physicians' Specialty's consolidated
statement of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998
---------- ------------
<S> <C> <C>
Net Revenues................................................ 100.0% 100.0%
Operating expenses:
Provider claims, wages and benefits....................... 68.4 62.2
General and administrative................................ 17.9 21.4
Depreciation and amortization............................. 1.5 3.0
----- -----
Total operating expenses.......................... 87.8 86.6
----- -----
Operating Income:........................................... 12.2 13.4
Other income (expense) -- net............................. 1.8 (0.1)
----- -----
Income before income taxes.................................. 14.0 13.3
Provision for income taxes.................................. 5.6 5.2
----- -----
Net Income........................................ 8.4% 8.1%
===== =====
</TABLE>
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In the following discussions, most percentages and dollar amounts have been
rounded to aid presentation. As a result, all such figures are approximations.
Revenue. Net patient service revenue increased from $20.7 million in 1997
to $54.9 million in 1998, an increase of $34.2 million, or 165%. The increase in
patient service revenue was primarily attributable to an increase in the number
of physicians affiliated with Physicians' Specialty to 82 physicians at December
31, 1998 as compared with 46 physicians at December 31, 1997. Patient service
revenue generated by physicians who were affiliated with Physicians' Specialty
for both 1997 and 1998 increased on average 12% per physician. Capitation
revenues increased from $3.6 million in 1997 to $4.9 million in 1998, an
increase of $1.3 million, or 36%. The increase in capitation revenues was
primarily attributable to an increase in the aggregate number of enrollees to
approximately 431,000 at December 31, 1998 as compared to approximately 315,000
at December 31, 1997, an increase of approximately 116,000 enrollees, or 37%.
Management fees increased from $169,000 in 1997 to $1.2 million in 1998
primarily as a result of transitional management fees earned in conjunction with
integration of Physicians' Specialty's acquired affiliated practices. For 1998,
Physicians' Specialty recorded as revenue earnings from its 17.5% equity
interest in Atlanta Surgery Center, which Physicians' Specialty acquired in
September 1998, in the amount of $630,000.
As a result of the foregoing factors, Physicians' Specialty's net revenue
increased to $61.6 million in 1998 as compared with $24.5 million in 1997, an
increase of $37.1 million or 152%.
Provider Claims, Wages and Benefits. Provider claims, wages and benefits,
which includes physician compensation, increased to $38.3 million in 1998 from
$16.7 million in 1997, an increase of $21.6 million or 129%. The dollar increase
in provider claims, wages, and benefits was primarily attributable to the
addition of non-medical personnel at Physicians' Specialty's affiliated
practices required to support the increase in the number of affiliated physician
groups managed by it. As a percent of net revenue, provider claims, wages and
benefits decreased to 62% in 1998 from 68% in 1997.
General and Administrative. General and administrative expenses increased
to $13.1 million in 1998 from $4.4 million in 1997, an increase of $8.7 million
or 198%. This increase was primarily attributable to the addition of personnel
and greater support costs associated with Physicians' Specialty's rapid
expansion since March 1997. As a percent of net revenue, general and
administrative expenses increased to 21% in 1998 as compared to 18% in 1997.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $1.8 million in 1998 from $377,000 in 1997, an increase of $1.4
million or 377%. The increase was primarily the result of the increases in
intangible assets, or goodwill, resulting from additional acquisitions and
resulting increases in amortization of intangible assets associated with these
acquisitions, as well as investments in equipment, leasehold improvements and
management information systems and resulting increases in depreciation of these
assets. As a percent of net revenue, depreciation and amortization expense
increased to 3% in 1998 from 1.5% in 1997.
Other Income (Expense). Other expense for 1998 was $54,000 representing
interest expense related primarily to the subordinated seller notes and
borrowings and the commitment fee in conjunction with Physicians' Specialty's
$45 million senior credit facility which was offset by interest income earned on
the short term investment of excess cash and cash equivalents. Other income for
1997 was $429,000 and was derived from interest income earned on the short term
investment of cash and cash equivalents of Physicians' Specialty's initial
public offering proceeds, net of amounts of immaterial interest.
Income Taxes. Income taxes were provided for at 39% and 40% effective tax
rates for 1998 and 1997, respectively.
Net Income. As a result of the foregoing factors, net income increased to
$5.0 million in 1998 as compared to $2.1 million in 1997, an increase of $2.9
million or 138%.
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Quarterly Results.
The following table presents certain unaudited quarterly financial data for
each of the quarters during the years ended December 31, 1997 and 1998. This
information has been prepared on the same basis as Physicians' Specialty's
consolidated financial statements appearing elsewhere in this Proxy Statement
and include, in Physicians' Specialty's opinion, all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the quarterly
results when read in conjunction with Physicians' Specialty's consolidated
financial statements and the notes thereto. Physicians' Specialty has
historically experienced and expects to continue to experience quarterly
fluctuations in net revenue and net income primarily relating to the timing of
acquisitions and seasonable variations. As a result, the operating results for
any quarter are not necessary indicative of results for any future period or for
the full year.
<TABLE>
<CAPTION>
1997 1998
-------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................. $ 634 $6,263 $7,785 $9,806 $12,004 $14,213 $16,613 $18,771
Operating income............. 20 720 962 1,291 1,539 1,718 2,306 2,708
Net income................... 20 512 664 864 957 1,124 1,357 1,572
Basic net income per share... $0.02 $ 0.09 $ 0.11 $ 0.14 $ 0.15 $ 0.15 $ 0.15 $ 0.18
Diluted net income per
share...................... $0.02 $ 0.09 $ 0.11 $ 0.13 $ 0.14 $ 0.14 $ 0.15 $ 0.17
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Physicians' Specialty utilized capital primarily:
- to acquire assets or equity of physician practices and related ancillary
businesses;
- to acquire equipment utilized by our affiliated practices;
- to fund corporate capital expenditures including management information
systems; and
- to fund ongoing corporate working capital requirements.
At June 30, 1999, Physicians' Specialty had working capital of $15,801,000
compared to $18,388,000 at December 31, 1998, a decrease of $2,587,000. The
decrease in working capital was due primarily to the decrease in cash and cash
equivalents at June 30, 1999 relating to the cash consideration paid for
acquisitions completed by the Company during the six month period ended June 30,
1999.
For the six month period ended June 30, 1999 net cash provided by operating
activities was $1,332,000 compared to net cash used in operating activities of
$111,000 for the same period in 1998. Net cash provided by operating activities
for the period ended June 30, 1999 consists of the Company's net income,
increased by non-cash expenses such as depreciation and amortization and
decreased by non-cash earnings from the Company's equity interests in Atlanta
Surgery Center and Marietta Surgery Center, and adjusted by changes in the
components of working capital primarily accounts receivable, prepayments and
accounts payable.
Net cash used in investing activities was $7,541,000 for the six month
period ended June 30, 1999 compared to $11,228,000 for the same period in 1998.
The Company's uses of cash in investing activities related primarily to
acquisitions and capital expenditures in both the 1999 and 1998 periods. For the
six month period ended June 30, 1999 Physicians' Specialty received a
distribution from its equity interest in Atlanta Surgery Center of approximately
$574,000.
Net cash provided by financing activities was $2.7 million for the six
month period ended June 30, 1999 primarily due to borrowings of approximately
$2.9 million under the Company's $45 million credit facility. For the same
period in 1998 the Company realized net proceeds of $16.5 million in connection
with a public offering of approximately 2.3 million shares of the Company's
common stock.
On July 31, 1998, Physicians' Specialty closed on a four year $45 million
amended and restated senior credit facility syndicated by Nationsbanc Montgomery
Securities LLC. Syndicate lenders include
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NationsBank, N.A., PNC Bank and Rabobank Nederland (the "Credit Facility"). The
Credit Facility replaced the Company's $20 million senior credit facility.
Borrowings under the Credit Facility (i) are secured by the assignment to the
banks of the Company's stock in all of our material subsidiaries and the
Company's accounts receivable, including the accounts receivable assigned to
Physicians' Specialty by affiliated practices pursuant to management services
agreements, (ii) are guaranteed by all material subsidiaries (including future
subsidiaries) and (iii) restrict the Company from pledging its assets to any
other party. Advances under the Credit Facility will be used to fund
acquisitions and working capital, will be governed by a borrowing base related
primarily to the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") and will bear interest, at the Company's option, based
upon either a prime-based or LIBOR-based rate. EBITDA is used by Physicians'
Specialty as an indicator of the Company's ability to incur and service debt.
EBITDA should not be considered an alternative to operating income, net income,
cash flows or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance, or as a measure of liquidity. The Credit Facility contains
affirmative and negative covenants which, among other things, require the
Company to maintain certain financial ratios (including maximum indebtedness to
pro forma EBITDA, maximum indebtedness to capital, minimum net worth, minimum
current ratio and minimum fixed charges coverage), limit the amounts of
additional indebtedness, dividends, advances to the Company's officers,
shareholders and physicians, acquisitions, investments and advances to
subsidiaries, and restrict changes in management and the Company's business. As
of August 13, 1999, Physicians' Specialty had approximately $5.8 million of
borrowings outstanding under the Credit Facility with approximately $34.6
million available under the Credit Facility.
During the three month period ended June 30, 1999, PSC Marietta Ambulatory
Surgery, Ltd., a Georgia limited partnership ("PSC Marietta Partnership"), of
which the Company's subsidiary PSC Georgia Corp. is the sole general partner,
and Atlanta ENT is the sole limited partner, acquired in the aggregate a 12.5%
limited partnership interest in Marietta Outpatient Surgery, Ltd., a Georgia
limited partnership ("Marietta Surgery Center"). The aggregate purchase price
was paid by the Company. Pursuant to the terms of the transaction, Physicians'
Specialty and Atlanta ENT own 99% and 1% respectively, of the partnership
interest in PSC Marietta Partnership provided that Atlanta ENT has an option to
purchase up to 40% of the partnership interest from Physicians' Specialty based
upon the Company's cost of such interest. Marietta Surgery Center operates a
multi-specialty ambulatory surgery center consisting of 8 operating rooms, in
the Marietta suburb of metropolitan Atlanta. As a result of the transaction,
effective April 1, 1999, the PSC Marietta Partnership will receive 12.5% of the
distributions made by Marietta Surgery Center, and Physicians' Specialty and
Atlanta ENT will receive the Company's pro rata share of such distributions
based on each of the Company's respective ownership interests in the PSC
Marietta Partnership.
Also, during the three months period ended June 30, 1999, Physicians'
Specialty acquired the assets of Computerized Tomography Center, Inc. ("CTC"), a
diagnostic imaging center located in the northern suburbs of metropolitan
Atlanta. CTC was previously an indirect wholly-owned subsidiary of PhyMatrix
Corp.
In connection with the PSC Marietta Partnership and CTC transactions
completed by the Company during the three month period ended June 30, 1999,
Physicians' Specialty (i) paid an aggregate of $3,047,000 in cash, (ii) issued a
subordinated promissory note in the principal amount of $125,000 with principal
payments beginning in June 2000, and bearing interest at a rate of 6% per annum,
(iii) agreed to pay in cash $192,900 upon the satisfactory completion of a
computer upgrade installation and (iv) entered into a Non Compete/Non
Solicitation Agreement providing for additional cash consideration in the amount
of $500,000 payable in equal monthly installments of $10,000 (without interest)
for 35 consecutive months, with a final payment of $150,000 on the 36th month.
In connection with these acquisitions, the Company paid approximately $240,000
to Premier HealthCare, an affiliate of the Company's Vice Chairman and Secretary
for advisory services rendered.
Several multi-specialty companies in the physician practice management
industry have discontinued physician practice management activities or divested
assets related to physician practice management or
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announced plans to do so. Other physician practice management companies have
completed or announced transactions, including mergers, recapitalizations or
other corporate transactions, as a result of which they are no longer public
companies. As a result of these trends and the depressed stock prices of
physician practice management companies, the Company believes that physician
practice management companies may generally experience a decrease in practice
acquisition activity and an associated slow down in revenue growth attributable
to practice acquisitions. Consistent with the Company's market driven strategy,
Physicians' Specialty focuses primarily on practice and ancillary services
acquisitions in markets in which Physicians' Specialty already manages ENT
practices and to a lesser extent, in new markets.
YEAR 2000
The Year 2000 issue is the result of using only the last two digits to
indicate the year in computer hardware and software programs and embedded
technology such as micro-controllers. As a result, these programs do not
properly recognize a year that begins with "20" instead of the familiar "19." If
uncorrected, such programs will be unable to interpret dates beyond the year
1999, which could cause computer system failure or miscalculations which could
disrupt the Company's operations and adversely affect the Company's cash flows
and results of operations.
Physicians' Specialty recognizes the importance of the Year 2000 issue and
has given it high priority. The Company's objective is to ensure an
uninterrupted transition to the year 2000 by assessing, testing and modifying
products and information technology ("IT") systems and non-IT systems so that
such systems and software will perform as intended and information and dates can
be processed with expected results. The scope of the Company's compliance
efforts include (i) identification and assessment of risks, including the risks
of non-compliance by third parties, (ii) development of remediation and
contingency plans, (iii) implementation and (iv) testing.
There are three major IT system applications that Physicians' Specialty
relies upon to process transactions and provide information for managing its
operations. These applications have been identified as follows:
- accounting and financial reporting system;
- practice management billing and account receivable systems; and
- capitated claims processing and reporting system.
Accounting and financial reporting system. During 1998 Physicians'
Specialty fully implemented the Great Plains accounting and financial reporting
software applications at all of the Company's affiliated practices, its
subsidiaries and its corporate locations. The Great Plains accounting package
has been modified and tested and Physicians' Specialty believes it is Year 2000
compliant.
Practice management billing and accounts receivable systems. The Company's
affiliated practices currently utilize software packages which were developed by
large third party software development companies such as Medic, Medical Manager,
Verysis and Reynolds & Reynolds. Physicians' Specialty has been in contact with
all of these companies and believes that all Year 2000 compliant modified
programs will be fully tested and implemented by the Company and the Company's
affiliates during the third quarter of 1999.
Capitalized claims processing and reporting system. Physicians' Specialty
has internally developed a proprietary capitated claims processing and reporting
system which Physicians' Specialty believes is Year 2000 compliant.
Physicians' Specialty is also highly dependent on receiving payments from
third party payors for capitated fees and for insurance reimbursement for claims
submitted by the Company's affiliated practices, and as such, the ability of
such payors to process claims submitted by affiliated practices accurately and
timely, constitutes a significant risk to the Company's cash flow and could
materially adversely affect the Company's operations. Physicians' Specialty and
its affiliated practices have been or will be in communication with these payors
to ensure that these payors will be Year 2000 compliant and will be able
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to process claims uninterrupted. However, there can be no assurance that such
third party payors will be Year 2000 compliant.
Like virtually every company, Physicians' Specialty is at risk for the
failure of major infrastructure providers to adequately address potential Year
2000 problems. The Company is highly dependent on a variety of public and
private infrastructure providers to conduct the Company's business. Failures of
banking systems, basic utility providers, telecommunication providers and other
services to achieve Year 2000 compliance, could have a material adverse effect
on the Company's and its affiliated practices' ability to conduct business.
While Physicians' Specialty is aware of these risks, a complete assessment of
all such risks is beyond the scope of the Company's Year 2000 project.
Through June 30, 1999, Physicians' Specialty has incurred costs of
approximately $125,000 related to the Year 2000 issue. Physicians' Specialty
does not anticipate that it will incur any additional material costs associated
with addressing Year 2000 issues.
The Company's current estimates of the amount of time and costs necessary
to remediate and test the Company's computer systems are based on the facts and
circumstances existing at this time. The estimates were made using assumptions
of future events including the continued availability of certain resources, Year
2000 modification plans, implementation success by key third-parties, and other
factors. New developments may occur that could affect the Company's estimates of
the amount of time and costs needed to modify and test the Company's IT and
non-IT systems for Year 2000 compliance. These developments include, but are not
limited to:
- the availability and cost of personnel trained in this area;
- the ability to locate and correct all relevant date-sensitive codes in
both IT and non-IT systems;
- unanticipated failures in our IT and non-IT systems; and
- the planning and Year 2000 compliance success that third-parties attain.
Physicians' Specialty cannot determine the impact of these potential
developments on the current estimate of probable costs of making our IT and
non-IT systems Year 2000 compliant. Accordingly, Physicians' Specialty is not
able to estimate our possible future costs beyond the current estimate of costs.
As new developments occur, these cost estimates may be revised to reflect the
impact of these developments on the costs to the Company of making the Company's
IT and non-IT systems Year 2000 compliant. Such revisions in costs could have a
material adverse impact on the Company's results of operations in the quarterly
period in which they are recorded. Although Physicians' Specialty considers it
unlikely, such revisions could also have a material adverse effect on the
business, financial condition or results of the Company's operations. If Year
2000 compliance is not achieved, Physicians' Specialty has developed a
contingency plan which includes:
- increasing normal inventories of critical supplies for the Company's
affiliated practices prior to December 31, 1999;
- ensuring an adequate line of bank credit if third party payor payments
are disrupted; and
- ensuring that all critical staff are available or scheduled to work prior
to, during and immediately after December 31, 1999.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by (i) each stockholder known to the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock, (ii) each director and named executive officer of the Company, (iii) all
executive officers and directors of the Company as a group and (iv) TA
Associates and each of the other members of the TA Investors and the Management
Sponsors based upon the number of outstanding shares of common stock as of June
30, 1999.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(2)
-------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENT
- --------------------------------------- --------- -------
<S> <C> <C>
Ramie A. Tritt, M.D.(3)..................................... 1,839,441 19.9%
Gerald R. Benjamin(4)....................................... 356,448 3.9
Richard D. Ballard(5)....................................... 192,476 2.1
Lawrence P. Kraska(6)....................................... 101,244 1.1
Robert A. DiProva(7)........................................ 117,485 1.3
Edward R. Casas, M.D.(8).................................... 12,500 *
Steven L. Posar, M.D.(8).................................... 12,500 *
Sidney Kirschner(8)......................................... 12,500 *
Steven H. Sacks, M.D.(9).................................... 2,500 *
BankAmerica Corporation..................................... 566,900 6.2
100 North Tryon St.
Charlotte, NC 28255(10)
Fleet Financial Group, Inc.................................. 532,410 5.8
One Federal Street
Boston, MA 02110(11)
All executive officers and directors of the Company as a
group (9 persons)(12)..................................... 2,647,094 27.1
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address is c/o Physicians' Specialty Corp.,
1150 Lake Hearn Drive, Suite 640, Atlanta, Georgia 30342. Except for the
shares that are subject to the Voting Agreement and as otherwise indicated,
each of the parties listed above has sole voting and investment power over
the shares owned.
(2) In computing the number and percentage ownership of shares beneficially
owned by a person, shares of Common Stock subject to options held by that
person that are exercisable within 60 days are deemed outstanding. Such
shares, however, are not deemed outstanding for purposes of computing the
percentage ownership of stockholders other than such person.
(3) Includes
- 1,761,257 shares of Common Stock owned directly by Dr. Tritt;
- 75,000 shares of Common Stock issuable upon exercise of options that are
exercisable within 60 days; and
- 3,184 shares of Common Stock held by members of Dr. Tritt's family.
Excludes 175,000 shares of Common Stock issuable upon exercise of options
which are not exercisable within 60 days.
(4) Includes
- 57,500 shares of Common Stock issuable upon exercise of options that are
exercisable within 60 days; and
- 293,948 shares of Common Stock owned by Bock, Benjamin & Co. Partners,
L.P. Mr. Benjamin is a principal of Bock, Benjamin & Co., the general
partner of Bock, Benjamin & Co. Partners, L.P.
Excludes 132,500 shares of Common Stock issuable upon exercise of options
which are not exercisable within 60 days.
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(5) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days. Excludes 177,492 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.
(6) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days. Excludes 133,748 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.
(7) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days. Excludes 82,495 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.
(8) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days. Excludes 5,000 shares of Common Stock
issuable upon exercise of options which are not exercisable within 60 days.
(9) Represents shares of Common Stock issuable upon exercise of options that
are exercisable within 60 days.
(10) Based on information provided by BankAmerica Corporation in a Schedule 13G
filed under the Securities Exchange Act of 1934 dated January 29, 1999.
Represents shares of Common Stock held by subsidiaries of BankAmerica.
BankAmerica may be deemed to possess indirect beneficial ownership of
shares beneficially owned directly by its subsidiaries. Similarly, higher
tier BankAmerica subsidiaries may be deemed to posses indirect beneficial
ownership of shares beneficially owned directly by lower tier BankAmerica
subsidiaries. The power to vote and to dispose of shares may be deemed to
be shared between entities due to their corporate relationships.
(11) Based on information provided by Fleet Financial Group, Inc., in a Schedule
13G filed under the Securities Exchange Act of 1934 dated February 12,
1999. Includes shares of Common Stock held by subsidiaries of Fleet
Financial Group.
(12) Includes 583,705 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Excludes 716,235 shares of Common
Stock issuable upon exercise of options which are not exercisable within 60
days.
CERTAIN INFORMATION CONCERNING MERGERCO
AND THE INVESTOR GROUP
MERGERCO
MergerCo is a newly formed Delaware corporation organized at the direction
of the TA Investors, each of which is a private investment partnership or an
affiliate thereof. MergerCo is not expected to have any significant assets or
liabilities (other than those arising in connection with the Merger and related
transactions) or engage in any activities (other than those incident to its
formation and the Merger). The principal executive offices of MergerCo are
located at c/o TA Associates, Inc., 125 High Street, Suite 2500, Boston,
Massachusetts 02110.
TA INVESTORS
TA/Advent VIII L.P., a Delaware limited partnership, TA/Atlantic and
Pacific IV L.P., a Delaware limited partnership, TA Executives Fund LLC, a
Delaware limited liability company, and TA Investors LLC, a Delaware limited
liability company, are principally engaged in the business of investing in other
companies. The sole general partner of TA/Advent VIII, L.P. is TA Associates
VIII LLC, a Delaware limited liability company. The sole general partner of
TA/Atlantic and Pacific IV, L.P. is TA Associates AP IV, L.P., a Delaware
limited partnership. The sole general partner of TA Associates AP IV, L.P., and
the manager of TA Associates VIII LLC, TA Executives Fund LLC, and TA Investors
LLC is TA Associates, Inc., a Delaware corporation.
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Set forth below is the name of each director and executive officer of TA
Associates, Inc. and the present principal occupation or employment of each such
person and a brief description of his principal occupation and business
experience during at least the last five years. Each person listed below is a
citizen of the United States.
C. Kevin Landry. Mr. Landry has been the President and Chief Executive
Officer, a Managing Director and Chairman of the Board of Directors of TA
Associates, Inc. since January 1, 1994.
P. Andrews McLane. Mr. McLane has been the Senior Managing Director of TA
Associates, Inc. since January 1, 1997 and a member of the Board of Directors
since January 1, 1994. From January 1, 1994 to January 1, 1997, Mr. McLane was a
Managing Director of TA Associates, Inc.
Jeffrey T. Chambers. Mr. Chambers has been a member of the Board of
Directors and a Managing Director of TA Associates, Inc. since January 1, 1994.
Jacqueline C. Morby. Ms. Morby has been a member of the Board of Directors
and a Managing Director of TA Associates, Inc. since January 1, 1994.
Katherine S. Cromwell. Ms. Cromwell has been a Managing Director and the
Chief Financial Officer, Treasurer and Secretary of TA Associates, Inc. since
January 1, 1994.
Richard Tadler. Mr. Tadler has been a Managing Director of TA Associates,
Inc. since January 1, 1994.
TA Associates, Inc. will not have a direct equity interest in the Surviving
Corporation and is therefore not included in the references in this proxy
statement to the TA Investors' equity interest in the Surviving Corporation.
The principal executive offices of TA Associates, Inc. and all related
entities and the business address for each of the individuals listed above is
125 High Street, Suite 2500, Boston, Massachusetts 02110.
MANAGEMENT SPONSORS
The Management Sponsors are the following executive officers of Physicians'
Specialty:
Ramie A. Tritt, M.D. Dr. Tritt has served as Chairman of the Board and
President of Physicians' Specialty since its inception in July 1996. Dr. Tritt
serves as President of Atlanta Ear, Nose and Throat Associates, P.C., a
multi-site otolaryngology group practice which is a successor to a practice
founded by Dr. Tritt in 1979. Dr. Tritt also serves as President and Medical
Director of the ENT Center of Atlanta, Inc., Atlanta ENT Center for Physicians,
Inc., and Atlanta AHP, Inc., three otolaryngology provider networks established
to contract with HMOs in greater Atlanta, each of which is a wholly-owned
subsidiary of Physicians' Specialty. Dr. Tritt was a founding member and
currently serves as President of Georgia Multi-Specialty Group, L.L.C., a
consortium of 15 specialty group practices, encompassing approximately 650
physicians, which contracts with payors for specialty medical services
throughout the metropolitan Atlanta area. Dr. Tritt also serves on our Medical
Advisory Board. Dr. Tritt received his M.D. degree from McGill University.
Richard D. Ballard. Mr. Ballard has served as Chief Executive Officer and
a director of Physicians' Specialty since November 1996. Prior to joining
Physicians' Specialty, Mr. Ballard served as Vice President of Recruiting for
Physicians' Online, Inc., an internet physician recruiting service. Prior to
joining Physicians' Online, Inc. in September 1995, Mr. Ballard served as
Executive Vice President, President and Chief Executive Officer of Allegiant
Physician Services, Inc. (formerly Premier Anesthesia, Inc.), an anesthesia
contracting and physician practice management company. Prior to joining Premier
Anesthesia in 1988, Mr. Ballard served for six years as Executive Vice President
of Jackson & Coker Inc., a national physician recruiting firm and for seven
years as director of national recruiting for Spectrum Emergency Care, Inc.
Gerald R. Benjamin. Mr. Benjamin has served as Vice Chairman and Secretary
of Physicians' Specialty since its inception in July 1996 and Treasurer since
June 1998. Mr. Benjamin serves as Chief
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Executive Officer of Premier HealthCare, a division of Bock, Benjamin & Co., a
boutique health care investment banking concern which Mr. Benjamin co-founded in
1993. Prior to founding Bock, Benjamin & Co., Mr. Benjamin served as Chief
Executive Officer of Premier HealthCare, Inc., a health care venture development
and management firm which Mr. Benjamin co-founded in 1991. Prior to co-founding
Premier HealthCare, Inc., Mr. Benjamin served for ten years as Managing Partner
and Director of Corporate Finance Services for Williams, Benjamin, Benator &
Libby, an Atlanta, Georgia-based Certified Public Accounting firm. Prior to
joining Williams, Benjamin, Benator & Libby in 1982, Mr. Benjamin was a member
of the Atlanta office of Ernst & Young. Mr. Benjamin is a Certified Public
Accountant and received his B.S. degree in accounting from the University of
Kentucky, where he was named a Coopers & Lybrand scholar.
Lawrence P. Kraska. Mr. Kraska has served as Chief Operating Officer and
Executive Vice President of Physicians' Specialty since April 1999, following
one year terms as Executive Vice President -- Operations and Vice
President -- Operations, respectively. Prior to joining Physicians' Specialty,
Mr. Kraska served as Administrator of Atlanta ENT. Prior to joining Atlanta ENT
in June 1994, Mr. Kraska provided hospital administration, physician recruiting
and practice management services as the Regional Director of Professional
Relations for the Atlanta division of National Medical Enterprises from July
1993 to May 1994, for Charter Medical Corporation -- Charter Peachford Hospital
from September 1992 to June 1993 and as the Administrator for The Center For
Psychiatry, a large multi-specialty mental health group practice, from March
1990 to August 1992. Mr. Kraska received his M.B.A. from Kennesaw State
University.
Robert A. DiProva. Mr. DiProva has served as Executive Vice President and
Chief Financial Officer of Physicians' Specialty since March 1997. Mr. DiProva
served as Vice President -- Administration, Chief Financial Officer, Secretary
and Treasurer of A.D.A.M. Software, Inc., a publicly traded medical software
company, from September 1995 to February 1997. Prior to joining A.D.A.M.
Software in 1995, Mr. DiProva served for six years as Vice President, Chief
Financial Officer and Treasurer of DATEQ Information Network, Inc., a publicly
traded data management company. Mr. DiProva is a Certified Public Accountant and
received his M.B.A. from Emory University.
The business address for each Management Sponsor is the principal executive
offices of Physicians' Specialty, 1150 Lake Hearn Drive, Suite 640, Atlanta,
Georgia 30342. Each Management Sponsor is a citizen of the United States.
PURCHASES OF COMMON STOCK BY CERTAIN PERSONS
The following table sets forth certain information concerning purchases of
Common Stock since January 1, 1997 by the Company, the Management Sponsors, the
TA Investors and TA Associates.
<TABLE>
<CAPTION>
NUMBER PRICE PER
OF SHARE OR WHERE AND HOW
SHARES RANGE OF TRANSACTION
NAME DATE PURCHASED PRICES PAID EFFECTED
- ---- ------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Ramie A. Tritt, M.D. 3/26/97 1,455,312 $8 Stock exchanged for Atlanta ENT
assets and The ENT Networks
Gerald R. Benjamin 7/27/98 5,000 $6 NASDAQ Open Market Purchase
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets as of December 31, 1998 and December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows of Physicians' Specialty for the period from inception
(July 31, 1996) to December 31, 1996 and for each of the two years ended
December 31, 1997 and 1998 and the financial statements of Ear, Nose and Throat
Associates, P.C., as of December 31, 1997 and 1996 and for the year then ended,
included in this Proxy Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their reports appearing
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herein. A representative of Arthur Andersen LLP will be at the Special Meeting
to answer appropriate questions from stockholders and will have the opportunity
to make a statement, if so desired.
STOCKHOLDER PROPOSALS
If the Merger is not consummated for any reason, proposals of stockholders
intended to be presented at the Company's next annual meeting must be received
by the Company at its principal executive offices within a reasonable time
before the Company begins to print and mail its proxy materials to be eligible
for inclusion in the Company's Proxy Statement and form of proxy relating to
that meeting. In addition, the Company's bylaws provide that a stockholder
proposal may only be acted upon at an annual meeting of stockholders if the
stockholder gives notice not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder must be received not later than the
close of business on the tenth day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. If the
Merger is not consummated for any reason, the persons named as proxies for the
next annual meeting will have discretionary voting authority with respect to any
stockholder proposal submitted to the Company to be considered at such meeting
otherwise then in conformity with such requirements of the Company's bylaws.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named in
the proxy to vote on such matters according to their best judgment unless the
authority to do so is withheld in such proxy.
WHERE YOU CAN FIND MORE INFORMATION
Physicians' Specialty files annual, quarterly, and current reports, proxy
statements, and other information with the Commission. You may read and copy any
reports, statements, or other information that Physicians' Specialty files at
the Commission's public reference rooms in Washington, D.C., New York, New York,
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Physicians' Specialty's public
filings are also available to the public from commercial document retrieval
services and at the Internet World Wide Web site maintained by the Commission at
http:/www.sec.gov. Reports, proxy statements, and other information concerning
Physicians' Specialty Corp. also may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C.
20006.
The Commission allows Physicians' Specialty to "incorporate by reference"
information into this document, which means that Physicians' Specialty can
disclose important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
deemed to be a part of this document, except for any information superseded by
information contained directly in this document. This document incorporates by
reference certain documents that Physicians' Specialty has previously filed with
the Commission. These documents contain important business information about
Physicians' Specialty and its financial condition.
Physicians' Specialty may have sent to you some of the documents
incorporated by reference, but you can obtain any of them through Physicians'
Specialty or the Commission or the Commission's Internet World Wide Web site
described above. Documents incorporated by reference are available from
Physicians' Specialty without charge, excluding all exhibits unless specifically
incorporated by reference as
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an exhibit to this document. Stockholders may obtain documents incorporated by
reference in this document upon written or oral request to the following address
or telephone number:
Physicians' Specialty Corp.
1150 Lake Hearn Drive
Suite 640
Atlanta, Georgia 30342
Telephone: (770) 254-7535
Attention: Robert A. DiProva
Executive Vice President and Chief Financial Officer
Physicians' Specialty will send any document so requested to the requesting
stockholder by first class mail or other equally prompt means within one day of
receiving such request. You should note that Robert A. DiProva, as well as the
other executive officers of Physicians' Specialty, are participants in the
Merger.
THE COMPANY, MERGERCO, THE TA INVESTORS, TA ASSOCIATES AND THE MANAGEMENT
SPONSORS HAVE FILED A SCHEDULE 13E-3 WITH THE COMMISSION WITH RESPECT TO THE
MERGER. AS PERMITTED BY THE COMMISSION, THIS PROXY STATEMENT OMITS CERTAIN
INFORMATION CONTAINED IN THE SCHEDULE 13E-3. THE SCHEDULE 13E-3, INCLUDING ANY
AMENDMENTS AND EXHIBITS FILED OR INCORPORATED BY REFERENCE AS A PART THEREOF, IS
AVAILABLE FOR INSPECTION OR COPYING AS SET FORTH ABOVE. STATEMENTS CONTAINED IN
THIS PROXY STATEMENT AS TO THE CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT
REFERRED TO HEREIN OR THEREIN ARE NOT NECESSARILY COMPLETE AND IN EACH INSTANCE
REFERENCE IS MADE TO SUCH CONTRACT OR OTHER DOCUMENT FILED AS AN EXHIBIT TO THE
SCHEDULE 13E-3 OR SUCH OTHER DOCUMENT, AND EACH SUCH STATEMENT SHALL BE DEEMED
QUALIFIED IN ITS ENTIRETY BY SUCH REFERENCE.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM PHYSICIANS' SPECIALTY, PLEASE
DO SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETING IN
ORDER TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the Special Meeting.
Physicians' Specialty has not authorized anyone to provide you with information
that is different from what is contained in this document. This document is
dated , 1999. You should not assume that the information contained
in this document is accurate as of any date other than that date, and the
mailing of this document to stockholders does not create any implication to the
contrary. This Proxy Statement does not constitute a solicitation of a proxy in
any jurisdiction where, or to or from any person to whom, it is unlawful to make
such proxy solicitation in such jurisdiction.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Physicians'
Specialty (SEC File No. 001-12759) are incorporated by reference in this Proxy
Statement:
(i) Physicians' Specialty's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, as amended;
(ii) Physicians' Specialty's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999;
(iii) Physicians' Specialty's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999;
(iv) Physicians' Specialty's Current Report on Form 8-K, filed on
January 13, 1999; and
(v) Physicians' Specialty's Current Report on Form 8-K, filed on June
18, 1999.
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All documents filed by Physicians' Specialty with the Commission pursuant
to Sections 13(a), 13(c), 14, and 15(d) of the Exchange Act after the date
hereof and prior to the date of the Special Meeting shall be deemed to be
incorporated by reference herein and shall be a part hereof from the date of
filing of such documents. Any statements contained in a document incorporated by
reference herein or contained in this Proxy Statement shall be deemed to be
modified or superseded for purposes hereof to the extent that a statement
contained herein (or in any other subsequently filed document which also is
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF PHYSICIANS' SPECIALTY CORP.
June 30, 1999 Unaudited Condensed Consolidated Financial
Statements:
Unaudited Condensed Consolidated Balance Sheets as of June
30, 1999 and December 31, 1998......................... F-2
Unaudited Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998...... F-3
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998................ F-4
Notes to the Consolidated Financial Statements
(Unaudited)............................................ F-5
December 31, 1998 Consolidated Financial Statements:
Report of Independent Public Accountants.................. F-13
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-14
Consolidated Statements of Operations for the period from
inception (July 31, 1996) to December 31, 1996 and for
the Years Ended December 31, 1997 and 1998............. F-15
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996.......... F-16
Consolidated Statements of Cash Flows for the period from
inception (July 31, 1996) to December 31, 1996 and for
the Years Ended December 31, 1997 and 1998............. F-17
Notes to Consolidated Financial Statements................ F-18
FINANCIAL STATEMENTS OF EAR, NOSE & THROAT ASSOCIATES, P.C.
(a medical practice whose shareholders own more than 50%
of the equity of Physicians' Domain, which was acquired by
Physicians' Specialty Corp. on May 27, 1998)
Financial Statements of the Business Acquired:
Report of Independent Public Accountants.................. F-35
Balance Sheets at December 31, 1997 and 1996.............. F-36
Statements of Operations for the Years Ended December 31,
1997 and 1996.......................................... F-37
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997 and 1996....................... F-38
Statements of Cash Flows for the Years ended December 31,
1997 and 1996.......................................... F-39
Notes to Financial Statements............................. F-40
Balance Sheet at March 31, 1998 (Unaudited)............... F-47
Statement of Operations for the Three Months Ended March
31, 1998 and 1997 (Unaudited).......................... F-48
Statements of Cash Flows for the Three Months Ended March
31, 1998 and 1997 (Unaudited).......................... F-49
</TABLE>
F-1
<PAGE> 108
PHYSICIANS' SPECIALTY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,407,338 $ 4,925,501
Accounts receivable, net of allowance for doubtful
accounts of $1,206,863 and $1,700,016 in 1999 and 1998,
respectively........................................... 20,080,599 16,166,944
Notes receivable.......................................... 1,647,662 80,000
Prepayments and other..................................... 1,263,960 1,779,070
----------- -----------
Total current assets.............................. 24,399,559 22,951,515
PROPERTY AND EQUIPMENT, net................................. 11,300,104 8,861,850
INTANGIBLE ASSETS, net...................................... 31,211,198 26,267,950
PROMISSORY NOTE RECEIVABLE -- RELATED PARTY................. 2,152,000 --
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES................... 4,803,864 5,396,609
OTHER ASSETS................................................ 491,749 207,231
----------- -----------
Total assets...................................... $74,358,474 $63,685,155
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 522,000 $ --
Due to physicians......................................... 702,539 --
Accounts payable and accrued expenses..................... 6,127,647 4,563,773
Borrowing under credit agreement.......................... 861,058 --
Deferred income taxes..................................... 385,184 --
----------- -----------
Total current liabilities......................... 8,598,428 4,563,773
SUBORDINATED SELLER NOTES AND
OTHER LONG TERM PAYABLES............................... 8,860,034 7,563,701
BORROWING UNDER CREDIT AGREEMENT.......................... 5,750,000 3,750,000
----------- -----------
Total liabilities................................. 23,208,462 15,877,474
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares
authorized issued: 9,172,025 in 1999 and 9,152,160 in
1998................................................... 9,172 9,152
Additional paid-in capital................................ 41,147,398 41,083,033
Treasury stock............................................ (184,272) --
Retained earnings......................................... 10,177,714 6,715,496
----------- -----------
Total shareholders' equity........................ 51,150,012 47,807,681
----------- -----------
Total liabilities and shareholders' equity........ $74,358,474 $63,685,155
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 109
PHYSICIANS' SPECIALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net patient service revenues.............. $20,785,144 $12,780,051 $40,295,853 $23,580,191
Capitation revenues....................... 1,311,944 1,145,368 2,674,114 2,310,674
Management fees........................... 560,754 288,071 904,054 326,690
Earnings in unconsolidated subsidiaries... 473,305 -- 768,305 --
----------- ----------- ----------- -----------
Net revenue....................... 23,131,147 14,213,490 44,642,326 26,217,555
EXPENSES
Provider claims, wages, benefits.......... 15,270,463 9,530,051 29,352,940 17,454,512
General and administrative................ 4,042,772 2,562,405 8,007,521 4,819,759
Depreciation and amortization............. 686,104 403,331 1,372,536 686,120
----------- ----------- ----------- -----------
Operating expenses..................... 19,999,339 12,495,787 38,732,997 22,960,391
Operating income.......................... 3,131,808 1,717,703 5,909,329 3,257,164
Other income (expense).................... (219,197) 124,659 (233,964) 153,559
----------- ----------- ----------- -----------
Pretax income............................. 2,912,611 1,842,362 5,675,365 3,410,723
Provision for income taxes................ 1,135,678 718,411 2,213,155 1,330,031
----------- ----------- ----------- -----------
Net income........................ $ 1,776,933 $ 1,123,951 $ 3,462,210 $ 2,080,692
=========== =========== =========== ===========
Earnings per share:
Basic earnings per share.................. $ 0.19 $ 0.15 $ 0.38 $ 0.29
Diluted earnings per share................ $ 0.19 $ 0.14 $ 0.37 $ 0.27
Weighted average shares outstanding
Basic..................................... 9,172,025 7,695,730 9,168,388 7,106,869
Diluted................................... 9,431,594 8,240,675 9,391,427 7,640,821
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 110
PHYSICIAN'S SPECIALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 3,462,210 $ 2,080,692
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,372,536 686,120
Compensation expense................................... -- 32,987
Earnings in unconsolidated subsidiaries................ (775,697) --
Increase in accounts receivable........................ (3,188,709) (3,197,606)
Change in prepayments and other........................ 282,597 (686,091)
Change in accounts payable and accrued liabilities..... 179,070 972,442
----------- -----------
Total adjustments................................. (2,130,203) (2,192,148)
----------- -----------
Net cash provided by (used in) operating activities....... 1,332,007 (111,456)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired............ (6,431,100) (10,310,258)
Distributions from unconsolidated subsidiaries............ 574,171 --
Purchase of property and equipment........................ (1,684,412) (917,354)
----------- -----------
Net cash used in investing activities............. (7,541,341) (11,227,612)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs........... 14,385 16,520,043
Common stock repurchased.................................. (184,272) --
Borrowing under credit agreement.......................... 2,861,058 75,185
----------- -----------
Net cash provided by financing activities......... 2,691,171 16,595,228
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (3,518,163) 5,256,159
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,925,501 5,351,639
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,407,338 $10,607,798
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 111
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE 1. ORGANIZATION
Physicians' Specialty Corp. (the "Company") was organized in July 1996 to
provide comprehensive physician practice management services to physician
practices and health care providers specializing in the treatment and management
of diseases and disorders of the ear, nose, throat, head and neck ("ENT") and
related specialties. The Company commenced its business activities upon
consummation of the reorganization, as described in Note 3, and its initial
public offering ("IPO") on March 26, 1997. The Company provides financial and
administrative management, enhancement of clinical operations, network
development and payor contracting services, including the negotiation and
administration of capitated arrangements. The Company has operations in greater
Atlanta, Georgia; Chicago, Illinois; Birmingham, Alabama; the South Florida
area; Southern New York and Northern New Jersey and in metropolitan Cleveland,
Ohio.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries and its investment in an unconsolidated
subsidiary and have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and in accordance with
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of normal recurring items) necessary for a fair presentation of the results for
the interim periods presented. These financial statements and footnote
disclosures should be read in conjunction with the audited financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
NOTE 3. REORGANIZATION
The Company acquired substantially all of the assets (other than certain
excluded assets such as employment agreements and patient charts, records, and
files) and certain liabilities of (i) Atlanta Ear, Nose & Throat Associates,
P.C. ("Atlanta ENT"), (ii) ENT & Allergy Associates, Inc., (iii) Metropolitan
Ear, Nose & Throat, P.C., (iv) Atlanta Head and Neck Surgery, P.C., and (v) Ear,
Nose & Throat Associates, P.C. (collectively, the "Initial Practices"), and all
of the outstanding shares of common stock of three corporations holding managed
care contracts (the "ENT Networks") in March 1997 (the "Reorganization"). In
connection with the acquisition of assets of the Initial Practices and the
common stock of the ENT Networks, the Company issued an aggregate of 3,104,755
shares of its common stock. The Reorganization was accounted for as a promoter
transaction under Staff Accounting Bulletin No. 48 at historical cost.
NOTE 4. ACQUISITIONS
1998 ACQUISITIONS
During 1998, the Company acquired substantially all of the assets (other
than certain excluded assets such as employment agreements and patient charts,
records, and files) and assumed certain contractual liabilities of five ENT
physician practices.
In connection with these acquisitions, the Company (i) paid an aggregate of
approximately $1.4 million in cash, (ii) issued an aggregate of 65,273 shares of
common stock (valued at approximately $495,000), (iii) agreed to issue an
aggregate of 78,038 additional shares of common stock (valued at approximately
$615,000) to four of the affiliated practices beginning in February 1999, of
which 12,765
F-5
<PAGE> 112
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
shares of common stock have been issued, (iv) issued a subordinated convertible
promissory note in the principal amount of $250,000 that is convertible into
shares of common stock, at the Company's option, valued at the average closing
price of such common stock for the ten trading days preceding the date of
delivery of such shares, and (v) issued a $150,000 noninterest bearing
contingent promissory note which is payable at the Company's option in cash or
the Company's common stock upon the holder achieving certain performance
targets.
In addition, in May 1998, the Company acquired (i) substantially all of the
tangible assets and assumed certain contractual liabilities of Physicians'
Domain, Inc., a White Plains, New York-based ENT physician practice management
company ("Physicians' Domain") and (ii) the stock of three corporations that are
successors to three ENT physician practices affiliated with Physicians' Domain
(collectively "PDI"). In connection with the PDI transaction, the Company (i)
paid approximately $5.4 million in cash, (ii) discharged approximately $3.8
million of liabilities of PDI, and (iii) issued a subordinated long-term
promissory note in the principal amount of approximately $6.4 million. If the
PDI practices achieve stipulated performance targets, the Company will pay an
additional $500,000, in cash or shares of common stock, at the Company's option.
The Company also entered into a management services agreement in connection
with the PDI transaction. The management services agreement provides for a fixed
annual management fee of approximately $2.1 million, plus reimbursement of
practice operating expenses. Pursuant to the management services agreement, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreement also provides for mutually
agreed-on increases in the fixed management fee upon (i) the management by the
Company of ancillary business developed or acquired or (ii) the acquisition of
additional physician practices which are merged into the existing PDI practices.
The Company used a portion of the net proceeds received from the Company's
public offering in May 1998 to pay the cash component of and to discharge the
indebtedness of PDI assumed by the Company in connection with the PDI
transaction.
In addition, PSC Ambulatory Surgery, Ltd., a Georgia limited partnership
(the "PSC Partnership"), of which a subsidiary of the Company is the sole
general partner, and Atlanta ENT, one of the Company's affiliated practices, is
the sole limited partner, acquired in the aggregate a 17.5% limited partnership
interest in Atlanta Surgery Center, Ltd., a Georgia limited partnership
("Atlanta Surgery Center"). The aggregate purchase price of approximately $4.8
million was paid in cash by the Company. Pursuant to the terms of the
transaction, the Company and Atlanta ENT own 99% and 1%, respectively, of the
partnership interest in the PSC Partnership provided that Atlanta ENT had an
option to purchase up to 40% of the partnership interest from the Company based
upon the Company's cost. Atlanta Surgery Center operates three multispecialty
ambulatory surgery centers in the metropolitan Atlanta area. In January 1999,
Atlanta ENT issued a secured promissory note in the amount of $2,152,000 as
consideration for an additional 39% equity interest in the PSC Partnership. In
January 1999 the Company sold 39% of its equity investment in the PSC
partnership to New Atlanta ENT.
Also during 1998, the Company acquired the assets of Cleveland Ear, Nose,
and Throat Center, Inc. ("Cleveland ENT") which had previously been affiliated
with MedPartners, Inc. ("MedPartners"). In connection with the transaction, the
Company entered into a clinic services agreement with Cleveland ENT maintaining
the percentage of net income management fee structure which existed in the
original agreement with MedPartners. Under the terms of the transaction, the
Company granted Cleveland ENT a one-time option to unwind the transaction with
the Company and repurchase all Cleveland ENT nonmedical assets acquired by the
Company. Cleveland ENT's option to unwind the transaction expired on December
15, 1998. In connection with the acquisition of the assets of this practice, the
Company (i) paid approximately $4.2 million in cash and (ii) issued a $150,000
noninterest bearing contingent promissory
F-6
<PAGE> 113
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
note which is payable at the Company's option in cash or the Company's common
stock upon Cleveland ENT achieving certain performance targets.
In January 1999, the Company amended the Clinic Services Agreement with
Cleveland ENT. Under the Agreement, as amended, the Company receives a
management fee equal to 12.5% of all net clinic revenue (after adjustment for
contractual allowances) generated by Cleveland ENT. Cleveland ENT also agreed to
pay the Company an additional $300,000 for management services provided during
the period from October 1, 1998 through December 31, 1998.
In connection with these acquisitions, the Company paid approximately $1.0
million to Premier HealthCare, an affiliate of the Company's Vice Chairman and
Secretary for advisory services rendered.
ACQUISITIONS FROM JANUARY 1, 1999 THROUGH JUNE 30, 1999
During the three month period ended March 31, 1999, the Company acquired
substantially all of the assets (other than certain excluded assets such as
employment agreements and patient charts, records and files) and assumed certain
contractual liabilities of (i) E.N.T. Medical Associates, Inc., P.C. ("ENT
Medical"), and (ii) Advanced Surgical Arts, Inc. ("ASA"). In addition the
Company acquired substantially all of the business assets and assumed certain
contractual liabilities of Preferred Diagnostic Services, Inc. ("PDS"). In
connection with the ENT Medical, ASA, and PDS transactions completed by the
Company during the three month period ended March 31, 1999, the Company (i) paid
an aggregate of $2,102,000 in cash, (ii) issued an aggregate of 4,600 shares of
common stock (valued at the time of issuance at an aggregate of approximately
$37,000, (iii) agreed to issue an aggregate of 1,637 shares of common stock
(valued at an aggregate of approximately $13,000 and (iv) issued subordinated
promissory notes in the aggregate principal amounts of $1,360,000 which accrue
interest at a rate of 6% per annum payable quarterly beginning in May 1999 with
principal payments beginning in February 2000. In connection with these
acquisitions, the Company paid approximately $207,000 to Premier HealthCare, an
affiliate of the Company's Vice Chairman and Secretary for advisory services
rendered.
During the three month period ended June 30, 1999, PSC Marietta Ambulatory
Surgery, Ltd., a Georgia limited partnership ("PSC Marietta Partnership"), of
which the Company is the sole general partner, and Atlanta ENT, one of the
Company's affiliated practices, is the sole limited partner, acquired in the
aggregate a 12.5% limited partnership interest in Marietta Outpatient Surgery,
Ltd., a Georgia limited partnership ("Marietta Surgery Center"). The aggregate
purchase price was paid by the Company. Pursuant to the terms of the
transaction, the Company and Atlanta ENT own 99% and 1% respectively, of the
partnership interest in PSC Marietta Partnership provided that Atlanta ENT has
an option to purchase up to 40% of the partnership interest from the Company
based upon the Company's cost. Marietta Surgery Center operates a
multi-specialty ambulatory surgery center consisting of 8 operating rooms, in
the Marietta suburb of metropolitan Atlanta. As a result of the transaction,
effective April 1, 1999, the PSC Marietta Partnership will receive 12.5% of the
distributions made by Marietta Surgery Center and the Company and Atlanta ENT
will receive their pro rata share of such distributions based on their ownership
interest in the PSC Marietta Partnership.
Also, during the three months period ended June 30, 1999, the Company
acquired the assets of Computerized Tomography Center, Inc. ("CTC"), a
diagnostic imaging center located in the northern suburbs of metropolitan
Atlanta. CTC was previously an indirect wholly-owned subsidiary of PhyMatrix
Corp.
In connection with the PSC Marietta Partnership and CTC transactions
completed by the Company during the three month period ended June 30, 1999, the
Company (i) paid an aggregate of $3,497,100 in cash (ii) issued a subordinated
promissory note in the principal amount of $125,000 with principal payments
beginning in June 2000, and bearing interest at a rate of 6% per annum, (iii)
agreed to pay in
F-7
<PAGE> 114
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
cash $192,900 upon the satisfactory completion of a computer upgrade
installation and (iv) entered into a Non Compete/Non Solicitation Agreement with
PhyMatrix providing for additional cash consideration in the amount of $500,000
payable in equal monthly installments of $10,000 (without interest) for 35
consecutive months, with a final payment of $150,000 on the 36th month. In
connection with these acquisitions, the Company paid approximately $240,000 to
Premier HealthCare, an affiliate of the Company's Vice Chairman and Secretary
for advisory services rendered.
NOTE 5. PUBLIC OFFERINGS
On March 26, 1997, the Company completed its IPO of 2,200,000 shares of its
common stock. The net proceeds of the IPO were approximately $14,275,000, a
portion of which was used for repayment of indebtedness of the acquired
practices, repayment of indebtedness of the Company, payment of a consulting
fee, and for general corporate purposes and working capital requirements.
In May 1998, the Company registered under the Securities Act of 1933, as
amended, an aggregate of 3,146,514 shares of common stock of which (i) 2,750,000
shares may be issued from time to time by the Company in connection with
potential future affiliation transactions with ENT physicians or related
specialty practices or the merger with or acquisition by the Company of other
related businesses or assets, (ii) 220,000 shares are issuable upon exercise of
warrants issued to the representatives of the underwriters in the IPO which may
be sold from time to time by the holders of the warrants after issuance, and
(iii) 176,514 shares which were issued in December 1998 in connection with a
practice asset acquisition completed in December 1997, may be sold from time to
time by the physician stockholders.
In May 1998, the Company completed a public offering of 2,050,263 shares of
its common stock (i) of which 2,000,000 shares were sold by the Company and (ii)
50,263 shares were sold by certain stockholders of the Company. In May 1998, the
Company's underwriters exercised their option to purchase 307,540 additional
shares of common stock from the Company to cover over-allotments. The net
proceeds to the Company from this offering and the exercise of the
over-allotment shares were approximately $16,520,000, with approximately
$5,400,000 and $3,800,000, respectively, used to pay the cash portion of the
purchase price of the PDI transaction and to repay outstanding indebtedness of
PDI.
NOTE 6. INTANGIBLE ASSETS
The Company's physician practice acquisitions involve the purchase of
tangible and intangible assets and the assumption of certain liabilities of the
acquired practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed based on estimated fair market values. Costs of
acquisitions in excess of the net estimated fair value of tangible and
identifiable intangible assets acquired and liabilities assumed are amortized
using the straight line method over a period of 25 years. At June 30, 1999, the
amount of such intangible assets was approximately $31,211,000 with accumulated
amortization totaling approximately $1,454,000.
NOTE 7. NOTES RECEIVABLE
In January 1999, the Company loaned $1,475,000 to the Cleveland ENT
physicians. This loan bears interest at a rate of 6% per annum and matures on
the earlier of January 14, 2000, the termination of the management services
agreement, or the termination of the employment of three or more of the
physicians. In addition, the Company granted the physicians the right and option
(the "Put Option") to require the Company to purchase from the physicians all of
the outstanding shares of common stock of Ohio Nasal Sinus Center, Inc.
("ONSC"), the sole asset of which is a corporate domain name. The Put Option may
be exercised by the physicians commencing January 10, 2000 and expiring on March
1, 2000. In the event the physicians exercise the Put Option, the Company would
be required to purchase the ONSC common
F-8
<PAGE> 115
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
stock for approximately $2 million in cash and the issuance of a subordinated
promissory note in the principal amount of $520,000 (collectively, the "Put
Purchase Price"). The subordinated promissory note would bear interest at a rate
of 6% per annum and would be payable in four equal annual installments
commencing on the first anniversary of the date of issuance of the note. In the
event the Put Option is exercised by the physicians, the cash portion of the Put
Purchase Price would be reduced by any amounts owed under the loan or any other
monetary obligations owed by the physicians to the Company. Pursuant to the
terms of the transaction, the Company has agreed to indemnify the physicians for
certain matters arising out of the transaction. The Company expects loan
repayment from Cleveland ENT physicians even if the Put Option is not exercised.
In January 1999, Atlanta ENT issued a secured promissory note in the amount
of $2,152,000 to PSC Georgia Corp., a wholly owned subsidiary of the Company and
the general partner of PSC Ambulatory Surgery, Ltd., as consideration for an
additional 39% equity interest in PSC Ambulatory Surgery Ltd. This note bears a
fluctuating rate of interest equal to the prime rate (as defined in the note),
and is payable on a monthly basis commencing February 1999 and continues for 119
consecutive months at which time all accrued interest and principal is due and
payable. The note is secured by Atlanta ENT's acquired interest in PSC
Ambulatory Surgery, Ltd.
NOTE 8. NET PATIENT SERVICE REVENUE
Net patient service revenue is based on established billing rates, less
estimated allowances for patients covered by Medicare and other contractual
reimbursement programs, and discounts from established billing rates. Amounts
received by the Company for treatment of patients covered by Medicare and other
contractual reimbursement programs, which may be based on cost of services
provided or predetermined rates, are generally less than the established billing
rates of the Company's practices.
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "FASB") issued its Consensus on Issue 97-2 ("EITF 97-2").
EITF 97-2 addresses certain specific matters pertaining to the physician
practice management industry. EITF 97-2 was effective for the Company for the
year ended December 31, 1998. EITF 97-2 addresses the ability of physician
practice management companies to consolidate the results of physician practices
with which it has an existing contractual relationship. The Company has
determined that its contracts met the criteria of EITF 97-2 for consolidating
the results of operations of the related physician practices, and the Company
has adopted EITF 97-2 in its consolidated statement of operations effective for
the year ended December 31, 1998. The Company has adjusted the statement of
operations for the three and six months ended June 30, 1998 to conform with such
consolidation. EITF 97-2 also has addressed the accounting method for future
combinations with individual physician practices. The Company believes that,
based on the criteria set forth in EITF 97-2, any future acquisitions of
individual physician practices will be accounted for under the purchase method
of accounting.
NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. SFAS No. 130 was effective for the year
beginning January 1, 1998. For the three month period ended March 31, 1999,
comprehensive income equals net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 was
effective for the Company's financial statements for the year ended
F-9
<PAGE> 116
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
December 31, 1998. The Company considers its entire business as one reporting
segment: providing comprehensive physician practice management services to
physician practices and health care providers specializing in the treatment and
management of diseases and disorders of the ear, nose, throat, head, and neck
and related specialties.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits," which requires disclosure of
additional information about the cost and financial status of pension and
postretirement plans. SFAS No. 132 was effective for financial statements for
the year ended December 31, 1997. SFAS No. 132 did not require any significant
disclosures or revision of prior disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for reporting
and disclosing information about derivative instruments. SFAS No. 133 is
effective for financial statements for the Company's fiscal quarter beginning
July 1, 1999. The Company does not expect SFAS No. 133 will have a significant
effect on its current financial reporting.
NOTE 10. EARNINGS PER SHARE
The Company has calculated its basic and diluted earnings per share in
accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share are
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the periods presented.
Diluted earnings per share reflects the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Interest expense, net of tax, of approximately
$8,000 and $15,000 and $10,000 and $19,000 related to the subordinated seller
notes was added to net income in computing diluted earnings per share for the
three and six month periods ending June 30, 1999 and 1998, respectively.
A reconciliation of the number of weighted average shares used in
calculating basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding -- basic...................... 9,172,025 7,695,730 9,168,388 7,106,869
Effect of potentially dilutive shares
outstanding............................... 142,247 431,490 105,717 431,577
Effect of convertible debt.................. 117,322 113,455 117,322 102,375
--------- --------- --------- ---------
Weighted average number of common shares
outstanding -- diluted.................... 9,431,594 8,240,675 9,391,427 7,640,821
========= ========= ========= =========
</TABLE>
NOTE 11. CREDIT AGREEMENT
Effective July 31, 1998, the Company closed on a four year $45 million
amended and restated senior credit facility syndicated by Nationsbanc Montgomery
Securities LLC. Syndicate lenders include NationsBank, N.A., PNC Bank and
Rabobank Nederland (the "Credit Facility"). The Credit Facility replaced the
Company's $20 million senior credit facility. Borrowings under the Credit
Facility (i) are secured by the assignment to the banks of the Company's stock
in all of its material subsidiaries and the Company's accounts receivable,
including the accounts receivable assigned to the Company by affiliated
practices pursuant to management services agreements, (ii) are guaranteed by all
material subsidiaries (including future subsidiaries) and (iii) restrict the
Company from pledging its assets to any other party. Advances under the Credit
Facility are used to fund acquisitions and working capital, are governed by a
F-10
<PAGE> 117
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
borrowing base related primarily to the Company's earnings before interest,
taxes, depreciation and amortization ("EBITDA") and bears interest, at the
Company's option, based upon either a prime-based or LIBOR-based rate. EBITDA is
used by the Company as an indicator of a company's ability to incur and service
debt. EBITDA should not be considered an alternative to operating income, net
income, cash flows or any other measure of performance as determined in
accordance with generally accepted accounting principles, as an indicator of
operating performance, or as a measure of liquidity. The Credit Facility
contains affirmative and negative covenants which, among other things, require
the company to maintain certain financial ratios (including maximum indebtedness
to pro forma EBITDA, maximum indebtedness to capital, minimum net worth, minimum
current ratio and minimum fixed charges coverage), limit the amounts of
additional indebtedness, dividends, advances to officers, shareholders and
physicians, acquisitions, investments and advances to subsidiaries, and restrict
changes in management and the Company's business. As of August 13, 1999, the
Company had approximately $5.8 million of borrowings outstanding under the
Credit Facility with approximately $34.6 million available under the Credit
Facility.
NOTE 12. DEFINITIVE MERGER AGREEMENT
On June 14, 1999, the Company announced the signing of a definitive merger
agreement between the Company and a new company organized at the direction of TA
Associates ("MergerCo"). Under the terms of the merger agreement, each
outstanding share of Physicians' Specialty Corp. common stock, other than shares
as to which appraisal rights are properly perfected and not withdrawn, shares
held by the Company or any of its subsidiaries or by MergerCo, certain shares
held by management and their affiliates, certain affiliated physicians and
certain shares held by employee option holders, will be converted into the right
to receive $10.50 per share and certain indebtedness of the Company will be
refinanced. In addition, certain shares held by the Company's Chairman and
President, other member of Company management and their affiliates, and certain
affiliated physicians will be converted into shares of the surviving corporation
and management will retain an equity interest in the surviving corporation.
Company management and affiliated physicians holding approximately 3.6 million
shares of Company common stock (representing 40% of the outstanding shares) have
entered into a Voting Agreement, under which they agreed to vote their shares in
favor of the proposed merger. TA Associates, Inc. and a syndicate of five
commercial banks including and led by First Union National Bank have agreed,
subject to the satisfaction of certain terms and conditions, to provide
financing in connection with the merger.
On June 29, 1999, the Company announced that the Company, certain of its
directors and TA Associates have been named as defendants in a lawsuit filed as
a purported class action in the Chancery Court for New Castle County, Delaware.
This suit alleges, that members of the Board of Directors suffer from conflicts
of interest that made in impracticable for the Board to conduct a "bona fide"
market check or auction of the Company prior to approval of the Merger. The
lawsuit also alleges that the announcement of the Merger was timed to place an
artificial lid on the market price of Physicians' Specialty Common Stock. The
suit seeks, among other things, injunctive relief prohibiting consummation of
the merger or, in the event that the transaction is consummated, rescission,
compensatory damages and costs and disbursements.
The Company believes the suit has no merit and intends to vigorously defend
the lawsuit.
F-11
<PAGE> 118
PHYSICIANS' SPECIALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 13. SUBSEQUENT EVENT
On July 1, 1999, the Company acquired substantially all of the assets and
assumed certain contractual obligations of Robert A. Mayers M.D., P.C., a solo
allergy practice located in Rye Brook, New York. In connection with the
acquisition of the assets of this practice, the Company paid $175,000 in cash.
In addition the Company paid approximately $5,000 to Premier HealthCare an
affiliate of the Company's Vice Chairman and Secretary for advisory services
rendered.
F-12
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physicians' Specialty Corp.:
We have audited the accompanying consolidated balance sheets of PHYSICIANS'
SPECIALTY CORP. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1997 and 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from inception (July 31,
1996) to December 31, 1996 and for each of the two years ended December 31, 1997
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physicians' Specialty Corp.
and subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for the period from inception (July 31, 1996) to
December 31, 1996 and for each of the two years ended December 31, 1997 and 1998
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 10, 1999
F-13
<PAGE> 120
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,351,639 $ 4,925,501
Accounts receivable, net of allowance for doubtful
accounts of $261,714 and $1,700,016 at December 31,
1997 and 1998, respectively............................ 9,273,565 16,166,944
Notes receivable.......................................... 81,682 80,000
Prepayments and other..................................... 335,650 1,730,825
Deferred income taxes..................................... 0 48,245
----------- -----------
Total current assets.............................. 15,042,536 22,951,515
EQUIPMENT, NET.............................................. 3,431,707 8,861,850
INTANGIBLE ASSETS, NET...................................... 11,793,777 26,267,950
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY..................... 0 5,396,609
OTHER ASSETS................................................ 330,338 207,231
----------- -----------
Total assets...................................... $30,598,358 $63,685,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 397,185 $ 2,012,658
Due to physicians......................................... 1,177,009 0
Accrued expenses.......................................... 1,701,667 1,978,868
Accrued income taxes...................................... 321,302 0
Provider claims payable................................... 637,726 572,247
Deferred income taxes..................................... 338,218 0
----------- -----------
Total current liabilities......................... 4,573,107 4,563,773
----------- -----------
SUBORDINATED SELLER NOTES AND DEBENTURE..................... 911,715 7,563,701
BORROWING UNDER CREDIT AGREEMENT............................ 0 3,750,000
----------- -----------
Total long-term debt.............................. 911,715 11,313,701
----------- -----------
Total liabilities................................. 5,484,822 15,877,474
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 10,000 shares
authorized, no shares issued and outstanding at
December 31, 1997 and 1998, respectively............... 0 0
Common stock, $0.001 par value; 50,000,000 shares
authorized, 6,503,098 and 9,152,160 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 6,503 9,152
Additional paid-in capital............................. 23,401,657 41,083,033
Retained earnings......................................... 1,705,376 6,715,496
----------- -----------
Total stockholders' equity........................ 25,113,536 47,807,681
----------- -----------
Total liabilities and stockholders' equity........ $30,598,358 $63,685,155
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-14
<PAGE> 121
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE YEARS ENDED
(JULY 31, 1996) DECEMBER 31,
TO DECEMBER 31, -------------------------
1996 1997 1998
--------------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Net patient service revenue......................... $ 0 $20,699,486 $54,889,930
Management fees..................................... 51,240 169,128 1,164,418
Capitation revenue.................................. 0 3,619,408 4,916,424
Earnings in unconsolidated subsidiary............... 0 0 630,415
--------- ----------- -----------
Net revenue................................. 51,240 24,488,022 61,601,187
--------- ----------- -----------
OPERATING EXPENSES:
Provider claims, wages, and benefits................ 46,582 16,747,582 38,339,351
General and administrative.......................... 357,340 4,370,611 13,140,889
Depreciation and amortization....................... 1,919 377,286 1,849,864
--------- ----------- -----------
Total operating expenses.................... 405,841 21,495,479 53,330,104
--------- ----------- -----------
OPERATING INCOME (LOSS)............................... (354,601) 2,992,543 8,271,083
OTHER INCOME (EXPENSE), NET........................... 0 429,254 (54,169)
--------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... (354,601) 3,421,797 8,216,914
PROVISION FOR INCOME TAXES............................ 0 1,361,820 3,206,794
--------- ----------- -----------
NET INCOME (LOSS)..................................... $(354,601) $ 2,059,977 $ 5,010,120
========= =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic............................................... $ (0.64) $ 0.42 $ 0.62
========= =========== ===========
Diluted............................................. $ (0.64) $ 0.42 $ 0.60
========= =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 552,894 4,868,035 8,021,914
========= =========== ===========
Diluted.......................................... 552,894 4,966,778 8,434,583
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-15
<PAGE> 122
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, INCEPTION (JULY 31, 1996) 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock.................. 599,893 600 711 0 1,311
Compensation expense...................... 0 0 343,000 0 343,000
Net loss.................................. 0 0 0 (354,601) (354,601)
--------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 1996.................. 599,893 600 343,711 (354,601) (10,290)
Issuance of common stock, net of offering
costs................................... 2,200,000 2,200 14,272,859 0 14,275,059
Issuance of common stock -- practice
acquisitions............................ 3,703,205 3,703 8,737,087 0 8,740,790
Compensation expense...................... 0 0 48,000 0 48,000
Net income................................ 0 0 0 2,059,977 2,059,977
--------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997.................. 6,503,098 6,503 23,401,657 1,705,376 25,113,536
Issuance of common stock, net of offering
costs................................... 2,307,540 2,308 16,517,458 0 16,519,766
Issuance of common stock -- practice
acquisitions............................ 341,522 341 1,109,935 0 1,110,276
Compensation expense...................... 0 0 53,983 0 53,983
Net income................................ 0 0 0 5,010,120 5,010,120
--------- ------ ----------- ---------- -----------
BALANCE, DECEMBER 31, 1998.................. 9,152,160 $9,152 $41,083,033 $6,715,496 $47,807,681
========= ====== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-16
<PAGE> 123
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JULY 31, 1996) FOR THE YEARS ENDED
TO DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
--------------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $(354,601) $2,059,977 $ 5,010,120
--------- ---------- ------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 1,919 377,286 1,849,864
Provision for deferred income taxes............ 0 338,218 (367,468)
Compensation expense........................... 343,000 48,000 53,983
Earnings in unconsolidated subsidiary.......... 0 0 (630,415)
Changes in operating assets and liabilities,
net of effects from acquisitions of
businesses:
Accounts receivable, net..................... (26,976) (4,648,359) (1,882,029)
Prepayments and other........................ (1,100) (318,721) (1,304,647)
Accounts payable and accrued liabilities..... 118,270 853,751 (1,357,210)
--------- ---------- ------------
Total adjustments......................... 435,113 (3,349,825) (3,637,922)
--------- ---------- ------------
Net cash provided by (used in) operating
activities.............................. 80,512 (1,289,848) 1,372,198
--------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired.... 0 (4,933,104) (19,759,897)
Purchase of property and equipment, net of
equipment sold................................. (21,706) (870,526) (2,335,215)
Decrease in other assets.......................... 0 135,078 0
Distributions from unconsolidated subsidiary...... 0 0 320,117
--------- ---------- ------------
Net cash used in investing activities..... (21,706) (5,668,552) (21,774,995)
--------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs... 1,311 14,275,059 16,519,766
Borrowings under short-term debt.................. 505,000 170,000 0
Repayment of debt................................. 0 (2,258,560) (170,000)
Borrowing under credit facility, net of issuance
costs.......................................... 0 0 3,626,893
Deferred offering costs........................... (441,577) 0 0
--------- ---------- ------------
Net cash provided by financing
activities.............................. 64,734 12,186,499 19,976,659
--------- ---------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS............. 123,540 5,228,099 (426,138)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 0 123,540 5,351,639
--------- ---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 123,540 $5,351,639 $ 4,925,501
========= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-17
<PAGE> 124
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. ORGANIZATION
Physicians' Specialty Corp. (the "Company") was organized in July 1996 to
provide comprehensive physician practice management services to physician
practices and health care providers specializing in the treatment and management
of diseases and disorders of the ear, nose, throat, head, and neck ("ENT") and
related specialties. The Company commenced its business activities upon
consummation of the reorganization, as described in Note 3, and its initial
public offering ("IPO") on March 26, 1997. The Company provides financial and
administrative management, enhancement of clinical operations, network
development, and payor contracting services, including the negotiation and
administration of capitated arrangements. The Company has operations in greater
Atlanta, Georgia; Chicago, Illinois; Birmingham, Alabama; the South Florida
area; southern New York; and northern New Jersey and in metropolitan Cleveland,
Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the Company's
financial statements and the accompanying notes. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash on deposit with financial institutions and all
highly liquid investments with original maturities of three months or less to be
cash and cash equivalents.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of depreciable assets for
financial statement reporting purposes. Maintenance and repairs are charged to
expenses as incurred. The cost of renewals and betterments is capitalized and
depreciated over the applicable estimated useful lives. The cost and accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the accounts, and the related gain or loss is credited or charged to operations.
F-18
<PAGE> 125
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciable assets at December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998 USEFUL LIVES
---------- ----------- --------------------
<S> <C> <C> <C>
Equipment................................ $1,132,111 $ 5,362,937 Three to seven years
Computer system and software............. 432,157 1,135,673 Three years
Furniture and fixtures................... 1,678,971 2,924,911 Seven years
Automobiles.............................. 57,548 0 Five years
Leasehold improvements................... 495,144 882,076 Three to five years
---------- -----------
Total cost..................... 3,795,931 10,305,597
Less accumulated depreciation.......... (364,224) (1,443,747)
---------- -----------
$3,431,707 $ 8,861,850
========== ===========
</TABLE>
INTANGIBLE ASSETS
The Company's physician practice acquisitions involve the purchase of
tangible and intangible assets and the assumption of certain liabilities of the
acquired practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed based on estimated fair market values. Costs of
acquisitions in excess of the net estimated fair value of tangible and
identifiable intangible assets acquired and liabilities assumed are amortized
using the straight-line method over a period of 25 years. The Company
continually evaluates whether later events and circumstances have occurred that
indicate the remaining balance of goodwill may not be recoverable. In evaluating
possible impairment, the Company uses the most appropriate method of evaluation
given the circumstances surrounding the particular acquisition, which has
generally been an estimate of the related practice's undiscounted operating
income before interest and taxes over the remaining life of the goodwill.
At December 31, 1997 and 1998, the amount of such intangible assets was
approximately $11,884,000 and $27,143,000, respectively, with accumulated
amortization totaling approximately $90,000 and $875,000, respectively.
Amortization expense was approximately $0, $90,000, and $785,000 during 1996,
1997, and 1998, respectively.
NET PATIENT SERVICE REVENUE
Net patient service revenue is based on established billing rates, less
estimated allowances for patients covered by Medicare and other contractual
reimbursement programs, and discounts from established billing rates. Amounts
received by the Company for treatment of patients covered by Medicare and other
contractual reimbursement programs, which may be based on cost of services
provided or predetermined rates, are generally less than the established billing
rates of the Company's practices.
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "FASB") issued its Consensus on Issue 97-2 ("EITF 97-2").
EITF 97-2 addresses certain specific matters pertaining to the physician
practice management industry. EITF 97-2 is effective for the Company for the
year ended December 31, 1998. EITF 97-2 addresses the ability of physician
practice management companies to consolidate the results of physician practices
with which it has an existing contractual relationship. The Company has
determined that its contracts met the criteria of EITF 97-2 for consolidating
the results of operations of the related physician practices, and the Company
has adopted EITF 97-2 in its consolidated statement of operations for the year
ended December 31, 1998. In addition, the Company has adjusted the statement of
operations for the year ended December 31, 1997 to conform with such
consolidation. EITF 97-2 also has addressed the accounting method for future
combinations with individual physician practices. The Company believes that,
based on the criteria set forth in EITF
F-19
<PAGE> 126
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
97-2, any future acquisitions of individual physician practices will be
accounted for under the purchase method of accounting.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company grants credit without collateral to its patients, most of whom
are insured under third-party payor arrangements. The provision for bad debts
that relates to patient service revenue is based on an evaluation of potentially
uncollectible accounts. The provision for bad debt expense was $0, $133,794, and
$805,510 during 1996, 1997, and 1998, respectively. The allowance for doubtful
accounts represents the estimate of the uncollectible portion of accounts
receivable.
CAPITATED CONTRACTS
Revenue is recognized over the applicable coverage period on a per-member
basis for covered members. Deferred revenue is recorded when premium payments
are received in advance of the applicable coverage period.
The Company establishes accruals for costs incurred in connection with its
capitated contracts based on historical trends. Any contracts that would have a
realized loss would be immediately accrued for and the loss would be charged to
operations.
During the years ended December 31, 1997 and 1998, approximately 14.8% and
8%, respectively, of the Company's net revenues were derived from capitated
arrangements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
subordinated seller notes and debenture, and short-term debt approximated their
fair values as of December 31, 1997 and 1998 due to the relatively short
maturity of these instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. SFAS No. 130 was effective for the year
beginning January 1, 1998. For the Company, comprehensive income equals net
income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 was
effective for the Company's financial statements for the year ended December 31,
1998. The Company considers its entire business as one reporting segment:
providing comprehensive physician practice management services to physician
practices and health care providers specializing in the treatment and management
of diseases and disorders of the ear, nose, throat, head, and neck and related
specialties.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits," which requires disclosure of
additional information about the cost and financial status of pension and
postretirement plans. SFAS No. 132 was effective for financial statements for
the year ended December 31, 1997. SFAS No. 132 did not require any significant
disclosures or revision of prior disclosures.
F-20
<PAGE> 127
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for reporting
and disclosing information about derivative instruments. SFAS No. 133 is
effective for financial statements for the Company's fiscal quarter beginning
July 1, 1999. The Company does not expect SFAS No. 133 will have a significant
effect on its current financial reporting.
EARNINGS PER SHARE
The Company has calculated its basic and diluted earnings per share in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share are
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the years presented.
Diluted earnings per share reflect the potential dilution that could occur if
securities and other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Interest expense, net of tax, of approximately
$0, $8,000, and $31,000 related to the subordinated seller notes was added to
net income in computing diluted earnings per share in 1996, 1997, and 1998,
respectively.
A reconciliation of the number of weighted average shares used in
calculating basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
------- --------- ---------
<S> <C> <C> <C>
Weighted average number of common shares outstanding --
basic................................................ 552,894 4,868,035 8,021,914
Effect of potentially dilutive shares outstanding...... 0 83,294 304,638
Effect of convertible debt............................. 0 15,449 108,031
------- --------- ---------
Weighted average number of common shares outstanding --
diluted.............................................. 552,894 4,966,778 8,434,583
======= ========= =========
</TABLE>
INCOME TAXES
The Company follows the practice of providing for income taxes based on
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
INDUSTRY RISKS
The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers. Violations of these laws could result in significant fines and
penalties as well as significant payments for services previously billed. The
Company is subject to similar regulatory reviews. A determination of liability
under any such laws could have a material effect on the Company's financial
position, results of operations, stockholders' equity, and cash flows.
F-21
<PAGE> 128
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
---- ----------- -----------
<S> <C> <C> <C>
Cash paid during the period for interest.................... $0 $ 87,474 $ 345,006
Cash paid during the period for income taxes, net of
refunds................................................... 0 2,233,550 3,700,980
Liabilities issued or assumed in connection with businesses
acquired.................................................. 0 (5,758,144) (6,651,986)
Common stock issued (value at time of issuance)............. 0 7,090,000 1,110,000
</TABLE>
RECLASSIFICATIONS
Certain amounts in the December 31, 1996 and 1997 financial statements have
been reclassified to conform to the current year presentation.
3. REORGANIZATION
The Company acquired substantially all of the assets (other than certain
excluded assets such as employment agreements and patient charts, records, and
files) and certain liabilities of (i) Atlanta Ear, Nose & Throat Associates,
P.C. ("AtlantaENT"), (ii) ENT & Allergy Associates, Inc., (iii) Metropolitan
Ear, Nose & Throat, P.C., (iv) Atlanta Head and Neck Surgery, P.C., and (v) Ear,
Nose & Throat Associates, P.C. (collectively, the "Initial Practices"), and all
of the outstanding shares of common stock of three corporations holding managed
care contracts (the "ENT Networks") in March 1997 (the "Reorganization"). In
connection with the acquisition of assets of the Initial Practices and the
common stock of the ENT Networks, the Company issued an aggregate of 3,104,755
shares of its common stock. The Reorganization was accounted for as a promoter
transaction under Staff Accounting Bulletin No. 48 at historical cost.
4. ACQUISITIONS
1997 ACQUISITIONS
During 1997, the Company acquired (a) substantially all of the assets
(other than certain excluded assets such as employment agreements and patient
charts, records, and files) and assumed certain contractual liabilities of six
ENT physician practices and (b) the stock of six professional associations owned
by seven ENT physicians and a partnership owned and operated by the professional
associations in Palm Beach and Broward Counties, Florida.
In connection with these acquisitions, the Company (i) paid an aggregate of
approximately $5 million in cash, (ii) issued an aggregate of 598,450 shares of
common stock (valued at approximately $4.5 million), (iii) agreed to issue an
aggregate of 276,249 additional shares of common stock (valued at the time of
issuance at approximately $2.6 million) to two of the affiliated practices
beginning in September 1998 all of which have been issued as of December 31,
1998, (iv) issued subordinated convertible promissory notes in the aggregate
principal amount of approximately $912,000 that are convertible into shares of
common stock at a conversion price of $10 per share, and (v) issued noninterest
bearing contingent subordinated promissory notes in the aggregate principal
amount of approximately $3 million. The payment of these notes is contingent
upon the physicians or practice holding such notes reaching certain performance
targets. Substantially all of these contingent notes are payable by the Company,
at the Company's option, in shares of common stock, valued at the average
closing price of the common stock for the ten trading days preceding the date of
delivery of such shares.
F-22
<PAGE> 129
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 ACQUISITIONS
During 1998, the Company acquired substantially all of the assets (other
than certain excluded assets such as employment agreements and patient charts,
records, and files) and assumed certain contractual liabilities of five ENT
physician practices.
In connection with these acquisitions, the Company (i) paid an aggregate of
approximately $1.4 million in cash, (ii) issued an aggregate of 65,273 shares of
common stock (valued at approximately $495,000), (iii) agreed to issue an
aggregate of 78,038 additional shares of common stock (valued at the time of
issuance at approximately $615,000) to four of the affiliated practices
beginning in February 1999, (iv) issued a subordinated convertible promissory
note in the principal amount of $250,000 that is convertible into shares of
common stock valued at the average closing price of such common stock for the
ten trading days preceding the date of delivery of such shares, and (v) issued a
$150,000 noninterest bearing contingent promissory note which is payable at the
Company's option in cash or the Company's common stock upon the holder achieving
certain performance targets. The excess of the purchase price over the fair
value of net assets acquired (goodwill) was approximately $2.2 million.
Additionally, in May 1998, the Company acquired (i) substantially all of
the tangible assets and assumed certain contractual liabilities of Physicians'
Domain, Inc., a White Plains, New York-based ENT physician practice management
company ("Physicians' Domain") and (ii) the stock of three corporations that are
successors to three ENT physician practices affiliated with Physicians' Domain
(collectively "PDI"). In connection with the PDI transaction, the Company (i)
paid approximately $5.4 million in cash, (ii) discharged approximately $3.8
million of liabilities of PDI, and (iii) issued a subordinated long-term
promissory note in the principal amount of approximately $6.4 million. If the
PDI practices achieve stipulated performance targets, the Company will pay an
additional $500,000, in cash or shares of common stock, at the Company's option.
The excess of the purchase price over the fair value of net assets acquired
(goodwill) was approximately $10.2 million.
The Company also entered into a management services agreement in connection
with the PDI transaction. The management services agreement provides for a fixed
annual management fee of approximately $1.9 million, plus reimbursement of
practice operating expenses. Pursuant to the management services agreement, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreement also provides for mutually
agreed-on increases in the fixed management fee upon (i) the management by the
Company of ancillary business developed or acquired or (ii) the acquisition of
additional physician practices which are merged into the existing PDI practices.
The Company used a portion of the net proceeds received from the Company's
public offering in May 1998 to pay the cash component of and to discharge the
indebtedness of PDI assumed by the Company in connection with the PDI
transaction.
In addition, PSC Ambulatory Surgery, Ltd., a Georgia limited partnership
(the "PSC Partnership"), of which the Company is the sole general partner, and
Atlanta ENT, one of the Company's affiliated practices, is the sole limited
partner, acquired in the aggregate a 17.5% limited partnership interest in
Atlanta Surgery Center, Ltd., a Georgia limited partnership ("Atlanta Surgery
Center") in July 1998. The aggregate purchase price of approximately $4.8
million was paid in cash by the Company. Pursuant to the terms of the
transaction, the Company and Atlanta ENT own 99% and 1%, respectively, of the
partnership interest in the PSC Partnership provided that Atlanta ENT has an
option to purchase up to 40% of the partnership interest from the Company for an
amount equal to the percentage of the PSC Partnership acquired by Atlanta ENT
multiplied by the purchase price of $4.8 million. Atlanta Surgery Center
operates three multispecialty ambulatory surgery centers in the metropolitan
Atlanta area.
F-23
<PAGE> 130
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally in October 1998, the Company acquired the assets of Cleveland
Ear, Nose, and Throat Center, Inc. ("Cleveland ENT") which had previously been
affiliated with MedPartners, Inc. ("MedPartners"). In connection with the
transaction, the Company entered into a clinic services agreement with Cleveland
ENT maintaining the percentage of net income management fee structure which
existed in the original agreement with MedPartners. Under the terms of the
transaction, the Company granted Cleveland ENT a one-time option to unwind the
transaction with the Company and repurchase all Cleveland ENT nonmedical assets
acquired by the Company. Cleveland ENT's option to unwind the transaction
expired on December 15, 1998. In connection with the acquisition of the assets
of this practice, the Company (i) paid approximately $4.2 million in cash and
(ii) issued a $150,000 noninterest bearing contingent promissory note which is
payable at the Company's option in cash or the Company's common stock upon the
holder achieving certain performance targets. The excess of the purchase price
over the fair value of net assets acquired (goodwill) was approximately $2.9
million.
The 1998 acquisitions described above were accounted for by the purchase
method of accounting for business combinations. Accordingly, the accompanying
statements of operations do not include revenues or expenses related to these
acquisitions prior to the respective closing dates. Following are the Company's
unaudited pro forma results for 1998 and 1997 assuming the acquisitions occurred
on January 1, 1997 and 1998:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net revenues................................................ $74,074,187 $44,837,546
Net income.................................................. $ 5,898,134 $ 1,915,980
Diluted earnings per share.................................. $ 0.67 $ 0.32
Diluted weighted average shares outstanding................. 8,806,245 6,028,678
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually resulted had the combinations been in effect on
January 1, 1997 and 1998, or of future results of operations.
The Company amended the clinic services agreement with Cleveland ENT to
provide that, effective January 1, 1999, the Company would receive a management
fee equal to 12.5% of all net clinic revenue (after adjustment for contractual
allowances) generated by Cleveland ENT.
5. PUBLIC OFFERINGS
On March 26, 1997, the Company completed its IPO of 2,200,000 shares of its
common stock. The net proceeds of the IPO were approximately $14,275,000, a
portion of which was used for repayment of indebtedness of the acquired
practices, repayment of indebtedness of the Company, payment of a consulting
fee, and for general corporate purposes and working capital requirements.
On May 12, 1998, the Company registered under the Securities Act of 1933,
as amended, an aggregate of 3,146,514 shares of common stock of which (i)
2,750,000 shares may be issued from time to time by the Company in connection
with potential future affiliation transactions with ENT physicians or related
specialty practices or the merger with or acquisition by the Company of other
related businesses or assets, (ii) 220,000 shares of common stock are issuable
upon exercise of warrants issued to the representatives of the underwriters in
the IPO which may be sold from time to time by the holders of the warrants after
issuance, and (iii) 176,514 shares of common stock which were issued in December
1998 in connection with a practice asset acquisition completed in December 1997,
which may be sold from time to time by the physician stockholders after
issuance.
On May 15, 1998, the Company completed a public offering of 2,050,263
shares of its common stock (i) 2,000,000 of which shares were sold by the
Company and (ii) 50,263 of which were sold by certain
F-24
<PAGE> 131
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders of the Company. On May 19, 1998, the Company's underwriters
exercised their option to purchase 307,540 additional shares of common stock
from the Company to cover over-allotments. The net proceeds to the Company from
this offering and the exercise of the over-allotment shares were approximately
$16,520,000, with approximately $5,400,000 and $3,800,000, respectively, used to
pay the cash portion of the purchase price of the PDI transaction and to repay
outstanding indebtedness of PDI.
6. LONG-TERM DEBT
As of December 31, 1997 and 1998, long-term debt, consisting of borrowings
under the credit agreement and subordinated seller notes and debenture, is
summarized as follows:
<TABLE>
<CAPTION>
1997 1998
-------- -----------
<S> <C> <C>
Credit agreement due July 2002; interest rate at LIBOR
(6.84% at December 31, 1998).............................. $ 0 $ 3,750,000
Subordinated convertible promissory notes payable to
physicians; due October 2000; interest rate of 5.61%...... 911,715 911,715
Subordinated promissory note payable to physicians; due
April 2000; interest rate of 6%........................... 0 250,000
Subordinated promissory note payable to physicians; due May
2003; interest rate of 6%................................. 0 6,401,986
-------- -----------
Total long-term debt.............................. $911,715 $11,313,701
======== ===========
</TABLE>
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999................................................... $ 0
2000................................................... 1,161,715
2001................................................... 0
2002................................................... 3,750,000
2003................................................... 6,401,986
Thereafter............................................. 0
-----------
$11,313,701
===========
</TABLE>
On July 31, 1998, the Company closed on a four-year, $45 million amended
and restated senior credit agreement (the "Credit Agreement") syndicated by
Nationsbanc Montgomery Securities LLC. The Credit Agreement replaced the
Company's $20 million senior credit agreement. At December 31, 1998, the Company
had $41.25 million available for borrowing under the Credit Agreement.
Borrowings under the Credit Agreement (i) are secured by the assignment to the
banks of the Company's stock in all of its subsidiaries and the Company's
accounts receivable, including the accounts receivable assigned to the Company
by affiliated practices pursuant to management services agreements, (ii) are
guaranteed by all subsidiaries (including future subsidiaries), and (iii)
restrict the Company from pledging its assets to any other party.
The Credit Agreement contains certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios, limit
the amounts of additional indebtedness, dividends, advances to officers,
shareholders and physicians, acquisitions, investments and advances to
subsidiaries, and restrict changes in management of the Company's business. The
Company was in compliance with all debt covenants at December 31, 1998.
Interest expense was $0, $78,874, and $523,227 during 1996, 1997, and 1998,
respectively.
F-25
<PAGE> 132
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
For all periods presented, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of SFAS
No. 109.
The following summarizes the components of the income tax provision:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................................... $0 $ 868,153 $3,097,528
State................................................. 0 155,449 476,734
Deferred:
Federal............................................... 0 279,108 (319,052)
State................................................. 0 59,110 (48,416)
-- ---------- ----------
Provision for income taxes $0 $1,361,820 $3,206,794
== ========== ==========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Provision computed at the federal statutory rate... $(120,564) $1,163,411 $2,795,676
State income taxes, net of federal income tax
benefit.......................................... (14,042) 142,573 282,690
Amortization of intangibles........................ 0 18,116 108,512
Nondeductible compensation expense................. 130,260 0 0
Other, net......................................... (1,674) 43,740 19,916
Change in valuation allowance...................... 6,020 (6,020) 0
--------- ---------- ----------
Provision for income taxes......................... $ 0 $1,361,820 $3,206,794
========= ========== ==========
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Accrued shareholder compensation.......................... $ 129,433 $ 167,917
Allowance for doubtful accounts........................... 10,745 358,605
Other..................................................... 0 7,415
--------- ---------
Total deferred tax assets......................... 140,178 533,937
--------- ---------
Deferred income tax liabilities:
Acquired accounts receivable.............................. (418,458) (122,018)
Depreciation and amortization............................. (59,938) (363,674)
--------- ---------
Total deferred tax liabilities.................... (478,396) (485,692)
--------- ---------
Valuation allowance......................................... 0 0
--------- ---------
Net deferred income tax (liabilities) assets...... $(338,218) $ 48,245
========= =========
</TABLE>
The Company had no income tax net operating loss carryforwards as of
December 31, 1998. 8. STOCKHOLDERS' EQUITY
The Company has authorized 10,000 shares of preferred stock with $1 par
value. No shares have been issued, and therefore, there were no shares
outstanding at December 31, 1997 and 1998. The board of
F-26
<PAGE> 133
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors has the authority to issue these shares and to fix dividends, voting
and conversion rights, redemption provisions, liquidation preferences, and other
rights and restrictions. During the period ended December 31, 1996, the Company
declared a .6875-to-1 reverse stock split. All financial information has been
restated to reflect for the stock split. In connection with certain stock
issuances during 1996, 1997, and 1998, the Company recorded a charge to
compensation of approximately $343,000, $48,000, and $54,000, respectively.
9. STOCK PLANS
STOCK OPTION PLANS
In November 1996, the Company adopted two stock option plans, the 1996
Stock Option Plan (the "1996 Plan") and the 1996 Health Care Professionals Stock
Option Plan (the "Health Care Professionals Plan").
In March and November 1998, the board of directors adopted amendments to
the 1996 Plan to increase the aggregate number of shares of common stock
authorized under the 1996 Plan to 2,000,000 shares of the Company's authorized
but unissued common stock authorized for issuance pursuant to the grant by the
Company of options to officers, directors, employees, consultants, and
independent contractors of the Company.
The Company may grant options for up to 2,275,000 shares under two plans,
the 1996 Plan and the Health Care Professionals Plan. The Company has granted
options for up to 439,940 and 993,000 shares through December 31, 1997 and 1998,
respectively, under the 1996 Plan and has granted options for up to 35,000 and
63,000 shares under the Health Care Professionals Plan through December 31, 1997
and 1998, respectively. The 1996 Plan and the Health Care Professionals Plan
options vest over periods ranging from three to five years, and both expire
after ten years. A summary of the status of the Company's two stock option plans
at December 31, 1997 and 1998 is presented in the table below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES (PER SHARE) PRICE
--------- ------------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1996................... 247,460 $ 6.80 $6.80
Granted.......................................... 227,480 $6.00-$12.875 7.42
Exercised........................................ 0 $ 0.00 0.00
Canceled......................................... (3,000) $ 8.00 8.00
--------- ------------- -----
Outstanding as of December 31, 1997................ 471,940 $6.00-$12.875 7.09
Granted.......................................... 1,056,000 $ 5.75-$11.50 8.51
Exercised........................................ 0 $ 0.00 0.00
Canceled......................................... (4,000) $8.00-$12.875 8.70
--------- ------------- -----
Outstanding as of December 31, 1998................ 1,523,940 $5.75-$12.875 $8.08
========= ============= =====
</TABLE>
F-27
<PAGE> 134
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's outstanding
stock options at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL
SHARES EXERCISE PRICE LIFE
--------- -------------- -----------
<S> <C> <C> <C>
Range of exercise prices:
$ 0.00-$8.00...................................... 1,014,440 $7.32 8.57
$ 8.01-$12.00..................................... 497,500 9.53 6.97
$12.01-$20.00..................................... 12,000 12.41 8.20
--------- ----- ----
Total..................................... 1,523,940 $8.08 8.04
========= ===== ====
</TABLE>
The following table summarizes information about the Company's exercisable
stock options at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Range of exercise prices:
$ 0.00-$8.00.............................................. 394,010 $7.16
$ 8.01-$12.00............................................. 110,000 9.37
$12.01-$20.00............................................. 4,750 12.64
------- -----
Total............................................. 508,760 $7.68
======= =====
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. If the Company had elected to recognize compensation cost for
these plans based on the fair value at the grant dates for awards under the
plans consistent with the method prescribed by SFAS No. 123, net income (loss)
and earnings (loss) per share would have been changed to the pro forma amounts
indicated below at December 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net (loss) income:
As reported...................................... $(354,601) $2,059,977 $5,010,120
Pro forma........................................ (634,924) 1,464,400 2,959,650
(Loss) earnings per share:
Basic:
As reported................................... $ (0.64) $ 0.42 $ 0.62
Pro forma..................................... (1.15) 0.30 0.37
Diluted:
As reported................................... (0.64) 0.42 0.60
Pro forma..................................... (1.15) 0.30 0.35
</TABLE>
The fair value of the Company's stock options used to compute pro forma net
income (loss) and earnings (loss) per share disclosures is the estimated present
value at grant date using the Black-Scholes option pricing model with the
following weighted average assumptions for 1996 and 1997: a dividend yield of
0%, an expected volatility of 44%, and a risk-free interest rate range of 6% to
6.9%, and an expected holding period of seven years; and for 1998: a dividend
yield of 0%, an expected volatility of 67.5%, and a risk-free interest rate
range of 4.73% - 5.72%, and an expected holding period of seven years.
F-28
<PAGE> 135
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was approved by the board of directors in November 1997 and approved by the
Company's stockholders in June 1998. The Stock Purchase Plan is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal
Revenue Code of 1986, as amended, in order to provide employees of the Company
with an opportunity to purchase common stock through payroll deductions. An
aggregate of 250,000 shares of the Company's common stock have been reserved for
issuance under the Stock Purchase Plan and are available for purchase
thereunder, and as of December 31, 1998, no shares have been purchased.
10. RETIREMENT PLAN
On March 15, 1998, the Company established a defined contribution 401(k)
retirement plan (the "Plan") covering substantially all employees who qualify
and elect to participate. Participants may make contributions up to a total
annual limit of 15% of annual compensation not to exceed $10,000. The Company
makes a contribution equal to 1.5% of each participant's salary. The Company
contributed approximately $64,000 to the Plan during the year ended December 31,
1998.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. In the opinion of management,
the amount of potential liability with respect to these claims will not
materially affect the Company's financial position or results of operations.
No legal proceedings are currently pending against the Company, and the
Company is not aware of any outstanding claims against any of its affiliated
practices that would have a material adverse effect on the Company's business,
financial condition, or results of operations. The Company and its affiliated
practices may be involved from time to time in litigation incidental to their
respective businesses.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries.
The employment agreements also provide for severance benefits upon the
occurrence of certain events, including a change in control, as defined.
LEASES
The Company leases equipment and certain medical office facilities under
noncancelable operating lease agreements which expire in various years through
2010. Rental expenses under these leases amounted to approximately $0,
$1,157,000, and $2,993,000 in 1996, 1997, and 1998, respectively.
F-29
<PAGE> 136
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 3,546,687
2000........................................................ 3,013,817
2001........................................................ 2,420,826
2002........................................................ 1,611,562
2003........................................................ 1,250,475
Thereafter.................................................. 5,565,560
-----------
Total............................................. $17,408,927
===========
</TABLE>
12. RELATED-PARTY TRANSACTIONS
In May 1997, the Company entered into an agreement with Premier HealthCare,
an affiliate of the Company's vice chairman and secretary, that was amended in
March 1998, pursuant to which Premier HealthCare will assist the Company as a
financial adviser in connection with acquisitions and similar transactions. In
the event that the Company completes any transaction in which Premier HealthCare
performed advisory services, Premier HealthCare will receive a fee equal to (i)
its out-of-pocket expenses and (ii) 5% of the initial $1 million of the
transaction value, as defined, 4% of the next $1 million of the transaction
value, 3% of the next $1 million of the transaction value, 2% of the next $1
million of the transaction value, and 1% of the amount of the transaction value
in excess of $4 million. Pursuant to the agreement, the fee to be paid to
Premier HealthCare for a particular transaction will be reduced by any finder's
fee payable by the Company, which has been approved by Premier HealthCare, and
the aggregate fee to be paid to Premier HealthCare in any given year will be
reduced by the product of (i) $12,500 and (ii) the number of months in any year
in which the Company's vice chairman and secretary is employed by the Company.
Therefore, so long as the Company's vice chairman and secretary is employed by
the Company at his current salary, the aggregate fee to be paid to Premier
HealthCare in any given year will be reduced by $150,000. The agreement may be
terminated by either party upon 90 days' written notice to the other.
During the year ended December 31, 1997, the Company paid an aggregate of
$647,000 to Premier HealthCare consisting of (i) $250,000 for consulting
services in connection with the formation of the Company and the Reorganization
and (ii) $397,000 for consulting services in connection with the acquisition of
assets or equity of the additional practices which were acquired during 1997.
During the year ended December 31, 1998, the Company paid an aggregate of
$893,000 to Premier HealthCare consisting of (i) $197,000 for consulting
services in connection with a public offering completed on May 15, 1998 and (ii)
$696,000 for consulting services in connection with the acquisition of assets or
equity of the additional practices which were acquired during 1998.
LEASES
The Company leases one clinical location from the Company's chairman and
president. The lease is for approximately 23,000 square feet and provides for
monthly rental payments of approximately $47,000, subject to annual increases.
The Company also leases one clinical location from Eastside Physicians Center,
L.P., a Georgia limited partnership, of which the Company's chairman and
president is a limited partner. The lease is for approximately 4,800 square feet
and provides for monthly rental payments of approximately $8,000, subject to
annual increases. The future minimum rental commitments related to these two
leases are included in Note 11.
F-30
<PAGE> 137
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net revenue has been adjusted for all quarters of 1997 and 1998 as the
Company has adopted EITF 97-2 in its statement of operations for its years
ending December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1998
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue....................................... $12,004 $14,213 $16,613 $18,771
Operating income.................................. 1,539 1,718 2,306 2,708
Net income........................................ 957 1,214 1,357 1,572
Basic earnings per share.......................... 0.15 0.15 0.15 0.18
Diluted earnings per share(s)..................... 0.14 0.14 0.15 0.17
Weighted average shares outstanding:
Basic................................... 6,511 7,696 8,867 8,978
Diluted................................. 7,034 8,241 9,299 9,385
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue............................................ $634 $6,263 $7,785 $9,806
Operating income....................................... 20 720 962 1,291
Net income............................................. 20 512 664 864
Basic earnings per share............................... 0.02 0.09 0.11 0.14
Diluted earnings per share(s).......................... 0.02 0.09 0.11 0.13
Weighted average shares outstanding:
Basic........................................ 836 5,905 6,207 6,329
Diluted...................................... 865 5,905 6,275 6,597
</TABLE>
- ---------------------
(a) The sum of the diluted earnings per share for 1997 and 1998 by quarter does
not agree with the amount disclosed on the statement of operations due to
the weighted average effect of the shares issued in the IPO and the
Company's offering in May 1998.
14. SUBSEQUENT EVENTS (UNAUDITED)
In January 1999, the Company loaned $1,475,000 to the Cleveland ENT
physicians. This loan bears interest at a rate of 6% per annum and matures on
the earlier of January 14, 2000, the termination of the management services
agreement, or the termination of the employment of three or more of the
physicians. In addition, the Company granted the physicians the right and option
(the "Put Option") to require the Company to purchase from the physicians all of
the outstanding shares of common stock of Ohio Nasal Sinus Center, Inc.
("ONSC"), the sole asset of which is a corporate domain name. The Put Option may
be exercised by the physicians commencing January 10, 2000 and expiring on March
1, 2000. In the event the physicians exercise the Put Option, the Company would
be required to purchase the ONSC common stock for approximately $2 million in
cash and the issuance of a subordinated promissory note in the principal amount
of $520,000 (collectively, the "Put Purchase Price"). The subordinated
promissory note would bear interest at a rate of 6% per annum and would be
payable in four equal annual installments commencing on the first anniversary of
the date of issuance of the note. In the event the Put Option is exercised by
the physicians, the cash portion of the Put Purchase Price would be reduced by
any amounts owed under the loan or any other monetary obligations owed by the
physicians to the Company. Pursuant to the terms of the transaction, the Company
has agreed to indemnify the physicians for certain matters
F-31
<PAGE> 138
PHYSICIANS' SPECIALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arising out of the transaction. The Company expects loan repayment from the
Cleveland ENT physicians even if the Put Option is not exercised.
On January 11, 1999, the Company acquired substantially all of the assets
(other than certain excluded assets such as employment agreements and patient
charts, records, and files) and assumed certain contractual liabilities of
E.N.T. Medical Associates, Inc., P.C., a solo ENT practice located in the
Middleberg Heights suburbs of greater Cleveland, Ohio. In addition, on February
1, 1999, the Company acquired substantially all of the business assets and
assumed certain contractual liabilities of Preferred Diagnostic Services, Inc.,
an Atlanta, Georgia-based provider of sleep diagnostic laboratory services. In
connection with the acquisition of the assets of this practice and the
laboratory, the Company (i) paid an aggregate of approximately $840,000 in cash,
(ii) issued 4,600 shares of common stock (valued at the time of issuance at
approximately $37,000), (iii) agreed to issue 1,637 additional shares of common
stock (valued at the time of issuance at approximately $13,000) in February
2000, and (iv) issued a subordinated promissory note in the aggregate principal
amount of approximately $200,000 that accrues interest at 6% per annum paid
quarterly beginning in May 1999, with five annual equal payments of principal
beginning on February 1, 2000. In connection with these acquisitions, the
Company paid approximately $85,000 to Premier HealthCare for advisory services
rendered.
F-32
<PAGE> 139
EAR, NOSE & THROAT ASSOCIATES, P.C.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH
AUDITORS' REPORT
F-33
<PAGE> 140
GENERAL INFORMATION
In May 1998, the Company acquired the stock of three corporations which
were successors to physician practices that had been affiliated with Physicians'
Domain, Inc., a physician practice management company. Ear, Nose & Throat
Associates, P.C. was the largest of the successor corporations acquired by the
Company, and the only one to require audits under SEC Rule 3-05. The financial
statements of Ear, Nose & Throat Associates, P.C. for the years ended December
31, 1997 and 1996 follow.
F-34
<PAGE> 141
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Ear, Nose & Throat
Associates, P.C.:
We have audited the accompanying balance sheets of EAR, NOSE & THROAT
ASSOCIATES, P.C. (a New York corporation) as of December 31, 1997 and 1996 and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ear, Nose & Throat
Associates, P.C. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 13, 1998
F-35
<PAGE> 142
EAR, NOSE & THROAT ASSOCIATES, P.C.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 116,371 $ 692
Accounts receivable, net of allowance for doubtful
accounts of $466,172 and $150,354 at December 31, 1997
and 1996, respectively................................. 2,431,055 1,809,818
Notes receivable for employee............................. -- 129,852
---------- ----------
Total current assets.............................. 2,547,426 1,940,362
EQUIPMENT, net.............................................. 981,318 979,531
DUE FROM RELATED PARTIES.................................... 1,383,313 133,049
DEFERRED INCOME TAXES....................................... -- 140,952
INTANGIBLE ASSETS, net...................................... 657,265 553,186
OTHER ASSETS, net........................................... 22,761 11,092
---------- ----------
Total assets...................................... $5,592,083 $3,758,172
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 298,816 $ 574,679
Due to related party...................................... 188,543 --
Accrued expenses.......................................... 442,585 189,204
Accrued shareholder compensation.......................... 1,310,053 1,275,300
Current portion of long-term debt and capital lease
obligations............................................ 2,855,801 678,333
---------- ----------
Total current liabilities......................... 5,095,798 2,717,516
DEFERRED INCOME TAXES....................................... 6,538 --
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT
PORTION................................................... 101,239 1,163,036
---------- ----------
Total liabilities................................. 5,203,575 3,880,552
---------- ----------
COMMITMENTS AND CONTINGENCIES(NOTE 10)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized, 126 and
112 shares issued and outstanding at December 31, 1997
and 1996, respectively................................. -- --
Additional paid-in capital................................ 293,687 2,233
Retained earnings (deficit)............................... 94,821 (124,613)
---------- ----------
Total stockholders' equity (deficit).............. 388,508 (122,380)
---------- ----------
Total liabilities and stockholders' equity........ $5,592,083 $3,758,172
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-36
<PAGE> 143
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE................................. $12,519,142 $7,758,807
----------- ----------
OPERATING EXPENSE:
Salaries, wages, and benefits............................. 4,189,254 2,530,982
Compensation to stockholder-physicians.................... 3,564,287 2,334,316
General and administrative expense........................ 2,799,251 3,113,258
Physician practice management expense..................... 944,415 --
Depreciation and amortization............................. 405,777 326,433
----------- ----------
Total operating expenses.......................... 11,902,984 8,304,989
----------- ----------
INCOME (LOSS) FROM OPERATIONS............................... 616,158 (546,182)
INTEREST EXPENSE............................................ (249,234) (122,076)
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................... 366,924 (668,258)
(PROVISION) BENEFIT FOR INCOME TAXES........................ (147,490) 19,316
----------- ----------
NET INCOME (LOSS)................................. $ 219,434 $ (648,942)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE> 144
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..................... 84 $-- $ 2,233 $ 524,329 $ 526,562
Stock dividend............................... 28 -- -- -- --
Net loss..................................... -- -- -- (648,942) (648,942)
--- -- -------- --------- ---------
BALANCE, DECEMBER 31, 1996..................... 112 -- 2,233 (124,613) (122,380)
Issuance of common stock-- practice
acquisition............................... 14 -- 291,454 -- 291,454
Net income................................... -- -- -- 219,434 219,434
--- -- -------- --------- ---------
BALANCE, DECEMBER 31, 1997..................... 126 $0 $293,687 $ 94,821 $ 388,508
=== == ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 145
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 219,434 $ (648,942)
----------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Noncash expense........................................ 127,000 --
Depreciation and amortization.......................... 398,167 326,433
Provision (benefit) for deferred taxes................. 147,490 (19,316)
Changes in operating assets and liabilities, net of
effect from acquisitions:
Accounts receivable.................................. (457,207) 272,268
Prepayments and other................................ 33,790 905
Due from related party
Accrued shareholder compensation..................... 34,753 (47,796)
Accounts payable and accrued liabilities............. 149,061 477,649
----------- ----------
Total adjustments................................. 433,054 1,010,143
----------- ----------
Net cash provided by operating activities......... 652,488 361,201
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to related party, net................................ (1,250,264) --
Repayment of employee and shareholder loans, net.......... 2,852 193,937
Payment for acquisitions, net............................. (185,000) (470,000)
Purchase of property and equipment, net................... (220,068) (629,134)
----------- ----------
Net cash used in investing activities............. (1,652,480) (905,197)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from capital leases, net.......... (379,159) 102,705
Repayments of note payable................................ (1,814,215) (508,749)
Repayments of loans to physicians......................... (135,955) (55,227)
Borrowings from physicians................................ 60,000 298,102
Proceeds from issuance of note payable.................... 3,385,000 706,668
----------- ----------
Net cash provided by financing activities......... 1,115,671 543,499
----------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 115,679 (497)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 692 1,189
----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 116,371 $ 692
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 146
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
Ear, Nose & Throat Associates, P.C. ("ENT") was incorporated on December
18, 1973 to provide treatment and management of diseases and disorders of the
ear, nose, throat, head, and neck. ENT has operations in Westchester and Putnam
Counties, New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in ENT's financial
statements and the accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
ENT considers cash on deposit with financial institutions and all highly
liquid investments with original maturities of three months or less to be cash
and cash equivalents.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of depreciable assets for
financial statement reporting purposes. Maintenance and repairs are charged to
expense as incurred. The cost of renewals and betterments is capitalized and
depreciated over the applicable estimated useful lives. The cost and accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the accounts, and the related gain or loss is credited or charged to income.
INTANGIBLE ASSETS
ENT's physician practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
practices. As part of the purchase price allocation, ENT allocates the purchase
price to the tangible and identifiable intangible assets acquired and
liabilities assumed based on estimated fair market values. Costs of acquisitions
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed are amortized using the
straight-line method over a period of 25 years. At December 31, 1997 and 1996,
the amount of such intangible assets was approximately $673,000 and $438,000
with related accumulated amortization totaling $45,000 and $15,000,
respectively.
Also included in intangible assets is a noncompete agreement ENT entered
into in conjunction with a buyout of a former shareholder. The noncompete
agreement stipulated that the former shareholder could not engage in the
practice of medicine specializing in the treatment and management of diseases
and disorders of the ear, nose, throat, head and neck within a certain radius of
his former office for a period of 48 months. At December 31, 1997 and 1996, the
gross amount of this noncompete agreement was $402,000 and the related
accumulated amortization was approximately $373,000 and $272,000, respectively.
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at estimated net realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under third-party payor agreements is subject to audit
F-40
<PAGE> 147
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and retroactive adjustment. Provisions for estimated third-party settlements are
provided in the period the related services are rendered. Differences between
estimated amounts accrued and final settlements are reported in the year of
settlement. ENT recognizes revenue as services are performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ENT provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable. Bad
debt expense during 1997 and 1996 was $315,818 and $16,695, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ENT estimates that the carrying amounts of financial instruments, including
cash and cash equivalents, accounts receivable, and accounts payable,
approximated their fair values as of December 31, 1997 and 1996 due to the
relatively short maturity of these instruments. Notes payable and capital leases
approximated their fair values based on borrowings currently available to ENT
for similar terms and average maturities.
INCOME TAXES
ENT follows the practice of providing for income taxes based on Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns.
INDUSTRY RISKS
The health care industry is subject to numerous laws and regulations at all
levels of government. These laws and regulations include, but are not
necessarily limited to, such matters as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by health care
providers. Violations of these laws could result in significant fines and
penalties as well as significant payments for services previously billed. ENT is
subject to similar regulatory reviews. A determination of liability under any
such laws could have a material effect on ENT's financial position, results of
operations, stockholders' equity, and cash flows.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash paid during the year for interest...................... $238,167 $122,076
Liabilities assumed in connection with business acquired.... 17,000 56,666
</TABLE>
3. ACQUISITIONS
During 1997 and 1996, ENT acquired substantially all of the assets (other
than certain excluded assets, such as employment agreements and patient charts,
records and files) and assumed certain contractual liabilities of four physician
practices.
In connection with the acquisition of assets or equity of these practices,
ENT paid an aggregate of $655,000 in cash and issued 14 shares of common stock
(valued at the time of issuance at approximately $291,000). Upon completion of
these acquisitions, ENT entered into employment agreements with the
F-41
<PAGE> 148
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
former owners for employment periods ranging from three to five years. The
acquisitions were accounted for under the purchase method of accounting.
4. EQUIPMENT
Equipment at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 USEFUL LIVES
---------- ---------- -------------------
<S> <C> <C> <C>
Medical equipment........................... $1,643,756 $1,366,837 Seven years
Computer system and software................ 148,160 148,160 Three years
Furniture and fixtures...................... 215,337 215,334 Seven years
Automobiles................................. 47,952 47,952 Five years
Leasehold improvements...................... 524,060 524,060 Three to five years
---------- ----------
Total cost........................ 2,579,265 2,302,343
Less accumulated depreciation............... (1,597,947) (1,322,812)
---------- ----------
$ 981,318 $ 979,531
========== ==========
</TABLE>
Depreciation expense was approximately $275,000 and $214,000 in 1997 and
1996, respectively.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company's long-term debt and capital lease obligations as of December
31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Notes payable with interest payable monthly at rates varying
from 6.5% to 9.65%; varying monthly principal payments;
maturing on various dates from December 31, 1997 through
January 2002; secured by substantially all assets and
contract rights of the Company................... $ -- $1,161,587
$92,000 note payable to a physician dated October 15, 1994;
payable in monthly installments of $1,855, including
interest at 8%, through November 15, 1998........ 19,616 39,442
$150,000 note payable to a physician dated April 30, 1996;
payable in monthly installments of $2,083, including
interest at 9.25%, through May 1, 2000 with a lump-sum
payment of $50,000 due May 1, 2000............... 92,915 108,527
$181,111 note payable to a physician dated August 1, 1996;
payable in monthly installments of $8,109, including
interest at the rate of 7%, through August 1, 1998... 63,200 152,654
$60,000 note payable to a physician dated June 1, 1997;
payable in monthly installments of $2,213, including
interest at 8%, through December 1, 1999......... 48,937 --
Capital lease obligations with interest rates ranging from
10.25% to 18.15%, payable monthly at various amounts;
maturing October 1998 through December 2002; secured by
leased assets.................................... -- 379,159
$2,200,000 note payable to bank dated April 24, 1997;
payable in monthly installments of $45,935, including
interest at prime plus .75% (9.25% at December 31, 1997),
through May 2002................................. 1,998,939 --
</TABLE>
F-42
<PAGE> 149
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
$400,000 note payable to bank dated October 30, 1997;
payable in monthly installments of $8,285, including
interest at prime plus .75% (9.25% at December 31, 1997)
through October 30, 2002......................... 383,433 --
$350,000 note payable to bank dated April 24, 1997; interest
payable monthly at prime plus .75% (9.25% at December 31,
1997), principal payment due annually on outstanding
balance.......................................... 350,000 --
----------- ----------
Total........................................ 2,957,040 1,841,369
Less current maturities..................................... (2,855,801) (678,333)
----------- ----------
Long-term debt.............................................. $ 101,239 $1,163,036
=========== ==========
</TABLE>
On April 24, 1997, ENT entered into a $2,950,000 term loan (the
"Agreement") with Manufacturers and Traders Trust Company. The Agreement
consisted of a $2,200,000 term loan (the "Term Loan"), $350,000 revolving line
of credit (the "Revolver"), and a $400,000 grid term loan (the "Grid Loan"). ENT
used the proceeds from the Term Loan to pay down its existing bank notes payable
and capital leases. The proceeds from the Grid Loan were used to finance the
purchase, installation, and implementation of the new management software system
and hardware for Physicians' Domain, Inc. ("PDI") (as defined), as stipulated by
the bank. The proceeds from the Revolver were used to fund working capital.
Borrowings outstanding under the Agreement primarily incur interest at the
bank's prime rate (8.5% at December 31, 1997) plus .75%. The Agreement is
presently secured by substantially all of ENT's assets, a gross receipts
security pledge, and personal guarantees of the stockholders, limited to their
proportional share of ENT.
The Agreement stipulates monthly interest and principal payments amortized
over 60 months on both the Grid Loan and the Term Loan. The Revolver payments
are monthly interest payments only, with an annual renewal period required.
The Agreement contains certain restrictive covenants, including, among
other things, limitations on additional indebtedness, transfers of assets, and
mergers and acquisitions. In addition, ENT must maintain certain financial
covenants, including, among others, a minimum tangible net worth and a debt
service ratio. ENT was in default of one of its debt covenants at December 31,
1997 and therefore, the Term Loan and Grid Loan have been classified as current
liabilities in the accompanying balance sheet.
The aggregate future maturities of long-term debt as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998........................................................ $2,855,801
1999........................................................ 44,215
2000........................................................ 57,024
----------
$2,957,040
==========
</TABLE>
6. INCOME TAXES
For all periods presented, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of SFAS
No. 109.
F-43
<PAGE> 150
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the components of the income tax provision
(benefit):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal................................................... $ -- $ --
State..................................................... -- --
Deferred:
Federal................................................... 114,255 (16,071)
State..................................................... 33,235 (3,245)
-------- --------
Total income tax provision (benefit) $147,490 $(19,316)
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amounts computed
by applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Provision (benefit) computed at the federal statutory
rate...................................................... $124,754 $(227,207)
State income taxes, net of federal income tax benefit..... 21,134 (38,492)
Other permanent differences................................. 16,021 39,136
(Decrease) increase in valuation allowance.................. (14,419) 207,247
-------- ---------
Total income tax provision (benefit).............. $147,490 $ (19,316)
======== =========
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $ 894,655 $ 814,450
Book over tax depreciation................................ 83,211 58,767
Net operating loss carryforward........................... 228,023 242,442
---------- ----------
Total deferred income tax assets.................. 1,205,889 1,115,659
---------- ----------
Deferred tax liabilities:
Accounts receivable....................................... 970,963 722,841
Tax over book amortization of goodwill.................... 13,441 9,424
---------- ----------
Total deferred income tax liabilities............. 984,404 732,265
---------- ----------
Valuation allowance......................................... (228,023) (242,442)
---------- ----------
Net deferred tax (liabilities) assets....................... $ (6,538) $ 140,952
========== ==========
</TABLE>
ENT had income tax net operating loss carryforwards totaling approximately
$571,000 and $607,000 as of December 31, 1997 and 1996, respectively which
expire in 2010.
The increase in valuation allowance in 1996 is the result of the ENT's
valuation allowance for net operating loss carryforwards generated during 1996.
The decrease in valuation allowance in 1997 is a result of the 1996 loss
carryforwards utilized in 1997.
7. EMPLOYEE BENEFIT PLAN
401(k) PLAN
ENT initiated a 401(k) plan covering all of its eligible employees and
stockholders on May 1, 1997. Under the plan, employees generally may contribute
up to 15% of their pretax compensation. ENT makes
F-44
<PAGE> 151
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a discretionary contribution to each employee's account in an amount equal to
25% of the employee's contribution, up to 4% of the employee's compensation. ENT
contributed $19,845 to the plan during 1997.
PROFIT-SHARING PLAN
ENT also initiated a Profit-Sharing Plan ("Sharing Plan") covering all of
its eligible employees and stockholders. Under the Sharing Plan, ENT makes a
discretionary contribution to each employee's account based on a percentage of
the employee's compensation. This percentage can range from 1% to 15% of
eligible compensation, with a 1997 percentage of 3.75%. ENT contributed $222,154
to the Sharing Plan during 1997.
8. RELATED-PARTY TRANSACTIONS
During June 1995, an executive employee of ENT entered into an employee
agreement with the agreement stipulating an employee loan from ENT. The original
amount of the loan was for $50,000 with interest payable annually at a rate of
6%. During 1996, ENT paid for certain expenses of the employee and, accordingly,
increased the loan balance outstanding. At December 31, 1996, the balance
outstanding was approximately $127,000. During 1997, ENT established a reserve
of $127,000 against the outstanding balance which was included as expense in the
accompanying statement of operations.
In April 1997, ENT entered into a five-year management service agreement
(the "MSA") with PDI. The stockholders of ENT are more than 50% owners of PDI.
The MSA stipulates that PDI will provide financial and administrative
management, enhancement of clinical operations, network development, billing and
collection, negotiation, establishment, supervision, and maintenance of
contracts and relationships related to managed care contracts. In return, ENT
pays a management fee based on the number of full-time physicians and an
additional annual amount payable in monthly installments. ENT is also
responsible for all the operating and nonoperating expenses incurred by PDI on
behalf of managing ENT.
During 1997, ENT incurred charges of approximately $955,000 related to the
MSA.
Upon completion of the debt financing during April 1997 (Note 5), ENT
allocated a portion of the repayments to PDI. This allocation is based on cost
incurred by ENT in assisting the start-up of PDI. This amount as well as other
start-up related charges not included in debt financing allocation are included
on the accompanying balance sheet.
9. STOCK DIVIDEND
ENT declared a stock dividend to all stockholders of record on June 1,
1996. The stock dividend was a dividend of 4 shares for every 12 shares owned by
the stockholders.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
ENT and its affiliated physician groups are insured with respect to medical
malpractice risks on a claims-made basis. In the opinion of management, the
amount of potential liability with respect to these claims will not materially
affect ENT's financial position or results of operations.
EMPLOYMENT AGREEMENTS
ENT has entered into employment agreements with the shareholders of ENT and
certain nonshareholder physicians. The agreements, which are substantially
similar, provide for compensation to the shareholders in the form of a monthly
salary based on respective collections. The employment agreements also contain
restrictive covenants relating to the treatment and management of diseases and
F-45
<PAGE> 152
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
disorders of the ear, nose, throat, head and neck within 24 months after the
employment agreements expire. The employment agreements with the nonshareholder
physicians are similar to the shareholder agreements, except for the monthly
salary which is based on annual compensation, as defined. The physician
employment agreements range from three to five years.
OPERATING LEASES
ENT leases certain medical office facilities under noncancelable operating
lease agreements which expire in various years through 2006. Rental expenses
under these leases amounted to approximately $618,000 and $486,000 in 1997 and
1996, respectively.
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 665,799
1999........................................................ 566,052
2000........................................................ 528,160
2001........................................................ 435,932
2002........................................................ 179,544
Thereafter.................................................. 253,070
----------
Total............................................. $2,628,557
==========
</TABLE>
11. SUBSEQUENT EVENT
On March 30, 1997, ENT signed a definitive letter of intent with
Physicians' Specialty Corp. ("PSC"), a physicians' practice management company.
PSC has agreed to acquire substantially all of the tangible assets of ENT and
PDI. Upon final acquisition, a successor practice to ENT will enter into a
management agreement with PSC whereby PSC would manage the practice for a fixed
annual fee, as defined.
F-46
<PAGE> 153
EAR, NOSE & THROAT ASSOCIATES, P.C.
BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 137,249
Accounts receivable, net of allowance for doubtful
accounts of $801,704 at March 31, 1998................. 2,775,450
----------
Total current assets.............................. 2,912,699
EQUIPMENT, net.............................................. 915,226
DUE FROM RELATED PARTY, net................................. 1,387,186
INTANGIBLE ASSETS, net...................................... 657,265
OTHER ASSETS, net........................................... 22,761
----------
Total assets...................................... $5,895,137
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 239,957
Accrued expenses.......................................... 461,021
Accrued shareholder compensation.......................... 1,310,053
Current portion of long-term debt and capital lease
obligations............................................ 2,834,520
----------
Total current liabilities......................... 4,845,551
DEFERRED INCOME TAXES....................................... 6,538
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT
PORTION................................................... 0
----------
Total liabilities................................. 4,852,089
----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized, 126
shares issued and outstanding at March 31, 1998........ --
Additional paid-in capital................................ 293,687
Retained earnings......................................... 749,361
----------
Total stockholders' equity........................ 1,043,048
----------
Total liabilities and stockholders' equity........ $5,895,137
==========
</TABLE>
F-47
<PAGE> 154
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE................................. $3,398,524 $3,913,910
---------- ----------
OPERATING EXPENSE:
Salaries, wages, and benefits............................. 1,033,588 1,874,937
Compensation to stockholder-physicians.................... 543,818 528,000
General and administrative expense........................ 656,906 1,219,094
Physician practice management expense..................... 385,999 233,773
Depreciation and amortization............................. 66,090 24,743
---------- ----------
Total operating expenses.......................... 2,686,401 3,880,547
INCOME (LOSS) FROM OPERATIONS............................... 712,123 33,363
INTEREST EXPENSE............................................ 57,582 33,363
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 654,541 --
PROVISION FOR INCOME TAXES.................................. 0 --
---------- ----------
NET INCOME.................................................. $ 654,541 $ --
========== ==========
</TABLE>
F-48
<PAGE> 155
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ 654,541 0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 66,090 24,743
Provision (benefit) for deferred taxes................. 0 (952)
Changes in operating assets and liabilities, net of
effect from acquisitions:
Accounts receivable.................................. (348,267) (706,081)
Prepayments and other 0 327
Due from related party............................... (188,843) 0
Accrued shareholder compensation..................... 0 688,814
Accounts payable and accrued liabilities............. (81,704) (79,216)
-------- --------
Total adjustments................................. (532,425) (72,365)
-------- --------
Net cash provided by (used in) operating
activities....................................... 122,117 (72,365)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment, net................... 0 (120,469)
-------- --------
Net cash provided by (used in) investing
activities....................................... 0 (120,469)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from capital leases, net.......... (101,239) 0
Borrowings from physicians................................ 0 498,154
-------- --------
Net cash (used in) provided by financing
activities....................................... (101,239) 498,154
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 20,878 305,320
CASH AND CASH EQUIVALENTS, beginning of period.............. 116,371 692
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... 137,249 306,012
======== ========
</TABLE>
F-49
<PAGE> 156
APPENDIX A
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AMONG
TA MERGERCO, INC.,
PHYSICIANS' SPECIALTY CORP.,
TA/ADVENT VIII, L.P.,
TA/ATLANTIC AND PACIFIC IV, L.P.,
TA INVESTORS LLC
AND
TA EXECUTIVES FUND LLC
DATED AS OF JUNE 14, 1999
A-1
<PAGE> 157
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER........................................................ A-7
1.1 The Merger.................................................. A-7
1.2 Effective Time.............................................. A-7
1.3 Stock Purchase.............................................. A-7
1.4 Closing..................................................... A-7
1.5 Directors and Officers...................................... A-7
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS..................................................... A-7
2.1 Effect on Capital Stock..................................... A-7
2.2 Conversion of Securities.................................... A-8
2.3 Company Stock Options and Related Matters................... A-8
2.4 Employee Stock Purchase Plan................................ A-8
ARTICLE III
PAYMENT FOR SHARES; DISSENTING SHARES............................. A-9
3.1 Payment for Shares of Old Common............................ A-9
3.2 Dissenting Shares........................................... A-10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGERCO AND THE GUARANTORS.....
A-10
4.1 Representations and Warranties of MergerCo.................. A-10
4.2 Representations and Warranties of the Guarantors............ A-11
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... A-12
5.1 Existence; Good Standing; Authority; Compliance With Law.... A-12
5.2 Authorization, Validity and Effect of Agreements............ A-13
5.3 Capitalization.............................................. A-13
5.4 Subsidiaries................................................ A-14
5.5 Other Interests............................................. A-14
5.6 No Violation; Consents...................................... A-14
5.7 SEC Documents............................................... A-15
5.8 Investigations: Litigation.................................. A-15
5.9 Absence of Certain Changes.................................. A-16
5.10 Taxes....................................................... A-16
5.11 Books and Records........................................... A-16
5.12 Properties.................................................. A-17
5.13 Intellectual Property....................................... A-17
5.14 Environmental Matters....................................... A-17
5.15 Employee Benefit Plans...................................... A-18
5.16 Labor Matters............................................... A-20
5.17 No Brokers.................................................. A-20
5.18 Opinion of Financial Advisor................................ A-20
5.19 Year 2000................................................... A-20
5.20 Insurance................................................... A-21
5.21 Contracts and Commitments................................... A-21
5.22 Vote Required............................................... A-21
</TABLE>
A-2
<PAGE> 158
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.23 Related Party Transactions.................................. A-21
5.24 Absence of Undisclosed Liabilities.......................... A-21
5.25 Customers and Suppliers..................................... A-22
5.26 Change of Control Provisions................................ A-22
5.27 Healthcare Compliance....................................... A-22
5.28 Healthcare Billings......................................... A-22
5.29 Conduct..................................................... A-23
5.30 Certain Relationships....................................... A-23
5.31 Practices................................................... A-24
5.32 Physician and Practice Qualification........................ A-24
5.33 Managed Care Contracts...................................... A-24
5.34 Disclosure.................................................. A-24
5.35 Definition of the Company's Knowledge....................... A-24
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER............................ A-25
6.1 Conduct of Business by the Company.......................... A-25
ARTICLE VII
ADDITIONAL AGREEMENTS............................................. A-26
7.1 Stockholders Meeting........................................ A-26
7.2 Other Filings............................................... A-28
7.3 Additional Agreements....................................... A-28
7.4 Fees and Expenses........................................... A-28
7.5 No Solicitations............................................ A-29
7.6 Officers' and Directors' Indemnification.................... A-30
7.7 Access to Information; Confidentiality...................... A-31
7.8 Financial and Other Statements.............................. A-31
7.9 Public Announcements........................................ A-32
7.10 Intentionally Omitted....................................... A-32
7.11 Recapitalization Accounting Treatment....................... A-32
7.12 Delisting................................................... A-32
7.13 Notification of Certain Matters............................. A-32
7.14 Transferor's Certificate of Non-foreign Status.............. A-32
7.15 Covenants of MergerCo and the Guarantors.................... A-32
7.16 Acquisition Agreements...................................... A-33
ARTICLE VIII
CONDITIONS TO THE MERGER.......................................... A-33
8.1 Conditions to the Obligations of Each Party to Effect the A-33
Merger......................................................
8.2 Conditions to Obligations of MergerCo and the Guarantors.... A-33
8.3 Conditions to Obligations of the Company.................... A-35
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER................................. A-35
9.1 Termination................................................. A-35
9.2 Effect of Termination....................................... A-36
ARTICLE X
GENERAL PROVISIONS................................................ A-37
10.1 Notices..................................................... A-37
10.2 Interpretation.............................................. A-38
</TABLE>
A-3
<PAGE> 159
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
10.3 Non-Survival of Representations, Warranties, Covenants and A-39
Agreements..................................................
10.4 Miscellaneous............................................... A-39
10.5 Assignment.................................................. A-39
10.6 Severability................................................ A-39
10.7 Choice of Law/Consent to Jurisdiction....................... A-39
10.8 No Agreement Until Executed................................. A-40
10.9 Extension; Waiver........................................... A-40
The Guarantors..............................................
10.10 A-40
Amendment...................................................
10.11 A-40
</TABLE>
A-4
<PAGE> 160
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1.1 Surviving Corporation Certificate of Incorporation and
Bylaws
Exhibit 8.2(k) Employment Agreements
</TABLE>
A-5
<PAGE> 161
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 14, 1999,
by and among TA MergerCo, Inc., a Delaware corporation ("MergerCo"), TA/Advent
VIII L.P., TA/Atlantic and Pacific IV L.P., TA Executives Fund LLC and TA
Investors LLC (each, a "Guarantor," and together, the "Guarantors"), and
Physicians' Specialty Corp., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the respective Boards of Directors of MergerCo and the Company
have approved the merger of MergerCo with and into the Company (the "Merger") in
accordance with the Delaware General Corporation Law (the "DGCL") and, upon the
terms and subject to the conditions set forth in this Agreement, holders of
shares of common stock, par value $.001 per share, of the Company (the "Company
Common Stock") issued and outstanding immediately prior to the Effective Time
(as hereinafter defined) will be entitled, subject to the terms and conditions
hereof, to the right to receive cash;
WHEREAS, the Board of Directors of the Company (the "Company Board") has,
in light of and subject to the terms and conditions set forth herein, (i)
determined that (A) the Merger Consideration to be paid for each share of
Company Common Stock in the Merger is fair to the stockholders of the Company
(other than the Voting Agreement Stockholders), and (B) the Merger is otherwise
advisable, fair and in the best interests of the Company and its stockholders,
and (ii) resolved to approve and adopt this Agreement and the transactions
contemplated or required by this Agreement, including the Merger (collectively,
the "Transactions"), and to recommend approval and adoption by the stockholders
of the Company of this Agreement and the Transactions;
WHEREAS, as a condition to the willingness of MergerCo to enter into this
Agreement, certain stockholders of the Company (the "Voting Agreement
Stockholders") have entered into a Voting Agreement (the "Voting Agreement") and
a Roll-over Agreement (the "Roll-over Agreement"), each dated as of the date
hereof, with MergerCo. Pursuant to the Voting Agreement each Voting Agreement
Stockholder has agreed, among other things, to vote his shares of Company Common
Stock in favor of the approval of the Transactions and the approval of any other
matter relating to consummation of the Transactions, upon the terms and subject
to the conditions set forth in the Voting Agreement. Pursuant to the Roll-over
Agreement each Voting Agreement Stockholder has agreed to receive stock in the
Surviving Corporation (as hereinafter defined) in exchange for his shares of
Company Common Stock;
WHEREAS, contemporaneously with the execution of this Agreement, the
Guarantors and the Voting Agreement Stockholders have entered into a Stock
Purchase Agreement, dated as of the date hereof, with the Guarantors (the "Stock
Purchase Agreement") pursuant to which the Guarantors shall purchase from the
Voting Agreement Stockholders, and the Voting Agreement Stockholders shall sell
to the Guarantors immediately prior to the Effective Time, an aggregate of
1,873,919 shares of Company Common Stock (the "Voting Agreement Stockholder
Shares"), and as consideration therefor, the Guarantors shall pay to the Voting
Agreement Stockholders an aggregate of $19,676,149.50 (the "Stock Purchase"),
upon the terms and subject to the conditions set forth in the Stock Purchase
Agreement;
WHEREAS, the Guarantors, MergerCo and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Transactions, and also to prescribe various conditions to the Transactions; and
WHEREAS, it is intended that the Merger be recorded as a recapitalization
for financial reporting purposes.
A-6
<PAGE> 162
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the Guarantors, MergerCo and the Company hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time, the Company and MergerCo shall consummate the Merger
pursuant to which (a) MergerCo shall be merged with and into the Company and the
separate corporate existence of MergerCo shall thereupon cease, (b) the Company
shall be the successor or surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation") and shall continue to be
governed by the laws of the State of Delaware, and (c) the separate corporate
existence of the Company with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. The certificate of
incorporation of the Company (the "Certificate of Incorporation"), as in effect
immediately prior to the Effective Time shall be amended and restated in its
entirety substantially as set forth in Exhibit 1.1 attached hereto and
thereafter shall be the Certificate of Incorporation of the Surviving
Corporation until further amended as provided by law and such Certificate of
Incorporation. The bylaws of the Company (the "Bylaws"), as in effect
immediately prior to the Effective Time shall be amended and restated in their
entirety substantially as set forth in Exhibit 1.1 attached hereto and
thereafter shall be the Bylaws of the Surviving Corporation until further
amended as provided by law, by such Certificate of Incorporation and by such
Bylaws. The Merger shall have the effects specified in the DGCL.
1.2 Effective Time. As promptly as practicable after all of the conditions
set forth in Article VIII shall have been satisfied or, if permissible, waived
by the party entitled to the benefit of the same, MergerCo and the Company shall
duly execute and file a certificate of merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware in accordance with the DGCL. The
Merger shall become effective as of the time of filing of the Certificate of
Merger (the "Effective Time").
1.3 Stock Purchase. At the Closing and prior to the Effective Time, the
Guarantors and the Voting Agreement Stockholders shall consummate the Stock
Purchase, upon the terms and subject to the conditions set forth in the Stock
Purchase Agreement.
1.4 Closing. The closing of the Merger (the "Closing") shall take place at
such time and on a date to be specified by the parties, which shall be no later
than the second business day after satisfaction or waiver of all of the
conditions set forth in Article VIII hereof (the "Closing Date"), at the offices
of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109,
unless another date or place is agreed to by the parties hereto.
1.5 Directors and Officers. The directors and officers of MergerCo
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of shares of Company
Common Stock or any holder of shares of capital stock of MergerCo:
(a) Capital Stock of MergerCo. Each share of the common stock of
MergerCo (the "MergerCo Common Stock") issued and outstanding immediately
prior to the Effective Time shall be converted into and become one fully
paid and nonassessable share of Common Stock, par value $0.001 per share,
of the Surviving Corporation. Each share of Convertible Participating
Preferred
A-7
<PAGE> 163
Stock and Redeemable Preferred Stock of MergerCo ("Convertible
Participating Preferred Stock" and "Redeemable Preferred Stock,"
respectively) issued and outstanding immediately prior to the Effective
Time shall be converted into and become one share of Convertible
Participating Preferred Stock and one share of Redeemable Preferred Stock,
respectively, of the Surviving Corporation with all of the rights and
privileges set forth in the certificate of incorporation of Surviving
Corporation in accordance with Section 1.1 hereof.
(b) Cancellation of Treasury Stock and MergerCo-Owned Stock. Each
share of Company Common Stock, and all other shares of capital stock of the
Company, that are owned by the Company or any Subsidiary of the Company (as
defined in Section 10.2) (a "Company Subsidiary") and all shares of Company
Common Stock and other shares of capital stock of the Company owned by
MergerCo shall be canceled and retired and shall cease to exist and no
consideration shall be delivered or deliverable in exchange therefor.
2.2 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of MergerCo, the Company or the
holders of any of the shares thereof:
(a) Subject to the other provisions of this Section 2.2, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time (excluding shares of Company Common Stock owned by the
Company or any of the Company Subsidiaries or by MergerCo and
Recapitalization Shares (as hereinafter defined) and Dissenting Shares (as
defined in Section 3.2) (the "Old Common") shall be converted into the
right to receive Ten Dollars and Fifty Cents ($10.50) per share, net to the
seller in cash, payable to the holder thereof, without any interest thereon
(the "Merger Consideration"), upon surrender and exchange of the
Certificate (as defined in Section 3.1) representing such share of Old
Common.
(b) All such shares of Old Common, when converted as provided in
Section 2.2(a), no longer shall be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each Certificate
previously evidencing such shares shall thereafter represent only the right
to receive the Merger Consideration. The holders of Certificates previously
evidencing shares of Old Common outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to the Old
Common except as otherwise provided herein or by law and upon the surrender
of Certificates in accordance with the provisions of Section 3.1, shall
only represent the right to receive for their shares of Old Common, the
Merger Consideration, without any interest thereon.
(c) Each share of Company Common Stock identified on Schedule 2.2(c)
(a "Recapitalization Share") shall be converted into one (1) fully paid and
nonassessable share of Common Stock, par value $0.001 per share, of the
Surviving Corporation.
2.3 Company Stock Options and Related Matters. The Company shall cause the
holders of at least 81.6% of the outstanding options to purchase Company Common
Stock ("Options") as of the date hereof to execute a Stock Option Exercise and
Termination Agreement in the form attached hereto as Exhibit 2.3. The Company
shall use its reasonable best efforts to cause any holder of Options other than
those holders described in the preceding sentence to execute such Stock Option
Exercise and Termination Agreement. The Company shall take all actions necessary
to ensure that no Options are granted after the date of this Agreement other
than as set forth on Exhibit 2.3.
2.4 Employee Stock Purchase Plan. The Company has taken appropriate action
to provide that (i) the current offering period under the Company's 1997
Employee Stock Purchase Plan, as amended (the "Stock Purchase Plan"), shall be
terminated as of June 30, 1999, (ii) each participant in the Stock Purchase Plan
on the date hereof shall be deemed to have exercised his or her Purchase Right
(as defined in the Stock Purchase Plan) on such date and shall acquire from the
Company (A) such number of whole shares of Company Common Stock as his or her
accumulated payroll deductions on such date will purchase at the Offering
Exercise Price (as defined in the Stock Purchase Plan) (treating the last
business day prior to June 30, 1999 as the "Purchase Date" for all purposes of
the Stock Purchase Plan) and
A-8
<PAGE> 164
(B) cash in the amount of any remaining balance in such participant's account,
and (iii) the Stock Purchase Plan shall be terminated effective as of June 30,
1999.
ARTICLE III
PAYMENT FOR SHARES; DISSENTING SHARES
3.1 Payment for Shares of Old Common.
(a) Prior to the Effective Time, MergerCo shall appoint a bank or
trust company reasonably acceptable to the Company to act as exchange agent
(the "Exchange Agent"). At or prior to the Effective Time, MergerCo shall
deposit, or MergerCo shall otherwise take all steps necessary to cause to
be deposited, with the Exchange Agent in an account (the "Exchange Fund")
the aggregate Merger Consideration to which holders of shares of Old Common
shall be entitled at the Effective Time pursuant to Section 2.2(a).
(b) Promptly after the Effective Time, MergerCo shall cause the
Exchange Agent to mail to each record holder of certificates (the
"Certificates") that immediately prior to the Effective Time represented
shares of Old Common a form of letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent.
(c) In effecting the payment of the Merger Consideration with respect
to shares of Old Common represented by Certificates entitled to payment of
the Merger Consideration pursuant to Section 2.2(a) (the "Cashed Shares"),
upon the surrender of each such Certificate, the Exchange Agent shall pay
the holder of such Certificate the Merger Consideration multiplied by the
number of Cashed Shares, in consideration therefor. Upon such payment such
Certificate shall forthwith be canceled.
(d) From and after the Effective Time until surrendered in accordance
with paragraph (c) above, each Certificate representing shares of Old
Common shall represent solely the right to receive the Merger Consideration
relating thereto. No interest or dividends shall be paid or accrued on the
Merger Consideration. If the Merger Consideration (or any portion thereof)
is to be delivered to any person other than the person in whose name the
Certificate formerly representing shares of Old Common surrendered therefor
is registered, it shall be a condition to such right to receive such Merger
Consideration that the Certificate so surrendered shall be properly
endorsed or otherwise be in proper form for transfer and that the person
surrendering such shares of Old Common shall pay to the Exchange Agent any
transfer or other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable.
(e) No dividends or other distributions with respect to shares of Old
Common with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of
Company Common Stock represented thereby.
(f) Promptly following the date which is 180 days after the Effective
Time, the Exchange Agent shall deliver to the Surviving Corporation all
cash, Certificates and other documents in its possession relating to the
Transactions, and the Exchange Agent's duties shall terminate. Thereafter,
each holder of a Certificate formerly representing a share of Old Common
may surrender such Certificate to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in
consideration therefor the Merger Consideration relating thereto without
any interest or dividends thereon.
(g) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any shares of Company Common
Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates formerly representing shares of Old
Common are presented to the Surviving Corporation or the Exchange Agent,
they shall be
A-9
<PAGE> 165
surrendered and canceled in return for the payment of the Merger
Consideration relating thereto, as provided in this Article III.
(h) None of MergerCo, the Company or the Exchange Agent shall be
liable to any person in respect of any cash from the Exchange Fund
delivered to a public official in good faith pursuant to any applicable
abandoned property, escheat or similar law.
(i) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the provision of reasonable and customary indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration due to such person
pursuant to this Agreement.
(j) The Surviving Corporation shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this Agreement
to any holder of shares of Old Common such amounts as the Surviving
Corporation is required to deduct and withhold with respect to the making
of such payment under the Internal Revenue Code of 1986, as amended (the
"Code"), or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Surviving Corporation, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the holder of the shares of Old Common with respect to which such
deduction and withholding was made by the Surviving Corporation.
3.2 Dissenting Shares. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Company Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders who
shall have not voted in favor of the Merger or consented thereto in writing and
who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of the DGCL (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive the Merger
Consideration. Such stockholders instead shall be entitled to receive payment of
the appraised value of such shares of Company Common Stock held by them in
accordance with the provisions of such Section 262, except that all Dissenting
Shares held by stockholders who shall have failed to perfect or who effectively
shall have withdrawn or lost their rights to appraisal of such shares of Company
Common Stock under such Section 262 shall thereupon be deemed to have been
converted into and to have become exchangeable, as of the Effective Time, for
the right to receive, without any interest thereon, the Merger Consideration
upon surrender in the manner provided in Section 3.1 of the Certificate or
Certificates that, immediately prior to the Effective Time, evidenced such
shares of Company Common Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
MERGERCO AND THE GUARANTORS
4.1 Representations and Warranties of MergerCo. MergerCo hereby represents
and warrants to the Company as follows:
(a) Organization. MergerCo is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and
has all requisite corporate or other power and authority and all necessary
governmental approvals to own, lease and operate its properties and to
carry on its business as now being conducted, except where the failure to
be so organized, existing and in good standing or to have such power,
authority, and governmental approvals would not reasonably be expected to
have a material adverse effect on the business, results of operations or
condition (financial or otherwise) of MergerCo (a "MergerCo Material
Adverse Effect").
(b) Authorization; Validity of Agreement; Necessary Action. MergerCo
has full corporate power and authority to execute and deliver this
Agreement and to consummate the Transactions. The
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execution, delivery and performance by MergerCo of this Agreement and the
consummation of the Transactions have been duly authorized by the Board of
Directors of MergerCo (the "MergerCo Board") and by stockholders of
MergerCo, and no other corporate action on the part of MergerCo is
necessary to authorize the execution and delivery by MergerCo of this
Agreement and the consummation of the Transactions. This Agreement has been
duly executed and delivered by MergerCo and, assuming due and valid
authorization, execution and delivery hereof by the Company, is a valid and
binding obligation of MergerCo enforceable against MergerCo in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
other similar laws relating to creditors' rights and general principles of
equity.
(c) Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under,
and other applicable requirements of, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the HSR Act (as hereinafter defined),
state securities or state "Blue Sky" laws, none of the execution, delivery
or performance of this Agreement by MergerCo, the consummation by MergerCo
of the Transactions or compliance by MergerCo with any of the provisions
hereof will (i) conflict with or result in any breach of any provision of
the certificate of incorporation or bylaws of MergerCo, (ii) require any
filing with, or permit, authorization, consent or approval of, any
Governmental Entity (as hereinafter defined), (iii) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which MergerCo is a party or by which it
or any of its properties or assets may be bound, or (iv) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to
MergerCo or any of its properties or assets, excluding from the foregoing
clauses (ii), (iii) and (iv) such violations, breaches or defaults which
would not, individually or in the aggregate, reasonably be expected to have
a MergerCo Material Adverse Effect. For purposes of this Agreement,
"Governmental Entity" means any governmental or quasi-governmental
authority including, without limitation, any federal, state, territorial,
county, municipal or other governmental or quasi-governmental agency,
board, branch, bureau, commission, court, department or other
instrumentality or political unit or subdivision, whether domestic or
foreign.
(d) Takeover Laws. MergerCo was not, immediately prior to the
execution of this Agreement, an "interested stockholder" within the meaning
of Section 203 of the DGCL.
(e) Formation of MergerCo; No Prior Activities. MergerCo was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement. As of the date hereof and as of the Effective Time, except for
(i) obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated by this
Agreement and (ii) this Agreement and any other agreements or arrangements
contemplated by this Agreement or in furtherance of the transactions
contemplated hereby, MergerCo has not incurred, directly or indirectly,
through any subsidiary or affiliate, any obligations or liabilities or
engaged in any business activities of any type or kind whatsoever or
entered into any agreements or arrangements with any person.
4.2 Representations and Warranties of the Guarantors. Each Guarantor
hereby represents and warrants to the Company severally as to itself as follows:
(a) Organization. Such Guarantor is an entity duly organized, validly
existing and in good standing under the laws of its state of formation, and
has all requisite corporate, partnership or other power and authority and
all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as now being conducted, except
where the failure to be so organized, existing and in good standing or to
have such power, authority, and governmental approvals would not reasonably
be expected to have a material adverse effect on the business, results of
operations or condition (financial or otherwise) of such Guarantor (a
"Guarantor Material Adverse Effect").
(b) Authorization; Validity of Agreement; Necessary Action. Such
Guarantor has all requisite power and authority to execute and deliver this
Agreement and to consummate the Transactions. The
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execution, delivery and performance by such Guarantor of this Agreement and
the consummation of the Transactions have been duly authorized by all
necessary action on the part of such Guarantor and no other action on the
part of such Guarantor is necessary to authorize the execution and delivery
by such Guarantor of this Agreement and the consummation of the
Transactions. This Agreement has been duly executed and delivered by such
Guarantor and, assuming due and valid authorization, execution and delivery
hereof by the Company, is a valid and binding obligation of such Guarantor
enforceable against such Guarantor in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity.
(c) Consents and Approvals; No Violations. Except for filings,
permits, authorizations, consents and approvals as may be required under,
and other applicable requirements of, the Exchange Act, the HSR Act (as
hereinafter defined), state securities or state "Blue Sky" laws, none of
the execution, delivery or performance of this Agreement by such Guarantor,
the consummation by such Guarantor of the Transactions or compliance by
such Guarantor with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the organizational documents of
Guarantor, (ii) require any filing with, or permit, authorization, consent
or approval of, any Governmental Entity, (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which such Guarantor is a party or by
which it or any of its properties or assets may be bound, or (iv) violate
any order, writ, injunction, decree, statute, rule or regulation applicable
to Guarantor or any of its properties or assets, excluding from the
foregoing clauses (ii), (iii) and (iv) such violations, breaches or
defaults which would not, individually or in the aggregate, reasonably be
expected to have a Guarantor Material Adverse Effect.
(d) Required Financing. The Guarantors and/or MergerCo have financing
commitments in place which, together with the equity contributions to be
made by the Guarantors in accordance with Section 7.15 hereof, will provide
sufficient funds to consummate the Transactions (collectively, the
"Transaction Costs"), including, without limitation, to (i) pay, with
respect to all shares of Old Common in the Merger, the Merger Consideration
pursuant to Section 2.2(a), (ii) refinance the outstanding indebtedness of
the Company as set forth in Exhibit 8.2(e) hereof and (iii) pay any fees
and expenses in connection with the Transactions or the financing thereof.
The Guarantors have provided to the Company true, complete and correct
copies of all financing commitment letters (the "Commitment Letters"),
including any exhibits, schedules or amendments thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules delivered at or prior to
the execution hereof to MergerCo, which shall refer to the relevant Sections of
this Agreement (the "Company Disclosure Schedule"), the Company represents and
warrants to MergerCo as follows:
5.1 Existence; Good Standing; Authority; Compliance With Law.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. The Company is
duly licensed or qualified to do business as a foreign corporation and is
in good standing under the laws of any other state of the United States in
which the ownership of its property or the conduct of its business makes
such qualification necessary, except where the failure to be so licensed or
qualified or in good standing would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect (as
hereinafter defined). For purposes of this Agreement, an event shall be
deemed to have a "Company Material Adverse Effect" if such event would
reasonably be expected to have a material adverse effect on the
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business, results of operations or condition (financial or otherwise) of
the Company and the Company Subsidiaries taken as a whole. The Company has
all requisite corporate power and authority to own, operate, lease and
encumber its properties and carry on its business as now conducted.
(b) Each of the Company Subsidiaries is a corporation, partnership or
limited liability company duly incorporated or organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
organization, has the corporate or other power and authority to own its
properties and to carry on its business as it is now being conducted, and
is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which
such failure to be so qualified or to be in good standing would not
reasonably be expected to have a Company Material Adverse Effect.
(c) The Company and the Company Subsidiaries have obtained all
licenses, permits and other authorizations required to be obtained by them
and have taken all actions required to be taken by them by applicable law
or governmental regulations in connection with their businesses as now
conducted by them, except where the failure to obtain such licenses,
permits and other authorizations or to take such actions would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
(d) Copies of the Certificate of Incorporation and Bylaws and the
other charter documents, bylaws, organizational documents and partnership,
and limited liability company agreements (and in each such case, all
amendments thereto) of the Company and each of the Company Subsidiaries
have been provided or made available to MergerCo and are true and correct
in all material respects.
5.2 Authorization, Validity and Effect of Agreements. Each of the Company
and the Company Subsidiaries, as applicable, has the requisite power and
authority to enter into the Transactions and to execute and deliver this
Agreement. The Company Board has approved this Agreement and the Transactions.
In connection with the foregoing, the Company Board has taken such actions and
votes as are necessary on its part under the DGCL to render the provisions of
Section 203 of the DGCL and all other applicable takeover statutes of the State
of Delaware inapplicable to this Agreement and the Transactions. Subject only to
the approval of this Agreement by the holders of the Company Common Stock, the
execution by the Company of this Agreement and consummation of the Transactions
have been duly authorized by all requisite corporate action on the part of the
Company. This Agreement has been duly executed and delivered by the Company and,
subject to approval by holders of the Company's Common Stock, and assuming due
and valid authorization, execution and delivery thereof by MergerCo, constitutes
a valid and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
5.3 Capitalization. The authorized capital stock of the Company consists
of 50,000,000 shares of Company Common Stock and 10,000 shares of preferred
stock, par value $1.00 per share, of the Company (the "Preferred Stock"). As of
the date of this Agreement, (i) 9,143,677 shares of Company Common Stock were
issued and outstanding, (ii) 2,000,000, 275,000 and 200,000 shares of Company
Common Stock have been authorized and reserved for issuance pursuant to the
Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), the 1996 Health
Care Professional Stock Option Plan (the "HCP Plan," and, together with the 1996
Plan, the "Stock Option Plans") and the Stock Purchase Plan, respectively,
subject to adjustment on the terms set forth in the applicable Stock Option
Plans, (iii) 1,421,440 and 103,500 Options were outstanding under the 1996 Plan
and the HCP Plan, respectively, (iv) no shares of Preferred Stock were issued
and outstanding and (v) 28,348 shares of Company Common Stock and no shares of
Preferred Stock were held in the treasury of the Company. As of the date of this
Agreement, except as set forth on Section 5.3 of the Company Disclosure
Schedule, the Company had no shares of Company Common Stock reserved for
issuance other than as described above. All such issued and outstanding shares
of Company Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Except as set forth on Section 5.3
of the Company Disclosure Schedule, the Company has no outstanding bonds,
debentures, notes or other obligations the holders of
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which have the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of the Company on any
matter. Except for the Options, each of which were issued pursuant to the 1996
Plan or the HCP Plan except as set forth on Section 5.3 of the Company
Disclosure Schedule, there are not at the date of this Agreement, except as set
forth on Section 5.3 of the Company Disclosure Schedule, any existing options,
warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments which obligate the Company to issue, transfer or sell
any shares of capital stock of the Company. Section 5.3 of the Company
Disclosure Schedule sets forth a full list of Options, including the name of the
person to whom such Options have been granted, the number of shares subject to
each Option, the per share exercise price for each Option and the vesting
schedule for each Option. Except as set forth in Section 5.3 of the Company
Disclosure Schedule and as provided in the Stock Option Plans, the vesting
schedule of all Options shall not be changed or affected by the execution of
this Agreement or consummation of the Transactions. Other than the Voting
Agreement, the Roll-Over Agreement, the Stock Purchase Agreement and that
certain Stock Option Exercise and Termination Agreement among the Company and
certain Stockholders and other than awards made pursuant to any of the Stock
Option Plans, except as set forth on Section 5.3 of the Company Disclosure
Schedule, there are no agreements or binding understandings to which the Company
or any Company Subsidiary is a party with respect to the voting of any shares of
capital stock of the Company or which restrict the transfer of any such shares,
nor does the Company have knowledge of any third party agreements or binding
understandings with respect to the voting of any such shares or which restrict
the transfer of any such shares. Other than awards made pursuant to any of the
Stock Option Plans, there are no outstanding contractual obligations of the
Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any
shares of capital stock, partnership interests or any other securities of the
Company or any Company Subsidiary. Except as set forth in Section 5.3 of the
Company Disclosure Schedule, neither the Company nor any Company Subsidiary is
under any obligation, contingent or otherwise, by reason of any agreement to
register the offer and sale or resale of any of their securities under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "Securities Act"). As of the date hereof, there are no declared
but unpaid dividends outstanding with respect to the Company Common Stock.
5.4 Subsidiaries. Except as set forth in Section 5.4 of the Company
Disclosure Schedule, the Company owns directly or indirectly each of the
outstanding shares of capital stock or other equity interests of each of the
Company Subsidiaries. Each of the outstanding shares of capital stock of each of
the Company Subsidiaries having corporate form is duly authorized, validly
issued, fully paid and nonassessable. Except as set forth in Section 5.4 of the
Company Disclosure Schedule, each of the outstanding shares of capital stock or
other equity interest of each of the Company Subsidiaries is owned, directly or
indirectly, by the Company free and clear of all liens, pledges, security
interests, claims or other encumbrances. The following information for each
Company Subsidiary as of the date of this Agreement is set forth in Section 5.4
of the Company Disclosure Schedule: (i) its name and jurisdiction of
incorporation or organization; (ii) its authorized capital stock, share capital
or other equity interest, to the extent applicable; and (iii) the name of each
stockholder or equity interest holder and the number of issued and outstanding
shares of capital stock, share capital or other equity interest held by it.
5.5 Other Interests. Except as set forth in Section 5.5 of the Company
Disclosure Schedule, neither the Company nor any Company Subsidiary owns
directly or indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, limited liability company, joint venture,
business, trust or other entity (other than investments in short-term investment
securities).
5.6 No Violation; Consents. Neither the execution and delivery by the
Company of this Agreement nor consummation by the Company of the Transactions in
accordance with the terms hereof, will conflict with or result in a breach of
any provisions of the Certificate of Incorporation, Bylaws, or the
organizational documents of the Company or any Company Subsidiary. Except as set
forth in Section 5.6 of the Company Disclosure Schedule, the execution and
delivery by the Company of this Agreement and consummation by the Company of the
Transactions in accordance with the terms hereof will not violate, or conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with
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notice or lapse of time or both, would constitute a default) under, or result in
the termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of the Company or the
Company Subsidiaries under, or result in being declared void, voidable or
without further binding effect, any of the terms, conditions or provisions of
(x) any note, bond, mortgage, indenture, deed of trust or (y) any license,
permit, contract, agreement or obligation to which the Company or any of the
Company Subsidiaries is a party, or by which the Company or any of the Company
Subsidiaries or any of their properties is bound, except as would not (A)
prevent or delay consummation of the Merger in any material respect or otherwise
prevent the Company from performing its obligations under this Agreement in any
material respect, or (B) individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect. Other than the filings
provided for in Article II of this Agreement, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), the Exchange Act or applicable state
securities and "Blue Sky" laws (collectively, the "Regulatory Filings"), the
execution and delivery of this Agreement by the Company does not, and the
performance of this Agreement by the Company and consummation of the
Transactions do not, require any consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority, except as would not (A) prevent or delay consummation of the Merger
in any material respect or otherwise prevent the Company from performing its
obligations under this Agreement in any material respect or (B) individually or
in the aggregate, reasonably be expected to have a Company Material Adverse
Effect.
5.7 SEC Documents. The Company has filed all required forms, reports and
documents with the SEC since March 26, 1997 (collectively, the "Company SEC
Reports"), required to be filed by it in accordance with the Exchange Act, the
Securities Act and the rules and regulations promulgated thereunder (the
"Securities Laws"). As of their respective dates, the Company SEC Reports (i)
complied as to form in all material respects with the applicable requirements of
the Securities Laws and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. Each of the consolidated balance sheets of the
Company included in or incorporated by reference into the Company SEC Reports
(including the related notes and schedules) fairly presents in all material
respects the consolidated financial position of the Company and the Company
Subsidiaries as of its date and each of the consolidated statements of income,
retained earnings and cash flows of the Company included in or incorporated by
reference into the Company SEC Reports (including any related notes and
schedules) fairly presents in all material respects the results of operations,
retained earnings or cash flows, as the case may be, of the Company and the
Company Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles ("GAAP") consistently applied during the periods
involved, except as may be noted therein and except, in the case of the
unaudited statements, as permitted by Form 10-Q pursuant to Section 13 or 15(d)
of the Exchange Act.
5.8 Investigations: Litigation.
(a) Other than reviews pursuant to the HSR Act, there are no pending
or, to the knowledge of the Company, threatened, investigations, reviews or
inquiries by any Governmental Entity with respect to the Company (an
"Investigation"), nor has the Company or any Company Subsidiary received
written notice from any Governmental Entity of such Governmental Entity's
intention to conduct an Investigation.
(b) Except as disclosed in the Company SEC Reports or as would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect, (i) there are no actions, suits, proceedings,
investigations or claims pending or, to the knowledge of the Company,
threatened against the Company, at law or in equity, or before or by any
court, commission, governmental department, board, bureau, agency,
administrative officer or executive, instrumentality (including, without
limitation any actions, suits, proceedings or investigations with respect
to the transactions contemplated by this Agreement) whether federal, state,
local or foreign, or before any
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arbitrator, and (ii) there are no outstanding domestic or foreign
judgments, settlements, decrees or orders against the Company enjoining it
in respect of, or the effect of which is to prohibit or modify, any
business practice or the acquisition of any property or the conduct of
business in any area. Neither the Company nor any of the Company
Subsidiaries is, or for the past three years has been, in violation of, any
federal, state, local or foreign laws, statutes, rules, regulations or
orders promulgated or judgments entered by any Governmental Entity,
arbitration board or tribunal to which the Company or any Company
Subsidiary or any of their respective assets or properties is subject,
except as would not, individually or in the aggregate, have a Material
Adverse Effect. Since June 1, 1998, neither the Company nor any Company
Subsidiary has received any written claim or notice that it is or was in
violation of any federal, state, local or foreign material laws, statutes,
rules, regulations or orders promulgated or judgments entered by any
Governmental Entity, arbitration board or tribunal.
5.9 Absence of Certain Changes. Except as set forth in Section 5.9 of the
Company Disclosure Schedule and except as disclosed in the Company SEC Reports
filed after December 31, 1998, since December 31, 1998, the Company and the
Company Subsidiaries have conducted their businesses only in the ordinary course
of business and there has not been: (i) any event or events that have taken
place that would, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect or (ii) any action taken by the Company
that would require the consent of MergerCo under Section 6.1 if taken after the
execution of this Agreement.
5.10 Taxes.
(a) Except as set forth in Section 5.10 of the Company Disclosure
Schedule, each of the Company and the Company Subsidiaries has filed all
Tax Returns (as hereinafter defined) which the Company was required to file
(after giving effect to any filing extension granted by a Governmental
Entity) and all such Tax Returns are true and accurate in all material
respects and has paid all Taxes (as hereinafter defined) required to be
paid by it, except, in each case, where the failure to file such Tax
Returns or pay such Taxes would not, individually or in the aggregate, have
a Company Material Adverse Effect. Except as set forth in Section 5.10 of
the Company Disclosure Schedule, the most recent audited financial
statements contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 reflect an adequate reserve for all
material Taxes payable by the Company and the Company Subsidiaries for all
taxable periods and portions thereof through the date of such financial
statements in accordance with GAAP applied on a consistent basis (excluding
from such reserve any amounts attributable to timing differences between
book and tax income). No deficiencies for any Taxes have been proposed,
asserted or assessed against the Company or any of the Company
Subsidiaries, and no requests for waivers of the time to assess any such
Taxes are pending. Neither the Company nor any Company Subsidiary is a
party to any Tax sharing agreement, or agreement for an exemption with any
Governmental Entity. Neither the Company nor any of the Company
Subsidiaries has made any payment, or is obligated to make any payment
under any agreement entered into on or before the Effective Time, that
would be non-deductible under Code Section 280G.
(b) For purposes of this Agreement, "Taxes" means all federal, state,
local and foreign income, property, sales, franchise, employment, payroll,
withholding, estimated minimum, excise and other taxes, tariffs or
governmental charges of any nature whatsoever, together with any interest,
penalties or additions to tax with respect thereto and shall include any
taxes, interest, penalties or additions to tax of another person to the
extent that the Company or any Company Subsidiary is liable to pay them (i)
under Treas. Reg. Section 1.1502-6 (or any similar provision of state,
local or foreign law), (ii) as a successor or transferee, or (iii) pursuant
to a contract entered into prior to the Effective Time.
(c) For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be
supplied to a taxing authority in connection with Taxes including any
amendments thereof.
5.11 Books and Records. The books of account and other financial records
of the Company and each of the Company Subsidiaries are accurately reflected in
all material respects in the financial statements included in the Company SEC
Reports.
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5.12 Properties.
(a) All of the real estate properties owned or leased by the Company
or any of the Company Subsidiaries are set forth in Section 5.12 of the
Company Disclosure Schedule. Except as set forth in Section 5.12 of the
Company Disclosure Schedule, the Company or a Company Subsidiary owns good
and marketable title to each of the owned real properties identified in
Section 5.12 of the Company Disclosure Schedule (the "Company Properties"),
free and clear of liens which secure the payment of money, mortgages or
deeds of trust, monetary charges which are liens, security interests or
other encumbrances on title which secure the payment of money
(collectively, "Encumbrances"), other than Encumbrances which secure
indebtedness which is properly reflected in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 (the "10-K"), and the
Company Properties are not subject to any easements, rights of way,
covenants, conditions, restrictions or other written agreements, laws,
ordinances and regulations materially and adversely affecting the current
use or occupancy of any of the Company Properties by the Company
(collectively, "Property Restrictions"), other than Property Restrictions
of record or Property Restrictions which would not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse
Effect.
(b) The Company and the Company Subsidiaries own or lease all
machinery, equipment and other tangible personal property and assets
necessary for the conduct of their business as presently conducted, except
where the absence of such ownership or leasehold interest would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. The Company and the Company Subsidiaries own good
title, free and clear of all Encumbrances, to all of the personal property
and assets shown on the Company's balance sheet at December 31, 1998 as
reflected in the 10-K (the "Balance Sheet") or acquired after December 31,
1998, except for (A) assets which have been disposed of to nonaffiliated
third parties since December 31, 1998 in the ordinary course of business or
(B) Encumbrances reflected in the Balance Sheet.
5.13 Intellectual Property. The Company or a Company Subsidiary is the
owner of, or a licensee under a valid license for, all items of intangible
property which are material to the business of the Company and the Company
Subsidiaries as currently conducted, taken as a whole, including, without
limitation, trade names, unregistered trademarks and service marks, brand names,
software, patents and copyrights, except where the failure to own or be a
licensee for such intangible property would not, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
There are no claims pending or, to the Company's knowledge, threatened, that the
Company or any Company Subsidiary is in violation of any such intellectual
property right of any third party which would, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect, and, to the
Company's knowledge, no third party is in violation of any intellectual property
rights of the Company or any Company Subsidiary which would, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse Effect.
5.14 Environmental Matters. The Company and the Company Subsidiaries have
complied with and are in compliance with all Environmental Laws (as hereinafter
defined) except where failure to so comply or be in compliance would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. As used in this Agreement, "Environmental Laws" shall
mean all federal, state and local laws, rules, regulations, ordinances and
orders and all common law that purport to regulate pollution, discharge or the
release or threatened releases of hazardous substances, wastes or other
materials into the environment, or impose liabilities or standards of conduct
relating to the foregoing. As used in this Agreement, "Hazardous Materials"
means any "hazardous waste" as defined in either the United States Resource
Conservation and Recovery Act or regulations adopted pursuant to said act, any
"hazardous substances" or "hazardous materials" as defined in the United States
Comprehensive Environmental Response, Compensation and Liability Act and, to the
extent not included in the foregoing, any medical waste, petroleum products, oil
or fractions thereof, pollutants or contaminants or any other materials or
substances covered by Environmental Laws. There is no administrative or judicial
enforcement proceeding pending, or to the knowledge of the Company threatened,
against the Company or any Company Subsidiary under any Environmental Law.
Neither the Company nor any Company Subsidiary
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has received any written notice since July 21, 1996 that it, any Company
Subsidiary or, to the knowledge of the Company, any legal predecessor of the
Company has violated or is alleged to have violated an Environmental Law or is
liable or potentially liable under any Environmental Law for response costs or
natural resource damages, as those terms are defined under the Environmental
Laws, at any location, and neither the Company nor any Company Subsidiary nor,
to the knowledge of the Company, their respective predecessors has treated,
stored, transported or disposed of, or allowed or arranged for any third party
to transport or dispose of, any waste containing Hazardous Materials at any
location included on the National Priorities List, as defined under the
Comprehensive Environmental Response, Compensation, and Liability Act, or any
location known to the Company to be proposed for inclusion on that list or at
any location on any analogous state list or at any other location in a manner
which has resulted or would result in any material liability under any
Environmental Law. To the knowledge of the Company there has been no release on
the real property currently or formerly owned or leased by the Company or any
Company Subsidiary, or on the real property owned or leased by any predecessor
entity of Hazardous Materials that has or would result in an order to perform a
response action or in any other material liability under the Environmental Laws
and to the Company's knowledge, there is no hazardous waste treatment, storage
or disposal facility, underground storage tank, landfill, surface impoundment
(other than for control of storm water), underground injection well (other than
for permitted disposal of sanitary wastes), friable asbestos or PCB's, as those
terms are defined under the Environmental Laws, located at any of the real
property owned or leased by the Company or any Company Subsidiary or, to the
knowledge of the Company, any legal predecessor entity of the Company or at any
facilities utilized by the Company or the Company Subsidiaries. To the knowledge
of the Company, no lien has been imposed by any governmental authority on the
real property owned or leased by the Company or any Company Subsidiary, or on
any facility, machinery or equipment owned, operated, leased or used by the
Company or any Company Subsidiary, in connection with the presence of any
Hazardous Material.
5.15 Employee Benefit Plans.
(a) Section 5.15 of the Company Disclosure Schedule sets forth a list
of each Company Benefit Plan (as hereinafter defined) that is maintained by
the Company or an Affiliate (as hereinafter defined) on the date hereof.
(b) Each Company Benefit Plan: (i) in which employees of the Company
or any Company Subsidiary actively participate and (ii) which is intended
to qualify under Section 401(a) of the Code, was adopted in 1998.
(c) Except as set forth in Section 5.15 of the Company Disclosure
Schedule, neither the Company nor any Affiliate knows of any failure of any
party to comply with any laws applicable with respect to the Company
Benefit Plans. Except as set forth in Section 5.15 of the Company
Disclosure Schedule, (i) each Company Benefit Plan and any related trust,
insurance contract or fund has been maintained, funded and administered in
compliance in all material respects with its respective terms and the terms
of any applicable collective bargaining agreement and in compliance with
all applicable laws and regulations, including, but not limited to, the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
the Code; and (ii) all contributions to, payments to be made from, or
premiums owing with respect to any Company Benefit Plan for all periods
ending on or prior to the Closing Date have been paid or accrued in
accordance with GAAP and are reflected in the most recent consolidated
balance sheet of the Company. Neither the Company nor any Affiliate has
engaged in a "prohibited transaction," as defined in Section 406 of ERISA,
or Code Section 4975, for which an exemption is not available, and there
has been no failure to comply with any provision of ERISA, other applicable
law, or any agreement, which, in either case, would subject the Company or
any Affiliate to liability (including, without limitation, through any
obligation of indemnification or contribution) for any damages, penalties,
or taxes, or any other material loss or expense which would, individually
or in the aggregate, reasonably be expected to have a Company Material
Adverse Effect. No litigation or governmental administrative proceeding (or
investigation) or other proceeding (other than those relating to routine
claims for benefits) is, to the Company's knowledge, pending or threatened
with respect to any such Company Benefit Plan.
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(d) Neither the Company nor any Affiliate has incurred any liability
under Title IV of ERISA which has not been paid in full as of the date of
this Agreement. There has been no "accumulated funding deficiency" (whether
or not waived) with respect to any employee pension benefit plan ever
maintained by the Company or any Affiliate and subject to Code Section 412
or ERISA Section 302. With respect to any Company Benefit Plan maintained
by the Company or any Affiliate and subject to Title IV of ERISA, there has
been no (nor will there be any as a result of the Transactions) (i)
"reportable event," within the meaning of ERISA Section 4043 or the
regulations thereunder, for which the notice requirement is not waived by
the regulations thereunder, and (ii) event or condition which presents a
material risk of a plan termination or any other event that may cause the
Company or any Affiliate to incur liability or have a lien imposed on its
assets under Title IV of ERISA. Neither the Company nor any Affiliate has
ever maintained a Multiemployer Plan (as hereinafter defined), and the
Company has not incurred any liability on account of a "partial withdrawal"
or a "complete withdrawal" (within the meaning of ERISA Sections 44205 and
4203) from any Multiemployer Plan, no such liability has been asserted, and
there are no events or circumstances which could result in the assertion of
any such liability.
(e) Except as set forth in Section 5.15 of the Company Disclosure
Schedule, the Company has complied with the health care coverage
continuation requirements of Part 6 of Subtitle B of Title I of ERISA and
Code Section 4980B ("COBRA"), and the Company has no obligation under any
Company Benefit Plan or otherwise to provide life or health insurance
benefits to current or future terminated or retired employees of the
Company, except as specifically provided by COBRA.
(f) With respect to each Company Benefit Plan, complete and correct
copies of the following documents (if applicable to such Company Benefit
Plan) have previously been delivered or made available to MergerCo: (i) all
documents embodying or governing such Company Benefit Plan, and any funding
medium for such Company Benefit Plan, trust agreement or insurance
contract, as they may have been amended to the date hereof; (ii) the most
recent IRS determination or approval letter with respect to such Company
Benefit Plan under Code Section 401(a), and any applications for
determination or approval subsequently filed with the IRS; (iii) if
applicable, the three most recently filed IRS Forms 5500, with all
applicable schedules and accountants' opinions attached thereto; (iv) the
current summary plan description for such Company Benefit Plan (or other
descriptions of such Company Benefit Plan provided to employees) and all
modifications thereto; and (v) any insurance policy (including any
fiduciary liability insurance policy or fidelity bond) related to such
Company Benefit Plan.
(g) For purposes of this Section:
(i) "Company Benefit Plan" means (A) all employee benefit plans
within the meaning of ERISA Section 3(3) maintained by the Company or
any Affiliate, including, but not limited to, multiple employer welfare
arrangements (within the meaning of ERISA Section 3(40)), plans to which
more than one unaffiliated employer contributes and employee benefit
plans (such as foreign or excess benefit plans) which are not subject to
ERISA; (B) all stock option plans, stock purchase plans, bonus or
incentive award plans, severance pay policies or agreements, deferred
compensation agreements, supplemental income arrangements, vacation
plans, and all other employee benefit plans, agreements, and
arrangements not described in (A) above maintained by the Company or any
Affiliate, including without limitation, any arrangement intended to
comply with Code Section 120, 125, 127, 129 or 137; and (C) all plans or
arrangements providing compensation to employee and non-employee
directors maintained by the Company or any Affiliate. In the case of a
Company Benefit Plan funded through a trust, or any other insurance
contract, each reference to such Company Benefit Plan shall include a
reference to such trust, organization or insurance contract;
(ii) An entity "maintains" a Company Benefit Plan if such entity
contributes to or provides benefits under or through such Company
Benefit Plan, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Company
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Benefit Plan, or if such Company Benefit Plan provides benefits to or
otherwise covers employees of such entity (or their spouses, dependents,
or beneficiaries);
(iii) An entity is an "Affiliate" of the Company for purposes of
this Section 5.15 if it would have ever been considered a single
employer with the Company under ERISA Section 4001(b) or part of the
same "controlled group" as the Company for purposes of ERISA Section
302(d)(8)(C); and
(iv) "Multiemployer Plan" means an employee pension or welfare
benefit plan to which more than one unaffiliated employer contributes
and which is maintained pursuant to one or more collective bargaining
agreements as defined in ERISA Section 3(37).
(h) Except as set forth in Section 5.15 of the Company Disclosure
Schedule, neither the Company nor any Affiliate contributes to, maintains
or sponsors or has any liability with respect to any employee benefit plan,
agreement or arrangement applicable to its employees who reside outside the
United States (the "Foreign Plans"). Each Foreign Plan is in compliance in
all material respects with all laws applicable thereto and with the
respective requirements of such Foreign Plan's governing documents.
5.16 Labor Matters. Neither the Company nor any Company Subsidiary is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union organization. To
the knowledge of the Company there is no unfair labor practice or labor
arbitration proceeding pending or threatened against the Company or any of the
Company Subsidiaries relating to their business, except for any such proceeding
which would not, individually or in the aggregate, reasonably be expected to
have a Company Material Adverse Effect. To the Company's knowledge there are no
organizational efforts with respect to the formation of a collective bargaining
unit presently being made or threatened involving (i) employees of the Company
or any of the Company Subsidiaries or (ii) "Physician Shareholders" or "Practice
Employees" at any "Practice," as such terms are defined in each management
services agreement or similar agreement to which the Company or any Company
Subsidiary is a party (each, a "Management Services Agreement").
5.17 No Brokers. Neither the Company nor any of the Company Subsidiaries
has entered into any contract, arrangement or understanding with any person or
firm which may result in the obligation of such entity or MergerCo to pay any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or consummation of
the Transactions, except that the Company has retained Premier HealthCare
("Premier") and The Robinson-Humphrey Company LLC ("Robinson-Humphrey") as its
financial advisors in connection with the Transactions. Other than the foregoing
arrangements, the Company is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or consummation of the Transactions.
The Company has furnished to MergerCo complete and correct copies of all
agreements between the Company and Premier and Robinson-Humphrey, respectively,
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated by this Agreement.
5.18 Opinion of Financial Advisor. The Company has received the opinion of
Robinson-Humphrey to the effect that, as of the date hereof, the Merger
Consideration is fair from a financial point of view to the holders of the
Company Common Stock other than the Voting Agreement Stockholders.
5.19 Year 2000. (a) (i) The Company and each Company Subsidiary have (x)
undertaken an inventory, review and assessment of all areas within their
respective business and operations to address the "Year 2000 Problem" (i.e., the
risk that applications used by the Company and the Company Subsidiaries and the
physician practices managed by the Company and the Company Subsidiaries may be
unable to recognize and properly perform date-sensitive functions involving
certain dates prior to and any date on or after January 1, 2000), (y) developed
a plan and time line for becoming Year 2000 Compliant on a timely basis, and (z)
to date, implemented that plan in accordance with their respective timetables in
all material respects;
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(ii) The Company's Year 2000 Problem program with respect to the
Company, each of the Company Subsidiaries and each physician practice
managed by the Company or any Company Subsidiary includes feasible
contingency plans to ensure uninterrupted and unimpaired business
operation, including liquidity needs, in the event of its failure to be
Year 2000 Compliant; and
(iii) The Company reasonably believes that the Year 2000 Problem
will not have a Company Material Adverse Effect.
(b) For purposes of this Section, "Year 2000 Compliant" means, with
respect to the operations of the Company, the Company Subsidiaries or any
physician practice managed by the Company or a Company Subsidiary, that all
computer-controlled processes, electronic communications interfaces,
software, hardware, machinery, equipment, programs, and tools operate for
all date-sensitive functions before, on or after January 1, 2000
consistently, predictably, accurately and unambiguously, without
interruption or manual intervention.
5.20 Insurance. Section 5.20 of the Company Disclosure Schedule contains a
true and complete list and description of insurance policies (including
information on the premiums payable in connection therewith, the scope and
amount of the coverage and deductibles provided thereunder) maintained by the
Company and the Company Subsidiaries. Each insurance policy to which the Company
or any of the Company Subsidiaries is a party is in full force and effect and
will not require any consent as a result of the consummation of the
Transactions, except as would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect. Except as would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect (i) neither the Company nor any of the Company
Subsidiaries is in material breach or default (including with respect to the
payment of premiums or the giving of notices) under any insurance policy to
which it is a party, and (ii) no event has occurred which, with notice or the
lapse of time, would constitute such a material breach or default by the Company
or any of the Company Subsidiaries or would permit termination, modification or
acceleration under such policies, and neither the Company nor any Company
Subsidiary has received any notice from the insurer disclaiming coverage or
reserving rights with respect to any material claim or any such policy in
general, except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
5.21 Contracts and Commitments. The Company has filed with the Securities
and Exchange Commission (the "SEC") as exhibits to the Company SEC Reports all
contracts required to be so filed by the federal securities laws (collectively,
the "Material Contracts"). Neither the Company nor any of the Company
Subsidiaries is in breach, nor has the Company or any Company Subsidiary
received in writing any claim that it has breached, any of the terms or
conditions of any Material Contract in such a manner as would permit any other
party to cancel or terminate the same prior to its stated term or would permit
any other party to collect material damages from the Company under any such
Material Contract. The Company is not a party to any "poison pill," shareholder
rights plan, rights agreement or similar agreement, instrument, plan or
arrangement.
5.22 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock entitled to vote thereon is the
only vote of any class of capital stock of the Company required by the DGCL, the
Certificate of Incorporation or the By-Laws of the Company to adopt this
Agreement and approve the Transactions.
5.23 Related Party Transactions. Except as set forth in Section 5.23 of
the Company Disclosure Schedule, set forth in the Company SEC Reports is a list
of all arrangements, agreements and contracts entered into by the Company or any
of the Company Subsidiaries (which are or will be in effect as of or after the
date of this Agreement) involving payments in excess of $60,000 with any person
who is an officer, director or affiliate of the Company or any of the Company
Subsidiaries, any relative of any of the foregoing or any entity of which any of
the foregoing is an affiliate.
5.24 Absence of Undisclosed Liabilities. Except as set forth in Section
5.24 of the Company Disclosure Schedule, and except as and to the extent
reflected or reserved against in the Balance Sheet
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contained in the 10-K, neither the Company nor any Company Subsidiary has or is
subject to any liability or obligation of any nature required to be reflected in
a balance sheet prepared in accordance with GAAP, whether accrued, absolute,
contingent or otherwise, other than liabilities or obligations arising in the
ordinary course since the date of the Balance Sheet (none of which is a
liability resulting from any breach of contract, breach of warranty, violation
of law, tort, infringement, claim or lawsuit). Neither the Company nor any
Company Subsidiary has at any time made any payments for political contributions
or made any bribes or other illegal payments of cash or other consideration,
including, without limitation, payments to customers or employees of customers
for purposes of doing business with such customers.
5.25 Customers and Suppliers. Section 5.25 of the Company Disclosure
Schedule sets forth any patient or referral source which accounted for more than
five percent (5%) of the net revenues of the Company and the Company
Subsidiaries on a consolidated basis for the twelve months ended December 31,
1998 (collectively, the "Customers"). Section 5.25 of the Company Disclosure
Schedule also lists all of the suppliers of the Company and each of the Company
Subsidiaries to whom, during the fiscal year ended December 31, 1998, the
Company or any of the Company Subsidiaries made payments aggregating $100,000 or
more (collectively, the "Suppliers"). Since December 31, 1998, no Customer or
Supplier has canceled, materially modified (other than as set forth in the
Company SEC Reports), or otherwise terminated its relationship with the Company
or any of the Company Subsidiaries, or has during the last twelve months
decreased materially its services, supplies or materials to the Company or any
of the Company Subsidiaries or its usage or purchase of the services or products
of the Company or any of the Company Subsidiaries.
5.26 Change of Control Provisions. Except as set forth in Section 5.26 of
the Company Disclosure Schedule, and after giving effect to the Employment and
Non-competition Agreements set forth in Exhibit 8.2(k) attached hereto, there
are no employment, consulting, severance or indemnification arrangements or
agreements or understandings between the Company and any directors, officers or
other employees of the Company, or employee benefit plans, programs or
arrangements of the Company which contain any provision that would become
operative as the result of the Merger or any other transactions contemplated by
this Agreement.
5.27 Healthcare Compliance. Except as set forth in Section 5.27 of the
Company Disclosure Schedule, (i) the Company and each of the Company
Subsidiaries has all Approvals required for participation in Medicare, Medicaid,
and other similar government or private programs in which they participate, all
of which Approvals are in full force and effect. Except as set forth on Section
5.27 of the Company Disclosure Schedule, to the knowledge of the Company, no
condition exists or event has occurred which will or could reasonably be
expected to result in the suspension, revocation, impairment, forfeiture or
non-renewal of any Approval. To the Company's knowledge, each Practice,
Physician Shareholder and Practice Employee, has all Approvals required for
participation in Medicare, Medicaid, and other similar government or private
programs in which they participate, all of which Approvals, to the knowledge of
the Company, are in full force and effect. To the Company's knowledge, no
condition exists or event has occurred which will or could reasonably be
expected to result in the suspension, revocation, impairment, forfeiture or
non-renewal of any such Approval, and, to the knowledge of the Company, (i)
neither the Company, nor any Company Subsidiary nor any Practice is in violation
of any material covenant under any Management Services Agreement, managed care
contract or similar agreement to which the Company, any Company Subsidiary or
any Practice is a party, and (ii) no condition exists or event has occurred
which will or could reasonably be expected to result in such a violation. For
purposes of this Agreement, "Approvals" means all authorizations, consents,
approvals, licenses and exemptions of, registrations and filings with, and
reports to, all Governmental Entities and all other entities maintaining or
administering private programs, to the extent applicable to the Company.
5.28 Healthcare Billings. To the knowledge of the Company, all billings by
each Practice, Physician Shareholder and Practice Employee to Medicare,
Medicaid, and other similar government or private programs have been made
substantially in accordance with Applicable Law (including, without limitation,
in accordance with all applicable regulations and published policies and
procedures and in the case of billings effective on or after January 1, 1989 in
accordance with the provisions of the Omnibus Budget
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Reconciliation Act of 1987) and all rules applicable to any such private
programs, except as set forth in Section 5.28 of the Company Disclosure
Schedule. To the knowledge of the Company, there has been no intentional or
material overbilling or overcollecting from any such program, other than as
created by routine adjustments and disallowances made in the ordinary course of
business by such programs with respect to the billings. Neither the Company, nor
any of the Company Subsidiaries nor any Practice is the subject of (i) to the
knowledge of the Company, any audit by any third party payor or (ii) any
recoupment claim by any third party payor other than routine adjustments and
disallowances. "Applicable Law" shall mean all applicable provisions of
constitutions, statutes, rules, regulations and orders of all governmental
bodies and all orders and decrees of all courts, tribunals and arbitrators.
5.29 Conduct. (a) Neither the Company nor any of the Company Subsidiaries
has engaged in any activities which are prohibited under 42 U.S.C. sec.1320a-7b,
or the regulations promulgated thereunder, including, without limitation, the
following: (A) knowingly and willfully making or causing to be made a false
statement or misrepresentation of a material fact in any application for any
benefit or payment; (B) knowingly and willfully making or causing to be made any
false statement or misrepresentation of a material fact for use in determining
rights to any benefit or payment; (C) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit or payment; and (D) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind, or
offering to pay or receive such remuneration (1) in return for referring an
individual to a Person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare,
Medicaid or any other similar government or private program, or (2) in return
for purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing or ordering any good, facility, service, or item for which
payment may be made in whole or in part of Medicare, Medicaid or any other
similar government or private program; and
(b) To the knowledge of the Company, no Practice, Physician
Shareholder or Practice Employee has engaged in any activities which are
prohibited under 42 U.S.C. sec.1320a-7b, or the regulations promulgated
thereunder, including, without limitation, the following: (A) knowingly and
willfully making or causing to be made a false statement or
misrepresentation of a material fact in any application for any benefit or
payment; (B) knowingly and willfully making or causing to be made any false
statement or misrepresentation of a material fact for use in determining
rights to any benefit or payment; (C) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued
right to any benefit or payment on its own behalf or on behalf of another,
with intent to fraudulently secure such benefit or payment; and (D)
knowingly and willfully soliciting or receiving any remuneration (including
any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind, or offering to pay or receive such
remuneration (1) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare, Medicaid or any other
similar government or private program, or (2) in return for purchasing,
leasing, or ordering or arranging for or recommending purchasing, leasing
or ordering any good, facility, service, or item for which payment may be
made in whole or in part by Medicare, Medicaid or any other similar
government or private program.
5.30 Certain Relationships. To the knowledge of the Company, neither the
Company nor any Company Subsidiary has unlawfully: (i) offered, paid, solicited
or received anything of value, paid directly or indirectly any remuneration to
or from any physician, family member of a physician, or an entity in which a
physician or physician family member has an ownership or investment interest,
including, but not limited to: (1) payments for personal or management services
pursuant to a medical director agreement, consulting agreement, management
contract, personal services agreement, or otherwise; (2) payments for the use of
premises leased to or from a physician, a family member of a physician or an
entity in which a physician or family member has an ownership or investment
interest; (3) payments for the acquisition or lease of equipment, goods or
supplies from a physician, a family member of a physician or an entity in
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which a physician or family member has an ownership or investment interest; (ii)
offered, paid, solicited or received any remuneration (excluding fair market
value payments for equipment or supplies) to or from any healthcare provider,
pharmacy, drug or equipment supplier, distributor or manufacturer, including,
but not limited to: (1) payments or exchanges of anything of value under a
warranty provided by a manufacturer or supplier of an item to the Company or any
Company Subsidiary; or (2) discounts, rebates, or other reductions in price on
good or service received by the Company or any Company Subsidiary; (iii)
offered, paid, solicited or received any remuneration to or from any person or
entity in order to induce business, including, but not limited to, payments
intended not only to induce referrals of patients, but also to induce the
purchasing, leasing, ordering or arrangement for any good, facility, service or
item; (iv) entered into any joint venture, partnership, co-ownership or other
arrangement involving any ownership or investment interest by any physician, or
family member of a physician, or an entity in which physician or physician
family member has an ownership or investment interest, directly or indirectly,
through equity, debt, or other means, including, but not limited to, an interest
in an entity providing goods or services to the Company or any Company
Subsidiary; (v) entered into any joint venture, partnership, co-ownership or
other arrangement involving any ownership or investment interest by any person
or entity including, but not limited to, a hospital, pharmacy, drug or equipment
supplier, distributor or manufacturer, that is or was in a position to make or
influence referrals, furnish items or services to, or otherwise generate
business for the Company or any Company Subsidiary; or (vi) entered into any
agreement providing for (1) the referral of any patient for the provision of
goods or services by the Company or any Company Subsidiary or (2) payments by
the Company or any Company Subsidiary as a result of any referrals of patients.
5.31 Practices. Except as set forth in Section 5.31 of the Company
Disclosure Schedule, to the knowledge of the Company there is no disagreement,
dispute or controversy between or among the Practices, Physician Shareholders,
Practice Employees, the Company and/or any Company Subsidiary that would,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
5.32 Physician and Practice Qualification. To the knowledge of the
Company, each physician practicing at any Practice, and each Practice, has all
requisite licenses, credentials and qualifications under all applicable laws and
regulations to conduct all activities presently conducted by such physician at
such Practice, or by such Practice. To the knowledge of the Company, no
physician practicing at any Practice nor any Practice is currently subject to
any suspension or revocation of any license, credential or qualification, and no
proceeding or action that could result in such suspension or revocation is
pending or threatened.
5.33 Managed Care Contracts. All provisions of managed care contracts or
similar agreements to which the Company or any Company Subsidiary is a party
relating to the adjustment of the capitated fees to be paid to the Company or
any Company Subsidiary thereunder are in full force and effect and have not been
amended since December 31, 1998.
5.34 Disclosure. The representations, warranties and statements made by
the Company in this Agreement and in the certificates delivered pursuant hereto
do not contain any untrue statement of a material fact, and, when taken
together, do not omit to state any material fact necessary to make such
representations, warranties and statements, in light of the circumstances under
which they are made, not misleading.
5.35 Definition of the Company's Knowledge. As used in this Agreement, the
phrase "to the knowledge of the Company" or any similar phrase means the
knowledge those individuals identified in Section 5.35 of the Company Disclosure
Schedule.
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
6.1 Conduct of Business by the Company. During the period from the date of
this Agreement to the Effective Time, except as otherwise contemplated by this
Agreement or to the extent MergerCo shall otherwise consent in writing, the
Company shall, and shall cause each of the Company Subsidiaries to, carry on
their respective businesses in the ordinary course, consistent with past
practice, and use their reasonable efforts to preserve intact their present
business organizations, keep available the services of their present officers
and employees and preserve their relationships with customers, suppliers,
licensors and others having business dealings with them and continue existing
contracts as in effect on the date hereof. Without limiting the generality of
the foregoing, neither the Company nor any of the Company Subsidiaries will
(except as expressly permitted by this Agreement or as contemplated by the
Transactions or to the extent that MergerCo shall otherwise consent in writing):
(a)(i) declare, set aside or pay any dividend or other distribution
(whether in cash, stock, property or any combination thereof) in respect of
any of its capital stock (other than dividends or distributions by any
Subsidiary to the Company), (ii) split, combine or reclassify any of its
capital stock, (iii) repurchase, redeem or otherwise acquire any of its
securities, except, in the case of this clause (iii), for the acquisition
of shares of Company Common Stock from holders of Options in full or
partial payment of the exercise price payable by such holders upon exercise
of Options outstanding on the date of this Agreement, or (iv) authorize for
issuance, issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock of
any class or any other securities (including indebtedness having the right
to vote) or equity equivalents (including, without limitation, stock
appreciation rights), other than: (A) the issuance of shares of Company
Common Stock upon the exercise of Options outstanding on the date of this
Agreement in accordance with their present terms or (B) the issuance by a
wholly owned Company Subsidiary of its capital stock to its parent;
(b)(i) Except as set forth in Section 6.1(b) of the Company Disclosure
Schedule, acquire any assets outside of the ordinary course of business, or
(ii) sell, lease, encumber, transfer or dispose of any assets outside the
ordinary course of business which are material to the Company except as set
forth in Section 6.1(b) of the Company Disclosure Schedule.
(c)(i) except as set forth in Section 6.1(c) of the Company Disclosure
Schedule, or pursuant to credit facilities in existence on the date hereof
in accordance with the current terms of such facilities, (A) create, incur
or assume any long-term debt (including, without limitation, obligations in
respect of capital leases) or (B) create, incur, assume, maintain or permit
to exist any short-term debt; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person except for endorsement of checks
and instruments for deposit of collections in the ordinary course of
business consistent with past practice; or (iii) make any loans, advances
or capital contributions to, or investments in, any other person other than
in the ordinary course of business and consistent with past practice.
(d) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than any payment, discharge or satisfaction (i) in the ordinary course of
business consistent with past practice, or (ii) in connection with the
Transactions;
(e) change any of the accounting principles or practices used by it
(except as required by the SEC, laws or generally accepted accounting
principles, in which case written notice shall be provided to MergerCo
prior to any such change);
(f) except as required by law, (i) enter into, adopt, amend or
terminate any Company Benefit Plan, (ii) enter into, adopt, amend or
terminate any agreement, arrangement, plan or policy between the Company or
any of the Company Subsidiaries on the one hand and one or more of their
directors or officers who has a base compensation in excess of $100,000 on
the other hand, (iii) increase in any manner the compensation or fringe
benefits of any director or executive officer or pay to any such
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director or executive officer any benefit not required by any Company
Benefit Plan or arrangement as in effect as of the date hereof, or (iv)
except in the ordinary course of business, consistent with past practice,
increase in any manner the compensation or fringe benefits of any employee
not described in the preceding clause (iii) or pay to any such employee any
benefit not required by any Company Benefit Plan or arrangement as in
effect as of the date hereof;
(g) adopt any amendments to the Certificate of Incorporation or Bylaws
except as expressly provided by the terms of this Agreement;
(h) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(i) settle or compromise any litigation to which the Company or any
Company Subsidiary is a party (whether or not commenced prior to the date
of this Agreement) in an amount in excess of $250,000;
(j) make capital expenditures (i) in excess of $100,000 individually
which is not identified in the capital budget set forth in Section 6.1 of
the Company Disclosure Schedule or (ii) in the aggregate in excess of 115%
of the Total Budgeted Capital Expenditures set forth in Section 6.1(j) of
the Company Disclosure Schedule, except substantially in accordance with
such Schedule;
(k) without the prior written consent of MergerCo, which shall not be
unreasonably withheld, make or change any Tax election, file a consent
under Code Section 341(f) regarding collapsible corporations, or settle or
compromise any material liability for Taxes of the Company or any of the
Company Subsidiaries except to the extent that negotiations for such
settlement or compromise are in process at the time of the execution of
this Agreement;
(l) waive or release or amend its rights under any confidentiality or
standstill agreement or any other similar agreement to which it is a party;
or
(m) enter into an agreement to take any of the foregoing actions.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Stockholders Meeting.
(a) Unless (i) the Company has received an Acquisition Proposal (as
hereinafter defined) that was unsolicited and did not otherwise result from
a breach of Section 7.5(a) herein and (ii) the Company Board determines
that such Acquisition Proposal is reasonably likely to lead to a Superior
Acquisition Proposal (as hereinafter defined), then the Company, acting
through the Company Board, shall, in accordance with applicable law:
(A) duly call, give notice of, convene and hold a special meeting
of its stockholders (the "Special Meeting") as soon as practicable
following the execution of this Agreement for the purpose of considering
and taking action upon this Agreement and the Transactions;
(B) together with MergerCo prepare and file with the SEC a
preliminary proxy statement relating to this Agreement and the
Transactions, and use its reasonable efforts to (A) obtain and furnish
the information required to be included by the SEC in a definitive proxy
statement (the "Proxy Statement") and, after consultation with MergerCo,
to respond promptly to any comments made by the SEC with respect to the
preliminary proxy statement and cause the Proxy Statement to be mailed
to its stockholders, and (B) obtain the necessary approval of this
Agreement and the Transactions by its stockholders; and
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(C) include in the Proxy Statement the recommendation of the
Company Board that stockholders of the Company vote in favor of the
approval of this Agreement and the Transactions.
(b) MergerCo and the Guarantors shall furnish all information about
themselves, their business and operations and their owners and all
financial information to the Company as may be reasonably necessary in
connection with the preparation of the Proxy Statement. The Company shall
give the Guarantors and their counsel the opportunity to review the Proxy
Statement prior to its being filed with the SEC and shall give the
Guarantors and their counsel the opportunity to review all amendments and
supplements to the Proxy Statement and all responses to requests for
additional information and replies to comments prior to their being filed
with, or sent to, the SEC. Each of the Company, on the one hand, and
MergerCo, on the other hand, agree promptly to correct any information
provided by either of them for use in the Proxy Statement if and to the
extent that such information shall have become false or misleading in any
material respect, and the Company further agrees to take all necessary
steps to cause the Proxy Statement as so corrected to be filed with the SEC
and to be disseminated to the stockholders of the Company, in each case, as
to the extent required by applicable federal securities laws. The Company
shall notify MergerCo of the receipt of any comments of the SEC with
respect to the preliminary proxy statement.
(c) As soon as practicable following the date of this Agreement, the
Company, the Guarantors and MergerCo shall together prepare and file with
the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3"). The Company, the Guarantors and MergerCo shall use all reasonable
best efforts to have the Schedule 13E-3 cleared by the SEC as soon as
practicable following such filing. Each of the Company, the Guarantors and
MergerCo shall furnish all information about itself, its business and
operations and its owners and all financial information to MergerCo as may
be reasonably necessary in connection with the preparation of the Schedule
13E-3. Each of the Company, the Guarantors and MergerCo agrees promptly to
correct any information provided by it for use in the Schedule 13E-3 if and
to the extent that such information shall have become false or misleading
in any material respect. Each of the Company, the Guarantors and MergerCo
shall notify the other of the receipt of any comments of the SEC with
respect to the Schedule 13E-3. Each of the Company, the Guarantors and
MergerCo shall give the other and its counsel the opportunity to review
Schedule 13E-3 prior to its being filed with the SEC and shall give the
other and its counsel the opportunity to review all amendments and
supplements to the Schedule 13E-3 and all responses to requests for
additional information and replies to comments prior to their being filed
with, or sent to, the SEC.
(d) None of the information supplied by the Company specifically for
inclusion or incorporation by reference in (i) the Proxy Statement, (ii)
the Schedule 13E-3 or (iii) the Other Filings (as hereinafter defined)
will, at the respective times filed with the SEC or other Governmental
Entity and, in addition, in the case of the Proxy Statement and the
Schedule 13E-3, as of the date it or any amendment or supplement thereto is
mailed to stockholders and at the time of any meeting of stockholders to be
held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy
Statement and the Schedule 13E-3, insofar as they relate to the Company or
other information supplied by the Company for inclusion therein, will
comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder. The
Company makes no representation, warranty or covenant with respect to
information concerning MergerCo or the Guarantors or their affiliates
included in the Proxy Statement or the Schedule 13E-3 or information
supplied by MergerCo or the Guarantors or their affiliates for inclusion in
the Proxy Statement or the Schedule 13E-3.
(e) None of the information supplied by MergerCo or the Guarantors or
their affiliates specifically for inclusion or incorporation by reference
in (i) the Proxy Statement, (ii) the Schedule 13E-3 or (iii) the Other
Filings, will, at the respective times filed with the SEC or other
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Governmental Entity and, in addition, in the case of the Proxy Statement
and the Schedule 13E-3, as of the date it or any amendment or supplement
thereto is mailed to stockholders and at the time of any meeting of
stockholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Proxy Statement and the Schedule 13E-3, insofar as they relate to MergerCo
or the Guarantors or their affiliates or other information supplied by
MergerCo or the Guarantors or their affiliates for inclusion therein, will
comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder. MergerCo
and the Guarantors make no representations, warranty or covenant with
respect to information concerning the Company included in the Proxy
Statement of the Schedule 13E-3 or information supplied by the Company for
inclusion in the Proxy Statement of the Schedule 13E-3.
7.2 Other Filings. As promptly as practicable, the Company and MergerCo
each shall properly prepare and file any other filings required under the
Exchange Act or any other federal or state law relating to the Merger and the
Transactions (including filings, if any, required under the HSR Act)
(collectively, the "Other Filings"). Each of the Company and MergerCo shall
promptly notify the other of the receipt of any comments on, or any request for
amendments or supplements to, any of the Other Filings by the SEC or any other
Governmental Entity or official, and each of the Company and MergerCo shall
supply the other with copies of all correspondence between it and each of its
Subsidiaries and representatives, on the one hand, and the SEC or the members of
its staff or any other appropriate governmental official, on the other hand,
with respect to any of the Other Filings. The Company and MergerCo each shall
use its respective reasonable best efforts to obtain and furnish the information
required to be included in any of the Other Filings. MergerCo hereby covenants
and agrees to use its commercially reasonable best efforts to secure termination
of any waiting periods under the HSR Act and obtain the approval of the Federal
Trade Commission (the "FTC") or any other Governmental Entity for the
Transactions.
7.3 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the Transactions and to cooperate with each other in
connection with the foregoing, including the taking of such actions as are
necessary to obtain any necessary consents, approvals, orders, exemptions and
authorizations by or from any public or private third party, including without
limitation any that are required to be obtained under any federal, state or
local law or regulation or any contract, agreement or instrument to which the
Company or any Company Subsidiary is a party or by which any of their respective
properties or assets are bound, to defend all lawsuits or other legal
proceedings challenging this Agreement or the consummation of the Transactions,
to cause to be lifted or rescinded any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
Transactions, and to effect all necessary registrations and Other Filings,
including, but not limited to, filings under the HSR Act, if any, and
submissions of information requested by governmental authorities and to execute
and deliver any additional instruments necessary to consummate the Transactions
and to fully carry out the purposes of this Agreement. The Company will use its
reasonable best efforts to ensure that the conditions set forth in Sections 8.1
and 8.3 hereof are satisfied, insofar as such matters are within the control of
the Company, and MergerCo and the Guarantors will use their reasonable best
efforts to ensure that the conditions set forth in Sections 8.1 and 8.2 hereof
are satisfied, insofar as such matters are within the control of MergerCo and
the Guarantors.
7.4 Fees and Expenses. Except as set forth in Section 9.2 hereof, whether
or not the Merger is consummated, all fees, costs and expenses incurred in
connection with this Agreement and the Transactions shall be paid by the party
incurring such costs or expenses. Notwithstanding the previous sentence, if the
Merger is consummated, the Company shall pay all reasonable out-of-pocket costs
and expenses of MergerCo, the Guarantors and TA Associates, Inc., incurred in
connection with this
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Agreement and the Transactions, including without limitation, fees and
disbursements of their outside legal counsel, accountants and other consultants
retained by or on behalf of them.
7.5 No Solicitations.
(a) The Company represents and warrants that it has terminated any
discussions or negotiations relating to, or that could reasonably be
expected to lead to, an Acquisition Proposal (as hereinafter defined).
Except as explicitly permitted hereunder, the Company shall not, and shall
not authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it to, directly or indirectly, (i) solicit,
initiate or encourage (including by way of furnishing non-public
information), or take any other action to facilitate, any inquiries or the
making of any proposal that constitutes an Acquisition Proposal, (ii)
participate in any discussions or negotiations regarding an Acquisition
Proposal or (iii) enter into any agreements, definitive or otherwise,
regarding an Acquisition Proposal; provided, however, that, at any time
prior to the approval of this Agreement by the stockholders of the Company,
if the Company receives an Acquisition Proposal that was unsolicited or
that did not otherwise result from a breach of this Section 7.5(a), the
Company may furnish non-public information with respect to the Company and
the Company Subsidiaries to the person who made such Acquisition Proposal
(a "Third Party") and may participate in discussions and negotiations
regarding such Acquisition Proposal if (A) the Company Board determines
based on the advice of independent legal counsel that failure to do so
would be reasonably likely to be inconsistent with its fiduciary duties to
the Company's stockholders under applicable law, and (B) the Company Board
determines that such Acquisition Proposal is reasonably likely to lead to a
Superior Acquisition Proposal.
(b) At any time prior to the approval of this Agreement by the
Stockholders of the Company, the Company Board shall not (i) withdraw or
modify in a manner adverse to MergerCo its approval or recommendation of
this Agreement or the Merger, (ii) approve or recommend an Acquisition
Proposal to its stockholders or (iii) cause the Company to enter into any
agreement with respect to an Acquisition Proposal, unless in any such case
the Company Board shall have determined in good faith, based on the advice
of independent legal counsel, that failure to do so would be inconsistent
with its fiduciary duties to the Company's stockholders under applicable
law and, in the case of clause (iii) above, the Company shall have complied
with the provisions of Section 9.1(c)(i) hereof.
(c) It is understood that the Company taking no position or remaining
neutral with respect to a tender or exchange offer from a third party (a
"Neutral Statement"), or making a recommendation in favor of such a tender
or exchange offer, in a filing made pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act shall constitute an adverse modification
of its approval or recommendation of the Merger.
(d) As used in this Agreement, the term "Acquisition Proposal" shall
mean any proposed or actual (i) merger, consolidation or similar
transaction involving the Company, (ii) sale, lease or other disposition,
directly or indirectly, by merger, consolidation, share exchange or
otherwise, of any assets of the Company or the Company Subsidiaries
representing 15% or more of the consolidated assets of the Company and the
Company Subsidiaries, (iii) issue, sale or other disposition by the Company
of (including by way of merger, consolidation, share exchange or any
similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 15%
or more of the votes associated with the outstanding securities of the
Company, (iv) tender or exchange offer in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the
Exchange Act), or the right to acquire beneficial ownership, or any "group"
(as such term is defined under the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership
of, 15% or more of the outstanding shares of Company Common Stock, (v)
recapitalization, restructuring, liquidation, dissolution, or other similar
type of transaction with respect to the Company or (vi) transaction which
is similar in form, substance or purpose to any of the foregoing
transactions; provided, however, that the term "Acquisition Proposal" shall
not include the Merger and the Transactions. The term "Superior Acquisition
Proposal" shall
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mean an Acquisition Proposal that the Company Board determines based on the
advice of its financial advisors is more favorable to the stockholders of
the Company from a financial point of view than the Transactions (taking
into account all the terms and conditions of such Acquisition Proposal and
the Transactions, including, without limitation, any conditions to
consummation and the likelihood of such Superior Acquisition Proposal and
the Transactions being consummated).
(e) The Company shall advise MergerCo promptly (but in any event
within 24 hours) in writing of (i) the receipt of any inquiries,
indications of interest or proposals relating to an Acquisition Proposal,
(ii) the status of any material developments in the negotiations with
respect thereto and (iii) the taking of any action referred to in Section
7.5(a) or (b). Following the receipt of any inquiries, indications of
interest or proposals relating to an Acquisition Proposal, the Company
shall furnish to MergerCo either a copy of such Acquisition Proposal (or
such inquiry, indication of interest or proposal) or a written summary of
any such oral Acquisition Proposal (or such inquiry, indication of interest
or proposal), including, without limitation, information regarding pricing,
structure and material conditions to closing.
(f) Nothing in this Section 7.5 shall (i) permit the Company to
terminate this Agreement other than pursuant to Article IX hereof or (ii)
affect any other obligation of the Company under this Agreement.
7.6 Officers' and Directors' Indemnification.
(a) The Company shall, and from and after the Effective Time, the
Surviving Corporation shall, indemnify, defend and hold harmless the
present and former directors, officers, employees and agents of the Company
or any of the Company Subsidiaries (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including reasonable attorney's
fees and expenses), liabilities or judgments or amounts that are paid in
settlement with the approval of the indemnifying party of or in connection
with any threatened or actual claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part
out of or pertaining to the fact that such person is or was a director or
officer of the Company or any of the Company Subsidiaries whether
pertaining to any matter existing at or prior to the Effective Time and
whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining
to this Agreement or the transactions contemplated hereby, in each case to
the fullest extent a corporation is permitted under the DGCL as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits broader than rights such law
permitted prior to such amendment and only to the extent such amendment is
not retroactively applicable) to indemnify its own directors or officers,
as the case may be. Without limiting the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Parties (whether arising before or after the Effective Time),
(i) the Indemnified Parties may retain counsel satisfactory to them and the
Surviving Corporation, and the Company or the Surviving Corporation shall
pay all fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and otherwise advanced to such
Indemnified Party upon request reimbursement of documented expenses
incurred, in either case to the fullest extent and in the manner permitted
by the DGCL; and (ii) the Company or the Surviving Corporation will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither the Company nor the Surviving Corporation shall be
liable for any settlement effected without its prior written consent. Any
Indemnified Party wishing to claim indemnification under this Section 7.6,
upon learning of any such claim, action, suit, proceeding or investigation,
shall notify the Company (or after the Effective Time, the Surviving
Corporation) (but the failure so to notify shall not relieve a party from
any liability which it may have under this Section 7.6 except to the extent
such failure materially prejudices such party), and shall to the extent
required by the DGCL deliver to the Company (or after the Effective Time,
the Surviving Corporation) the undertaking contemplated by Section 145(c)
of the DGCL. The Indemnified Parties as a group may retain only one law
firm to represent them with respect to each such matter unless there is,
under applicable standards of
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professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. The Company and MergerCo
agree that all rights to indemnification, including provisions relating to
advances or expenses incurred in defense of any action or suit, existing in
favor of the Indemnified Parties with respect to matters occurring through
the Effective Time, shall survive the Merger and shall continue in full
force and effect for a period of not less than six years from the Effective
Time; provided, however, that all rights to indemnification in respect of
any Indemnified Liabilities asserted or made within such period shall
continue until the disposition of such Indemnified Liabilities. This
Section 7.6 is intended for the irrevocable benefit of, and to grant third
party rights to, the Indemnified Parties and shall be binding on all
successors and assigns of MergerCo, the Company and the Surviving
Corporation. Each of the Indemnified Parties shall be entitled to enforce
the covenants contained in this Section 7.6.
(b) Prior to the Effective Time, the Company shall purchase an
extended reporting period endorsement ("Reporting Tail Coverage") under the
Company's existing directors' and officers' liability insurance coverage
for the Company's directors and officers in a form acceptable to the
Company which shall provide such directors and officers with coverage for
six (6) years following the Effective Time of not less than the existing
coverage under, and have other terms not materially less favorable to, the
insured persons than the directors' and officers' liability insurance
coverage presently maintained by the Company; provided, however, that in
any event the total aggregate cost of such Reporting Tail Coverage shall
not exceed $150,000 (the "Maximum Amount"); and provided, further, that if
such coverage cannot be obtained for such cost, the Company will maintain,
for such six-year period, the maximum amount of comparable coverage as
shall be available for the Maximum Amount on such terms.
7.7 Access to Information; Confidentiality. From the date hereof until the
Effective Time, the Company shall, and shall cause each of the Company
Subsidiaries and each of the Company's and Company Subsidiaries' officers,
employees and agents to, afford to MergerCo and to the officers, employees and
agents of MergerCo complete access at all reasonable times to such officers,
employees, agents, properties, books, records and contracts, and shall furnish
MergerCo such financial, operating and other data and information as MergerCo
may reasonably request. MergerCo shall hold in confidence all such information
on the terms and subject to the conditions contained in that certain agreement
between the Company and TA Associates, Inc. dated March 23, 1999 (the
"Confidentiality Agreement"). The Company hereby waives the provisions of the
Confidentiality Agreement as and to the extent necessary to permit the making
and consummation of the Transactions. At the Effective Time, such
Confidentiality Agreement shall terminate.
7.8 Financial and Other Statements. Notwithstanding anything contained in
Section 7.7, during the term of this Agreement, the Company shall also provide
to MergerCo the following documents and information:
(a) As soon as reasonably available, but in no event more than 45 days
after the end of each fiscal quarter ending after the date of this
Agreement, the Company will deliver to MergerCo its Quarterly Report on
Form 10-Q as filed under the Exchange Act. As soon as reasonably available,
but in no event more than 90 days after the end of each fiscal year ending
after the date of this Agreement, the Company will deliver to MergerCo its
Annual Report on Form 10-K, as filed under the Exchange Act. The Company
will also deliver to MergerCo, promptly after its being filed with the SEC,
a copy of each Current Report on Form 8-K.
(b) Promptly upon receipt thereof, the Company will furnish to
MergerCo copies of all internal control reports submitted to the Company or
any Company Subsidiary by independent accountants in connection with each
annual, interim or special audit of the books of the Company or any such
Company Subsidiary made by such accountants.
(c) As soon as practicable, the Company will furnish to MergerCo
copies of all such financial statements and reports as it or any Company
Subsidiary shall send to its stockholders, the SEC or any
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other regulatory authority, to the extent any such reports furnished to any
such regulatory authority are not confidential and except as legally
prohibited thereby.
(d) As soon as practicable, the Company will furnish MergerCo copies
of all materials provided to the Company Board by the Company, any Company
Subsidiary or any Practice, other than information concerning an
Acquisition Proposal.
7.9 Public Announcements. The Company and MergerCo shall consult with each
other before issuing any press release or otherwise making any public statements
with respect to this Agreement or any of the Transactions and shall not issue
any such press release or make any such public statement without the prior
consent of the other party, which consent shall not be unreasonably withheld;
provided, however, that a party may, without the prior consent of the other
party, issue such press release or make such public statement as may be required
by law or the applicable rules of The Nasdaq Stock Market, Inc. if it has (i)
used its reasonable best efforts to consult with the other party and to obtain
such party's consent but has been unable to do so in a timely manner and (ii)
faxed a copy of such press release or public statement to such other party at a
reasonable time prior to issuing such release or making such statement. In this
regard, the parties agree that the initial press release to be issued with
respect to the Merger will be in a form agreed to by the parties hereto prior to
the execution of this Agreement.
7.10 Intentionally Omitted.
7.11 Recapitalization Accounting Treatment. Each of the Company and
MergerCo shall use its commercially reasonable efforts to cause the
Transactions, including the Merger, to be accounted for as a recapitalization
and such accounting treatment to be accepted by their respective accountants and
by the SEC, and each of the Company and MergerCo agrees that it shall not take
or omit to take any action that would cause such accounting treatment not to be
obtained.
7.12 Delisting. Each of the parties hereto agrees to cooperate with each
other in taking, or causing to be taken, all actions necessary to delist the
Company Common Stock from The Nasdaq Stock Market, Inc. provided that such
delisting shall not be effective until after the Effective Time of the Merger.
7.13 Notification of Certain Matters. Each party shall give prompt written
notice to the other of (A) any fact, event or circumstance known to it that
would be reasonably likely to (i) cause or constitute a material breach of any
of its representations, warranties or covenants contained herein or (ii) result
in such party being unable to satisfy any condition required to be satisfied by
it under this Agreement or (B) the receipt of (i) any notice or other
communication from any person alleging that the consent of such person is or may
be required in connection with the transactions contemplated by this Agreement
or (ii) any notice or other communication from any Governmental Entity in
connection with the transactions contemplated by this Agreement.
7.14 Transferor's Certificate of Non-foreign Status. The Company shall use
its reasonable best efforts to cause each Voting Agreement Stockholder to
deliver to the Guarantors, prior to the Closing Date, a transferor's certificate
of non-foreign status in the form attached to the Stock Purchase Agreement as
Exhibit C thereto.
7.15 Covenants of MergerCo and the Guarantors.
(a) MergerCo and each Guarantor will use their respective reasonable
best efforts to satisfy the conditions set forth in the Commitment Letters
and cause the financing of the Transactions to be closed on terms
substantially similar to those set forth within the Commitment Letters. In
the event that any portion of the financing of the Transactions become
unavailable, MergerCo and each Guarantor will use their reasonable best
efforts to arrange alternative financing from other sources. MergerCo and
each Guarantor shall keep the Company apprised of all material developments
relating to the financing of the Transactions. Any fees to be paid by the
Company or any other obligations to be incurred by the Company in
connection with the financing of the Transactions shall be subject to the
occurrence of the Closing.
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(b) The Guarantors agree that, subject to the satisfaction or waiver
of all conditions set forth in Article VIII hereof, on or prior to the
Closing Date they will purchase or cause to be purchased equity of MergerCo
for an aggregate consideration of $32.8 million, consisting of cash and the
Voting Agreement Stockholder Shares (the "Equity Contribution"), which
equity will consist of $5.0 million of Convertible Preferred Stock and
$27.8 million of Redeemable Preferred Stock; provided, however, that in the
event the number of shares of Company Common Stock that are subject to the
Roll-over Agreement as of the Closing Date is more than 2,058,862 shares,
the Equity Contribution and the corresponding amount of MergerCo equity
will each be reduced proportionately.
7.16 Acquisition Agreements. The Company shall issue prior to the
Effective Time Company Common Stock in accordance with the terms of the
agreements set forth on Exhibit 7.16 hereto, except that such Company Common
Stock may be delivered prior to the dates specified in such agreements.
ARTICLE VIII
CONDITIONS TO THE MERGER
8.1 Conditions to the Obligations of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver, where permissible, at or prior to the Closing Date,
of each of the following conditions:
(a) Stockholder Approval. If required by applicable law, this
Agreement and the Transactions, including the Merger, shall have been
approved and adopted by the affirmative vote of the stockholders of the
Company to the extent required by the DGCL and the Certificate of
Incorporation.
(b) Hart-Scott-Rodino Act. Any waiting period (and any extension
thereof) applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated.
(c) Other Regulatory Approvals. All necessary approvals,
authorizations and consents of any governmental or regulatory entity
required to consummate the Merger shall have been obtained and remain in
full force and effect, and all waiting periods relating to such approvals,
authorizations and consents shall have expired or been terminated.
(d) No Injunctions, Orders or Restraints; Illegality. No preliminary
or permanent injunction or other order, decree or ruling issued by a court
of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission (an "Injunction") nor any statute,
rule, regulation or executive order promulgated or enacted by any
governmental authority shall be in effect which would (i) make the
consummation of the Merger illegal, or (ii) otherwise prevent or prohibit
the consummation of any of the Transactions, including the Merger, (iii)
prohibit or limit the ownership or operation by the Company (or any of the
Company Subsidiaries) of any portion of the Company's or the Company
Subsidiaries' business, properties or assets which is material to the
Company and the Company Subsidiaries as a whole, or (iv) compel the Company
(or any Company Subsidiary) to dispose of or hold separate any portion of
the Company's or the Company Subsidiaries' business, properties or assets
which is material to the Company and the Company Subsidiaries as a whole;
provided, however, that prior to invoking this condition, each party shall
use its reasonable best efforts to have any such Injunction vacated.
8.2 Conditions to Obligations of MergerCo and the Guarantors. The
obligations of MergerCo to effect the Merger are further subject to the
following conditions:
(a) Representations and Warranties. Those representations and
warranties of the Company set forth in this Agreement which are qualified
by materiality or a Company Material Adverse Effect or words of similar
effect shall be true and correct as of the Closing Date as though made on
and as of the Closing Date (except to the extent such representations and
warranties expressly relate to a specific date, in which case such
representations and warranties shall be true and correct as of such date),
and those representations and warranties of the Company set forth in this
Agreement which are
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not so qualified shall be true and correct in all material respects as of
the Closing Date as though made on and as of the Closing Date (except to
the extent such representations and warranties expressly relate to a
specific date, in which case such representations and warranties shall be
true and correct in all material respects as of such date).
(b) Performance and Obligations of the Company. The Company shall
have performed all obligations required to be performed by it under this
Agreement, including, without limitation, the covenants contained in
Articles 6 and 7 hereof, in all material respects.
(c) Governmental Consents. Any consent, authorization, order or
approval of (or filing or registration with) any governmental commission,
board or other regulatory body required to be made or obtained by the
Company or any of the Company Subsidiaries or affiliates in connection with
the execution, delivery and performance of the Agreement shall have been
obtained or made, except where the failure to have obtained or made any
such consent, authorization, order, approval, filing or registration, would
not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect or would, individually or in the aggregate,
not materially impair or significantly delay the ability of MergerCo to
consummate the Merger.
(d) Other Consents. All consents and approvals by third parties (i)
that are identified as conditions to closing in Section 8.2(d) of the
Company Disclosure Schedule, and (ii) that are required in order to prevent
a breach of, a default under, or a termination, change in the terms or
conditions or modification of, any instrument, contract, lease, license or
other agreement, where such breach, default, termination or change would,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect, will have been obtained on terms and conditions
reasonably satisfactory to MergerCo.
(e) Indebtedness. Payoff letters with respect to the Company's
indebtedness for borrowed money outstanding as of the Effective Time as set
forth on Exhibit 8.2(e) hereof, and releases of any and all Liens (other
than permitted Encumbrances) related to such payoff letters, including
appropriate UCC termination statements, held by third parties against the
property of the Company shall have been obtained pending receipt of the
amounts indicated in the applicable payoff letters, all on terms reasonably
satisfactory to MergerCo.
(f) Financing. Debt financing from senior and subordinated lenders
shall have been obtained in amounts and on substantially the same terms as
set forth in the Commitment Letters attached hereto as Exhibit 8.2(f) as
reasonably determined by MergerCo.
(g) Material Adverse Change. There shall not have occurred any change
or changes concerning the Company and the Company Subsidiaries taken as a
whole which would, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect.
(h) Dissenting Shares. As of immediately prior to the Effective Time,
no more than 5% of the outstanding shares of Company Common Stock shall
have taken all required actions to assert appraisal rights under Section
262 of the DGCL and not withdrawn or otherwise permitted to lapse such
appraisal rights or demands therefor.
(i) Accounting Treatment. The Proxy Statement shall contain a
statement to the effect that the Merger shall be treated as a
recapitalization for accounting purposes and the SEC shall not have
disapproved such statement in the Proxy Statement.
(j) Roll-over Agreement. Not less than 2,047,310 shares of Company
Common Stock shall be subject to the Roll-over Agreement and such Agreement
shall be in full force and effect with respect to such shares.
(k) Employment Agreements. Each person whose name is set forth on
Exhibit 8.2(k) attached hereto shall have entered into an Amendment to
Executive Employment Agreement in the form attached hereto as Exhibit
8.2(k).
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8.3 Conditions to Obligations of the Company. The obligation of the
Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. Those representations and
warranties of MergerCo set forth in this Agreement which are qualified by
materiality or a MergerCo Material Adverse Effect or words of similar
effect shall be true and correct as of the Closing Date as though made on
and as of the Closing Date (except to the extent such representations and
warranties expressly relate to a specific date, in which case such
representations shall be true and correct as of such date), and those
representations and warranties of MergerCo set forth in this Agreement
which are not so qualified shall be true and correct in all material
respects as of the Closing Date as though made on the Closing Date (except
to the extent such representations and warranties expressly relate to a
specific date, in which case such representations and warranties shall be
true and correct in all material respects as of such date).
(b) Performance of Obligations of MergerCo. MergerCo shall have
performed all obligations required to be performed by it under this
Agreement, including, without limitation, the covenants contained in
Articles 6 and 7 hereof, except where any failure to perform would,
individually or in the aggregate, not materially impair or delay the
ability of the Company to consummate the Merger.
(c) Stock Purchase Agreement. The Stock Purchase Agreement shall have
been consummated.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after stockholder approval thereof:
(a) by the mutual written consent of MergerCo and the Company.
(b) by either of the Company or MergerCo:
(i) if the stockholders of the Company shall have voted on the
Merger Agreement and this Agreement and the votes shall not have been
sufficient to satisfy the condition set forth in Section 8.1(a); or
(ii) if any Governmental Entity shall have issued an Injunction or
taken any other action (which Injunction or other action the parties
hereto shall use their best efforts to lift), which permanently
restrains, enjoins or otherwise prohibits the Merger, and such
Injunction shall have become final and non-appealable; or
(iii) if, without any material breach by the terminating party of
its obligations under this Agreement, the Merger shall not have occurred
on or before November 30, 1999.
(c) by the Company:
(i) in connection with entering into a definitive agreement to
effect a Superior Acquisition Proposal in accordance with Section 7.5
hereof; provided, however, that prior to terminating this Agreement
pursuant to this Section 9.1(c)(i), (A) the Company shall have paid the
Liquidated Amount, as set forth in Section 9.2(b), and (B) the Company
shall have provided MergerCo with five (5) days' prior written notice of
the Company's decision to so terminate. Such notice shall indicate in
reasonable detail the terms and conditions of such Superior Acquisition
Proposal, including, without limitation, the amount and form of the
proposed consideration and whether such Superior Acquisition Proposal is
subject to any material conditions; or
(ii) if MergerCo shall have breached in any material respect any of
its respective representations, warranties, covenants or other
agreements contained in this Agreement (except where such
representations, warranties, covenants or other agreements are qualified
by materiality or MergerCo Material Adverse Effect, in which case
MergerCo's breach shall not be qualified as
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to materiality), which breach cannot be or has not been cured within
fifteen (15) days after the giving of written notice to MergerCo except,
in any case, for such breaches which are not reasonably likely to affect
adversely MergerCo's ability to consummate the Merger.
(d) by MergerCo:
(i) if the Company shall have breached in any material respect any
of its representations, warranties, covenants or other agreements
contained in this Agreement (except where such representations,
warranties, covenants or other agreements are qualified by materiality
or Company Material Adverse Effect, in which case the Company's breach
shall not be qualified as to materiality), which breach has not been
cured within fifteen (15) days after the giving of written notice to the
Company; or
(ii) if (A) in accordance with Section 9.1(c)(i) hereof the Company
enters into an agreement concerning an Acquisition Proposal or (B) the
Company Board withdraws or modifies in a manner adverse to MergerCo its
approval or recommendation of this Agreement or the Merger to the
stockholders of the Company.
9.2 Effect of Termination.
(a) Subject to the provisions of this Section 9.2, in the event of the
termination of this Agreement pursuant to Section 9.1 hereof, this
Agreement shall forthwith become null and void and have no effect, without
any liability on the part of any party hereto or its affiliates, trustees,
directors, officers or stockholders and all rights and obligations of any
party hereto shall cease except for the agreements contained in Section 7.4
and Articles 9 and 10; provided, however, that notwithstanding anything to
the contrary set forth herein, nothing contained in this Section shall
relieve any party from liability for any fraud or willful breach of this
Agreement.
(b) The Company shall pay to MergerCo an amount in cash (the
"Liquidated Amount") equal to (i) Three Million, Five Hundred Thousand
Dollars ($3,500,000) plus (ii) the MergerCo Expenses (as hereinafter
defined) if (X) the Company terminates this Agreement pursuant to Section
9.1(c)(i) or (Y) either the Company or MergerCo terminates this Agreement
pursuant to Section 9.1(b)(i), and, (A) prior to the Special Meeting, an
Acquisition Proposal shall have been made to the Company's stockholders
generally or any person shall have publicly announced an Acquisition
Proposal or an intention to make an Acquisition Proposal or solicited
proxies or consents in opposition to the Merger and (B) within twelve (12)
months immediately following the date of such termination the Company shall
have entered into a definitive agreement with respect to an Acquisition
Proposal. For purposes of this Agreement, "MergerCo Expenses" shall mean an
amount equal to MergerCo's out-of-pocket costs and expenses incurred in
connection with this Agreement and the Transactions, including without
limitation, fees and disbursements of its outside legal counsel,
accountants and other consultants retained by or on behalf of MergerCo
together with the other out-of-pocket costs incurred by MergerCo in
connection with analyzing and structuring the Transactions, negotiating the
terms and conditions of this Agreement and any other agreements or other
documents relating to the Transactions, arranging financing (including,
without limitation, commitment fees), conducting due diligence and other
activities related to this Agreement and the Transactions. Notwithstanding
anything in this Agreement to the contrary, in no event shall the Company
be obligated to pay MergerCo Expenses in excess of $750,000 in the
aggregate.
(c) If MergerCo terminates this Agreement pursuant to Section 9.1(d),
then the Company shall pay to MergerCo an amount in cash equal to the
MergerCo Expenses. Notwithstanding anything in this Agreement to the
contrary, in no event shall the Company be obligated to pay MergerCo
Expenses in excess of $750,000 in the aggregate.
(d) If the Company terminates this Agreement pursuant to Section
9.1(c)(ii), then MergerCo shall pay the Company an amount in cash equal to
the Company's out-of-pocket costs and expenses incurred in connection with
this Agreement and the Transactions, including without limitation, fees and
disbursements of its outside legal counsel, accountants and other
consultants retained by or on
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behalf of the Company together with the other out-of-pocket costs incurred
by the Company in connection with analyzing and structuring the
Transactions, negotiating the terms and conditions of this Agreement and
any other agreements or documents relating to the Transactions (the
"Company Expenses"). Notwithstanding anything in this Agreement to the
contrary, in no event shall MergerCo be obligated to pay Company Expenses
in excess of $750,000 in the aggregate.
(e) Except as provided in Section 9.1(c)(i) hereof, any payment
required by this Section 9.2 shall be due and payable within three (3)
business days after the date of termination by wire transfer of immediately
available funds to an account designated by the payee. In the event that
the Company fails to pay either the Liquidated Amount or MergerCo Expenses,
or MergerCo fails to pay the Company Expenses, as the case may be, when
due, the term "Liquidated Amount," "MergerCo Expenses" or "Company
Expenses," as applicable, shall be deemed to include (i) interest on such
unpaid amount commencing on the date such amount becomes due, at a rate per
annum equal to the rate of interest publicly announced by Citibank, N.A.
from time to time, in the City of New York, as such bank's Prime Rate, and
(ii) any and all costs and expenses (including without limitation,
attorneys' fees and disbursements) incurred by MergerCo or the Company, as
applicable, in enforcing its rights under this Section 9.2(e). The payments
made by the Company to MergerCo, or by MergerCo to the Company as set forth
in Section 9.2 shall represent the sole and exclusive remedy at law or in
equity to which MergerCo or the Company, as applicable, and their
respective officers, directors, representatives and affiliates shall be
entitled in the event this Agreement shall be terminated in the
circumstances contemplated by Section 9.2 above. Such payments shall be
made without duplication and accordingly, neither MergerCo nor the Company
shall be entitled to payments under Section 9.2 in more than one instance.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered or sent if delivered personally or sent by telecopier
or by prepaid overnight carrier to the parties at the following addresses (or at
such other addresses as shall be specified by the parties by like notice):
(a) if to MergerCo:
TA MergerCo, Inc.
c/o TA Associates, Inc.
High Street Tower, Suite 2500
125 High Street
Boston, Massachusetts 02110
Attn: Richard Tadler
Fax: 617-574-6728
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: Kevin M. Dennis, Esq.
Joseph L. Johnson III, P.C.
Fax: (617) 523-1231
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(b) if to the Guarantors:
c/o TA Associates, Inc.
High Street Tower, Suite 2500
125 High Street
Boston, Massachusetts 02110
Attn: Richard Tadler
Fax: (617) 574-6728
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: Kevin M. Dennis, Esq.
Joseph L. Johnson III, P.C.
Fax: (617) 523-1231
(c) if to the Company:
Special Committee of the Board of Directors
c/o Physicians' Specialty Corporation
The Pavillion at Lake Hearn
1150 Lake Hearn Drive, Suite 640
Atlanta, Georgia 30342
Attn: Sidney Kirschner, Chairman
Fax: (404) 256-1078
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attn: John J. Kelley III
Fax: (404) 572-5100
and a copy to:
Ramie A. Tritt, M.D.
Physicians' Specialty, Inc.
1150 Lake Hearn Drive
Suite 640
Atlanta, Georgia 30342
Fax: (404) 250-0162
and a copy to:
Troutman Sanders
Suite 5200
600 Peachtree Street, NE
Atlanta, Georgia 30308-2216
Attn: Richard H. Brody, Esq.
Fax: (404) 962-6514
10.2 Interpretation. When a reference is made in this Agreement to a
subsidiary or subsidiaries of MergerCo or the Company, the word "Subsidiary"
means any corporation more than 50% of whose outstanding voting securities, or
any partnership, joint venture or other entity more than 50% of whose total
equity interest, is directly or indirectly owned by MergerCo or the Company, as
the case may be. The
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headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
10.3 Non-Survival of Representations, Warranties, Covenants and
Agreements. Except for Sections 7.4, 7.6, 7.7 (except as provided therein),
10.7 and this Section 10.3, none of the representations, warranties, covenants
and agreements contained in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time, and thereafter
there shall be no liability on the part of either MergerCo or the Company or any
of their respective officers, directors or stockholders in respect thereof.
Except as expressly set forth in this Agreement, there are no representations or
warranties of any party hereto, express or implied.
10.4 Miscellaneous. This Agreement (i) constitutes, together with the
Confidentiality Agreement, the Company Disclosure Schedule, the MergerCo
Disclosure Schedule and the Exhibits hereto, the entire agreement and supersedes
all of the prior agreements and understandings, both written and oral, among the
parties, or any of them, with respect to the subject matter hereof, (ii) subject
to Section 10.5, shall be binding upon and inure to the benefits of the parties
hereto and their respective successors and assigns and is not intended to confer
upon any other person (except as set forth below) any rights or remedies
hereunder and (iii) may be executed in two or more counterparts which together
shall constitute a single agreement. Section 7.6 is intended to be for the
benefit of those persons described therein and the covenants contained therein
may be enforced by such persons. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware Court (as
hereinafter defined), this being in addition to any other remedy to which they
are entitled at law or in equity. Any requirements for the securing or posting
of any bond with respect to such remedy are hereby waived by each of the parties
hereto.
10.5 Assignment. Except as expressly permitted by the terms hereof,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto without the prior written consent
of the other parties.
10.6 Severability. If any provision of this Agreement, or the application
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of this Agreement, and the application of such provision to other
persons or circumstances, shall not be affected thereby, and to such end, the
provisions of this Agreement are agreed to be severable.
10.7 Choice of Law/Consent to Jurisdiction. All disputes, claims or
controversies arising out of or relating to this Agreement, or the negotiation,
validity or performance of this Agreement, or the Transactions shall be governed
by and construed in accordance with the laws of the State of Delaware without
regard to its rules of conflict of laws. Each of the Company and MergerCo hereby
irrevocably and unconditionally consents to submit to the sole and exclusive
jurisdiction of the courts of the State of Delaware and of the United States
located in the State of Delaware (the "Delaware Courts") for any litigation
arising out of or relating to this Agreement, or the negotiation, validity or
performance of this Agreement, or the Transactions (and agrees not to commence
any litigation relating thereto except in such courts), waives any objection to
the laying of venue of any such litigation in the Delaware Courts and agrees not
to plead or claim in any Delaware Court that such litigation brought therein has
been brought in any inconvenient forum. Each of the parties hereto agrees, (a)
to the extent such party is not otherwise subject to service of process in the
State of Delaware, to appoint and maintain an agent in the State of Delaware as
such party's agent for acceptance of legal process, and (b) that service of
process may also be made on such party by prepaid certified mail with a proof of
mailing receipt validated by the United States Postal Service constituting
evidence of valid service. Service made pursuant to (a) or (b) above shall have
the same legal force and effect as if served upon such party personally within
the State of Delaware. For purposes of implementing the parties' agreement to
appoint and maintain an agent for
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service of process in the State of Delaware, each such party does hereby appoint
CT Corporation, Corporation Trust Center, 1209 Orange Street, Wilmington, DE
19801, as such agent.
10.8 No Agreement Until Executed. Irrespective of negotiations among the
parties or the exchanging of drafts of this Agreement, this Agreement shall not
constitute or be deemed to evidence a contract, agreement, arrangement or
understanding among the parties hereto unless and until (i) the Board of
Directors of the Company has approved, for purposes of Section 203 of the DGCL
and any applicable provision of the Certificate of Incorporation, the terms of
this Agreement, and (ii) this Agreement is executed by the parties hereto.
10.9 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors or Committees thereof, as the case may be, may, to the extent legally
allowed: (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (b) waive any inaccuracies in the
representations and warranties of the other parties contained herein or in any
document delivered pursuant hereto; and (c) waive compliance by the other
parties with any of the agreements or conditions contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of such party. The
failure of any party hereto to assert any of its rights hereunder shall not
constitute a waiver of such rights.
10.10 The Guarantors.
(a) Subject to Section 10.10(c), each Guarantor hereby unconditionally
and irrevocably guarantees severally, but not jointly, to the Company the
performance of each of the obligations and the undertakings of MergerCo
under this Agreement when and to the extent the same are required to be
performed and subject to all of the terms and conditions hereof. If
MergerCo shall fail to perform any obligation or undertaking of MergerCo
under this Agreement when and to the extent the same is required to be
performed, the Guarantors will upon written demand from the Company
forthwith perform or cause to be performed such obligation or undertaking,
as the case may be.
(b) Subject to Sections 10.10(a) and (c), the obligations of the
Guarantors under this guaranty are absolute and unconditional, are not
subject to any counterclaim, set off, deduction, abatement or defense based
upon any claim any Guarantor may have against the Company (except for any
of the foregoing that MergerCo may have against the Company under the terms
of this Agreement or otherwise), and shall remain in full force and effect
without regard to (i) any insolvency, bankruptcy, dissolution, liquidation,
reorganization or the like of MergerCo at or prior to the Closing or (ii)
any transfer of shares of capital stock of MergerCo, or any assignment by
MergerCo of its rights and obligations under this Agreement to a
wholly-owned subsidiary of MergerCo or any Guarantor.
(c) Notwithstanding any provision of this Agreement to the contrary,
any liability arising under this contract or this guaranty shall be limited
to $10.0 million in the aggregate in the case of the Guarantors, provided,
however, that any liability arising as a result of a breach of Section
7.15(b) hereof shall be limited to $32,800,000, and provided, further, that
(i) TA/Advent VIII, L.P. shall not have liability for more than 60% of any
liability arising from a breach by MergerCo under this Agreement, (ii)
TA/Atlantic and Pacific IV, L.P. shall not have liability for more than 38%
of any liability arising from a breach by MergerCo under this Agreement,
(iii) TA Executives Fund LLC shall not have liability for more than 1% of
any liability arising from a breach by MergerCo under this Agreement, and
(iv) TA Investors LLC shall not have liability for more than 1% of any
liability arising from a breach by MergerCo under this Agreement; and
provided, further that no Guarantor shall have any liability whatsoever
under this guaranty after the Closing, whether based upon events occurring
prior to or after the Closing.
10.11 Amendment. This Agreement may be amended by the parties hereto by an
instrument in writing signed on behalf of each of the parties hereto at any time
before the Effective Time; provided, however, that after this Agreement is
approved by the Company's stockholders, no such amendment or
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modification shall reduce the amount or change the form of consideration to be
delivered to the stockholders of the Company.
IN WITNESS WHEREOF, MergerCo, the Company and the Guarantors have caused
this Agreement and Plan of Merger to be executed as of the date first written
above by their respective officers thereunto duly authorized.
TA MERGERCO, INC.
By: /s/ RICHARD TADLER
------------------------------------
Richard Tadler
President and Chief Executive
Officer
PHYSICIANS' SPECIALTY CORP.
By: /s/ EDWARD R. CASAS, M.D.
------------------------------------
Edward R. Casas, M.D.
Director
TA/ADVENT VIII, L.P.
By: TA Associates VIII LLC, its
General Partner
By: TA Associates, Inc., its General
Partner
By: /s/ RICHARD TADLER
------------------------------------
Richard Tadler
Managing Director
TA/ATLANTIC AND PACIFIC IV, L.P.
By: TA Associates AP IV, L.P., its
General Partner
By: TA Associates, Inc., its General
Partner
By: /s/ RICHARD TADLER
------------------------------------
Richard Tadler
Managing Director
TA INVESTORS LLC
By: TA Associates Inc., its Manager
By: /s/ RICHARD TADLER
------------------------------------
Richard Tadler
Managing Director
TA EXECUTIVES FUND LLC
By: TA Associates Inc., its Manager
By: /s/ RICHARD TADLER
------------------------------------
Richard Tadler
Managing Director
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EXHIBIT 1.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PHYSICIANS' SPECIALTY CORP.
An original Certificate of Incorporation of Physicians' Specialty Corp.
(the "Corporation") was filed with the Secretary of State on July 31, 1996. This
Amended and Restated Certificate of Incorporation has been duly adopted by the
Corporation in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware.
ARTICLE I
The name of the Corporation shall be Physicians' Specialty Corp.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
The total number of shares of capital stock which the corporation shall
have authority to issue is [ ], of which (a) [3,293,161](1) shares
shall be preferred stock, par value $.001 per share ("Preferred Stock"),
consisting of [3,265,361](1) shares of Convertible Participating Preferred Stock
(as hereinafter defined) and [27,800](1) shares of 6% Redeemable Preferred Stock
(as hereinafter defined), (b) [ ] shares shall be preferred stock, par
value $.01 per share (the "Undesignated Preferred Stock") and (c) [ ]
shares shall be common stock, par value $.001 per share. As set forth in this
Article IV, the Board of Directors or any authorized committee thereof is
authorized from time to time to establish and designate one or more series of
Undesignated Preferred Stock, to fix and determine the variations in the
relative rights, preferences and powers as between the different series of
Undesignated Preferred Stock in the manner hereinafter set forth in this Article
IV, and to fix or alter the number of shares comprising any such series and the
designation thereof to the fullest extent permitted by law.
The number of authorized shares of the class of Undesignated Preferred
Stock may be increased or decreased (but not below the number of shares
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock entitled to vote, without a vote of the holders of the Undesignated
Preferred Stock.
Except as otherwise restricted by this Amended and Restated Certificate of
Incorporation, the Corporation is authorized to issue, from time to time, all or
any portion of the capital stock of the
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1Assumes a total equity investment of $32,800,000 by funds affiliated with TA
Associates, Inc. or their assignees (the "TA Investors"). Such amount would
consist of approximately $5,000,000 of Convertible Preferred Stock (that will
convert into approximately 57.0% of the fully-diluted Common Stock of the
Corporation) and $27,800,000 of Redeemable Preferred Stock. In the event the
amount of such total equity investment by the TA Investors is different from
that set forth above, the share numbers and fully-diluted equity ownership of
the TA Investors will change in a proportionate manner.
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Corporation which may have been authorized but not issued, to such person or
persons and for such lawful consideration as it may deem appropriate, and
generally in its absolute discretion to determine the terms and manner of any
disposition of such authorized but unissued capital stock.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid shares of capital stock, and the
holder of such shares shall not be liable for any further call or assessment or
any other payment thereon.
The voting powers, designations, preferences, privileges and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of each class of capital stock of the Corporation,
shall be as provided in this Article IV.
A. CONVERTIBLE PARTICIPATING PREFERRED STOCK
1. Designation. A total of [3,265,361] shares of the Corporation's
Preferred Stock shall be designated as a class known as Convertible
Participating Preferred Stock, par value $.001 per share (the "Convertible
Stock"). All of the preferential amounts to be paid to the holders of the
Convertible Stock as provided in this Section A shall be paid or set apart for
payment before the payment or setting apart for payment of any amount for, or
the distribution of any property of the Corporation to, the holders of any other
equity securities of the Corporation, whether now or hereafter authorized, other
than the Redeemable Preferred Stock which shall rank equal to the Convertible
Stock in connection with any event referred to in Section A.4 or A.5.
2. Election of Directors; Voting.
(a) Election of Directors. For so long as the holders of Convertible
Stock continue to hold at least twenty-five percent (25%) of the shares of
Convertible Stock issued in the original issuance of the Convertible Stock,
the holders of outstanding shares of Convertible Stock shall, voting
together as a separate class, be entitled to elect two (2) Directors of the
Corporation. Such Directors shall be the candidates receiving the greatest
number of affirmative votes of the outstanding shares of Convertible Stock
(the "Convertible Stock Director Designees"), with each share of
Convertible Stock entitled to one (1) vote with fractional votes for
fractional shares, and with votes cast against such candidates and votes
withheld having no legal effect. The election of the Convertible Stock
Director Designees by the holders of the Convertible Stock shall occur (i)
at the annual meeting of holders of capital stock, (ii) at any special
meeting of holders of capital stock, (iii) at any special meeting of
holders of Convertible Stock called by holders of a majority of the
outstanding shares of Convertible Stock or (iv) by a written consent of
holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power (a "Two Thirds Interest") of the outstanding shares of
Convertible Stock. If at any time when any share of Convertible Stock is
outstanding a Convertible Stock Director Designee should cease to be a
Director of the Corporation for any reason, the vacancy shall only be
filled by the vote or written consent of the holders of the outstanding
shares of Convertible Stock, voting together as a separate class, in the
manner and on the basis specified above. The holders of outstanding shares
of Convertible Stock shall also be entitled to vote for all other Directors
of the Corporation together with holders of all other shares of the
Corporation's outstanding capital stock entitled to vote thereon, voting as
a single class, with each outstanding share entitled to the number of votes
specified in Section A.2(b).
(b) Voting Generally. Each share of Convertible Stock shall be
entitled to the number of votes equal to the largest number of full shares
of Common Stock (as defined in Section C.1) into which such share of
Convertible Stock could be converted pursuant to Section A.6 hereof on the
record date for the vote or written consent of stockholders, if applicable,
with appropriate adjustments for stock splits, stock dividends,
recapitalizations and the like. Each holder of shares of Convertible Stock
shall be entitled to notice of any stockholders' meeting in accordance with
the by-laws of the Corporation and shall vote with holders of the Common
Stock, voting together as single class, upon all matters submitted to a
vote of stockholders, excluding those matters required to be submitted to a
class or
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series vote pursuant to the terms hereof (including, without limitation,
Section A.8) or by law. Fractional votes shall not, however, be permitted
and any fractional voting rights resulting from the above formula (after
aggregating all shares of Common Stock into which shares of Convertible
Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with any fraction equal or greater than one-half
rounded upward to one).
3. Dividends. The holders of Convertible Stock shall be entitled to
receive dividends out of funds legally available therefor at such times and in
such amounts as the Board of Directors may determine in its sole discretion;
provided, however, that no such dividend may be declared or paid on any shares
of Convertible Stock unless at the same time a dividend is declared or paid on
all outstanding shares of Common Stock and vice versa, with holders of
Convertible Stock and Common Stock sharing in any such dividends as if they
constituted a single class of stock and with each holder of shares of
Convertible Stock entitled to receive such dividends based on the number of
shares of Common Stock into which such shares of Convertible Stock are then
convertible in accordance with Section A.6 hereof.
4. Liquidation.
(a) Liquidation Preference. Upon any liquidation, dissolution or
winding up of the Corporation and its subsidiaries, whether voluntary or
involuntary (a "Liquidation Event"), each holder of outstanding shares of
Convertible Stock shall be entitled to be paid out of the assets of the
Corporation available for distribution to stockholders, whether such assets
are capital, surplus or earnings, and before any amount shall be paid or
distributed to the holders of Common Stock or of any other stock ranking on
liquidation junior to the Convertible Stock, an amount in cash, equal to
(i) $[1.53](2) per share of Convertible Stock held by such holder (adjusted
appropriately for stock splits, stock dividends, recapitalizations and the
like with respect to the Convertible Stock), plus (ii) any declared but
unpaid dividends to which such holder of outstanding shares of Convertible
Stock is then entitled pursuant to Sections A.3 and A.5(f) hereof (the sum
of clauses (i) and (ii) being referred to herein as the "Convertible
Preferred Base Liquidation Amount"), plus (iii) any interest accrued
pursuant to Section A.5(e) hereof to which such holder of Convertible Stock
is entitled, if any (the sum of clauses (i), (ii) and (iii) being referred
to herein as the "Convertible Liquidation Preference Amount"); provided,
however, that if, upon any Liquidation Event, the amounts payable with
respect to the Convertible Liquidation Preference Amount are not paid in
full, the holders of the Convertible Stock and the Redeemable Preferred
Stock shall share ratably in any distribution of assets in proportion to
the full respective preferential amounts to which they are entitled; and
provided further, however, that if upon any Liquidation Event the holders
of the outstanding shares of Convertible Stock would receive more than the
Convertible Liquidation Preference Amount in the event their shares were
converted into Common Stock immediately prior to such Liquidation Event and
such shares of Common Stock received a liquidating distribution or
distributions from the Corporation (after giving effect to the preferential
amounts payable to the holders of the Redeemable Preferred Stock), then
each holder of Convertible Stock shall receive as a distribution from the
Corporation in connection with such Liquidation Event an amount equal to
the amount that would be paid if such holder's shares of Convertible Stock
were converted into Common Stock immediately prior to such Liquidation
Event in lieu of the Convertible Liquidation Preference Amount. The
provisions of this Section A.4 shall not in any way limit the right of the
holders of Convertible Stock to elect to convert their shares of
Convertible Stock into Common Stock pursuant to Section A.6 prior to or in
connection with any Liquidation Event. Upon any Liquidation Event, holders
of fractional shares of Convertible Stock shall receive proportionate
payments in respect thereof.
(b) Notice. Prior to the occurrence of any Liquidation Event, the
Corporation will furnish each holder of Convertible Stock notice in
accordance with Section A.9 hereof, together with a certificate
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2 See Footnote 1 above. In the event the amount of such total equity investment
by the TA Investors is different from that set forth above, the Liquidation
Amount will change in a proportionate manner.
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prepared by the chief financial officer of the Corporation describing in
detail the facts of such Liquidation Event, stating in detail the amount(s)
per share of Convertible Stock each holder of Convertible Stock would
receive pursuant to the provisions of Section A.4(a) hereof pursuant to
clauses (i), (ii) and (iii) thereof or pursuant to the provisos to Section
A.4(a) and stating in detail the facts upon which such amounts were
determined.
5. Redemption; Preferential Payment in Extraordinary Transactions.
(a)(i) Scheduled Redemption. At any one time on or after the sixth
anniversary of the date of original issuance of the Convertible Stock, upon
the election of the holder or holders of a Two Thirds Interest of the
outstanding Convertible Stock, the Corporation shall redeem all (and not
less than all, other than pursuant to Section 5(e) below) of the
outstanding shares of Convertible Stock. The redemption price for each
share of Convertible Stock redeemed pursuant to this Section A.5(a)(i)
shall be the per share Convertible Liquidation Preference Amount (as
defined in Section A.4(a) above) (the "Convertible Redemption Price"). The
foregoing election shall be made by such holders giving the Corporation and
each of the other holders of Convertible Stock not less than fifteen (15)
days prior written notice, which notice shall set forth the date for such
redemption.
(ii) Extraordinary Transactions. Upon the election of any holder
or holders of a Two Thirds Interest of the outstanding Convertible Stock
to have the Convertible Stock redeemed or otherwise to participate in
connection with the occurrence of any of the following events: (A) a
merger or consolidation of the Corporation with or into another
corporation (with respect to which less than a majority of the
outstanding voting power of the surviving or consolidated corporation is
held by stockholders of the Corporation immediately prior to such
event), (B) the sale or transfer of all or substantially all of the
properties and assets of the Corporation, (C) any purchase by any party
(or group of affiliated parties) of shares of capital stock of the
Corporation (either through a negotiated stock purchase or a tender for
such shares), the effect of which is that such party (or group of
affiliated parties) that did not beneficially own a majority of the
voting power of the outstanding shares of capital stock of the
Corporation immediately prior to such purchase beneficially owns at
least a majority of such voting power immediately after such purchase,
(D) the redemption or repurchase of shares representing a majority of
the voting power of the outstanding shares of capital stock of the
Corporation or (E) a public offering not constituting a "QPO" (as
defined in Section A.6(b) below) (each an "Extraordinary Transaction"),
then, as a part of and as a condition to the effectiveness of such
Extraordinary Transaction, unless the holders of Convertible Stock shall
have elected to convert their shares of Convertible Stock into Common
Stock in accordance with the voluntary conversion provisions of Section
A.6 prior to the effective date of such Extraordinary Transaction, the
Corporation shall either (1) if redemption is elected, on the effective
date of such Extraordinary Transaction, redeem all (but not less than
all) of the outstanding shares of Convertible Stock held by each holder
of Convertible Stock for an amount equal to the Convertible Redemption
Price, such amount to be payable in the same form of consideration as is
paid to the holders of Common Stock in such Extraordinary Transaction,
or (2) if such holders elect to participate in the relevant transaction
(such as a merger) on terms acceptable to them, take such actions as
shall be sufficient to facilitate such participation (including
executing a merger agreement including an exchange ratio reflecting the
provisions hereof) on terms giving such holders the right to such
Convertible Redemption Price as a preferential amount, in which event
such amount shall be paid in the same form of consideration as is paid
to the holders of Common Stock in such Extraordinary Transaction, but in
preference to and before any amount is paid or otherwise distributed to
the holders of the Common Stock or any other stock ranking with regard
to dividend rights, rights upon a Liquidation Event or an Extraordinary
Transaction, or redemption rights junior to the Convertible Stock, in
which event such preferential amount shall be deemed to have been
distributed to the holders of the Convertible Stock as if in a
Liquidation Event.
Notwithstanding the foregoing, if upon any Extraordinary
Transaction the holders of the outstanding shares of Convertible Stock
would receive more than the Convertible Redemption
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Price in the event their shares were converted into Common Stock
immediately prior to such Extraordinary Transaction and such shares of
Common Stock were purchased or otherwise participated in such
Extraordinary Transaction, then each holder of Convertible Stock shall
receive from the Corporation or the relevant purchaser, as applicable,
upon the election by a Two Thirds Interest to redeem or otherwise
participate in such Extraordinary Transaction an amount equal to the
amount per share that would be paid if the shares of Common Stock
receivable upon conversion of the Convertible Stock were being acquired
in the Extraordinary Transaction at the same price per share as is paid
for other shares of Common Stock, which amount shall be paid in the same
form of consideration as is paid to holders of Common Stock, as if each
share of Convertible Stock had been converted into the number of shares
of Common Stock issuable upon the conversion of such share of
Convertible Stock immediately prior to such Extraordinary Transaction.
Also, notwithstanding the foregoing, in connection with the acquisition
of the Convertible Stock in an Extraordinary Transaction which is to be
accounted for by the acquiring entity as a pooling of interests, the
holders of shares of Convertible Stock shall receive upon such election
to redeem or otherwise participate, if so required for the application
of such accounting treatment, and in lieu of cash, the number of shares
of common stock of such entity having a value equal to the amount
otherwise payable to the holders of Convertible Stock in such
Extraordinary Transaction pursuant to this Section A.5(a)(ii) and having
the same registered status or registration rights as any other shares in
such transaction. The Corporation shall not participate in any
Extraordinary Transaction or make or agree to have made any payments to
the holders of shares of Common Stock or any other stock ranking junior
to the Convertible Stock in an Extraordinary Transaction unless the
holders of the Convertible Stock shall have received the amount to which
they are entitled hereunder in an Extraordinary Transaction.
The foregoing election shall be made by such holders giving the
Corporation and each other holder of Convertible Stock not less than ten
(10) business days prior written notice, which notice shall set forth
the date for such redemption or participation in an Extraordinary
Transaction, as applicable. The provisions of this Section A.5 shall not
in any way limit the right of the holders of Convertible Stock to elect
to convert their shares into shares of Common Stock pursuant to Section
A.6 prior to or in connection with any Extraordinary Transaction.
(b) Valuation of Distribution Securities. Any securities or other
consideration to be delivered to the holders of the Convertible Stock if so
elected in connection with a redemption or upon any Extraordinary
Transaction in accordance with the terms hereof shall be valued as follows:
(i) If traded on a nationally recognized securities exchange or
inter-dealer quotation system, the value shall be deemed to be the
average of the closing prices of the securities on such exchange or
system over the 20-day period ending three (3) business days prior to
the closing of such Extraordinary Transaction;
(ii) If traded over-the-counter, the value shall be deemed to be
the average of the closing bid prices over the 20-day period ending
three (3) business days prior to the closing of such Extraordinary
Transaction; and
(iii) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the Board of
Directors of the Corporation (excluding any members of the Board of
Directors that have been designated by the holders of the Convertible
Stock) and the holders of not less than a Two Thirds Interest of the
outstanding shares of Convertible Stock, provided that if the Board of
Directors of the Corporation and the holders of not less than a Two
Thirds Interest of the outstanding shares of Convertible Stock are
unable to reach agreement, then by independent appraisal by a mutually
agreed to investment banker, the fees of which shall be paid by the
Corporation.
(c) Notice by Corporation. Prior to the occurrence of any
Extraordinary Transaction, the Corporation will furnish each holder of
Convertible Stock notice in accordance with Section A.9 hereof, together
with a certificate prepared by the chief financial officer of the
Corporation describing
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all material terms of such Extraordinary Transaction, including without
limitation the consideration to be delivered in connection with such
Extraordinary Transaction, and the identities of the parties to the
Extraordinary Transaction.
(d) Purchase Date and Price. Upon the election of the holders of not
less than a Two Thirds Interest of the outstanding Convertible Stock to
cause the Corporation to redeem the Convertible Stock or otherwise to
participate in an Extraordinary Transaction pursuant to Section A.5(a)(i)
or (ii), each holder of Convertible Stock shall be deemed to have elected
to cause all of the shares of Convertible Stock held by such holder to be
so redeemed or to so participate. Any date upon which a redemption or other
acquisition is to occur in accordance with Section A.5(a) shall be referred
to as a "Convertible Redemption Date." If at a Convertible Redemption Date
shares of Convertible Stock are unable to be redeemed (as contemplated by
Section A.5(e) below), then holders of Convertible Stock shall also be
entitled to interest and dividends pursuant to Sections A.5(e) and (f)
below. The aggregate Convertible Redemption Price elected to be payable in
cash pursuant to Section A.5(a) shall be payable in cash in immediately
available funds to the respective holders on the Convertible Redemption
Date (subject to Section A.5(e)), except as otherwise contemplated by
Section A.5(a)(ii). Upon any redemption as provided herein, holders of
fractional shares shall receive proportionate amounts in respect thereof.
Until the aggregate applicable redemption price has been paid for all
shares of Convertible Stock being redeemed or acquired: (A) except with
respect to stock splits and distributions, no dividend whatsoever shall be
paid or declared, and no distribution shall be made, on any capital stock
of the Corporation other than the Redeemable Preferred Stock; and (B)
except as permitted by Sections A.8(d) and B.6(d), no shares of capital
stock of the Corporation (other than in accordance with this Section A.5
and Section B.5 below) shall be purchased, redeemed or acquired by the
Corporation and no monies shall be paid into or set aside or made available
for a sinking fund for the purchase, redemption or acquisition thereof.
(e) Redemption Prohibited. If, at a Convertible Redemption Date, the
Corporation is prohibited under the Delaware General Corporation Law from
redeeming all shares of Convertible Stock for which redemption is required
hereunder, then it shall redeem such shares, if any, on a pro-rata basis
among the holders of Convertible Stock in proportion to the full respective
redemption amounts to which they are entitled hereunder to the extent
possible and shall redeem the remaining shares to be redeemed as soon as
the Corporation is not prohibited from redeeming some or all of such shares
under the Delaware General Corporation Law, subject to the last paragraph
of Section A.8. Any shares of Convertible Stock not redeemed shall remain
outstanding and entitled to all of the rights and preferences provided in
this Article IV. The Corporation shall take such commercially reasonable
action as shall be necessary or appropriate to review and promptly remove
any impediment to its ability to redeem Convertible Stock under the
circumstances contemplated by this Section A.5(e). In the event that the
Corporation fails for any reason to redeem shares for which redemption is
required pursuant to this Section A.5 (except with respect to failures
resulting from the provisions of Section A.5(h) in connection with a
redemption under Section A.5(a)(ii) hereof), including without limitation
due to a prohibition of such redemption under the Delaware General
Corporation Law, then during the period from the applicable Convertible
Redemption Date through the date on which such shares are redeemed, the
applicable Convertible Preferred Base Liquidation Amount of such shares
shall bear interest payable in cash at the rate of the higher of (i) ten
percent (10%) per annum or (ii) four percent (4%) over the Prime Rate as
reported in the Wall Street Journal on the Convertible Redemption Date,
with such interest to accrue daily in arrears and to be compounded
annually; provided, however, that in no event shall such interest exceed
the maximum permitted rate of interest under applicable law (the "Maximum
Permitted Rate"). In the event that fulfillment of any provision hereof
results in such rate of interest being in excess of the Maximum Permitted
Rate, the obligation to be fulfilled shall automatically be reduced to
eliminate such excess; provided, however, that any subsequent increase in
the Maximum Permitted Rate shall be retroactively effective to the
applicable Convertible Redemption Date.
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(f) Dividend After Convertible Redemption Date. From and after a
Convertible Redemption Date, no shares of Convertible Stock subject to
redemption shall be entitled to dividends, if any, as contemplated by
Section A.3; provided, however, that in the event that shares of
Convertible Stock are unable to be redeemed and continue to be outstanding
in accordance with Section A.5(e), such shares shall continue to be
entitled to dividends and interest thereon as provided in Sections A.3 and
A.5(e) until the date on which such shares are actually redeemed by the
Corporation.
(g) Surrender of Certificates. Upon receipt of the applicable
redemption price by certified check or wire transfer (in the event such
price is to be paid in cash), each holder of shares of Convertible Stock to
be redeemed shall surrender the certificate or certificates representing
such shares to the Corporation, duly assigned or endorsed for transfer (or
accompanied by duly executed stock powers relating thereto), or, in the
event the certificate or certificates are lost, stolen or missing, shall
deliver an affidavit or agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection
therewith (an "Affidavit of Loss") with respect to such certificates at the
principal executive office of the Corporation or the office of the transfer
agent for the Convertible Stock or such office or offices in the
continental United States of an agent for redemption as may from time to
time be designated by notice to the holders of Convertible Stock, and each
surrendered certificate shall be canceled and retired; provided, however,
that if the Corporation is prohibited from redeeming all shares of
Convertible Stock as provided in Section A.5(e), then upon the surrender of
such certificate(s), the Corporation will deliver to the holder a new
certificate for the shares of Convertible Stock not so redeemed.
(h) Further Restrictions on Redemption. Notwithstanding anything
herein to the contrary, the Convertible Stock shall not be redeemed or
subject to redemption hereunder unless (i) all obligations of the
Corporation under the Credit Agreement dated as of , 1999 among
the Corporation, the lenders party thereto, (the "Senior Lenders"), and
, both as Senior Lender and agent (such agreement, as
amended or supplemented from time to time, the "Credit Agreement") and the
Subordinated Credit Agreement dated as of , 1999 among the
Corporation, the lenders party thereto, (the "Subordinated Lenders") (such
agreement, as amended or supplemented from time to time, the "Subordinated
Credit Agreement") shall have been or are currently paid in full, (ii) the
Senior Lenders and Subordinated Lenders shall have consented to such
redemption, or (iii) such redemption otherwise is permitted under the
Senior Credit Agreement and Subordinated Credit Agreement. If the
Corporation is prohibited from redeeming the Convertible Stock under
Section A.5(a)(i) pursuant to this Section A.5(h), the holders of the
Convertible Stock shall be entitled to the provisions of Sections A.5(e).
6. Conversion. The holders of the Convertible Stock shall have the
following conversion rights:
(a) Conversion Upon Election of Holders. Each holder of a share of
Convertible Stock shall be entitled at any time, upon the written election
of such holder without the payment of any additional consideration, to
convert such share of Convertible Stock into the number of fully paid and
nonassessable shares of Common Stock which results from dividing the
Conversion Value (as defined in this Section A.6(a)) per share in effect
for the Convertible Stock at the time of conversion, as the numerator, by
the per share Conversion Price (as defined in this Section A.6(a)) of the
Convertible Stock, as the denominator. However, the Company may not issue
fractional shares of Common Stock. Any fractional shares resulting from the
conversion of Convertible Stock into Common Stock shall be rounded to the
nearest whole number (with any fraction equal to or greater than one-half
rounded upward to one). The number of shares of Common Stock into which a
share of a Convertible Stock is convertible is hereinafter referred to as
the "Conversion Rate." In addition, the holders of shares of Convertible
Stock shall be entitled at any time, upon the written election of a Two
Thirds Interest of outstanding Convertible Stock without the payment of any
additional consideration, to cause all (but not less than all) of the
outstanding shares of Convertible Stock to be automatically converted into
Common Stock at the Conversion Rate, with fractional shares treated as
provided above. Upon the filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the
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State of Delaware the "Conversion Price" per share of Convertible Stock
shall be $[1.53](3), and the per share "Conversion Value" of Convertible
Stock shall be $[1.53](3). The Conversion Price per share of Convertible
Stock and the Conversion Rate shall be subject to adjustment from time to
time as provided in Section A.7 hereof. If any share of Convertible Stock
is converted at a time when there are any declared but unpaid dividends or
other amounts due on or in respect of such shares, such declared but unpaid
dividends and other amounts shall be paid in full in cash by the
Corporation in connection with such conversion.
(b) Automatic Conversion Upon QPO. Each share of Convertible Stock
shall automatically be converted, without the payment of any additional
consideration, into shares of Common Stock as of, and in all cases subject
to, the closing of the Corporation's first underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, following the filing date of this Amended and Restated
Certificate of Incorporation provided that (i) such registration statement
covers the offer and sale of Common Stock of which the aggregate gross
proceeds attributable to sales for the account of the Corporation exceed
$50 million, at a price per share equal to at least [$10.00](3)
(appropriately adjusted for any stock split, combination, reorganization,
recapitalization, stock dividend, or similar event), (ii) such Common Stock
is listed for trading on either the New York Stock Exchange or the Nasdaq
National Market, and (iii) all outstanding shares of Redeemable Preferred
Stock are redeemed for cash and/or Series A Notes (as defined in Section
B.5 below) immediately upon and as of the closing of such offering (a "QPO"
or a "Qualified Public Offering"); provided that if a closing of a QPO
occurs, all outstanding shares of Convertible Stock shall be deemed to have
been converted into shares of Common Stock immediately prior to such
closing. Any such conversion shall be at the Conversion Rate in effect upon
the closing of a QPO, as applicable.
If the holders of shares of Convertible Stock are required to convert
the outstanding shares of Convertible Stock pursuant to this Section A.6(b)
at a time when there are any declared but unpaid dividends or other amounts
due on or in respect of such shares, such dividends and other amounts shall
be paid in full in cash, or, at the Corporation's option, shares of Common
Stock, by the Corporation in connection with such conversion.
(c) Procedure for Voluntary Conversion. Upon election to convert
pursuant to Section A.6(a), the relevant holder of Convertible Stock shall
surrender the certificate or certificates representing the Convertible
Stock being converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating
thereto), at the principal executive office of the Corporation or the
offices of the transfer agent for the Convertible Stock or such office or
offices in the continental United States of an agent for conversion as may
from time to time be designated by notice to the holders of the Convertible
Stock by the Corporation, or shall deliver an Affidavit of Loss with
respect to such certificates. The issuance by the Corporation of Common
Stock upon a conversion of Convertible Stock pursuant to Section A.6(a)
hereof shall be effective as of the surrender of the certificate or
certificates for the Convertible Stock to be converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly executed
stock powers relating thereto), or as of the delivery of an Affidavit of
Loss. Upon surrender of a certificate representing Convertible Stock for
conversion, or delivery of an Affidavit of Loss, the Corporation shall
issue and send by hand delivery, by courier or by first class mail (postage
prepaid) to the holder thereof or to such holder's designee, at the address
designated by such holder, certificates for the number of shares of Common
Stock to which such holder shall be entitled upon conversion plus a cash
payment in the amount of any declared but unpaid dividends and other
amounts as contemplated by Section A.6(a) in respect of the shares of
Convertible Stock. The issuance of certificates for Common Stock upon
conversion of Convertible Stock will be made without charge to the holders
of such shares for any issuance tax in respect thereof or other costs
incurred by the Corporation in connection with such
- ---------------
3See Footnote 1 above. In the event the amount of such total equity investment
by the TA Investors is different from that set forth above, the Conversion
Price, Conversion Value and per share QPO price will change in a proportionate
manner.
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conversion and the related issuance of such stock. If a conversion of
Convertible Stock upon a Liquidation Event or an Extraordinary Transaction
occurs and the holders of the Common Stock issued on such conversion elect
to participate, the Corporation shall make appropriate provisions for the
Common Stock issued upon such conversion to be treated on the same basis as
all other Common Stock in such Liquidation Event or Extraordinary
Transaction. In the event of any public offering constituting a QPO, the
provisions of Section A.6(d) shall apply.
(d) Procedure for Automatic Conversion. As of, and in all cases
subject to, the closing of a QPO (the "Automatic Conversion Date"), all
outstanding shares of Convertible Stock shall be converted automatically
into shares of Common Stock at the Conversion Rate and without any further
action by the holders of such shares and whether or not the certificates
representing such shares of Convertible Stock are surrendered to the
Corporation or its transfer agent. On the Automatic Conversion Date, all
rights with respect to the Convertible Stock so converted shall terminate,
except any of the rights of the holders thereof upon surrender of their
certificate or certificates therefor or delivery of an Affidavit of Loss
thereof to receive certificates for the number of shares of Common Stock
into which such Convertible Stock has been converted plus all declared but
unpaid dividends and other amounts as contemplated by Section A.6(b). If so
required by the Corporation, certificates surrendered for conversion shall
be endorsed or accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or by his, her or its attorney duly authorized in
writing. Upon surrender of such certificates or Affidavit of Loss the
Corporation shall issue and deliver to such holder, promptly (and in any
event in such time as is sufficient to enable such holder to sell its
shares in such QPO) at such office and in its name as shown on such
surrendered certificate or certificates, a certificate or certificates for
the number of shares of Common Stock into which the shares of the
Convertible Stock surrendered are convertible on the Automatic Conversion
Date.
(e) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Convertible Stock such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Convertible Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all of the then outstanding
shares of Convertible Stock, the Corporation will take such corporate
action as may be necessary to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purpose.
(f) No Closing of Transfer Books. The Corporation shall not close its
books against the transfer of shares of Convertible Stock in any manner
which would interfere with the timely conversion of any shares of
Convertible Stock.
7. Adjustments. The Conversion Price in effect from time to time shall be
subject to adjustment from and after the date this Amended and Restated
Certificate of Incorporation is filed, and regardless of whether any shares of
Convertible Stock are then issued and outstanding as follows:
(a) Dividends and Stock Splits. If the number of shares of Common
Stock outstanding at any time after the date hereof is increased by a stock
dividend payable in shares of Common Stock or by a subdivision or split-up
of shares of Common Stock, then, on the date such payment is made or such
change is effective, the Conversion Price shall be appropriately decreased
so that the number of shares of Common Stock issuable on conversion of any
shares of Convertible Stock shall be increased in proportion to such
increase of outstanding shares of Common Stock.
(b) Reverse Stock Splits. If the number of shares of Common Stock
outstanding at any time after the date hereof is decreased by a combination
or reverse split of the outstanding shares of Common Stock, then, on the
effective date of such combination or reverse split, the Conversion Price
shall be appropriately increased so that the number of shares of Common
Stock issuable on
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conversion of any shares of Convertible Stock shall be decreased in
proportion to such decrease in outstanding shares of Common Stock.
(c) Reorganization, etc. If the Common Stock issuable upon the
conversion of the Convertible Stock shall be changed into the same or
different number of shares of any class or classes of stock, whether by
reclassification or otherwise (other than a subdivision or combination of
shares or stock dividend provided for above, or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 7),
then and in each such event the holders of Convertible Stock shall have the
right thereafter to convert such shares into the kind and amount of shares
of stock and other securities and property receivable upon such
reorganization, reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Convertible Stock might
have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
(d) Mergers and Other Reorganizations. Unless such transaction is an
Extraordinary Transaction in which the holders of the Convertible Stock
elect redemption (in which case Section 5(a)(ii) shall apply and this
subsection shall not apply), if at any time or from time to time there
shall be a capital reorganization of the Common Stock (other than a
subdivision, combination or reclassification provided for elsewhere in this
Section 7) or a merger or consolidation of the Corporation with or into
another Corporation or the sale of all or substantially all of the
Corporation's properties and assets to any other person, then, as of and as
a condition to the effectiveness of such reorganization, merger,
consolidation or sale, lawful and adequate provision shall be made so that
the holders of the Convertible Stock shall thereafter be entitled to
receive upon conversion of the Convertible Stock the number of shares of
stock or other securities or property of the Corporation or of the
successor Corporation resulting from such merger or consolidation or sale,
to which a holder of Common Stock deliverable upon conversion would have
been entitled on such capital reorganization, merger, consolidation, or
sale had the holder of such Convertible Stock converted such securities
immediately prior to such transaction. In any such case, appropriate
provisions shall be made with respect to the rights of the holders of the
Convertible Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this Section 7 (including, without
limitation, provisions for adjustment of the applicable Conversion Price
and the number of shares purchasable upon conversion of the Convertible
Stock) shall thereafter be applicable, as nearly as may be, with respect to
any shares of stock, securities or assets to be deliverable thereafter upon
the conversion of the Convertible Stock.
(e) Calculations. All calculations under this Section 7 shall be made
to the nearest cent or to the nearest one hundredth ( 1/100) of a share of
Common Stock, as the case may be.
(f) Certificate. Upon the occurrence of each adjustment or
readjustment pursuant to this Section 7, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance with
the terms hereof and prepare and furnish to each holder of Convertible
Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon written request at any time of any
holder of Convertible Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the applicable Conversion Prices before and after such
adjustment or readjustment, and (iii) the number of shares of Common Stock
and the amount, if any, of other property which at the time would be
received upon the conversion of such holder's shares of Convertible Stock.
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8. Covenants. So long as the holders of Convertible Stock continue to hold
at least twenty-five percent (25%) of the shares of Convertible Stock issued in
the original issuance of the Convertible Stock, the Corporation shall not,
without first having provided written notice of such proposed action to each
holder of outstanding shares of Convertible Stock and having obtained the
affirmative vote or written consent of the holders of not less than a Two Thirds
Interest of the outstanding shares of Convertible Stock, voting as a single
class, with each share of Convertible Stock entitling the holder thereof to one
vote per share of Convertible Stock held by such holder:
(a) amend, alter or repeal any provision of, or add any provision to,
Article IV of this Amended and Restated Certificate of Incorporation, or
otherwise amend, alter or repeal any provision of, or add any provision to,
this Amended and Restated Certificate of Incorporation or the Corporation's
by-laws if such latter action would alter or change the preferences,
rights, privileges or powers of, or the restrictions provided for the
benefit of, any of the Convertible Stock;
(b) reclassify any capital stock;
(c) create, obligate itself to create, authorize or issue any new
class or classes of stock or new series of common stock or preferred stock
or any security convertible into or evidencing the right to purchase shares
of any new class or series of common stock or preferred stock or any new
capital stock of the Corporation having preference over or being on parity
with the Convertible Stock in any respect;
(d) declare or pay any dividends (other than stock dividends and other
than dividends on the Redeemable Preferred Stock as provided in Section
B.3) or make any distributions of cash, property or securities of the
Corporation in respect of its capital stock, or apply any of its assets to
the redemption, retirement, purchase or other acquisition of its capital
stock, directly or indirectly, through subsidiaries or otherwise, except
for (i) the redemption of Convertible Stock or Redeemable Preferred Stock
pursuant to and as provided in this Amended and Restated Certificate of
Incorporation, (ii) the redemption of up to [INSERT AMOUNT EQUAL TO 5%
POOL] shares of Common Stock from employees, officers or Directors of, or
consultants, advisors or independent contractors to, the Corporation or any
of its subsidiaries pursuant to an agreement containing vesting and/or
repurchase provisions approved by the Board of Directors of the Corporation
or a committee thereof and (iii) the exercise of the Right of First Refusal
(as defined in the Stockholders Agreement);
(e) enter into any transaction involving payments to be made to or by
the Corporation for the benefit of any of its shareholders, Directors,
officers, key management employees or any person controlling, controlled
by, under common control with or otherwise affiliated with, or a member of
a family of, any such person (an "Affiliate") on other than on an arm's
length basis or on terms and conditions less favorable to the Corporation
than could be obtained from unrelated persons, other than fees paid to a
Director in his or her capacity as a Director or a member of a committee of
the Board of Directors and compensation authorized by the Compensation
Committee of the Board of Directors (and approved by the Board of
Directors) to be paid to an Affiliate for services performed by such
Affiliate; or
(f) effect any Liquidation Event or any Extraordinary Transaction.
Further, the Corporation shall not, by amendment of this Amended and
Restated Certificate of Incorporation or through any Extraordinary
Transaction or other reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, agreement or any other
voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation
but shall at all times in good faith assist in the carrying out of all the
provisions of this Article IV and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holders
of the Convertible Stock against impairment. Without limitation of the
foregoing, the Corporation shall take such action as shall be necessary or
appropriate, to the extent reasonably within its control, to remove
promptly any impediments to its ability to
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redeem Convertible Stock under the circumstances contemplated by Section
A.5(e). Any successor to the Corporation shall agree, as a condition to
such succession, to carry out and observe the obligations of the
Corporation hereunder with respect to the Convertible Stock, except to the
extent the succession causes a Liquidation Event or is an Extraordinary
Transaction.
9. Notice.
(a) Liquidation Events, Extraordinary Transactions, Etc. In the event
(i) the Corporation establishes a record date to determine the holders of
any class of securities who are entitled to receive any dividend or other
distribution or who are entitled to vote at a meeting (or by written
consent) in connection with any of the transactions identified in clause
(ii) hereof, or (ii) any Liquidation Event (as defined in Section A.4), any
Extraordinary Transaction (as defined in Section A.5) or any QPO (as
defined in Section A.6) becomes reasonably likely to occur, the Corporation
shall mail or cause to be mailed by first class mail (postage prepaid) to
each holder of Convertible Stock at least twenty (20) days prior to such
record date specified therein or the expected effective date of any such
transaction, whichever is earlier, a notice specifying (A) the date of such
record date for the purpose of such dividend or distribution or meeting or
consent and a description of such dividend or distribution or the action to
be taken at such meeting or by such consent, (B) the date on which any such
Liquidation Event or Extraordinary Transaction is expected to become
effective or a registration statement relating to a QPO is expected to be
filed, and (C) the date on which the books of the Corporation shall close
or a record shall be taken with respect to any such event.
(b) Waiver of Notice. The holder or holders of not less than a Two
Thirds Interest of the outstanding shares of Convertible Stock may, at any
time upon written notice to the Corporation, waive any notice provisions
specified herein for the benefit of such holders, and any such waiver shall
be binding upon all holders of such securities.
(c) General. In the event that the Corporation provides any notice,
report or statement to any holder of common stock, the Corporation shall at
the same time provide a copy of any such notice, report or statement to
each holder of outstanding shares of Convertible Stock.
10. No Reissuance of Convertible Stock. No share or shares of Convertible
Stock acquired by the Corporation by reason of redemption, purchase, conversion
or otherwise shall be reissued, and all such shares shall be canceled, retired
and eliminated from the shares which the Corporation shall be authorized to
issue.
11. Contractual Rights of Holders. The various provisions set forth herein
for the benefit of the holders of the Convertible Stock shall be deemed contract
rights enforceable by them, including without limitation, one or more actions
for specific performance.
B. REDEEMABLE PREFERRED STOCK
1. Designation. A total of [27,800] shares of the Corporation's Preferred
Stock shall be designated as a series known as Redeemable Preferred Stock, par
value $.001 per share (the "Redeemable Preferred Stock"). All of the
preferential amounts to be paid to the holders of the Redeemable Preferred Stock
as provided in this Section B shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any property of the Corporation to, the holders of any other equity securities
of the Corporation, whether now or hereafter authorized, other than the
Convertible Stock which shall rank equal to the Redeemable Preferred Stock in
connection with any event referred to in Section B.4 or B.5.
2. Voting. Except as set forth herein, the Redeemable Preferred Stock
shall not be entitled to vote on any matters except to the extent otherwise
required under the Delaware General Corporation Law.
3. Dividends. The holders of outstanding shares of Redeemable Preferred
Stock shall be entitled to receive, in preference to the holders of any and all
other classes of capital stock of the Corporation, out of any funds legally
available therefor, cumulative dividends on the Redeemable Preferred Stock in
cash or,
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at the option of the holders of not less than a Two Thirds Interest of the
outstanding shares of Redeemable Preferred Stock, in shares of Common Stock of
equivalent value, at the per share rate per annum of six percent (6%) of
$1,000.00 (adjusted appropriately for stock splits, stock dividends,
recapitalizations and the like with respect to the Redeemable Preferred Stock)
subject to proration for partial years on the basis of a 365-day year (a
"Redeemable Cumulative Dividend"). Such dividends will commence as of the date
of issuance of the Redeemable Preferred Stock, will accumulate and compound
annually as of January 1 of each year beginning January 1, 2000 until paid and
will be cumulative, to the extent unpaid, whether or not they have been declared
and whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. Redeemable Cumulative Dividends
shall become due and payable with respect to any share of Redeemable Preferred
Stock as provided in Section B.4 and Section B.5. Dividends paid in an amount
less than the total amount of such dividends at the time accumulated and payable
on all outstanding shares of Redeemable Preferred Stock shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding. So
long as any shares of Redeemable Preferred Stock are outstanding and the
Redeemable Cumulative Dividends have not been paid in full: (a) no dividend
whatsoever (other than stock dividends) shall be paid or declared, and no
distribution shall be made, on any Common Stock or other capital stock of the
Corporation ranking junior to the Redeemable Preferred Stock; and (b) except as
provided in Section A.8(d) and B.6(d), no shares of capital stock of the
Corporation ranking with regard to dividend rights, rights upon a Liquidation
Event or an Extraordinary Transaction, or redemption rights junior to the
Redeemable Preferred Stock shall be purchased, redeemed or acquired by the
Corporation and no monies shall be paid into or set aside or made available for
a sinking fund for the purchase, redemption or acquisition thereof. All numbers
relating to the calculation of dividends pursuant to this Section B.3 shall be
subject to equitable adjustment in the event of any stock split, combination,
reorganization, recapitalization, reclassification or other similar event
involving a change in the Redeemable Preferred Stock.
4. Liquidation. Upon any Liquidation Event, each holder of outstanding
shares of Redeemable Preferred Stock shall be entitled to be paid out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are capital, surplus, or earnings, and before any amount shall be
paid or distributed to the holders of Common Stock or of any other stock ranking
on liquidation junior to the Redeemable Preferred Stock, an amount in cash equal
to the sum of (a) $1,000.00 per share of Redeemable Preferred Stock held by such
holder (adjusted appropriately for stock splits, stock dividends,
recapitalizations and the like with respect to the Redeemable Preferred Stock),
plus (b) any accumulated but unpaid dividends to which such holder of
outstanding shares of Redeemable Preferred Stock is entitled pursuant to
Sections B.3 and B.5(d) hereof (the sum of clauses (a) and (b) being referred to
herein as the "Redeemable Base Liquidation Amount"), plus (c) any interest
accrued pursuant to Section B.5(c) to which such holder of outstanding shares of
Redeemable Preferred Stock is entitled, if any (the sum of clauses (a), (b) and
(c) being referred to herein as the "Redeemable Liquidation Preference Amount");
provided, however, that if, upon any Liquidation Event, the amounts payable with
respect to the Redeemable Liquidation Preference Amount are not paid in full,
the holders of the Redeemable Preferred Stock and the holders of the Convertible
Stock shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which they are entitled.
5. Redemption.
(a) Redemption Events.
(i) Automatic. Immediately upon and as of, and in all cases
subject to, the closing of a QPO, the Corporation shall redeem all (and
not less than all) of the outstanding shares of Redeemable Preferred
Stock at the Redeemable Redemption Price specified in Section B.5(b),
such amount (except as provided in the following proviso) to be payable
in cash; provided, however that, in the event the principal underwriter,
if any, for such QPO shall reasonably and in good faith request in
writing, or cause the Corporation to so request in writing, that the
holders of Redeemable Preferred Stock waive the holders' right to elect
to have all of such holders' shares of Redeemable Preferred Stock
redeemed for cash pursuant to this Section B.5(a)(i),
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then any outstanding shares of Redeemable Preferred Stock may be
exchanged, without the payment of additional consideration, for any
combination of cash and notes of the Company ("Series A Notes") in an
aggregate principal amount equal to the Redeemable Redemption Price (as
defined below) multiplied by the number of shares so exchanged, which
Series A Notes shall (i) mature on the second anniversary of the
effective date of such QPO and (ii) bear interest at the rate of the
higher of (x) ten percent (10%) per annum or (y) four percent (4%) over
the Prime Rate as reported in the Wall Street Journal on the effective
date of the QPO, which interest shall accrue daily in arrears and be
paid on the last day of each month commencing on the last day of the
first month following the consummation of such QPO.
(ii) Scheduled. At any one time on or after the sixth anniversary
of the date of original issuance of the Redeemable Preferred Stock, upon
the election of the holder or holders of a Two Thirds Interest of the
outstanding Redeemable Preferred Stock, the Corporation shall redeem all
(and not less than all, other than pursuant to Section B.5(c) below) of
the outstanding shares of Redeemable Preferred Stock. The redemption
price for each share of Redeemable Preferred Stock redeemed pursuant to
this Section B.5(a)(i) shall be the per share Redeemable Liquidation
Preference Amount (as defined in Section B.4 above) (the "Redeemable
Redemption Price"). The foregoing election shall be made by such holders
giving the Corporation and each of the other holders of Redeemable
Preferred Stock not less than fifteen (15) days prior written notice,
which notice shall set forth the date for such redemption.
(iii) Upon Occurrence of Extraordinary Transactions. Immediately
upon and as of, and in all cases subject to, the closing of an
Extraordinary Transaction (as defined in Section A.5) unless such
Redeemable Preferred Stock is acquired in such Extraordinary Transaction
on terms giving effect to the preferential amount to which the
Redeemable Preferred Stock would be entitled in connection with a
Liquidation Event hereunder and otherwise as agreed to by the holders of
not less than a Two Thirds Interest of the outstanding Redeemable
Preferred Stock, the Corporation shall redeem all (and not less than
all) of the outstanding shares of Redeemable Preferred Stock at the
Redeemable Redemption Price, such amount (except as provided in Section
A.5(b)) to be payable in cash.
(b) Purchase Date and Price. Upon the election of the holders of not
less than a Two Thirds Interest of the outstanding Redeemable Preferred
Stock to cause the Corporation to redeem the Redeemable Preferred Stock or
otherwise to participate in an Extraordinary Transaction pursuant to
Section B.5(a)(ii) or (iii), all holders of Redeemable Preferred Stock
shall be deemed to have elected to cause the Redeemable Preferred Stock
subject to such election to be so redeemed or to so participate. Any date
upon which a redemption or other acquisition shall actually occur in
accordance with Section B.5(a) shall be referred to as a "Redeemable
Redemption Date." The aggregate Redeemable Redemption Price shall be
payable in cash in immediately available funds on the Redeemable Redemption
Date. Until the aggregate Redeemable Redemption Price, including any
interest thereon, has been paid for all shares of Redeemable Preferred
Stock redeemed or purchased as of the applicable Redeemable Redemption
Date: (A) no dividend (other than stock dividends or splits) whatsoever
shall be paid or declared, and no distribution shall be made, on any
capital stock of the Corporation; and (B) except as provided in Sections
A.8(d) and B.6(d), no shares of capital stock of the Corporation (other
than in accordance with Section A.5 above or this Section B.5) shall be
purchased, redeemed or acquired by the Corporation and no monies shall be
paid into or set aside or made available for a sinking fund for the
purchase, redemption or acquisition thereof. Notwithstanding the foregoing,
in connection with a redemption or acquisition of the Redeemable Preferred
Stock in an Extraordinary Transaction which is accounted for by the
acquiring entity as a pooling of interests, the holders of shares of
Redeemable Preferred Stock shall receive, upon election to sell the same if
so required for the application of such accounting treatment, and in lieu
of cash, the number of shares of common stock of such entity having a value
equal to the amount otherwise payable to the holders of Redeemable
Preferred Stock in such Extraordinary Transaction pursuant to the preceding
sentence and having the same registered status or registration rights as
any other shares
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in such transaction. Any securities or other consideration to be delivered
to the holders of the Redeemable Preferred Stock if so elected in
connection with a redemption or upon any Extraordinary Transaction in
accordance with the terms hereof shall be valued as set forth in Section
A.5(b) above.
(c) Redemption Prohibited. If, at a Redeemable Redemption Date, the
Corporation is prohibited under the Delaware General Corporation Law from
redeeming all shares, if any, of Redeemable Preferred Stock for which
redemption is required hereunder, then it shall redeem such shares on a
pro-rata basis among the holders of Redeemable Preferred Stock in
proportion to the full respective redemption amounts to which they are
entitled hereunder to the extent possible and shall redeem the remaining
shares to be redeemed as soon as the Corporation is not prohibited from
redeeming some or all of such shares under the Delaware General Corporation
Law, subject to the last paragraph of Section B.6. The shares of Redeemable
Preferred Stock not redeemed shall remain outstanding and entitled to all
of the rights and preferences provided in this Article IV. The Corporation
shall take such commercially reasonable action as shall be necessary and
appropriate to review and promptly remove any impediment to its ability to
redeem Redeemable Preferred Stock under the circumstances contemplated by
this Section B.5(c). In the event that the Corporation fails for any reason
to redeem shares for which redemption is required pursuant to Section B.5
(except with respect to failures resulting from the provisions of Section
A.5(h) in connection with a redemption under Section B.5(a)(iii) hereof),
including, without limitation, due to a prohibition of such redemption
under the Delaware General Corporation Law, then during the period from the
applicable Redeemable Redemption Date through the date on which such shares
are redeemed, the applicable Redeemable Base Liquidation Amount of such
shares shall bear interest at the rate of the higher of (i) ten percent
(10%) per annum or (ii) four percent (4%) over the Prime Rate as reported
in the Wall Street Journal on the Redeemable Redemption Date, with such
interest to accrue daily in arrears and to be compounded annually;
provided, however, that in no event shall such interest exceed the Maximum
Permitted Rate.
(d) Dividend After Redeemable Redemption Date. From and after the
Redeemable Redemption Date, no shares of Redeemable Preferred Stock subject
to redemption shall be entitled to any further dividends pursuant to
Section B.3 hereof; provided, however, that in the event that shares of
Redeemable Preferred Stock are unable to be redeemed and continue to be
outstanding in accordance with Section B.5(c), such shares shall continue
to be entitled to dividends and interest thereon as provided in Sections
B.3 and B.5(c) until the date on which such shares are actually redeemed by
the Corporation.
(e) Surrender of Certificates. Upon receipt of the applicable
Redeemable Redemption Price by certified check or wire transfer, each
holder of shares of Redeemable Preferred Stock to be redeemed shall
surrender the certificate or certificates representing such shares to the
Corporation, duly assigned or endorsed for transfer (or accompanied by duly
executed stock powers relating thereto), or shall deliver an Affidavit of
Loss with respect to such certificates at the principal executive office of
the Corporation or the office of the transfer agent for the Redeemable
Preferred Stock or such office or offices in the continental United States
of an agent for redemption as may from time to time be designated by notice
to the holders of Redeemable Preferred Stock, and each surrendered
certificate shall be canceled and retired; provided, however, that if the
Corporation is prohibited from redeeming all shares of Redeemable Preferred
Stock as provided in Section B.5(c), then, upon the surrender of such
certificate(s), the Corporation will deliver to the holder a new
certificate for those shares of Redeemable Preferred Stock not so redeemed.
(f) Further Restrictions on Redemptions. Notwithstanding anything
herein to the contrary, the Redeemable Preferred Stock shall not be
redeemed or subject to redemption hereunder unless (i) all obligations of
the Corporation under the Credit Agreement and Subordinated Credit
Agreement shall have been or are concurrently paid in full, (ii) the Senior
Lenders and Subordinated Lenders shall have consented to such redemption,
or (iii) such redemption otherwise is permitted under the Credit Agreement
and Subordinated Credit Agreement. If the Corporation is prohibited from
redeeming the
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Redeemable Preferred Stock under Section B.5(a)(i) or (ii) pursuant to this
Section B.5(f), the holders of Redeemable Preferred Stock shall be entitled
to the provisions of Section B.5(c).
6. Covenants. So long as the holders of Redeemable Preferred Stock
continue to hold at least twenty-five percent (25%) of the shares of Redeemable
Preferred Stock issued in the original issuance of the Redeemable Preferred
Stock, the Corporation shall not, without first having provided written notice
of such proposed action to each holder of outstanding shares of Redeemable
Preferred Stock and having obtained the affirmative vote or written consent of
the holders of not less than a Two Thirds Interest of the outstanding shares of
Redeemable Preferred Stock, voting as a single class, with each share of
Redeemable Preferred Stock entitling the holder thereof to one vote per share of
Redeemable Preferred Stock held by such holder:
(a) amend, alter or repeal any provision of, or add any provision to,
Article IV of this Amended and Restated Certificate of Incorporation, or
otherwise amend, alter or repeal any provision of, or add any provision to,
this Amended and Restated Certificate of Incorporation or the Corporation's
by-laws if such latter action would alter or change the preferences,
rights, privileges or powers of, or the restrictions provided for the
benefit of, any of the Redeemable Preferred Stock;
(b) reclassify any capital stock;
(c) create, obligate itself to create, authorize or issue any new
class or classes of stock or new series of common stock or preferred stock
or any security convertible into or evidencing the right to purchase shares
of any new class or series of common stock or preferred stock or any new
capital stock of the Corporation having preference over or being on parity
with the Redeemable Preferred Stock in any respect;
(d) declare or pay any dividends other than stock dividends or
dividends on the Redeemable Preferred Stock as provided in Section B.3 or
make any distributions of cash, property or securities of the Corporation
in respect of its capital stock, or apply any of its assets to the
redemption, retirement, purchase or other acquisition of its capital stock,
directly or indirectly, through subsidiaries or otherwise, except for (i)
the redemption of Convertible Stock or Redeemable Preferred Stock pursuant
to and as provided in this Amended and Restated Certificate of
Incorporation, (ii) the redemption of up to [INSERT AMOUNT EQUAL TO 5%
POOL] shares of Common Stock from employees, officers or Directors of, or
consultants, advisors or independent contractors to, the Corporation or any
of its subsidiaries pursuant to an agreement containing vesting and/or
repurchase provisions approved by the Board of Directors of the Corporation
or a committee thereof and (iii) the exercise of the Right of First Refusal
(as defined in the Stockholders Agreement);
(e) enter into any transaction involving payments to be made to or by
the Corporation for the benefit of any of its shareholders, Directors,
officers, key management employees or any person controlling, controlled
by, under common control with or otherwise affiliated with, or a member of
a family of, any such person (an "Affiliate") on other than on an arm's
length basis or on terms and conditions less favorable to the Corporation
than could be obtained from unrelated persons, other than fees paid to a
Director in his or her capacity as a Director or a member of a committee of
the Board of Directors and compensation authorized by the Compensation
Committee of the Board of Directors (and approved by the Board of
Directors) to be paid to an Affiliate for services performed by such
Affiliate; or
(f) effect any Liquidation Event or any Extraordinary Transaction.
Further, the Corporation shall not, by amendment of this Amended and
Restated Certificate of Incorporation or through any Extraordinary
Transaction or other reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, agreement or any other
voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation
but shall at all times in good faith assist in the carrying out of all the
provisions of this Article IV and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the holders
of the Redeemable Preferred Stock against impairment.
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Without limitation of the foregoing, the Corporation shall take such action
as shall be necessary or appropriate, to the extent reasonably within its
control, to remove promptly any impediments to its ability to redeem
Redeemable Preferred Stock under the circumstances contemplated by Section
B.5(c). Any successor to the Corporation shall agree, as a condition to
such succession, to carry out and observe the obligations of the
Corporation hereunder with respect to the Redeemable Preferred Stock,
except to the extent the succession causes a Liquidation Event or is an
Extraordinary Transaction.
7. Notices. In the event (i) the Corporation establishes a record date to
determine the holders of any class of securities who are entitled to receive any
dividend or other distribution or who are entitled to vote at a meeting (or by
written consent) in connection with any of the transactions identified in clause
(ii) hereof, or (ii) any Liquidation Event (as defined in Section A.4), any
Extraordinary Transaction (as defined in Section A.5), any QPO (as defined in
Section A.6) or any other public offering becomes reasonably likely to occur,
the Corporation shall mail or cause to be mailed by first class mail (postage
prepaid) to each holder of Redeemable Preferred Stock at least twenty (20) days
prior to such record date specified therein or the expected effective date of
any such transaction, whichever is earlier, a notice specifying (A) the date of
such record date for the purpose of such dividend or distribution or meeting or
consent and a description of such dividend or distribution or the action to be
taken at such meeting or by such consent, (B) the date on which any such
Liquidation Event or Extraordinary Transaction is expected to become effective
or a registration statement relating to a QPO is expected to be filed, and (C)
the date on which the books of the Corporation shall close or a record shall be
taken with respect to any such event.
In the event that the Corporation provides or is required to provide notice
to any holder of Convertible Stock and Common Stock in accordance with the
provisions of this Amended and Restated Certificate of Incorporation (including
the provisions of Sections A.5(c) and A.9) and/or the Corporation's by-laws, the
Corporation shall at the same time provide a copy of any such notice to each
holder of outstanding shares of Redeemable Preferred Stock.
The holder or holders of not less than a Two Thirds Interest of the
outstanding shares of Redeemable Preferred Stock may, at any time upon written
notice to the Corporation, waive any notice provisions specified herein for the
benefit of such holders, and any such waiver shall be binding upon all holders
of such securities.
8. No Reissuance of Redeemable Preferred Stock. No share or shares of
Redeemable Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion, exchange or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
9. Contractual Rights of Holders. The various provisions set forth herein
for the benefit of the holders of the Redeemable Preferred Stock shall be deemed
contract rights enforceable by them, including without limitation, one or more
actions for specific performance.
C. COMMON STOCK
1. Designation; Ranking. A total of [ ] shares of the
Corporation's common stock shall be designated as Common Stock, par value $.001
per share (the "Common Stock").
2. Voting.
(a) Election of Directors. The holders of Common Stock shall be
entitled to elect a number of Directors of the Corporation equal to (i) for
so long as the holders of Convertible Stock continue to hold at least
twenty-five percent (25%) of the shares of Convertible Stock issued in the
original issuance of the Convertible Stock, five (5) Directors; and (ii)
thereafter, such number of Directors as may be designated by the
stockholders or Directors in accordance with the applicable provisions
hereof, of the Corporation's by-laws and of applicable law. The election of
such Directors shall occur
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at the annual meeting of holders of capital stock or at any special meeting
called and held in accordance with the by-laws of the Corporation, or by
consent in lieu thereof in accordance with this Amended and Restated
Certificate of Incorporation and applicable law. If a person elected in
accordance with the foregoing provisions should cease to be a Director for
any reason, the vacancy shall only be filled by the vote or written consent
of holders of the outstanding shares entitled to vote for such Directors,
in the manner and on the basis specified above. If at any time fewer than
the number of Directors indicated above have been elected, the Board of
Directors shall nonetheless be deemed duly constituted.
(b) Other Voting. The holder of each share of Common Stock shall be
entitled to one vote for each such share as determined on the record date
for the vote or consent of stockholders. The holders of the Common Stock
shall vote together with the holders of the Convertible Stock as a single
class upon any items submitted to a vote of stockholders as long as any
shares of Convertible Stock are outstanding, except as otherwise provided
herein.
3. Dividends. Subject to the payment in full of all preferential dividends
to which the holders of the Redeemable Preferred Stock are entitled hereunder
and to the other provisions hereof, the holders of Common Stock and Convertible
Stock shall be entitled to receive dividends out of funds legally available
therefor on a pari passu basis as if a single class at such times and in such
amounts as the Board of Directors may determine in its sole discretion, as
contemplated by Section A.3.
4. Liquidation. Upon any Liquidation Event, after the payment or provision
for payment of all debts and liabilities of the Corporation and all preferential
amounts to which the holders of Convertible Stock and Redeemable Preferred Stock
are entitled with respect to the distribution of assets in liquidation, the
holders of Common Stock shall be entitled to share ratably in the remaining
assets of the Corporation available for distribution.
5. Fractional Shares; Uncertificated Shares. The Corporation may issue
fractional shares of Convertible Stock and Redeemable Preferred Stock, but may
not issue fractional shares of Common Stock. Fractional shares shall be entitled
to dividends (on a pro rata basis), and the holders of fractional shares shall
be entitled to all rights as stockholders of the Corporation to the extent or
except as provided herein and under applicable law in respect of such fractional
shares. Fractional shares may, but need not be represented by share
certificates. Such shares, or fractions thereof, not represented by share
certificates ("Uncertificated Shares") shall be registered in the stock records
book of the Corporation. The Corporation at any time at its sole option may
deliver to any registered holder of such shares share certificates to represent
Uncertificated Shares previously issued (or deemed issued) to such holder.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to make, alter
or repeal the bylaws of the Corporation.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the board of directors or in the bylaws
of the Corporation. Election of directors need not be by written ballot unless
the bylaws of the Corporation so provide.
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ARTICLE VIII
To the fullest extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, a director of this
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. If the General
Corporation Law of the State of Delaware is amended after the effective date of
this Amended and Restated Certificate of Incorporation to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of each past or present Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended. Any repeal or modification of this
Article VIII shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
ARTICLE IX
1. Indemnification of Directors and Officers. The Corporation shall
indemnify, to the fullest extent permitted by the General Corporation Law of the
State of Delaware any person who was or is a party or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, and whether by or in the right of the Corporation,
its stockholders, a third party or otherwise (a "Proceeding"), by reason of the
fact that he is or was a Director or officer of the Corporation, or is or was a
Director or officer of the Corporation serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all expense (including, but not limited to,
attorneys' fees), liability, loss, judgments, fines, excise taxes, penalties and
amounts paid in settlement actually and reasonably incurred by him in connection
with such Proceeding, including expenses incurred in seeking such
indemnification. In addition, the Corporation shall grant such indemnification
to each of its Directors and officers with respect to any matter in a Proceeding
as to which his liability is limited pursuant to Article VIII of the Certificate
of Incorporation of the Corporation. However, such indemnification shall exclude
(i) indemnification with respect to any improper personal benefit which a
Director or officer is determined to have received and the expenses of defending
against an improper personal benefit claim unless the Director or officer is
successful on the merits in said defense, and (ii) indemnification of present or
former officers, directors, employees or agents of a constituent corporation
absorbed in a merger or consolidation transaction with this Corporation with
respect to their activities prior to said transaction, unless specifically
authorized by the Board of Directors or stockholders of this Corporation. Such
indemnification shall include prompt payment of expenses incurred by a Director
or officer in defending a Proceeding in advance of the final disposition of such
Proceeding, upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amounts if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation under this Article IX, which
undertaking shall be an unsecured general obligation of the Director or officer
and may be accepted without regard to his ability to make repayment.
2. Indemnification of Employees and Agents. The Corporation may, to the
extent authorized from time to time by the Board of Directors, grant rights to
indemnification and to an advancement of expenses, pursuant to the provisions of
this Article IX, to any person who was or is a party or is threatened to be made
a party to or is otherwise involved in any Proceeding by reason of the fact that
he is or was an employee or agent of the Corporation or is or was serving at the
request of the Corporation, as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
3. Nature of Indemnification Rights. The indemnification rights provided
in this Article IX shall be a contract right and shall not be deemed exclusive
of any other rights to which any person, whether or not entitled to be
indemnified hereunder, may be entitled under any statute, by-law, agreement,
vote of stockholders or Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of such a person. A Director or officer shall be entitled to the
benefit of any amendment of the General Corporation
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Law of the State of Delaware which enlarges indemnification rights hereunder,
but any such amendment which adversely affects indemnification rights with
respect to prior activities shall not apply to him without his consent unless
otherwise required by law. Each person who is or becomes a Director or officer
of the Corporation shall be deemed to have served or to have continued to serve
in such capacity in reliance upon the indemnity provided for in this Article IX.
4. Amendment. The provisions of this Article IX may be amended as provided
herein; however, no amendment or repeal of such provisions which adversely
affects the rights of a Director or officer under this Article IX with respect
to his acts or omissions prior to such amendment or repeal, shall apply to him
without his consent.
ARTICLE X
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed as of
this day of , 1999.
PHYSICIANS' SPECIALTY CORP.
By:
------------------------------------
Name: Ramie A. Tritt, M.D.
Title: President and Chairman
ATTEST:
- ---------------------------------------------------------
Name:
Title: Secretary
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EXHIBIT 1.1
BY-LAWS
OF
SURVIVING CORPORATION
ARTICLE I
STOCKHOLDERS
1. Annual Meeting. The annual meeting of stockholders shall be held each
year at the place, date and time determined by the Board of Directors or the
President, provided that the date of the meeting is within six months after the
end of the fiscal year of the corporation. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the
Certificate of Incorporation (the "Certificate of Incorporation") or by these
By-laws, may be specified by the Board of Directors or the President. If no
annual meeting has been held on the date fixed above, a special meeting in lieu
thereof may be held or there may be action by written consent of the
stockholders on matters to be voted on at the annual meeting, and such special
meeting or written consent shall have for the purposes of these By-Laws or
otherwise all the force and effect of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by the
President or by the Board of Directors. Special meetings shall be called by the
Secretary, or in case of death, absence, incapacity or refusal of the Secretary,
by any other officer, upon written application of one or more stockholders who
hold at least fifty percent in interest of the capital stock entitled to vote at
such meeting. The call for the meeting shall state the place, date, hour and
purposes of the meeting. Only the purposes specified in the notice of special
meeting shall be considered or dealt with at such special meeting.
3. Notice of Meetings. A written notice stating the place, date and hour
of all meetings of stockholders, and in the case of special meetings the
purposes of the meeting, shall be given by the Secretary (or other person
authorized by these By-Laws or by law) not less than ten nor more than sixty
days before the meeting to each stockholder entitled to vote thereat and to each
stockholder who, under the Certificate of Incorporation or under these By-laws
is entitled to such notice, by delivering such notice to him or by mailing it,
postage prepaid, and addressed to such stockholder at his address as it appears
in the records of the corporation. Notice need not be given to a stockholder if
a written waiver of notice is executed before or after the meeting by such
stockholder, if communication with such stockholder is unlawful, or if such
stockholder attends the meeting in question, unless such attendance was for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. If a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place are announced at the
meeting at which the adjournment is taken, except that if the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
4. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, whether or not a quorum is present. The stockholders
present at a duly constituted meeting may continue to transact business until
adjournment notwithstanding the withdrawal of enough stockholders to reduce the
voting shares below a quorum.
5. Voting and Proxies. Stockholders shall have one vote for each share of
stock entitled to vote owned by them of record according to the books of the
corporation unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy or
express directly or by written proxy their consent or dissent to a corporate
action taken without a meeting, but no proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period or is
irrevocable and coupled with an interest. Proxies shall be filed with the
Secretary of the
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meeting, or of any adjournment thereof. Except as otherwise limited therein,
proxies shall entitle the persons authorized thereby to vote at any adjournment
of such meeting.
6. Action at Meeting. When a quorum is present, any matter before the
meeting shall be decided by vote of the holders of a majority of the shares of
stock voting on such matter except where a larger vote is required by law, by
the Certificate of Incorporation or by these By-laws. Any election by
stockholders shall be determined by a plurality of the votes cast, except where
a larger vote is required by law, by the Certificate of Incorporation or by
these By-laws. The corporation shall not directly or indirectly vote any share
of its own stock; provided, however, that the corporation may vote shares which
it holds in a fiduciary capacity to the extent permitted by law.
7. Stockholder Lists. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
ARTICLE II
DIRECTORS
1. Powers. The business of the corporation shall be managed by or under
the direction of a Board of Directors who may exercise all the powers of the
corporation except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws. In the event of a vacancy in the Board of
Directors, the remaining Directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2. Election and Qualification. Unless otherwise provided in the
Certificate of Incorporation or in these By-laws, the number of Directors which
shall constitute the whole board shall be determined by vote of the Board of
Directors or by the stockholders at the annual meeting. Directors need not be
stockholders.
3. Vacancies; Reduction of Board. A majority of the Directors then in
office, although less than a quorum, or a sole remaining Director, may fill
vacancies in the Board of Directors occurring for any reason and newly created
directorships resulting from any increase in the authorized number of Directors.
In lieu of filling any vacancy the stockholders or the Board of Directors may
reduce the number of Directors.
4. Enlargement of the Board. The Board of Directors may be enlarged by the
stockholders at any meeting or by vote of a majority of the Directors then in
office.
5. Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws, Directors shall hold office until their
successors are elected and qualified or until their earlier resignation or
removal. Any Director may resign by delivering his written resignation to the
corporation. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
6. Removal. To the extent permitted by law, a Director may be removed from
office with or without cause by vote of the holders of a majority of the shares
of stock entitled to vote in the election of Directors. A Director may be
removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
7. Meetings. Regular meetings of the Board of Directors may be held
without notice at such time, date and place as the Board of Directors may from
time to time determine. Special meetings of the Board of Directors may be
called, orally or in writing, by the President, Chief Executive Officer or two
or more
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Directors, designating the time, date and place thereof. Directors may
participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by which all Directors
participating in the meeting can hear each other, and participation in a meeting
in accordance herewith shall constitute presence in person at such meeting.
8. Notice of Meetings. Notice of the time, date and place of all special
meetings of the Board of Directors shall be given to each Director by the
Secretary, or Assistant Secretary, or in case of the death, absence, incapacity
or refusal of such persons, by the officer or one of the Directors calling the
meeting. Notice shall be given to each Director in person or by telephone or by
telegram sent to his business or home address at least twenty-four hours in
advance of the meeting, or by written notice mailed to his business or home
address at least forty-eight hours in advance of the meeting. Notice need not be
given to any Director if a written waiver of notice is executed by him before or
after the meeting, or if communication with such Director is unlawful. A notice
or waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting.
9. Quorum. At any meeting of the Board of Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
10. Action at Meeting. At any meeting of the Board of Directors at which a
quorum is present, a majority of the Directors present may take any action on
behalf of the Board of Directors, unless a larger number is required by law, by
the Certificate of Incorporation or by these By-laws.
11. Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all the members of
the Board of Directors or the committee, as the case may be, and filed with the
records of the meetings of the Board of Directors. Such consent shall be treated
as a vote of the Board of Directors or the committee, as the case may be, for
all purposes.
12. Committees. The Board of Directors, by vote of a majority of the
Directors then in office, may establish one or more committees, each committee
to consist of one or more Directors, and may delegate thereto some or all of its
powers except those which by law, by the Certificate of Incorporation, or by
these By-laws may not be delegated. Except as the Board of Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but in the absence of such rules its business shall be conducted so
far as possible in the same manner as is provided in these By-laws for the Board
of Directors. All members of such committees shall hold their committee offices
at the pleasure of the Board of Directors, and the Board may abolish any
committee at any time. Each such committee shall report its action to the Board
of Directors who shall have power to rescind any action of any committee without
retroactive effect.
ARTICLE III
OFFICERS
1. Enumeration. The officers of the corporation shall consist of a
Chairman, a President, a Chief Executive Officer, a Treasurer, a Secretary, and
such other officers, including one or more Vice Presidents, Assistant Treasurers
and Assistant Secretaries, as the Board of Directors may determine.
2. Election. The Chairman, President, Chief Executive Officer, Treasurer
and Secretary shall be elected annually by the Board of Directors at their first
meeting following the annual meeting of stockholders. Other officers may be
chosen by the Board of Directors at such meeting or at any other meeting.
3. Qualification. No officer need be a stockholder or Director. Any two or
more offices may be held by the same person. Any officer may be required by the
Board of Directors to give bond for the faithful performance of his duties in
such amount and with such sureties as the Board of Directors may determine.
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4. Tenure. Except as otherwise provided by the Certificate of
Incorporation or by these By-laws, each of the officers of the corporation shall
hold his office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer may resign by delivering his written
resignation to the corporation, and such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
5. Removal. The Board of Directors may remove any officer with or without
cause by a vote of a majority of the entire number of Directors then in office;
provided, that an officer may be removed for cause only after reasonable notice
and opportunity to be heard by the Board of Directors.
6. Vacancies. Any vacancy in any office may be filled for the unexpired
portion of the term by the Board of Directors.
7. Chairman of the Board. Unless otherwise provided by the Board of
Directors, the Chairman shall preside, when present, at all meetings of the
stockholders and the Board of Directors.
8. President and Vice Presidents. Unless otherwise provided by the Board
of Directors, the President shall have general supervision and control of the
Corporation's business and affairs, subject to the direction of the Board of
Directors. In the absence of the Chairman, the President shall preside, when
present, at all meetings of stockholders and the Board of Directors. The Board
of Directors shall have the authority to appoint a temporary presiding officer
to serve at any meeting of the stockholders or Board of Directors if the
Chairman and President are unable to do so for any reason.
Any Vice President shall have such powers and shall perform such duties as
the Board of Directors may from time to time designate.
9. Chief Executive Officer. Unless otherwise provided by the Board of
Directors, the Chief Executive Officer shall have general charge of the
day-to-day operations of the Corporation, subject to the direction of the Board
of Directors. In the absence of the President or in the event of his inability
or refusal to act, the Chief Executive Officer shall perform the duties of the
President, and when so acting, shall have all the powers and responsibilities of
and be subject to all the restrictions upon the President.
10. Treasurer and Assistant Treasurers. The Treasurer shall, subject to
the direction of the Board of Directors, have general charge of the financial
affairs of the corporation and shall cause to be kept accurate books of account.
He shall have custody of all funds, securities, and valuable documents of the
corporation, except as the Board of Directors may otherwise provide.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors may from time to time designate.
a. Secretary and Assistant Secretaries. The Secretary shall record
the proceedings of all meetings of the stockholders and the Board of
Directors in books kept for that purpose. In his absence from any such
meeting an Assistant Secretary, or if he is absent, a temporary secretary
chosen at the meeting, shall record the proceedings thereof.
The Secretary shall have charge of the stock ledger (which may,
however, be kept by any transfer or other agent of the corporation) and
shall have such other duties and powers as may be designated from time to
time by the Board of Directors or the President.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
b. Other Powers and Duties. Subject to these By-laws, each officer of
the corporation shall have in addition to the duties and powers
specifically set forth in these By-laws, such duties and powers as are
customarily incident to his office, and such duties and powers as may be
designated from time to time by the Board of Directors.
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ARTICLE IV
CAPITAL STOCK
1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary. Such signatures may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed on such certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
and every certificate issued when the corporation is authorized to issue more
than one class or series of stock shall contain such legend with respect thereto
as is required by law. The corporation shall be permitted to issue fractional
shares.
2. Transfers. Subject to any restrictions on transfer, shares of stock may
be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate therefor properly endorsed
or accompanied by a written assignment or power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the corporation or its transfer agent may
reasonably require.
3. Record Holders. Except as may otherwise be required by law, by the
Certificate of Incorporation or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of his
post office address.
4. Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not precede the date on which it is established, and which shall not be more
than sixty nor less than ten days before the date of such meeting, more than ten
days after the date on which the record date for stockholder consent without a
meeting is established, nor more than sixty days prior to any other action. In
such case only stockholders of record on such record date shall be so entitled
notwithstanding any transfer of stock on the books of the corporation after the
record date.
If no record date is fixed, (a) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, (b) the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is necessary,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in this state, to its principal place of business, or
to an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded, and (c) the record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
5. Replacement of Certificates. In case of the alleged loss, destruction
or mutilation of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms as the Board of Directors may prescribe.
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ARTICLE V
INDEMNIFICATION
The corporation may indemnify any person in accordance with and in the
manner provided by its Certificate of Incorporation, to the full extent
permitted by the General Corporation Law of the State of Delaware.
ARTICLE VI
MISCELLANEOUS PROVISIONS
1. Fiscal Year. Except as otherwise determined by the Board of Directors,
the fiscal year of the corporation shall end on December 31 of each year.
2. Seal. The Board of Directors shall have power to adopt and alter the
seal of the corporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or Treasurer, or
by any other officer of the corporation designated by the Board of Directors,
except as the Board of Directors may generally or in particular cases otherwise
determine.
4. Voting of Securities. Unless otherwise provided by the Board of
Directors, the President or Treasurer may waive notice of and act on behalf of
this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or shareholders of any
other corporation or organization, any of whose securities are held by this
corporation.
5. Resident Agent. The Board of Directors may appoint a resident agent
upon whom legal process may be served in any action or proceeding against the
corporation.
6. Corporate Records. The original or attested copies of the Certificate
of Incorporation, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock and transfer records,
which shall contain the names of all stockholders, their record addresses and
the amount of stock held by each, shall be kept at the principal office of the
corporation, at the office of its counsel, or at an office of its transfer
agent.
7. Certificate of Incorporation. All references in these By-laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
8. Amendments. These By-laws may be amended or repealed or additional
By-laws adopted by the stockholders or by the Board of Directors; provided, that
(a) the Board of Directors may not amend or repeal Article V or this Section 8
of Article VI or any provision of these By-laws which by law, by the Certificate
of Incorporation or by these By-laws requires action by the stockholders, (b)
any amendment or repeal of these By-laws by the Board of Directors and any
By-law adopted by the Board of Directors may be amended or repealed by the
stockholders.
Adopted , 1999
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APPENDIX B
June 12, 1999
Special Committee of the Board of Directors
Physicians' Specialty Corp.
1150 Lake Hearn Drive, Suite 640
Atlanta, GA 30342
Dear Sirs:
We understand that Physicians' Specialty Corp. (the "Company") intends to
enter into an Agreement and Plan of Merger (the "Merger Agreement") by and among
TA MergerCo, Inc. ("MergerCo"), TA/Advent VIII L.P., TA/Atlantic and Pacific IV
L.P., TA Executives Fund LLC and TA Investors LLC (each, a "Guarantor," and
together, the "Guarantors") and the Company (the "Proposed Transaction"). We
understand that under the Merger Agreement MergerCo will be merged with and into
the Company and each share of Company common stock issued and outstanding
immediately prior to the effective time of the merger (excluding shares owned by
the Voting Agreement Stockholders, as defined in the Merger Agreement and
described below, and dissenting shares) shall be converted into the right to
receive $10.50 per share in cash (the "Merger Consideration"). We further
understand that as a condition to the willingness of MergerCo to enter into the
Merger Agreement, certain members of management and certain physician
stockholders of the Company who constitute the Voting Agreement Stockholders
have entered into Voting Agreements, Roll-Over Agreements and Stock Purchase
Agreements under which MergerCo will purchase a portion of the Voting Agreement
Stockholders' shares for $10.50 per share in cash and the remaining shares held
by Voting Agreement Stockholders will be converted into common stock in the
Surviving Corporation. The terms and conditions of the Proposed Transaction are
set forth in more detail in the Merger Agreement to be dated June 14, 1999.
We have been requested by the Special Committee of the Board of Directors
of the Company to render our opinion with respect to the fairness, from a
financial point of view, to the Company's stockholders (other than the Voting
Agreement Stockholders) of the Merger Consideration to be received in the
Proposed Transaction. We have not been requested to opine as to, and our opinion
does not in any manner address, the Company's underlying business decision to
proceed with, effect or consummate the Proposed Transaction. In addition, we
have not been requested to opine as to, and our opinion does not in any manner
address, the decision by the Voting Agreement Stockholders to enter into the
Roll-Over Agreements and Stock Purchase Agreements or the consideration to be
received as a result of such Voting Agreement Stockholders' entering into the
Roll-Over Agreements and Stock Purchase Agreements.
In arriving at our opinion, we reviewed and analyzed: (1) the Merger
Agreement to be dated June 14, 1999, (2) publicly available information
concerning the Company which we believe to be relevant to our inquiry, (3)
financial and operating information with respect to the business, operations and
prospects of the Company furnished to us by the Company, (4) a trading history
of the Company's Common Stock from March 20, 1997 to the present and a
comparison of that trading history with those of other companies which we deemed
relevant, (5) certain other factors, including the proposals and responses, as
communicated to us, that resulted from the discussions that the Company's other
financial advisor held with various potential acquirors and investors, (6) a
comparison of the historical financial results and present financial condition
of the Company with those of other companies which we deemed relevant, (7) a
comparison of the financial terms of the Proposed Transaction with the financial
terms of certain other recent transactions which we deemed relevant, and (8)
certain historical data relating to acquisitions of publicly traded companies,
including percentage premiums and price/earnings ratios paid in such
acquisitions. In addition, we have had discussions with the management of the
Company concerning its business, operations, assets, present condition and
future prospects and undertook such other studies, analyses and investigations
as we deemed appropriate.
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Special Committee of the Board of Directors
Physicians' Specialty Corp.
June 12, 1999
Page 2
- -------------------------
We have assumed and relied upon the accuracy and completeness of the
financial and other information used by us in arriving at our opinion without
independent verification. With respect to the financial projections provided by
the Company, we have assumed that such projections have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company.
In arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of the Company and have not made nor obtained any
evaluations or appraisals of the assets or liabilities of the Company. In
addition, we have not been authorized to solicit, and we have not solicited, any
indications of interest from any third party with respect to the purchase of all
or a part of the Company's business. Our opinion is necessarily based upon
market, economic and other conditions as they exist on, and can be evaluated as
of, the date of this letter.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Proposed Transaction and will
receive a fee for our services which is in part contingent upon the consummation
of the Proposed Transaction. In addition, the Company has agreed to indemnify us
for certain liabilities arising out of the rendering of this opinion. In the
ordinary course of our business, we actively trade in the common stock of the
Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
This Opinion is for the use and benefit of the Board of Directors of the
Company and the Special Committee of the Board of Directors and is not intended
to be and does not constitute a recommendation to any shareholder as to how such
shareholder should vote with respect to the Merger.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that the Merger Consideration to be received in the Proposed
Transaction is fair, from a financial point of view, to the stockholders of the
Company (other than the Voting Agreement Stockholders).
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC. 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to sec.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
receipt thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
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therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PROXY
PHYSICIANS' SPECIALTY CORP.
1150 LAKE HEARN DRIVE
SUITE 640
ATLANTA, GEORGIA 30342
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD
ON ____________, ________ , 1999 AT 10:00 A.M.
The undesigned hereby appoints , and each of them, proxies, with
full power of substitution and resubstitution, for and in the name of the
undersigned, to vote all shares of common stock, par value $.001 per share, of
Physicians' Specialty, held by the undersigned at the close of business on
, 1999, which the undersigned would be entitled to vote if personally
present at the Special Meeting of Stockholders to be held on ,
, 1999 at 10:00 a.m., local time, at the offices of King & Spalding, located at
191 Peachtree Street, Atlanta, Georgia, and at any adjournment thereof, upon the
matters described in the accompanying Notice of Special Meeting of Stockholders
and Proxy Statement, receipt of which is hereby acknowledged, and upon any other
business that may properly come before the meeting or any adjournment thereof.
Said proxies are directed to vote on the matters described in the Notice of
Special Meeting of Stockholders and Proxy Statement as follows, and otherwise in
their discretion upon such other business as may properly come before the
meeting or any adjournment thereof.
PROPOSAL OF THE BOARD OF DIRECTORS TO APPROVE AND ADOPT THE AGREEMENT AND
PLAN OF MERGER, DATED AS OF JUNE 14, 1999, BY AND AMONG PHYSICIANS' SPECIALTY
CORP., TA MERGERCO, INC., PHYSICIANS' SPECIALTY CORP., TA/ADVENT VIII, L.P.,
TA/ATLANTIC AND PACIFIC IV, L.P., TA INVESTORS LLC AND TA EXECUTIVES FUND LLC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL OF THE BOARD OF DIRECTORS TO VOTE UPON THE ADJOURNMENT OF THE
SPECIAL MEETING IF A MOTION TO ADJOURN THE SPECIAL MEETING IS PROPERLY BROUGHT.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
said proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PHYSICIANS'
SPECIALTY. THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS
INDICATED, WITH RESPECT TO A PROPOSAL LISTED ABOVE, THE PROXY WILL BE VOTED FOR
SUCH PROPOSAL.
Dated: , 1999
------------------------------
------------------------------------
Signature
Please sign exactly as your name(s)
appear(s) hereon. Where more than
one owner is shown above, each
should sign. When signing in a
fiduciary or representative
capacity, please add your full title
as such. If this proxy is submitted
by a corporation, it should be
executed in the full corporate name
by a duly authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF YOU ATTEND
THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 1
EXHIBIT 99
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Proxy Statement, into the previously filed registration
statements of Physicians' Specialty Corp. on Form S-8 (File Nos. 333-41605 and
333-62033).
/s/ ARTHUR ANDERSEN LLP
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ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 27, 1999
