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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21440
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PHYSICIAN CORPORATION OF AMERICA
(Exact name of Registrant as specified in its charter)
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DELAWARE 48-1006287
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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6101 BLUE LAGOON DRIVE
MIAMI, FL 33126
(Principal Executive Offices, Including Zip Code)
Registrant's telephone number including area code: (305) 267-6633
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
RIGHTS TO PURCHASE COMMON STOCK
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (I) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (II) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST NINETY DAYS.
YES __X__ NO _____
Insert by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of December 31, 1996, there were 38,829,456 shares of common stock
outstanding and the aggregate market value of such shares (based upon $10.00 per
share, the last reported sale price reported on the NASDAQ National Market on
such date) of Physician Corporation of America held by non-affiliates was
approximately $388,294,560 (For purposes of this valuation, "affiliates" are the
officers and directors whose shares are included in the table appearing in Item
12.)
DOCUMENTS INCORPORATED BY REFERENCE:
None
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PHYSICIAN CORPORATION OF AMERICA
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 10
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 11
Item 6. Selected Financial Data................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 13
Item 8. Financial Statements and Supplementary Data............................................... 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...... 24
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................ 24
Item 11. Executive Compensation.................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 29
Item 13. Certain Relationships and Related Transactions............................................ 30
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 30
Signature Page............................................................................................. 33
Financial Statements and Schedules......................................................................... F-1
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PART I
ITEM 1. BUSINESS
A) GENERAL DEVELOPMENT OF BUSINESS.
Physician Corporation of America ("PCA" or the "Company") is a managed
health care company that provides comprehensive health care services through its
health maintenance organizations ("HMOs"), administrative and management
services through its workers' compensation third-party administration companies
(TPA's) and workers' compensation and health related insurance through its
insurance companies ("Insurance Companies").
The Company conducts substantially all of its operations through the
following subsidiaries and related entities which it controls including: PCA
Health Plans of Texas, Inc. ("PCA/Texas"), a federally qualified HMO based in
Austin, Texas; PCA Health Plans of Florida, Inc. ("PCA/Florida"), a federally
qualified HMO based in Miami, Florida; PCA Family Health Plan, Inc.
("PCA/Family"), a state licensed HMO based in Miami, Florida; PCA Health Plans
of Puerto Rico, Inc. ("PCA/Puerto Rico"), a federally qualified HMO based in San
Juan, Puerto Rico; PCA Insurance Group of Puerto Rico, Inc. ("PCA/IG"), a Puerto
Rico licensed insurance company based in San Juan, Puerto Rico; PCA Solutions,
Inc. and its subsidiaries ("PCA Solutions"), based in Orlando, Florida which
operates a workers' compensation TPA; PCA Property and Casualty Insurance
Company ("PCA/P&C"), a multi-state licensed insurance company based in Orlando,
Florida; PCA Life Insurance Company, Inc. ("PCA/Insurance"); and Florida
Builders & Employers Mutual Insurance Company ("FBE"), a Florida based mutual
workers' compensation company controlled by PCA/P&C.
During 1996, the Company sold its wholly owned subsidiaries: PCA Health
Plans of Georgia, Inc. ("PCA/Georgia"), PCA Health Plans of Alabama, Inc.
("PCA/Alabama") and Physicians First, Inc. ("PFI"). In September 1996, the
Company sold PCA/Georgia and PCA/Alabama for $24.5 million in cash and non-
compete payments of which $2.5 million has been deposited in escrow and $1.5
million is due to PCA through 1998. This transaction resulted in a gain on the
sale of approximately $4.5 million. In June 1996, the Company sold PFI for $23.6
million in stock and notes to FPA Medical Management, Inc. (FPA). As
consideration, the Company received 525,000 shares of unregistered FPA common
stock, warrants to acquire 100,000 shares of FPA common stock and a $15 million
note from FPA. The Company valued the FPA stock and warrants at their fair value
which was estimated using the quoted market price of FPA's common stock less a
discount of approximately 6% to consider their unregistered status.
Additionally, as a condition of the sale, PCA entered into a four-year covenant
not-to-compete with FPA. This transaction resulted in a gain on the sale of PFI
of approximately $7.9 million. During the third quarter of 1996, FPA paid its
$15 million note obligation to PCA in full and PCA used the proceeds to make a
$15 million bank debt principal payment in the third quarter of 1996.
On November 2, 1996, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Sierra Health Services, Inc. ("Sierra"). Under
the general terms of the Merger Agreement at the effective time of the Merger,
each outstanding share of PCA Common Stock would be converted into a right to
receive 0.45 of a share of Sierra Common Stock. The completion of the Merger
required approval from certain governmental and non-governmental agencies, and
approval by the stockholders of PCA and Sierra which was in the process of being
obtained when, in March 1997 Sierra breached material terms of and terminated
the Merger Agreement. PCA filed a lawsuit against Sierra seeking damages for
Sierra's actions. Sierra has also filed a lawsuit against the Company in this
matter. The outcome of such litigation cannot be determined at this time.
B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During 1996, the Company operated principally in three segments: providing
health care services to its health plan members ("Health Plan" segment),
providing third-party administration services to
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workers' compensation self-insured funds ("WC TPA" segment) and the writing of
workers' compensation insurance ("WC Insurance" Segment). In fourth quarter of
1996, the Company ceased writing new and renewal workers' compensation related
insurance. Please refer to note 21 to the Company's 1996 audited consolidated
financial statements for information about the Company's operating segments.
C) NARRATIVE DESCRIPTION OF BUSINESS.
PRINCIPAL SERVICES RENDERED
HEALTH MAINTENANCE ORGANIZATIONS. PCA's HMO and insurance companies provide
health care services to commercial members enrolled through employer groups and
as individuals, as well as members enrolled through government sponsored
Medicaid and Medicare programs. PCA's HMOs operate in Florida, Texas and Puerto
Rico. The following table sets forth PCA's HMO membership as of and revenues for
the year ended December 31, 1996:
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PERIOD ENDING MEMBERSHIP
REVENUE ------------------------------------------------------
(IN PUERTO
MILLIONS) FLORIDA TEXAS RICO OTHER TOTAL
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Commercial................................... $ 552.4 157,000 216,000 34,000 -- 407,000
Medicaid..................................... 382.4 143,000 52,000 269,000 -- 464,000
Medicare..................................... 317.4 39,000 21,000 -- -- 60,000
Indemnity.................................... 40.7 -- -- 69,000 12,000 81,000
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Total...................................... $ 1,292.9 339,000 289,000 372,000 12,000 1,012,000
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HMO SERVICES--MARKETS.
FLORIDA. As one of the largest HMO's in Florida, PCA's Florida operation
services approximately 339,000 total members. PCA is the largest Medicaid HMO
provider in the State of Florida with approximately 143,000 Medicaid
beneficiaries which is approximately 30% of Florida's total HMO-enrolled
Medicaid beneficiaries. PCA's service area includes most counties in Florida
including those encompassing the metropolitan areas of Miami, Ft. Lauderdale,
Orlando, Tampa, Jacksonville and Tallahassee.
TEXAS. PCA's Texas operation services approximately 289,000 total members.
Approximately 216,000 commercial members are serviced in the Austin, San
Antonio, Houston and Dallas metropolitan areas, approximately 52,000 Medicaid
beneficiaries in the Austin/Central, San Antonio Texas areas, and approximately
21,000 Medicare beneficiaries throughout the State. PCA is the largest HMO in
the Austin/Central Texas area.
PUERTO RICO. PCA's Puerto Rico HMO operation services approximately 372,000
total members. In September 1995, PCA was awarded the central region reform
(Medicaid) contract in Puerto Rico. Enrollment under this contract began in
December 1995 and has grown to 269,000 members at December 31, 1996. For the
year ended December 31, 1996, PCA received approximately $136.5 million or 11%
of its total health premium revenue from this contract, which expires on March
31, 1997. This contract has been renewed for two years commencing April 1, 1997,
the first such two-year contract awarded in the commonwealth, at premium rates
approximately 1% less than current contract rates. As part of this renewal
contract, the Company will provide health care services to approximately 145,000
additional members in Puerto Rico's southeast region, bringing the total members
receiving health care services under reform contracts to more than 400,000 by
the second quarter of 1997. In conjunction with receiving this contract, the
Company has agreed to infuse approximately $5.0 million of additional capital in
its PCA Puerto Rico operations by the end of the second quarter of 1997.
Additionally, as of December 31, 1996, 103,000 commercial and indemnity/PPO
members were served by the Company throughout the Commonwealth of Puerto Rico.
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OTHER. PCA also provides indemnity health coverage to 12,000 members in
Florida and Texas through its indemnity subsidiaries in those states. These
products are offered only in conjunction with the Company's HMO product.
HMO SERVICES -- GENERAL.
PCA's HMOs provide a comprehensive range of basic and supplemental health
care services to its members, including inpatient hospital care, ambulatory or
outpatient primary physician care, consulting physician care, x-rays, laboratory
services, emergency care, pre-natal and maternity services, pharmaceuticals,
dental and eye care, home health nursing, physical therapy, mental health and
ancillary diagnostic and therapeutic services. PCA's HMOs offer a variety of
benefit plans ranging from plans in which the monthly enrollment fees cover all
required services, to plans which require copayments or deductibles in addition
to a lower monthly premium.
HMO PRODUCTS.
PCA offers the following HMO products to large and small employer groups,
individuals and government-sponsored beneficiaries:
LARGE GROUP COMMERCIAL. Commercial members join PCA's HMOs through their
employer-sponsored health benefit plans. Monthly premium rates are fixed for a
one-year period by contracts between PCA and each employer. During a designated
annual "open enrollment period", or at the time of their employment, employees
may select their desired health care benefit program. Employees may be
disenrolled as a result of termination of employment or may disenroll during the
open enrollment period.
INDIVIDUAL (SELF-PAY) AND SMALL GROUP COMMERCIAL. PCA offers a variety of
programs for individuals and small groups (25 members or less) with varying
degrees of benefits and copayments. PCA offers these programs as part of its
commitment to provide comprehensive and accessible health care in its service
areas. These members pay fixed monthly premiums for their own and their
dependents' health care coverage. PCA's contracts with individual members are
renewable on an annual basis, with the members being permitted to disenroll on a
monthly basis for any reason. PCA may also cause disenrollment if payment is not
received within ten days after the beginning of the month in which payment is
due.
MEDICAID. PCA offers a program for Medicaid beneficiaries in Florida, which
it markets under the name PCA Family Health Plan. Under PCA's Medicaid risk
contract with the State of Florida's Agency for Health Care Administration
("AHCA"), PCA is paid a fixed monthly premium per member for health care
services rendered to Medicaid beneficiaries in Florida. Medicaid beneficiaries
who receive their health care from PCA do not pay any premiums, deductibles or
copayments for office visits or prescription drugs. PCA assumes the risk that
the actual cost of health care services may exceed the monthly premium received
from the State of Florida. PCA's Medicaid contract with AHCA which renews
annually on June 30, provides for premium rates per member equal to 95% of the
average per capita Medicaid expenditures on non-HMO Medicaid beneficiaries
within each county, as adjusted for inflation. In June 1995, AHCA revised PCA's
Florida Medicaid contract, including a reduction of the Medicaid premium rate
for the contract year ending June 30, 1996. These reductions, which were made
based on age, sex and geographical factors, resulted in an approximate 10%
reduction in PCA's Florida Medicaid premiums from the June 1995 rates for July
and August 1995 and an approximate 18% reduction from the June 1995 rates for
months thereafter. PCA's Medicaid premium revenues from this contract were
approximately $202.5 million, $270.1 million and $297.6 million for the years
ended December 31, 1996, 1995 and 1994, respectively. This contract represented
16% of PCA's total health premium revenues in 1996. See "Dependence Upon a
Single Customer."
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In late 1996, AHCA initiated a competitive bidding process whereby it would
grade responses to a request for proposal ("RFP") from qualified bidders using
both cost and quality of care criteria and award contracts to selected bid
winners to provide health services to Medicaid recipients in Florida. PCA's
response to the RFP was submitted to AHCA in November 1996. In February 1997,
AHCA announced its intent to award a 30-month Medicaid managed care contract to
bid winners including PCA, which are not expected to begin before the end of the
second quarter of 1997. The premium rates will be set at 92% of fee-for-service
costs and PCA was awarded capacity to provide services to up to 337,000 Medicaid
beneficiaries, which is the largest award in the state.
PCA offers a program for Medicaid beneficiaries in Texas, which it markets
under the name of PCA Star Health Plan. Under PCA's three Medicaid contracts
with the Texas Department of Health ("TDOH"), the State of Texas pays PCA a
fixed monthly premium per member for health care services rendered to Medicaid
beneficiaries. Medicaid beneficiaries do not pay any premiums, deductibles or
copayments for office visits or prescription drugs. PCA assumes the risk that
the actual cost of health care services may exceed the monthly premium received
from the State of Texas. PCA's Medicaid contracts in Austin/San Antonio and
Dallas with the TDOH terminate on September 1, 1997, and October 1, 1997,
respectively, and provide for premium reimbursement rates per member equal to
approximately 85% of the projected per capita Medicaid expenditures on non-HMO
Medicaid beneficiaries within the applicable service area divided by the number
of total non-HMO Medicaid beneficiaries, as adjusted for inflation. Premiums
pursuant to the contracts are also subject to a revenue sharing provision which
requires PCA to share certain of its contract revenues with the TDOH based on
the level of contract expenditures. PCA expects all its Texas Medicaid contracts
to be renewed in 1997. The contracts are subject to termination upon 60 days'
notice by the TDOH for cause. These contracts represented 3% of PCA's health
premium revenues in 1996.
In Puerto Rico, the government has initiated a reform program to privatize
the delivery of Medicaid services. In September 1995, PCA was awarded a one-year
exclusive contract to provide health care services to beneficiaries of the
Commonwealth of Puerto Rico's health care reform program in the central health
region. PCA started providing health care services for enrolled members in
December 1995. This contract expired on March 31, 1997 and has been renewed for
two years commencing April 1, 1997. Additionally effective April 1, 1997, PCA
was awarded a two-year exclusive contract to provide health services to
approximately 145,000 members in Puerto Rico's southeastern region. PCA has
contracted with providers to capitate them at 86% of premiums in 1996 which was
increased to 87% of premiums for the April 1997 contract. This contract
represented 11% of PCA's health premium revenues in 1996. See "Dependence Upon a
Single Customer."
MEDICARE. PCA offers a program for Medicare beneficiaries in Florida, which
it markets under the name PCA Qualicare. In addition, PCA provides services to
Medicare beneficiaries in the Austin/Central Texas area. Since 1991, PCA has
entered into annual contracts with the federal government to provide health care
services to Medicare beneficiaries under the Tax Equity and Fiscal
Responsibility Act of 1982. The federal government pays PCA a fixed monthly
premium per member equal to approximately 95% of the average medical costs by
area adjusted for age, sex and service entitlements. Florida Medicare
beneficiaries pay no monthly payments, deductibles or copayments for office
visits or prescription drugs. Texas Medicare beneficiaries pay a portion of the
monthly premium as well as copayments for certain benefits. Premiums payable to
PCA under these contracts are subject to periodic unilateral revision by the
federal government. The federal government may terminate PCA's Medicare
contracts at any time if PCA fails to comply with applicable laws and
regulations. Medicare beneficiaries are enrolled on an individual basis and may
disenroll for any reason upon 30 days' notice. PCA provides health services to
approximately 60,000 Medicare beneficiaries in Florida and Texas. These two
Medicare contracts represented 25% of PCA's health premium revenues in 1996. See
"Dependence Upon a Single Customer."
HCFA has announced that the 1997 AAPCC rates which provide the basis for
premium payments to HMOs providing services to Medicare beneficiaries are
expected to increase by approximately 6%
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nationally over 1996 rates. The Company expects the blended AAPCC rates for the
geographic regions in which it provides health services to Medicare
beneficiaries to increase by more than 7% over 1996 rates, primarily because the
AAPCC rates in South Florida are higher than the national average.
RELATED HEALTH INSURANCE PRODUCTS. PCA's PCA/Insurance operations provide
POS/Indemnity health insurance services to approximately 12,000 members located
in Florida and Texas. In Florida, legislative mandates require that the medical
component of workers' compensation utilize managed care concepts. Management
expects that such measures will assist PCA to diversify the products it offers
in its existing markets.
PCA offers an indemnity PPO/POS program through its relationship with an
insurance company under which the insurance company's indemnity products are
sold to some employer groups along with PCA's HMO products. All of the financial
risk on such products is assumed by PCA's wholly owned subsidiary,
PCA/Insurance, either directly or through a reinsurance agreement with this
insurance company. These products represent less than 1% of PCA's health premium
revenues.
WORKERS' COMPENSATION SERVICES
THIRD PARTY ADMINISTRATIVE SERVICES. PCA provides administrative services
primarily to workers' compensation and other benefit plan insurance entities.
PCA offers claims processing and health care management services, whereby it
acts as a third party administrator on behalf of the insurance entity.
Additional services include: underwriting, billing, audit, sales and marketing
assistance, premium collection, safety management, fraud investigation,
actuarial services, medical bill review, policy administration, information
management and employee benefits. PCA earns a service fee for these services
which ranges from 8% to 15% of earned normal premiums. PCA's administrative
service products also introduce the employer sponsor to PCA's provider network
and utilization management programs, enabling them to utilize managed care to
reduce their workers' compensation expenses. As of December 31, 1996, PCA
provided its administrative services to employer groups, throughout the
Southeast and Midwest areas of the United States. At December 31, 1996, PCA
provided administrative services to approximately 46,000 employer groups.
WORKERS' COMPENSATION INSURANCE. In 1994 and 1995, PCA acquired four
workers' compensation TPA companies and PCA/P&C. These subsidiaries became PCA's
workers' compensation division operating in two segments. In 1994 and 1995 these
companies earned the majority of their revenues and earnings from investment
earnings and TPA service fees for services provided to a number of self
insurance funds, assessable mutual insurers, insurance companies and employer
groups in the Southeastern United States, including: Florida Business Mutual
Insurance Company ("FBM"), Florida Automobile Dealers Self Insurers Fund
("FADA"), and Florida Builders and Employers Mutual Insurance Company ("FBE")
(collectively the "Funds"). These Funds had been administered by the acquired
TPA companies since 1978. In 1995, certain assets and liabilities of FADA were
assumed by PCA. In November 1996, effective September 30, 1996, the assets and
liabilities of FBM were also assumed by PCA pursuant to a loss portfolio
reinsurance agreement. Also effective September 30, 1996, PCA/P&C entered into
an asset guarantee agreement with FBE which effectively transferred the right of
ownership to PCA. As a result, the assets and liabilities of FBE are
consolidated with PCA since that date.
As regulatory and legal changes occurred in Florida, competition increased
in the Florida workers' compensation market place and PCA evaluated its
strategic options to preserve its TPA service fee revenue base from the employer
groups of these funds. As a result of this evaluation, in November 1995, PCA,
through PCA/P&C, began providing primary workers' compensation insurance
coverage to employers in Florida, most of which previously were self insured
throughout the Funds. In conjunction with providing this new risk product,
PCA/P&C entered into quota share arrangements with five reinsurers whereby 25%
of the premiums and the claims costs are retained by PCA/P&C and the
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remaining 75% is ceded to the reinsurers. PCA/P&C also provided reinsurance stop
loss coverage to various funds and employer groups for catastrophic cases and
aggregate stop loss coverage.
Throughout 1996, PCA continued to provide TPA services to the Funds to run
off the claims liabilities remaining in the Funds. On November 1, 1996, PCA
entered into various arrangements to reinsure or assume, effective September 30,
1996, financial responsibility for the net liabilities of FBM and FBE. These
agreements included an asset guaranty and indemnification agreement between
PCA/P&C and FBE. PCA assumed the net liabilities of the Funds as part of its
evaluation of its entire workers' compensation operations in Florida and based
upon its determination that it was necessary to preserve its TPA service revenue
and the operating relationships among PCA's workers' compensation and HMO
subsidiaries.
An actuarial evaluation completed in November 1996, indicated that FBM and
FBE's liabilities exceeded their assets by approximately $130.0 million on a
pre-tax undiscounted basis as of September 30, 1996. Accordingly, PCA recorded a
loss on assumption of net workers' compensation liabilities of $100.0 million
(net of a $30.0 million income tax benefit) in the third quarter of 1996. All
assets and liabilities of FBE and FBM have been consolidated with the results of
PCA in the Company's balance sheet since September 30, 1996.
As a result of a further actuarial evaluation of all of PCA/P&C's claims
liabilities through December 31, 1996, PCA P&C recorded an additional $145.9
million pretax charge in the fourth quarter of 1996. Of this charge,
approximately $50.9 million related to the claims associated with the Funds'
liabilities which were assumed by PCA in September 1996 and $95.0 million
related primarily to claims for other workers' compensation related insurance
products.
As a result of the total 1996 loss on assumption of net workers'
compensation liabilities of approximately $180.9 million, PCA/P&C has a deficit
of approximately $121 million at December 31, 1996 and PCA/P&C has been rendered
insolvent under Florida statutory accounting standards. In November 1996, State
of Florida Department of Insurance ("DOI") placed PCA/P&C under administrative
supervision permitting the DOI to exercise comprehensive regulatory oversight
functions with respect to PCA/P&C's operations, claims payments and
expenditures. In addition, PCA/P&C agreed to suspend all insurance writings
until the DOI otherwise permits and submitted a detailed corrective plan to
remedy its capital deficiency.
Accordingly, in response to its evaluation of the long-term prospects of the
Florida workers' compensation insurance risk, and as per its agreement with the
DOI, in the fourth quarter of 1996, PCA ceased writing new or renewal workers'
compensation insurance risk products and is focusing its efforts on providing
TPA services to its current and future customer base. To this end, in November
1996, PCA entered into five-year agreements with ZCIC, a subsidiary of an A.M.
Best "A" rated insurance company, whereby PCA provides administrative and
management services to ZCIC in exchange for a fee based on a percentage of net
earned premiums, as defined. Under these agreements, the renewal of insurance
coverage to PCA's existing Florida workers' compensation policyholders and the
providing of workers' compensation insurance coverage to new customers will be
underwritten by ZCIC. PCA believes that this strategy will eliminate PCA's
additional exposure to further workers' compensation underwriting risks while
preserving its Florida workers' compensation TPA business.
In February 1997, as a result of PCA's announcement of an anticipated
additional loss in its WC Insurance segment arising from the additional fourth
quarter charges noted above, the DOI obtained a Florida circuit court order
which required PCA/P&C to submit a corrective action plan by April 2, 1997 and
to attend a hearing on May 2, 1997 to show cause why the DOI should not place
PCA/P&C under Florida state rehabilitation. Additionally, the court issued an
automatic stay of all actions or proceedings against PCA/P&C to remain in effect
until further order by the court.
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PCA submitted a corrective action plan to the DOI on April 2, 1997 which
included the following components: (i) payment from PCA to PCA/P&C of future tax
benefits derived from PCA/P&C's losses, and (ii) an agreement to provide certain
future TPA administrative services to PCA/P&C for less than fair market value
and other considerations, if deemed appropriate. In exchange for these
commitments and possibly others to be negotiated, PCA will seek to obtain a
release from any further obligation to PCA/ P&C. If the plan is deemed
unacceptable to the DOI, then PCA/P&C will likely be placed under state
rehabilitation. In such event, PCA and its subsidiaries; PCA Solutions and
PCA/P&C, will likely be involved in some ongoing litigation regarding the
PCA/P&C deficit. The outcome of any such possible litigation cannot be
determined.
HEALTH MAINTENANCE ORGANIZATION ACCREDITATION
With the increasing significance of managed care in the health care
industry, several independent organizations have been formed with the purpose of
responding to external demands for accountability over the managed care
industry. The organizations utilized by PCA are NCQA and the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). NCQA performs site reviews
of standards established for quality assurance, credentialing, utilization
management, medical records, preventive services and member rights and
responsibilities. JCAHO reviews rights, responsibilities and ethics, continuum
of care, education and communication, leadership, management of information and
human resources and network performance. Both organizations evaluate the
mechanisms the organization has established to ensure continuous quality
improvement.
In the State of Florida, accreditation is mandatory and is generally
required for licensure. At December 31, 1996, PCA's Texas and Florida HMOs were
accredited by NCQA.
STATUS OF PRODUCT OR SEGMENT.
During 1996, PCA/P&C wrote workers' compensation primary and reinsurance
policies and earned net premiums of approximately $75 million. In conjunction
with its assumption of assets and liabilities of the Funds effective September
30, 1996, PCA/P&C elected effective in November 1996 to cease writing or
renewing any workers' compensation related insurance policies. Additionally, as
a result of this action, the Company expects that its 1997 TPA revenues will
decrease by as much as 25% over 1996 levels.
PATENTS, TRADEMARKS AND LICENSES.
The Company has a service mark registered with the United States Patent and
Trademark Office for the words "Physician Corporation of America" and the
letters "PCA" incorporated into a distinctive design which expires on January
12, 2008. The Company also has a service mark registered with the United States
Patent and Trademark Office for the words "PCA Health Plans," which expires on
August 31, 2001, and the words "PCA Qualicare," and distinctive design which
expires on February 16, 2003. The Company considers all of these service marks
to contribute significantly to its operations.
The Company's HMOs are licensed and subject to periodic examination by
governmental agencies and are subject to state and federal statutes and
regulations which extensively regulate the activities of HMOs. The Company's
HMOs must also file periodic reports with, and are subject to periodic review by
the state and federal licensing authorities that regulate HMOs. To remain
licensed, it may be necessary for the Company's HMOs to make changes from time
to time in their services, procedures, structures and marketing methods. The
loss of a state HMO license would require the Company to cease offering its HMO
product in the respective state. Additionally, loss of the Florida HMO license
by PCA/Family would cause an automatic termination of the Florida Medicaid
contract with the State of Florida.
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SEASONALITY.
The Company experiences certain seasonal variations in its HMO operations,
which have had an impact on its quarterly results. For example, advertising
expenses are typically highest in the fourth quarter of each year prior to the
Company's January 1 open enrollment. Also, hospital expenses are typically lower
than average during the fourth quarter due to deferment of elective medical
procedures until after the holiday season.
WORKING CAPITAL PRACTICES.
Most states require HMOs or insurance companies licensed to operate in their
state to maintain minimum equity, capital, deposit and/or reserve requirements.
A portion of the Company's HMOs' and insurance companies' cash is essentially
restricted by various state regulatory or other requirements limiting certain of
the Company's subsidiaries' cash to use within their current operations as a
result of minimum capital requirements. The liabilities for claims have a
significant impact on working capital. With respect to hospital costs and other
costs paid directly by the Company, the Company establishes liabilities for
claims that have been incurred but not yet reported to the Company. The Company
estimates such liabilities on a monthly basis using standard actuarial
methodologies which are based on the historical average interval between the
date services are rendered, the date claims are reported, the date claims are
paid and expected changes in membership as adjusted for expected inflation
rates. These liabilities are depleted when claims are paid which typically
occurs over a one to six month period for HMOs and for up to ten years for
insurance companies from the date the liability was recorded. For additional
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE UPON A SINGLE CUSTOMER.
The Company's HMO subsidiaries operating in Florida provide health services
to approximately 143,000 members whose premiums are paid by the State of
Florida's Agency for Health Care Administration ("AHCA") through its Medicaid
program. For the year ended December 31, 1996, the Company received
approximately $202.5 million or 16% of its total health premiums revenues
pursuant to its contract to provide health care services to Medicaid members.
There can be no assurance that AHCA will renew the Company's Medicaid contract,
which expires on June 30, 1997. However, AHCA has announced its intent to award
a 30-month contract to the Company at premium rates approximately 3% less than
current contract rates. The existing contract is also subject to termination
upon 90 days' notice by either party without cause or upon 24 hours notice by
the AHCA in case of the Company's breach or if funds become unavailable to
finance the contract. In the event of such termination, the Company will be paid
a mutually agreed upon amount for partial performance of the contract. If the
contract is terminated by the AHCA for cause, the Company is obligated to pay
liquidated damages of up to 25% of the total contract price and to reimburse the
AHCA for any federal disallowances or sanctions. Future levels of Medicaid
payments may be affected by government efforts to contain medical costs, and may
further be affected by state and federal budgetary constraints, and such
payments cannot be predicted with certainty. The loss or modification of the
Company's Medicaid contracts or termination or modification of the Medicaid
program, including, without limitation, a reduction in premium rates from the
State of Florida, could have a material adverse effect on the Company. During
1995, the Medicaid premium rate for the contract year ending June 30, 1996 was
significantly reduced from the rate for the contract year ended June 30, 1995.
This reduction had a material adverse effect on the Company. There can be no
assurance that future decreases will not occur.
The Company's HMO subsidiaries in Florida and Texas provide health services
to approximately 60,000 Medicare members whose premiums are paid by the Federal
government. For the year ended December 31, 1996, the Company received
approximately $317.3 million or 25% of its total health premiums revenues from
the Federal government pursuant to the terms of its contracts to provide health
8
<PAGE>
care services to Medicare members. The Medicare contracts renew annually on
January 1 of each year and while the Company expects the contracts to be
renewed, there can be no assurance that the Federal government will not
terminate its contract or reduce the monthly premium rate per member it pays the
Company.
The Company's HMO subsidiary in Puerto Rico provides health services to
approximately 269,000 Medicaid members. For the year ended December 31, 1996,
the Company received approximately $136.4 million or 11% of its total health
premiums revenues from the Commonwealth of Puerto Rico, pursuant to the terms of
its contract to provide health services to these members. This contract expired
on March 31, 1997 and has been renewed for two years commencing April 1, 1997.
Additionally effective April 1, 1997, the Company was awarded a two-year
contract to provide health services to approximately 145,000 additional members
in Southeast Puerto Rico. The annual health premiums from these contracts are
expected to be approximately $230 million. While the Company expects these
contracts to be renewed in the future, there can be no assurance the contracts
will be renewed in the future nor premium rate decreases will not occur.
Additionally, premium rates on this membership will be approximately 1% less on
a per member per month basis than in 1996.
COMPETITION.
The health care industry is highly competitive. The Company has numerous
types of competitors, including, among others, HMOs, preferred provider
organizations and traditional indemnity insurance carriers, many of which have
substantially larger enrollments, greater financial resources and offer a
broader scope of products than the Company. Additional competitors may enter the
Company's markets in the future.
The Company believes that the principal competitive features affecting its
ability to retain and increase HMO membership include the price of benefit plans
offered, geographic areas of service, reputation of the provider network,
quality of service, responsiveness to member demands, comprehensiveness of
benefit coverage, diversity of product offerings and market presence and
reputation. The Company believes that it competes effectively with respect to
all of these factors. The relative importance of each of these features and the
Company's key competitors vary by customer type and by market.
The Company competes with other managed care plans to enter into contracts
with independent physicians, physician groups and other providers. Competitive
factors influencing a physician's or other provider's decision to contract with
the Company include potential membership volume, reimbursement rates, timeliness
of reimbursement and administrative services capabilities.
The Company competes with other third party administrators and indemnity
insurance companies to provide the administration and insurance services to the
workers' compensation funds. The Company believes the primary competitive
factors affecting its ability in this market are the price of the service plans
offered, range of products offered, and the quality of service. The Company
believes it competes effectively with respect to these factors and that it is
well positioned to be a leading provider of workers' compensation TPA services
in the Southeastern United States. However, as a result of the events which have
lead to PCA P&C ceasing to write workers' compensation insurance, the Company's
ability to retain its TPA customer base in Florida is uncertain.
COMPLIANCE WITH ENVIRONMENTAL REGULATION.
The Company believes that its clinical, surgical and laboratory operations
are in compliance with environmental protection and other governmental
regulations. The Company does not anticipate that its compliance with federal,
state and local provisions regulating the packaging, storage, treatment and
transportation of biohazardous materials will have a material adverse effect on
the Company's earnings or competitive position. The Company sold its clinical
operations in June 1996.
9
<PAGE>
EMPLOYEES.
As of December 31, 1996, the Company had approximately 2,980 employees, of
which approximately 1,800 were employed by the Company's HMO subsidiaries, 1,010
were employed by the Company's workers' compensation companies and approximately
170 were corporate administrative and management personnel. Currently, none of
the Company's employees are covered by a collective bargaining agreement. The
Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company leases in the aggregate approximately 141,000 square feet of
office space for its Texas HMO operation, 228,000 square feet for its Florida
HMO operations, 53,000 square feet for its Puerto Rico HMO operation, 141,000
square feet for its workers compensation businesses primarily in Florida, North
Carolina and Oklahoma and 85,000 square feet for its corporate executive offices
in Florida. The Company owns a 75,000 square foot office building used for its
Florida HMO offices and two 70,000 square foot buildings in Florida used by its
workers compensation business. The Company believes that its facilities are
adequate for its current operations. See note 8 to the Company's Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in pending and threatened legal actions and
proceedings arising in the ordinary course of its business, a significant
portion of which involve claims of medical malpractice, claims for coverage or
payment of medical services rendered to HMO members and for claims by providers
for payment for medical services rendered to HMO members. In the opinion of
management, the outcome of such legal actions and proceedings will not have a
material adverse effect on the Company.
On March 18, 1997, the Company filed a lawsuit against Sierra in the Federal
District Court in Miami, Florida for material breach of several provisions of
the Merger Agreement and among other things is seeking monetary damages for its
costs and damages incurred as a result of Sierra's actions. In April 1997,
Sierra filed a lawsuit against the Company in the State Courts of Delaware
seeking monetary damages. The outcome of this litigation is not known.
As a result of the deterioration of PCA/P&C's financial position, in
November 1996, the Florida DOI placed PCA/P&C under regulatory supervision. In
February 1997, after the Company announced it expected further losses in its
PCA/P&C subsidiary, the Florida DOI obtained a Florida circuit court order
requiring PCA/P&C to submit a detailed corrective action plan setting forth a
program to remedy the capital deficiency in PCA/P&C. Additionally, this plan
will be the basis for the evaluation of whether the DOI should place PCA/P&C
under statutory rehabilitation at a hearing to take place on May 2, 1997. The
Company cannot predict the outcome of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
A) MARKET INFORMATION.
The Company's Common Stock has been quoted on The NASDAQ Stock Market under
the symbol PCAM since March 30, 1993. The following table sets forth the high
and low sales prices per share of common stock for the indicated periods, as
reported on The NASDAQ Stock Market.
<TABLE>
<CAPTION>
BID PRICE
--------------------
HIGH LOT
--------- ---------
<S> <C> <C>
Quarter Ended:
March 31, 1995........................................................... $ 28.00 $ 19.75
June 30, 1995............................................................ 24.00 13.50
September 30, 1995....................................................... 18.63 13.50
December 31, 1995........................................................ 18.50 13.50
Quarter Ended:
March 31, 1996........................................................... $ 20.00 $ 14.25
June 30, 1996............................................................ 16.75 12.75
September 30, 1996....................................................... 13.75 9.50
December 31, 1996........................................................ 12.75 9.50
</TABLE>
B) HOLDERS.
As of January 1, 1997, there were 38,829,456 shares outstanding and
approximately 400 shareholders of record as determined by an examination of the
Company's transfer book. However, because a number of shares of stock are held
in "street name", the actual number of stockholders cannot be determined more
precisely.
C) DIVIDENDS.
The Company has not paid any cash dividends or made other cash distributions
on its Common Stock since its formation. The Company intends to retain all of
its earnings for the foreseeable future. The Company's ability to pay dividends
may be restricted by state insurance regulations applicable to its subsidiaries
and is currently prohibited by the terms of a Credit Agreement with Citibank,
N.A. (the "Credit Agreement" or "Credit Facility"). Subject to the terms of such
insurance regulations and the Credit Agreement, any future decision as to the
payment of dividends will be at the discretion of the Company's Board of
Directors and will depend on the Company's earnings, financial position, capital
requirements and other relevant factors.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1)
Revenues:
Health premiums................................. $ 1,292,914 $ 1,038,637 $ 760,669 $ 542,030 $ 354,342
Workers' compensation related revenues.......... 122,611 143,395 46,466 -- --
Investment income............................... 25,961 18,602 10,631 3,880 1,956
Other revenues.................................. 12,822 15,915 6,963 3,937 3,253
------------ ------------ ---------- ---------- ----------
Total revenues................................ 1,454,308 1,216,549 824,729 549,847 359,551
Operating expenses:
Medical costs................................... 1,130,528 878,918 562,364 394,723 279,128
Health administrative, marketing and other
expenses...................................... 188,710 179,362 124,979 81,887 56,432
Workers' compensation related administrative,
marketing and other expenses.................. 191,505 111,906 33,751 -- --
Loss on assumption of net workers' compensation
liabilities................................... 180,934 -- -- -- --
Loss on write-down of long lived assets......... 38,979 25,863 -- -- --
Depreciation and amortization................... 22,497 23,264 12,621 5,553 3,901
Other operating expenses........................ 10,519 14,242 2,129 -- --
------------ ------------ ---------- ---------- ----------
Total operating expenses...................... 1,763,672 1,233,555 735,844 482,163 339,461
------------ ------------ ---------- ---------- ----------
Operating (loss) income....................... (309,364) (17,006) 88,885 67,684 20,090
Gain on sale of subsidiaries...................... 12,352 -- -- -- 5,917
Interest expense.................................. (13,738) (9,113) (2,107) (1,448) (2,058)
Other income (expense)............................ (2,216) 263 (31) (542) (36)
------------ ------------ ---------- ---------- ----------
Earnings (loss) before income taxes........... (312,966) (25,856) 86,747 65,694 23,913
Income tax expense (benefit)...................... (35,281) (1,260) 34,200 25,600 9,476
------------ ------------ ---------- ---------- ----------
Net earnings (loss)........................... $ (277,685) $ (24,596) $ 52,547 $ 40,094 $ 14,437
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
Net earnings (loss) per common share and common
equivalent share on primary and fully diluted
basis............................................ $ (7.16) $ (0.62) $ 1.30 $ 1.12 $ 0.49
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
OPERATING STATISTICS: (1)
<S> <C> <C> <C> <C> <C>
Medical loss ratio (2)............................ 87.4% 84.6% 73.9% 72.8% 78.8%
Health administrative, marketing, and other
expenses ratio (3)............................... 14.6% 17.3% 16.4% 16.6% 16.1%
Operating items as a percentage of total revenues:
Total administrative, marketing, and other
operating expenses............................ 26.9% 25.1% 19.5% 16.3% 15.2%
Operating income (loss)......................... (21.3)% (1.3)% 10.8% 12.3% 5.6%
Net earnings (loss)............................. (19.1)% (2.0)% 6.4% 7.3% 4.0%
Period end membership:
Commercial...................................... 406,958 424,027 316,951 217,249 166,728
Medicaid........................................ 464,280 377,055 215,941 241,972 149,809
Medicare........................................ 59,540 53,240 23,274 13,259 5,302
Indemnity and PPO............................... 81,379 30,517 4,337 -- --
------------ ------------ ---------- ---------- ----------
Total......................................... 1,012,157 884,839 560,503 472,480 321,839
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
Approximate number of employer groups utilizing
workers' compensation TPA services............... 46,000 69,000 55,000 -- --
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $ (115,343) $ 77,167 $ 59,297 $ 73,125 $ (10,848)
Total assets...................................... 1,354,987 849,662 644,978 356,949 150,629
Long-term debt, including current portion......... 133,053 184,039 90,080 7,928 18,503
Stockholders' equity (deficit) (4)................ $ (64,832) $ 210,169 $ 243,548 $ 185,942 $ 30,993
</TABLE>
- ------------------------
(1) Certain 1995, 1994, 1993 and 1992 amounts have been reclassified to conform
with the 1996 presentation. These reclassifications have no impact on net
earnings (loss) or stockholders' equity as previously reported.
(2) Medical costs as a percentage of health premium revenues.
(3) Health administrative, marketing, and other expenses before elimination of
intercompany charges, as a percentage of health premium revenues.
(4) Includes $10,000 in put warrants in 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The discussion and analysis presented below provides management's assessment
of the Company's results of operations and financial condition as of and for the
years ended December 31, 1996 and 1995. This information should be read in
conjunction with the Company's consolidated financial statements and notes
thereto.
13
<PAGE>
FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION AND AS
PART OF OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED BELOW. SHOULD ONE
OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THEIR RESPECTIVE DATES.
AMONG THE FACTORS THAT HAVE A DIRECT BEARING ON THE COMPANY'S RESULTS OF
OPERATIONS ARE THE ABILITY OF PCA/P&C TO SUBMIT A DETAILED CORRECTIVE PLAN TO
REMEDY ITS CAPITAL DEFICIENCY THAT IS ACCEPTABLE TO THE DOI AND PCA/P&C'S
RELATED ABILITY TO SHOW CAUSE ON MAY 2, 1997, WHY THE DOI SHOULD NOT PLACE
PCA/P&C UNDER STATE OF FLORIDA STATUTORY REHABILITATION, THE ABILITY OF THE
COMPANY TO REFINANCE THE CREDIT FACILITY BY ITS MATURITY DATE OF OCTOBER 1,
1997, THE ABILITY OF SIERRA TO CALL PCA'S DEMAND PROMISSORY NOTE PAYABLE TO
SIERRA, SIERRA'S SUCCESS IN ANY ACTION BROUGHT TO ENFORCE ITS DEMANDS FOR
EXPENSES IN CONNECTION WITH THE TERMINATED MERGER AGREEMENT, MEDICARE AND
MEDICAID PREMIUM RATES SET BY STATE AND FEDERAL GOVERNMENT AGENCIES CHANGING
UNEXPECTEDLY, ACTIONS BY TEXAS, FLORIDA OR PUERTO RICO REGULATORS AND OTHER
FACTORS DISCUSSED HEREIN.
HMO OPERATIONAL STRATEGY. The Company is one of the largest HMOs in each of
its three HMO markets of Texas, Florida and Puerto Rico. The Company intends to
continue its growth in each of these markets through product diversification
including generating health premiums from its Commercial, Medicare and Medicaid
products. Utilizing its purchasing power, the Company works to establish high
quality, cost effective relationships with its health care delivery providers.
The Company is increasing its use of full risk capitation arrangements and
renegotiating lower cost contracts with providers in order to reduce its medical
costs as a percentage of health premiums. Concurrently, the Company continues to
expand its emphasis on quality health service delivery to its members. The
Company has made significant progress in improving its HMO operating results. On
a pretax, premanagement fee basis, the Company's HMO combined operating results
of Texas, Florida and Puerto Rico have improved from a loss of $20.0 million in
fourth quarter 1995 to a loss of $5.7 million in first quarter 1996, to a loss
of $0.7 million in second quarter 1996, to a profit of $3.0 million in third
quarter 1996 and to a profit of $5.5 million in the fourth quarter of 1996.
WORKERS' COMPENSATION/TPA STRATEGY. The Company is one of the largest TPAs
of workers' compensation products in the Southeastern United States. It receives
approximately 12% of gross workers' compensation premiums for these services and
works to provide these TPA services in a cost effective manner while assisting
its customers in controlling/reducing its workers' compensation claims. In the
fourth quarter of 1996, the Company ceased writing workers' compensation related
insurance and began to focus solely on providing TPA services to its workers'
compensation related customers. As a result of writing insurance coverage prior
to November 1, 1996 and the assumption of net Fund liabilities in 1995 and 1996,
the Company's consolidated balance sheet at December 31, 1996 includes
approximately $121.1 million of net liabilities relating to the WC Insurance
Segment. This net amount includes approximately $862.9 million in assets
(primarily investments and reinsurance receivables) and $984.0 million in
liabilities (primarily workers' compensation related claims). See
"Business--Narrative Description of Business--Workers' Compensation Services".
The Company intends to maximize its interest earnings on these assets while
minimizing the amounts paid to settle its workers' compensation claims.
14
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company incurred a net loss of $277.7 million for the year ended
December 31, 1996, as compared with a $24.6 million net loss for the year ended
December 31, 1995. The primary contributors to the loss in 1996 were (i) the
$229.0 million after tax loss incurred by the Company's WC insurance operations
which included the $180.9 million pretax charge related to the assumption of net
workers' compensation liabilities as described in note 22 to the Company's
audited consolidated financial statements as of and for the year ended December
31, 1996, and (ii) the non-cash $39.0 million loss on impairment of intangible
assets associated with the Company's WC TPA segment.
The pretax, premanagement fee loss from HMO operations decreased to $3.5
million in 1996 from $38.0 million in 1995. The primary reasons for the
reduction in loss relates to (i) the sale of the Company's HMO operations in
Alabama and Georgia, (ii) the improved profitability of the Company's Puerto
Rico HMO operations which mitigated lower profits from the Texas HMO operations
and increased losses from the Florida HMO operations.
Total revenues increased by $237.8 million or 19% to $1.454 billion for the
year ended December 31, 1996 from $1.217 billion for the year ended December 31,
1995. The increase is attributable to a $254.3 million increase in health
premiums, a $20.8 million decrease in workers' compensation related revenues, a
$3.1 million decrease in other revenues and an $7.4 million increase in
investment income.
Health premiums increased by $254.3 million or 25% to $1.293 billion for the
year ended December 31, 1996, compared to $1.039 billion in 1995. The weighted
average health plan membership increased by 38% for the year ended December 31,
1996 as compared to 1995 which accounted for $396.9 million of the increase
while a 10.0% reduction in the weighted average health premium rate resulted in
a $142.6 million reduction to premium revenue in 1996, as compared to 1995. A
comparison of premiums by member type for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
% INCREASE (DECREASE) FOR
YEARS ENDED DECEMBER 31,
1996 VS. 1995
------------------------------------------
TOTAL
HEALTH PREMIUMS AVERAGE WEIGHTED AVERAGE PER
-------------------- HEALTH AVERAGE MEMBER
1996 1995 PREMIUMS MEMBERSHIP PREMIUM YIELD
--------- --------- ------------ ------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Commercial......................................... $ 552.4 $ 502.4 10.0% 8.5% 1.3%
Medicaid........................................... 382.4 313.1 22.1 86.7 (34.6)
Medicare........................................... 317.4 197.5 60.7 45.9 10.1
Indemnity.......................................... 40.7 25.6 59.0 63.4 (2.9)
--------- --------- ----- ------ ------
Total.......................................... $ 1,292.9 $ 1,038.6 24.5% 38.2% (10.0)%
--------- --------- ----- ------ ------
--------- --------- ----- ------ ------
</TABLE>
The Medicaid membership growth was primarily from the Puerto Rico Reform
members which have a low monthly premium rate, accounting for the reduction in
the Medicaid and the overall premium yield. In January 1997, the Company's
Florida Medicaid membership declined from 143,000 members at December 31, 1996
to approximately 131,000 in January 1997, a 12,000 reduction arising from the
State of Florida's semi-annual enrollment reconciliation and review. In February
1997, the Florida Medicaid membership increased to approximately 135,000
increasing primarily due to the initiation of the AHCA mandatory assignment
program. Also in February 1997, AHCA announced its intent to award a 30-month
contract to the Company with premium rates to be approximately 3% less than
current rates and established PCA's authorized membership capacity to be 337,000
members. Medicare premium revenues increased consistent with the weighted
average membership growth and the 10.1% increase in national AAPCC rate in 1996
from 1995. HCFA has announced that the 1997 AAPCC
15
<PAGE>
rates which provide the basis for premium payments to HMOs providing services to
Medicare beneficiaries are expected to increase by approximately 6% nationally
over 1996 rates. The Company expects the blended AAPCC rates for the geographic
regions in which it provides health services to Medicare beneficiaries to
increase by more than 7% over 1996 rates, primarily because the AAPCC rates in
South Florida are higher than the national average.
Workers' compensation related revenues decreased by $20.8 million or 15% to
$122.6 million for the year ended December 31, 1996 as compared to $143.4
million for 1995. These revenues were generated primarily by the Company's TPA
services provided to self insured funds and other insurance entities and until
November 1996, the writing of workers' compensation related insurance. In 1996,
the Company began offering primary workers' compensation risk policies to
certain employer groups who were previously members of these self insured funds.
Thus, the TPA fees earned from these employers in 1995 have been replaced in
1996 by primary workers' compensation premiums. As a result, the Company
experienced a $33.5 million decrease in TPA fees. This TPA fee decrease was from
an approximate 25% decline in the Company's book of workers' compensation
business being managed or under a risk policy. Additionally, the Company entered
into reinsurance agreements with other reinsurers which ceded 75% of the
workers' compensation related insurance to these A.M. Best A-rated companies.
The Company ceased writing workers' compensation insurance in late 1996 and most
of the underwritten risk business has been transferred to ZCIC with whom PCA has
a five-year TPA arrangement. It is anticipated that the Company's 1997 TPA book
of business will decline by a further 25% from 1996 levels due to market
competition and the implementation of ZCIC underwriting guidelines.
Other operating revenues decreased by $3.1 million or 19% to $12.8 million
for the year ended December 31, 1996 as compared to $15.9 million for 1995.
Other operating revenues consist primarily of professional and management fees
charged by the Company's medical clinics and HMOs which were owned for all of
1995 but sold in 1996.
Interest income increased by $7.4 million or 40% to $26.0 million in 1996,
as compared to $18.6 million for 1995. This increase is primarily attributable
to interest earnings on investment balances which were transferred to PCA from
the workers' compensation funds and investments arising from cash flows from
operations.
Total operating expenses increased by $530.1 million or 43% to $1.764
billion for the year ended December 31, 1996 from $1.234 billion in 1995. This
increase is attributable to a $251.6 million volume related increase in medical
costs, the $9.3 million increase in health administrative, marketing and other
expenses, a $260.5 million increase in workers' compensation related expenses
(including the 1996 $180.9 loss from the assumption of net workers' compensation
liabilities), a $3.7 million decrease in other operating expenses, a $0.7
million decrease in depreciation and amortization, and a $13.1 million increase
in the write down of long lived assets incurred for the year ended December 31,
1996, as compared to 1995.
Medical costs increased by $251.6 million or 28% to $1.130 billion for the
year ended December 31, 1996 from $878.9 million in 1995. Of this increase,
$335.9 million was due to the 38% increase in weighted average number of health
plan members offset by a $84.3 million decrease due to the 6.9% decrease in
weighted average medical cost per member. The total medical loss ratio (MLR) for
the year ended
16
<PAGE>
December 31, 1996 was 87.4% as compared to 84.6% for 1995. The following table
sets forth the MLR by product type for the years ended December 31,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial..................................................... 90.4% 88.0%
Medicaid....................................................... 81.0 70.7
Medicare....................................................... 88.5 97.6
Indemnity...................................................... 100.3 89.4
----- -----
Overall........................................................ 87.4% 84.6%
----- -----
----- -----
</TABLE>
The increase in overall MLR is attributable to the following factors: (i)
the increase in the Company's commercial and indemnity MLR's which was a result
of flat premium yields while medical costs increased due to increased
utilization, (ii) the increase in the Company's Medicaid MLR was a result of a
decline in Florida's premium yield in the last half of 1995 and the addition of
the Puerto Rico Medicaid members in late 1995 which has a fixed MLR of 86%
through capitated network arrangements (this arrangement was increased to 87% in
1997), offset by (iii) a significant improvement in the Medicare MLR which
resulted from the increased premium yields while costs remained flat.
Health administrative, marketing and other costs increased by $9.3 million
to $188.7 million for the year ended December 31, 1996 from $179.4 million in
1995. This increase in health related administrative expenses has resulted from
the costs associated with servicing the 38% weighted average increase in
membership in 1996 vs. 1995. The Company's health administrative ratio decreased
to 14.6% for the year ended December 31, 1996 from 17.3% for the year ended
December 31, 1995 and was the result of the Company taking aggressive action to
control its overhead costs while increasing premium revenues. This action
included a reduction in the number of employees, substantial office space
consolidation and disposition of its inefficient HMO operations in Georgia and
Alabama.
Workers' compensation related administrative, marketing and other expenses
increased by $79.6 million or 71% to $191.5 million for the year ended December
31, 1996, compared to $111.9 million for 1995. This significant increase is the
result of a deterioration in the workers' compensation related insurance loss
ratio which has been driven by a $77.7 million increase in workers' compensation
related claims expense and a $2.6 million increase in administrative costs for
the year ended December 31, 1996, as compared to 1995. The 1996 claims expense
has been derived from actuarial studies completed by the Company's independent
actuaries during 1996 and 1997. During the fourth quarter of 1996, the Company
ceased writing new or renewal workers' compensation related insurance.
Other operating expenses decreased by $3.7 million or 26% to $10.5 million
in 1996 from $14.2 million in 1995. This decrease is consistent with the change
in other operating revenue as noted above.
Depreciation and amortization decreased by $0.7 million or 3% to $22.5
million for the year ended December 31, 1996 as compared to $23.2 million for
the same period in 1995. This decrease is attributable to the Company recording
reduced depreciation and amortization expense as a result of the sale of its
subsidiaries in 1996 (PCA/Georgia, PCA/Alabama, and PFI), offset by: (i) a full
year of amortization of goodwill and depreciation expense associated with
acquisitions made during 1995 (Universal, Hallmark and CAI), and (ii)
depreciation expense associated with the approximate $14.8 million of capital
expenditures made during 1996.
As a result of the actions taken by the Company to refocus its revenue
strategy for its workers' compensation companies and to cease writing workers'
compensation related insurance, the Company has completed a review of future
anticipated revenue and cash flows from its workers' compensation businesses.
Accordingly, the Company concluded that approximately $38.9 million of goodwill
and intangibles which were previously recorded on PCA Solutions' balance sheet
have been impaired. As a result during the fourth quarter of 1996, the Company
recorded a $38.9 million loss on the impairment of long lived assets relating to
its workers' compensation TPA business.
17
<PAGE>
In 1995, the Company recorded a $25.9 million charge reflecting the write
down of certain of its long lived assets. The $25.9 million non-cash charge
represents a write down of the value of the goodwill relating to the Company's
Alabama operations and was estimated as the Company's investment in PCA/ Alabama
in excess of the estimated selling price, less costs to sell. The Company
completed the sale of both PCA/Alabama and PCA/Georgia in 1996 which resulted in
a $4.5 million gain recognized in 1996. During 1996, the Company also sold its
clinic operations in Florida which resulted in an additional $7.9 million gain
on the sale of subsidiaries.
Interest expense increased by $4.6 million to $13.7 million for the year
ended December 31, 1996 from $9.1 million for 1995. This increase is primarily
due to the increase in interest expense incurred on the Company's bank Credit
Facility. Although the Company's debt balance decreased to $133.1 million at
December 31, 1996, from $184.0 million at December 31, 1995, the average debt
outstanding during 1996 was approximately $161.0 million, as compared to
approximately $117.0 million in 1995. Additionally, during 1996 the Company
expensed approximately $0.3 million for fees incurred to modify its bank Credit
Facility and has recorded these amounts as interest expense.
The Company's 1996 effective tax rate was 11.2% and resulted in a $35.3
million income tax benefit for the year ended December 31, 1996. This compared
to a 4.8% effective tax rate and income tax benefit of $1.3 million for the year
ended December 31, 1995. The Company's 1996 effective tax rate of 11.2% differs
from the statutory rate of 35% primarily due to the Company's inability to
carryback $97.0 million of net operating loss. The Company also recorded an
increase to the prior year's valuation allowance of approximately $70.8 million,
which results from net operating loss carryforwards, capital loss carryforwards
and losses generated from claims which may not be fully deductible for tax
purposes. Additionally, the Company cannot deduct, for tax purposes, the
amortization of acquisition related intangible assets. This non-deductible
permanent difference is offset by the Company's tax exempt investment earnings.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's results for the year ended December 31, 1995 were impacted
significantly by the following factors:
(1) The State of Florida's Agency for Healthcare Administration (AHCA)
reduced the Company's Florida Medicaid premium rates by 18% in two phases
resulting in a $27.0 million reduction of Florida Medicaid premiums for
the year ended December 31, 1995 as compared to 1994. Additionally, AHCA
made modifications to the Company's Medicaid contract to restrict certain
marketing practices which was the cause of the 9% reduction in the
Company's Florida Medicaid membership from December 31, 1994 to 1995. The
Company's Florida Medicaid medical margin decreased by $41.4 million in
1995, as compared to 1994.
(2) The Company incurred significant administrative costs associated with
the rapid expansion of its Medicare business by increasing its membership
by 130% from 23,000 in 1994 to 53,000 at December 31, 1995. The Company's
Medicare medical margin was almost break even during 1995.
(3) The Company's Puerto Rico Health Plan was awarded a one-year contract to
provide health services to approximately 200,000 health reform members in
Puerto Rico's central region commencing December 15, 1995 and incurred
approximately $3.0 million of administrative start up costs in the fourth
quarter of 1995.
(4) The Company's HMO operations in Georgia and Alabama incurred a pre-tax
operating loss of $39.3 million for the year ended December 31, 1995, as
compared to a $4.8 million loss in 1994. Included in the 1995 loss is a
$25.9 million expense to write down the carrying value of goodwill
associated with PCA Alabama.
18
<PAGE>
The Company incurred a net loss of $24.6 million for the year ended December
31, 1995, a reduction of $77.1 million from the $52.5 million net earnings for
the year ended December 31, 1994. This reduction was caused by a $7.1 million
increase in the earnings provided by the Company's workers' compensation
companies, offset by a $81.9 million reduction in the Company's earnings from
its Health Plans and a $2.3 million reduction in earnings from its other
businesses.
Total revenues increased by $391.8 million or 48% to $1.216 billion for the
year ended December 31, 1995 from $824.7 million for the year ended December 31,
1994. The increase is attributable to a $278.0 million increase in health
premiums, a $105.8 million increase in administrative service fees and other
revenues and an $8.0 million increase in investment income.
Health premiums increased by $278.0 million or 36.5% to $1.038 billion for
the year ended December 31, 1995, compared to $760.7 million in 1994. The
weighted average health plan membership increased by 41% for the year ended
December 31, 1995 as compared to 1994 which accounted for $311.4 million of the
increase while a 4.0% reduction in the weighted average health premium rate
resulted in a $33.4 million reduction to premium revenue in 1995, as compared to
1994. A comparison of premiums earned by member type for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Commercial..................................................... $ 502.4 $ 333.2
Medicare....................................................... 197.5 82.2
Medicaid....................................................... 313.1 337.1
Indemnity...................................................... 25.6 8.2
--------- ---------
Total........................................................ $ 1,038.6 $ 760.7
--------- ---------
--------- ---------
</TABLE>
Workers' compensation related and other revenues increased by $105.9 million
or 198% to $159.3 million for the year ended December 31, 1995 as compared to
$53.4 million for 1994. This increase is attributable to a $48.7 million
increase in administrative fees, a $54.5 million increase in workers'
compensation related direct insurance and reinsurance premiums, and a $2.7
million increase in other revenues (primarily life and property and casualty
premiums). The increase in worker's compensation related insurance resulted from
the Company owning PCA P&C for a full 12 months in 1995 vs. 5 months in 1994.
Additionally in 1995, the Company began writing worker's compensation related
direct insurance in Florida which approximated $10 million.
Total operating expenses increased by $497.7 million or 68% to $1.233
billion for the year ended December 31, 1995 from $735.8 million in 1994. This
increase is attributable to a $316.5 million increase in medical costs, a $144.7
million increase in administrative, marketing and other expenses, a $10.6
million increase in depreciation and amortization and the $25.9 million loss on
the write down of long lived assets incurred for the year ended December 31,
1995, as compared to 1994.
Medical costs increased by $316.5 million or 56% to $878.9 million for the
year ended December 31, 1995 from $562.4 million in 1994. Of this increase,
$230.1 million was due to the 41% increase in weighted average number of health
plan members and $86.4 million was due to the 11% increase in weighted average
medical cost per member.
19
<PAGE>
The total medical loss ratio for the year ended December 31, 1995 was 84.6%,
as compared to 73.9% for 1994. The following table sets forth the medical loss
ratios by product type for the years ended December 31,:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Commercial...................................................... 88.0% 80.8%
Medicare........................................................ 97.6 94.0
Medicaid........................................................ 70.7 61.0
Indemnity....................................................... 89.4 123.4
--------- ---------
Overall......................................................... 84.6% 73.9%
--------- ---------
--------- ---------
</TABLE>
The increase in overall medical loss ratio is attributable to three major
factors: (i) the Company's membership mix changed during 1995 as it
significantly increased its Medicare membership which incurred a 1995 medical
loss ratio of 97.6%, (ii) the Company's Medicaid loss ratio increased to 70.7%
for the year ended December 31, 1995 as a result of the 18% reduction in
Medicaid premium rates imposed by the State of Florida in the last two quarters
of 1995, and (iii) the Company's commercial medical loss ratio increased to 88%
for the year ended December 31, 1995, as compared to 80.8% in 1994 as a result
of the Company's strategic decision to grow its commercial membership in
anticipation of Florida Medicaid mandation and holding 1995 premium increases to
a minimum.
Administrative, marketing and other costs increased by $144.7 million or 90%
to $305.5 million for the year ended December 31, 1995 from $160.8 million in
1994. Of this increase, $54.7 million was attributable to an increase in health
administrative, marketing and other costs and $90.0 million was due to an
increase in administrative, marketing and other costs associated with the
Company's delivery of administrative services and the provision of workers'
compensation related insurance and other expenses.
The Company's health administrative ratio increased to 17.3% for the year
ended December 31, 1995 from 16.4% for the year ended December 31, 1994 and was
the result of incurring costs associated with: (i) expanding its Medicare and
small group/individual commercial membership in 1995 which require
proportionally more per member administrative services, (ii) expanding it's
Puerto Rico health plan and incurring approximately $3.0 million of start up
costs associated with the Reform Contract awarded in the territory, and (iii)
incurring administrative costs associated with the ongoing reorganization of the
Company's Florida HMO operations.
Additionally, the $90.3 million increase in non-health administrative,
marketing and other costs is attributable to the fact that the Company's
subsidiaries PCA Solutions and PCA/P&C were owned by the Company for a full year
in 1995, as compared to approximately five months in 1994.
Depreciation and amortization increased by $10.7 million or 84% to $23.3
million for the year ended December 31, 1995 as compared to $12.6 million for
the same period in 1994. This increase in attributable to: (i) the Company
recording a full year of amortization of goodwill depreciation expense
associated with acquisitions made during 1994, (ii) the incremental amortization
of goodwill and depreciation expense associated with the acquisitions of
Universal, Hallmark and CAI during 1995, and (iii) depreciation expense
associated with the $18.4 million of capital expenditures made during 1995.
In 1995, the Company recorded a $25.9 million charge reflecting the write
down of certain of its long lived assets. As described in note 20 to the
Company's consolidated financial statements, the Company announced its intention
to sell its health plan operations in Georgia and Alabama. The 1995 $25.9
million non-cash charge represents a write down of the value of the goodwill
relating to the Company's Alabama operations and is estimated as the Company's
investment in PCA/Alabama in excess of the estimated selling price, less costs
to sell. While the Company adopted the provisions of SFAS 121 effective January
1, 1995, there was no effect of adopting the standard as the impairment occurred
after January 1, 1995. The Company sold both PCA/Alabama and PCA/Georgia in
1996.
20
<PAGE>
Interest expense increased by $7.0 million to $9.1 million for the year
ended December 31, 1995 from $2.1 million for 1994. This increase is primarily
due to the increase in interest expense incurred on the Company's bank Credit
Facility as indicated by the Company's increase in debt to $184.0 million at
December 31, 1995, from $90.1 million at December 31, 1994.
The Company's 1995 effective tax rate was 4.8% and resulted in a $1.3
million income tax benefit for the year ended December 31, 1995. This compared
to a 39.4% effective tax rate and income tax expense of $34.2 million for the
year ended December 31, 1994.
The Company's 1995 effective tax rate of 4.8% differs from the statutory
rate of 35% primarily due to the Company recording a valuation allowance of $8.4
million relating to the capital loss carryforward attributable to the $25.9
million write down of the long lived assets, the non-deductibility for tax
purposes of the amortization of intangible assets, off set by the tax exempt
investment earnings.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had a working capital deficit of $115.3
million. This compares to working capital of $77.2 million at December 31, 1995.
Cash and cash equivalents were $134.0 million at December 31, 1996, a decrease
of $30.7 million from $164.7 million at December 31, 1995. The Company's cash
and cash equivalents do not include statutory cash deposits segregated as
required by various regulatory authorities which approximated $24.3 million at
December 31, 1996. The primary cause of the working capital deficit is the
$118.5 million of debt currently due to the Credit Facility lenders and to
Sierra which is classified as a current liability at December 31, 1996.
Net cash provided by operating activities decreased to $22.1 million for the
year ended December 31, 1996, from $66.8 million for the same period in 1995.
This was primarily due to an increase in claims payable net of those acquired,
offset by greater losses.
During the year ended December 31, 1996, net cash used in investment
activities decreased to $2.0 million, from $92.9 million for the same period in
1995. The net cash used during this period in 1996 included $20.1 million net,
to purchase investment securities, net additions of $10.8 million in property
and equipment purchases and $11.0 million in statutory cash deposits offset by
proceeds of $8.6 million from the sale of subsidiaries and $31.4 million from
cash assumed as part of the assumption of net workers' compensation liabilities.
The Company has utilized capital leases to finance certain equipment additions
in the past and expects to continue to do so in the future.
Net cash used in financing activities for the year ended December 31, 1996
was $50.8 million compared to $67.6 million provided by financing activities for
the year ended December 31, 1995. The cash used in 1996 was the result of $1.5
million provided by the net proceeds received from the issuance of common stock,
less $52.3 million used to repay long-term debt and covenant obligations.
In September 1994, the Company entered into a Credit Agreement with
Citibank, N.A., as agent and five other banks as participating lenders. The debt
is secured by the Company's pledge of the stock of certain of its subsidiaries.
Borrowings under the agreement incurred interest charges at LIBOR plus 1.75%
during 1996 (approximately 7.2%) which was increased to prime rate
(approximately 8.25%) at January 6, 1997, to prime plus 1% at February 17, 1997
and to prime plus 3% at March 1, 1997. The Credit Agreement contains customary
covenants, including, among others, a prohibition of payment of cash dividends
on the Common Stock, restrictions on incurring additional debt, and a
requirement that the Company maintain minimum surplus requirements in its
subsidiaries as required under the state and federal HMO regulations.
Due to certain violations of the Credit Facility covenants, the Company
executed four amendments to the Credit Facility during 1996. An additional
amendment to the Credit Facility was executed in January 1997 in connection with
an installment payment of $16,750,000 which was due on December 31, 1996, but
was not paid until January 1997 from the proceeds of a loan from Sierra. In
connection with a
21
<PAGE>
waiver of certain terms of the Credit Agreement in January 1997, which waived
potential financial covenant defaults as of December 31, 1996, the Company
borrowed $16,750,000 from Sierra and made a principal reduction of $16,750,000
on its Credit Agreement. The Sierra loan bears interest at 8 1/4% and is due
upon demand, secured by a second position in the stock of certain Company
subsidiaries and subordinated to the Credit Facility.
Another Credit Facility amendment was executed in February 1997, which
extended the time to complete the Sierra merger until April 30, 1997. In March
1997, the Merger Agreement with Sierra was terminated. Consequently, the
Company's $101.75 million Credit Facility debt became currently due.
Accordingly, the Company requested that the Credit Facility lenders consent for
a reasonable period of time to permit it to seek other alternatives to meet its
obligations under this indebtedness. As a result, the Credit Facility lenders
have provided the Company with a written commitment to further amend the Credit
Facility, the terms of which provide for: (i) the extension of the maturity date
to October 1, 1997, (ii) the modification of the interest rate to prime plus a
margin of 3% in April through July 1997 with the margin increasing to 4% through
maturity, (ii) the payment of an amendment fee of 1% of the then outstanding
Credit Facility principle balance upon execution of the proposed amendment and,
in certain circumstances, 1% of the then outstanding Credit facility principle
balance on July 31, 1997, and (iv) certain customary financial covenants.
The Company anticipates that it will be able to effect one or more of the
following alternatives by October 1, 1997, in order to meet its obligations
under the Credit Facility indebtedness: (i) completing a merger or sale
transaction with another partner, (ii) raising equity capital or high-yield debt
through a private placement or a public offering, or (iii) completing the sale
of certain of the Company's assets. In the past, the Company has received
indications of interest from third parties related to each of these four
possible alternatives. The Company is currently working towards completing one
or more of these refinancing alternatives by October 1, 1997. See note 2 to the
consolidated financial statements for management's plan to refinance the Credit
Facility.
The Company is significantly restricted in its ability to utilize the
working capital or the operating cash flows of its regulated subsidiaries. These
restrictions include requirements to maintain a certain level of statutory
equity in each regulated subsidiary and to obtain prior consent to declare any
dividend. At December 31, 1996, the Company's regulated HMO and insurance
subsidiaries (excluding PCA/P&C) had approximately $12.7 million in excess
statutory equity. The Company's Florida HMOs incurred operating losses in 1996
and the Company has submitted a corrective action plan to regulators under which
these HMOs will operate until profitability is obtained. Additionally, the
PCA/P&C subsidiary had a deficit of approximately $121.1 million as of December
31, 1996, which, pursuant to a corrective action plan in process, will be
replenished through collection of non-admitted assets and future investment
earnings. As a result, the Company will not have access to the cash flow from
PCA/P&C which is expected from its estimated 1997 pretax earnings to be $11.5
million to $15.0 million and will pay approximately $2.0 million in income tax
obligations from other cash flow sources or the utilization of net operating
loss carryforwards. The Company expects that this deficit will be reduced by
actual future earnings and the collection of non-admitted assets, the largest
component of which is an income tax receivable of $35.0 million from PCA.
In conjunction with the assumption of certain assets and liabilities of the
workers' compensation funds and as a result of the workers' compensation risk
policies written directly by PCA/P&C, PCA's December 31, 1996 consolidated
balance sheet includes significant balances related to workers' compensation
items. The most significant assets include: i) premiums and reinsurance
receivables of $401.1 million ($154.9 million current, $246.2 million long term)
for which PCA has a credit risk, (ii) cash and investments of $371.5 million
($85.0 million current, $286.5 million long term), (iii) income tax related
assets of $40.4 million (current), and (iv) other assets of $49.9 million ($16.7
million current, $33.2 million long term). Significant workers' compensation
related liabilities include: (i) $903.1 million in claims
22
<PAGE>
reserves and reinsurance payable ($217.3 million current, $685.8 million long
term) and $80.9 million in accrued expenses, deferred income and other ($61.6
million current, $19.3 million long term).
In the event the DOI places PCA/P&C under state rehabilitation, the Company
expects such action would not have a significant impact on the Company's
liquidity and working capital deficit position as PCA/P&C had an approximately
neutral working capital position at December 31, 1996. Additionally, in such an
event, the Company anticipates its statement of operations, on a prospective
basis, would not include future investment earnings from the $371.5 million of
cash and investment balances included in PCA/P&C's December 31, 1996 balance
sheet.
PCA's promissory note from Sierra is due on demand, however Sierra is
required to standstill through September, 1997. Accordingly, management expects
that its execution of an alternative to refinance its Credit Facility
indebtedness will incorporate sufficient refinancing to ensure the discharge of
the Company's indebtedness to Sierra.
The Company believes that cash on hand and cash flow generated from
operations will be sufficient to fund future capital expenditures, introduction
of new products and services and pay interest charges on its debt for the
foreseeable future. However, as described above the Company expects that it will
not generate sufficient cash from operations which would be available to make
1997 principal payments which will be due on the Company's outstanding debt
balance.
INFLATION
Historically, medical costs have risen at a higher rate than those of
consumer goods. The Company believes that its cost containment procedures and
contractual arrangements with providers mitigate, but do not wholly offset, the
effects of medical cost inflation on its operating results. The Company has
generally increased its commercial premium rates commensurate with or in excess
of its medical cost increases; however, the Company has no control over premium
rate adjustments relative to its government-sponsored membership. The Company's
profitability could be adversely affected if future rate adjustments (for both
commercial and government-sponsored members) are not commensurate with future
medical cost increases experienced by the Company.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock Based Compensation" (SFAS 123). SFAS 123
encourages but does not require the fair value based method for expense
recognition for stock-based compensation. It does, however, require companies to
choose the method for accounting for stock-based awards and use either (i) the
fair value method or (ii) the intrinsic value method approach under APB Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB 25). SFAS 123 is
effective for years commencing after December 15, 1995. The Company, as
permitted by SFAS 123, has elected to follow the provisions of APB 25 in
accounting for its stock options. The pro forma disclosure requirements of SFAS
123 are included in note 9 to the consolidated financial statements of the
Company as of December 31, 1996.
Effective January 1, 1995, the Company adopted provisions of Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of" (SFAS 121). These
provisions set forth the guidelines for measuring and recording an impairment
loss and requires the Company's long lived assets and identifiable intangibles
held for disposal to be accounted for at the lower of cost or fair value less
cost to sell. See note 1 to the Company's consolidated financial statements.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements that the Company is required to file under Item 8
of this Form 10-K are presented on Pages F-1 through F-36 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the directors and executive officers of the Company and
significant employees of the Company's HMOs and other subsidiaries, and their
respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
E. Stanley Kardatzke, M.D. 57 Chairman of the Board and Chief Executive Officer
Peter E. Kilissanly 49 President, Chief Operating Officer and Director
Clifford W. Donnelly 43 Senior Vice President of Finance and Chief Financial Officer
Glen R. Johnson, M.D. 53 Senior Vice President of Medical Affairs
John A. Hageman 42 Senior Vice President of Legal Affairs, General Counsel and Secretary
Donald J. Gessler, M.D. 55 President and Chief Executive Officer of PCA/Texas
Elias A. Hourani, M.D. 46 President and Chief Operating Officer of PCA/Florida and PCA/ Family
George J. Farha, M.D. 69 Vice Chairman of the Board
William C. Loewen, M.D. 55 Director
Clark R. Mandigo 53 Director
</TABLE>
E. STANLEY KARDATZKE, M.D. has been Chairman of the Board and Chief
Executive Officer of the Company since 1985, when he founded the Company. Dr.
Kardatzke was Chairman of the Board of Health Care Plus of America, Inc., an HMO
operating in the Wichita, Kansas area ("Health Care Plus"), from 1983 through
1985, and was the medical director of Health Care Plus from 1980 to 1983. Before
becoming associated with Health Care Plus, Dr. Kardatzke was, for 18 years, a
family practice physician in private practice in Wichita, Kansas.
PETER E. KILISSANLY has been President of the Company since 1989, Chief
Operating Officer and a Director of the Company since 1986, and is Chief
Executive Officer of PCA/Florida and PCA/Family. Mr. Kilissanly served as Vice
Chairman of the Board of the Company from 1986 to 1989. Mr. Kilissanly was the
Senior Vice President of Marketing of Health Care Plus from 1981 to 1986.
CLIFFORD W. DONNELLY has been Senior Vice President of Finance and Chief
Financial Officer of the Company since 1988, and the President of PCA/Insurance
since 1990. Mr. Donnelly was Chief Financial Officer for American City Business
Journals, a chain of weekly business journals, from 1982 to 1988. From 1977 to
1982, Mr. Donnelly was an audit manager for Fox & Company, a public accounting
firm. Mr. Donnelly is a certified public accountant.
GLEN R. JOHNSON, M.D. has been Senior Vice President of Medical Affairs of
the Company since 1990. Dr. Johnson was Vice President of Medical Affairs of
PCA/Texas from 1989 to June 1992. Dr. Johnson was a family practice physician in
private practice from 1975 to 1989 and was director of the family practice
residency program of Central Texas Medical Foundation from 1977 to 1987. Dr.
Johnson is currently Vice President and a director of the American Academy of
Family Physicians and serves on its executive committee.
24
<PAGE>
JOHN A. HAGEMAN has been General Counsel and Secretary of the Company since
1987 and Senior Vice President of Legal Affairs since 1994. Prior to joining the
Company in 1987, Mr. Hageman was a partner in a Wichita, Kansas law firm and had
been associated with such firm since 1981. Mr. Hageman is a member of the
American and Kansas Bar Associations and the National Health Lawyers
Association.
DONALD J. GESSLER, M.D. has been President and Chief Executive Officer of
PCA/Texas since 1990. Dr. Gessler was Executive Vice President of PCA/Texas from
1987 through 1989. Dr. Gessler was Vice President and General Manager of Cigna
Health Plan in Houston, Texas from 1983 to 1987. Dr. Gessler was program
director of family practice residency for St. Francis Regional Medical Center,
Inc., located in Wichita, Kansas, from 1975 to 1983.
ELIAS A. HOURANI, M.D. has been President and Chief Operating Officer of
PCA/Florida and PCA/ Family since June 1996. Dr. Hourani was President and Chief
Executive Officer of PFI since its inception in early 1995. Prior to that, he
occupied the position of President and Chief Operating Officer of PCA Family
Medical Centers, Inc. since early 1992. Prior to his involvement with PCA, Dr.
Hourani was a practicing general surgeon in Kansas from 1985 to 1991. Prior to
private practice, he was on the surgical faculty of the University of New Mexico
in Albuquerque in 1985.
GEORGE J. FARHA, M.D. has been a Director of the Company since 1986, and
Vice Chairman of the Board of the Company since 1989, and served as the
Company's President from 1986 to 1989. For the past 31 years, Dr. Farha has been
a practicing general surgeon and President and Chief Executive Officer of the
Wichita Surgical Specialists, P.A. and its predecessor Wichita Surgical Group,
P.A. He also is, and for the past 19 years has been, a professor and Chairman of
the Department of Surgery at the University of Kansas School of Medicine in
Wichita, Kansas.
WILLIAM C. LOEWEN, M.D. has been a Director of the Company since 1986. Dr.
Loewen served as Senior Vice President of Medical Affairs of the Company from
1986 to 1989. For the past 24 years, Dr. Loewen has been a practicing family
physician in Wichita, Kansas. He is a member of the American Academy of Family
Physicians, of which he is both board certified and an elected Fellow. He is the
past Chief of Medical Staff of St. Francis Regional Medical Center, Inc.,
Wichita, Kansas.
CLARK R. MANDIGO has been a Director of the Company since 1986. Mr. Mandigo
has been a business consultant since 1991. Mr. Mandigo was the President and
Chief Executive Officer of Intelogic Trace, Inc., a corporation engaged in the
sale, lease and support of computer and communications systems and equipment
from 1986 to 1991. Mr. Mandigo is a member of the Board of Directors of Lone
Star Steakhouse and Saloon, Inc., a restaurant chain, Palmer Wireless, Inc., a
cellular telephone system operator, and Trustee of Accolade Funds and
Pauze/Swanson United Services Funds.
The Company's Certificate of Incorporation (the "Certificate") divides the
Board of Directors into three classes of as equal size as possible, with the
term of each class expiring in consecutive years so that only one class is
elected in any given year. Successors to those whose terms have expired are
required to be elected by stockholder vote. Vacancies in unexpired terms and any
additional positions created by Board action are filled by action of the
existing Board of Directors. The terms of Messrs. Kilissanly and Mandigo will
expire at the 1997 annual meeting of stockholders, the term of Dr. Loewen will
expire at the 1998 annual meeting of stockholders, and the terms of Drs.
Kardatzke and Farha will expire at the 1999 annual meeting of stockholders.. The
executive officers are elected annually by the Board of Directors following the
annual meeting of stockholders and serve at the discretion of the Board of
Directors until their successors are elected and qualified.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on review of the Forms 3, 4 and 5 furnished to the Company, or
written representations that no Form 5s were required, the Company believes that
during the fiscal year ended December 31,
25
<PAGE>
1996, all officers, directors and greater than 10% beneficial owners complied
with all Section 16(a) filing requirements applicable to such individuals.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued during
the fiscal years ended December 31, 1996, 1995 and 1994, to the Company's Chief
Executive Officer and the five highest paid executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- AWARDS
OTHER ---------------------
ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) OPTIONS/SARS (#) COMPENSATION (3)
- --------------------------- --- --------- ----------- ----------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
E. Stanley Kardatzke, M.D. 1996 $ 369,288 $ -- $ 10,997 -- $ 4,750
Chairman of the Board and 1995 336,210 -- 8,418 -- 2,878
Chief Executive Officer 1994 341,940 82,167 9,129 -- 4,620
Peter E. Kilissanly 1996 352,993 -- 9,082 -- 4,750
President and Chief 1995 352,993 -- 6,133 -- 2,188
Operating Officer 1994 326,402 78,437 6,421 -- 4,620
Clifford W. Donnelly 1996 225,000 -- 5,616 -- 4,750
Senior Vice President of 1995 225,000 -- 5,277 -- 4,620
Finance and Chief 1994 208,275 29,992 5,390 -- 4,620
Financial Officer
Glen R. Johnson, M.D. 1996 272,544 -- 7,652 -- 4,750
Senior Vice President of 1995 272,544 -- 6,465 -- 4,620
Medical Affairs 1994 259,565 37,478 6,864 -- 4,620
Donald J. Gessler, M.D. 1996 222,600 49,043 10,758 -- 4,750
President and Chief 1995 210,000 -- 6,870 -- 4,620
Executive Officer 1994 183,803 20,658 6,655 -- 4,620
of PCA/Texas
Elias A. Hourani, M.D. 1996 260,000(4) -- 32,196 -- 4,750
President of PCA/Florida
and PCA/Family
</TABLE>
- ------------------------------
(1) Amounts represent discretionary cash bonuses paid and accrued pursuant to
then existing Company incentive bonus plans.
(2) Represents payments for unused vacation time, relocation allowances, group
term life insurance, and automobile allowances.
(3) Represents contributions made by the Company under the Physician Corporation
of America 401(k) Profit Sharing Plan.
(4) Includes Dr. Hourani's salary for full year 1996, including the time he
served as President and Chief Operating Officer of PFI.
Effective January 1, 1996, the Company entered into salary continuation
agreements with the named executives above. These agreements provide for the
payment of a severance benefit in the event of a change in control of the
Company (as defined) should the employee be terminated or demoted without good
cause. The severance benefit includes a payment of from 15 to 18 months of
salary, the continuation of eligibility for participation in the Company's
benefit programs and compensation for the value of all unvested stock options at
the employee's termination date. The benefits are ratably decreased subsequent
to a change in control and expire no later than 42 months after a change of
control.
26
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth information with respect to options granted
to executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENTAGE OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM (10
UNDERLYING GRANTED TO EXERCISE OR YEAR)(1)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL 1996 ($/SHARE) DATE 5% 10%
- ---------------------------------------- ------------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Gessler, M.D. 35,000 4.4% $ 10.50 8/3/2006 $ 231,199 $ 585,700
President and Chief Executive Officer
of PCA/Texas
Elias A. Hourani, M.D. 50,000 6.3% $ 10.50 8/3/2006 $ 330,170 $ 836,715
President of PCA/Florida and PCA/Family
</TABLE>
- ------------------------------
(1) Potential value realized is the difference between the market price of the
underlying common stock on the exercise date and the exercise price.
27
<PAGE>
AGGREGATED OPTION EXERCISE IN FISCAL YEAR 1996
The following table sets forth information with respect to stock options
exercised by the Company's Chief Executive Officer and the five highest paid
executive officers of the Company in fiscal year 1996 and unexercised options
held as of December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1996 DECEMBER 31, 1996
SHARES VALUE -------------------- -----------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (1) UNEXERCISABLE UNEXERCISABLE (2)
- --------------------------------------- ----------- ----------- -------------------- -----------------------
<S> <C> <C> <C> <C>
E. Stanley Kardatzke, M.D. -- -- 112,000/ $ 266,000/
Chairman of the Board and Chief 28,000 66,500
Executive Officer
Peter E. Kilissanly 56,000 $ 308,000 28,000/ $ 66,500/
President and Chief Operating Officer 28,000 66,500
Clifford W. Donnelly 46,800 $ 444,600 22,000/ $ 52,250/
Senior Vice President of Finance and 22,000 52,250
Chief Financial Officer
Glen R. Johnson, M.D. -- -- 44,000/ $ 104,500/
Senior Vice President of Medical 22,000 52,250
Affairs
Donald J. Gessler, M.D. -- -- 128,000/ $ 304,000/
President and Chief Executive Officer 57,000 52,250
of PCA/Texas
Elias A. Hourani, M.D. -- -- 43,600/ $ 188,300/
President of PCA/Florida and 68,400 15,200
PCA/Family
</TABLE>
- ------------------------
(1) Value realized is the difference between the market price of the underlying
common stock on the exercise date and the exercise price.
(2) Values have been computed based on the last reported sale price on December
31, 1996 of $10.00 per share.
28
<PAGE>
DIRECTORS' COMPENSATION
All Board members, other than employees of the Company (Dr. Kardatzke and
Mr. Kilissanly), receive $2,500 per quarter for their services as directors,
$1,500 for each Board meeting attended, $250 for participation in each
telephonic Board Meeting, $500 for each Board committee meeting attended ($1,000
if such Board committee meeting is held on a date when a Board meeting was not
held), $4,000 annually while serving as a committee chairman (limited to $4,000
per board member even if such member serves as chairman for more than one
committee), and reimbursement by the Company of out-of-pocket expenses incurred
for attendance at meetings. Pursuant to the 1993 Stock Option Plan, the Company
also grants automatic, nondiscretionary stock options to purchase 6,000 shares
to each of its non-employee directors annually. Such options have a one year
vesting period and an exercise price per share equal to the fair market value
per share on the date of the grant. In addition, each newly elected non-employee
director will receive an automatic, nondiscretionary grant of stock options to
purchase 12,000 shares on the date of his election to the Board of Directors of
the Company, vesting ratably over a three year period at an exercise price per
share equal to the fair market value per share on the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with regard to the
beneficial ownership of Common Stock as of March 1, 1997 by: (i) each
stockholder who is known by the Company to beneficially own in excess of 5% of
the outstanding shares of Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
directors and executive officers as a group. Except as otherwise indicated, each
stockholder listed below has sole voting and investment power with respect to
shares beneficially owned by such person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS(1) BENEFICIAL OWNERSHIP CLASS
- ------------------------------------------------------------------------------ ---------------------- -----------
<S> <C> <C>
E. Stanley Kardatzke, M.D. (2) 2,474,448 7.1%
Peter E. Kilissanly (3) 875,398 2.2
Clifford W. Donnelly (4) 57,000 *
Glen R. Johnson, M.D. (5) 62,600 *
Donald J. Gessler, M.D. (6) 148,000 *
Elias A. Hourani, M.D. (7) 124,600 *
George J. Farha, M.D. (8) 666,332 1.7
William C. Loewen, M.D. (9) 583,332 1.5
Clark R. Mandigo (10) 277,664 *
All directors and executive officers as a group
(10 individuals) (11) 5,465,698 13.9
</TABLE>
- ------------------------
* Less than 1%
(1) The business address of all officers and directors of the Company is 6101
Blue Lagoon Drive, Miami, Florida 33126.
(2) Includes (i) 182,482 shares as to which Dr. Kardatzke's wife has sole voting
and investment power, (ii) 292,750 shares held by a charitable foundation of
which Dr. Kardatzke holds voting and investment power, and (iii) 112,000
shares that can be acquired upon exercise of stock options.
(3) Includes (i) 173,332 shares held in trust as to which Mr. Kilissanly holds
sole voting and investment power, (ii) 1,800 shares owned by Mr.
Kilissanly's wife, and (iii) 28,000 shares that can be acquired upon
exercise of stock options.
29
<PAGE>
(4) Includes (i) 10,000 shares owned by Mr. Donnelly's wife who has sole voting
and investment power with respect to such shares, and (ii) 22,000 shares
that can be acquired upon exercise of stock options.
(5) Includes (i) 2,666 shares owned by Dr. Johnson's wife who has sole voting
and investment power with respect to such shares, (ii) 15,200 shares held in
an Individual Retirement Account for the benefit of Dr. Johnson, (iii) 400
shares held in an Individual Retirement Account for the benefit of Dr.
Johnson's wife, and (iv) 44,000 shares that can be acquired upon exercise of
stock options.
(6) Includes 128,000 shares that can be acquired upon exercise of stock options.
(7) Includes 43,600 shares that can be acquired upon exercise of stock options.
(8) Includes 12,000 shares that can be acquired upon exercise of stock options.
(9) Includes (i) 200,000 shares owned by Dr. Loewen's wife who has sole voting
and investment power with respect to such shares, (ii) 50,000 shares held by
a charitable foundation of which Dr. Loewen shares voting and investment
power, and (iii) 18,000 shares that can be acquired upon exercise of stock
options.
(10) Includes (i) 22,664 shares held in trusts for the benefit of Mr. Mandigo's
children, (ii) 93,334 shares owned jointly with Mr. Mandigo's wife, and
(iii) 11,666 shares held in an Individual Retirement Account for the benefit
of Mr. Mandigo, and (iv) 58,000 shares that can be acquired upon exercise of
stock options.
(11) Includes 510,400 shares that can be acquired upon exercise of stock
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996, the Company did not enter into any transactions with
management of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A) DOCUMENTS FILED AS PART OF THIS REPORT.
(I) FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements and Schedules" on Page F-1
of this Report
II) EXHIBITS
See Item 14(C), "Exhibits" below
B) REPORTS ON FORM 8-K.
On October 8, 1996, the Company filed a Form 8-K, dated September 23, 1996,
reporting the sale of its Georgia and Alabama operations. The following
financial statements were filed with such report:
- Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996.
- Pro Forma Condensed Consolidated Statements of Operations:
-- Years ended December 31, 1996
-- Six Months Ended June 30, 1996
A Form 8-K/A1 was filed on November 12, 1996 relative to such report.
30
<PAGE>
C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement dated February 2, 1995 between the Company and Universal Life Insurance Company (filed
as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1995 and incorporated
herein by this reference).
2.2 Stock Purchase Agreement dated April 27, 1995 between the Company, Consolidated Administrators,
Inc. and Medical Improvement, Incorporated (filed as Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended March 31, 1995, and incorporated herein by this reference).
2.3 Stock Purchase Agreement between Health Partners of Alabama and the Company dated May 3, 1996
(filed as Exhibit 2.1 to the Company's Form 8-K/A1 filed on November 12, 1996).
3.1 Certificate of Incorporation of the Company dated February 6, 1987 (filed as Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1994, and incorporated herein by this
reference).
3.2 Certificate of Amendment to Certificate of Incorporation of the Company dated May 15,1987 (filed
as Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1994, and incorporated
herein by this reference).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company dated June 15, 1987 (filed
as Exhibit 3.3 to the Company's Form 10-K for the year ended December 31, 1994, and incorporated
herein by this reference).
3.4 Certificate of Amendment to Certificate of Incorporation of the Company dated July 1, 1993 (filed
as Exhibit 3.4 to the Company's Form 10-K for the year ended December 31, 1994, and incorporated
herein by this reference).
3.5 Certificate of Amendment to Certificate of Incorporation of the Company dated June 29, 1994 (filed
as Exhibit 3.5 to the Company's Form 10-K for the year ended December 31, 1994, and incorporated
herein by this reference).
3.6 Bylaws of the Company (filed as Exhibit 3.2 to Registration Statement No. 33-11976 on Form S-1,
and incorporated hereby by this reference).
4 Rights Agreement, dated January 13, 1995, between the Company and Boatmen's Trust Company, as
Rights Agent, which includes as exhibits, the form of Right Certificate and the Summary of Rights
to Purchase Common Shares (filed as Exhibit 1 to the Company's Form 8-A dated January 13, 1995,
and incorporated herein by this reference).
4.1 Amendment to Rights Agreement, dated November 11, 1996, between the Company and Boatmen's Trust
Company (filed herewith).
10.1 Revolving Credit Agreement between the Company and Citibank, N.A. dated October 27, 1994 (filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1994, and
incorporated herein by this reference).
10.1.1 Amendment to Credit Agreement between the Company and Citibank, N.A. and Consent dated September
22, 1995 (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30,
1995, and incorporated herein by this reference).
10.1.2 Second Amendment to Credit Agreement dated March 29, 1996 between the Company and Citibank, N.A.
as agent (filed as Exhibit 10.9.1 to the Company's Form 10-K for the year ended December 31,
1995, and incorporated herein by this reference).
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ------------- --------------------------------------------------------------------------------------------------
10.1.3 Third Amendment to Credit Agreement between the Company and Citibank, N.A. dated April 5, 1996
(filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1996, and
incorporated herein by this reference).
<S> <C>
10.1.4 Fourth Amendment to Credit Agreement between the Company and Citibank, N.A. dated June 10, 1996
(filed herewith).
10.1.5 Fifth Amendment to Credit Agreement between the Company and Citibank, N.A. dated June 10, 1996
(filed herewith).
10.1.6 Sixth Amendment to Credit Agreement between the Company and Citibank, N.A. dated January 8, 1997
(filed herewith).
10.1.7 Seventh Amendment to Credit Agreement between the Company and Citibank, N.A. dated February 14,
1997 (filed herewith).
10.1.8 Notice of Default under Credit Agreement between the Company and Citibank, N.A. dated March 20,
1997 (filed herewith).
10.2 Physician Corporation of America 1993 Stock Option Plan (filed as Exhibit 10.30 to Amendment No. 2
to Registration No. 33-56798 on Form S-1, and incorporated herein by this reference).*
10.3 Change in Control Agreements, dated January 1, 1996 between the Company and E. Stanley Kardatzke,
M.D., Peter E. Kilissanly, Clifford W. Donnelly, Glen R. Johnson, M.D. and Donald Gessler, M.D.
(filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1995, and
incorporated herein by this reference).*
10.4 Contract for services between PCA Health Plans of Texas, Inc. and the Texas Department of Human
Services (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30,
1993, and incorporated herein by this reference).
10.5 Medicaid Contract between State of Florida Agency for Health Care Administration and Century
Medical Health Plan, Inc. dated June 29, 1995. (filed as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended June 30, 1995, and incorporated herein by this reference).
10.6 Health Insurance Contract Central Health Region, dated November 9, 1995, between the Puerto Rico
Health Insurance Administration and PCA Health Plans of Puerto Rico, Inc. (filed as Exhibit 10.17
to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by this
reference).
10.7 Credit and Share Pledge Agreement between the Company and Sierra Health Services, Inc. dated
January 10, 1997 (filed herewith).
10.8 Workers' Compensation and Employers Liability Asset Guarantee and Indemnification Contract By and
Between Florida Builders and Employers Mutual Insurance Company and PCA Property & Casualty
Insurance Company effective September 30, 1996 (filed as Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended September 30, 1996, and incorporated herein by this reference).
11.1 Statement relative to computation of per share earnings (filed herewith).
21 Subsidiaries of the Company (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
99 Verified Petition for Order to Show Cause, Injunction and Notice of Automatic Stay (filed
herewith).
</TABLE>
- ------------------------
* Management's Compensatory Plan
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHYSICIAN CORPORATION OF AMERICA
<TABLE>
<S> <C>
Date: April 14, 1997 By/s/E. Stanley Kardatzke, M.D.
E. Stanley Kardatzke, M.D.,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C>
By /s/E. Stanley Kardatzke, M.D. Date: April 14, 1997
E. Stanley Kardatzke, M.D.
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR
By /s/Peter E. Kilissanly Date: April 14, 1997
Peter E. Kilissanly
PRESIDENT AND DIRECTOR
By /s/Clifford W. Donnelly Date: April 14, 1997
Clifford W. Donnelly
SR. VICE PRESIDENT OF FINANCE
CHIEF FINANCIAL OFFICER
By /s/Jay M. Grobowsky Date: April 14, 1997
Jay M. Grobowsky
VICE PRESIDENT OF FINANCE
By /s/George J. Farha, M.D. Date: April 14, 1997
George J. Farha, M.D.
DIRECTOR
By /s/William C. Loewen, M.D. Date: April 14, 1997
William C. Loewen, M.D.
DIRECTOR
By /s/Clark R. Mandigo Date: April 14, 1997
Clark R. Mandigo
DIRECTOR
</TABLE>
33
<PAGE>
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995.................. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994...................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994...................................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Physician Corporation of America:
We have audited the accompanying consolidated balance sheets of Physician
Corporation of America and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physician
Corporation of America and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2, the Company is seeking alternatives to meet its obligations to its credit
facility lenders which are due October 1, 1997. Such alternatives include
obtaining debt or equity financing, completing a merger transaction or selling
certain assets. As discussed in Note 23, the Company has submitted a corrective
plan to the State of Florida Department of Insurance (DOI) to show cause why the
DOI should not place the Company's workers' compensation insurance subsidiary
under state rehabilitation. In addition, the Company has suffered significant
recent losses and has a deficiency in equity as of December 31, 1996. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Notes 2 and 23. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
KPMG PEAT MARWICK LLP
Miami, Florida
April 14, 1997
F-2
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
------------ ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 134,011 $ 164,706
Short term investments (note 6)....................................................... 130,788 131,185
Accounts receivable, net of allowance of approximately $52,351 and $7,670 at December
31, 1996 and 1995, respectively:
Trade (health and workers' compensation premiums, and administrative service
fees)............................................................................. 92,454 54,821
Reinsurance and other recoverables on paid and unpaid losses (note 22).............. 102,893 6,450
Other............................................................................... 20,340 11,478
Prepaid expenses, inventories and other current assets................................ 8,362 8,449
Income taxes receivable (note 10)..................................................... 42,274 20,580
Deferred income tax benefit (note 10)................................................. 23,280 11,301
------------ ----------
Total current assets.............................................................. 554,402 408,970
------------ ----------
Property and equipment, net (note 4).................................................... 52,132 59,564
Long term investments (note 6).......................................................... 335,015 145,865
Reinsurance and other recoverables on unpaid losses (note 22)........................... 246,211 20,727
Statutory deposits and other assets..................................................... 45,242 22,414
Intangible assets, net (notes 5 and 20) 121,985 192,122
------------ ----------
$ 1,354,987 $ 849,662
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, accrued expenses and other current liabilities...................... $ 82,792 $ 55,592
Health claims payable................................................................. 182,206 171,241
Current portion of other claims payable, primarily workers' compensation (note 22).... 230,476 23,629
Unearned premiums and service fees.................................................... 51,562 54,398
Current portion of long-term debt and obligations under capital leases
(note 7)............................................................................ 122,709 26,943
------------ ----------
Total current liabilities......................................................... 669,745 331,803
Long-term debt and obligations under capital leases, less current portion
(note 7)............................................................................... 10,344 157,096
Long-term portion of other claims payable, primarily workers' compensation (note 22).... 699,299 138,894
Deferred income taxes (note 10)......................................................... 7,432 2,068
Deferred income and other long-term liabilities......................................... 32,999 9,632
------------ ----------
Total liabilities................................................................. 1,419,819 639,493
------------ ----------
Stockholders' equity (deficit) (notes 9 and 18):
Preferred stock, $1.00 par value, 10,000,000 shares authorized; none issued and
outstanding......................................................................... -- --
Common stock, $.01 par value, authorized 200,000,000 shares; issued 38,829,456 and
38,608,913 shares at December 31, 1996 and 1995, respectively....................... 388 386
Additional paid-in capital............................................................ 136,435 137,826
(Accumulated deficit) retained earnings............................................... (193,627) 84,058
Unrealized gain on investments........................................................ 1,182 464
Common stock held in treasury -- at cost; 460,754 and 681,292 shares at December 31,
1996 and 1995, respectively (note 9)................................................ (9,210) (12,565)
------------ ----------
Total stockholders' equity (deficit).............................................. (64,832) 210,169
Commitments and contingencies (notes 7, 8, 9, 14, 22 and 23)
$ 1,354,987 $ 849,662
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Health premiums......................................................... $ 1,292,914 $ 1,038,637 $ 760,669
Workers' compensation related revenues.................................. 122,611 143,395 46,466
Investment income....................................................... 25,961 18,602 10,631
Other revenues.......................................................... 12,822 15,915 6,963
------------ ------------ ----------
Total revenues...................................................... 1,454,308 1,216,549 824,729
Operating expenses:
Medical costs (note 13)................................................. 1,130,528 878,918 562,364
Health administrative, marketing and other expenses 188,710 179,362 124,979
Workers' compensation related administrative marketing and other
expenses.............................................................. 191,505 111,906 33,751
Loss on assumption of net workers' compensation related liabilities
(note 22)............................................................. 180,934 -- --
Loss on write-down of long lived assets (note 20)....................... 38,979 25,863 --
Depreciation and amortization........................................... 22,497 23,264 12,621
Other operating expenses................................................ 10,519 14,242 2,129
------------ ------------ ----------
Total operating expenses............................................ 1,763,672 1,233,555 735,844
Operating (loss) income............................................. (309,364) (17,006) 88,885
Gain on sales of subsidiaries (note 3).................................... 12,352 -- --
Interest expense.......................................................... (13,738) (9,113) (2,107)
Other income (expense).................................................... (2,216) 263 (31)
------------ ------------ ----------
Earnings (loss) before income taxes................................. (312,966) (25,856) 86,747
Income tax benefit (expense) (note 10).................................... 35,281 1,260 (34,200)
------------ ------------ ----------
Net earnings (loss)................................................. $ (277,685) $ (24,596) $ 52,547
------------ ------------ ----------
------------ ------------ ----------
Net earnings (loss) per common and common equivalent share (primary and
fully diluted)........................................................... $ (7.16) $ (0.62) $ 1.30
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS UNREALIZED
COMMON PAID-IN (ACCUMULATED GAIN (LOSS) TREASURY
STOCK CAPITAL DEFICIT) INVESTMENTS STOCK TOTAL
----------- ----------- ------------- ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........... $ 382 129,453 56,107 -- -- $ 185,942
Exercise of options to purchase
common stock..................... 11 11,990 -- -- -- 12,001
Net unrealized loss on marketable
securities, net of related income
tax benefit...................... -- -- -- (1,562) -- (1,562)
Purchase of Treasury Shares -- at
cost............................. (3) -- -- -- (6,090) (6,093)
Issuance of Put Warrants, net of
premium received (note 9)........ -- (9,287) -- -- -- (9,287)
Net earnings....................... -- -- 52,547 -- -- 52,547
--- ----------- ------------- ------------ --------- ----------
Balance, December 31, 1994........... 390 132,156 108,654 (1,562) (6,090) 233,548
Exercise of options to purchase
common stock..................... 3 (4,038) -- -- 6,342 2,307
Change in net unrealized
gain/(loss) on marketable
securities, net of related income
tax (benefit) expense............ -- -- -- 2,026 2,026
Purchase of Treasury Shares........ (5) -- -- -- (7,613) (7,618)
Exercise/expiring of Put
Warrants......................... (2) 9,708 -- -- (5,204) 4,502
Net loss........................... -- -- (24,596) -- -- (24,596)
--- ----------- ------------- ------------ --------- ----------
Balance, December 31, 1995........... 386 137,826 84,058 464 (12,565) 210,169
Exercise of options to purchase
common stock..................... 2 (1,391) -- -- 3,355 1,966
Change in net unrealized
gain/(loss) on marketable
securities, net of related income
tax (benefit) expense............ -- -- -- 718 -- 718
Net loss........................... -- -- (277,685) -- -- (277,685)
--- ----------- ------------- ------------ --------- ----------
Balance, December 31, 1996........... $ 388 136,435 (193,627) 1,182 (9,210) $ (64,832)
--- ----------- ------------- ------------ --------- ----------
--- ----------- ------------- ------------ --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings....................................................... $ (277,685) $ (24,596) $ 52,547
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization........................................... 22,497 23,264 12,621
Amortization of premium/accretion of discount 1,855 -- --
Gain on sale of subsidiaries............................................ (12,352) -- --
Loss on sale of property and equipment.................................. 70 -- 46
Loss on assumption of net workers' compensation liabilities............. 180,934 -- --
Write down of long lived assets......................................... 38,979 25,863 --
Deferred income taxes................................................... (8,852) (39) 1,959
Changes in working capital:
Accounts receivable................................................... (61,644) (9,991) 7,341
Reinsurance and other recoverables.................................... (314,455) (3,866) (10,154)
Income taxes receivable/payable....................................... (8,833) (18,160) 4,275
Accounts payable, accrued expenses and other current liabilities...... 8,373 (10,385) (12,088)
Claims payable........................................................ 449,549 95,390 12,636
Unearned premiums..................................................... 13,908 (10,412) (3,418)
Other changes in assets and liabilities................................. (10,259) (219) (2,144)
----------- ----------- ----------
Net cash provided by operating activities............................. 22,085 66,849 63,621
----------- ----------- ----------
Cash flows from investing activities:
Purchase of investments................................................... (278,812) (320,494) (393,123)
Sale/maturity of investments.............................................. 258,659 279,075 306,881
Purchase of property and equipment........................................ (12,173) (18,353) (8,948)
Proceeds from sale of property and equipment.............................. 1,328 -- 17
Statutory deposits and other assets....................................... (10,983) (5,283) (4,946)
Acquisitions of subsidiaries, net of cash acquired........................ -- (27,868) (108,116)
Cash acquired from assumption of net workers' compensation liabilities.... 31,318 -- --
Dispositions, net of cash sold............................................ 8,645 -- --
----------- ----------- ----------
Net cash used in investing activities................................. (2,018) (92,923) (208,235)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from borrowings.................................................. -- 95,000 65,000
Principal payments on debt and capital leases............................. (49,192) (4,992) (3,540)
Principal payments on covenants not-to-compete............................ (3,112) (3,972) (2,861)
Proceeds from issuance of common stock.................................... 1,542 1,074 4,303
Payments for repurchase of shares of common stock......................... -- (19,243) --
Debt issue costs.......................................................... -- (222) (567)
----------- ----------- ----------
Net cash (used in) provided by financing activities................... (50,762) 67,645 62,335
----------- ----------- ----------
Net increase (decrease) in cash............................................. (30,695) 41,571 (82,279)
Cash and cash equivalents at beginning of period............................ 164,706 123,135 205,414
----------- ----------- ----------
Cash and cash equivalents at end of period.................................. $ 134,011 $ 164,706 $ 123,135
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Physician Corporation of America's (PCA or the Company) operations consist
primarily of owning and operating health maintenance organizations (HMOs)
located in Florida, Texas and Puerto Rico and providing workers' compensation
related third-party administrative services to insurance companies and employee
groups. In 1996, the Company began and ceased writing direct workers'
compensation insurance. (See note 22) The Company's significant accounting
policies are as follows:
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PCA, its
wholly owned subsidiaries and related entities which it controls including,
PCA Health Plans of Texas, Inc. (PCA/Texas); PCA Health Plans of Florida, Inc.
(PCA/Florida); PCA Family Health Plan, Inc. and its subsidiaries (PCA/Family);
PCA Health Plans of Puerto Rico, Inc. (PCA/Puerto Rico); PCA Insurance Group of
Puerto Rico, Inc. (PCA/IG); PCA Life Insurance Company, Inc. and PCA Life
Insurance Company of Florida, Inc. (PCA/Insurance); PCA Solutions, Inc. and its
subsidiaries (PCA Solutions); PCA Property and Casualty Insurance Company
(PCA/P&C); and Florida Builders and Employers Mutual Insurance Company (FBE), a
company controlled by PCA. As more fully described in note 3, during 1996, the
Company sold its wholly owed subsidiaries, PCA Health Plans of Georgia, Inc.
(PCA/Georgia); PCA Health Plans of Alabama, Inc. (PCA/ Alabama); and Physicians
First, Inc. and its wholly-owned subsidiary, PCA Family Medical Centers, Inc.
(PFI). Accordingly, the results of these subsidiaries' operations through the
date of their disposition are included in the Company's consolidated results.
The term Company as used herein refers to PCA and its wholly owned subsidiaries,
collectively. All significant intercompany accounts and transactions have been
eliminated.
(B) REVENUE RECOGNITION
HMO, indemnity, workers' compensation and reinsurance premiums are
recognized as income during the coverage period. Premium payments received
or which are due prior to the coverage month are recorded as "unearned premiums
and service fees" in the accompanying consolidated financial statements.
Administrative service fees earned from the administration of self insured funds
and employers, primarily workers' compensation related, are recognized on a pro
rata basis over the period in which services are provided. In some instances,
the Company is required by statute or by contract to provide certain services
beyond the service agreement contract period. In these cases, the Company
estimates and establishes a reserve to match the estimated future costs
associated with providing those services beyond the service contract period.
Administration fees and workers' compensation related insurance premiums are
included in the accompanying consolidated financial statements as part of
workers' compensation related revenues.
(C) CLAIMS EXPENSE AND CLAIMS PAYABLE
I) MEDICAL COSTS AND OTHER CLAIMS
The HMOs pay providers for covered health care services. Payments vary
depending on the individual provider and the type of service rendered, and
include payments based on a fee for each member served and payments based on
a fee for services provided. The cost of providing health benefits to HMO
members and the estimated costs to process the related claims are included
in "Medical costs" in the accompanying consolidated statements of
operations.
Health claims payable represent unpaid HMO medical and other claims and
an estimate of claims incurred but not reported (IBNR). The Company
estimates the amount of IBNR using
F-8
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) CLAIMS EXPENSE AND CLAIMS PAYABLE (CONTINUED)
standard actuarial methodologies based upon the historical average interval
between the date services are rendered and the date claims are reported and
paid in addition to other factors considered relevant by management. The
year-end claims payable are also reviewed by independent actuarial firms. To
the extent that actual claims are more or less than the estimates, the
difference is recorded in the current period.
The Company maintains various programs with physicians and certain other
medical service providers participating in its HMO networks through the use
of risk-sharing agreements and expenses related to these and other programs
which are based in part on estimates, are recorded in the period in which
the related services are rendered.
The estimated liabilities for other claims payable, primarily workers'
compensation, relate to the Company's workers' compensation business and
include the accumulation of estimates for losses and claims reported prior
to the balance sheet dates, estimates (using historical data) of IBNR claims
and estimates of expenses for investigating and adjusting all incurred and
unadjusted claims. Amounts reported are actuarially determined and represent
estimates of the ultimate net cost of settlement which is subject to the
impact of future changes in economic and social conditions. Such amounts are
not discounted for interest earnings. As settlements are made or reserves
adjusted, differences are reflected in current operations. Workers'
compensation related claims costs incurred relating to workers' compensation
primary and excess insurance are included in workers' compensation related
administrative, marketing and other expenses in the accompanying
consolidated financial statements.
II) SERVICE ADMINISTRATION COSTS
The costs to provide administrative and management services to the self
insured funds, primarily workers' compensation, are included in workers'
compensation related administrative, marketing and other expenses in the
accompanying consolidated financial statements.
(D) INVESTMENTS
Investments consist primarily of U.S. Treasury and agency securities,
corporate bonds and equity securities. The Company has determined that its
investment securities are available for sale. Debt and equity securities are
carried at estimated fair value based upon quoted market prices. Unrealized
gains and losses are included in the stockholders' equity (deficit) section of
the balance sheet, net of applicable deferred income taxes.
(E) INVENTORIES
Inventories, which consist primarily of medical and optical supplies and
pharmaceuticals, held for resale, are stated at the lower of cost or market
based upon the first-in, first-out method.
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on the estimated useful life of the asset.
The Company has estimated the useful life of its property and equipment as
follows: buildings--25 to 40 years, furniture and equipment--5 to 8 years,
F-9
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PROPERTY AND EQUIPMENT (CONTINUED)
and purchased software--3 to 5 years. Leasehold improvements are amortized using
the straight-line method over the term of the related leases, generally 8 to 10
years.
(G) INTANGIBLE ASSETS
Intangible assets consist of goodwill, subscribers and hospital/physician
contracts, covenants not-to-compete and organization costs. Goodwill is
amortized on a straight-line basis primarily over a period of 25 years. The
costs of purchased subscriber and hospital/physician contracts are amortized
over the average expected retention period on a straight-line basis (primarily 7
to 18 years). Organizational costs are amortized using the straight-line method
over five years. The cost of acquiring covenants not-to-compete are amortized
using the effective interest method over the term of the agreement. Debt issue
costs are amortized over the term of the related debt using the straight-line
method.
The Company regularly determines whether events or circumstances have
occurred that may affect the estimated useful life or the recoverability of the
remaining balance of its goodwill and other identifiable intangible assets.
Impairment of an intangible asset occurs when the estimated future undiscounted
cash flows do not exceed the carrying amount of the intangible asset. If the
events or circumstances indicate that the remaining balance of the intangible
assets may be permanently impaired, such potential impairment is then measured
based upon the difference between the carrying amount of the intangible asset
and the fair value of such asset determined using the estimated future
discounted cash flows generated from the use and ultimate disposition of the
respective acquired entity. See note 20 regarding such impairments.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
(I) EARNINGS PER SHARE AND STOCK-BASED COMPENSATION
Earnings per common and common equivalent share amounts are based upon the
weighted average number of shares outstanding during the periods, including
common stock equivalents resulting from dilutive stock options and warrants. For
the years ended December 31, 1996 and 1995, the Company incurred a net loss
after taxes. Accordingly, earnings per share on a primary and fully diluted
basis have been calculated using the Company's weighted average shares
outstanding. The average number of shares of common stock and common stock
equivalents used for computing earnings per share for the years ended December
31, 1996, 1995 and 1994 were 38,757,660, 39,969,520 and 40,474,615,
respectively. The average number of shares of common stock and common stock
equivalents used in computing earnings per share assuming full dilution was
38,757,660, 39,969,520 and 40,528,878, for the years ended December 31, 1996,
1995 and 1994, respectively.
F-10
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (CONTINUED)
The Company follows Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employee" (APB 25) in accounting for its employee stock
options. See note 9, "Stock Options and Stock Repurchase Plan" for additional
disclosures.
(J) STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all cash
on hand, in depository institutions and short-term liquid investments with
an original maturity to the Company of less than 90 days as cash equivalents.
During the years ended December 31, 1996, 1995 and 1994, the following
amounts of cash were paid for interest and income taxes:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest..................................................................... $ 11,587 $ 8,579 $ 1,305
Income taxes................................................................. 938 15,406 26,527
</TABLE>
Non-cash investing and financing activities included the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Capital lease obligations for furniture and equipment........................ $ 973 $ 825 $ 4,006
Obligations applicable to covenant not-to-compete............................ 1,338 2,356 8,068
Assumption of mortgage on building and land purchase......................... -- 4,418 5,663
</TABLE>
(K) WORKERS' COMPENSATION
The Company, through its subsidiary PCA/P&C, received premiums for primary
and reinsurance policies issued to insured employers and self insured funds.
A portion of these premiums are subject to reinsurance and quota share
arrangements with other insurance carriers. (See note 22)
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with the
presentation in the 1996 consolidated financial statements.
(2) MANAGEMENT'S PLAN FOR REFINANCING THE CREDIT FACILITY DEBT
At December 31, 1996, the Company has classified all of its outstanding debt
pursuant to its Credit Facility (Credit Facility debt) (see note 7) of $118,500
as a current liability. The Credit Facility debt was reduced by $16,750 on
January 10, 1997 through proceeds of the $16,750 demand loan PCA received from
F-11
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) MANAGEMENT'S PLAN FOR REFINANCING THE CREDIT FACILITY DEBT (CONTINUED)
Sierra (see note 23). On February 14, 1997, the Credit Facility was amended to
extend the debt maturity date to April 30, 1997.
As a result of the termination of the Sierra Merger Agreement (see note 23),
the Company's Credit Facility became currently due. Accordingly, the Company
requested that the Credit Facility lenders consent for a reasonable period of
time to permit it to seek other alternatives to meet its obligations under this
indebtedness. As a result, the Credit Facility lenders have provided the Company
with a written commitment to further amend the Credit Facility, the terms of
which provide for: (i) the extension of the maturity date to October 1, 1997,
(ii) the modification of the interest rate to prime plus a margin of 3% in April
through July 1997 with the margin increasing to 4% through maturity, (iii) the
payment of an amendment fee of 1% of the then outstanding Credit Facility
principal balance upon execution of the proposed amendment and, in certain
circumstances, 1% of the then outstanding Credit Facility principal balance on
July 31, 1997, and (iv) certain customary financial covenants.
The alternatives management will seek to complete before October 1, 1997
include: (i) completing a merger transaction with another partner, (ii) raising
equity capital or high-yield debt through a private placement or a public
offering, or (iii) completing the sale of certain of the Company's assets. In
the past, the Company has received indications of interest from third parties
related to each of these four possible alternatives. The Company is currently
working towards completing one or more of these refinancing alternatives by
October 1, 1997. There can be no assurance that the Company will be successful
in completing an alternative financing plan within such time period.
(3) ACQUISITIONS AND DISPOSITION OF SUBSIDIARIES
(A) ACQUISITIONS
HALLMARK MANAGEMENT, INC.
Effective September 1, 1995, PCA Solutions acquired 100% of the shares of
Hallmark Management, Inc. and its affiliate ("Hallmark"), a workers'
compensation management company providing services to employer groups in the
Southeastern United States for a purchase price of approximately $6,000. Of the
cash purchase price, approximately $1,400 has been escrowed for the satisfaction
of certain known and unknown liabilities of Hallmark. These escrowed amounts are
under the custodianship of an escrow agent and are not included in the Company's
financial statements. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, Hallmark's operations have been included
in the accompanying consolidated statements of operations subsequent to
September 1, 1995. Goodwill and other intangibles arising from the acquisition
amounted to approximately $6,647.
CONSOLIDATED ADMINISTRATORS, INC.
Effective April 1, 1995, PCA Solutions acquired 100% of the shares of
Consolidated Administrators, Inc. and its affiliates (CAI), a workers'
compensation management company providing services to approximately 9,000
employer groups in the Southeastern United States for a purchase price of
approximately $11,200. Of the cash purchase price, $500 has been escrowed for
the satisfaction of certain known and unknown liabilities of CAI. These escrowed
amounts are under the custodianship of an escrow agent and are not included in
the Company's financial statements. The acquisition has been accounted for using
the purchase method of accounting and, accordingly, CAI's operations have been
included in
F-12
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) ACQUISITIONS AND DISPOSITION OF SUBSIDIARIES (CONTINUED)
(A) ACQUISITIONS (CONTINUED)
the accompanying consolidated statements of operations subsequent to April 1,
1995. Goodwill arising from the acquisition amounted to approximately $9,000.
UNIVERSAL LIFE INSURANCE COMPANY
Effective February 1, 1995, the Company acquired 100% of the outstanding
capital stock of Universal Life Insurance Company (subsequent to purchase, the
name was changed to PCA Insurance Group of Puerto Rico, Inc.) located in Puerto
Rico for a cash purchase price and additional costs of approximately $12,500. Of
the cash purchase price, approximately $1,900 has been escrowed for the
satisfaction of certain known and unknown liabilities of Universal Life
Insurance Company. These escrowed amounts are under the custodianship of an
escrow agent and are not included in the Company's financial statements. The
purchase price has been allocated to the assets and liabilities acquired based
upon estimated fair value at date of acquisition. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, PCA/IG's
operations have been included in the accompanying consolidated statements of
operations subsequent to February 1, 1995. Goodwill arising from the acquisition
amounted to approximately $8,000.
HEALTH PLUS, INC. (HPI)
Effective December 1, 1994, the Company acquired 100% of the capital stock
of HPI (subsequent to purchase, the name was changed to PCA Health Plans of
Puerto Rico, Inc.), a Puerto Rico company, and certain assets and liabilities of
Health Care Horizons, Inc. including a contract to provide management and
administrative services to HPI for a total purchase price of approximately
$19,800. Of the cash purchase price, $1,500 has been escrowed for the
satisfaction of certain known and unknown liabilities of HPI. These escrowed
amounts are under the custodianship of an escrow agent and are not included in
the Company's financial statements. The Company also entered into not-to-compete
agreements with the prior owners for terms ranging from one to three years. The
purchase price has been allocated to the assets and liabilities acquired based
on the estimated fair value at date of acquisition. The acquisition has been
accounted for by the purchase method of accounting and, accordingly, HPI's
operations have been included in the accompanying consolidated statements of
operations subsequent to December 1, 1994. Goodwill as adjusted arising from the
acquisition amounted to $18,149.
SOUTHEAST HEALTH PLAN (DELAWARE), INC. AND SUBSIDIARIES (SHPI)
Effective November 1, 1994, the Company acquired the outstanding capital
stock of SHPI (subsequent to purchase, the name was changed to PCA Health Plans
of Alabama, Inc.) for a cash purchase price of approximately $40,300 ($39,270
net of cash acquired). Of the cash purchase price, $2,000 has been escrowed for
the satisfaction of certain known and unknown liabilities of SHPI. These
escrowed amounts are under the custodianship of an escrow agent and are not
included in the Company's financial statements. The purchase price has been
allocated to the assets and liabilities acquired based on the estimated fair
values at the date of the acquisition. The acquisition has been accounted for by
the purchase method of accounting and, accordingly, SHPI's operations have been
included in the accompanying consolidated statements of operations subsequent to
November 1, 1994. Goodwill arising from the acquisition amounted to
approximately $36,699. In 1996, the Company sold its HMO operations in Alabama
(as discussed below).
F-13
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) ACQUISITIONS AND DISPOSITION OF SUBSIDIARIES (CONTINUED)
(A) ACQUISITIONS (CONTINUED)
EXECUTIVE RISK CONSULTANTS, INC. AND ITS SUBSIDIARIES, AND THE FOLLOWING
AFFILIATED COMPANIES: ASSOCIATED EMPLOYERS MGA, INC.; MAXIMUM MEDICAL, INC.;
COMPENSATION RESOURCES, INC.; AND ASSOCIATION EMPLOYERS INSURANCE COMPANY
(ERC)
Effective August 1, 1994, the Company acquired 100% of the outstanding
capital stock of ERC for a cash purchase price of $47,167 ($36,838 net of cash
acquired). Of the purchase cash price, $18,200 was escrowed based upon certain
known and unknown liabilities of ERC. These escrowed amounts are under the
custodianship of an escrow agent and are not included in the Company's
consolidated financial statements. The Company also entered into an employment
agreement and a three year not-to-compete agreement with each of the principal
shareholders and officers of ERC. A total of $5,000 (which includes interest)
will be paid in equal monthly installments over a three year period as
consideration for the covenants not-to-compete. The purchase price has been
allocated to the assets and liabilities acquired based upon the estimated fair
value at date of acquisition. The acquisition has been accounted for by the
purchase method of accounting and, accordingly, ERC's operations have been
included in the accompanying consolidated statements of operations subsequent to
August 1, 1994. Goodwill arising from the acquisition amounted to $34,690.
Effective October 17, 1994, ERC (except Association Employers Insurance Company)
and CRIMS were merged and operate as PCA Solutions, Inc.
COMBINED RISK AND INSURANCE MANAGEMENT SERVICES, INC. AND SUBSIDIARY (CRIMS)
Effective June 1, 1994, the Company acquired 100% of the outstanding capital
stock of CRIMS, a third party administrator of workers' compensation funds,
located in Orlando, Florida for a cash purchase price of approximately $16,600
($13,826 net of cash acquired). Of this purchase price, approximately $2,000 was
escrowed for certain known and unknown contingencies. These escrowed amounts are
under the custodianship of an escrow agent and are not included in the Company's
financial statements. The purchase price has been allocated to the assets and
liabilities acquired based upon estimated fair value at date of acquisition.
Approximately $2,300 of the purchase price will be paid over a 2 year period to
three of the principal shareholders of CRIMS as consideration for covenants
not-to-compete. The acquisition has been accounted for by the purchase method of
accounting and, accordingly, CRIMS' operations have been included in the
accompanying consolidated statements of operations subsequent to June 1, 1994.
Goodwill arising from the acquisition amounted to $14,398.
FAMILY HEALTH SYSTEMS, INC. AND SUBSIDIARIES (FAMILY)
Effective December 1, 1993, the Company, through its wholly-owned
subsidiary, Century Acquisition Company, acquired 100% of the outstanding
capital stock of Family for a cash purchase price and additional costs of
approximately $44,200. The purchase price has been allocated to the assets and
liabilities acquired based upon estimated fair value at date of acquisition. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, Family's operations have been included in the accompanying
consolidated statements of operations subsequent to December 1, 1993. In
addition, the Company also entered into a five-year covenant not-to-compete with
a former officer of Family. The Company will pay a total of $1,000 in 20 equal
quarterly installments of $50. Goodwill, as adjusted, arising from the
acquisition amounted to $37,668.
F-14
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) ACQUISITIONS AND DISPOSITION OF SUBSIDIARIES (CONTINUED)
(B) DISPOSITIONS
In September 1996, the Company sold its wholly owned subsidiaries,
PCA/Georgia and PCA/ Alabama for $24,500 in cash and non-compete payments of
which $2,500 has been deposited in escrow and $1,500 is due to PCA through 1998.
This transaction resulted in a gain on the sale of approximately $4,500. After
completing this transaction in September 1996, the Company made a $17,000
principal payment to reduce its outstanding bank debt balance.
In June 1996, the Company sold its wholly owned subsidiary, Physicians
First, Inc. (PFI), for $23,600 in stock and notes to FPA Medical Management,
Inc. (FPA). As consideration, the Company received 525,000 shares of
unregistered FPA common stock, warrants to acquire 100,000 shares of FPA common
stock and a $15,000 note from FPA. The Company valued the FPA stock and warrants
at their fair value which was estimated using the quoted market price of FPA's
common stock less a discount of approximately 6% to consider their unregistered
status. Additionally, as a condition of the sale, PCA entered into a four-year
covenant not-to-compete with FPA. This transaction resulted in a gain on the
sale of PFI of approximately $7,900. After completing this transaction in June
1996, the Company made a $9,500 principal payment to reduce its outstanding bank
debt balance. During the third quarter of 1996, FPA paid its $15,000 note
obligation to PCA in full and PCA used the proceeds to make an additional
$15,000 of bank debt principal payment in the third quarter of 1996.
The following table summarizes the unaudited pro forma results of operations
for the years ended December 31, 1996, 1995 and 1994 as if all of the above
acquisitions and dispositions had been consummated at the beginning of the
respective periods. The pro forma results do not necessarily reflect what would
have occurred if the acquisitions and dispositions had been made at the
beginning of the respective periods or the results that may occur in the future.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Revenues............................................................. $ 1,408,102 $ 1,129,508 $ 861,779
Net (loss) earnings.................................................. (283,468) 10,657 65,582
Net (loss) earnings per share........................................ $ (7.31) $ 0.27 $ 1.62
</TABLE>
F-15
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Buildings............................................................................... $ 17,251 $ 18,917
Land.................................................................................... 3,657 4,312
Leasehold improvements.................................................................. 3,556 8,860
Furniture and equipment................................................................. 44,226 46,017
Purchased software...................................................................... 5,024 4,110
--------- ---------
73,714 82,216
Less accumulated depreciation and amortization.......................................... 21,582 22,652
--------- ---------
Net property and equipment............................................................ $ 52,132 $ 59,564
--------- ---------
--------- ---------
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $19,123 and $14,742 at December 31, 1996
and 1995, respectively (note 20).................................................... $ 108,377 $ 164,871
Subscriber and provider contracts, net of accumulated amortization of $4,926 and
$6,504 at December 31, 1996 and 1995, respectively.................................. 10,670 15,524
Covenant not-to-compete, net of accumulated amortization of $5,766 and $6,927 at
December 31, 1996 and 1995, respectively............................................ 2,681 11,301
Organizational costs and certificate of authority, net of accumulated amortization of
$537 and $583 at December 31, 1996 and 1995, respectively........................... 257 426
---------- ----------
$ 121,985 $ 192,122
---------- ----------
---------- ----------
</TABLE>
(6) INVESTMENT SECURITIES
The cost and fair values of investment securities held at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS CARRYING
UNREALIZED UNREALIZED VALUE AND
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Available for sale:
Debt securities issued by the U.S. Treasury and other
U.S. Government corporations and agencies.............. $ 146,682 $ 505 $ 544 $ 146,643
Debt securities issued by states of the U.S. and
political subdivisions of the states................... 282,637 378 830 282,185
Other debt securities.................................... 3,780 -- -- 3,780
Other...................................................... 30,623 2,572 -- 33,195
---------- ----------- ----------- ----------
Total.................................................. $ 463,722 $ 3,455 $ 1,374 $ 465,803
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-16
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) INVESTMENT SECURITIES (CONTINUED)
The cost and fair values of investment securities held at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS CARRYING
UNREALIZED UNREALIZED VALUE AND
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Available for sale:
Debt securities issued by the U.S. Treasury and other
U.S. Government corporations and agencies.............. $ 55,062 $ 47 $ 5 $ 55,104
Debt securities issued by states of the U.S. and
political subdivisions of the states................... 218,546 689 56 219,179
Other debt securities.................................... 1,450 2 11 1,441
Other...................................................... 1,402 -- 76 1,326
---------- ----------- ----------- ----------
Total.................................................. $ 276,460 $ 738 $ 148 $ 277,050
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The contractual maturities of investments at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
CARRYING
VALUE AND
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less.............................................................. $ 67,848 $ 70,472
Due after one year through five years................................................ 203,657 203,907
Due after five years through ten years............................................... 138,667 138,149
Due after ten years.................................................................. 53,550 53,275
---------- ----------
$ 463,722 $ 465,803
---------- ----------
---------- ----------
</TABLE>
The Company intends to liquidate approximately $60,316 of investments in
1997 which have contractual maturities of more than one year. Accordingly, these
investments have been classified as short term investments. The unrealized loss
on these investments at December 31, 1996 approximated $114.
The Company recorded proceeds from sales of available for sale securities
and recognized gross realized gains and gross realized losses as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM GROSS REALIZED GROSS REALIZED
SALES GAINS LOSSES
-------------- --------------- -----------------
<S> <C> <C> <C>
1996....................................................... $ 161,620 $ 425 $ (239)
1995....................................................... 154,718 1,643 (201)
1994....................................................... 6,457 541 (251)
</TABLE>
The Company determines the cost of its debt securities in computing its
realized gain or loss upon sale using the specific identification method.
F-17
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
(A) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable pursuant to secured bank Credit Facility................................ $ 118,500 $ 160,000
Mortgage notes payable secured by office buildings and equipment (with a net book
value of $10,819 at December 31, 1996) interest rates vary from 6.25% to 14.5%,
payable in monthly installments, through June 2006.................................. 8,896 14,061
Obligation to former owners of businesses acquired for covenants not-to-compete,
imputed interest rates vary from 5.5% to 8%; payable in monthly, quarterly and
annual installments through September 1998.......................................... 2,607 5,716
---------- ----------
Total long-term debt................................................................. 130,003 179,777
Less current maturities of long-term debt............................................ 120,862 24,705
---------- ----------
Long-term debt, less current maturities.............................................. $ 9,141 $ 155,072
---------- ----------
---------- ----------
</TABLE>
In September 1994, the Company entered into a Credit Agreement with
Citibank, N.A., as agent and five other banks as participating lenders (Credit
Facility). The debt is secured by the Company's pledge of the stock of certain
of its subsidiaries. As of September 30, 1996, the Company was in violation of
certain of its financial covenants. Such violations were waived by the lenders
in the fourth quarter of 1996. Additionally, a January 1997 amendment waived the
requirement for the Company to make a regularly scheduled $16,750 principal
payment on December 31, 1996. Borrowings under the agreement incur interest
charges at a rate equal to LIBOR plus a spread of 1.0% to 1.75% during 1994
through 1996 which was increased to prime rate at January 1, 1997, to prime plus
1% at February 17, 1997, to prime plus 3% through July 1997 and to prime plus 4%
through September 1997. The terms of the Credit Agreement, as most recently
amended by written commitment from the Credit Facility lenders in April 1997
(see notes 2 and 23), provide for the Company to repay the entire balance of
indebtedness by October 1, 1997. Accordingly, the entire balance of the bank
indebtedness is classified as a current liability in the accompanying
consolidated balance sheet as of December 31, 1996. See note 2 for management's
plan for refinancing this Credit Agreement. The Credit Agreement contains
customary covenants, including, among others, a prohibition of payment of cash
dividends on the Common Stock, restrictions on incurring additional debt, and
requirement that the Company maintain minimum surplus requirements in its
subsidiaries as required under the state and federal HMO regulations. During
1996, the Company made principal repayments of $41,500 relating to this
facility.
F-18
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
(B) CAPITAL LEASE OBLIGATIONS
The Company leases various furniture and equipment pursuant to the terms of
several capital leases. The future minimum lease payment obligations under
capital leases through maturity and maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
CAPITAL LONG-TERM
YEARS ENDING DECEMBER 31: LEASES DEBT TOTAL
- --------------------------------------------------------------------------- --------- ----------- ----------
<S> <C> <C> <C>
1997..................................................................... $ 2,086 $ 120,863 $ 122,949
1998..................................................................... 839 1,015 1,854
1999..................................................................... 296 4,633 4,929
2000..................................................................... 34 842 876
2001..................................................................... -- 450 450
Thereafter............................................................... -- 2,200 2,200
--------- ----------- ----------
3,255 130,003 133,258
Less amount representing interest........................................ 205 -- 205
--------- ----------- ----------
Total obligation under capital leases and long-term debt................. 3,050 130,003 133,053
Less current portion..................................................... 1,847 120,862 122,709
--------- ----------- ----------
Obligation under capital leases and long-term debt, less current
portion................................................................ $ 1,203 $ 9,141 $ 10,344
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
(8) OPERATING LEASES
The Company has noncancelable operating leases for office space and
equipment. The leases expire at various dates through 2003. Rental expense of
$11,481, $10,008 and $6,091 is included in administrative, marketing and other
expenses for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum lease commitments are:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- --------------------------------------------------------------------------
<S> <C>
1997...................................................................... $ 10,607
1998...................................................................... 9,151
1999...................................................................... 8,561
2000...................................................................... 7,442
2001...................................................................... 4,394
Thereafter................................................................ 12,378
---------
$ 52,533
---------
---------
</TABLE>
F-19
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) STOCK OPTIONS AND STOCK REPURCHASE PLAN
(A) STOCK OPTION PLANS
The Company maintains four Stock Option Plans as described below. The
Company has not issued any stock options with an exercise price below fair
market value.
INCENTIVE STOCK OPTION PLAN
In 1986, the Company's stockholders approved the Physician Corporation of
America Incentive Stock Option Plan (the "Incentive Option Plan") under Section
422A of the Internal Revenue Code of 1986. The Incentive Option Plan, as
amended, covers up to an aggregate of 2,666,666 shares of Common Stock. As of
December 31, 1996, 1,065,068 shares of Common Stock were available for future
grants of options under the Incentive Option Plan. Incentive stock options may
be granted to key employees, officers and directors who are employees of the
Company under the Incentive Option Plan. Under the Incentive Option Plan, the
option exercise price per share of Common Stock may not be less than the fair
market value of the outstanding Common Stock on the date the option is granted
(110% of the fair market value in the case of beneficial owners of 10% of the
Common Stock). Options issued under the Incentive Option Plan are not
exercisable (unless the stock option agreement provides otherwise) while any
options granted prior to January 1, 1987 to an optionee under the Incentive
Option Plan are outstanding and, with certain exceptions, are exercisable only
while the optionee is employed by the Company and for three months thereafter.
The Incentive Option Plan is administered by the Stock Option Committee and
options are granted at the discretion of the Stock Option Committee. Options to
purchase a total of 184,000 shares of Common Stock granted pursuant to the
Incentive Option Plan were outstanding as of December 31, 1996.
NON-QUALIFIED STOCK OPTION PLAN
In 1986, the Company's stockholders approved the Physician Corporation of
America Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). The
Non-Qualified Plan currently covers up to an aggregate of 2,666,666 shares of
Common Stock. As of December 31, 1996, 41,798 shares of Common Stock were
available for future grants of options under the Non-Qualified Plan.
Non-qualified stock options may be granted under the Non-Qualified Plan to key
employees, officers and directors of the Company. The option exercise price per
share of Common Stock may not be less than the fair market value of the Common
Stock on the date the option is granted. The Non-Qualified Plan is administered
by the Stock Option Committee and options are granted at the discretion of the
Stock Option Committee. All options granted under the Non-Qualified Plan have a
four-year vesting schedule (as provided in the stock option agreements) unless
the Stock Option Committee otherwise determines. Options to purchase a total of
120,872 shares of Common Stock granted pursuant to the Non-Qualified Plan were
outstanding as of December 31, 1996.
NON-PLAN OPTIONS
In addition to stock options granted pursuant to the Incentive Option Plan
and the Non-Qualified Plan, the Company has granted non-qualified stock options
(the "Non-Plan Options") to certain officers and employees of the Company.
Options to purchase a total of 1,339,935 shares of Common Stock were outstanding
on December 31, 1996.
F-20
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) STOCK OPTIONS AND STOCK REPURCHASE PLAN (CONTINUED)
(A) STOCK OPTION PLANS (CONTINUED)
OTHER STOCK OPTION PLAN
In 1993, the Company's stockholders approved a new stock option plan (the
"1993 Plan") which covers an aggregate of 3,000,000 shares of Common Stock.
Options granted under the 1993 Plan, which is administered by the Stock Option
Committee, may be either incentive or non-qualified stock options, at the
discretion of this Committee. As of December 31, 1996, 976,250 shares of Common
Stock were available for future grants under the 1993 Plan. Options to purchase
a total of 1,706,600 shares of Common Stock were outstanding at December 31,
1996. A summary of options is as follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK
OPTION PLAN OTHER
------------------------ ---------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
--------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993................... 614,668 $ .38-7.63 2,411,946 $ .38- 24.25
Granted...................................... -- -- 1,098,150 19.75- 22.00
Expired/Canceled............................. (38,400) 7.63 (92,218) 1.88- 22.00
Exercised.................................... (219,800) .38-7.63 (891,441) .38- 13.88
--------- ------------- ---------- ---------------
Balance at December 31, 1994................... 356,468 .38-7.63 2,526,437 .38- 24.25
Granted...................................... -- -- 1,492,700 13.81- 22.00
Expired/Canceled............................. -- -- (387,985) 1.88- 15.75
Exercised.................................... (135,668) .38-7.63 (188,240) .38- 13.88
--------- ------------- ---------- ---------------
Balance at December 31, 1995................... 220,800 .38-7.63 3,442,912 .38- 24.25
Granted...................................... -- -- 794,500 10.00- 18.38
Expired/Canceled............................. -- -- (886,267) 1.88- 22.00
Exercised.................................... (36,800) 7.63 (183,738) 1.88- 15.75
--------- ------------- ---------- ---------------
Balance at December 31, 1996................... 184,000 $7.63 3,167,407 $ .38-$22.00
--------- ------------- ---------- ---------------
--------- ------------- ---------- ---------------
</TABLE>
At December 31, 1996, options to acquire an aggregate of 814,538 shares were
exercisable. At December 31, 1996, the Company has reserved 5,434,523 shares of
common stock for future issuance which includes both shares which may be issued
for exercise of options previously granted and options which may be granted in
the future.
During the fourth quarter of 1995, the Company's board of directors approved
the repricing of employee stock options, setting the exercise price at $15.75
per share which was the closing share price on the date of repricing.
Additionally, on August 3, 1996, the Company's Board of Directors approved the
repricing of employee stock options at $12.00 per share which was above the
closing share price on the date of the repricing. No directors or executive
officers of the Company were granted options which were subject to repricing.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. The use of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not necessarily developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is equal to
F-21
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) STOCK OPTIONS AND STOCK REPURCHASE PLAN (CONTINUED)
(A) STOCK OPTION PLANS (CONTINUED)
or greater than the market price of the underlying stock on the date of grant,
no compensation expense has been recognized.
Pro forma information regarding net income and earnings per share as
required by the provisions of Statement 123, has been determined as if the
Company had accounted for its employee stock options under the fair value method
required by Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 6.0% and 5.2%; dividend yields of 0% and 0%, volatility factors of the
expected market price of the Company's common stock of 0.46 and 0.57; and a
weighted-average expected life of the option of approximately two years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Pro forma net loss.............................................................. $ (280,116) $ (24,596)
Pro forma loss per share:
Primary and fully diluted..................................................... (7.23) (0.62)
</TABLE>
(B) STOCK REPURCHASES
The Company implemented a stock repurchase plan in December 1994 which
authorized the Company to repurchase up to 1,000,000 shares of the Company's
common stock. Additionally, the Company was authorized to issue up to 1,000,000
put warrants. In 1994, the Company repurchased 310,000 common shares in the open
market at a cost of $6,093. Additionally, in 1995 the Company acquired 695,000
shares including 225,000 obtained by exercised put warrants, at a cost of
$13,150.
Additionally during 1994, the Company sold 500,000 put warrants exercisable
at $20 per share for an aggregate premium of approximately $713. In 1995, 25,000
of these warrants expired unexercised, 225,000 were exercised at $20 per share
and repurchased as noted are included in the 695,000 shares above, and 250,000
warrants were settled for a net price of $1,032.
F-22
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current expense (benefit):
Federal................................................................... $ (40,839) $ (830) $ 29,884
State..................................................................... -- (31) 3,877
--------- --------- ---------
(40,839) (861) 33,761
Deferred expense (benefit).................................................. 5,558 (399) 439
--------- --------- ---------
$ (35,281) $ (1,260) $ 34,200
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income tax expense (benefit) results from temporary differences in
the recognition of revenue and expense for income tax and financial reporting
purposes. The sources of these differences and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenue and expenses recognized for financial reporting purposes in a
different period than for income tax purposes............................... $ 2,615 $ (550) $ (739)
Depreciation expense recognized for financial statement purposes on a
straight-line basis and on an accelerated cost recovery basis for income tax
purposes.................................................................... 2,943 151 1,178
--------- --------- ---------
$ 5,558 $ (399) $ 439
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES (CONTINUED)
A reconciliation of income tax (benefit) expense and the amount that would
be computed using the statutory Federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- --------------------
$ % $ % $ %
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at the statutory rate... $ (109,538) (35.0) $ (9,050) (35.0) $ 30,362 35.0
State and foreign income taxes, net of Federal
income tax benefit........................... (10,545) (3.4) (28) (0.1) 2,520 3.2
Amortization of intangible assets not
deductible for income tax purposes........... 17,316 5.6 2,585 10.0 1,422 1.6
Change in valuation allowance attributable to
net operating loss carryforward, capital loss
carryforward and other losses................ 70,811 22.5 8,387 32.4 -- --
Tax exempt interest........................... (5,784) (1.9) (3,629) (14.0) (653) (.8)
Other......................................... 2,459 1.0 475 1.8 549 .4
----------- --------- --------- --------- --------- ---
$ (35,281) (11.2) $ (1,260) 4.9 $ 34,200 39.4
----------- --------- --------- --------- --------- ---
----------- --------- --------- --------- --------- ---
</TABLE>
The Company deducted $1,346, $3,180 and $24,936 of stock option expense in
1996, 1995 and 1994, respectively, for stock option exercises.
F-24
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS -- CURRENT PORTION:
Accrued liabilities and claims payable................................................ $ 10,925 $ 9,548
Excess of tax basis over book basis of intangible assets.............................. -- 2,344
Unrealized loss on investments available for sale..................................... 4,097 46
Income deferred for book basis........................................................ 5,156 1,042
Other................................................................................. 5,354 --
--------- ---------
Total gross deferred tax asset current................................................ 25,532 12,980
Less valuation allowance.............................................................. (2,252) (1,679)
--------- ---------
Net deferred tax asset current portion................................................ 23,280 11,301
--------- ---------
DEFERRED TAX LIABILITIES -- LONG-TERM:
Excess of book basis over tax basis of identifiable intangible assets................. (3,697) (5,078)
Property and equipment................................................................ (2,943) (2,198)
Other................................................................................. (2,065) (1,119)
--------- ---------
Gross deferred tax liabilities -- long-term........................................... (8,705) (8,395)
--------- ---------
DEFERRED TAX ASSETS -- LONG-TERM:
Excess of tax basis over book basis of intangible assets.............................. 4,181 6,708
Accrued liabilities and claims payable................................................ 34,134 6,327
Federal and state NOL carryforward.................................................... 39,904 --
Less valuation allowance.............................................................. (76,946) (6,708)
--------- ---------
Net deferred tax asset long-term...................................................... 1,273 6,327
--------- ---------
Net deferred tax liabilities long-term................................................ (7,432) (2,068)
--------- ---------
Net deferred tax asset................................................................ $ 15,848 $ 9,233
--------- ---------
--------- ---------
</TABLE>
The accompanying financial statements include a $79,198 valuation allowance at
December 31, 1996, an increase of $70,811 over the December 31, 1995 valuation
allowance balance. This increase arises primarily from an allowance against the
recoverability of deferred tax assets relating to net operating loss
carryforwards, capital loss carryforwards and losses generated from claims which
may not be fully recoverable within a fifteen year, five year and fifteen year
carryforward period, respectively. Additionally, at December 31, 1996, the
Company had an income tax receivable of approximately $42,274 which compares to
an approximate $20,600 income tax receivable balance at December 31, 1995. This
increase in income tax receivable is attributable to the Company's ability to
carryback the current year net operating loss to refund prior years' taxes paid.
Additionally, income tax receivables at December 31, 1996 of approximately
$4,700 were assumed by the Company as part of the assumption of net workers'
compensation liabilities as described in note 22.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $97,000 which are available to
offset future taxable income through the year 2011, when any unused amounts
expire. Net operating losses for alternative minimum tax purposes at
F-25
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES (CONTINUED)
December 31, 1996 approximated $80,000 and also expire in 2011. Since most
states in which the Company operates do not permit the carryback of net
operating losses, the state net operating losses approximate $211,000 and
likewise expire in 2011.
(11) RELATED PARTY TRANSACTIONS
The Company provided management services to Physicians Medical Group (PMG),
formerly Physicians Clinic of Texas (PCT). Management fees amounted to
approximately $10, $63 and $63 for the years ended December 31, 1996, 1995 and
1994, respectively.
The Company had guaranteed bank debt of PMG which had an outstanding balance
of $568 at December 31, 1991. During the year ended December 31, 1992, PCA/Texas
advanced funds to PCT under a $1,000 line of Credit Agreement. PMG used these
funds to pay off the above mentioned bank debt. PCA/Texas received a 9% note
receivable from PMG payable in monthly installments of interest only beginning
on February 1, 1992 and ending on January 1, 1993. Beginning on January 31,
1993, the note is payable in monthly installments that amortize the unpaid
balance over 36 months. The carrying amount of the receivable amounted to $439
and $627 at December 31, 1996 and 1995, respectively, and is included in
statutory deposits and other assets on the accompanying consolidated balance
sheets.
(12) EMPLOYEE BENEFIT PLAN
On March 1, 1990, the Company adopted a 401(k) Profit Sharing Plan ("Plan").
All employees as of March 1, 1990 were able to participate in the Plan.
Employees employed after March 1, 1990 who have completed one year of service,
during which a minimum of 1,000 hours are worked, may participate in the Plan on
semi-annual enrollment dates, January 1 and July 1 of each year. Employees may
contribute up to 15% of their annual compensation, not to exceed $9,500, to the
Plan. The Company will match up to 50% of an employee's elected contribution to
a maximum of 7% of the employee's compensation. The Company's matching
contribution vests to the employee at 25% per year of service. Service with the
Company prior to March 1, 1990 is used in determining total years of service for
vesting purposes. For the years ended December 31, 1996, 1995 and 1994, the
Company made matching contributions to the Plan totaling $1,551, $1,814 and
$953, respectively.
Effective January 1, 1996, the Company entered into salary continuation
agreements with its key employees. These agreements provide for the payment of a
severance benefit upon a change in control of the Company, should the employee
be demoted or terminated without good cause. The severance benefit includes a
payment of up to 18 months of salary, the continuation of eligibility for
participation in the Company's benefit programs and compensation for the value
of all unvested stock options at the employee's termination date. The benefits
are ratably decreased commencing 12 to 24 months subsequent to a change in
control and expire no later than 42 months after a change of control.
F-26
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) MEDICAL COSTS
Medical costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Physician services................................................ $ 458,668 $ 300,213 $ 212,393
Medical........................................................... 651,058 559,734 320,257
Clinic operations................................................. -- -- 32,130
Reinsurance premiums, net of recoveries........................... (1,986) 1,283 (2,712)
Coordination of benefits and subrogation benefits................. (18,022) (5,225) (9,839)
Indemnity health costs............................................ 40,810 22,913 10,135
------------ ---------- ----------
$ 1,130,528 $ 878,918 $ 562,364
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(14) COMMITMENT AND CONTINGENCIES
OPM AUDIT
The Company's subsidiary, PCA/Texas, was audited in May 1992 by the Office
of Personnel Management (OPM) with respect to whether the premium rates charged
for Federal employee members for contract years 1987 through 1991 by PCA/Texas
were in accordance with the terms of the underlying contract. OPM asserted
PCA/Texas billings for subscriber premiums for the Federal employees exceeded
contractually allowable rates by approximately $3,200 including interest
foregone in the aggregate for the five-year period under audit.
Determination of allowable premium rates under the contract involves certain
judgmental factors including actuarial computations as well as interpretive
matters under the contract and related regulations. The Company has assessed the
OPM claim arising from the audit and has paid approximately $2,600 to the OPM to
settle all aspects of the audit except the interest forgone component Management
believes the amount, if any, to fully settle this matter will not be material to
the Company's financial position. The Company believes that its accrual for OPM
related assessments is adequate.
MALPRACTICE CLAIMS
Malpractice claims have been asserted against the Company by various
claimants. These claims are at various stages of processing, and some may
ultimately be brought to trial. In the opinion of counsel, the outcome of these
actions will not have a significant effect on the consolidated financial
position or results of operations of the Company. Incidents occurring through
December 31, 1996 may result in the assertion of additional claims. No accrual
has been made for possible losses attributable to incidents that may have
occurred but that have not been identified because the amount is not reasonably
estimated. The Company has professional liability insurance for potential claims
incurred in connection with its operations, which covers claims made during the
policy period. The Company intends to keep such insurance in force during the
foreseeable future.
CONCENTRATION OF CREDIT RISK
The Company's HMO subsidiaries are party to a variety of agreements with
publicly traded physician practice management companies and other provider
groups. These agreements which include global capitation arrangements transfer a
substantial portion of the underwriting risk to these entities in exchange for a
percentage of premiums. The Company monitors the credit risk associated with the
F-27
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(14) COMMITMENT AND CONTINGENCIES (CONTINUED)
obligations incurred by these entities and has taken measures to ensure the
Company is protected in the event these entities become insolvent. The Company
has obtained letters of credit and/or maintains fiduciary control over certain
of the entities' liquid assets which would enable the Company to mitigate its
exposure to credit risk from these entities in the event they become unable to
meet their contractual obligations. Additionally in 1996, the Company was party
to a variety of reinsurance agreements with third party reinsurers. These
reinsurance companies are believed to be financially sound and have earned an
A.M. Best A-rating or higher.
(15) FOURTH QUARTER ADJUSTMENTS AND QUARTERLY OPERATING RESULTS (UNAUDITED)
In the fourth quarter of 1996, the Company recorded a $145.9 million charge
relating to its workers' compensation operations. Approximately, $50.9 million
of this charge has been reflected as a component of the loss from the assumption
of net workers' compensation liabilities in the accompanying statement of
operations. Additionally in the fourth quarter of 1996, the Company wrote off
approximately $39.0 million of intangible assets relating to PCA/Solutions (see
note 20). Quarterly operating results for the year ended December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 365,116 $ 362,080 $ 348,189 $ 378,923
Operating loss.......................................... (175,015) (127,367) (2,375) (4,607)
Earnings (loss) before income taxes..................... (179,999) (126,026) 1,683 (8,624)
Income tax benefit (expense)............................ (2,574) 30,512 3,653 3,690
Net earnings (loss)..................................... (182,573) (95,514) 5,336 (4,934)
Net earnings (loss) per common and common equivalent
shares assuming full dilution.......................... $ (4.70) $ (2.44) $ 0.14 $ (0.13)
------------- ------------- ---------- ----------
------------- ------------- ---------- ----------
</TABLE>
In the fourth quarter of 1995, the Company recorded two material
adjustments: (i) as discussed in note 20, the Company established a $25.9
million provision for the impairment of long lived assets relating to the
goodwill recorded on the books at PCA/Alabama, (ii) health premium revenue and
receivables were reduced by $11.0 million which related exclusively to the
Company's Florida HMO operations and pertained to commercial health premiums
which were over billed during the first three quarters of 1995. This adjustment
related to the Company's Florida HMO commercial health plan billings and
collections. Quarterly operating results for the year ended December 31, 1995
reflecting a
F-28
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(15) FOURTH QUARTER ADJUSTMENTS AND QUARTERLY OPERATING RESULTS
(UNAUDITED) (CONTINUED)
restatement of the first three quarters of 1995 for these premium and
receivables adjustments are as follows:
<TABLE>
<CAPTION>
AS RESTATED
----------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................................ $ 330,640 $ 310,537 $ 299,904 $ 275,468
Operating income (loss)................................. (41,968) (176) 12,358 12,780
Earnings (loss) before income taxes..................... (44,180) (2,646) 9,971 10,999
Income tax benefit (expense)............................ 7,710 1,437 (3,292) (4,595)
Net earnings (loss)..................................... (36,470) (1,209) 6,679 6,404
Net earnings per common and common equivalent shares
assuming full dilution................................. $ (0.92) $ (0.03) $ 0.17 $ 0.16
------------- ------------- ---------- ----------
------------- ------------- ---------- ----------
</TABLE>
The calculation of earnings per share for each period presented are
performed independently. Therefore, the sum of the quarterly earnings per share
may not equal the total for the year.
(16) RESTRICTED NET ASSETS OF REGULATED SUBSIDIARIES
The Company's regulated subsidiaries are required to maintain certain levels
of regulatory capital for statutory purposes. Consequently, net assets of
consolidated subsidiaries amounting to approximately $64,075 and $43,910 were
not available for transfer to PCA at December 31, 1996 and 1995, respectively.
Additionally, PCA P&C's assets are fully restricted from transfer to the Company
and are subject to oversight by the Florida Department of Insurance (Florida
DOI) (see note 22).
F-29
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(17) SIGNIFICANT CONTRACTS
The Company's HMO subsidiaries operating in Florida provide health services
to approximately 143,000 members whose premiums are paid by the State of
Florida's Agency for Health Care Administration ("AHCA") through its Medicaid
program. For the years ended December 31, 1996, 1995 and 1994, the Company
received approximately $202,500, $270,000 and $298,000, respectively, pursuant
to its contract to provide health care services to Medicaid members. There can
be no assurance that AHCA will renew the Company's Medicaid contract, which
expires on June 30, 1997. However in February 1997, AHCA announced its intent to
award a 30-month contract to the Company at premium rates approximately 3% less
than current contract rates. The Company does not expect the contract to
commence before the second quarter of 1997. The existing contract is also
subject to termination upon 90 days' notice by either party without cause or
upon 24 hours notice by the AHCA in case of the Company's breach or if funds
become unavailable to finance the contract. In the event of such termination,
the Company will be paid a mutually agreed upon amount for partial performance
of the contract. If the contract is terminated by the AHCA for cause, the
Company is obligated to pay liquidated damages of up to 25% of the total
contract price and to reimburse the AHCA for any federal disallowances or
sanctions. However, the Company anticipates renewing such contracts and has been
successful in renewing its contracts and expanding the service areas for
Florida's Medicaid beneficiaries throughout the State. Future levels of Medicaid
payments may be affected by government efforts to contain medical costs, and may
further be affected by state and federal budgetary constraints, and such
payments cannot be predicted with certainty. The loss or modification of the
Company's Medicaid contracts or termination or modification of the Medicaid
program, including, without limitation, a reduction in premium rates from the
State of Florida, could have a material adverse effect on the Company. During
1995, the Medicaid premium rate for the contract year ending June 30, 1996 was
significantly reduced from the rate for the contract year ended June 30, 1995.
This reduction had a material adverse effect on the Company. There can be no
assurance that future decreases will not occur.
The Company's HMO subsidiaries in Florida and Texas provide health services
to approximately 60,000 Medicare members whose premiums are paid by the Federal
government. For the years ended December 31, 1996, 1995 and 1994, the Company
received approximately $317,300, $197,500 and $82,200, respectively, from the
Federal government pursuant to the terms of its contracts to provide health care
services to Medicare members. The Medicare contracts renew annually on January 1
of each year and while the Company expects these contracts to be renewed, there
can be no assurance that the Federal government will not terminate its contract
or reduce the monthly premium rate per member it pays the Company.
The Company's HMO subsidiary in Puerto Rico provides health services to
approximately 269,000 Medicaid members in the territory's central region. For
the year ended December 31, 1996 and 1995, the Company received approximately
$136,400 and $4,800, respectively, from the Commonwealth of Puerto Rico,
pursuant to the terms of its contract to provide health services to these
members. This contract expired on March 31, 1997. In February 1997, the Company
was awarded a two-year contract effective April 1, 1997 to provide health care
services to these members and to approximately 145,000 additional members in the
territory's southeast region. The Company expects premium rates during this
contract for these members to be approximately 1% less than the 1996 rates.
While the Company expects this contract to be renewed in the future, there can
be no assurance the contract will be renewed nor premium rate decreases will not
occur. In conjunction with receiving the contract, the Company has
F-30
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(17) SIGNIFICANT CONTRACTS (CONTINUED)
agreed to capitalize its Puerto Rico HMO subsidiary with additional funds of
approximately $5,000 by the end of the second quarter of 1997.
(18) COMMON STOCK SHAREHOLDER RIGHTS PLAN
On January 13, 1995, the Company adopted a Shareholder Rights Plan ("Plan").
The Plan is designed to enable the Company and its Board of Directors to develop
and preserve long-term values for stockholders and to protect stockholders in
the event an attempt is made to acquire control of the Company through certain
coercive or unfair tactics or without an offer of fair value to all
stockholders. Under the terms of the Plan, each stockholder of record at the
close of business on January 27, 1995, received as a dividend, one right for
each share of common stock held. The rights expire on January 13, 2005. Each
right entitles the holder to buy from the Company one share of common stock at
an exercise price of $95.00 per share. The rights will attach to and trade with
the common stock and will not detach from the common stock and become
exercisable until after a person or group acquires 15% of the Company's common
stock or begins a tender offer that would result in ownership of at least 15% of
the Company's common stock. If any person or group were to acquire 15% (except
pursuant to a tender offer for all outstanding shares of Company common stock at
a price and on terms determined to be fair by a majority of PCA's independent
directors), each right (except those held by the acquiring person) would then
entitle its holder to purchase, for the $95.00 exercise price, the number of
shares of Company common stock having twice the value of the exercise price.
Additionally, if the Company is acquired in a merger or other
business-combination transaction, or sells more than 50% of its assets or
earning power to any person, each right will entitle its holder to purchase for
the $95.00 exercise price, the number of shares of common stock of the acquiring
company having twice the value of the exercise price. The Company may redeem the
rights at $0.02 per right at any time on or prior to the tenth business day
following the acquisition of 15% or more of its common stock or commencement of
a tender offer for at least 15% ownership of the Company. Once the trigger has
been activated and prior to a person or group becoming the beneficial owner of
50% or more of the Company's common stock, the Board of Directors may, in lieu
of allowing the rights to be exercised, issue one share of common stock in
exchange for (and in mandatory redemption of) all or any pro rata portion of the
rights.
(19) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are stated at their estimated fair value
as follows:
CASH, CASH EQUIVALENTS AND INVESTMENTS
The carrying amount approximates fair value because of the short maturity of
those instruments.
STATUTORY DEPOSITS
Statutory deposits are comprised of short-term certificates of deposit, U.S.
Treasury securities and other short-term investments which are held under the
control of various state regulatory agencies in accordance with various HMO
regulations. The carrying amount approximates fair value because of the short
maturity of the underlying instruments.
LONG-TERM DEBT
The carrying amount approximates fair value because the interest rate is
adjustable on the significant portion of such debt.
F-31
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(19) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CLAIMS PAYABLE
The carrying amount of health claims payable amount approximates fair value
because of the short payment period. The other claims payable, primarily
workers' compensation includes undiscounted amounts which are payable over a
7-10 year period. The discounted value of such liabilities would be
approximately $75,000 less than the carrying value.
(20) IMPAIRMENT OF LONG LIVED ASSETS
The Company has performed an analysis of the future recoverability of the
goodwill and other intangible assets previously recorded on the books of its
subsidiaries; PCA Solutions and PCA P&C. Using discounted cash flow methods, the
Company determined that approximately $39,000 of goodwill and intangible assets
associated with PCA Solutions' workers' compensation third party administration
business has been impaired by the expected future decrease in underlying premium
revenue. This write off resulted from the overall impairment of the Company's
investment in its P&C subsidiary (see note 22).
In December 1995, the Company announced its intention to sell its HMO
operations in Alabama and Georgia. This decision was made after the Company's
unsuccessful bid for the Champus Regions 3 and 4 health services contract
elevated the Company's strategic commitment to concentrate on its core health
plan business' in Florida, Texas and Puerto Rico. After determining the value of
PCA Alabama's expected future operations was diminished as a result of not being
awarded the Champus contract, the Company recorded a $25,900 charge in 1995
reflecting an impairment of PCA/Alabama's intangible assets. This impairment was
determined by comparing the carrying value of PCA Alabama's net assets to their
expected net realizable value. The Company estimated the net realizable value of
PCA Alabama's net assets by utilizing discounted cash flow and comparable sales
analysis.
The carrying value of the net assets of PCA/Alabama and PCA/Georgia were
approximately $14,000 and $5,000, respectively, at December 31, 1995 and these
assets were held in the Company's Health Plans segment. During 1996, 1995 and
1994, PCA/Alabama and PCA/Georgia incurred pretax operating losses (including
the $25,900 write down of goodwill in 1995) of approximately $8,900, $39,400 and
$4,800, respectively. PCA completed the sale of PCA/Alabama and PCA/Georgia
during 1996 (see note 3).
F-32
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(21) SEGMENT INFORMATION
The Company operates principally in three segments; providing health care
services to its health plan members, providing third-party administration
services to workers' compensation self-insured funds and the writing of workers'
compensation insurance. The following table sets forth information about the
Company's operating segments for the years ended December 31,:
<TABLE>
<CAPTION>
WORKERS'
WORKERS' COMPENSATION ADJUSTMENTS
COMPENSATION AND RELATED OTHER AND
HEALTH PLANS ADMINISTRATION INSURANCE BUSINESSES ELIMINATIONS CONSOLIDATED
------------ --------------- -------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Sales to unaffiliated
customers............... $1,292,914 $ 41,045 $ 81,566 $ 12,822 $ -- $1,428,347
Operating income
(loss).................. (40,017) (32,540)(2) (250,887)(3) 14,197(4) (117) (309,364)
Interest expense......... -- -- -- -- -- (13,738)
Other income (expense)... -- -- -- -- -- 10,136(6)
Loss before income
taxes................... -- -- -- -- -- (312,966)
Identifiable assets...... 414,148 104,002 862,896 41,948 (68,007)(5) 1,354,987
Depreciation and
amortization............ 10,548 8,112 358 3,479 -- 22,497
Capital expenditures..... 6,881 4,875 -- 3,063 -- 14,819
1995
Sales to unaffiliated
customers............... 1,038,637 74,523 68,872 15,915 -- 1,197,947
Operating income
(loss).................. (57,120)(1) 11,923 13,810 14,541(4) (160) (17,006)
Interest expense......... -- -- -- -- -- (9,113)
Other income (expense)... -- -- -- -- -- 263
Loss before income
taxes................... -- -- -- -- -- (25,856)
Identifiable assets...... 452,681 119,967 286,866 22,217 (32,069)(5) 849,662
Depreciation and
amortization............ 14,354 6,874 101 1,935 -- 23,264
Capital expenditures..... 9,138 13,241 -- 4,286 -- 26,665
1994
Sales to unaffiliated
customers............... 760,669 32,111 14,355 6,963 -- 814,098
Operating income
(loss).................. 64,349 9,439 4,541 10,556(4) -- 88,885
Interest expense......... -- -- -- -- -- (2,107)
Other income (expense)... -- -- -- -- -- (31)
Income before income
taxes................... -- -- -- -- -- 86,747
Identifiable assets...... 429,353 94,599 101,668 29,696 (10,338)(5) 644,978
Depreciation and
amortization............ 9,300 2,289 7 1,025 -- 12,621
Capital expenditures..... 15,473 2,385 -- 2,002 -- 19,860
</TABLE>
- ------------------------
(1) Includes a $25,863 write down of goodwill related to the PCA/Alabama
operations which were sold in 1996.
(2) Includes $39,000 write down of goodwill related to PCA/Solutions which
became impaired as a result of the loss on assumption of net workers'
compensation liabilities.
(3) Includes $180,900 loss on assumption of net workers' compensation
liabilities.
F-33
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(21) SEGMENT INFORMATION (CONTINUED)
(4) Results include management fees charged to health plans and workers'
compensation subsidiaries.
(5) Results from intercompany balances and reclassifications.
(6) Includes $12,352 gain on the 1996 sale of PCA/Georgia, PCA/Alabama and PFI.
(22) WORKERS' COMPENSATION OPERATIONS
LOSS ON ASSUMPTION OF NET WORKERS' COMPENSATION LIABILITY
In 1994 and 1995, the Company acquired four workers compensation third party
administration (TPA) companies and a property and casualty insurance (PCA/P&C)
company. These subsidiaries became the Company's workers compensation division.
In 1994 and 1995 these companies earned the majority of their revenues and
earnings from investment earnings and TPA service fees for services provided to
a number of self insured funds and employer groups in the Southeastern United
States including; the Florida Business Mutual Insurance Company (FBM), the
Florida Auto Dealers Self Insured Fund (FADA), and the Florida Builders and
Employers Mutual Insurance Company (FBE) (collectively the "Funds"). These Funds
had been managed by the acquired TPA companies since 1978. As regulatory and
legal changes occurred in Florida, competition increased in the Florida market
place and the Company evaluated its strategic options to preserve its TPA
service fee revenue base from the employer groups of these funds. As a result of
this evaluation, in January 1996, the Company, through PCA/P&C, began providing
primary workers compensation insurance coverage to employer groups in Florida
who previously were self insured through the Funds. In conjunction with
providing this new risk product, the Company entered into quota share
arrangements with five reinsurers whereby 25% of the premiums and 25% of the
claims costs are retained by the Company and the remaining 75% is ceded to the
reinsurers. In 1995, the assets and liabilities of FADA were assumed by the
Company.
Throughout 1996, the Company continued to provide TPA services to the Funds
to run off the claims liabilities remaining in the Funds. As part of its
evaluation of its entire workers compensation operations in Florida, the Company
determined it was necessary to preserve its TPA service revenue and further that
it was in the best interest of the Company and the Funds policyholders to assume
the net liabilities of the Funds. On November 1, 1996, the Company entered into
various arrangements to assume, effective September 30, 1996, financial
responsibility for the net liabilities of FBM and FBE. These agreements include
an asset guaranty agreement between PCA/P&C and FBE.
An actuarial evaluation indicated that FBE's liabilities exceeded its assets
by approximately $130,000 on a pre-tax undiscounted basis as of September 30,
1996. Accordingly, PCA recorded a loss on assumption of net workers'
compensation liabilities of $100,000 (net of a $30,000 income tax benefit) in
the third quarter of 1996, as it had determined the future recoverability of
this deficit could not be assured. All assets and liabilities and operating
results of the FBE and FBM have been consolidated in the accompanying
consolidated balance sheet.
In response to its evaluation of the long-term prospects of the Florida
workers' compensation insurance risk, in November 1996, the Company ceased
writing all workers' compensation insurance products and to focus its workers'
compensation division on providing TPA services to its current and future
customer base, eliminating the Company's future exposure to workers'
compensation underwriting risks.
F-34
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(22) WORKERS' COMPENSATION OPERATIONS (CONTINUED)
As a result of a further actuarial evaluation of all of PCA/P&C's claims
liabilities through December 31, 1996, PCA P&C recorded an additional $145,900
pretax charge in the fourth quarter of 1996. Of this charge, approximately
$50,900 related to the claims associated with the Funds' liabilities which were
assumed by PCA in September 1996 and $95,000 related primarily to claims for
other workers' compensation related insurance products.
As a result of the total 1996 loss on assumption of net workers'
compensation liabilities of approximately $180,900 PCA/P&C has a deficit of
approximately $121,100 at December 31, 1996 and has been rendered insolvent
under Florida statutory accounting standards. In November 1996, State of Florida
Department of Insurance ("DOI") placed PCA/P&C under administrative supervision
permitting the DOI to exercise comprehensive regulatory oversight functions with
respect to PCA/P&C's operations, claims payments and expenditures.
Accordingly, in response to its evaluation of the long-term prospects of the
Florida workers' compensation insurance risk, and as per its agreement with the
DOI, in the fourth quarter of 1996, PCA ceased writing new or renewal workers'
compensation insurance risk products and is focusing its efforts on providing
TPA services to its current and future customer base. To this end, in November
1996, PCA entered into five-year agreements with ZCIC, a subsidiary of an A.M.
Best "A" rated insurance company, whereby PCA provides administrative and
management services to ZCIC in exchange for a fee based on a percentage of net
earned premiums, as defined. Under these agreements, the renewal of insurance
coverage to PCA's existing Florida workers' compensation policyholders and the
providing of workers' compensation insurance coverage to new customers will be
underwritten by ZCIC. PCA believes that this strategy will eliminate PCA's
additional exposure to workers' compensation underwriting risks while preserving
its Florida workers' compensation TPA business.
The Company is evaluating several alternatives regarding the future
operations of its Workers' Compensation Insurance Segment. These alternatives
include selling its segment operations by permitting the Florida Department of
Insurance (FDOI) to place the segment under its ownership and control and
commute all net liabilities of the segment to the FDOI or complete a plan to
rehabilitate the operations of the segment and resume future Workers'
Compensation insurance related business. The Company expects to complete its
analysis of its strategic options during the second quarter of 1997.
WORKERS' COMPENSATION AND RELATED INSURANCE PREMIUM REVENUES AND CLAIMS
COSTS
The Company records its primary and reinsurance premiums net of quota
share and reinsurance arrangements. The components are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Workers' compensation premiums............................................. $ 289,553 $ 51,262 $ 16,986
Premiums ceded............................................................. (214,730) (8,490) (2,806)
---------- --------- ---------
Net premiums............................................................... $ 74,823 $ 42,772 $ 14,180
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-35
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(22) WORKERS' COMPENSATION OPERATIONS (CONTINUED)
The Company records its workers' compensation claims expenses net of quota
share and reinsurance arrangements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------- --------- ----------
<S> <C> <C> <C>
Gross workers' compensation claims expense............................... $ 291,417 $ 34,996 $ 10,492
Claims and costs ceded (recoverable)..................................... (188,167) (5,325) (1,728)
----------- --------- ----------
Net claims expense....................................................... $ 103,250 $ 29,671 $ 8,764
----------- --------- ----------
----------- --------- ----------
</TABLE>
The Company records its workers' compensation claims and related reinsurance
and other recoverables on a gross basis in the accompanying consolidated
financial statements. The recoveries are estimated on paid and unpaid losses
based upon terms of the underlying contracts. Virtually all of the recoveries
recorded in the accompanying consolidated financial statements are due from A.M.
Best A-rated reinsurers and the Florida Special Disability Trust Fund (SDTF).
The Company regularly monitors the credit risk of these entities in assessing
the recoverability of amounts due. The reinsurance and other recoverables
reflected in the accompanying consolidated financial statements includes
estimated recoveries from the SDTF of approximately $50,000. Over the past few
years, the Florida Legislature has been evaluating the SDTF and its ability to
fund workers' compensation claims by insurers. The Company's ability to
ultimately recover amounts from the SDTF are partially dependent upon future
legislative actions taken by the State of Florida.
(23) SUBSEQUENT EVENTS
On January 10, 1997, the Company entered into an agreement whereby PCA
borrowed $16,750 from Sierra. The loan which is due upon demand bears interest
at 8.25% and is subordinated to the prior payment in full of the Company's bank
Credit Facility described in Note 7. The Company used the proceeds of this
borrowing to make a $16,750 principal payment on its bank Credit Facility on
January 10, 1997.
On February 14, 1997, the Company entered into an agreement which amended
its Credit Facility by extending the maturity date to April 30, 1997 and
increasing the interest rate payable to prime plus 1%. The Company paid a fee
equal to 1% of the then outstanding debt balance for such amendment.
As a result of the termination of the Merger Agreement with Sierra, the
Company became in default of its Credit Facility. Effective March 1, 1997, the
Company's Credit Facility debt incurs interest at the default rate of prime plus
3%.
In April 1997, the Credit Facility lenders agreed to further modify the
Credit Facility to: (i) extend the maturity date to October 1, 1997, (ii)
increase the interest rate payable to prime plus 3% through July 1997 and to
prime plus 4% through September 1997, and (iii) require the Company to pay a fee
equal to 1% of the outstanding Credit Facility principal balance on the date of
amendment and in certain circumstances on July 31, 1997.
In February 1997, as a result of PCA's announcement of an anticipated
additional loss in its Workers' Compensation Insurance segment arising from the
additional fourth quarter charges noted above, the DOI obtained a Florida
circuit court order which requires PCA/P&C to submit a corrective action plan by
April 2, 1997 and to attend a hearing on May 2, 1997 to show cause why the DOI
should not place PCA/
F-36
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(23) SUBSEQUENT EVENTS (CONTINUED)
P&C under State Rehabilitation. Additionally, the court issued an automatic stay
of all actions or proceedings against PCA/P&C to remain in effect until further
order by the court.
On November 2, 1996, the Company signed a definitive agreement to merge with
Sierra, a managed care company with primary operations in Nevada. During March
1997, the Merger Agreement with Sierra was terminated. The Company has filed a
lawsuit against Sierra for material breach of several provisions of the Merger
Agreement, and is seeking among other things, monetary damages for recovery of
the Company's costs and fees due from Sierra to the Company. Sierra has also
filed a lawsuit against the Company seeking monetary damages. The ultimate
outcome of this matter is not determinable at this time.
F-37
<PAGE>
EXHIBIT 4.1
- -------------------------------------------------------------------------------
PHYSICIAN CORPORATION OF AMERICA
and
BOATMEN'S TRUST COMPANY
Rights Agent
AMENDMENT NO. 1 TO
RIGHTS AGREEMENT
Dated as of November 11, 1996
- -------------------------------------------------------------------------------
<PAGE>
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
This Amendment No. 1 to Rights Agreement, dated as of November 11, 1996
(this "Amendment"), is between Physician Corporation of America, a Delaware
corporation (the "Company"), and Boatmen's Trust Company (the "Rights Agent").
The Company and the Rights Agent have entered into a Rights Agreement,
dated as of January 13, 1995 (the "Rights Agreement"). On November 2, 1996,
the Company, Sierra Health Services, Inc., a Nevada corporation ("Sierra"),
and Sierra Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Sierra ("Sierra Sub"), entered into an Agreement and Plan of
Merger (the "Merger Agreement"). The Company and the Rights Agent wish to
amend the Rights Agreement as provided below.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
1. For purposes of this Amendment, the capitalized terms used herein
(in addition to those defined above) have the meaning indicated in the Rights
Agreement, except as otherwise set forth in this Amendment.
2. Section 1(a) of the Rights Agreement is hereby amended in its
entirety to read as follows:
"(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the
Beneficial Owner (as such term is hereinafter defined) of 15% or more of the
Common Shares then outstanding, but shall not include the Company, any
wholly-owned Subsidiary (as such term is hereinafter defined) of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company,
any Person holding Common Shares for or pursuant to the terms of any such
plan to the extent, and only to the extent, of the Common Shares so held or
the Exempt Person (as such term is hereinafter defined); "Exempt Person"
shall mean Sierra or any Affiliate of Sierra so long as neither Sierra nor
any Affiliate of Sierra is the Beneficial Owner of any Common Shares other
than Common Shares of which Sierra or any Subsidiary of Sierra is the
Beneficial Owner solely by reason of the execution, delivery or performance
of the Merger Agreement. Notwithstanding the foregoing, no Person shall
become an "Acquiring Person" as the result of an acquisition of Common Shares
by the Company which, by reducing the number of shares outstanding, increases
the proportionate number of shares beneficially owned by such Person to 15%
or more of the Common Shares then outstanding; PROVIDED, HOWEVER, that if a
Person becomes the Beneficial Owner of 15% or more of the Common Shares
<PAGE>
then outstanding by reason of share acquisitions by the Company and shall,
after such share acquisitions by the Company, become the Beneficial Owner of
any additional Common Shares, then such Person shall be deemed to be an
"Acquiring Person"."
3. Section 3 of the Rights Agreement is hereby amended in its entirety to
read as follows:
"Section 3. ISSUE OF RIGHT CERTIFICATES.
(a) Until the earlier (the earlier of such dates being herein
referred to as the "Distribution Date") of (i) the close of
business on the tenth Business Day after the Shares Acquisition
Date and (ii) the close of business on the tenth Business Day after
the date of the commencement by any Person (other than the Company,
any wholly-owned Subsidiary of the Company, any employee benefit
plan of the Company or of any wholly-owned Subsidiary of the
Company, any entity holding Common Shares for or pursuant to the
terms of any such plan, to the extent such entity is so acting with
the approval or consent of the Company, or the Exempt Person) of,
or of the first public announcement of the intention of any Person
(other than the Company, any wholly-owned Subsidiary of the
Company, any employee benefit plan of the Company or of any
wholly-owned Subsidiary of the Company, any entity holding Common
Shares for or pursuant to the terms of any such plan, to the extent
such entity is so acting with the approval or consent of the
Company or as part of its ordinary activities with respect to any
such plan, or the Exempt Person) to commence, a tender or exchange
offer the consummation of which would result in any Person becoming
the Beneficial Owner of 15% or more of the Common Shares then
outstanding (including any such date which is after the date of
this Agreement and prior to the issuance of the Rights), (x) the
Rights will be evidenced (subject to the provisions of Section 3(b)
hereof) by the certificates for Common Shares registered in the
names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right
Certificates, and (y) the right to receive Right Certificates will
be transferable only in connection with the transfer of Common
Shares of the Company. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights
Agent will countersign, and the Company will send or cause to be
sent (and the Rights Agent will, if requested, send), by
first-class, insured, postage prepaid mail, to
-2-
<PAGE>
each record holder of Common Shares as of the close of business on
the Distribution Date, at the address of such holder shown on the
records of the Company, a Right Certificate, in substantially the
form of EXHIBIT A hereto (a "Right Certificate"), evidencing one
Right for each Common Share of the Company so held. As of the
Distribution Date, the Rights will be evidenced solely by such
Right Certificates."
4. Section 7(a) of the Rights Agreement is hereby amended in its
entirety to read as follows:
"Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) The registered holder of any Right Certificate may exercise
the Rights evidenced thereby (except as otherwise provided herein)
in whole or in part at any time, subject to the last sentence of
Section 23(a) hereof, after the Distribution Date upon surrender of
the Right Certificate, with the form of election to purchase on the
reverse side thereof duly executed, to the Rights Agent at the
principal office of the Rights Agent, together with payment of the
Purchase Price for each Common Share as to which the Rights are
exercised, at or prior to the earliest of (i) the close of business
on January 13, 2005 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof (the
"Redemption Date"), (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof and (iv) immediately
before the effective time of the merger set forth in the Merger
Agreement."
5. Section 25(a) of the Rights Agreement is hereby amended in its
entirety to read as follows:
Section 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall propose (i) to pay any dividend
payable in stock of any class to the holders of Common Shares or to
make any other distribution to the holders of Common Shares (other
than a regular quarterly cash dividend), (ii) to offer to the
holders of Common Shares rights or warrants to subscribe for or to
purchase any additional Common Shares or shares of stock of any
class or any other securities, rights or options (iii) to effect
any reclassification of Common Shares (other than a
reclassification involving only the subdivision of outstanding
Common Shares), (iv) to effect any consolidation or merger into or
with, or to effect any sale or other transfer (or to permit one or
more of its Subsidiaries to effect any sale or other transfer), in
one or more transactions, of 50% or more of the assets or earning
power
-3-
<PAGE>
of the Company and its Subsidiaries (taken as a whole) to, any
other Person (other than the Exempt Person), or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in
each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for purposes
of such stock dividend, or distribution of rights or warrants, or
the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take
place and the date of participation therein by the holders of the
Common Shares, if any such date is to be fixed, and such notice
shall be so given in the case of any action described by clause (i)
or (ii) above at least 10 days prior to the record date for
determining holders of the Common Shares for purposes of such
action, and in the case of any such other action, at least 10 days
prior to the date of the taking of such proposed action or the date
of participation therein by the holders of the Common Shares,
whichever shall be the earlier."
6. The Rights Agreement is hereby amended by adding a Section 35 to read
as follows:
"Section 35. SIERRA MERGER. Anything in this Agreement to the
contrary notwithstanding, in no event shall the execution, delivery
or performance of the Merger Agreement (including without
limitation the consummation of the merger set forth in the Merger
Agreement and the exchange of Common Shares for the shares of
Sierra Common Stock (as defined in the Merger Agreement) in
accordance with Article II of the Merger Agreement) cause (A) the
Rights to become exercisable, (B) Sierra or any Affiliate of Sierra
to be deemed an "Acquiring Person", or (C) the "Shares Acquisition
Date" to occur upon any such event and (ii) the "Final Expiration
Date" shall occur immediately prior to the Effective Time (as
defined in the Merger Agreement)."
7. This Amendment shall be deemed effective as of 12:01 a.m., Miami,
Florida time, on November 2, 1996, as if executed by both parties at such
time. Except as expressly set forth herein, the terms and provisions of the
Rights Agreement shall continue in full force and effect.
8. Upon effectiveness of this Amendment, each reference in the Rights
Agreement, to "this Agreement", "hereunder", "herein" or words of like import
shall be a reference to the Rights Agreement, as amended by this Amendment.
9. This Amendment shall be construed and enforced in accordance with
and governed by the laws of the State of Delaware.
-4-
<PAGE>
10. This Amendment may be executed in any number of counterparts, each of
such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: PHYSICIAN CORPORATION
OF AMERICA
By By
--------------------------------- ---------------------------------
John A. Hageman E. Stanley Kardatzke, M.D.
Secretary Chairman of the Board
Attest: BOATMEN'S TRUST COMPANY
By By
--------------------------------- ---------------------------------
Linda Welch Jerry L. Rector
Assistant Vice President and Vice President and
Assistant Secretary Assistant Secretary
-5-
<PAGE>
EXHIBIT 10.1.4
FOURTH AMENDMENT AND CONSENT AGREEMENT
FOURTH AMENDMENT AND CONSENT AGREEMENT dated as of June 10, 1996
(this "Amendment") among Physician Corporation of America (the "Borrower"), the
banks listed on the signature pages hereof (the "Lenders"), Citibank, N.A., as
issuing bank (the "Issuing Bank"), and Citibank, N.A., as agent for the Lenders
and Issuing Bank (the "Agent").
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Issuing Bank and the Agent are
parties to that certain Revolving Credit Agreement dated as of October 27, 1994,
as amended by an Amendment to Credit Agreement and Consent to Acquisition dated
as of September 22, 1995, by a Second Amendment to Credit Agreement dated as of
March 29, 1996 (the "Second Amendment") and by a Third Amendment to Credit
Agreement dated as of April 5, 1996 (such Revolving Credit Agreement, as so
amended and as further amended, supplemented or otherwise modified and in effect
from time to time being the "Credit Agreement"). Capitalized terms defined in
the Credit Agreement and not otherwise defined herein are used herein as therein
defined; and capitalized terms defined in Section 2 hereof are used elsewhere
herein as so defined (without regard to the conditions to effectiveness in
Section 5 hereof).
2. Pursuant to the Borrower Pledge Agreement, the Borrower has
pledged all of the issued and outstanding stock of Physicians First, Inc.
("PFI"), a wholly owned Subsidiary of the Borrower. PFI is a Guarantor under
its Guaranty dated as of March 29 made for the benefit of the Lenders, the
Issuing Bank and the Agent (the "PFI Guaranty"). PFI's obligations under the
PFI Guaranty are secured by Liens on PFI's properties granted under the
Subsidiary Security Agreement dated as of March 29, 1996 made by PFI in favor of
the Agent for the benefit of the Lenders and the Issuing Bank (the "PFI Security
Agreement").
3. Section 7(b) of the Second Amendment provides that concurrently
upon and subject to the occurrence of all of (x) the consummation of the sale by
the Borrower of the stock of PFI or of all or substantially all of the assets of
PFI in a transaction providing aggregate consideration of not less than $20
million, (y) the Agent's receipt, in immediately available funds, of all Net
Cash Proceeds of such sale pursuant to Section 2.10 of the Credit Agreement and
(z) the pledge to the Agent, on terms and pursuant to documents in each case
satisfactory to the Agent, the Issuing Bank and the Majority Lenders, of all
non-cash proceeds received by the Borrower as part of the consideration for such
sale, the Agent shall
<PAGE>
2
take such action as shall be reasonably necessary (i) to cause the release of
the stock of PFI so sold from the pledge thereof under the Borrower Pledge
Agreement and (ii) to cause PFI to be released from the PFI Guaranty and the PFI
Security Agreement and the Collateral granted by PFI under such PFI Security
Agreement to be released from the Lien thereof.
4. The Borrower proposes to sell all of the issued and outstanding
stock of PFI in a transaction (the "PFI Stock Sale") provided for in the Stock
Purchase Agreement dated as of May 5, 1996 between the Borrower and FPA Medical
Management, Inc. ("FPA"), a copy of which is attached hereto as Annex I (such
Stock Purchase Agreement, as amended, supplemented or otherwise modified from
time to time being the "PFI Stock Purchase Agreement"). The PFI Stock Purchase
Agreement provides for payment of consideration in the form of cash, shares of
the common stock, par value $0.002 per share, of FPA ("FPA Stock"), warrants to
purchase FPA Stock and additional payments, as specified in Section 1.2 of the
PFI Stock Purchase Agreement. The aggregate amount of such consideration is
above the $20 million minimum amount specified in clause (x) of Section 7(b) of
the Second Amendment. The Borrower has requested that the Agent, Issuing Bank
and Majority Lenders consent to the proposed terms, which are provided for
herein, of the pledge to the Agent of the non-cash consideration to be paid
under the PFI Stock Purchase Agreement, which consent, together with
satisfaction of the other requirements of Section 7(b) of the Second Amendment,
is required in order for the release provisions of said Section 7(b) to be
implemented and for the consummation of the PFI Stock Sale.
5. The Borrower proposes to cause its Subsidiary, PCA Property &
Casualty Company ("PCIC") on or before June 30, 1996 to purchase from the
Borrower (the "FPA Stock Monetization Purchase") the FPA Stock (the "FPA Closing
Stock") to be delivered to the Borrower under the PFI Stock Purchase Agreement
on the Closing, as such term is defined in the PFI Stock Purchase Agreement (the
"PFI Closing"). The Borrower proposes that the purchase price to be paid by
PCIC in the FPA Stock Monetization Purchase will be such amount as is stated to
be the fair market value of such FPA Closing Stock in a valuation opinion (the
"FPA Closing Stock Valuation Opinion") to be provided in connection with the
closing of the PFI Stock Sale by a nationally recognized investment banking or
valuation firm to be retained by the Borrower, which will be used by the
Borrower and FPA and their respective auditors as the basis for valuing the FPA
Closing Stock component and related components of the consideration paid in the
PFI Stock Sale. The Borrower has requested that the Super Majority Lenders
consent to the FPA Stock Monetization Purchase, and to the release, upon
consummation of the FPA Stock Monetization Purchase, of the pledge the FPA
Closing Stock that will be granted in favor of the Agent in connection herewith,
and the Super Majority Lenders are willing to grant such consent, in each case
on and subject to the terms hereof.
6. The Borrower has further requested that the Credit Agreement be
amended so that the restrictions in Section 6.02(i) of the Credit Agreement will
not apply to
<PAGE>
3
the Borrower's holding of the non-cash consideration to be paid upon
consummation of the PFI Stock Sale and pledged to the Agent or to PCIC's holding
of the FPA Closing Stock upon and after the FPA Stock Monetization Purchase.
The Agent, Issuing Bank and Majority Lenders are willing to grant such consent
and agree to such amendment upon the terms and subject to the conditions hereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereto agree as follows:
SECTION 1. CONSENTS. (a) The Majority Lenders, the Issuing Bank
and the Agent hereby consent to the terms of the pledge to the Agent of the non-
cash consideration to be paid under the PFI Stock Purchase Agreement, as
provided in this Amendment, and upon such pledge confirm satisfaction of the
requirements of clause (z) of Section 7(b) of the Second Amendment.
(b) The Super Majority Lenders hereby consent to the FPA Stock
Monetization Purchase and to the Agent's release in connection therewith of the
FPA Closing Stock from the pledge thereof under the PFI Consideration Pledge
Agreement on or prior to June 30, 1996, subject, in each case, to the
satisfaction of all of the following conditions:
(i) The FPA Closing Stock Valuation Opinion shall have been issued
and the Agent shall have received evidence satisfactory to it that the FPA
Closing Stock Valuation Opinion has been accepted by the Borrower and FPA
and their respective auditors as the basis for valuing the FPA Closing
Stock component and related components of the consideration paid in the PFI
Stock Sale.
(ii) The Borrower shall have or paid or caused to be paid to the Agent
(in the manner specified in Section 2.14 of the Credit Agreement) an amount
equal to the greater of (A) the fair market value of the FPA Closing Stock
as stated in the FPA Closing Stock Valuation Opinion and (B) $7.5 million,
for application in the manner provided for Net Cash Proceeds in Section
2.10(a)(ii)(A) of the Credit Agreement.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. (a)(i) The definition of
"Loan Documents" set forth in Section 1.01 of the Credit Agreement is hereby
amended in its entirety so as to read in full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of the
Guaranties, Security Agreements and other documents delivered by the
Borrower or any of its Subsidiaries pursuant to Section 6 of the
Second Amendment, the Fourth Amendment, the PFI
<PAGE>
4
Consideration Pledge Agreement and the PFI Consideration Consent
Agreement, in each case as amended, supplemented or otherwise modified
from time to time."
(ii) The definition of "Collateral Documents" set forth in
Section 1.01 of the Credit Agreement is hereby amended in its entirety so
as to read in full as follows:
"'COLLATERAL DOCUMENTS' means the Borrower Pledge Agreement, each
of the Security Agreements and any other agreement that creates or
purports to create a Lien in favor of the Agent for the benefit of the
Secured Parties, including, without limitation, the PFI Consideration
Collateral Documents."
(iii) The Definition of "EBITDA" set forth in Section 1.01 of
the Credit Agreement is hereby amended in its entirety so as to read in
full as follows:
"'EBITDA'" means, for any period, the sum of (i) Net Income, plus
(ii) interest expense, plus (iii) income tax expense, minus (iv)
income tax credits, plus (v) depreciation expense, plus (vi)
amortization expense, in each case determined in accordance with
generally accepted accounting principles."
(iv) The definition of "Fixed Charges" set forth in Section
1.01 of the Credit Agreement is hereby amended in its entirety so as to
read in full as follows:
"'FIXED CHARGES' means, for any period and without duplication,
the sum of (i) Interest Expense and fees, to the extent regularly
scheduled and due and payable during such period on, and amortization
for such period of debt discount in respect of, all Debt (including
the interest portion of rentals under Capital Leases during such
period) PLUS (ii) the aggregate principal amount of all Debt
(including the principal portion of rentals under Capital Leases and
the principal portion of Debt incurred in connection with Capital
Expenditures) to the extent regularly scheduled and due and payable
during such period."
(b) Section 1.01 of the Credit Agreement is hereby amended by the
addition of the following definitions thereto:
"FOURTH AMENDMENT" means the Fourth Amendment and Consent Agreement
dated as of June 10, 1996 among the Borrower, the Lenders parties thereto,
the Issuing Bank and the Agent.
<PAGE>
5
"FPA CLOSING STOCK" has the meaning set forth in Preliminary Statement
5 of the Fourth Amendment.
"FPA CLOSING STOCK MONETIZATION PURCHASE" has the meaning set forth in
Preliminary Statement 5 of the Fourth Amendment.
"FPA NOTE" has the meaning set forth in Section 5(e)(iv) of the Fourth
Amendment.
"FPA STOCK" has the meaning set forth in Preliminary Statement 4 of
the Fourth Amendment.
"FPA WARRANTS" has the meaning set forth in Section 5(e)(iv) of the
Fourth Amendment.
"PFI CONSIDERATION COLLATERAL DOCUMENTS" means the PFI Consideration
Pledge Agreement and the PFI Consideration Consent Agreement, in each case
as amended, supplemented or otherwise modified from time to time.
"PFI CONSIDERATION CONSENT AGREEMENT" has the meaning set forth in
Section 5(e)(xii) of the Fourth Amendment.
"PFI CONSIDERATION PLEDGE AGREEMENT" has the meaning set forth in
Section 5(e)(iv) of the Fourth Amendment.
"PFI STOCK PURCHASE AGREEMENT" has the meaning set forth in
Preliminary Statement 4 of the Fourth Amendment.
(c) Section 6.02(i) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(i) INVESTMENTS IN OTHER PERSONS. Make, or permit any of its
Subsidiaries to make, any loan or advance or gift to, or investment in, any
other Person, or purchase or otherwise acquire, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of capital stock,
obligations or other securities, or make any capital contribution to, or
otherwise invest in, any other Person, EXCEPT for (i)(A) Cash Equivalents
and (B) investments by the Borrower or any of its Subsidiaries in
compliance with the Investment Policy and Guidelines applicable to the
Borrower and its Subsidiaries, as approved by the Borrower's Board of
Directors and in effect from time to time (exclusive, however, of any
investment otherwise permitted thereunder that is comprised of a loan or
advance of a type referred to in clause (ii) or (iii) of this Section
6.02(i) or is otherwise a loan or advance to or an
<PAGE>
6
investment in the Borrower or any of its Subsidiaries), (ii) (A) loans or
advances by any Subsidiary of the Borrower that is not a Collateral Party
to any other Subsidiary of the Borrower that is not a Collateral Party and
(B) capital contributions by the Borrower to any HMO Subsidiary or
Insurance Subsidiary whose stock and debt are pledged as Collateral under
the Borrower Pledge Agreement (whether as of or after the Second Amendment
Effective Date) solely to the extent, however, that such capital
contributions are necessary to enable such HMO Subsidiary or Insurance
Subsidiary, as the case may be, to maintain, but not exceed, a level of
105% of the amount of HMO Regulatory Tangible Net Equity or Insurance
Regulatory Tangible Net Equity required under the HMO Regulations or
Insurance Regulations, as the case may be, applicable to such HMO
Subsidiary or Insurance Subsidiary, (iii) loans to employees in connection
with housing relocations; PROVIDED, that, the aggregate outstanding
principal amount thereof does not at any time exceed $250,000 loaned to any
one individual or $2,000,000 in the aggregate and (iv) such loans,
investments and other interests of the Borrower and PCIC, respectively, as
are comprised of (A) the Borrower's interests in the FPA Stock and FPA
Warrants and in the FPA Note and collateral therefor, in each case to the
extent acquired pursuant to the transactions contemplated in the PFI Stock
Purchase Agreement and pledged pursuant to the PFI Consideration Pledge
Agreement and (B) PCIC's holding of the FPA Closing Stock upon and after
the FPA Closing Stock Monetization Purchase."
(d) Section 6.03 of the Credit Agreement is hereby amended by the
addition of a new subsection (f), to read in full as follows:
"(f) COVENANT CALCULATIONS. For purposes of any covenant in this
Section 6.03, calculations made after the date hereof of financial position
or results as at the end of any period shall be made as at the closing of
the financial records for such period and in any event without any
adjustment or restatement of such position or results for such period or
any earlier period after, in any case, the closing of such records
therefor."
(e) Section 7.01(s) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(s) the Borrower shall fail to comply with any obligation in Section
8(b) of the Second Amendment or in Section 6 of the Fourth Amendment; or"
SECTION 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows:
(a) All representations and warranties of the Borrower contained in
the Credit Agreement, both before and after giving effect to this
Amendment, are true in
<PAGE>
7
all material respects as of the date hereof (except for any such
representation or warranty (or portion thereof) that is qualified by
reference to a specific materiality standard, in which case such
representation or warranty is true in all respects as of the date hereof).
(b) Without limiting the representations and warranties made in
subsection (a) above or in the Credit Agreement, no authorization, consent,
approval or other action by, and no notice to or filing with, any HMO
Regulator or Insurance Regulator is required for, and no HMO Event,
Insurance Event or violation of the HMO Regulations or Insurance
Regulations would result from, the due execution, delivery or performance
by the Borrower of this Amendment or any of the Loan Documents to be
delivered in connection herewith.
(c) The Consolidated balance sheet of the Borrower and its
Subsidiaries, dated March 31, 1996, and the related Consolidated statements
of operations, stockholders' equity and cash flow of the Borrower and its
Subsidiaries for the fiscal quarter then ended, copies of which have been
furnished to the Agent, the Issuing Bank and each Lender, fairly present
the financial condition of the Borrower and its Subsidiaries as at such
date and the results of the operations of the Borrower and its Subsidiaries
for the fiscal quarter ended on such date, all in accordance with generally
accepted accounting principles consistently applied.
SECTION 4. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and
after the Fourth Amendment Effective Date, each reference in the Credit
Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like
import referring to the Credit Agreement, and each reference to the Credit
Agreement in the other Loan Documents, shall mean and be a reference to the
Credit Agreement as amended hereby.
(b) Except as specifically amended under Section 2 hereof, each of
the Credit Agreement and each other Loan Document shall remain in full force and
effect and is hereby ratified and confirmed.
(c) The Borrower acknowledges and agrees that, except to the extent
specifically amended under Section 2 hereof, it is obligated to comply with each
and every term, covenant, agreement and condition applicable to it under the
Credit Agreement or the other Loan Documents. The execution, delivery and
effectiveness of this Amendment shall not otherwise operate as a waiver of any
right, remedy or privilege of any Lender, the Issuing Bank or the Agent under
the Credit Agreement or any other Loan Document, any and all of which rights,
remedies and privileges are reserved.
SECTION 5. CONDITIONS OF EFFECTIVENESS. Sections 1, 2 and 6 of this
Amendment shall become effective subject to the satisfaction of the following
conditions
<PAGE>
8
precedent as of the date (the "Fourth Amendment Effective Date") when all such
conditions shall first have been satisfied:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Agent, the Issuing Bank and the Super
Majority Lenders.
(b) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement (including those relating to
this Amendment) to the extent that request for such payment has been made
to the Borrower.
(c) The Agent shall have received, in immediately available funds for
application as specified in Sections 2.10(a)(ii)(A) of the Credit
Agreement, an amount equal to the amount certified in the certificate
referred to in Section 5(e)(i) hereof as the amount, if any, of the cash
consideration payable to the Borrower at the PFI Closing pursuant to
Section 1.3.1.1 of the PFI Stock Purchase Agreement.
(d) The Agent shall have received evidence satisfactory to it that
(x) the PFI Stock Purchase Agreement and the documents to be delivered
thereunder have been amended to the extent determined by the Agent to be
reasonably necessary in order for the Borrower's interest in the PFI Stock
Purchase Agreement and the non-cash consideration payable thereunder to be
amenable to pledge and assignment to the Agent for the benefit of the
Lenders and Issuing Bank pursuant to the terms of the PFI Consideration
Collateral Documents, such that the rights and remedies provided for
therein will be available to the Agent, the Lenders and the Issuing Bank
and (y) no amendments to the PFI Stock Purchase Agreement or the
Georgia/Alabama Breakup Fee Agreement (as defined below) have been made
other than those referred to in the foregoing clause (x) and such others as
shall have been approved by the Agent.
(e) The Agent shall have received the following, each dated the
Fourth Amendment Effective Date (unless otherwise specified), in form and
substance satisfactory to the Agent, the Issuing Bank and the Majority
Lenders and (unless otherwise specified) in sufficient copies for the
Agent, Issuing Bank and each Lender:
(i) A certificate of the Borrower, signed by the Borrower's
Chief Executive Officer, Chief Financial Officer or other officer duly
authorized, certifying as follows:
(A) that the PFI Closing has occurred in accordance with
the terms of the PFI Stock Purchase Agreement without any waiver
of the conditions thereto;
<PAGE>
9
(B) that attached thereto is a true and complete copy of
each of the PFI Stock Purchase Agreement and the Georgia/Alabama
Purchase Agreement (as defined below), in each case as in effect
on such date;
(C) the amount of cash payable at the PFI Closing
pursuant to Section 1.3.1.1 of the PFI Stock Purchase Agreement;
and
(D) that (1) each of the representations and warranties
contained in Section 3 hereof is true and correct in all respects
on and as of the date of such certificate and (2) after giving
effect to the PFI Stock Sale and Sections 1 and 2 hereof, no
event has occurred and is continuing which constitutes a Default
or Event of Default.
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower approving each Loan Document to which it is
or is to be a party in connection herewith, and of all documents
evidencing other necessary corporate action and governmental and other
third party approvals and consents, if any, with respect each such
Loan Document.
(iii) A certificate of the Secretary or an Assistant Secretary
of the Borrower certifying the names and true signatures of the
officers of the Borrower authorized to sign this Agreement and each
other Loan Document which it is or is to be party and the other
documents to be delivered hereunder and thereunder.
(iv) A Pledge, Security and Assignment Agreement, in form and
substance satisfactory to the Agent (the "PFI Consideration Pledge
Agreement"), duly executed by the Borrower, granting security
interests in and pledges of, the collateral describe therein,
including, without limitation, all of the Borrower's right, title and
interest in and to the following and the rights and interests arising
thereunder:
(A) the note to be delivered by FPA pursuant to Section
1.3.1.2 of the PFI Stock Purchase Agreement (the "FPA Note");
(B) the FPA Closing Stock and all additional shares of
FPA Stock as may be held by the Borrower and indebtedness of FPA
as may be owed to the Borrower in each case from time to time;
(C) the warrants to be delivered by FPA pursuant to
Section 1.3.3 of the PFI Stock Purchase Agreement (the "FPA
Warrants");
<PAGE>
10
(D) the registration rights agreement to be entered into
pursuant to Section 1.10 of the PFI Stock Purchase Agreement (the
"FPA Registration Rights Agreement");
(E) the PFI Stock Purchase Agreement;
(F) each of the guaranties to be delivered by FPA, PFI
Family First Medical Centers, Inc. ("Family First"), Physicians
Medical Group of Florida, Inc. ("Medical Group") and PCA Family
Pharmacy, Inc. ("Pharmacy") pursuant to Section 1.13 of the PFI
Stock Purchase Agreement or otherwise under Section 1 of the PFI
Stock Purchase Agreement (the "FPA Guaranties");
(G) each of the pledge and security agreements to be
delivered by FPA and PFI pursuant to Section 1.11 of the PFI
Stock Purchase Agreement (the "FPA Pledge Agreements"); and
(H) each of the asset security agreements to be delivered
by PFI, Family First, Medical Group and Pharmacy pursuant to
Section 1.12 of the PFI Stock Purchase Agreement (the "FPA
Security Agreements"; together with the FPA Note, the FPA
Warrants, the FPA Registration Rights Agreement, the FPA
Guaranties, the FPA Pledge Agreements and the PFI Stock Purchase
Agreement, in each case as amended, supplemented or otherwise
modified from time to time, being the "FPA Documents").
(v) The executed original of the FPA Note (certified by the
Borrower to be the only such original), duly endorsed in blank.
(vi) The certificates evidencing the FPA Closing Stock, duly
endorsed in blank.
(vii) The executed original of each of the FPA Warrants, duly
endorsed in blank.
(viii) The executed original of each of the FPA Guaranties
(certified by the Borrower to be the only such originals).
(ix) The executed original of each of the FPA Pledge Agreements
(certified by the Borrower to be the only such originals), together
with all certificates and instruments evidencing the shares and
indebtedness pledged thereunder, in each case duly endorsed in blank.
<PAGE>
11
(x) The executed original of each of the FPA Security
Agreements (certified by the Borrower to be the only such originals),
together, in the case of each such FPA Security Agreement, with:
(A) acknowledgment copies or stamped receipt copies of
proper financing statements, duly filed on or before the date of
such FPA Security Agreement under the Uniform Commercial Code of
all jurisdictions that the Agent may deem necessary or desirable
in order to perfect and protect the security interests created
under such FPA Security Agreement and covering the collateral
described in such FPA Security Agreement or other evidence
satisfactory to the Agent that arrangements have been made with a
reputable filing service for such filing of such financing
statements;
(B) acknowledgment copies or stamped receipt copies of
proper assignments, in favor of the Agent, of each of the
financing statements referred to in subsection (A) above, duly
filed on or before the Fourth Amendment Effective Date under
applicable the Uniform Commercial Code or other evidence
satisfactory to the Agent that arrangements have been made with a
reputable filing service for such filing of such assignments; and
(C) evidence of the completion of all other recordings
and filings of or with respect to such FPA Security Agreement
that the Agent may deem necessary or desirable in order to
perfect and protect the security interests created thereby.
(xi) acknowledgment copies or stamped receipt copies of proper
financing statements, duly filed on or before the Fourth Amendment
Effective Date under the Uniform Commercial Code of all jurisdictions
that the Agent may deem necessary or desirable in order to perfect and
protect the security interests created under the PFI Consideration
Pledge Agreement and covering the Collateral described therein or
other evidence satisfactory to the Agent that arrangements have been
made with a reputable filing service for such filing of such financing
statements, together with evidence of the completion of all other
recordings and filings of or with respect to the PFI Consideration
Pledge Agreement that the Agent may deem necessary or desirable in
order to perfect and protect the Liens created thereby.
(xii) A Consent Agreement, in form and substance satisfactory to
the Agent (the "PFI Consideration Consent Agreement"), duly executed
by each of FPA, PFI, Family First, Medical Group, Pharmacy and the
Borrower,
<PAGE>
12
consenting to the PFI Consideration Pledge Agreement and to the grant
provided for therein of security interests, pledges and assignments of
the Borrower's interests in property and obligations of such parties
other than the Borrower and agreeing to such other matters as are
provided for in the PFI Collateral Consent Agreement.
(xiii) An Amendment to Borrower Pledge Agreement, in form and
substance satisfactory to the Agent, duly executed by the Borrower,
providing for the pledge pursuant to the Borrower Pledge Agreement of
the shares of stock held by the Borrower in each of PCA Health Plans
of Puerto Rico, Inc. and PCA Insurance Group of Puerto Rico, Inc.
(collectively, the "Puerto Rico Subsidiaries") together with
(A) certificates representing all of the shares of stock
held by the Borrower of each of the Puerto Rico Subsidiaries, in
each case duly indorsed in blank; and
(B) an opinion of special outside regulatory counsel to
the Puerto Rico Subsidiaries satisfactory to the Agent, and in
form and substance satisfactory to the Agent, in respect of the
Puerto Rico Subsidiaries and such pledge.
(xiv) Certified copies of the resolutions of the Board of
Directors of each of FPA, PFI, Family First, Medical Group and
Pharmacy approving each PFI Consideration Collateral Document, FPA
Document and other document to be delivered hereunder or thereunder to
which it is or is to be a party, and of all documents evidencing other
necessary corporate action and governmental and other third party
approvals and consents, if any, with respect each such PFI
Consideration Collateral Document, FPA Document and other document.
(xv) A certificate of the Secretary or an Assistant Secretary
of each of FPA, PFI, Family First, Medical Group and Pharmacy
certifying the names and true signatures of the officers of such party
authorized to sign each PFI Consideration Collateral Document and FPA
Document to which it is or is to be party and the other documents to
be by it delivered hereunder and thereunder.
(xvi) Legal opinions from (i) counsel to the Borrower and (ii)
counsel to FPA, to the extent requested by the Agent and in each case
in form and substance satisfactory to the Agent.
<PAGE>
13
SECTION 6. COVENANTS. The Borrower agrees to comply with the
following covenants for so long as any obligation under any Loan Document shall
remain unpaid:
(a) ADDITIONAL AMOUNT PAYMENT. (i) Promptly upon the
determination of the Additional Amount (as defined in the PFI Stock
Purchase Agreement) in accordance with Section 1.3.1.4 of the PFI Stock
Purchase Agreement, but in no event later than the Settlement Date (as
defined in the PFI Stock Purchase Agreement), the Borrower shall deliver to
the Agent a certificate, signed by the Borrower's chief executive officer
or chief financial officer, setting forth the Additional Amount as so
determined (together with the calculations, in reasonable detail, made to
determine such amount) and indicating whether such amount is payable to the
Borrower pursuant to the penultimate sentence of Section 1.3.1.4 of the PFI
Stock Purchase Agreement.
(ii) Not later than the Business Day immediately
following the Borrower's receipt of the Additional Amount, if payable
to the Borrower pursuant to Section 1.3.1.4 of the PFI Stock Purchase
Agreement, the Borrower shall pay such amount to the Agent (in the
manner specified in Section 2.14 of the Credit Agreement) for
application in the manner provided for Net Cash Proceeds in Section
2.10(a)(ii)(A) of the Credit Agreement.
(b) SUBSEQUENT PAYMENTS. (i) Not later than the first
anniversary of the Effective Closing Date (as defined in Section 1.3.1.3 of
the PFI Stock Purchase Agreement), the Borrower shall deliver the Agent a
certificate, signed by the Borrower's chief executive officer or chief
financial officer, setting forth the amount of the Subsequent Payment (as
defined in Section 1.3.1.3 of the PFI Stock Purchase Agreement) payable to
the Borrower on such first anniversary, as determined in accordance with
said Section 1.3.1.3 (the "First Anniversary Subsequent Payment"), together
with the calculations, in reasonable detail, made to determine such amount.
(ii) Not later than the Business Day immediately
following the Borrower's receipt of the First Anniversary Subsequent
Payment, the Borrower shall pay such amount to the Agent (in the
manner specified in Section 2.14 of the Credit Agreement) for
application in the manner provided for Net Cash Proceeds in Section
2.10(a)(ii)(A) of the Credit Agreement.
(iii) Not later than the second anniversary of the
Effective Closing Date, the Borrower shall deliver the Agent a
certificate, signed by the Borrower's chief executive officer or chief
financial officer, setting forth the amount of the Subsequent Payment
payable to the Borrower on such second anniversary, as determined in
accordance with Section 1.3.1.3 of the PFI Stock Purchase Agreement
(the "Second Anniversary Subsequent Payment"),
<PAGE>
14
together with the calculations, in reasonable detail, made to
determine such amount.
(iv) Not later than the Business Day immediately
following the Borrower's receipt of the Second Anniversary Subsequent
Payment, the Borrower shall pay such amount to the Agent (in the
manner specified in Section 2.14 of the Credit Agreement) for
application in the manner provided for Net Cash Proceeds in Section
2.10(a)(ii)(A) of the Credit Agreement.
(c) FPA DOCUMENT; GEORGIA/ALABAMA BREAKUP FEE AGREEMENT
PAYMENTS. (i) All amounts of cash paid to the Borrower from time to
time under the FPA Note or any other FPA Document (other than any amount
covered by the provisions of subsection (a) or (b) of this Section 6)
shall, not later than the Business Day immediately following the Borrower's
receipt thereof, be paid by the Borrower to the Agent (in the manner
specified in Section 2.14 of the Credit Agreement) for application in the
manner provided for Net Cash Proceeds in Section 2.10(a)(ii)(A) of the
Credit Agreement.
(ii) All amounts of cash paid to the Borrower from time
to time under the agreement under Section 7.3(a) of the Stock Purchase
Agreement dated as of May 3, 1996 (the "Georgia/Alabama Purchase
Agreement") between Health Partners of Alabama, Inc. ("Health
Partners") and the Borrower and terms of such agreement applicable to
the implementation or construction of said Section 7.3(a) (the
"Georgia/Alabama Breakup Fee Agreement") shall, not later than the
Business Day immediately following the Borrower's receipt thereof, be
paid by the Borrower to the Agent (in the manner specified in Section
2.14 of the Credit Agreement) for application in the manner provided
for Net Cash Proceeds in Section 2.10(a)(ii)(A) of the Credit
Agreement.
(d) SEGREGATION OF PAYMENTS; PAYMENTS UPON EVENT OF DEFAULT.
(i) All amounts referred to in subsections (a), (b) and (c) of this
Section 6 that are received by the Borrower shall be received in trust for
the benefit of the Agent and segregated from the other property and funds
of the Borrower until paid over to the Agent as required hereunder.
(ii) Upon the occurrence and during the continuance of an Event
of Default, all rights of the Borrower to receive amounts that it
would otherwise be authorized to receive under subsections (a), (b)
and (c) of this Section 6 shall automatically cease, and all such
rights shall thereupon become vested in the Agent, which shall
thereupon have the sole right to receive such amounts,
<PAGE>
15
for application in the manner provided for Net Cash Proceeds in
Section 2.10(a)(ii)(A) of the Credit Agreement.
(e) AMENDMENTS TO FPA DOCUMENTS; EXERCISE OF RIGHTS AND
REMEDIES UNDER FPA DOCUMENTS; DEFAULTS UNDER FPA DOCUMENTS. (i) Except
a permitted under the PFI Consideration Pledge Agreement, the Borrower
shall not amend, supplement or otherwise modify, or agree to any waiver or
grant any consent under, any FPA Document or the Georgia/Alabama Breakup
Fee Agreement without the prior written consent of the Agent.
(ii) The Borrower shall not (A) exercise any remedy upon the
occurrence of a default under any of the FPA Documents or any right of
setoff against any party to any FPA Document or against Health
Partners in respect of the Georgia/Alabama Breakup Fee Agreement or
(B) exercise any of its rights under any FPA Document to acquire, or
cause the filing of a registration statement in respect of, any shares
of FPA Stock, unless, in either case, both (1) the Borrower shall have
given the Agent prior notice of the proposed exercise and the date
proposed therefor (which notice shall be not later than five Business
Days prior to the proposed exercise or, if a notice period is not
practicable given the circumstances of the proposed exercise, such
later notice as shall be the earliest practicable given such
circumstances) and (2) the Agent shall not have advised the Borrower
prior to the proposed date of such exercise that the Agent has
determined that the proposed exercise would materially and
detrimentally affect the rights, remedies, privileges or interests of
the Agent, Issuing Bank or Lenders in respect of the Collateral
covered by the PFI Consideration Pledge Agreement or the value of such
Collateral or in respect of the Georgia/Alabama Breakup Fee Agreement.
(iii) Promptly following the occurrence of any default
under any FPA Document or upon any termination by Health Partners of
the Georgia/Alabama Purchase Agreement, the Borrower shall give the
Agent written notice thereof.
(f) AVOIDANCE OF DEFENSES, ETC. The Borrower will not, and
will not permit any of its Subsidiaries to, enter into any agreement or
arrangement, engage in any act or omission or otherwise conduct its affairs
in any manner if the effect thereof in any case would give rise to or
permit any validly asserted defense, counterclaim, setoff or right of
recoupment in favor of FPA or any other party to any FPA Document (other
than the Borrower), or in favor of Health Partners, respectively, in
respect of any amount payable under the terms of any FPA Document or the
Georgia/Alabama Breakup Fee Agreement, respectively (in each case without
regard to any such defense, counterclaim, setoff or right of recoupment) .
<PAGE>
16
SECTION 7. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same agreement.
SECTION 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
17
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
PHYSICIAN CORPORATION OF AMERICA
By:
-------------------------------------------
Name:
Title:
THE LENDERS AND ISSUING BANK:
CITIBANK, N.A., as Lender and as Issuing Bank
By:
-------------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
-------------------------------------------
Name:
Title:
NATIONSBANK OF TENNESSEE
By:
-------------------------------------------
Name:
Title:
<PAGE>
18
BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY
By:
-------------------------------------------
Name:
Title:
SUNTRUST BANK, MIAMI, N.A.
By:
-------------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
-------------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.1.5
EXECUTION COPY
FIFTH AMENDMENT AND WAIVER AGREEMENT
FIFTH AMENDMENT AND WAIVER AGREEMENT dated as of November 25, 1996
(this "Amendment") among Physician Corporation of America (the "Borrower"), the
banks listed on the signature pages hereof (the "Lenders"), Citibank, N.A., as
issuing bank (the "Issuing Bank"), and Citibank, N.A., as agent for the Lenders
and Issuing Bank (the "Agent").
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Issuing Bank and the Agent are
parties to that certain Revolving Credit Agreement dated as of October 27, 1994,
as amended by an Amendment to Credit Agreement and Consent to Acquisition dated
as of September 22, 1995, by a Second Amendment to Credit Agreement dated as of
March 29, 1996, by a Third Amendment to Credit Agreement dated as of April 5,
1996 and by a Fourth Amendment and Consent Agreement dated as of June 10, 1996
(such Revolving Credit Agreement, as so amended and as further amended,
supplemented or otherwise modified and in effect from time to time being the
"Credit Agreement"). Capitalized terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined; and capitalized
terms defined in Section 2 hereof are used elsewhere herein as so defined
(without regard to the conditions to effectiveness in Section 6 hereof).
2. As at the end of the Borrower's Fiscal Quarter ending September
30, 1996, and on each date since then, the Borrower has been in default of the
covenant set forth in Section 6.03(a) of the Credit Agreement (relating to the
Borrower's Consolidated Net Worth). As at the end of the Borrower's Fiscal
Quarter ending September 30, 1996, the Borrower was in default of the covenants
set forth in Section 6.03(c) of the Credit Agreement (relating to the Borrower's
Consolidated Funded Debt/Capitalization Ratio) and Section 6.03(d) of the Credit
Agreement (relating to the Borrower's Fixed Charge Coverage Ratio). As at
September 30, 1996, the Borrower was in default of the covenant set forth in
Section 6.03(e) of the Credit Agreement (relating to the Consolidated EBITDA of
the Borrower and its Subsidiaries) for the month of September 1996. Before the
date hereof and after the Second Amendment Effective Date, events occurred (the
"PCIC Events") such that the Borrower and PCIC determined that PCIC did not
have adequate capital reserves and PCIC recorded a $100 million charge against
earnings as a result, as reported in the Borrower's press release of November 4,
1996. The PCIC Events constituted a Material Adverse Change, giving rise to an
Event of Default under Section 7.01(m) of the Credit Agreement.
<PAGE>
2
3. The Borrower has entered into an Agreement and Plan of Merger
dated as of November 2, 1996 (the "Merger Agreement") with Sierra Health
Services, Inc. ("Sierra") and Sierra Acquisition Corp., a wholly owned
subsidiary of Sierra ("Sierra Sub"). The Merger Agreement contemplates that on
or before March 31, 1997 the Borrower will merge into Sierra Sub, with Sierra
Sub being the surviving corporation, on the terms provided for in the Merger
Agreement (the "Merger"). It is the intention of the Borrower and the Lenders
that concurrently with or before the closing of the Merger, the Borrower will
pay the Obligations in full.
4. The Borrower has requested that the Issuing Bank and the Lenders
waive the Defaults and Events of Default described in paragraph 2 above and
agree to certain amendments to the Credit Agreement, in each case on the terms
and subject to the conditions hereof. The Issuing Bank and the Lenders are
willing to grant such waivers and agree to such amendments, in each case on the
terms and subject to the conditions hereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereto agree as follows:
SECTION 1. WAIVERS. (a) The Issuing Bank and the Lenders hereby
waive any Default or Event of Default arising solely from the Borrower's failure
to be in compliance with Section 6.03(a) of the Credit Agreement on any date
during the period from June 30, 1996 to the Fifth Amendment Effective Date (as
defined in Section 6 below).
(b) The Issuing Bank and the Lenders hereby waive any Default or
Event of Default arising solely from the Borrower's failure to be in compliance
with Section 6.03(c) of the Credit Agreement as at the end of the Borrower's
Fiscal Quarter ending September 30, 1996.
(c) The Issuing Bank and the Lenders hereby waive any Default or
Event of Default arising solely from the Borrower's failure to be in compliance
with Section 6.03(d) of the Credit Agreement as at the end of the Borrower's
Fiscal Quarter ending September 30, 1996.
(d) The Issuing Bank and the Lenders hereby waive any Default or
Event of Default arising solely from the Borrower's failure to be in compliance
with Section 6.03(e) of the Credit Agreement for the month of September 1996.
(e) The Issuing Bank and the Lenders hereby waive any Default or
Event of Default comprised solely of the occurrence, consisting of the PCIC
Events, of a Material Adverse Change after the Second Amendment Effective Date
and before the Fifth Amendment Effective Date.
<PAGE>
3
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. (a) (i) The
definition of "Loan Documents" set forth in Section 1.01 of the Credit Agreement
is hereby amended in its entirety so as to read in full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of the
Guaranties, Security Agreements and other documents delivered by the
Borrower or any of its Subsidiaries pursuant to Section 6 of the
Second Amendment, the Fourth Amendment, the PFI Consideration Pledge
Agreement (including, without limitation, the Amendment to Borrower
Security Agreement delivered pursuant to the Fifth Amendment), the PFI
Consideration Consent Agreement and the Fifth Amendment, in each case
as amended, supplemented or otherwise modified from time to time."
(ii) The definition of "Termination Date" set forth in Section 1.01
of the Credit Agreement is hereby amended in its entirety so as to read in
full as follows:
"'TERMINATION DATE' means (x) the date that is the earliest to
occur of any date specified as the Fifth Amendment Termination Date in
clauses (i), (ii), (iii), (ix) and (x) of the definition of 'Fifth
Amendment Termination Date' set forth in Section 1.01 or (y) such
earlier date of declaration of the Advances, the Notes, all interest
thereon and all other amounts payable hereunder to be forthwith due
and payable pursuant to Section 7.01 hereof or otherwise."
(b) Section 1.01 of the Credit Agreement is hereby amended by the
addition of the following definitions thereto:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FIFTH AMENDMENT" means the Fifth Amendment and Waiver Agreement dated
as of November 25, 1996 among the Borrower, the Lenders parties thereto,
the Issuing Bank and the Agent.
"FIFTH AMENDMENT EFFECTIVE DATE" has the meaning set forth in Section
6 of the Fifth Amendment.
"FIFTH AMENDMENT TERMINATION DATE" means the earliest to occur of the
following:
<PAGE>
4
(i) the date on which the Merger Agreement is terminated;
(ii) December 31, 1996, if the conditions of Section 7 of
the Fifth Amendment have not been satisfied in full on or before
December 31, 1996;
(iii) the date on which the commitment under the Refinancing
Commitment (after delivery thereof to the Borrower) expires or
terminates;
(iv) December 16, 1996, if on or before such date the
Borrower shall not have delivered to the Agent a certificate, duly
executed by the Borrower's Chief Executive Officer or Chief Financial
Officer, certifying that drafts of the Proxy Statement and S-4 have
been filed for review by the Securities and Exchange Commission;
(v) December 23, 1996, if on or before such date the
Borrower shall not have delivered to the Agent a certificate, duly
executed by the Borrower's Chief Executive Officer or Chief Financial
Officer, certifying that each of the Borrower and Sierra has filed or
caused to be filed a premerger notification report in respect of the
Merger under the HSR Act;
(vi) December 30, 1996, if on or before such date the
Borrower shall not have delivered to the Agent a certificate, duly
executed by the Borrower's Chief Executive Officer or Chief Financial
Officer, certifying that each of the Borrower and Sierra has made or
caused to be made, all necessary filings seeking any State Approval
required for the Merger;
(vii) February 17, 1997, if on or before such date the
Borrower shall not have delivered to the Agent a certificate, duly
executed by the Borrower's Chief Executive Officer or Chief Financial
Officer, certifying that the S-4 has become effective under the
Exchange Act;
(viii) February 24, 1997, if on or before such date the
Borrower shall not have delivered to the Agent a certificate, duly
executed by the Borrower's Chief Executive Officer or Chief Financial
Officer, certifying that the Proxy Statement has been dispatched for
delivery to the stockholders of the Borrower and shareholders of
Sierra;
(ix) the date on which the Merger closes;
(x) March 31, 1997.
<PAGE>
5
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"MERGER" has the meaning set forth in Preliminary Statement 3 to the
Fifth Amendment.
"MERGER AGREEMENT" has the meaning set forth in Preliminary Statement
3 to the Fifth Amendment.
"PROXY" has the meaning set forth in the Merger Agreement.
"REFINANCING COMMITMENT" has the meaning set forth in Section 7 of the
Fifth Amendment.
"REFINANCING PROVIDER" has the meaning set forth in Section 7 of the
Fifth Amendment.
"S-4" has the meaning set forth in the Merger Agreement.
"SIERRA" has the meaning set forth in Preliminary Statement 3 to the
Fifth Amendment.
"STATE APPROVAL" has the meaning set forth in the Merger Agreement.
(c) Section 2.07(b) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(b) DEFAULT INTEREST. Upon the occurrence and during the
continuance of an Event of Default, the Borrower shall pay interest (i) on
the unpaid principal amount of each Advance owing to each Lender, payable
in arrears on such dates when interest is otherwise payable under the terms
applicable to such Advance, as the case may be, and on demand by the Agent,
at a rate per annum equal at all times to 2% per annum above the rate per
annum otherwise required to be paid on such Advance under the terms
applicable to such Advance and (ii) to the fullest extent permitted by law,
on the unpaid amount of all interest, fees and other amounts payable
hereunder that is not paid when due, payable in arrears on demand by the
Agent and on the date such amount shall be paid in full, at a rate per
annum equal at all times to 2% per annum above the rate payable on Base
Rate Advances pursuant to Section 2.07(a) above (determined without regard
to whether or not any Base Rate Advances are outstanding) from time to
time; PROVIDED, HOWEVER, that on and after the Fifth Amendment Termination
Date, the Borrower shall pay interest on the unpaid principal amount of
each Advance owing to each Lender and, to the fullest extent
<PAGE>
6
permitted by law, on the unpaid amount of all interest, fees and other
amounts payable hereunder, payable in arrears on demand by the Agent and on
the date such amount shall be paid in full, at a rate per annum equal at
all times to 2% per annum above the Base Rate in effect from time to time
(computed on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring during the
period for which such interest is payable)."
(d) Section 6.03(a) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(a) NET WORTH. Permit the Consolidated Net Worth of the Borrower and
its Subsidiaries on any date of determination after September 30, 1996 to
be less than the sum of (A) $116,000,000 PLUS (B) an amount equal to 75% of
the aggregate amount of the Consolidated Net Income of the Borrower and its
Subsidiaries for each calendar month ending after October 1, 1996 but
before such date of determination (the amount such Consolidated Net Income
to be computed without regard to any net loss in any month)."
(e) Section 6.03(c) of the Credit Agreement is hereby deleted in its
entirety.
(f) Section 6.03(d) of the Credit Agreement is hereby deleted in its
entirety.
(g) Section 6.03(e) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(e) EBITDA. (i) Permit, as at the end of any calendar month ending
after October 1, 1996, the Consolidated EBITDA of the Borrower and its
Subsidiaries for such calendar month to be less than an amount that allows
the Interest Coverage Ratio for such calendar month to be 3.50 to 1.00 or
greater."
(h) Section 6.03(f) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(f) COVENANT CALCULATIONS. For purposes of any covenant in this
Section 6.03, calculations of financial position or results as at the end
of any period shall be made as at the closing of the financial records for
such period and in any event without any adjustment or restatement of such
position or results for such period or any earlier period after, in any
case, the closing of such records therefor. Without limiting the
foregoing, for purposes of the covenants in this Section 6.03 on and after
September 30, 1996, calculations shall not take account of any adjustment
or
<PAGE>
7
restatement of the charge against earnings recorded by the Borrower in
respect of its Fiscal Quarter ended September 30, 1996 that may be made
after the date of the Fifth Amendment as a result of differences between
the final report of William M. Mercer, Incorporated evaluating the unpaid
loss and loss adjustment expense liabilities of PCIC as at September 30,
1996 and the draft of such report that was issued prior to the date of the
Fifth Amendment."
(i) Section 7.01(s) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(s) the Borrower shall fail to comply with any obligation in Section
8(b) of the Second Amendment, in Section 6 of the Fourth Amendment or in
Section 8 of the Fifth Amendment; or any date specified as the Fifth
Amendment Termination Date in clauses (iv) through (viii) of the definition
of 'Fifth Amendment Termination Date' set forth in Section 1.01 shall
occur; or"
(j) The address for notices to the Agent under Section 9.02 of the
Credit Agreement is hereby changed to the following sole address:
599 Lexington Avenue
New York, New York 10022
Attention: Ms. Ruth E. Ford
SECTION 3. ADDITIONAL AMENDMENT TO CREDIT AGREEMENT. Section
2.10(a)(i) of the Credit Agreement is hereby deleted in its entirety.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows:
(a) All representations and warranties of the Borrower contained in
the Credit Agreement, both before and after giving effect to Sections 2 and
3 hereof, are true in all material respects (except for any such
representation or warranty (or portion thereof) that is qualified by
reference to a specific materiality standard, in which case such
representation or warranty is true in all respects).
(b) Without limiting the representations and warranties made in
subsection (a) above or in the Credit Agreement, no authorization, consent,
approval or other action by, and no notice to or filing with, any HMO
Regulator or Insurance Regulator is required for, and no HMO Event,
Insurance Event or violation of the HMO Regulations or Insurance
Regulations would result from, the due execution, delivery or performance
by the Borrower or any Loan Party of this Amendment or any of the Loan
Documents and other documents to be delivered in connection herewith.
<PAGE>
8
SECTION 5. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and
after the date hereof, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof", "herein", or words of like import referring
to the Credit Agreement, and each reference to the Credit Agreement in the other
Loan Documents, shall mean and be a reference to the Credit Agreement as amended
hereby.
(b) Except as specifically amended under Sections 2 and 3 hereof or
modified by the waivers under Section 1 hereof, each of the Credit Agreement and
each other Loan Document shall remain in full force and effect and is hereby
ratified and confirmed.
(c) The Borrower acknowledges and agrees that, except to the extent
specifically amended under Sections 2 and 3 hereof or modified by the waivers
under Section 1 hereof, it is obligated to comply with each and every term,
covenant, agreement and condition applicable to it under the Credit Agreement or
the other Loan Documents. The execution, delivery and effectiveness of this
Amendment shall not otherwise operate as a waiver of any right, remedy or
privilege of any Lender, the Issuing Bank or the Agent under the Credit
Agreement or any other Loan Document, any and all of which rights, remedies and
privileges are reserved.
SECTION 6. CONDITIONS OF EFFECTIVENESS OF SECTIONS 1 AND 2. Sections
1 and 2 of this Amendment shall become effective, subject to the satisfaction of
the following conditions precedent, as of the date (the "Fifth Amendment
Effective Date") when all such conditions shall first have been satisfied:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Issuing Bank and each Lender and a
counterpart of the Consent of Guarantor attached hereto duly executed by
the Guarantor.
(b) The Agent shall have received on or before the Fifth Amendment
Effective Date the following, each dated such date (unless otherwise
specified), in form and substance satisfactory to the Agent, the Issuing
Bank and the Majority Lenders (unless otherwise specified) and in
sufficient copies for the Agent, Issuing Bank and each Lender:
(i) A certificate, duly executed by the Borrower's Chief
Executive Officer or Chief Financial Officer, certifying that (i) on
such date, after giving effect to Sections 1 and 2 hereof, no Default
or Event of Default has occurred and is continuing (ii) on such date
no event or circumstance has occurred that will cause the occurrence
of the Fifth Amendment Termination Date and (iii) the representations
and warranties set forth in Section 4 hereof are true on and as of
such date.
<PAGE>
9
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower and each other Loan Party approving each
Loan Document to which it is or is to be a party in connection
herewith, and of all documents evidencing other necessary corporate
action and governmental and other third party approvals and consents,
if any, with respect each such Loan Document.
(iii) A certificate of the Secretary or an Assistant
Secretary of the Borrower and each other Loan Party certifying the
names and true signatures of the officers of the Borrower and such
other Loan Party authorized to sign this Amendment and each other Loan
Document which they are or are to be parties and the other documents
to be delivered hereunder and thereunder.
(iv) An Amendment to Borrower Security Agreement, duly
executed by the Borrower, in substantially the form of Exhibit A
hereto (the "Borrower Security Agreement Amendment"), providing for
the grant of a first priority security interest under the Borrower
Security Agreement in the Borrower's right, title and interest in and
to the provisions (the "Sierra Breakup Fee Agreements") pertaining to
(A) the Sierra Termination Fee (as defined in Merger Agreement) under
Section 8.4(b) of the Merger Agreement and (B) the $3,000,000 payment
contemplated under Section 7.5(c) of the Merger Agreement, and in each
case the proceeds thereof, together with:
(A) acknowledgment copies or stamped receipt copies of
proper financing statements, duly filed on or before the date of
such Security Agreement under the Uniform Commercial Code of all
jurisdictions that the Agent may deem necessary or desirable in
order to perfect and protect the first priority liens and
security interests created under the Borrower Security Agreement
as a result of such Borrower Security Agreement Amendment,
covering the Collateral comprised of the Borrower's right, title
and interest in and to the Sierra Breakup Fee Agreements and
related Collateral or other evidence satisfactory to the Agent
that arrangements have been made with a reputable filing service
for such filing of such financing statements,
(B) evidence of the completion of all other recordings and
filings of or with respect to such Borrower Security Agreement
Amendment that the Agent may deem necessary or desirable in order
to perfect and protect the Liens arising thereunder,
(C) a copy, certified by the Borrower to be true and
complete, of the Merger Agreement as in effect on the Fifth
Amendment Effective Date, together with a consent to the
assignment
<PAGE>
10
of the Sierra Breakup Fee Agreements, in substantially the form
of Exhibit B hereto, duly executed by Sierra, Sierra Sub and the
Borrower, and
(D) evidence that all other action that the Agent may deem
necessary or desirable in order to perfect and protect the first
priority liens and security interests created under the Borrower
Security Agreement as a result of such Borrower Security
Agreement Amendment has been taken.
(v) A legal opinion from Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quintal, P.A., counsel to the Borrower, as to this Amendment
and the Credit Agreement, as amended hereby, and the documents
delivered in connection herewith and the security interest provided
for under the Borrower Security Agreement Amendment, in form and
substance satisfactory to the Agent.
(c) The Borrower shall have paid to the Agent, in immediately
available funds for the rateable account of the Lenders, a fee in the
amount of 0.25% of the aggregate amount of the Advances and Letter of
Credit Liability outstanding on the date hereof.
(d) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement (including those relating to
this Amendment) to the extent that request for such payment has been made
to the Borrower.
SECTION 7. CONDITIONS OF EFFECTIVENESS OF SECTION 3. Section 3 of
this Amendment shall become effective, subject to the condition precedent that
Sections 1 and 2 hereof shall have become effective and subject to the
satisfaction of the following conditions precedent, as of the date (the
"Amortization Amendment Effective Date") when all such conditions shall first
have been satisfied:
(a) The Borrower shall have entered into a commitment letter or other
agreement with one or more lenders providing for the commitment of such
lender or lenders to provide financing to the Borrower that will be
sufficient to enable the Borrower to pay all Obligations in full
(including, without limitation, replacement and termination of any
outstanding Letter of Credit) at or before the Effective Time (as defined
in the Merger Agreement) of the Merger.
(b) The Borrower shall have provided to the Agent a copy, certified
to be true and complete by the Borrower's Chief Executive Officer or Chief
Financial Officer, of the commitment letter or other agreement referred to
in Section 7(a)
<PAGE>
11
above, and the Agent shall have notified the Borrower in writing that the
Majority Lenders have approved the terms of such letter or agreement
(including, without limitation, the lender or lenders thereunder (each
being a "Refinancing Provider"), whereupon such letter or agreement shall
constitute the "Refinancing Commitment" for purposes hereof.
(c) The Agent shall have received from the Borrower a certificate,
dated the Amortization Amendment Effective Date and duly executed by the
Borrower's Chief Executive Officer or Chief Financial Officer, certifying
that (i) on such date no Default or Event of Default has occurred and is
continuing (ii) on such date no event or circumstance has occurred that
will cause the occurrence of the Fifth Amendment Termination Date and (iii)
the representations and warranties set forth in Section 4 hereof are true
on and as of such date.
(d) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement (including those relating to
this Amendment) to the extent that request for such payment has been made
to the Borrower.
SECTION 8. COVENANTS. The Borrower agrees to comply with the
following covenants for so long as any obligation under any Loan Document shall
remain unpaid:
(a) SIERRA BREAKUP FEE AGREEMENT PAYMENTS. The Borrower shall cause
all amounts of cash that become payable to the Borrower from time to time
under the Sierra Breakup Fee Agreements to be paid directly to the Agent
for application FIRST, to pay accrued unpaid fees and expenses of the
Agent, the Issuing Bank and the Lenders payable under the Credit Agreement
or hereunder; SECOND, rateably to pay unpaid accrued interest on the
Advances; THIRD, to pay unpaid reimbursement obligations and accrued
interest under, and thereafter to cash collateralize remaining outstanding
Letter of Credit Liability under, any outstanding Letter of Credit; and
THEREAFTER rateably to pay unpaid principal of the Advances.
(b) SEGREGATION OF PAYMENTS; PAYMENTS UPON EVENT OF DEFAULT. (i)
All amounts referred to in subsection (a) of this Section 8 that are
received by the Borrower shall be received in trust for the benefit of the
Agent and segregated from the other property and funds of the Borrower
until paid over to the Agent as required hereunder.
(c) AMENDMENTS TO MERGER AGREEMENT AND REFINANCING COMMITMENT.
Notwithstanding any provision of Section 7(d) of the Borrower Security
Agreement to the contrary, the Borrower shall not amend, supplement or
otherwise modify, or agree to any waiver or grant any consent under, (i)
Articles 6 or 7 or Sections 8.3 or 8.4(b) of the Merger Agreement or any
provision defining terms used in such Articles
<PAGE>
12
or Sections or (ii) the Refinancing Commitment, unless, in any case, both
(1) the Borrower shall have given the Agent written notice thereof prior to
the effective date of the proposed amendment, supplement, modification,
waiver or consent, as the case may be, and (2) (A) if such notice from the
Borrower is received by the Agent more than 10 days prior to such effective
date, the Agent shall not have notified the Borrower prior to such
effective date that the Majority Lenders (acting in their sole and absolute
discretion) have determined that the proposed amendment, supplement,
modification, waiver or consent, as the case may be, would materially and
detrimentally affect the rights, remedies, privileges or interests of the
Agent, Issuing Bank or Lenders under or in respect of the Obligations or
the Sierra Breakup Fee Agreements or this Amendment or the other Loan
Documents or (B) if such notice from the Borrower is received by the Agent
10 or fewer days prior to such effective date, the Agent shall have
notified the Borrower prior to such effective date that the Majority
Lenders (acting in their sole and absolute discretion) have determined that
the proposed amendment, supplement, modification, waiver or consent, as the
case may be, would not materially and detrimentally affect the rights,
remedies, privileges or interests of the Agent, Issuing Bank or Lenders
under or in respect of the Obligations or the Sierra Breakup Fee Agreements
or this Amendment or the other Loan Documents.
(d) AVOIDANCE OF DEFENSES, ETC. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into any agreement or arrangement,
engage in any act or omission or otherwise conduct its affairs in any
manner if the effect thereof in any case would give rise to or permit any
validly asserted defense, counterclaim, setoff or right of recoupment (i)
in favor of Sierra in respect of any amount payable under the Sierra
Breakup Fee Agreements (without regard to any such defense, counterclaim,
setoff or right of recoupment) or (ii) in favor of any Refinancing Provider
in respect of the Refinancing Commitment.
(e) NOTICES RELATING TO MERGER AGREEMENT AND REFINANCING COMMITMENT.
(i) The Borrower will notify the Agent promptly upon, and in any event not
later than the next day following, any of the following:
(A) the termination of the Merger Agreement or the
Borrower's receipt or dispatch of any notice of such termination;
(B) the expiration or termination of the commitment under
the Refinancing Commitment or the Borrower's receipt or dispatch
of any notice of such termination;
<PAGE>
13
(C) the termination of the waiting period in respect of the
Merger under HSR Act or the extension of such period or request
for additional information in respect of the Merger under the HSR
Act;
(D) the Borrower's or Sierra's receipt of notice of denial
of any request of the Borrower or Sierra for any State Approval
for the Merger; or
(E) the dispatch of any notice by the Borrower to Sierra of
the occurrence of any change or event having a Material Adverse
Effect, as such term is defined in the Merger Agreement.
(ii) The Borrower will provide the following to the Agent, in
each case certified to be true and complete by the Borrower's Chief
Executive Officer or Chief Financial Officer (which certification
shall be to best knowledge, in the case of any document not prepared
by or on behalf of the Borrower or any of its Subsidiaries):
(A) a copy of the Proxy Statement, upon dispatch thereof to
the stockholders of the Borrower and shareholders of Sierra;
(B) a copy of the S-4, upon its effectiveness under the
Exchange Act; and
(C) a copy of each application by the Borrower or Sierra
seeking any State Approval for the Merger, upon the filing of
such application with the relevant government or regulatory
authority.
(f) TERMINATION FEE. In the event that the Obligations have not been
or are not paid in full (including, without limitation, replacement and
termination of any outstanding Letter of Credit) on or before the Fifth
Amendment Termination Date, then on the Fifth Amendment Termination Date,
the Borrower shall pay the to the Agent, in immediately available funds for
the ratable account of the Lenders, a fee in the amount of 1.00% of the
aggregate amount of the Advances and Letter of Credit Liability outstanding
on the Fifth Amendment Termination Date (after giving effect to any payment
of such Advances or reduction in Letter of Credit Liability made on such
date). Without limiting any provision of any Loan Document, such fee shall
be payable in addition to interest at the default rate under the Credit
Agreement and all other amounts payable under the Loan Documents.
SECTION 9. SUPERIOR PROPOSAL. In the event of the occurrence of
all of (i) the Borrower's determination to terminate the Merger Agreement upon
receipt of a "superior
<PAGE>
14
proposal" (as defined in Section 8.2(d) of the Merger Agreement) pursuant to
Section 8.2(b) of the Merger Agreement, (ii) the Borrower's entry, in connection
with such "superior proposal", into a commitment letter or other agreement with
one or more lenders or other sources of financing providing for the commitment
of such lenders or sources to provide financing to the Borrower that will be
sufficient to enable the Borrower to pay all Obligations in full (including,
without limitation, replacement and termination of any outstanding Letter of
Credit) before March 31, 1997 (an "Alternate Refinancing Commitment") and (iii)
the Agent's receipt of confirmation from all of the Lenders and the Issuing Bank
that they find the terms of such Alternate Refinancing Commitment and lenders or
other sources of financing thereunder to be satisfactory (in the sole and
absolute discretion of the Lenders and Issuing Bank), then the definition of the
Fifth Amendment Termination Date shall be modified to the extent that the
Borrower, all of the Lenders, the Issuing Bank and the Agent agree (in the sole
and absolute discretion of such parties) is appropriate to accommodate the
timing of the transactions contemplated in such "superior proposal" and
Alternative Refinancing Commitment.
SECTION 10. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same agreement.
SECTION 11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
15
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
PHYSICIAN CORPORATION OF AMERICA
By:
----------------------------
Name:
Title:
THE LENDERS AND ISSUING BANK:
CITIBANK, N.A., as Lender and as Issuing Bank
By:
----------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
----------------------------------------
Name:
Title:
NATIONSBANK OF TENNESSEE
By:
----------------------------------------
Name:
Title:
<PAGE>
16
BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY
By:
----------------------------------------
Name:
Title:
SUNTRUST BANK, MIAMI, N.A.
By:
----------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
----------------------------------------
Name:
Title:
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as Guarantor under that certain Guaranty dated as of
March 29, 1996 (the "Guaranty") made in favor of the lenders parties to the
Revolving Credit Agreement referred to in the foregoing Fifth Amendment and
Waiver Agreement, the Issuing Bank and the Agent (in each case as defined in
such Revolving Credit Agreement), hereby consents to such Fifth Amendment and
Waiver Agreement (and to all prior amendments, waivers, consents and other
modifications to or under such Revolving Credit Agreement) and confirms and
agrees that notwithstanding such Fifth Amendment and Waiver Agreement (or any
prior such amendment, waiver, consent or other modification) the Guaranty is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects.
PCA SOLUTIONS, INC.
By
------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
to
Fifth Amendment and Waiver Agreement
dated as of November 25, 1996
Form of Borrower Security Agreement Amendment
<PAGE>
EXHIBIT B
to
Fifth Amendment and Waiver Agreement
dated as of November 25, 1996
Form of Consent to Assignment of Sierra Breakup Fee Agreements
<PAGE>
EXHIBIT 10.1.6
EXECUTION COPY
SIXTH AMENDMENT AND WAIVER AGREEMENT
SIXTH AMENDMENT AND WAIVER AGREEMENT dated as of January 8, 1997 (this
"Amendment") among Physician Corporation of America (the "Borrower"), the banks
listed on the signature pages hereof (the "Lenders"), Citibank, N.A., as issuing
bank (the "Issuing Bank"), and Citibank, N.A., as agent for the Lenders and
Issuing Bank (the "Agent").
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Issuing Bank and the Agent are
parties to that certain Revolving Credit Agreement dated as of October 27, 1994,
as amended by an Amendment to Credit Agreement and Consent to Acquisition dated
as of September 22, 1995, by a Second Amendment to Credit Agreement dated as of
March 29, 1996, by a Third Amendment to Credit Agreement dated as of April 5,
1996, by a Fourth Amendment and Consent Agreement dated as of June 10, 1996 and
by a Fifth Amendment and Waiver Agreement dated as of November 25, 1996 (the
"Fifth Amendment"; such Revolving Credit Agreement, as so amended and as further
amended, supplemented or otherwise modified and in effect from time to time
being the "Credit Agreement"). Capitalized terms defined in the Credit
Agreement and not otherwise defined herein are used herein as therein defined;
and capitalized terms defined in Sections 1 and 2 hereof are used elsewhere
herein as so defined (without regard to the conditions to effectiveness in
Sections 5 and 6 hereof).
2. Pursuant to the Credit Agreement, as a result of the amendments
provided for in the Fifth Amendment, the Termination Date occurred on December
31, 1996 because of the Borrower's failure to have entered into the Refinancing
Commitment and otherwise to have satisfied the conditions provided for in
Section 7 of the Fifth Amendment as of such date. Accordingly, all Obligations
became due and payable in full on December 31, 1996, including the termination
fee payable on the Fifth Amendment Termination Date as provided in Section 8(f)
of the Fifth Amendment. The Borrower has not paid the Obligations in full.
Accordingly, interest on all Obligations has been accruing from December 31,
1996 at the default rate as provided in Section 2.07(b) of the Credit Agreement.
3. The Borrower has requested that the Issuing Bank and the Lenders
(i) waive the occurrence of the Termination Date and Fifth Amendment Termination
Date, the Borrower's failure to pay the Obligations in full on December 31, 1996
and the requirement that the Borrower pay interest accruing on the Obligations
at the default rate from December 31, 1996 and (ii) extend the deadline for
satisfaction of the conditions of Section 7 of the Fifth Amendment and modify
the requirements as to what will constitute the Refinancing
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2
Commitment to be provided pursuant to such Section 7, in each on the terms and
subject to the conditions hereof.
4. The Borrower proposes to effect the above waivers and
modifications subject to either one of two alternative sets of terms and
conditions and otherwise as provided herein. Under one alternative (the
"Principal Paydown Alternative") the Borrower proposes (i) to borrow from Sierra
the principal amount of $16,750,000 pursuant to a promissory note and related
documents providing for such borrowing (collectively, the "Sierra Subordinated
Note") to be subordinated to the Obligations and secured by liens junior to the
liens securing the Obligations, in each case on terms satisfactory to the
Lenders, the Issuing Bank and the Agent, (ii) pay over the proceeds of the
borrowing under the Sierra Note for application toward the installment of
principal of the Revolving Advances that became payable on December 31, 1996
under Section 2.10(a)(i) of the Credit Agreement and (iii) give effect to such
other terms as are provided for in Section 1 hereof.
5. Under the alternative set of terms and conditions (the "Pricing
Increase Alternative"), the Borrower proposes to (i) increase the interest rates
payable under the Credit Agreement and the termination fee provided for in
Section 8(f) of the Fifth Amendment and (ii) give effect to such other terms as
are provided for in Section 2 hereof.
6. The Issuing Bank and the Lenders are willing to agree to either
of the alternative sets of waivers and modifications requested by the Borrower,
in each case on the terms and subject to the conditions hereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereto agree as follows:
SECTION 1. PRINCIPAL PAYDOWN ALTERNATIVE WAIVERS AND AMENDMENTS.
(a) PRINCIPAL PAYDOWN ALTERNATIVE WAIVERS. (i) The Issuing Bank and the
Lenders hereby waive (A) any occurrence of the Termination Date or Fifth
Amendment Termination Date prior to the Sixth Amendment A Effective Date (as
defined in Section 5 below) resulting solely from the Borrower's failure to
satisfy the conditions of Section 7 of the Fifth Amendment, (B) any failure of
the Borrower to make any payment that became payable solely as a result of any
such occurrence and (C) any requirement that the Borrower pay interest at the
default rate under Section 2.07(b) of the Credit Agreement accruing for the
period from December 31, 1996 until the Sixth Amendment A Effective Date on
Obligations that became due and payable solely as a result of any such
occurrence.
(ii) The Issuing Bank and the Lenders hereby waive the Borrower's
compliance with the covenants of Section 6.02(a) and 6.02(c) of the Credit
Agreement to the extent that such covenant would otherwise be violated by
the Borrower creating, incurring or suffering to exist the Debt evidenced
by the Sierra Note or liens
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securing such Debt, provided that the Debt under the Sierra Note is
subordinate to the Obligations and the liens securing such Debt are junior
to the liens securing the Obligations, in each case on terms and pursuant
to documentation that has been approved by the Agent, all of the Lenders
and the Issuing Bank in their sole and absolute discretion.
(b) PRINCIPAL PAYDOWN ALTERNATIVE AMENDMENTS. (i) (A) The
definition of Applicable Base Rate Margin" set forth in Section 1.01 of the
Credit Agreement is hereby amended in its entirety so as to read in full as
follows:
"'APPLICABLE BASE RATE MARGIN' means, at all times after
December 31, 1996, 0.00%."
(B) Clause (ii) of the definition of "Fifth Amendment
Termination Date" set forth in Section 1.01 of the Credit Agreement is
hereby amended in its entirety so as to read in full as follows:
"(ii) February 17, 1997, if the conditions of Section 7
of the Fifth Amendment have not been satisfied in full on or
before such date;"
(C) Clause (iii) of the definition of "Fifth Amendment
Termination Date" set forth in Section 1.01 of the Credit Agreement is
hereby amended in its entirety so as to read in full as follows:
"(iii) any date on which (A) the commitment under the
Refinancing Commitment (after delivery thereof to the Borrower)
expires or terminates or (B) funds subject to the escrow
arrangement under the Refinancing Commitment are released to any
party other than the Agent for the benefit of itself, the Issuing
Bank and the Lenders;"
(D) The definition of "Loan Documents" set forth in Section 1.01
of the Credit Agreement is hereby amended in its entirety so as to
read in full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of
the Guaranties, Security Agreements and other documents delivered
by the Borrower or any of its Subsidiaries pursuant to Section 6
of the Second Amendment, the Fourth Amendment, the PFI
Consideration Pledge
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Agreement (including, without limitation, the Amendment to
Borrower Security Agreement delivered pursuant to the Fifth
Amendment), the PFI Consideration Consent Agreement, the Fifth
Amendment, the Sixth Amendment and any document delivered by the
Borrower for the benefit of the Lenders, Issuing Bank or Agent in
connection with the Sierra Subordinated Note, in each case as
amended, supplemented or otherwise modified from time to time."
(E) The definition of "Refinancing Commitment" set forth in
Section 1.01 of the Credit Agreement (and including, without
limitation, for purposes of Sections 7, 8 and 9 of the Fifth
Amendment) is hereby amended in its entirety so as to read in full as
follows:
"'REFINANCING COMMITMENT' means, collectively, one or more
commitment letters or agreements and, individually, each such
letter or agreement, that satisfy all of the following
requirements: (i) each such letter or agreement has been provided
or entered into by parties (other than the Borrower) satisfactory
to the Majority Lenders in their sole and absolute discretion;
(ii) each such letter or agreement has terms that have been
approved by the Majority Lenders in their sole and absolute
discretion; and (iii) such letters or agreements collectively
provide for (A) a commitment to provide financing by one or more
lenders satisfactory to the Majority Lenders in their sole and
absolute discretion or (B) funds to be held in escrow and
disbursed by an escrow agent and on terms in each case
satisfactory to the Majority Lenders in their sole and absolute
discretion, which financing and/or funds shall collectively be
sufficient to enable the Borrower to pay all Obligations in full
(including, without limitation, replacement and termination of
any outstanding Letter of Credit) at or before the Effective Time
(as defined in the Merger Agreement) of the Merger."
(F) The definition of "Refinancing Provider" set forth in
Section 1.01 of the Credit Agreement (and including, without
limitation, for purposes of Sections 7, 8 and 9 of the Fifth
Amendment) is hereby amended in its entirety so as to read in full as
follows:
"'REFINANCING PROVIDER' (i) any lender party to a commitment
to provide financing under any commitment letter or agreement
comprising the Refinancing Commitment and (ii) any Person acting
as escrow agent and any Person (other than the Borrower)
otherwise party to an escrow arrangement arising under the
Refinancing Commitment."
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5
(ii) Section 1.01 of the Credit Agreement is hereby amended by the
addition of the following definitions thereto:
"SIXTH AMENDMENT" means the Sixth Amendment and Waiver Agreement
dated as of January 8, 1997 among the Borrower, the Lenders parties
thereto, the Issuing Bank and the Agent.
"SIERRA SUBORDINATED NOTE" has the meaning set forth in
Preliminary Statement 4 of the Sixth Amendment.
"SIERRA SUBORDINATED NOTE DOCUMENT" has the meaning set forth in
Section 5 of the Sixth Amendment.
(iii) Section 6.02 of the Credit Agreement is hereby amended by
the addition of a new subsection (q) thereto, to read as follows:
"(q) MODIFICATIONS TO SIERRA NOTE DOCUMENTS. Amend, supplement
or otherwise modify the Sierra Subordinated Note or any other Sierra
Subordinated Note Document, unless, in any case, both (1) the Borrower
shall have given the Agent written notice thereof prior to the
effective date of the proposed amendment, supplement or modification,
as the case may be, and (2) the Agent shall have notified the Borrower
prior to such effective date that the Majority Lenders (acting in
their sole and absolute discretion) have determined that the proposed
amendment, supplement or modification, as the case may be, would not
materially and detrimentally affect the rights, remedies, privileges
or interests of the Agent, Issuing Bank or Lenders under or in respect
of the Obligations or the Sierra Subordinated Note Documents or this
Agreement or the other Loan Documents."
(iv) Subsections (a) and (b) of Section 7 of the Fifth Amendment are
hereby amended in their entirety so as to read in full as a single
subsection (a), as follows:
"(a) The Borrower shall have received or entered into one or more
commitment letters and agreements that individually and collectively
satisfy the requirements, of and collectively comprise, the
Refinancing Commitment; and the Borrower shall have provided copies
thereof, certified to be true and complete by the Borrower's Chief
Executive Officer or Chief Financial Officer, to the Agent."
(v) Clause (B) of Section 8(e) of the Fifth Amendment is hereby
amended in its entirety so as to read in full as follows:
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6
"(B) the expiration or termination of the commitment under the
Refinancing Commitment or any disbursement of funds under any escrow
arrangement provided for under the Refinancing Commitment or the
Borrower's receipt or dispatch of any notice of such termination or
disbursement;"
SECTION 2. PRICING INCREASE ALTERNATIVE WAIVERS AND AMENDMENTS.
(a) PRICING INCREASE ALTERNATIVE WAIVERS. The Issuing Bank and the Lenders
hereby waive (i) any occurrence of the Termination Date or Fifth Amendment
Termination Date prior to the Sixth Amendment B Effective Date (as defined in
Section 6 below) resulting solely from the Borrower's failure to satisfy the
conditions of Section 7 of the Fifth Amendment, (ii) any failure of the Borrower
to make any payment that became payable solely as a result of any such
occurrence and (iii) any requirement that the Borrower pay interest at the
default rate under Section 2.07(b) of the Credit Agreement accruing for the
period from December 31, 1996 until the Sixth Amendment B Effective Date on
Obligations that became due and payable solely as a result of any such
occurrence.
(b) PRICING INCREASE ALTERNATIVE AMENDMENTS. (i) (A) The
definition of Applicable Base Rate Margin" set forth in Section 1.01 of the
Credit Agreement is hereby amended in its entirety so as to read in full as
follows:
"'APPLICABLE BASE RATE MARGIN' means, at all times after
December 31, 1996, 2.00%."
(B) Clause (ii) of the definition of "Fifth Amendment
Termination Date" set forth in Section 1.01 of the Credit Agreement is
hereby amended in its entirety so as to read in full as follows:
"(ii) February 17, 1997, if the conditions of Section 7
of the Fifth Amendment have not been satisfied in full on or
before such date;"
(C) Clause (iii) of the definition of "Fifth Amendment
Termination Date" set forth in Section 1.01 of the Credit Agreement is
hereby amended in its entirety so as to read in full as follows:
"(iii) any date on which (A) the commitment under the
Refinancing Commitment (after delivery thereof to the Borrower)
expires or terminates or (B) funds subject to the escrow
arrangement under the Refinancing Commitment are released to any
party other than the Agent for the benefit of itself, the Issuing
Bank and the Lenders;"
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7
(D) The definition of "Loan Documents" set forth in Section 1.01
of the Credit Agreement is hereby amended in its entirety so as to
read in full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of
the Guaranties, Security Agreements and other documents delivered
by the Borrower or any of its Subsidiaries pursuant to Section 6
of the Second Amendment, the Fourth Amendment, the PFI
Consideration Pledge Agreement (including, without limitation,
the Amendment to Borrower Security Agreement delivered pursuant
to the Fifth Amendment), the PFI Consideration Consent Agreement,
the Fifth Amendment and the Sixth Amendment, in each case as
amended, supplemented or otherwise modified from time to time."
(E) The definition of "Refinancing Commitment" set forth in
Section 1.01 of the Credit Agreement (and including, without
limitation, for purposes of Sections 7, 8 and 9 of the Fifth
Amendment) is hereby amended in its entirety so as to read in full as
follows:
"'REFINANCING COMMITMENT' means, collectively, one or more
commitment letters or agreements and, individually, each such
letter or agreement, that satisfy all of the following
requirements: (i) each such letter or agreement has been provided
or entered into by parties (other than the Borrower) satisfactory
to the Majority Lenders in their sole and absolute discretion;
(ii) each such letter or agreement has terms that have been
approved by the Majority Lenders in their sole and absolute
discretion; and (iii) such letters or agreements collectively
provide for (A) a commitment to provide financing by one or more
lenders satisfactory to the Majority Lenders in their sole and
absolute discretion or (B) funds to be held in escrow and
disbursed by an escrow agent and on terms in each case
satisfactory to the Majority Lenders in their sole and absolute
discretion, which financing and/or funds shall collectively be
sufficient to enable the Borrower to pay all Obligations in full
(including, without limitation, replacement and termination of
any outstanding Letter of Credit) at or before the Effective Time
(as defined in the Merger Agreement) of the Merger."
(F) The definition of "Refinancing Provider" set forth in
Section 1.01 of the Credit Agreement (and including, without
limitation, for purposes
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8
of Sections 7, 8 and 9 of the Fifth Amendment) is hereby amended in
its entirety so as to read in full as follows:
"'REFINANCING PROVIDER' (i) any lender party to a commitment
to provide financing under any commitment letter or agreement
comprising the Refinancing Commitment and (ii) any Person acting
as escrow agent and any Person (other than the Borrower)
otherwise party to an escrow arrangement arising under the
Refinancing Commitment."
(ii) Section 1.01 of the Credit Agreement is hereby amended by the
addition of the following definition thereto:
"SIXTH AMENDMENT" means the Sixth Amendment and Waiver Agreement
dated as of January 8, 1997 among the Borrower, the Lenders parties
thereto, the Issuing Bank and the Agent.
(iii)Section 2.07 (b) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(b) DEFAULT INTEREST. Upon the occurrence and during the
continuance of an Event of Default, the Borrower shall pay interest on
the unpaid principal amount of each Advance owing to each Lender and,
to the fullest extent permitted by law, on the unpaid amount of all
interest, fees and other amounts payable hereunder and under the other
Loan Documents, payable in arrears on demand by the Agent and on the
date such amount shall be paid in full, at a rate per annum equal at
all times to 4% per annum above the Base Rate in effect from time to
time (computed on the basis of a year of 360 days for the actual
number of days (including the first day but excluding the last day)
occurring during the period for which such interest is payable)."
(iv) Subsections (a) and (b) of Section 7 of the Fifth Amendment are
hereby amended in their entirety so as to read in full as a single
subsection (a), as follows:
"(a) The Borrower shall have received or entered into one or more
commitment letters and agreements that individually and collectively
satisfy the requirements, of and collectively comprise, the
Refinancing Commitment; and the Borrower shall have provided copies
thereof, certified to be true and complete by the Borrower's Chief
Executive Officer or Chief Financial Officer, to the Agent."
(v) Clause (B) of Section 8(e) of the Fifth Amendment is hereby
amended in its entirety so as to read in full as follows:
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9
"(B) the expiration or termination of the commitment under the
Refinancing Commitment or any disbursement of funds under any escrow
arrangement provided for under the Refinancing Commitment or the
Borrower's receipt or dispatch of any notice of such termination or
disbursement;"
(vi) Section 8(f) of Fifth Amendment is hereby amended in its entirety
so as to read in full as follows:
"(f) TERMINATION FEE. In the event that the Obligations have not
been or are not paid in full (including, without limitation,
replacement and termination of any outstanding Letter of Credit) on or
before the Fifth Amendment Termination Date, then on the Fifth
Amendment Termination Date, the Borrower shall pay the to the Agent,
in immediately available funds for the ratable account of the Lenders,
a fee in the amount of 2.00% of the aggregate amount of the Advances
and Letter of Credit Liability outstanding on the Fifth Amendment
Termination Date (after giving effect to any payment of such Advances
or reduction in Letter of Credit Liability made on such date).
Without limiting any provision of any Loan Document, such fee shall be
payable in addition to interest at the default rate under the Credit
Agreement and all other amounts payable under the Loan Documents."
SECTION 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows:
(a) All representations and warranties of the Borrower contained in
the Credit Agreement, both before and after giving effect to Sections 1 and
2 hereof, are true in all material respects (except for any such
representation or warranty (or portion thereof) that is qualified by
reference to a specific materiality standard, in which case such
representation or warranty is true in all respects).
(b) Without limiting the representations and warranties made in
subsection (a) above or in the Credit Agreement, no authorization, consent,
approval or other action by, and no notice to or filing with, any HMO
Regulator or Insurance Regulator is required for, and no HMO Event,
Insurance Event or violation of the HMO Regulations or Insurance
Regulations would result from, the due execution, delivery or performance
by the Borrower or any Loan Party of this Amendment or any of the Loan
Documents and other documents to be delivered in connection herewith.
SECTION 4. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and
after the date hereof, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof", "herein", or words of like import referring
to the Credit Agreement,
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10
and each reference to the Credit Agreement in the other Loan Documents, shall
mean and be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended under Section 1(b) or 2(b) hereof,
as the case may be, or modified by the waiver under Section 1(a) or 2(a) hereof,
as the case may be, each of the Credit Agreement and each other Loan Document
shall remain in full force and effect and is hereby ratified and confirmed.
(c) The Borrower acknowledges and agrees that, except to the extent
specifically amended under Section 1(b) or 2(b) hereof, as the case may be, or
modified by the waiver under Section 1(a) or 2(a) hereof, as the case may be,
it is obligated to comply with each and every term, covenant, agreement and
condition applicable to it under the Credit Agreement or the other Loan
Documents. The execution, delivery and effectiveness of this Amendment shall
not otherwise operate as a waiver of any right, remedy or privilege of any
Lender, the Issuing Bank or the Agent under the Credit Agreement or any other
Loan Document, any and all of which rights, remedies and privileges are
reserved.
SECTION 5. CONDITIONS OF EFFECTIVENESS OF PRINCIPAL PAYDOWN
ALTERNATIVE UNDER SECTION 1. Section 1 of this Amendment shall become effective
(to the exclusion of Section 2 hereof), subject to the satisfaction on or before
January 10, 1997 of the following conditions precedent, as of the date, if any
(the "Sixth Amendment A Effective Date"), when all such conditions shall first
have been so satisfied:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Issuing Bank and each Lender and a
counterpart of the Consent of Guarantor attached hereto duly executed by
the Guarantor.
(b) The Agent shall have received on or before the Sixth Amendment A
Effective Date the following, each dated such date (unless otherwise
specified), in form and substance satisfactory to the Agent, the Issuing
Bank and the Majority Lenders (unless otherwise specified) and in
sufficient copies for the Agent, Issuing Bank and each Lender:
(i) A certificate, duly executed by the Borrower's Chief
Executive Officer or Chief Financial Officer, certifying that (i) on
such date, after giving effect to Section 1 hereof, no Default or
Event of Default has occurred and is continuing (ii) on such date,
after giving effect to Section 1 hereof, no event or circumstance has
occurred that will cause the occurrence of the Fifth Amendment
Termination Date and (iii) the representations and warranties set
forth in Section 3 hereof are true on and as of such date.
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11
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower approving this Amendment, and of all
documents evidencing other necessary corporate action and governmental
and other third party approvals and consents, if any, with respect
each such Loan Document.
(iii)A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying the names and true signatures of the officers
of the Borrower authorized to sign this Amendment.
(iv) A legal opinion from Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quintal, P.A., counsel to the Borrower, as to this Amendment
and the Credit Agreement, as amended hereby, in form and substance
satisfactory to the Agent.
(v) A legal opinion from Morgan, Lewis & Bockius, counsel to
Sierra, in form and substance satisfactory to the Agent, as to the
authorization, execution and delivery by, and enforceability against,
Sierra of Sierra Subordinated Note Documents and as to such other
matters as the Agent may reasonably request.
(c) The Agent shall have received copies, certified by the Borrower's
Chief Executive Officer or Chief Financial Officer to be true and complete
as of the Sixth Amendment A Effective Date, of the Sierra Subordinated Note
and each document delivered in connection therewith, including, without
limitation a subordination agreement for the benefit of the Lenders, the
Issuing Bank and the Lenders and each document providing for the creation
or perfection of any lien to secure the Sierra Subordinated Note (all such
documents, together with the Sierra Subordinated Note, as the same may be
amended, supplemented or otherwise modified and in effect from time to
time, being the "Sierra Subordinated Note Documents"), and the Agent shall
have advised the Borrower that the terms of each Sierra Subordinated Note
Document are satisfactory to all of the Lenders and the Issuing Bank, in
their sole and absolute discretion.
(d) The Borrower shall have paid to the Agent, in immediately
available funds (i) the sum of $16,750,000, as the proceeds of the Sierra
Subordinated Note, for application toward the installment of principal that
became due on December 31, 1996 under Section 2.10(a)(i) of the Credit
Agreement, plus (ii) the unpaid interest accrued on such principal.
(e) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement to the extent that request for
such payment has been made to the Borrower.
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12
(f) Section 2 hereof shall not have become effective.
SECTION 6. CONDITIONS OF EFFECTIVENESS OF PRICING INCREASE
ALTERNATIVE UNDER SECTION 2. Section 2 of this Amendment shall become effective
(to the exclusion of Section 1 hereof), subject to the satisfaction on or before
January 10, 1997 of the following conditions precedent, as of the date, if any
(the "Sixth Amendment B Effective Date"), when all such conditions shall first
have been so satisfied:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Issuing Bank and each Lender and a
counterpart of the Consent of Guarantor attached hereto duly executed by
the Guarantor.
(b) The Agent shall have received on or before the Sixth Amendment B
Effective Date the following, each dated such date (unless otherwise
specified), in form and substance satisfactory to the Agent, the Issuing
Bank and the Majority Lenders (unless otherwise specified) and in
sufficient copies for the Agent, Issuing Bank and each Lender:
(i) A certificate, duly executed by the Borrower's Chief
Executive Officer or Chief Financial Officer, certifying that (i) on
such date, after giving effect to Section 2 hereof, no Default or
Event of Default has occurred and is continuing (ii) on such date,
after giving effect to Section 2 hereof, no event or circumstance has
occurred that will cause the occurrence of the Fifth Amendment
Termination Date and (iii) the representations and warranties set
forth in Section 3 hereof are true on and as of such date.
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower approving this Amendment, and of all
documents evidencing other necessary corporate action and governmental
and other third party approvals and consents, if any, with respect
each such Loan Document.
(iii)A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying the names and true signatures of the officers
of the Borrower authorized to sign this Amendment.
(iv) A legal opinion from Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quintal, P.A., counsel to the Borrower, as to this Amendment
and the Credit Agreement, as amended hereby, in form and substance
satisfactory to the Agent.
(c) The Borrower shall have paid to the Agent, in immediately
available funds for the rateable account of the Lenders, a fee in the
amount of 0.50% of the
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13
aggregate amount of the Advances and Letter of Credit Liability outstanding
on the date hereof.
(d) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement to the extent that request for
such payment has been made to the Borrower.
(e) Section 1 hereof shall not have become effective.
SECTION 7. CONVERSION TO BASE RATE ADVANCES. The Borrower agrees
that no Advance may be Converted into or continued as a Eurodollar Advance after
the date hereof, notwithstanding any provision of the Credit Agreement to the
contrary.
SECTION 8. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same agreement.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
PHYSICIAN CORPORATION OF AMERICA
By:
-----------------------------
Name:
Title:
THE LENDERS AND ISSUING BANK:
CITIBANK, N.A., as Lender and as Issuing Bank
By:
------------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
------------------------------------------
Name:
Title:
NATIONSBANK OF TENNESSEE
By:
------------------------------------------
Name:
Title:
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15
BOATMEN'S NATIONAL BANK (formerly known as
Boatmen's First National Bank of Kansas City)
By:
------------------------------------------
Name:
Title:
SUNTRUST BANK, MIAMI, N.A.
By:
------------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
------------------------------------------
Name:
Title:
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as Guarantor under that certain Guaranty dated as of
March 29, 1996 (the "Guaranty") made in favor of the lenders parties to the
Revolving Credit Agreement referred to in the foregoing Sixth Amendment and
Waiver Agreement, the Issuing Bank and the Agent (in each case as defined in
such Revolving Credit Agreement), hereby consents to such Sixth Amendment and
Waiver Agreement (and to all prior amendments, waivers, consents and other
modifications to or under such Revolving Credit Agreement) and confirms and
agrees that notwithstanding such Sixth Amendment and Waiver Agreement (or any
prior such amendment, waiver, consent or other modification) the Guaranty is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects.
PCA SOLUTIONS, INC.
By
-----------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.1.7
EXECUTION COPY
SEVENTH AMENDMENT TO CREDIT AGREEMENT
SEVENTH AMENDMENT TO CREDIT AGREEMENT dated as of February 14, 1997
(this "Amendment") among Physician Corporation of America (the "Borrower"), the
banks listed on the signature pages hereof (the "Lenders"), Citibank, N.A., as
issuing bank (the "Issuing Bank"), and Citibank, N.A., as agent for the Lenders
and Issuing Bank (the "Agent").
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Issuing Bank and the Agent are
parties to that certain Revolving Credit Agreement dated as of October 27, 1994,
as amended by an Amendment to Credit Agreement and Consent to Acquisition dated
as of September 22, 1995, by a Second Amendment to Credit Agreement dated as of
March 29, 1996, by a Third Amendment to Credit Agreement dated as of April 5,
1996, by a Fourth Amendment and Consent Agreement dated as of June 10, 1996, by
a Fifth Amendment and Waiver Agreement dated as of November 25, 1996 and by a
Sixth Amendment and Waiver Agreement dated as of January 8, 1997 (such Revolving
Credit Agreement, as so amended and as further amended, supplemented or
otherwise modified and in effect from time to time being the "Credit
Agreement"). Capitalized terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined; and capitalized
terms defined in Section 1 hereof are used elsewhere herein as so defined
(without regard to the conditions to effectiveness in Section 4 hereof).
2. The Borrower has requested that the Issuing Bank and the Lenders
amend the Credit Agreement to extend the dates comprising certain components of
the Fifth Amendment Termination Date, due to delays that the Borrower expects
will be incurred in connection with the transactions leading up to the closing
of the Merger, in each case on the terms and subject to the conditions hereof.
The Borrower has determined that it will be unable to provide one or more
commitment letters or agreements that will satisfy the requirements for the
Refinancing Commitment specified in the Credit Agreement. As a result, the
Borrower has further requested that the Issuing Bank and Lenders amend the
Credit Agreement so as to eliminate failure to deliver the Refinancing
Commitment as an event that would trigger the Fifth Amendment Termination Date,
on and subject to the terms hereof.
3. The Issuing Bank and the Lenders are willing to agree to such
amendments requested by the Borrower, in each case on the terms and subject to
the conditions hereof.
<PAGE>
2
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. (a) (i) The
definition of "Applicable Base Rate Margin" set forth in Section 1.01 of the
Credit Agreement is hereby amended in its entirety so as to read in full as
follows:
"'APPLICABLE BASE RATE MARGIN' means, at all times on and after
February 17, 1997, 1.00%."
(ii) Clause (ii) of the definition of "Fifth Amendment Termination
Date" set forth in Section 1.01 of the Credit Agreement is hereby deleted
in its entirety; and Section 3 of the Fifth Amendment is deemed effective
notwithstanding the Borrower's failure to satisfy the conditions of Section
7 of the Fifth Amendment in full.
(iii) Clause (vii) of the definition of "Fifth Amendment Termination
Date" set forth in Section 1.01 of the Credit Agreement is hereby amended
by changing the date February 17, 1997 appearing therein to March 20, 1997.
(iv) Clause (viii) of the definition of "Fifth Amendment Termination
Date" set forth in Section 1.01 of the Credit Agreement is hereby amended
by changing the date February 24, 1997 appearing therein to March 24, 1997.
(v) Clause (x) of the definition of "Fifth Amendment Termination
Date" set forth in Section 1.01 of the Credit Agreement is hereby amended
in its entirety so as to read in full as "April 30, 1997".
(vi) The definition of "Loan Documents" set forth in Section 1.01 of
the Credit Agreement is hereby amended in its entirety so as to read in
full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of the
Guaranties, Security Agreements and other documents delivered by the
Borrower or any of its Subsidiaries pursuant to Section 6 of the
Second Amendment, the Fourth Amendment, the PFI Consideration Pledge
Agreement (including, without limitation, the Amendment to Borrower
Security Agreement delivered pursuant to the Fifth Amendment), the PFI
Consideration Consent Agreement, the Fifth Amendment, the Sixth
Amendment, the Seventh Amendment and any document delivered by the
Borrower for the benefit of the Lenders, Issuing
<PAGE>
3
Bank or Agent in connection with the Sierra Subordinated Note, in each
case as amended, supplemented or otherwise modified from time to
time."
(b) Section 1.01 of the Credit Agreement is hereby amended by the addition
of the following definition thereto:
"SEVENTH AMENDMENT" means the Seventh Amendment to Credit Agreement
dated as of February 14, 1997 among the Borrower, the Lenders parties
thereto, the Issuing Bank and the Agent.
(c) Section 2.07(b) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(b) DEFAULT INTEREST. Upon the occurrence and during the
continuance of an Event of Default, the Borrower shall pay interest on the
unpaid principal amount of each Advance owing to each Lender and, to the
fullest extent permitted by law, on the unpaid amount of all interest, fees
and other amounts payable hereunder and under the other Loan Documents,
payable in arrears on demand by the Agent and on the date such amount shall
be paid in full, at a rate per annum equal at all times to 3% per annum
above the Base Rate in effect from time to time (computed on the basis of a
year of 360 days for the actual number of days (including the first day but
excluding the last day) occurring during the period for which such interest
is payable)."
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows:
(a) All representations and warranties of the Borrower contained in
the Credit Agreement, both before and after giving effect to Section 1
hereof, are true in all material respects (except for any such
representation or warranty (or portion thereof) that is qualified by
reference to a specific materiality standard, in which case such
representation or warranty is true in all respects).
(b) Without limiting the representations and warranties made in
subsection (a) above or in the Credit Agreement, no authorization, consent,
approval or other action by, and no notice to or filing with, any HMO
Regulator or Insurance Regulator is required for, and no HMO Event,
Insurance Event or violation of the HMO Regulations or Insurance
Regulations would result from, the due execution, delivery or performance
by the Borrower or any Loan Party of this Amendment or any of the Loan
Documents and other documents to be delivered in connection herewith.
SECTION 3. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and
after the date hereof, each reference in the Credit Agreement to "this
Agreement",
<PAGE>
4
"hereunder", "hereof", "herein", or words of like import referring to the Credit
Agreement, and each reference to the Credit Agreement in the other Loan
Documents, shall mean and be a reference to the Credit Agreement as amended
hereby.
(b) Except as specifically amended under Section 1 hereof, each of
the Credit Agreement and each other Loan Document shall remain in full force and
effect and is hereby ratified and confirmed.
(c) The Borrower acknowledges and agrees that, except to the extent
specifically amended under Section 1 hereof, it is obligated to comply with each
and every term, covenant, agreement and condition applicable to it under the
Credit Agreement or the other Loan Documents. The execution, delivery and
effectiveness of this Amendment shall not otherwise operate as a waiver of any
right, remedy or privilege of any Lender, the Issuing Bank or the Agent under
the Credit Agreement or any other Loan Document, any and all of which rights,
remedies and privileges are reserved.
SECTION 4. CONDITIONS OF EFFECTIVENESS. Section 1 of this Amendment
shall become effective as of February 17, 1997, if and only if all of the
following conditions precedent are satisfied on or before February 18, 1997:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Issuing Bank and each Lender and a
counterpart of the Consent of Guarantor attached hereto duly executed by
the Guarantor.
(b) The Borrower shall have furnished to the Lenders, Issuing Bank
and Agent copies of a bank commitment letter and highly confident letters
that are substantially in conformity with the description of such letters
set forth under the heading "Modification of Takeout Commitment" in the
letter dated February 10, 1997 from Clifford Donnelly of the Borrower to
the Lenders.
(c) The Agent shall have received on or before February 18, 1997 the
following, each dated such date (unless otherwise specified), in form and
substance satisfactory to the Agent, the Issuing Bank and the Majority
Lenders (unless otherwise specified) and in sufficient copies for the
Agent, Issuing Bank and each Lender:
(i) A certificate, duly executed by the Borrower's Chief
Executive Officer or Chief Financial Officer, certifying that (i) on
such date, after giving effect to Section 1 hereof, no Default or
Event of Default has occurred and is continuing (ii) on such date,
after giving effect to Section 1 hereof, no event or circumstance has
occurred that will cause the occurrence of the Fifth Amendment
Termination Date and (iii) the representations and warranties set
forth in Section 2 hereof are true on and as of such date.
<PAGE>
5
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower approving this Amendment, and of all
documents evidencing other necessary corporate action and governmental
and other third party approvals and consents, if any, with respect
each such Loan Document.
(iii)A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying the names and true signatures of the officers
of the Borrower authorized to sign this Amendment.
(iv) A legal opinion from Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quintal, P.A., counsel to the Borrower, as to this Amendment
and the Credit Agreement, as amended hereby, in form and substance
satisfactory to the Agent.
(d) The Borrower shall have paid to the Agent, in immediately
available funds for the rateable account of the Lenders, a fee in the
amount of 1.00% of the aggregate amount of the Advances and Letter of
Credit Liability outstanding on the date hereof.
(e) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement to the extent that request for
such payment has been made to the Borrower.
SECTION 5. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same agreement.
SECTION 6. PARTIAL FEE REBATE. In the event that the Borrower
pays all of the Obligations in full on or before April 30, 1997 (including,
without limitation, replacement and termination of any outstanding Letter of
Credit), then one-half of the aggregate amount of the fee paid pursuant to
Section 4(d) of this Amendment shall be rebated, by application thereof rateably
as a credit against the outstanding Advances and Letter of Credit Liability.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
PHYSICIAN CORPORATION OF AMERICA
By:
-----------------------------
Name:
Title:
THE LENDERS AND ISSUING BANK:
CITIBANK, N.A., as Lender and as Issuing Bank
By:
------------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:
------------------------------------------
Name:
Title:
NATIONSBANK OF TENNESSEE
By:
------------------------------------------
Name:
Title:
<PAGE>
7
BOATMEN'S NATIONAL BANK (formerly known as
Boatmen's First National Bank of Kansas City)
By:
------------------------------------------
Name:
Title:
SUNTRUST BANK, MIAMI, N.A.
By:
------------------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA
By:
------------------------------------------
Name:
Title:
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as Guarantor under that certain Guaranty dated as of
March 29, 1996 (the "Guaranty") made in favor of the lenders parties to the
Revolving Credit Agreement referred to in the foregoing Seventh Amendment to
Credit Agreement, the Issuing Bank and the Agent (in each case as defined in
such Revolving Credit Agreement), hereby consents to such Seventh Amendment to
Credit Agreement (and to all prior amendments, waivers, consents and other
modifications to or under such Revolving Credit Agreement) and confirms and
agrees that notwithstanding such Seventh Amendment to Credit Agreement (or any
prior such amendment, waiver, consent or other modification) the Guaranty is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects.
PCA SOLUTIONS, INC.
By
--------------------------------------
Name:
Title:
<PAGE>
Exhibit 10.1.8
March 20, 1997
BY TELECOPIER AND OVERNIGHT COURIER
- -----------------------------------
To: Physician Corporation of America
5835 Blue Lagoon Drive, Suite 400
Miami, Florida 33126
Attention: Chief Financial Officer
Attention: General Counsel
$200,000,000 REVOLVING CREDIT AGREEMENT DATED AS OF OCTOBER 27, 1994
---------------------------------------------------------------------
Ladies and Gentlemen:
Reference is made to the Revolving Credit Agreement dated as of
October 27, 1994 among Physician Corporation of America (the "Borrower"), the
Lenders parties thereto, Citibank, N.A., as Issuing Bank, and Citibank, N.A., as
Agent (the "Agent") for the Lenders and Issuing Bank, as amended by an Amendment
to Credit Agreement and Consent to Acquisition dated as of September 22, 1995,
by a Second Amendment to Credit Agreement dated as of March 29, 1996, by a Third
Amendment to Credit Agreement dated as of April 5, 1996, by a Fourth Amendment
and Consent Agreement dated as of June 10, 1996, by a Fifth Amendment and Waiver
Agreement dated as of November 25, 1996, by a Sixth Amendment and Waiver
Agreement dated as of January 8, 1997 and by a Seventh Amendment to Credit
Agreement dated as of February 14, 1997 (such Revolving Credit Agreement, as so
amended and as further amended, supplemented or otherwise modified and in effect
from time to time being the "Credit Agreement"; capitalized terms defined
therein and not otherwise defined herein being used herein as therein defined).
This notice is to confirm that, as discussed more fully below, (i)
Events of Default under the Credit Agreement have occurred and are continuing,
(ii) the Fifth Amendment Termination Date occurred on March 1, 1997 and (iii)
the Termination Date occurred on March 1, 1997.
Such Events of Default include those arising from the recent actions
of the Florida Department of Insurance (the "DOI"). On February 25, 1997, the
DOI commenced proceedings for the appointment of a receiver for PCA Property &
Casualty Insurance Company ("PCIC") on grounds, among others, that PCIC is
insolvent for purposes of relevant Insurance Regulations. This event (i)
constituted a Material Adverse Change, giving rise to an Event of Default under
Section 7.01(m) of the Credit Agreement and (ii) constituted an Insurance Event
not susceptible of a cure, giving rise to an Event of Default under Section
7.01(o) of the Credit Agreement. This event also constituted a proceeding
described in Section 7.01(e) of the Credit Agreement and the entry on February
25, 1997 of the court's order granting relief in such proceeding gave rise to an
Event of Default under Section 7.01(e) of the Credit Agreement. The Borrower
has also notified the Lenders and Agent that additional charges against earnings
relating to PCIC (going beyond the $100 million charge addressed in the Fifth
Amendment and the $80 million charge addressed in the
<PAGE>
2
Waiver Agreement dated as of February 21, 1997) may be recorded by the
Borrower upon completion of the review process relating to PCIC's
capitalization that the Borrower is conducting with its advisors. The
outcome of this review process, and circumstances determined to exist as a
result of it, could give rise to additional Events of Default.
As a result of the occurrence and continuance of the Events of Default
described above, interest on the Obligations has been accruing since February
25, 1997 at the default rate of 3% per annum above the Base Rate in effect from
time to time, as provided in Section 2.07(b) of the Credit Agreement. Please
consider this notice a demand, pursuant to Section 2.07(b), that such interest
accruing from time to time (including, without limitation, interest accruing at
such rate since March 1, 1997 on the fee referred to in the following paragraph)
be paid when interest is otherwise scheduled to be paid under Section 2.07(a)(i)
of the Credit Agreement (except to the extent such interest is otherwise paid or
payable earlier concurrently with any payment of principal of the Obligations).
In the Borrower's complaint against Sierra filed in case No. 97-0671
in the United States District Court for the Southern District of Florida and in
other announcements, the Borrower announced that the Merger Agreement was
terminated by Sierra on March 1, 1997. Accordingly, under clause (i) of the
definition of Fifth Amendment Termination Date, the Fifth Amendment Termination
Date occurred on March 1, 1997. As a result of this occurrence, a fee in the
amount of 1% of the aggregate amount of the Advances and Letter of Credit
Liability became payable on March 1, 1997, pursuant to Section 8(f) of the Fifth
Amendment. As indicated above, interest at the default rate has been accruing
on the amount of this fee since March 1, 1997. Further as a result of such
termination of the Merger Agreement, (i) the Termination Date occurred under
clause (i) of the definition of Termination Date and (ii) the outstanding
principal amount of the Advances, and all unpaid interest accrued thereon,
became due and payable in full on March 1, 1997, pursuant to Sections 2.06 and
2.07 of the Credit Agreement.
Please be advised that the above notice of defaults and of the
occurrence of the Fifth Amendment Termination Date and Termination Date, and any
forbearance of the Lenders, Issuing Bank and Agent in respect thereof do not and
shall not constitute a waiver in respect thereof or any waiver or modification
of any term of the Credit Agreement or any other Loan Document, and do not and
shall not constitute a waiver of any right, remedy or privilege of any Lender,
the Issuing Bank or the Agent in respect of such defaults or occurrences or any
other default or occurrence under any Loan Document or otherwise.
Any past or ongoing discussions of any potential waiver or
modification of the terms of the Loan Documents in respect of the above defaults
and occurrences or otherwise shall not be effective or otherwise construed as
any waiver of any right, remedy or privilege
<PAGE>
3
of any Lender, the Issuing Bank or the Agent unless the terms thereof are
agreed to in writing in accordance with the terms of the Credit Agreement.
Very truly yours,
Citibank, N.A., as Agent for the
Lenders and Issuing Bank
By: /s/ Ruth E. Ford
--------------------------------------
Name: Ruth E. Ford
Title: Vice President
cc: Fernando Alonso
Lenders and Issuing Bank
Douglas Young
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AND SHARE PLEDGE AGREEMENT
DATED AS OF JANUARY 10, 1997
BETWEEN
PHYSICIAN CORPORATION OF AMERICA,
AS BORROWER
AND
SIERRA HEALTH SERVICES, INC.,
AS LENDER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INDEBTEDNESS AND SECURITY INTERESTS PROVIDED FOR OR EVIDENCED BY THIS
AGREEMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL OF THE OBLIGATIONS (AS
DEFINED IN THE SUBORDINATION AGREEMENT HEREUNDER REFERRED TO) AND TO THE
SECURITY INTERESTS SECURING THE OBLIGATIONS, PURSUANT TO, AND TO THE EXTENT
PROVIDED IN, THE SUBORDINATION AGREEMENT DATED AS OF JANUARY 10, 1997 AMONG
PHYSICIAN CORPORATION OF AMERICA, SIERRA HEALTH SERVICES, INC. AND CITIBANK
N.A., AS AGENT IN FAVOR OF THE LENDERS, ISSUING BANK AND AGENT PARTIES TO THE
REVOLVING CREDIT AGREEMENT DATED AS OF OCTOBER 27, 1994, AS AMENDED, AMONG
PHYSICIAN CORPORATION OF AMERICA, THE LENDERS PARTIES THERETO, CITIBANK, N.A.,
AS ISSUING BANK, AND CITIBANK, N.A., AS AGENT FOR SUCH LENDERS AND ISSUING BANK.
CREDIT AND SHARE PLEDGE AGREEMENT, dated as of
January 10, 1997 (as amended, supplemented or otherwise
modified, renewed or replaced from time to time, the "Credit
Agreement"), between PHYSICIAN CORPORATION OF AMERICA, a
Delaware corporation ("Borrower"), and SIERRA HEALTH
SERVICES, INC., a Nevada corporation ("Lender").
INTRODUCTORY STATEMENT
All terms not otherwise defined above or in this Introductory
Statement are as defined in Article 1 hereof, or as defined elsewhere herein.
The Borrower has requested that the Lender make available a sixteen
million seven hundred fifty thousand dollar ($16,750,000) secured loan which
will be used to make a mandatory prepayment of principal pursuant to
Section 2.10(a)(i) of the Citibank Facility.
To provide assurance for the repayment of the Loan and other
Obligations of the Borrower hereunder, the Borrower will provide or will cause
to be provided to the Lender (as more fully described herein) a pledge of the
Pledged Securities pursuant to the Article 6 hereof.
As a condition precedent to Citibank's consent to the transactions
contemplated herein, Citibank is requiring that the Lender enter into a
Subordination Agreement in the form of Exhibit C attached hereto and Lender is
willing to so enter into such a Subordination Agreement.
<PAGE>
Subject to the terms and conditions set forth herein, the Lender is
willing to make Loans to the Borrower.
Accordingly, the parties hereto hereby agree as follows:
1. DEFINITIONS
For the purposes hereof unless the context otherwise requires, all
Section references herein shall be deemed to correspond with Sections herein,
the following terms shall have the meanings indicated and all terms defined in
the UCC and not otherwise defined herein shall have the respective meanings
accorded to them therein. Unless the context otherwise requires, any of the
following terms may be used in the singular or the plural, depending on the
reference:
"AFFILIATE" shall mean any Person which, directly or indirectly, is
controlled by or is under common control with another Person. For purposes of
this definition, a Person shall be deemed to be "controlled by" another Person
if such latter Person possesses, directly or indirectly, power either to direct
or cause the direction of the management and policies of such controlled Person
whether by contract or otherwise.
"APPLICABLE LAW" shall mean all provisions of statutes, rules,
regulations and orders of the United States, any state or local governmental
authority, or any other governmental bodies or regulatory agencies applicable to
the Person in question, and all orders and decrees of all courts and arbitrators
in proceedings or actions in which the Person in question is a party.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or
other day on which banks are required or permitted to close in the State of
New York.
"CITIBANK ACKNOWLEDGMENT" shall mean the letter agreement
substantially in the form of Exhibit B hereto, to be delivered by the Borrower
to the Lender in accordance with Section 4.1(d).
"CITIBANK FACILITY" shall mean that certain Revolving Credit Agreement
dated as of October 27, 1994 by and between the Borrower; the Lenders set forth
therein; Citibank, N.A., as Agent ("Citibank"); Nationsbank of Tennessee and
First Union National Bank of North Carolina, as Co-Agents; Citibank, as Issuing
Bank; and Citicorp Securities, Inc., as Arranger, as amended by an
<PAGE>
Amendment to Credit Agreement and Consent dated as of September 22, 1995, by a
Second Amendment to Credit Agreement dated as of March 29, 1996, by a Third
Amendment to Credit Agreement dated as of April 5, 1996, by a Fourth Amendment
and Consent Agreement dated as of June 10, 1996, by a Fifth Amendment and Waiver
Agreement dated as of November 25, 1996 and by a Sixth Amendment and Waiver
Agreement dated as of January 8, 1997.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"EVENT OF DEFAULT" shall have the meaning given such term in
Section 6.3 hereof.
"LIEN" shall mean any mortgage, copyright mortgage, pledge, security
interest, encumbrance, lien or charge of any kind whatsoever (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction or the agreement to grant a
security interest at a future date).
"LOAN" shall mean the Loan made hereunder in accordance with the
provisions of Section 2.1.
"MATURITY DATE" shall mean the date on which the Loan shall become due
and payable in accordance with the provisions of Section 2.5(a).
"MERGER AGREEMENT" shall mean the Agreement and Plan of Merger dated
as of November 2, 1996 among Lender, Sierra Acquisition, Inc. and Borrower.
"OBLIGATIONS" shall mean the obligation of the Borrower to make due
and punctual payment of principal of and interest on the Loan and all other
monetary obligations of the Borrower to the Lender under this Credit Agreement
or the Note.
"PERSON" shall mean any natural person, corporation, division of a
corporation, partnership, trust, joint venture, association, company, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"PLEDGED SECURITIES" shall mean all of the issued and outstanding
capital stock directly or indirectly owned or controlled by the Borrower, as
listed on Schedule 3.5.
<PAGE>
"SUBSIDIARY" shall mean with respect to any Person, any corporation,
association, joint venture, partnership or other business entity (whether now
existing or hereafter organized) of which at least a majority of the Voting
Stock or other ownership interests having ordinary voting power for the election
of directors (or the equivalent) is, at the time as of which any determination
is being made, owned or controlled by such Person or one or more subsidiaries of
such Person or by such Person and one or more subsidiaries of such Person.
"UCC" shall mean the Uniform Commercial Code as in effect in the State
of New York on the date of execution of this Credit Agreement.
"VOTING STOCK" shall mean the capital stock of an entity having
ordinary voting power under ordinary circumstances to vote in the election of
directors of such entity.
2. THE LOAN
SECTION 2.1. LOAN; MAKING OF THE LOAN.
The Lender agrees, upon the terms and subject to the conditions
hereof, to make a Loan to the Borrower in the principal amount of sixteen
million seven hundred fifty thousand dollars ($16,750,000) on the date on which
this Credit Agreement is fully executed. Subject to the satisfaction of the
conditions set forth in Section 4.1, the Lender shall disburse the Loan by
depositing the Loan proceeds directly into an account designated by Citibank in
writing for the purpose of making the mandatory prepayment of principal and the
payment of fees as described in the Introductory Statement of this Credit
Agreement.
SECTION 2.2. NOTE.
The Loan made by the Lender hereunder shall be evidenced by a single
promissory note substantially in the form of Exhibit A hereto (the"NOTE") in the
principal amount of the Loan payable to the order of the Lender, duly executed
by the Borrower and dated the date on which the Loan is disbursed by Lender.
SECTION 2.3. INTEREST ON NOTE.
Interest on the Loan shall be payable at the rate of ten percent (10%)
per annum (computed on the basis of the actual
<PAGE>
number of days elapsed over a year of 360 days). Interest shall be payable on
the Maturity Date. Anything in this Credit Agreement or the Note to the
contrary notwithstanding, the interest rate on the Loan shall in no event be in
excess of the maximum permitted by Applicable Law.
SECTION 2.4. DEFAULT INTEREST.
If the Borrower shall default in the timely payment of the principal
of, or interest on the Loan due hereunder, or the payment of any other amount
becoming due hereunder after written notification from the Lender to the
Borrower of such amount, the Borrower shall on demand from time to time pay
interest, to the extent permitted by law, on the Loan and overdue amounts
outstanding up to the date of actual payment of such defaulted amount (after as
well as before judgment) at 5% in excess of the interest rate then in effect.
SECTION 2.5. REPAYMENT OF LOAN.
(a) The Borrower shall repay to Lender the principal of the Loan,
together with all accrued and unpaid interest due thereon and all other amounts
due under this Credit Agreement and the Note, on or before the fifth Business
Day following demand by Lender (the "Maturity Date").
(b) The Borrower shall have the right at its option at any time and
from time to time to prepay the Loan, in whole or in part, upon at least two
Business Days' prior written notice. All prepayments under this Section 2.5(b)
shall be accompanied by accrued but unpaid interest on the principal amount
being prepaid to the date of (but not including) prepayment.
SECTION 2.6. MANNER OF PAYMENTS.
All payments by the Borrower hereunder and under the Note shall be
made in Dollars in Federal or other immediately available funds at such place as
Lender shall notify Borrower no later than 1:00 p.m., New York City time, on the
date on which such payment shall be due.
SECTION 2.7. INTEREST ADJUSTMENTS.
If the provisions of this Credit Agreement or the Note would at any
time require payment by the Borrower to the Lender of any amount of interest in
excess of the maximum amount then permitted by Applicable Law, the interest
payments to the Lender
<PAGE>
shall be reduced to the extent necessary so that the Lender shall not receive
interest in excess of such maximum amount.
3. REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Credit Agreement and
to make the Loan provided for herein, the Borrower makes the following
representations and warranties to, and agreements with, the Lender, all of which
shall survive the execution and delivery of this Credit Agreement, the issuance
of the Note and the making of the Loan:
SECTION 3.1. CORPORATE EXISTENCE AND POWER.
The Borrower and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is in good standing as a foreign corporation
in all jurisdictions where the nature of its properties or business so requires
and where the failure to be in good standing as a foreign corporation would give
rise to a material liability. The Borrower and each of its Subsidiaries has the
corporate power and authority to own its respective properties and carry on its
respective businesses as now being conducted, and, in the case of the Borrower,
to execute, deliver and perform its obligations under this Credit Agreement and
the Note and other documents contemplated hereby to which it is or will be a
party as provided herein and to grant to the Lender, a security interest in the
Pledged Securities as contemplated by Article 6 hereof.
<PAGE>
SECTION 3.2. CORPORATE AUTHORITY AND NO VIOLATION.
(a) The execution, delivery and performance of this Credit Agreement,
the Loan hereunder, the execution and delivery of the Note and the grant to the
Lender of the security interest in the Pledged Securities as contemplated herein
(i) have been duly authorized by all necessary corporate action on the part of
the Borrower, (ii) will not constitute a violation by the Borrower of any
provision of Applicable Law, any order of any court or other agency of the
United States or any state thereof applicable to the Borrower or any of its
Subsidiaries or any of their respective properties or assets, (iii) will not
violate any provision of the Certificate of Incorporation or By-Laws of the
Borrower or any of its Subsidiaries, or any material provision of any indenture,
agreement, bond, note or other similar instrument to which the Borrower or any
of its Subsidiaries is a party or by which the Borrower or any of its
Subsidiaries or their respective properties or assets are bound, (iv) will not
be in conflict with, result in a breach of or constitute (with due notice or
lapse of time or both) a default under or create any right to terminate any such
indenture, agreement, bond, note or other instrument, and (v) will not result in
the creation or imposition of any Lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of the Borrower or any of its
Subsidiaries other than pursuant to this Credit Agreement.
(b) Except as provided in the Citibank Facility and as described on
Schedule 3.2, there are no restrictions on the transfer of any of the Pledged
Securities other than as a result of this Credit Agreement or applicable
securities laws and the regulations promulgated thereunder.
SECTION 3.3. GOVERNMENTAL APPROVAL.
All authorizations, approvals, registrations or filings with any
governmental or public regulatory body or authority of the United States or any
state thereof required for the execution, delivery and performance by the
Borrower of this Credit Agreement have been duly obtained or made, or duly
applied for and are in full force and effect, and if any such further
authorizations, approvals, registrations or filings should hereafter become
necessary, the Borrower will use their best efforts to obtain or make all such
authorizations, approvals, registrations or filings.
SECTION 3.4. BINDING AGREEMENTS.
<PAGE>
This Credit Agreement and the Note when executed will constitute the
legal, valid and binding obligations of the Borrower, enforceable in accordance
with their respective terms, subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity.
<PAGE>
SECTION 3.5. OWNERSHIP OF PLEDGED SECURITIES, ETC.
Annexed hereto as Schedule 3.5 is a correct and complete list as of
the date hereof, of each of Borrower's Subsidiaries showing, as to each, its
name, classes of capital stock outstanding, the par value of each such class,
the number of shares of each such class owned by Borrower and the percentage of
the outstanding shares of each such class owned by Borrower.
SECTION 3.6. SECURITY INTEREST; OTHER SECURITY.
This Credit Agreement when executed and delivered and, upon the making
of the Loan hereunder, will create and grant to the Lender (upon delivery of the
Pledged Securities to the Lender) a valid and perfected security interest in the
Pledged Securities subject only to the security interest created pursuant to the
Citibank Facility.
SECTION 3.7. PLEDGED SECURITIES.
All of the Pledged Securities are duly authorized, validly issued and
fully paid, and are owned and held by the Borrower, free and clear of any Liens,
encumbrances, or security interests whatsoever other than those created pursuant
to the Citibank Facility and this Credit Agreement. Except as described on
Schedule 3.2, as provided in the Citibank Facility and this Credit Agreement or
applicable securities laws there are no restrictions on the transfer of the
Pledged Securities. Except as set forth on Schedule 3.7, there are no
outstanding rights, warrants, options, or agreements to purchase or otherwise
acquire any shares of the stock or securities or obligations of any kind
convertible into any shares of capital stock of the issuers of the Pledged
Securities.
SECTION 3.8. MERGER AGREEMENT.
The representations and warranties set forth in Section 3.1 of the
Merger Agreement are true and complete in all material respects and the Borrower
is in full compliance with the covenants set forth in Section 4.1 of the Merger
Agreement.
SECTION 3.9. COMPLIANCE WITH LAWS.
Neither the Borrower nor any of its Subsidiaries are in violation of
any Applicable Law except for such violations in the aggregate which would not
have a material adverse effect on their business condition (financial or
otherwise) taken as a whole.
<PAGE>
4. CONDITIONS OF LENDING
SECTION 4.1. CONDITIONS PRECEDENT TO LOAN.
The obligation of the Lender to make the Loan is subject to the
following conditions precedent:
(a) CORPORATE DOCUMENTS. At the time of the making of the Loan, the
Lender shall have received:
(i) a copy of the certificate of incorporation of the Borrower
and each of its Subsidiaries, certified as of a recent date by the
Secretary of State of such Person's jurisdiction of incorporation;
(ii) a certificate of such Secretary of State, dated as of a
recent date as to the good standing of and payment of taxes by the
Borrower and each of its Subsidiaries, which lists the charter
documents on file in the office of such Secretary of State;
(iii) a certificate dated as of a recent date as to the good
standing of the Borrower and each of its Subsidiaries issued by the
Secretary of State of each jurisdiction in which such Person is
qualified as a foreign corporation; and
(iv) a certificate of the Secretary of the Borrower, dated the
date on which the Loan is disbursed and certifying (A) that attached
thereto is a true and complete copy of the by-laws of the Borrower as
in effect on the date of such certification, (B) that attached thereto
is a true and complete copy of resolutions adopted by the Board of
Directors of the Borrower authorizing (to the extent applicable) the
Loan hereunder, the execution, delivery and performance in accordance
with their respective terms of this Credit Agreement, the Note and all
other documents required or contemplated hereunder or thereunder and
that such resolutions have not been amended, rescinded or supplemented
and are currently in effect, (C) that the certificate of incorporation
of the Borrower has not been amended since the date of the last
amendment thereto indicated on the certificate of the Secretary of
State furnished pursuant to clause (i) above except to the extent
specified in such Secretary's certificate and (D) as to the incumbency
and specimen signature of
<PAGE>
each officer of the Borrower executing (as applicable) this Credit
Agreement, the Note or any other document delivered by it in
connection herewith or therewith (such certificate to contain a
certification by another officer of the Borrower as to the incumbency
and signature of the officer signing the certificate referred to in
this clause (iv)); and
(v) such additional supporting documents as the Lender or its
counsel may reasonably request.
(b) NOTE. The Lender shall have received the Note duly executed by
the Borrower.
(c) OPINIONS OF COUNSEL. The Lender shall have received the written
opinions dated the date hereof and addressed to the Lender in form and substance
satisfactory to Morgan, Lewis & Bockius LLP, of Greenberg, Trauwick, Hoffman,
Lipoff, Rosen & Quentel, P.A. and internal legal counsel to the Borrower.
(d) CITIBANK ACKNOWLEDGMENT. On or prior to the date hereof, the
Lender shall have received the fully executed Citibank Acknowledgment.
(e) REQUIRED CONSENTS AND APPROVALS. The Lender shall be satisfied
that all required consents and approvals have been obtained with respect to the
transactions contemplated hereby from all Governmental Authorities with
jurisdiction over the business and activities of the Borrower and its
Subsidiaries as of the date hereof, and from any other entity whose consent or
approval the Lender in its reasonable discretion deems necessary to consummate
the transactions contemplated hereby.
(f) COMPLIANCE WITH LAWS. The Lender shall be satisfied that the
transactions contemplated hereby will not violate any provision of Applicable
Law, or any order of any court or other agency of the United States or any state
thereof, applicable to any of the Borrower or any of its Subsidiaries (as of the
date hereof) or any of their respective properties or assets.
5. COVENANTS
From the date hereof and for so long as any amount remains outstanding
under the Note or any Obligations remain unpaid or unsatisfied, Borrower agrees
that it will comply with
<PAGE>
each of the covenants set forth in Article VI of the Citibank Facility as in
effect on the date hereof (without giving effect to any subsequent amendment or
modification) and each such covenant is hereby incorporated herein by reference
as if set forth in full and the same shall be deemed to inure hereunder to the
benefit of Lender.
<PAGE>
6. PLEDGE
SECTION 6.1. PLEDGE.
As security for the Obligations, the Borrower hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto the Lender, a
security interest in all Pledged Securities now owned or hereafter acquired by
it subordinate only to the security interest therein created pursuant to the
Citibank Facility. Upon the termination of the security interest in the Pledged
Securities created pursuant to the Citibank Facility, the Borrower shall cause
Citibank to deliver to the Lender definitive instruments representing all
Pledged Securities, accompanied by executed undated stock powers, duly endorsed
or executed in blank by the Borrower, and such other instruments or documents as
the Lender or its counsel shall reasonably request.
SECTION 6.2. COVENANT.
Borrower covenants that as the sole stockholder of each of its
Subsidiaries it will not take any action to allow any additional shares of
common stock, preferred stock or other equity securities of any of its
respective Subsidiaries or any securities convertible or exchangeable into
common or preferred stock of such Subsidiaries to be issued, or grant any
options or warrants, unless such securities are pledged to the Lender as
security for the Obligations.
SECTION 6.3. REGISTRATION IN NOMINEE NAME; DENOMINATIONS.
Upon the occurrence of a default in the payment of any principal of or
interest on the Note or other amounts payable by the Borrower hereunder, when
and as the same shall become due and payable (an "Event of Default"), the Lender
shall have the right (in its sole and absolute discretion) to hold the
certificates representing any Pledged Securities (a) in its own name or in the
name of its nominee or (b) in the name of the Borrower, endorsed or assigned in
blank or in favor of the Lender. The Borrower shall have the right to exchange
the certificates representing Pledged Securities for certificates of smaller or
larger denominations for any purpose consistent with this Credit Agreement.
SECTION 6.4. VOTING RIGHTS; DIVIDENDS; ETC.
<PAGE>
(a) The Borrower shall be entitled to exercise any and all voting
and/or consensual rights and powers accruing to owners of the Pledged Securities
or any part thereof for any purpose not inconsistent with the terms hereof, at
all times, except as expressly provided in (c) below.
(b) Any dividends or distributions of any kind whatsoever (other, so
long as an Event of Default is not continuing, than cash) received by Borrower,
whether resulting from a subdivision, combination, or reclassification of the
outstanding capital stock of the issuer or received in exchange for Pledged
Securities or any part thereof or as a result of any merger, consolidation,
acquisition, or other exchange of assets to which the issuer may be a party, or
otherwise, shall be and become part of the Pledged Securities pledged hereunder
and shall immediately be delivered to the Lender, subject to the Borrower's
obligations under the Citibank Facility, to be held subject to the terms hereof.
(c) Upon the occurrence and during the continuance of an Event of
Default and notice from the Lender of the transfer of such rights to the Lender,
(i) all rights of the Borrower to exercise the voting and/or consensual rights
and powers which it is entitled to exercise pursuant to this Section shall
cease, and all such rights shall thereupon become vested in the Lender, which
shall have the sole and exclusive right and authority to exercise such voting
and/or consensual rights and (ii) all cash dividends, interest and other cash
payments and distributions relating to the Pledged Securities shall be delivered
to the Lender to be held as Collateral for the Obligations; provided, however,
that to the extent any governmental consents or filings are required for the
exercise by the Lender of any of the foregoing rights and powers, the Lender
shall refrain from exercising such rights or powers until the making of such
required filings, the receipt of such approval and the expiration of all related
waiting periods.
SECTION 6.5. REMEDIES UPON DEFAULT.
(a) If an Event of Default shall have occurred and be continuing, the
Lender may sell the Pledged Securities, or any part thereof, at public or
private sale or at any broker's board or on any securities exchange, for cash,
upon credit or for future delivery as the Lender shall deem appropriate subject
to the terms hereof or as otherwise provided in the UCC. The Lender shall be
authorized at any such sale (if it deems it advisable to do so) to restrict to
the full extent permitted by Applicable Law
<PAGE>
the prospective bidders or purchasers to Persons who will represent and agree
that they are purchasing the Pledged Securities for their own account for
investment and not with a view to the distribution or sale thereof, and upon
consummation of any such sale the Lender shall have the right to assign,
transfer, and deliver to the purchaser or purchasers thereof the Pledged
Securities so sold. Each such purchaser at any such sale shall hold the
property sold absolutely, free from any claim or right on the part of the
Borrower. The Lender shall give ten (10) days' written notice of its intention
to make any such public or private sale, or sale at any broker's board or on any
such securities exchange, or of any other disposition of the Pledged Securities.
Such notice, in the case of public sale, shall state the time and place for such
sale and, in the case of sale at a broker's board or on a securities exchange,
shall state the board or exchange at which such sale is to be made and the day
on which the Pledged Securities, or portion thereof, will first be offered for
sale at such board or exchange. Any such public sale shall be held at such time
or times within ordinary business hours and at such place or places as the
Lender may fix and shall state in the notice of such sale. At any such sale,
the Pledged Securities, or portion thereof, to be sold may be sold in one lot as
an entirety or in separate parcels, as the Lender may (in its sole and absolute
discretion) determine. The Lender shall not be obligated to make any sale of
the Pledged Securities if it shall determine not to do so, regardless of the
fact that notice of sale of the Pledged Securities may have been given. The
Lender may, without notice or publication, adjourn any public or private sale or
cause the same to be adjourned from time to time by announcement at the time and
place fixed for sale, and such sale may, without further notice, be made at the
time and place to which the same was so adjourned. In case the sale of all or
any part of the Pledged Securities is made on credit or for future delivery, the
Pledged Securities so sold shall be retained by the Lender until the sale price
is paid by the purchaser or purchasers thereof, but the Lender shall not incur
any liability in case any such purchaser or purchasers shall fail to take up and
pay for the Pledged Securities so sold and, in case of any such failure, such
Pledged Securities may be sold again upon like notice. At any sale or sales
made pursuant to this Section 6.5, the Lender may bid for or purchase, free from
any claim or right of whatever kind, including any equity of redemption, of the
Borrower, any such demand, notice, claim, right or equity being hereby expressly
waived and released, any or all of the Pledged Securities offered for sale, and
may make any payment on the account thereof by using any claim for moneys then
due and payable to the Lender by the Borrower as a credit
<PAGE>
against the purchase price; and the Borrower, upon compliance with the terms of
sale, may hold, retain and dispose of the Pledged Securities without further
accountability therefor to the Borrower or any third party. The Lender shall in
any such sale make no representations or warranties with respect to the Pledged
Securities or any part thereof, and shall not be chargeable with any of the
obligations or liabilities of the Borrower with respect thereto. The Borrower
hereby agrees (i) it will indemnify and hold the Lender harmless from and
against any and all claims with respect to the Pledged Securities asserted
before the taking of actual possession or control of the Pledged Securities by
the Lender pursuant to this Credit Agreement or arising out of any act of, or
omission to act on the part of, any party prior to such taking of actual
possession or control by the Lender (whether asserted before or after such
taking of possession or control), or arising out of any act on the part of the
Borrower, its agents or Affiliates before or after the commencement of such
actual possession or control by the Lender and (ii) the Lender shall have no
liability or obligation arising out of any such claim. As an alternative to
exercising the power of sale herein conferred upon it, the Lender may proceed by
a suit or suits at law or in equity to foreclose upon the Pledged Securities
under this Credit Agreement and to sell the Pledged Securities, or any portion
thereof, pursuant to a judgment or decree of a court or courts having competent
jurisdiction.
(b) If the Lender shall determine that in order to exercise its right
to sell all or any of the Pledged Securities, and to have the Pledged Securities
or the portion thereof sold, the Pledged Securities shall be registered under
the provisions of the Securities Act of 1933, as amended (the "Securities Act")
the Borrower agrees, at its own expense, (i) to execute and deliver, and to use
its best efforts to cause each corporation whose securities are to be sold and
their directors and officers to execute and deliver, all such instruments and
documents, and to use its best efforts to do or cause to be done all other such
acts and things, as may be necessary or, in the opinion of the Lender, advisable
to register such securities under the provisions of the Securities Act and to
use its best efforts to cause the registration statement relating thereto to
become effective and to remain effective for such period as prospectuses are
required by law to be furnished, and to make or to cause to be made all
amendments and supplements thereto and to the related prospectus which, in the
opinion of the Lender, are necessary or advisable, all in conformity with the
requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission thereunder; provided, that the Lender shall
furnish to the Borrower such information which the Borrower may reasonably
request and as shall be required in connection therewith, (ii) to use its best
efforts to cause the corporation whose securities are to be sold to agree to
make, and to make available to its security holders as soon as practicable, an
earnings statement (which need not be audited) covering a period of at least 12
months, beginning with the first month after the effective date of any such
registration statement, which
<PAGE>
earning statement will satisfy the provisions of Section 11(a) of the Securities
Act, (iii) to use its best efforts to qualify such securities under state Blue
Sky or securities laws and to obtain the approval of any governmental
authorities for the sale of such securities, as requested by the Lender;
provided, that the Lender shall furnish to the Borrower such information which
the may reasonably request and as shall be required in connection therewith, and
(iv) to indemnify and hold harmless the Lender and any underwriters (or any
person controlling any of the foregoing) from and against any loss, liability,
claim, damage and expense (and reasonable counsel fees incurred in connection
therewith) under the Securities Act or otherwise insofar as such loss,
liability, claim, damage or expense arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement or prospectus or in any preliminary prospectus or any
amendment or supplement thereto, or arises out of or is based upon any omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, such indemnification to
remain operative regardless of any investigation made by or on behalf of the
Lender, or any underwriters (or any person controlling any of the foregoing),
Borrower shall not be liable in any case to the extent that any such loss,
liability, claim, damage or expense arises out of or is based on an untrue
statement or alleged untrue statement or an omission or an alleged omission made
in reliance upon and in conformity with written information furnished to such
corporation by the Lender, or any underwriter expressly for use in such
registration statement or prospectus.
SECTION 6.6. LENDER APPOINTED ATTORNEY-IN-FACT.
Upon the occurrence of an Event of Default and during the continuance
of an Event of Default, Borrower hereby appoints the Lender its attorney-in-fact
for the purpose of carrying out the provisions of this Section 6 and the pledge
of the Pledged Securities hereunder and taking any action and executing any
instrument which the Lender may deem necessary or advisable to accomplish the
purposes hereof, which appointment is irrevocable and coupled with an interest.
Without limiting the generality of the foregoing, the Lender shall have the
right and power, upon the occurrence and continuance of an Event of Default, to
receive, endorse and collect all checks and other orders for the payment of
money made payable to the Borrower representing any dividend or other
distribution payable in respect of the Pledged Securities or any part thereof
and to give full discharge for the same.
SECTION 6.7. APPLICATION OF PROCEEDS OF SALE AND CASH.
The proceeds of sale of the Pledged Securities sold pursuant to
Section 6.5 hereof shall be applied by the Lender as follows:
(i) to the payment of all out-of-pocket costs and expenses paid
or incurred by the Lender in connection with such sale, including,
without limitation, all court costs and the fees and expenses of
counsel for the Lender in connection therewith, and the payment of
<PAGE>
all out-of-pocket costs and expenses paid or incurred by the Lender in
enforcing this Credit Agreement, in realizing or protecting any
collateral and in enforcing or collecting any Obligations thereof,
including, without limitation, court costs and the attorney's fees and
expenses incurred by the Lender in connection therewith; and
(ii) to the payment in full of the Obligations in such order as
determined by the Lender.
Any amounts remaining after such indefeasible payment in full shall be remitted
to the Borrower, or as a court of competent jurisdiction may otherwise direct.
SECTION 6.8. SECURITIES ACT, ETC.
In view of the position of the Borrower in relation to the Pledged
Securities, or because of other present or future circumstances, a question may
arise under the Securities Act or any similar statute hereafter enacted
analogous in purpose or effect (such Act and any such similar statute as from
time to time in effect being hereinafter called the "Federal Securities Laws"),
with respect to any disposition of the Pledged Securities permitted hereunder,
Borrower understands that compliance with the Federal Securities Laws may very
strictly limit the course of conduct of the Lender if the Lender were to attempt
to dispose of all or any part of the Pledged Securities, and may also limit the
extent to which or the manner in which any subsequent transferee of any Pledged
Securities may dispose of the same. Similarly, there may be other legal
restrictions or limitations affecting the Lender in any attempt to dispose of
all or any part of the Pledged Securities under applicable Blue Sky or other
state securities laws, or similar laws analogous in purpose or effect. Under
Applicable Law, in the absence of an agreement to the contrary, the Lender may
be held to have certain general duties and obligations to the Borrower to make
some effort towards obtaining a fair price even though the Obligations may be
discharged or reduced by the proceeds of a sale at a lesser price. Borrower
waives to the fullest extent permitted by Applicable Law any such general duty
or obligation to it, and the Borrower will not attempt to hold the Lender
responsible for selling all or any part of the Pledged Securities at an
inadequate price, even if the Lender shall accept the first offer received or
does not approach more than one possible purchaser. Without limiting the
generality of the foregoing, the provisions of this Section 6.8 would apply if,
for example, the Lender were
<PAGE>
to place all or any part of the Pledged Securities for private placement by an
investment banking firm, or if such investment banking firm purchased all or any
part of the Pledged Securities for its own account, or if the Lender placed all
or any part of the Pledged Securities privately with a purchaser or purchasers.
SECTION 6.9. CONTINUATION AND REINSTATEMENT.
Borrower further agrees that its pledge hereunder shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part thereof, of principal of or interest on any Obligation is rescinded or must
otherwise be restored by Lender upon the bankruptcy or reorganization of
Borrower or otherwise.
SECTION 6.10. TERMINATION.
The pledge referenced herein shall terminate when all of the
Obligations shall have been indefeasibly fully paid at which time the Lender
shall assign and deliver to the Borrower, or to such Person or Persons as the
Borrower shall designate, against receipt, such of the Pledged Securities (if
any) as shall not have been sold or otherwise applied by the Lender pursuant to
the terms hereof and shall still be held by it hereunder, together with
appropriate instruments of reassignment and release. Any such reassignment
shall be free and clear of all Liens, arising by, under or through the Lender
but shall otherwise be without recourse upon or warranty by the Lender and at
the expense of the Borrower.
7. MISCELLANEOUS
SECTION 7.1. NOTICES.
Notices and other communications provided for herein shall be in
writing and shall be delivered or mailed (or in the case of telegraphic
communication, if by telegram, delivered to the telegraph company and, if by
telex, graphic scanning or other telegraphic or facsimile communications
equipment of the sending party hereto, delivered by such equipment) addressed,
if to the Lender, to it at 2724 North Tenaya Way, Las Vegas, Nevada 89128,
Attn: Frank Collins, Esq., facsimile no.: 702-242-1532, with a copy to Morgan,
Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178, Attn: Stephen P.
Farrell, facsimile no.: 212- 309-6273, or if to Borrower at 5835 Blue Lagoon
Drive, Miami, Florida, Attn: Cliff Donnelly facsimile no.: 305-265-2959 or such
<PAGE>
other address as such party may from time to time designate by giving written
notice to the other parties hereunder. All notices and other communications
given to any party hereto in accordance with the provisions of this Credit
Agreement shall be deemed to have been given on the fifth Business Day after the
date when sent by registered or certified mail, postage prepaid, return receipt
requested, if by mail, or when delivered to the telegraph company, charges
prepaid, if by telegram, or upon receipt by such party, if by any telegraphic or
facsimile communications equipment, in each case addressed to such party as
provided in this Section 7.1 or in accordance with the latest unrevoked written
direction from such party.
SECTION 7.2. SURVIVAL OF AGREEMENT, REPRESENTATIONS AND WARRANTIES,
ETC.
All warranties, representations and covenants made by the Borrower
herein or in any certificate or other instrument delivered by it or on its
behalf in connection with this Credit Agreement shall be considered to have been
relied upon by the Lender and, except for any terminations, amendments,
modifications or waivers thereof in accordance with the terms hereof, shall
survive the making of the Loan herein contemplated and the execution and
delivery to the Lender of the Note regardless of any investigation made by the
Lender and shall continue in full force and effect so long as any amount due or
to become due hereunder is outstanding and unpaid. All statements in any such
certificate or other instrument shall constitute representations and warranties
by the Borrower hereunder.
SECTION 7.3. SUCCESSORS AND ASSIGNS.
Whenever in this Credit Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party (PROVIDED, HOWEVER, that the Borrower may not assign its
rights hereunder without the prior written consent of the Lender), and all
covenants, promises and agreements by or on behalf of the Borrower which are
contained in this Credit Agreement shall inure to the benefit of the successors
and assigns of the Lender.
SECTION 7.4. EXPENSES; DOCUMENTARY TAXES.
Whether or not the transactions hereby contemplated shall be
consummated, the Borrower agrees to pay all out-of-pocket expenses incurred by
the Lender in connection with the transactions hereby contemplated and the
preparation,
<PAGE>
execution, delivery, waiver or modification and administration of this Credit
Agreement and any other documentation contemplated hereby, the Note and the
making of the Loan, including but not limited to any internally allocated audit
costs, the fees and disbursements of Morgan, Lewis & Bockius LLP, counsel for
the Lender, and any other counsel that the Lender shall retain, fees and
expenses of technical or other consultants engaged by the Lender to the extent
previously approved by the Borrower. Such payments shall be made on the date of
execution of this Credit Agreement and thereafter on demand. In addition, the
Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the
Lender in the enforcement or protection of the rights of the Lender in
connection with this Credit Agreement or the Note, and with respect to any
action which may be instituted by any Person against the Lender in respect of
the foregoing, or as a result of any transaction, action or non-action arising
from the foregoing, including but not limited to the fees and disbursements of
any counsel for the Lender. Such payments shall be made on demand after the
date of execution of this Credit Agreement. The Borrower agrees that it shall
indemnify the Lender from and hold it harmless against any documentary taxes,
assessments or charges made by any Governmental Authority by reason of the
execution and delivery of this Credit Agreement or the Note. The obligations of
the Borrower under this Section 7.4 shall survive the termination of this Credit
Agreement and/or the payment of the Loan.
SECTION 7.5. INDEMNIFICATION OF LENDER.
The Borrower agrees (a) to indemnify and hold harmless the Lender (to
the full extent permitted by law) from and against any and all claims, demands,
losses, judgments and liabilities (including liabilities for penalties) of
whatsoever nature, and (b) to pay to the Lender an amount equal to the amount of
all costs and expenses, including legal fees and disbursements, and with regard
to both (a) and (b) growing out of or resulting from any litigation or other
proceedings relating to the Pledged Securities, the making of the Loan, any
attempt to audit, inspect, protect or sell the Pledged Securities, or the
administration and enforcement or exercise of any right or remedy granted to the
Lender hereunder but excluding therefrom all costs arising out of or resulting
from the gross negligence or willful misconduct of the Lender. The foregoing
indemnity agreement includes any costs incurred by the Lender in connection with
any action or proceeding which may be instituted in respect of the foregoing by
the Lender, or by any other Person either against the Lender or in connection
with which any officer or employee of
<PAGE>
the Lender is called as a witness or deponent, including, but not limited to,
the fees and disbursements of Morgan, Lewis & Bockius LLP, counsel to the
Lender, and any out-of-pocket costs incurred by the Lender in appearing as a
witness or in otherwise complying with legal process served upon them. In no
event shall the Lender be liable to the Borrower for any matter or thing in
connection with this Credit Agreement other than to make the Loan.
Whenever the provisions of this Credit Agreement provide that, if the
Borrower shall fail to do any act or thing which it has covenanted to do
hereunder or any representation or warranty of the Borrower shall be breached,
the Lender may (but shall not be obligated to) perform the same or cause it to
be done or remedy any such breach and if the Lender does the same or causes it
to be done, there shall be added to the Obligations hereunder the cost or
expense incurred by the Lender in so doing, and any and all amounts expended by
the Lender in taking any such action shall be repayable to it upon its demand
therefor and shall bear interest at 5% in excess of the interest rate in effect
from the date advanced to the date of repayment.
All indemnities contained in this Section 7.5 shall survive the
expiration or earlier termination of this Credit Agreement.
SECTION 7.6. CHOICE OF LAW.
THIS CREDIT AGREEMENT AND THE NOTE SHALL IN ALL RESPECTS BE CONSTRUED
IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WHICH ARE
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE AND,
IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAW OF THE
UNITED STATES OF AMERICA.
SECTION 7.7. WAIVER OF JURY TRIAL.
TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED,
THE BORROWER HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS
PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN
RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF
OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR
OTHERWISE. THE BORROWER ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE LENDER
THAT THE
<PAGE>
PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE
LENDER HAS RELIED, IS RELYING AND WILL RELY IN ENTERING INTO THIS CREDIT
AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
SECTION 7.7 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE BORROWER TO
THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY.
SECTION 7.8. NO WAIVER.
No failure on the part of the Lender or to exercise, and no delay in
exercising, any right, power or remedy hereunder or under the Note shall operate
as a waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. All remedies hereunder are cumulative and
are not exclusive of any other remedies provided by law.
SECTION 7.9. EXTENSION OF PAYMENT DATE.
Should any payment of principal of or interest on the Note or any
other amount due hereunder become due and payable on a day other than a Business
Day, the due date of such payment thereof shall be extended to the next
succeeding Business Day and, in the case of principal, interest shall be payable
thereon at the rate herein specified during such extension.
SECTION 7.10. AMENDMENTS, ETC.
No modification, amendment or waiver of any provision of this Credit
Agreement, and no consent to any departure by the Borrower herefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Lender and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on the
Borrower shall entitle the Borrower to any other or further notice or demand in
the same, similar or other circumstances.
SECTION 7.11. SEVERABILITY.
Any provision of this Credit Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
<PAGE>
SECTION 7.12. ENTIRE AGREEMENT.
This Credit Agreement shall supersede all prior discussions and
agreements between the parties with respect to the subject matter hereof and
thereof, and contains the sole and entire agreement between the parties hereto
with respect to the subject matter hereof and thereof and Lender shall have no
obligation to make any additional loans or provide any additional funds to
Borrower other than as provided herein.
SECTION 7.13. HEADINGS.
Section headings used herein and the Table of Contents are for
convenience only and are not to affect the construction of or be taken into
consideration in interpreting this Credit Agreement.
<PAGE>
SECTION 7.14. EXECUTION IN COUNTERPARTS.
This Credit Agreement may be executed in any number of counterparts,
each of which shall constitute an original, but all of which taken together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be duly executed as of the day and the year first written.
BORROWER:
PHYSICIAN CORPORATION
OF AMERICA
By
-------------------------------
Name:
Title:
LENDER:
SIERRA HEALTH SERVICES, INC.
By
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF NOTE
THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR
PAYMENT IN FULL OF THE OBLIGATIONS (AS DEFINED IN THE SUBORDINATION AGREEMENT
HEREUNDER REFERRED TO) AND TO THE SECURITY INTERESTS SECURING THE OBLIGATIONS,
PURSUANT TO, AND TO THE EXTENT PROVIDED IN, THE SUBORDINATION AGREEMENT DATED AS
OF JANUARY __, 1997 AMONG PHYSICIAN CORPORATION OF AMERICA, SIERRA HEALTH
SERVICES, INC. AND CITIBANK, N.A., AS AGENT IN FAVOR OF THE LENDERS, ISSUING
BANK AND AGENT PARTIES TO THE REVOLVING CREDIT AGREEMENT DATED AS OF OCTOBER 27,
1994, AS AMENDED, AMONG PHYSICIAN CORPORATION OF AMERICA, THE LENDERS PARTIES
THERETO, CITIBANK, N.A., AS ISSUING BANK, AND CITIBANK, N.A., AS AGENT FOR SUCH
LENDERS AND ISSUING BANK.
NOTE
$16,750,000 New York, New York
January 10, 1997
FOR VALUE RECEIVED, the undersigned, PHYSICIAN CORPORATION OF AMERICA,
a Delaware corporation (the "Borrower"), hereby promises to pay, upon demand, to
the order of SIERRA HEALTH SERVICES, INC. (the "Lender"), the principal sum of
SIXTEEN MILLION SEVEN HUNDRED FIFTY THOUSAND Dollars ($16,750,000]) in lawful
money of the United States of America in immediately available funds together
with interest from the date hereof on the principal amount hereof from time to
time outstanding, in like funds, at said office, at a rate of ten percent (10%)
per annum.
The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at a rate of five percent (5%) per annum in excess of the rate otherwise
in effect.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
This Note is the Note referred to in the Credit and Share Pledge
Agreement dated as of January 10, 1997 (the "Agreement") between Borrower and
Lender, which, among other things, contains provisions for optional and
mandatory payment of the principal hereof and for the amendment or waiver of
certain provisions of the Agreement, all upon the terms and conditions therein
specified. This Note shall be construed in accordance with and governed by the
laws of the State of New York and any applicable laws of the United States of
America.
PHYSICIAN CORPORATION
OF AMERICA
By: Clifford W. Donnelly
----------------------------
Name: Clifford W. Donnelly
Title: S.V.P.
<PAGE>
EXHIBIT B
FORM OF CITIBANK ACKNOWLEDGMENT
PHYSICIAN CORPORATION OF AMERICA
January __, 1997
Citibank N.A.
399 Park Avenue
New York, New York 10043
Attn: Credit Department
Re: Borrower Pledge Agreement
-------------------------
Dear Gentleman/Mesdames:
We refer to the Borrower Pledge Agreement dated as of March 29, 1996, as amended
(the "Borrower Pledge Agreement"), made by Physician Corporation of America
("PCA") to Citibank N.A., as agent ("Agent") for the lenders from time to time
parties to the Credit Agreement (as hereinafter defined), pursuant which we
have pledged, among other things, the capital stock of our subsidiaries (as more
particularly described on Schedule A attached hereto) and any additional shares
of any class of stock issued by such subsidiaries or any securities convertible
into such shares, acquired by purchase, stock dividend, distribution of capital
or otherwise (the "Pledged Securities"), as security for the obligations of PCA
pursuant to that certain Revolving Credit Agreement dated as of October 27, 1994
by and between PCA; the Lenders; the Agent; Nationsbank of Tennessee and First
Union National Bank of North Carolina, as Co-Agents; Citibank, as Issuing Bank;
and Citicorp Securities, Inc., as Arranger, as amended (the "Credit Agreement").
As you are aware, we have entered into a Credit and Share Pledge Agreement,
dated as of January 10, 1997 (the "Sierra Credit Agreement"), with Sierra Health
Services, Inc. ("Sierra") pursuant to which we have pledged the Pledged
Securities to Sierra, subject to your prior rights under the Borrower Pledge
Agreement, as security for PCA indebtedness to Sierra pursuant to the Sierra
Credit Agreement.
We hereby irrevocably and unconditionally instruct you that, upon payment in
full of all payment obligations of PCA under the Credit Agreement and any
document referred to therein and upon satisfaction in full of all other
obligations under the Credit Agreement, any document referred to therein and the
Borrower Pledge Agreement, unless you receive written notification from Sierra
to the contrary (in which case these instructions shall have no further effect),
you shall deliver the Pledged Securities to Sierra at 2724 North Tenaya Way,
Las Vegas, Nevada 89128, Attention: Frank Collins, Esq. whose written receipt
therefore shall be conclusive evidence of such delivery and shall discharge your
obligations to us under the Borrower Pledge Agreement or otherwise, with respect
to the redelivery of the Pledged Securities.
Kindly acknowledge your receipt of this notice and that you are currently
holding the Stock certificates listed on Schedule A hereto, and indicate your
<PAGE>
acceptance of these instructions by signing in the manner hereinafter provided.
Very truly yours,
Physician Corporation of America
By:
-----------------------
Name:
Title:
Acknowledged and Accepted
on January , 1997
--
By: Citibank, N.A., as Agent
By:_____________________
Name:
Title:
<PAGE>
SCHEDULE 3.2
Those laws and regulations of the States of Florida and Texas, and
the Commonwealth of Puerto Rico, which regulate insurance companies and health
maintenance organizations require the consent or approval of insurance and/or
health regulatory authorities under certain circumstances for the exercise of
the rights and remedies provided in Section 6 hereof or by the UCC and those
that may be exercised upon an Event of Default. For example, Sections 628.461
and 628.4615 of the Florida Insurance Statutes and Section 541.255 of the
Florida Health Maintenance Organization Act require prior approval by the
Florida Department of Insurance for a change of ownership or control of a
Florida-domiciled insurance company or health maintenance organization,
respectively.
In addition, to the extent that the attempt to exercise or to
enforce rights and remedies provided in the Section 6 or the UCC occurs in the
context of a judicial or administrative proceeding, or during the pendency of a
bankruptcy or insolvency proceeding, notice to and the authorization, consent or
approval of the tribunal would or may be necessary.
<PAGE>
SCHEDULE 3.5
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
STOCK NUMBER OF PERCENTAGE OF
STOCK ISSUER CLASS OF CERTIFICATE PAR SHARES OUTSTANDING SHARES
------------ STOCK NO(S) VALUE --------- ------------------
----- ----------- -----
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PCA Solutions, Common 1 $ 1.00 92 100%
Inc.
- ----------------------------------------------------------------------------------------------------------------------
PCA Property and Common 1 $ 1.00 1,800,000 100%
Casualty Insurance
Company
----------------------------------------------------------------------------------------------------------------------
PCA Health Plans Common 1 $ 0.01 10,000 100%
of Florida, Inc.
Preferred 2 thru 5 $ 0.01 17,500 100%
Series A
Preferred 6 thru 8 $ 0.01 80,000 100%
- ----------------------------------------------------------------------------------------------------------------------
PCA Health Plans Common 1 $ 0.01 100,000 100%
of Texas, Inc.
(f/k/a Texas Health Preferred 1 $ 1.00 30,000 100%
Plans, Inc.) Series A
Preferred 2 $ 1.00 30,000 100%
Series B
- ----------------------------------------------------------------------------------------------------------------------
PCA Family Common 1 $10.00 40 100%
Health Plan, Inc.
Preferred 1 thru 7 $ 0.01 255,500 100%
Series A
- ----------------------------------------------------------------------------------------------------------------------
PCA Health Plans Common C1 $ 5.00 28,500 99.9%
of Puerto Rico,
Inc.
- ----------------------------------------------------------------------------------------------------------------------
PCA Insurance Common C1 $ 6.00 133,336 100%
Group of
Puerto Rico, Inc.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.1. LOAN; MAKING OF THE LOAN. . . . . . . . . . . . . . . . . . 4
SECTION 2.2. NOTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.3. INTEREST ON NOTE. . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.4. DEFAULT INTEREST. . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.5. REPAYMENT OF LOAN.. . . . . . . . . . . . . . . . . . . . . 4
SECTION 2.6. MANNER OF PAYMENTS. . . . . . . . . . . . . . . . . . . . . 5
SECTION 2.7. INTEREST ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . 5
3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.1. CORPORATE EXISTENCE AND POWER.. . . . . . . . . . . . . . . 5
SECTION 3.2. CORPORATE AUTHORITY AND NO VIOLATION. . . . . . . . . . . . 6
SECTION 3.3. GOVERNMENTAL APPROVAL.. . . . . . . . . . . . . . . . . . . 6
SECTION 3.4. BINDING AGREEMENTS. . . . . . . . . . . . . . . . . . . . . 6
SECTION 3.5. OWNERSHIP OF PLEDGED SECURITIES, ETC. . . . . . . . . . . . 7
SECTION 3.6. SECURITY INTEREST; OTHER SECURITY.. . . . . . . . . . . . . 7
SECTION 3.7. PLEDGED SECURITIES. . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.8. MERGER AGREEMENT. . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.9. COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . 7
4. CONDITIONS OF LENDING. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.1. CONDITIONS PRECEDENT TO LOAN. . . . . . . . . . . . . . . . 8
5. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6. PLEDGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
SECTION 6.1. PLEDGE. . . . . . . . . . . . . . . . . . . . . . . . . . .10
SECTION 6.2. COVENANT. . . . . . . . . . . . . . . . . . . . . . . . . .10
SECTION 6.3. REGISTRATION IN NOMINEE NAME; DENOMINATIONS.. . . . . . . .10
SECTION 6.4. VOTING RIGHTS; DIVIDENDS; ETC.. . . . . . . . . . . . . . .10
SECTION 6.5. REMEDIES UPON DEFAULT.. . . . . . . . . . . . . . . . . . .11
SECTION 6.6. LENDER APPOINTED ATTORNEY-IN-FACT.. . . . . . . . . . . . .13
SECTION 6.7. APPLICATION OF PROCEEDS OF SALE AND CASH. . . . . . . . . .14
SECTION 6.8. SECURITIES ACT, ETC.. . . . . . . . . . . . . . . . . . . .14
SECTION 6.9. CONTINUATION AND REINSTATEMENT. . . . . . . . . . . . . . .15
SECTION 6.10. TERMINATION.. . . . . . . . . . . . . . . . . . . . . . . .15
7. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
SECTION 7.1. NOTICES.. . . . . . . . . . . . . . . . . . . . . . . . . .15
SECTION 7.2. SURVIVAL OF AGREEMENT, REPRESENTATIONS
AND WARRANTIES, ETC.. . . . . . . . . . . . . . . . . . . .16
SECTION 7.3. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . .16
SECTION 7.4. EXPENSES; DOCUMENTARY TAXES.. . . . . . . . . . . . . . . .16
SECTION 7.5. INDEMNIFICATION OF LENDER.. . . . . . . . . . . . . . . . .17
SECTION 7.6. CHOICE OF LAW.. . . . . . . . . . . . . . . . . . . . . . .17
SECTION 7.7. WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . .18
SECTION 7.8. NO WAIVER.. . . . . . . . . . . . . . . . . . . . . . . . .18
SECTION 7.9. EXTENSION OF PAYMENT DATE . . . . . . . . . . . . . . . . .18
SECTION 7.10. AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . .18
SECTION 7.11. SEVERABILITY.. . . . . . . . . . . . . . . . . . . . . . .19
<PAGE>
SECTION 7.12. ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . .19
SECTION 7.13. HEADINGS.. . . . . . . . . . . . . . . . . . . . . . . . .19
SECTION 7.14. EXECUTION IN COUNTERPARTS. . . . . . . . . . . . . . . . .20
ii
<PAGE>
Schedules
- ---------
3.2 Certain Restrictions
3.5 Pledged Securities
Exhibits
- --------
A Form of Note
B Form of Citibank Acknowledgment
iii
<PAGE>
EXHIBIT 11.1
PHYSICIAN CORPORATION OF AMERICA
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
-------------- ------------- -----------
Net (loss) earnings $(277,685,000) $(24,596,000) $52,547,000
-------------- ------------- -----------
-------------- ------------- -----------
Number of common shares and
common share equivalents:
Primary........................ 38,757,660 39,969,520 40,474,615
-------------- ------------- -----------
-------------- ------------- -----------
Fully diluted.................. 38,757,660 39,969,520 40,528,878
-------------- ------------- -----------
-------------- ------------- -----------
Net (loss) earnings per common and
common equivalent share......... $(7.16) $(0.62) $1.30
-------------- ------------- -----------
-------------- ------------- -----------
Net (loss) earnings per common and
common equivalent share assuming
full dilution................... $(7.16) $(0.62) $1.30
-------------- ------------- -----------
-------------- ------------- -----------
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
________________________________
PHYSICIAN CORPORATION OF AMERICA
a Delaware Corporation
________________________________
|
|
----------------------------------------------------------------------------------------------------------------
| | | | |
PCA Health Plans | PCA Health Plans | Association Employers QuestCare, Inc.
of Texas, Inc. | of Florida, Inc. |-- MGA, Inc. an Alabama Corporation
a Texas Corporation | a Florida Corporation | a Florida Corporation 4-11-91 63-092858
2-27-67 48-1032349 | 3-22-90 65-0187919 | 9-11-86 59-2739281
| | |
| PCA Options, Inc. | PCA Property & Casualty
| a Florida Corporation |-- Insurance Company
| 11-15-96 65-0235154 | a Florida Corporation
| | 12-12-86 59-2751695
| | 2-16-95
| |
| | PCA Life
PCA Military |-- Insurance Company
Programs, Inc. | a Florida Corporation
a Florida Corporation | 9-30-93 65-0424536
6-24-94 65-6500631 |
| | PCA Life Insurance
PCA Homestead, Inc. |-- Company of Texas, Inc.
a Florida Corporation a Texas Corporation
5-18-94 65-0495042 11-93 74-2687002
<CAPTION>
________________________________
PHYSICIAN CORPORATION OF AMERICA
a Delaware Corporation
________________________________
|
|
--------------------------------------------------------------------------------------------
| | |
| PCA Development Corp. PCA Solutions, Inc.
| a Delaware Corporation a Florida Corporation
| 4-20-94 APPLIED FOR 11-1-85 59-2632447
| 10-17-94
| |
| Hallmark Re Ltd.
| a Bermuda Corporation
| 3-31-94 N-A
|
|
|
|
|
|
|
- - - - - - - - - - - - - - - -
Physician Corporation
of America
an unincorporated Puerto Rican
operating subdivision
- - - - - - - - - - - - - - - -
|
-------------------------------
| |
| |
PCA Health Plans of PCA Insurance Group
Puerto Rico, Inc. of Puerto Rico, Inc.
A Puerto Rico Corporation A Puerto Rico Corporation
12-8-83 660406894 9-27-69 65-0291866
12-3-81
4-3-95
<CAPTION>
________________________________
PHYSICIAN CORPORATION OF AMERICA
a Delaware Corporation
________________________________
|
|
--------------------------------------------------------------------------------------------
| | |
| Century Vision PCA Provider
| Optical, Inc. Organization, Inc.
| a Florida Corporation a Texas Corporation
| 2-4-85 59-2555995 4-28-88 74-2588887
| 4-91 (AMENDED) 12-31-96
|
|
|
|
|
|
|
PCA Family
Health Plan, Inc.
a Florida Corporation
5-8-84 59-2483336
1-1-95
|
-------------------------------
| |
| |
Family Health Plan Family Health Plan
Insurance Company Administrators, Inc.
a Florida Corporation a Florida Corporation
5-3-91 65-8252958 5-7-91 65-8262061
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Physician Corporation of America
We consent to incorporation by reference in the registration statements No.
33-48153, No. 33-65174 and No. 33-98406 on Form S-8 of Physician Corporation
of America of our report dated April ___, 1997, relating to the consolidated
balance sheets of Physician Corporation of America and subsidiaries as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1996, which report appear in
the December 31, 1996 annual report on Form 10-K of Physician Corporation of
America.
KPMG Peat Marwick LLP
Miami, Florida
April ___, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 134,011
<SECURITIES> 130,788
<RECEIVABLES> 92,454
<ALLOWANCES> 52,351
<INVENTORY> 373
<CURRENT-ASSETS> 554,402
<PP&E> 73,714
<DEPRECIATION> 21,582
<TOTAL-ASSETS> 1,354,987
<CURRENT-LIABILITIES> 669,746
<BONDS> 10,344
0
0
<COMMON> 388
<OTHER-SE> (65,220)
<TOTAL-LIABILITY-AND-EQUITY> 1,354,987
<SALES> 1,428,347
<TOTAL-REVENUES> 1,454,308
<CGS> 1,265,735
<TOTAL-COSTS> 1,763,672
<OTHER-EXPENSES> 2,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,738
<INCOME-PRETAX> (312,966)
<INCOME-TAX> (35,281)
<INCOME-CONTINUING> (277,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277,685)
<EPS-PRIMARY> (7.16)
<EPS-DILUTED> (7.16)
</TABLE>
<PAGE>
Exhibit 99
IN THE CIRCUIT COURT OF THE
SECOND JUDICIAL CIRCUIT, IN
AND FOR LEON COUNTY, FLORIDA
STATE OF FLORIDA, ex rel., ) CIVIL ACTION NO.: 97-997
The Department of Insurance,
) FLA. BAR NO.: 0221791
Relator, 0980188
) 0347108
vs.
)
PCA PROPERTY & CASUALTY
INSURANCE COMPANY, a )
Florida corporation,
)
Respondent.
VERIFIED PETITION FOR ORDER TO SHOW CAUSE,
INJUNCTION AND NOTICE OF AUTOMATIC STAY
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The State of Florida, ex. rel., the Department of Insurance (herein
"Department"), by counsel, applies to the Court for the entry of an Order to
Show Cause on the appointment of receiver for purposes of rehabilitation and
giving notice of automatic stay, and as grounds therefor says:
1. PCA PROPERTY & CASUALTY INSURANCE COMPANY, (herein "Respondent") is
a Florida corporation with its principal place of business at 260 Wekiva
Springs Road, Suite 200, Longwood, Florida 32779, and is a domestic insurer
authorized to transact an insurance business in this state.
2. This Court has jurisdiction of this matter pursuant to Section
631.021, Florida Statutes. That section further provides
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that venue of a delinquency proceeding against a domestic insurer shall be in
the Circuit Court of Leon County.
3. Under Section 631.031, Florida Statutes, the Department is
empowered to apply to this Court for an Order directing the Respondent to
show cause why the Department should not be appointed Receiver of the
Respondent for the purposes of rehabilitation or liquidation under any of the
grounds set out in Sections 631.051, or 631.061 Florida Statutes. Section
631.031, Florida Statutes, further provides on the return of such order to
show cause, and after full hearing, the court shall either grant or deny the
application together with such other relief as the nature of the case and the
interests of the policyholders, creditors, stockholders, members,
subscribers, or public may require.
4. The Department has found that grounds exist pursuant to Sections
631.051 and 631.061, Florida Statutes, for the entry of an Order to Show
Cause why the Department should not be appointed the Receiver of Respondent
for purposes of rehabilitation. Respondent is impaired or insolvent within
the meaning of the provisions of Section 631.061, Florida Statutes, and has
admitted to being insolvent as set out herein and in "Exhibit A" attached
hereto and incorporated herein by reference.
5. The Respondent has been found by the Department to be in such a
condition and has used such methods and practices in the conduct of its
business to render its further transaction of
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insurance business presently and prospectively hazardous to its
policyholders, creditors and the public as set forth in Section 631.051 (3),
Florida Statutes.
6. Respondent filed a sworn quarterly financial statement with the
Department as of September 30, 1996. In that sworn statement Respondent
admitted to be impaired and insolvent, indicating a negative surplus of
($48,313,549.00). In order to attempt to work with Respondent in an attempt
to resolve this admitted insolvency, the Department placed Respondent under
Administrative Supervision pursuant to Section 624.81, Florida Statues in
November, 1996. A copy of that Order is attached hereto as "Exhibit B" and
incorporated herein by reference. The efforts by Respondent to cure this
insolvency have failed. On February 20, 1997, Respondent's parent issued a
press release, which it corrected on February 21, 1997 (see Composite
"Exhibit C" attached hereto and incorporated herein by reference). In the
initial release, Respondent's parent admitted that preliminary reports from
its actuaries were causing it "to take an additional fourth quarter charge of
approximately $60,000,000.00 against its worker's compensation subsidiary."
That "subsidiary" is the Respondent. The subsequent release reported on
February 21, 1997, corrected and adjusted this figure to $80,000,000.00.
This indicates that the prior negative position reported in Respondent's
sworn financial statement as of September 30, 1996, has deteriorated in the
fourth
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quarter of 1996 by an additional $80,000,000.00. This, by Respondent's own
publicly stated admission, would further reduce Respondent's surplus, as of
December 31, 1996, to approximately a negative ($128,313,549.00). The
Department anticipates that the final numbers may show the actual deficiency
to be even greater than admitted by Respondent at this time.
7. Section 624.418 (3), Florida Statues, provides that the "insolvency
or impairment of an insurer constitutes an immediate serious danger to the
public health, safety, or welfare." Because of the extent of the financial
impairment or insolvency of the Respondent, the Department has determined
that the use of Administrative Supervision for a continued period of time is
insufficient to cure the financial problems of the Respondent. Respondent's
further transaction of insurance business is presently and prospectively
hazardous to its policyholders, creditors, and the public. The Department
believes that the authority to rehabilitate an insolvent insurer granted to
it under Chapter 631, Florida Statutes, would better assist the Respondent
and protect its policyholders, creditors, and the public in attempting to
correct the financial problems of the Respondent.
8. In order to maintain the status quo and assist the Department in
obtaining additional documentation regarding the financial condition of the
Respondent, the Department recommends that the Agreement for Supervision
remain in full force and effect
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until superseded by the Department's appointment as Receiver of Respondent.
9. Section 631.041 (1), Florida Statutes, provides that the
Department's petition for an order to show cause operates as an automatic
stay of judicial and administrative actions against the insurer and its
assets. Notice of the automatic stay should be contained within the order to
show cause.
10. A receivership is an in rem action. The assets of the estate are
within the constructive possession and control of the Court. In order to
provide the Court with tools to safeguard those assets, Sections 631.041 (3)
and (4), Florida Statutes, authorize this court to enter certain injunctions
to preserve the remaining assets of the insurer. Section 631.021, Florida
Statutes, further provides the Court with the authority to make all necessary
or proper orders to carry out the purposes of this chapter. The stated
purpose of Chapter 631, Florida Statutes, is contained in Section 631.001
(4), Florida Statutes, specifically that purpose is to protect the interests
of the insureds, creditors and the public generally.
WHEREFORE, the Department respectfully moves the Court for an Order:
11. Directing the Respondent to appear before this Court on a short day
certain and show good cause, if any, as to why the Department should not be
appointed Receiver of Respondent for
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purposes of rehabilitation under the provisions of Chapter 631, Florida
Statutes.
12. Directing that the Administrative Supervision of Respondent shall
continue until further Order of the Court or the Department's appointment as
Receiver of Respondent.
13. Giving notice of the automatic stay provisions of Section
631.041(1), Florida Statutes.
14. Granting such other relief as the Court deems appropriate.
AND FURTHER, at hearing or on consent of Respondent, if this Court
determines that a receiver should be appointed, that the Court enter an order
appointing the Department of Insurance as Receiver for Respondent for
purposes of rehabilitation, and authorizing and directing that the Receiver:
15. Conduct the business of Respondent and take all steps as the Court
may direct toward the removal of the causes and conditions which have made
the order of rehabilitation necessary.
16. Take immediate possession of all Respondent's property, assets and
estate, and all other property of Respondent of every kind whatsoever and
wheresoever located belonging to or in the possession of Respondent or its
officers, directors, employees or agents, including but not limited to all
offices maintained by Respondent, rights of action, books, papers, data
processing records, evidences of debt, bank accounts, savings accounts,
certificates of deposit, stocks, bonds, debentures and other
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securities, mortgages, furniture, fixtures, office supplies and equipment,
and all real property of the Respondent wherever situate, and to administer
such assets as is required in order to comply with the directions contained
in this Order, and to hold all other assets pending further order of this
Court.
17. Proceed to collect any and all debts economically feasible to
collect due and owing Respondent, including but not limited to funds or
premiums held by agents of Respondent under agency contracts or otherwise.
18. Appoint one or more special agents and employ legal counsel,
actuaries, accountants, clerks, consultants and assistants as it deems
necessary and to fix and to pay the reasonable compensation and reasonable
expenses thereof and all reasonable expenses of taking possession of the
insurer, subject to approval by this Court at the time the Receiver accounts
to the Court for such expenditures and compensation.
19. Reimburse employees, from the funds of this receivership, for their
actual necessary and reasonable expenses incurred while traveling on the
business of this receivership.
20. Commence and maintain all legal actions necessary for the conduct
of the rehabilitation proceeding.
21. Not defend legal actions wherein Respondent or the Receiver is a
party defendant, commenced either prior to or subsequent to this order,
without authorization of this Court.
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Except, however, in actions where Respondent is a nominal party, as in
certain foreclosure actions and the action does not effect a claim against or
adversely affect the assets of Respondent, the Receiver may file appropriate
pleadings in its discretion.
22. Deposit funds and maintain bank accounts in accordance with Section
631.221, Florida Statutes.
23. Take possession of all Respondent's securities on deposit with the
Treasurer of Florida and liquidate or reinvest as much of the same as may be
necessary, in its judgment, to best benefit the estate or to pay expenses as
set forth above.
24. Apply to this Court for further instructions in the discharge of
its duties.
AND FURTHER:
25. Pursuant to Section 631.391, Florida Statutes, any officer, director,
manager, trustee, attorney, agent, actuary, broker, employee, adjuster, or
affiliate of Respondent and any other person who possesses or possessed any
executive authority over or who exercises, or exercised, any control over any
segment of Respondent's affairs or its affiliates shall fully cooperate with the
Receiver under Chapter 631, Florida Statutes, or any investigation incidental to
this proceeding. All attorneys employed by Respondent as of this date shall,
within 10 days notice of this Order, report to the Receiver on the name, company
claim number and status of each file they are handling on behalf of the
Respondent.
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Said report shall also include an accounting of any funds received from or on
behalf of the Respondent. All attorneys employed by Respondent are hereby
advised that pursuant to Section 631.011(15), Florida Statutes, a claim based
on mere possession does not create a secured claim and all attorneys employed
by Respondent, pursuant to IN RE THE RECEIVERSHIP OF SYNDICATE TWO, INC., 538
So.2d 945 (Fla. 1st DCA 1989), who are in possession of litigation files or
other material, documents or records belonging to or relating to work
performed by the attorney on behalf of Respondent shall deliver such
litigation files, material, documents or records intact and without purging
to the Receiver, on request, notwithstanding any claim of a retaining lien
which, if otherwise valid, shall not be extinguished by such delivery of
documents.
26. All persons who have in their possession, custody or control,
assets of the Respondent of any kind whatsoever and wherever situate,
including but not limited to, monies, books or records, and personal or real
property, are directed to deliver forthwith upon demand such assets or books
and records to the Receiver.
27. Title to all property, real or personal, all contracts, rights of
action and all books and records of Respondent, wherever located within or
without this state, is vested by operation of law in the Receiver, pursuant
to Section 631.141(2), Florida Statutes.
28. Upon request by the Receiver, any company providing
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telephonic services to the Respondent shall provide a reference of calls from
the number presently assigned to the Respondent to any such number designated
by the Receiver or perform any other changes necessary to the conduct of the
receivership.
29. Any entity furnishing water, electric, telephone, sewage, garbage
or trash removal services to Respondent shall maintain such service and
transfer any such accounts to the Receiver as of the date of the order of
rehabilitation unless instructed to the contrary by the Receiver.
30. The United States Postal Service is directed to provide any
information requested by the Receiver regarding the Respondent and to handle
future deliveries of Respondent's mail as directed by the Receiver.
31. All policies of insurance or similar contracts of coverage issued
or assumed by the Respondent (hereinafter referred to as "contracts") shall
remain in full force and effect until further Order of this Court, except
where canceled in the normal course of business or upon the normal expiration
date thereof. Any contract cancellations initiated by insureds shall be
prospective only.
32. Any bank, savings and loan association, other financial institution,
or any other entity or person, which has on deposit or in its possession,
custody or control any funds, accounts and any other assets of the Respondent
shall immediately transfer title, custody and control of all such funds,
accounts or assets to the
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Receiver, and is hereby instructed that the Receiver has absolute control
over such accounts and other assets, and that the Receiver may change the
name of such accounts and other assets, withdraw them from such bank, savings
and loan association or other financial institution, or take any lesser
action necessary for the proper conduct of the receivership.
33. No bank, savings and loan association, other financial institution,
or any other person or entity shall exercise any form of set-off, alleged
set-off, lien, or any form of self-help whatsoever or refuse to transfer any
funds or assets to the Receiver's control without the permission of this
Court.
34. Pursuant to Sections 631.041(3) and (4), Florida Statutes (1989), all
persons, firms, corporations and associations within the jurisdiction of this
Court, including, but not limited to Respondent, its officers, directors,
trustees, agents, affiliates, and employees are enjoined and restrained from the
further transaction of the insurance business of Respondent without written
permission of the Receiver; from doing, through acts of commission or omission,
or permitting to be done any action which might waste or otherwise dispose of
the books, records and assets of, or directly or indirectly relating to, the
Respondent; from denying the Receiver access to the books, records, and assets
of, or directly or indirectly relating to, the Respondent; from in any manner
interfering with the Receiver or the conduct of these proceedings;
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from the removal, concealment or other disposition of the property, books,
records, and accounts of, or directly or indirectly relating to, the
Respondent; from the commencement or prosecution of any actions against the
Respondent, the Receiver, or the agents or employees of the Receiver in their
representative capacities, or the obtaining of preferences, judgments, writs
of attachment or garnishment or other liens; and from the making of any levy
or execution against Respondent or its property or assets. Employees of
affiliate corporations are hereby enjoined and restrained from doing, through
acts of commission or omission, or permitting to be done any action which
might waste or dispose of the books, records and assets of, or directly or
indirectly relating to, the Respondent; from denying the Receiver access to
the books, records, and assets of, or directly or indirectly relating to, the
Respondent, including the books, records, and assets of the affiliate
corporation; from in any manner interfering with the Receiver or the conduct
of these proceedings; from the removal, concealment or other disposition of
the property, books, records, and accounts of, or directly or indirectly
relating to, the Respondent; from the commencement or prosecution of any
actions, service of process, or subpoena against the Respondent, the
Receiver, or the agents or employees of the Receiver in their representative
capacities, or the obtaining of preferences, judgments, writs of attachment
or garnishment or other liens; and
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from the making of any levy or execution against Respondent or its
property or assets.
NOTICE OF AUTOMATIC STAY
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35. Notice is hereby given that, pursuant to Section 631.041(1),
Florida Statutes, the filing of the Department's petition for consent order
herein operates as an automatic stay applicable to all persons and entities,
other than the Receiver, which shall be permanent and survive the entry of
this order, and which prohibits:
a. The commencement or continuation of judicial, administrative
or other action or proceeding against the insurer or against its assets or
any part thereof;
b. The enforcement of judgment against the insurer or an
affiliate obtained either before or after the commencement of the delinquency
proceeding;
c. Any act to obtain possession of property of the insurer;
d. Any act to create, perfect or enforce a lien against property
of the insurer, except a secured claim as defined in Section 631.011(15),
Florida Statutes;
e. Any action to collect assess or recover a claim against the
insurer, except claims as provided for under Chapter 631;
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f. The set-off or offset of any debt owing to the insurer except
offsets as provided in Section 631.281, Florida Statutes.
36. This Court retains jurisdiction of this cause for the purpose of
granting such other and further relief as from time to time shall be deemed
appropriate.
STATE OF FLORIDA
COUNTY OF LEON
Before me, the undersigned authority, personally appeared WAYNE A.
JOHNSON who was sworn and says the foregoing petition is true.
/s/ WAYNE A. JOHNSON
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WAYNE A. JOHNSON
Sworn to and subscribed before me this 24th day of February, 1997, by
Wayne A. Johnson.
/s/ Pamela Burleson Mills
NOTARY PUBLIC
Personally known OR produced Identification
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Type of Identification produced
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DATED this 24th day of February, 1997.
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FLORIDA DEPARTMENT OF INSURANCE
DIVISION OF REHABILITATION AND
LIQUIDATION
[seal] Post Office Box 110
Tallahassee, Florida 32302
(904) 922-3179
By /s/ DENNIS K. THREADGILL
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DENNIS K. THREADGILL
ROBIN WESTCOTT and
MICHAEL L. BERRY
ATTORNEYS FOR DEPARTMENT
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