<PAGE> 1
As filed with the Securities and Exchange Commission on November 4, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
PHYCOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 8099 62-1344801
(State or Other Juris- (Primary Standard Industrial Classi- (I.R.S. Employer
diction of Incorporation fication Code Number) Identification Number)
or organization)
</TABLE>
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Address, Including Zip Code, and Telephone Number
Including Area Code, of Registrant's Principal Executive Offices)
JOSEPH C. HUTTS
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHYCOR, INC.
30 BURTON HILLS BOULEVARD, SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Name, Address, Including Zip Code, and Telephone Number
Including Area Code, of Agent for Service)
---------------------
COPY TO:
J. CHASE COLE, ESQ.
WALLER LANSDEN DORTCH & DAVIS,
A PROFESSIONAL LIMITED LIABILITY COMPANY
NASHVILLE CITY CENTER
511 UNION STREET, SUITE 2100
NASHVILLE, TENNESSEE 37219
(615) 244-6380
---------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement and
the effectiveness of the Merger described in the Prospectus included herewith.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered Registered Price Per Share Aggregate Offering Price (1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock,
no par value 300,000 Shares Not Applicable $691,599 $210
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the amount of the
registration fee in accordance with Rule 457(f)(2) under the
Securities Act of 1933.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
STRAUB CLINIC & HOSPITAL, INCORPORATED
888 South King Street
Honolulu, Hawaii 96813
November ___, 1996
Dear Shareholder:
You are cordially invited to attend a special meeting of the
shareholders of Straub Clinic & Hospital, Incorporated ("Straub") to be held on
December ___, 1996, at 5:00 p.m., local time, at the Thomas Square Conference
Room at Straub located at 846 South Hotel Street, Honolulu, Hawaii. At the
special meeting, shareholders will be asked to approve and adopt: (1) a Plan of
Corporate Separation and Reorganization pursuant to which (i) the assets and
liabilities of Straub constituting the medical practice and hospital components
of Straub's business operations and related real property, including the real
property located at 888 South King Street, Honolulu, Hawaii, all of which
assets are identified in the Plan of Corporate Separation and Reorganization,
will be transferred to a newly-formed subsidiary of Straub ("New Straub P.C."),
(ii) the Common Stock of New Straub P.C. will be distributed, pro rata, to the
holders of common stock of Straub ("Straub Common Stock"), and (iii) the
holders of Series C Preferred Stock of Straub ("Series C Preferred Stock") will
exchange their shares for an equivalent number of shares of Series A Preferred
Stock of New Straub P.C. (collectively, the "Spin-Off Transaction"); and (2) an
Amended and Restated Agreement of Merger (the "Agreement of Merger") and Plan
of Merger pursuant to which Straub, immediately following the Spin-Off
Transaction, will be merged with and into PhyCor, Inc. ("PhyCor") (the
"Merger"). As a result of the Merger, shares of Straub Common Stock will be
converted into shares of Common Stock of PhyCor at values and in accordance
with a conversion ratio described in the Agreement of Merger. The separate
existence of Straub will cease and holders of Straub Common Stock, other than
those who dissent from the Merger, will become shareholders of PhyCor. New
Straub P.C. will continue to exist and be the entity through which medical
services will be provided and will enter into a 40-year Service Agreement with
PhyCor of Hawaii, Inc., a wholly-owned subsidiary of PhyCor. Details of the
Spin-Off Transaction, the Merger, and other important information are set forth
in the accompanying Prospectus and Proxy Statement, which you are urged to read
carefully.
Your Board of Directors has carefully reviewed and considered the
terms and conditions of the proposed Spin-Off Transaction and the Merger. In
addition, your Board of Directors has received an opinion of its financial
advisor, Hambrecht & Quist LLC, that the consideration to be received by the
holders of Straub Common Stock in the Spin-Off Transaction and the Merger is
fair to such shareholders from a financial point of view. Your Board of
Directors has approved the proposed Spin-Off Transaction and the Merger and
recommends that you vote for approval of the Spin-Off Transaction and the
Merger.
Pursuant to the provisions of the Hawaii Revised Statutes, for
the Spin-Off Transaction and the Merger to be approved, the holders of at least
seventy-five percent (75%) of the issued and outstanding shares of (i) the
Straub Common Stock must vote in favor of the Spin-Off Transaction and (ii) the
Straub Common Stock and Series C Preferred Stock, voting as a single class,
must vote in favor of the Merger. In addition, each transaction is contingent
upon the approval of the other. Accordingly, your vote is important. Although
you may attend the special meeting in person, we urge you to complete, date,
sign and return the enclosed proxy in the accompanying envelope. If you attend
the special meeting, you may still vote in person even if you have previously
delivered a proxy.
Shareholders of Straub are entitled to dissent from the proposed
Spin-Off Transaction and/or the Merger and to obtain payment of the fair value
of their shares in accordance with Sections 415-80 and 415-81 of the Hawaii
Revised Statutes, a copy of which is included in the accompanying Prospectus
and Proxy Statement as Annex B.
Sincerely,
--------------------------------------
Straub Clinic & Hospital, Incorporated
<PAGE> 3
STRAUB CLINIC & HOSPITAL, INCORPORATED
888 South King Street
Honolulu, Hawaii 96813
-------------------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
To Be Held on December __, 1996
-------------------------
To the Shareholders of
Straub Clinic & Hospital, Incorporated:
A special meeting of the shareholders of Straub Clinic &
Hospital, Incorporated ("Straub") will be held on Monday, December ___, 1996,
at 5:00 p.m., local time, at the Thomas Square Conference Room at Straub
located at 846 South Hotel Street, Honolulu, Hawaii for the following purposes:
(1) For the holders of Straub Common Stock ("Straub Common Stock") to
consider and vote upon the recommendation of the Board of Directors to
approve and adopt a Plan of Corporate Separation and Reorganization
pursuant to which (i) the assets and liabilities of Straub
constituting the medical practice and hospital components of Straub's
business operations and related real property, including the real
property located at 888 South King Street, Honolulu, Hawaii, all of
which assets are identified in the Plan of Corporate Separation
and Reorganization, will be transferred to a newly-formed
subsidiary of Straub ("New Straub P.C."), (ii) the Common Stock of New
Straub P.C. will be distributed, pro rata, to the holders of Straub
Common Stock, and (iii) the holders of Series C Preferred Stock of
Straub will exchange their shares for an equivalent number of shares
of Series A Preferred Stock of New Straub P.C. (collectively, the
"Spin-Off Transaction").
(2) For the holders of Straub Common Stock and Series C Preferred Stock to
consider and vote upon the recommendation of the Board of Directors to
approve and adopt an Amended and Restated Agreement of Merger (the
"Agreement of Merger") and Plan of Merger pursuant to which Straub,
following the Spin-Off Transaction, will be merged with and into
PhyCor, Inc. ("PhyCor") (the "Merger") and the holders of Straub
Common Stock will exchange their shares for shares of Common Stock of
PhyCor.
(3) To transact such other business incidental to the foregoing as may
properly come before the meeting or any adjournment thereof.
Information regarding the matters to be considered and voted
upon at the special meeting, including copies of the proposed Plan of Corporate
Separation and Reorganization, the Agreement of Merger and Plan of Merger and
the proposed Service Agreement between New Straub P.C. and PhyCor of Hawaii,
Inc., a wholly-owned subsidiary of PhyCor, is contained in the Prospectus and
Proxy Statement accompanying this Notice.
Shareholders of record of Straub Common Stock and Series C
Preferred Stock at the close of business on November ___, 1996 (the "Record
Date") are entitled to notice of and to vote at the special meeting. Pursuant
to the provisions of the Hawaii Revised Statutes, for the Spin-Off Transaction
and the Merger to be approved, the holders of at least seventy-five percent
(75%) of the issued and
<PAGE> 4
outstanding shares of (i) the Straub Common Stock must vote in favor of the
Spin-Off Transaction and (ii) the Straub Common Stock and Series C Preferred
Stock, voting as a single class, must vote in favor of the Merger. In addition,
each transaction is contingent upon the approval of the other. Accordingly,
your vote is important. Although you may attend the special meeting in person,
we urge you to complete, date, sign and return the enclosed proxy in the
accompanying envelope. If you attend the special meeting, you may still vote in
person even if you have previously delivered a proxy.
Holders of Straub Common Stock and Series C Preferred Stock
are entitled to dissent from the proposed Spin-Off Transaction and/or the
Merger. Holders who perfect dissenters' rights may obtain payment of the fair
value of their shares in accordance with Sections 415-80 and 415-81 of the
Hawaii Revised Statutes, a copy of which is included in the accompanying
Prospectus and Proxy Statement as Annex B. If the holders of more than five
percent (5%) of the shares of either the Straub Common Stock or Series C
Preferred Stock dissent with respect to the Spin-Off Transaction and/or the
Merger, as applicable, Straub and PhyCor will be required to waive a condition
to the consummation of the Spin-Off Transaction and the Merger or, if not
waived, the Spin-Off Transaction and the Merger will not be consummated.
By Order of the Board of Directors,
---------------------------------------
Secretary
Honolulu, Hawaii
November ___, 1996
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON AS
EXPLAINED ON PAGE 20 OF THE ACCOMPANYING PROSPECTUS AND PROXY STATEMENT.
<PAGE> 5
PROSPECTUS AND PROXY STATEMENT
300,000 SHARES
PHYCOR, INC.
COMMON STOCK
--------------
This Prospectus and Proxy Statement is being furnished to the holders
of Straub Common Stock ("Straub Common Stock") and Series C Preferred Stock
("Series C Preferred Stock") of Straub Clinic & Hospital, Incorporated, a
Hawaii professional corporation ("Straub"), in connection with the solicitation
of proxies by the Board of Directors of Straub for use at a special meeting of
shareholders of Straub (the "Straub Shareholders") to be held on December ___,
1996, at 5:00 p.m. at the Thomas Square Conference Room at Straub located at
846 South Hotel Street, Honolulu, Hawaii, and any and all adjournments or
postponements thereof (the "Special Meeting").
This Prospectus and Proxy Statement relates to the Plan of Corporate
Separation and Reorganization pursuant to which (i) the assets and liabilities
of Straub constituting the medical practice and hospital components of Straub's
business operations and related real property, including the real property
located at 888 South King Street, Honolulu, Hawaii, all of which assets are
identified in the Plan of Corporate Separation and Reorganization and the
Agreement of Merger (the "Medical Practice"), will be transferred to a
newly-formed subsidiary of Straub ("New Straub P.C."), (ii) the common stock of
New Straub P.C. will be distributed, pro rata, to the holders of Straub Common
Stock, and (iii) the holders of Series C Preferred Stock will exchange their
shares for an equivalent number of shares of Series A Preferred Stock of New
Straub P.C. (collectively, the "Spin-Off Transaction").
This Prospectus and Proxy Statement also relates to the Amended and
Restated Agreement of Merger, dated as of October 1, 1996 (the "Agreement of
Merger"), by and between PhyCor, Inc. ("PhyCor") and Straub pursuant to which
Straub will be merged (the "Merger") with and into PhyCor, and PhyCor will be
the surviving corporation. In the Merger, each share of Straub Common Stock
will be converted into the right to receive 0.1091 shares (based on a per share
price of $33.88 and based on the 2,074,976 outstanding shares of Straub Common
Stock) of the Common Stock, no par value per share, of PhyCor ("PhyCor Common
Stock"). Such ratio assumes the issuance of 226,299 shares of PhyCor Common
Stock as provided for in the Agreement of Merger. In the event the average of
the closing prices of PhyCor Common Stock on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") as reported in The Wall Street Journal
for the twenty (20) trading days ending on the second trading day immediately
prior to the effective date of the Merger (the "Closing Market Price") is less
than $33.88, the number of shares of PhyCor Common Stock to be received by
holders of Straub Common Stock in the Merger will be increased to the number of
shares of PhyCor Common Stock having an aggregate value equal to $7,667,000
divided by the Closing Market Price. Cash will be delivered in lieu of
fractional shares. Consummation of the Merger is subject to various
conditions, including (i) approval of the Spin-Off Transaction at the Special
Meeting by holders of 75% of the issued and outstanding shares of Straub Common
Stock (ii) approval of the Merger at the Special Meeting by holders of 75% of
the issued and outstanding shares of Straub Common Stock and Straub Series C
Preferred Stock, voting as a single class, and (iii) the execution of a
long-term service agreement (the "Service Agreement") between New Straub P.C.
and PhyCor of Hawaii, Inc., a wholly-owned subsidiary of PhyCor
("PhyCor-Hawaii").
This Prospectus and Proxy Statement also constitutes a prospectus of
PhyCor for the issuance of up to 300,000 shares of PhyCor Common Stock to be
issued in connection with the Merger. PhyCor Common Stock is listed and traded
on the Nasdaq National Market under the symbol "PHYC". On October 31, 1996, the
closing sales price for PhyCor Common Stock as reported on the Nasdaq National
Market was $31.00 per share.
This Prospectus and Proxy Statement and the accompanying form of proxy
are first being mailed to Straub Shareholders on or about November ____, 1996.
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 13 THROUGH 16.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY AND ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
November 4, 1996
<PAGE> 6
AVAILABLE INFORMATION
PhyCor has filed a Registration Statement on Form S-4, including
amendments thereto, if any, relating to the PhyCor Common Stock offered hereby
(the "Registration Statement") with the Securities and Exchange Commission (the
"Commission"). This Prospectus and Proxy Statement does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus and Proxy Statement
as to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement or
as previously filed with the Commission and incorporated herein by reference.
For further information with respect to PhyCor and the PhyCor Common Stock
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon payment of certain fees
prescribed by the Commission.
PhyCor is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information may be
inspected and copied at the offices of the Commission as stated above or at its
regional offices located in the Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material also can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, and the address at such site is http://www.sec.gov. PhyCor Common
Stock is listed on the Nasdaq National Market, and such reports, proxy
statements and other information can also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
--------------------
PhyCor was incorporated in Tennessee in January 1988. Unless the
context otherwise requires, references in this Prospectus and Proxy Statement
to "PhyCor" refer to PhyCor, Inc. and its subsidiaries. PhyCor's executive
offices are located at 30 Burton Hills Boulevard, Suite 400, Nashville,
Tennessee 37215, and its telephone number is (615) 665-9066.
--------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFER MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION MAY NOT BE LEGALLY MADE. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
2
<PAGE> 7
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are incorporated herein by reference:
(1) PhyCor's Annual Report on Form 10-K for the year ended
December 31, 1995;
(2) PhyCor's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;
(3) PhyCor's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996; and
(4) The description of PhyCor Common Stock contained in PhyCor's
Registration Statements on Form 8-A, dated January 8, 1992 and
March 8, 1994, respectively.
All reports and other documents filed by PhyCor pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of PhyCor Common Stock hereunder
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the filing date of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which is also incorporated or deemed to be
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Subject to the
foregoing, all information appearing herein is qualified in its entirety by the
information appearing in the documents incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
WRITTEN OR ORAL REQUEST, AT NO CHARGE, FROM PHYCOR. REQUESTS SHOULD BE DIRECTED
TO PHYCOR, INC., 30 BURTON HILLS BOULEVARD, SUITE 400, NASHVILLE, TENNESSEE
37215, ATTENTION: N. CAROLYN FOREHAND, VICE PRESIDENT AND GENERAL COUNSEL. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE
FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE FINAL INVESTMENT DECISION
MUST BE MADE.
3
<PAGE> 8
TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Parties To The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrative Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Spin-Off Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Comparative Per Share Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Comparative Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Regulatory Review and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Approval of the Spin-Off Transaction and the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendation of the Board of Directors of Straub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Opinion of Straub Investment Banker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Principal Differences Between Rights of Holders of Common Stock Under
the Governing Instruments of PhyCor and Straub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Solicitation of Straub Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Record Date and Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Merger Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Opinion of Straub Investment Banker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Redemption of Straub Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Spin-Off Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Service Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Effective Date of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Exchange of Straub Common Stock; Issuance of PhyCor Common Stock . . . . . . . . . . . . . . . . . . . . . . 29
Conditions to Consummation of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Conduct of Business Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Accounting Treatment of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Expenses and Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
4
<PAGE> 9
<TABLE>
<S> <C>
Resales of PhyCor Common Stock; Payment of Brokerage Fees and Expenses . . . . . . . . . . . . . . . . . . . 35
Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
RIGHTS OF DISSENTING STRAUB SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Action Necessary to Preserve Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
MARKET PRICE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Pro Forma Combined Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Pro Forma Combined Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Pro Forma Combined Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
STRAUB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 . . . . . . . . . . . . . . . . . . 47
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . 48
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . 50
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
STRAUB CLINIC & HOSPITAL, INCORPORATED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Material Agreements Between Straub and PhyCor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
STRAUB PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
PRINCIPAL DIFFERENCES BETWEEN RIGHTS OF HOLDERS OF COMMON STOCK UNDER
THE GOVERNING INSTRUMENTS OF PHYCOR AND STRAUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
MANAGEMENT OF STRAUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Employment Agreements and Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . 62
PHYCOR, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Multi-Specialty Medical Clinics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Physician Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
5
<PAGE> 10
<TABLE>
<S> <C>
Index to Financial Statements of Straub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Annex A -- Hambrecht & Quist LLC Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Annex B -- Provisions of Hawaii Revised Statutes
Governing Exercise of Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Annex C -- Form of Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Annex D -- Amended and Restated Agreement of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Annex E -- Form of Service Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
Annex F -- Form of Articles of Incorporation of New Straub P.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Annex G -- Form of Bylaws of New Straub P.C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Annex H -- Plan of Corporate Separation and Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H-1
</TABLE>
6
<PAGE> 11
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the documents incorporated
herein by reference. This summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Prospectus and Proxy Statement and the documents
incorporated herein by reference and included herewith as annexes. The
shareholders of Straub are urged to review this entire Prospectus and Proxy
Statement and the documents referred to or incorporated herein by reference or
included herewith as annexes.
PARTIES TO THE MERGER
PhyCor, Inc. As of October 31, 1996, PhyCor operated 42 clinics with
approximately 2,850 physicians in 24 states and managed independent practice
associations ("IPAs") with over 8,700 physicians in 15 markets. PhyCor's
clinics and IPAs provide capitated medical services to approximately 761,000
members, including approximately 92,000 Medicare members. The clinics operated
by PhyCor provide a wide range of primary and specialty physician care and
ancillary services. PhyCor acquires certain assets of established clinics and
operates each clinic under a long-term service agreement with an affiliated
multi-specialty physician group practicing exclusively through the clinic.
Pursuant to the service agreement, PhyCor generally manages all aspects of the
clinic other than the provision of medical services, which is controlled by the
physician groups. PhyCor, under the terms of the service agreement, provides
the physician group with the equipment and facilities used in their medical
practices, manages clinic operations, employs most of the clinic's
non-physician employees, other than certain diagnostic technicians, and
receives a service fee. PhyCor's objective is to organize physicians into
professionally managed networks that assist physicians in assuming increased
responsibility for delivering cost-effective medical care while attaining
high-quality clinical outcomes.
Since June 30, 1996, PhyCor has acquired six multi-specialty clinics
with an aggregate of approximately 330 physicians and one IPA management
company with approximately 1,000 affiliated physicians. As of October 31, 1996,
PhyCor has agreements in principle to affiliate with four additional
multi-specialty physician clinics with an aggregate of approximately 320
physicians within the next three months.
Straub Clinic & Hospital, Incorporated. Straub was founded in 1921 by
George F. Straub, M.D. and began as a five-physician practice in the Honolulu,
Hawaii area. Since that time, Straub has added additional physicians, medical
specialties and services and is today one of the oldest and largest private
multi-specialty group medical practices in Hawaii. Upon the completion of its
159-bed acute care hospital in 1973, Straub became a fully integrated clinic
and hospital system.
Straub employs approximately 200 doctors, and over 1,800 nurses,
medical staff and employees. Together, they provide services to more than
550,000 outpatients at Straub's main clinic facility and 11 additional
locations throughout Hawaii, almost 47,000 days of hospital care, and over
20,000 emergency care treatments each year.
After nearly eight decades of service, Straub has emerged as a leading
integrated health care system in Hawaii. Outside of Hawaii, Straub operates
The Doctors' Clinic on Guam and treats a significant number of patients from
other Pacific island communities, including the Commonwealth of Northern
Marianna Island, American Samoa and Federated States of Micronesia. The
principal executive offices of Straub are located at 888 South King Street,
Honolulu, Hawaii 96813. The telephone number for Straub's executive offices is
(808) 522-3101.
SPECIAL MEETING
At the Special Meeting, the Straub Shareholders will consider and vote,
as separate matters, upon the recommendation of the Straub Board of Directors
to approve and adopt the Spin-Off Transaction and the Merger. Holders of record
of Straub Common Stock and Series C Preferred Stock at the close of business on
November ___, 1996 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting and any adjournment thereof. Holders of Straub Common
Stock are entitled to vote on the Spin-Off Transaction and the Merger. Although
the shares of Series C Preferred Stock are normally non-voting, holders of
shares of the Series C Preferred Stock are entitled to vote on the Merger (but
not on the Spin-Off Transaction) at the Special Meeting. As of October 31,
1996, there
7
<PAGE> 12
were 2,074,976 shares of Straub Common Stock issued and outstanding and
10,199,288 shares of Series C Preferred Stock issued and outstanding. Each
share of Straub Common Stock and Series C Preferred Stock is entitled to one
vote at the Special Meeting. For the Spin-Off Transaction and the Merger to be
approved, the holders of at least 75% of the issued and outstanding shares of
(i) Straub Common Stock must vote in favor of the Spin-Off Transaction and (ii)
Straub Common Stock and Series C Preferred Stock, voting as a single class,
must vote in favor of the Merger. On October 1, 1996, the Board of Directors of
Straub authorized the redemption of all of the Series B Preferred Stock of
Straub. Prior to the Record Date, the Series B Preferred Stock of Straub will
be redeemed for cash by Straub.
ADMINISTRATIVE SERVICES AGREEMENT
As of October 1, 1996, PhyCor-Hawaii entered into an Administrative
Services Agreement with Straub (the "Administrative Services Agreement")
pursuant to which PhyCor-Hawaii agreed to provide certain advisory services to
Straub in anticipation of the consummation of the Merger. For its services
under the Administrative Services Agreement, PhyCor-Hawaii receives a monthly
service fee, the first payment of which is due as of November 1, 1996. The
Administrative Services Agreement expires on the earlier of (i) the effective
date of the Merger, (ii) termination of the Agreement of Merger, or (iii)
February 28, 1997. The Administrative Services Agreement may also be terminated
by either party upon the filing of a petition in voluntary bankruptcy or an
assignment for the benefit of creditors or upon a material default in the
performance of any duty or obligation unless cured within thirty (30) days. In
the event that the Administrative Services Agreement terminates as a result of
the consummation of the Merger, any accrued but unpaid fees shall be assumed by
PhyCor as a result of the Merger.
THE SPIN-OFF TRANSACTION
The Spin-Off Transaction, which will include the transfer to New Straub
P.C. of the Medical Practice, is required as a condition to the Merger because
PhyCor, as a non-professional corporation, cannot practice medicine in the
State of Hawaii and because PhyCor does not desire to own the hospital
operations. To accomplish the Spin-Off Transaction, Straub currently
anticipates that it will incorporate New Straub P.C. prior to the Special
Meeting and, immediately prior to consummation of the Merger, will transfer the
Medical Practice to New Straub P.C. in exchange for shares of Common Stock of
New Straub P.C. ("New Straub P.C. Common Stock") and Series A Preferred Stock
of New Straub P.C. ("New Straub P.C. Series A Preferred Stock") (New Straub
P.C. Common Stock and New Straub P.C. Series A Preferred Stock are collectively
referred to herein as "New Straub P.C. Shares") and will distribute the New
Straub P.C. Shares in a transaction intended to be a tax-free spin-off under
Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended
(the "Code"). The New Straub P.C. Common Stock issued to Straub will be
distributed to the holders of Straub Common Stock in the same proportion as
their ownership of Straub Common Stock. The New Straub P.C. Series A Preferred
Stock will be distributed to holders of Series C Preferred Stock in exchange
for their Series C Preferred Stock so that holders of Series C Preferred Stock
will receive an equivalent number of shares of New Straub P.C. Series A
Preferred Stock. The rights and preferences of the New Straub P.C. Series A
Preferred Stock will be identical to the rights and preferences of the Series C
Preferred Stock. The resulting ownership of New Straub P.C. following the
consummation of the Spin-Off Transaction will be the same as the ownership of
Straub prior to the consummation of the Spin-Off Transaction, except for Straub
Shareholders who dissent from the Spin-Off Transaction. The Spin-Off
Transaction will not be consummated unless (i) 75% of the issued and
outstanding shares of Straub Common Stock are voted in favor of the Spin-Off
Transaction, (ii) holders of Straub Common Stock perfecting dissenters' rights
to the Spin-Off Transaction and the Merger collectively do not own more than 5%
of the issued and outstanding Straub Common Stock, (iii) holders of Series C
Preferred Stock perfecting dissenters' rights to the Spin-Off Transaction and
the Merger collectively do not own more than 5% of the outstanding Series C
Preferred Stock and (iv) all conditions to consummation of the Merger are
satisfied, unless otherwise waived.
THE MERGER
General. Pursuant to the terms of the Agreement of Merger, Straub
will be merged with and into PhyCor. Following the approval of the Straub
Shareholders of the Merger and the satisfaction of the conditions contained in
the Agreement of Merger, including the filing of all appropriate documents with
each of the Secretary of State of Tennessee and the Department of Commerce and
Consumer Affairs of the State of Hawaii, the separate corporate existence of
Straub shall cease, and Straub will be merged with and into PhyCor. All of the
assets and liabilities of Straub, other than those related to the Medical
Practice being transferred to New Straub P.C., will
8
<PAGE> 13
be acquired by PhyCor. New Straub P.C. will remain in existence as a separate
entity and will be the entity through which the physicians will practice
medicine. In connection with the Spin-Off Transaction, the patient medical
records and regulatory licenses will be assigned to New Straub P.C., and the
Straub Shareholders will become employees of New Straub P.C. pursuant to newly
entered into employment agreements between the Straub Shareholders and New
Straub P.C. containing the restrictive covenant provisions described in the
Service Agreement. See "Merger -- General."
Determination of Merger Consideration. The consideration for the Merger
was determined through arm's-length negotiations between representatives of
PhyCor and Straub. The Boards of Directors of each of PhyCor and Straub
considered, among other factors, information with respect to the financial
condition, assets, liabilities, businesses, operations and prospects of each
company on both a historical and prospective basis, including financial
information reflecting the two entities on a pro forma consolidated basis.
PhyCor presented its offer to Straub based upon an evaluation of the business
to be acquired by PhyCor and on the assumption that PhyCor-Hawaii would enter
into the Service Agreement with New Straub P.C. and that PhyCor would utilize
the assets of Straub in performing its obligations under the Service Agreement.
Interests of Affiliates and Non-Affiliates of Straub. "Affiliates" (as
such term is defined in the rules under the Securities Act of 1933, as amended
(the "Securities Act")) and non-affiliates of Straub will receive the same
benefits and be subject to the same consequences as a result of the
consummation of the Merger. In connection with the Merger, the holders of
Straub Common Stock are entitled to receive shares of PhyCor Common Stock
in the same proportion as their ownership in Straub Common Stock. Any resales
of shares of PhyCor Common Stock received by Affiliates of Straub must be made
in compliance with Rule 145 of the Securities Act. With the exceptions of Blake
E. Waterhouse and Louise L. Liang, who are expected to become the Chief
Executive Officer and Chief Operating Officer, respectively, of PhyCor-Hawaii,
no officer or director of Straub or the New Straub P.C. will be an employee,
officer or director of PhyCor or PhyCor-Hawaii following the consummation of
the Merger. The officers and directors of Straub as a group hold approximately
8.2% of the Straub Common Stock and 12.3% of the Series C Preferred Stock and,
therefore, a significant number of the non-affiliated Straub Shareholders must
vote in favor of the Spin-Off Transaction and the Merger for their approval.
See "Straub Principal Shareholders."
Exchange of Straub Common Stock; Issuance of PhyCor Common Stock.
Pursuant to the Agreement of Merger, each share of Straub Common Stock
outstanding as of the effective date of the Merger, subject to rights of
dissenters, shall be converted into the right to receive 0.1091 share of PhyCor
Common Stock (based on a per share price of $33.88 and based on the 2,074,976
outstanding shares of Straub Common Stock), which conversion ratio is
calculated by dividing the number of shares of PhyCor Common Stock issuable
pursuant to the Agreement of Merger by the number of shares of Straub Common
Stock outstanding as of the effective date of the Merger. Such ratio assumes
the issuance of 226,299 shares of PhyCor Common Stock as provided for in the
Agreement of Merger. The Agreement of Merger provides, however, that in the
event the Closing Market Price is less than $33.88 per share, PhyCor will
deliver as of the effective date of the Merger the number of shares of PhyCor
Common Stock having an aggregate value equal to $7,667,000 divided by the
Closing Market Price. No fractional shares of PhyCor Common Stock will be
issued and in lieu thereof, cash will be paid for such fractional shares based
on the applicable price per share. See "Merger -- Exchange of Straub Common
Stock; Issuance of PhyCor Common Stock."
Procedure for Exchange of Straub Common Stock. First Union National
Bank of North Carolina will act as exchange agent for the Merger (the "Exchange
Agent") by accepting for exchange the surrender of the certificates
representing the Straub Common Stock and the execution of a letter of
transmittal in form satisfactory to the Exchange Agent. As soon as practicable
after the surrender of the certificates representing the Straub Common Stock,
the Exchange Agent will deliver to the holders of Straub Common Stock that
number of shares of PhyCor Common Stock as is provided for in the Agreement of
Merger and cash in lieu of any fractional shares of PhyCor Common Stock. See
"Merger -- Exchange of Straub Common Stock; Issuance of Phycor Common Stock."
Effective Date. Straub and PhyCor intend to consummate the Spin-Off
Transaction and the Merger as soon as is practicable after all Straub
Shareholder and regulatory and other approvals have been obtained and the other
conditions of the Agreement of Merger have been satisfied or waived.
Conditions to Consummation of Merger. The consummation of the Merger is
subject to several conditions, including the approval of the Merger by the
Straub Shareholders, holders of Straub Common Stock who perfect dissenters'
rights to the Spin-Off Transaction and the Merger collectively owning not more
than 5% of the outstanding Straub Common Stock, holders of Series C Preferred
Stock who perfect
9
<PAGE> 14
dissenters' rights to the Spin-Off Transaction and the Merger collectively
owning not more than 5% of the outstanding Series C Preferred Stock, the
completion of the Spin-Off Transaction, the execution of the Service Agreement,
the obtaining of necessary consents and approvals, including approvals relating
to certificates of need, the change-in-control of the Straub HMO administration
business, the receipt by Straub and PhyCor of tax opinions, the delivery of
opinions of counsel and the delivery of a fairness opinion to Straub. The
fairness opinion has been delivered in satisfaction of the applicable
condition. Any or all of the conditions may be waived in writing by the party
whose obligation is subject to satisfaction of the condition. See "Merger --
Conditions to Consummation of Merger."
Termination of Agreement of Merger. The Agreement of Merger provides
that in certain circumstances the Agreement of Merger may be terminated and the
Merger abandoned at any time by either Straub or PhyCor prior to the Effective
Date, whether before or after being submitted to a vote for approval by the
Straub Shareholders.
COMPARATIVE PER SHARE DATA
The following table presents selected comparative unaudited per share
data (i) of each of PhyCor and Straub on an historical basis, (ii) for the
combined companies on a pro forma basis assuming the Merger had been effective
for the periods indicated in the table, and (iii) for Straub on a pro forma
equivalent basis. Neither PhyCor nor Straub has declared or paid a dividend on
their respective shares of common stock. See "Dividends."
<TABLE>
<CAPTION>
BOOK VALUE PER SHARE: DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
PhyCor historical . . . . . . . . . . . . . $7.28 $7.63
Straub historical . . . . . . . . . . . . . (11.84) (10.04)
PhyCor pro forma combined . . . . . . . . . 7.18 7.49
Straub pro forma equivalent (1) . . . . . . .88 .84
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
NET INCOME PER SHARE: DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
PhyCor historical . . . . . . . . . . . . . $.41 $.27
Straub historical . . . . . . . . . . . . . 3.00 .86
PhyCor pro forma combined . . . . . . . . .45 .29
Straub pro forma equivalent (2) . . . . . . .06 .03
</TABLE>
- --------------------
(1) Calculated by multiplying the PhyCor pro forma combined book value per
share number by the conversion ratio described in the Agreement of
Merger. The conversion ratio is calculated by dividing the number of
shares of PhyCor Common Stock issuable under the Agreement of Merger by
the number of shares of Straub Common Stock outstanding as of the end
of the period. For purposes hereof, the conversion ratio used assumes
the issuance by PhyCor of 226,299 shares of PhyCor Common Stock under
the Agreement of Merger.
(2) Calculated by multiplying the PhyCor pro forma combined
earnings per share by the conversion ratio. The conversion
ratio is calculated by dividing the number of shares of PhyCor Common
Stock issuable under the Agreement of Merger by the average number of
shares of Straub Common Stock outstanding during the period. For
purposes hereof, the conversion ratio used assumes the issuance by
PhyCor of 226,299 shares of PhyCor Common Stock under the Agreement of
Merger.
COMPARATIVE MARKET PRICE DATA
As of October 1, 1996, the date preceding public announcement of the
execution of the Agreement of Merger by Straub and PhyCor, the closing sales
price of the PhyCor Common Stock as reported by the Nasdaq National Market on
such date was $35.50 per share. The closing sales price of the PhyCor Common
Stock on October 31, 1996 was $31.00 per share. See "Market Price Data."
Straub is a closely-held Hawaii professional corporation. There has been no
public trading market in the securities of Straub and, therefore, there is no
10
<PAGE> 15
historical per share price for Straub's securities. The Board of Directors of
Straub believes that the consideration to be paid by PhyCor in connection with
the Agreement of Merger is fair, based upon, among other factors, the fairness
opinion of Hambrecht & Quist LLC. See "Merger -- Reasons for Merger" and
"Merger -- Opinion of Straub Investment Banker."
REGULATORY REVIEW AND APPROVALS
The Merger is not subject to regulatory review or approval, other than
(i) the requirements of Tennessee and Hawaii state laws requiring that Articles
of Merger containing the Plan of Merger be filed with the Secretary of State of
Tennessee and the Department of Commerce and Consumer Affairs of the State of
Hawaii, which documents must meet certain requirements as to form and content,
(ii) expiration or early termination of the waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act, if a filing is required, and (iii) the
requirements of Hawaii law concerning reviews of certificates of need and
change in ownership. The Merger will be effective upon the filing of the
Articles of Merger and the Plan of Merger with the Secretary of State of
Tennessee and the Department of Commerce and Consumer Affairs of the State of
Hawaii. Straub and its subsidiaries hold various governmental licenses
necessary for the operation of their businesses. New Straub P.C. will need
similar licenses and, in some cases, must file change in control applications
with applicable governmental agencies with respect to licenses held by
subsidiaries of Straub transferred to New Straub P.C. in connection with the
Spin-Off Transaction. The applicable governmental agencies will not accept
licensure or change in control applications until after the consummation of the
Spin-Off Transaction. Straub anticipates that New Straub P.C. will receive all
required licenses and that the change in control applications will be approved.
There can be no assurance, however, that such licenses and approvals will be
received in a timely manner or at all. Any significant delay or failure to
obtain such licenses or change in control approvals could have a material
adverse effect on the business of New Straub P.C. and its subsidiaries. See
"Merger -- Conditions to Consummation of Merger".
APPROVAL OF THE SPIN-OFF TRANSACTION AND THE MERGER
In accordance with Hawaii law, the affirmative vote of the holders of
at least 75% of the issued and outstanding shares of (i) Straub Common Stock is
required to approve the Spin-Off Transaction and (ii) Straub Common Stock and
Series C Preferred Stock, voting as a single class, is required to approve the
Merger. See "Merger -- General."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF STRAUB
The Board of Directors of Straub has approved the Plan of Corporate
Separation and Reorganization and the Agreement of Merger and Plan of Merger
and believes that the Spin-Off Transaction and the Merger are in the best
interests of the Straub Shareholders. THE BOARD OF DIRECTORS RECOMMENDS THAT
THE STRAUB SHAREHOLDERS VOTE FOR THE APPROVAL OF THE SPIN-OFF TRANSACTION AND
THE MERGER. See "Merger -- Background of Merger," "Merger -- Reasons for
Merger" and "Merger -- Spin-Off Transaction."
In determining to approve the Plan of Corporate Separation and
Reorganization and enter into the Agreement of Merger, Straub's Board of
Directors considered several factors, including Straub's need for capital and
PhyCor's access to capital, PhyCor's management and practice asset acquisition
expertise, Straub's desire to acquire the assets of primary care practices in
the area, changes in the health care industry, the amount of the consideration
being received by the holders of Straub Common Stock for their Straub Common
Stock, the fact that the PhyCor Common Stock which will be exchanged for the
Straub Common Stock in the Merger will have greater liquidity than the Straub
Common Stock, the fact that PhyCor cannot acquire the Medical Practice in the
State of Hawaii, the tax attributes of the transactions, and the common goals
and desires shared by PhyCor and Straub in providing quality health care
services in Hawaii. The Board of Directors of Straub concluded that PhyCor
offered the necessary capital and expertise to accomplish many of the goals of
the Straub Shareholders and that the consideration to be received by Straub
Shareholders is fair.
OPINION OF STRAUB INVESTMENT BANKER
Straub retained Hambrecht & Quist LLC ("H&Q") to act as its financial
advisor in connection with (i) the proposed Merger and (ii) the formation of
New Straub P.C. in connection with the Spin-Off Transaction and the
consideration to be received by New Straub P.C. at the time it enters into the
Service Agreement with PhyCor-
11
<PAGE> 16
Hawaii. The Board of Directors selected H&Q, after interviewing other
investment banking firms, because H&Q is an internationally recognized
investment banking firm, which, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, corporate
restructurings, strategic alliances, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Prior to the engagement by Straub of H&Q, there has been no
relationship between H&Q, its affiliates and/or unaffiliated representatives
and Straub or any of its affiliates. H&Q rendered its oral opinion
(subsequently confirmed in writing) on October 1, 1996 to the Board of
Directors of Straub that, as of such date, the consideration to be received by
the holders of Straub Common Stock in the Spin-Off Transaction and the Merger
is fair to such holders from a financial point of view. Straub Shareholders are
advised to read, in its entirety, H&Q's opinion dated October 1, 1996 (the "H&Q
Opinion"), which sets forth the assumptions made, matters considered, the scope
and limitations of the review undertaken and the procedures followed by H&Q. A
copy of the H&Q opinion is attached to this Prospectus and Proxy Statement as
Annex A. The Board of Directors of Straub has based its recommendation of the
Merger, in part, on the H&Q Opinion. See "Merger -- Reasons for Merger" and
"Merger -- Opinion of Straub Investment Banker."
DISSENTERS' RIGHTS
In order to be able to dissent from the Spin-Off Transaction and/or the
Merger and demand the right to receive a cash payment from Straub for the fair
value of the Straub Shares held by any such dissenter, Straub Shareholders must
object to the Spin-Off Transaction and/or the Merger in writing prior to the
time of the vote on whether to approve the Spin-Off Transaction and the Merger,
and such dissenting Straub Shareholders must not vote in favor of the Spin-Off
Transaction or the Merger, as applicable, at such meeting. The dissenting
Straub Shareholders must also follow the procedures set forth in the Hawaii
Revised Statutes, the applicable portions of which are attached to this
Prospectus and Proxy Statement as Annex B. The failure of a Straub Shareholder
to follow the specific requirements set forth in the Hawaii Revised Statutes
with regard to such dissenters' rights will result in the loss of such rights.
See "Rights of Dissenting Straub Shareholders."
PRINCIPAL DIFFERENCES BETWEEN RIGHTS OF HOLDERS OF COMMON STOCK UNDER THE
GOVERNING INSTRUMENTS OF PHYCOR AND STRAUB
The Bylaws, as amended, of Straub provide for mandatory redemption of
the Straub Shares held by a shareholder in certain circumstances. The
Articles of Incorporation, as amended, of Straub permit only individuals
licensed to practice medicine in Hawaii to be shareholders and provide for
common stock and preferred stock.
PhyCor's Restated Charter and Amended Bylaws, each as amended, do not
make special provision for redemption of shares, have no restriction as to the
type of holder which may possess the capital stock of PhyCor and provide for
the creation of multiple series of preferred stock which may have preferences
over holders of common stock, although no shares of preferred stock are
outstanding as of the date hereof. See "Principal Differences Between Rights of
Holders of Common Stock Under the Governing Instruments of PhyCor and Straub."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that the Spin-Off Transaction will constitute a
reorganization and tax-free corporate separation for federal income tax
purposes and that the Merger will constitute a reorganization for federal
income tax purposes and, accordingly, that no gain or loss will be recognized
by Straub Shareholders (except with respect to Straub Shareholders who exercise
dissenters' rights and except with respect to cash received in lieu of
fractional shares in the Merger). Consummation of the Merger by Straub is
conditioned upon the delivery of an opinion of its special counsel to this
effect. In addition, PhyCor shall have received an opinion satisfactory to it
concerning the tax consequences of the Merger. See "Merger -- Certain Federal
Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for by PhyCor as a purchase under
generally accepted accounting principles. See "Merger -- Accounting Treatment
of Merger."
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<PAGE> 17
RISK FACTORS
In addition to the other information in this Prospectus and Proxy
Statement, the following factors should be considered carefully by the holders
of Straub Common Stock in evaluating an investment in the shares of PhyCor
Common Stock. This discussion also identifies important cautionary factors that
could cause PhyCor's actual results to differ materially from those projected
in forward looking statements of PhyCor made by, or on behalf of, PhyCor. In
particular, forward looking statements contained herein, including those
regarding the acquisition of additional physician practices, the development of
additional IPAs and the adequacy of PhyCor's capital resources and other
statements regarding trends relating to various revenue and expense items,
could be affected by a number of risks and uncertainties including those
described below.
Risks Associated with the Spin-Off Transaction and the Merger. The
Spin-Off Transaction is intended to qualify as a tax-free reorganization and
corporate separation for federal income tax purposes, and the Merger is
intended to qualify as a tax-free reorganization for federal income tax
purposes. Failure of the transactions to so qualify could have a material
adverse effect on PhyCor and the Straub Shareholders. See "Merger -- Certain
Federal Income Tax Consequences." As a result of the Merger, PhyCor will become
liable for any penalties that may result from an on-going federal investigation
of Straub's billing and receivables practices, including with respect to
Medicare, Medicaid and CHAMPUS. See "Straub Clinic & Hospital, Incorporated -
Litigation." In connection with the Merger, New Straub P.C. has agreed to fully
indemnify PhyCor-Hawaii for any fines or penalties assessed against it by the
government in this matter. Because the potential liability cannot be quantified
at this time, however, there can be no assurance that New Straub P.C. will have
sufficient assets to fully fund its indemnification obligation should it arise.
No Assurance of Continued Rapid Growth. PhyCor's continued growth is
dependent upon its ability to achieve significant consolidation of
multi-specialty medical clinics, to sustain and enhance the profitability of
those clinics and to develop and manage IPAs. The process of identifying
suitable acquisition candidates and proposing, negotiating and implementing an
economically feasible affiliation with a physician group or formation or
management of a physician network is lengthy and complex. Clinic and physician
network operations require intensive management in a dynamic marketplace
increasingly subject to cost containment pressures. There can be no assurance
that PhyCor will be able to sustain its historically rapid rate of growth. The
success of PhyCor's strategy to develop and manage IPAs is largely dependent
upon its ability to form networks of physicians, to obtain favorable payor
contracts, to manage and control costs and to realize economies of scale. Many
of the agreements entered into by physicians participating in PhyCor-managed
IPAs are not exclusive arrangements. The physicians, therefore, could join
competing networks or terminate their relationships with the IPAs. There can be
no assurance that PhyCor will continue to be successful in establishing new IPA
networks or maintaining relationships with affiliated physicians. See "PhyCor,
Inc. -- Physician Networks."
Additional Financings. PhyCor's multi-specialty medical clinic
acquisition and expansion program and its IPA development and management plans
require substantial capital resources. The operations of its existing clinics
require ongoing capital expenditures for renovation and expansion and the
addition of costly medical equipment and technology utilized in providing
ancillary services. PhyCor may also, in certain circumstances, acquire real
estate in connection with clinic acquisitions. PhyCor will require additional
financing for the development of additional IPAs and expansion and management
of its existing IPAs. PhyCor expects that its capital needs over the next
several years will exceed capital generated from operations. PhyCor plans to
incur indebtedness and to issue, from time to time, additional debt or equity
securities, including the issuance of Common Stock or convertible notes in
connection with the types of transactions identified on the cover page of this
Prospectus. PhyCor's bank credit facility requires the lenders' consent for
borrowings in connection with the acquisition of clinic assets in excess of
$50.0 million. There can be no assurance that sufficient financing will be
available or available on terms satisfactory to PhyCor.
Competition. The business of providing health care related services is
highly competitive. Many companies, including professionally managed physician
practice management companies, have been organized to pursue the acquisition of
medical clinics, manage such clinics, employ clinic physicians or provide
services to IPAs. Large hospitals, other multi-specialty clinics and other
health care companies, health maintenance organizations ("HMOs") and insurance
companies are also involved in activities similar to those of PhyCor. Some of
these competitors have longer operating histories and significantly greater
resources than PhyCor. There can be no
13
<PAGE> 18
assurance that PhyCor will be able to compete effectively, that additional
competitors will not enter the market, or that such competition will not make
it more difficult to acquire the assets of multi-specialty clinics on terms
beneficial to PhyCor. See "PhyCor, Inc. -- Physician Networks."
Risks Associated with Capitation; Reliance on Physician Networks. Many
of the payor contracts entered into on behalf of PhyCor-managed IPAs are based
on capitated fee arrangements. Under capitation arrangements, health care
providers bear the risk, subject to certain loss limits, that the aggregate
costs of providing medical services to the members will exceed the premiums
received. The management fees are based, in part, upon a share of surplus, if
any, of a capitated amount of revenue. Agreements with payors also contain
"shared risk" provisions under which PhyCor and the IPA can earn additional
compensation based on utilization of hospital services by members and may be
required to bear a portion of any loss in connection with such "shared risk"
provisions. Any such losses could have a material adverse effect on PhyCor. The
profitability of the managed IPAs is dependent upon the ability of the
providers to effectively manage the per patient costs of providing medical
services and the level of utilization of medical services. The management fees
are also based upon a percentage of revenue collected by the IPAs. Any loss of
revenue by the IPAs as a result of losing affiliated physicians, the
termination of third party payor contracts or otherwise could have a material
adverse effect on management fees derived by PhyCor from its management of
IPAs. Through its service agreements, PhyCor also shares in capitation risk
assumed by its affiliated physician groups.
Risks of Changes in Payment for Medical Services. The profitability of
PhyCor may be adversely affected by Medicare and Medicaid regulations, cost
containment decisions of third party payors and other payment factors over
which PhyCor has no control. The federal Medicare program has undergone
significant legislative and regulatory changes in the reimbursement and fraud
and abuse areas, including the adoption of the resource-based relative value
scale ("RBRVS") schedule for physician compensation under Medicare, which may
continue to have a negative impact on PhyCor's revenue. Efforts to control the
cost of health care services are increasing. Many of PhyCor's physician groups
are becoming affiliated with provider networks, managed care organizations and
other organized health care systems, which often provide fixed fee schedules or
capitation payment arrangements that are lower than standard charges. Future
profitability in the changing health care environment, with differing methods
of payment for medical services, is likely to be affected significantly by
management of health care costs, pricing of services and agreements with
payors. Because PhyCor derives its revenues from the revenues generated by its
affiliated physician groups and from its managed IPAs, further reductions in
payments to physicians generally or other changes in payment for health care
services could have an adverse effect on PhyCor.
Additional Regulatory Risks. The health care industry, including the
management and operation of hospitals, physicians' medical practices and other
health care providers, is highly regulated at the state and federal levels.
Because of the uniqueness of the structure of the relationships between PhyCor
and the physician groups and its managed IPAs, there can be no assurance that
review of PhyCor's business by courts or health care, tax, labor or other
regulatory authorities will not result in determinations that could adversely
affect the financial condition or results of operations of PhyCor or that the
health care regulatory environment will not change in a manner that would
restrict PhyCor's existing operations or limit the expansion of PhyCor's
business or otherwise adversely affect PhyCor. PhyCor has been the subject of
an audit by the IRS and understands that the IRS may propose adjustments
relating to the timing of recognition of certain revenue and deductions for tax
purposes. Such adjustment may result from a recharacterization for tax purposes
only of PhyCor's relationships with its affiliated physician groups. PhyCor
disagrees with the tentative positions taken by the IRS agent including any
recharacterization and intends to vigorously contest these adjustments if
asserted. Any adjustment resulting from resolution of this disagreement would
not affect reported net earnings of PhyCor but would defer tax benefits and
change the levels of current and deferred tax assets and liabilities. PhyCor
does not believe the resolution of this matter will have a material adverse
effect on its financial condition, although there can be no assurance as to the
outcome of this audit.
In addition to the matters referred to above, many state laws restrict
the unlicensed practice of medicine, the splitting or sharing of fees with
non-physician entities and the enforcement of non-competition agreements.
Federal law prohibits the offer, payment, solicitation or receipt of any form
of remuneration in return for the referral of Medicare or state health program
patients or patient care opportunities, or in return for the purchase, lease or
order of items or services that are covered by Medicare or state health
programs. Moreover, simultaneously with the consummation of the Merger,
PhyCor-Hawaii will enter into the Service Agreement whereby it will provide
certain management services to New Straub P.C., including both the physician
group practice and the hospital. Because the hospital is subject to extensive
regulation and because hospital management companies have, in some instances,
been viewed as referral sources by federal regulatory agencies, the
relationship between PhyCor-Hawaii and New Straub P.C. could come under
increased scrutiny under the Medicare fraud and abuse law. In addition,
federal law requires that physician groups be included within a definition of
group practice in order to be permitted to make referrals within the group.
Federal law also prohibits conduct that may result in price-fixing or other
anticompetitive conduct. In addition to criminal penalties, violators may be
excluded from participation in Medicare
14
<PAGE> 19
or state health programs. Although management of PhyCor believes the operations
of PhyCor are in material compliance with existing law, there can be no
assurance that PhyCor's existing agreements with its physicians, including
service agreements or IPA management agreements, will not be successfully
challenged.
Applicability of Insurance Regulations. PhyCor, through its IPAs,
enters into contracts and joint ventures with licensed insurance companies,
such as HMOs, whereby PhyCor and its IPAs assume risk in connection with the
providing of health care services under capitation arrangements. To the extent
PhyCor or its managed IPAs are in the business of insurance as a result of
entering into such risk sharing arrangements, they are subject to a variety of
regulatory and licensing requirements applicable to insurance companies or
HMOs. There can be no assurance that PhyCor or its managed IPAs will not be
adversely affected by such regulations. In connection with multi-specialty
medical clinic acquisitions, PhyCor has and may continue to acquire HMOs
previously affiliated with such clinics. In connection with the Merger, PhyCor
will acquire the HMO owned by Straub. The HMO industry is highly regulated at
the state level and is highly competitive. Additionally, the HMO industry has
been subject to numerous legislative initiatives within the past several years.
Certain aspects of health care reform legislation may have direct or indirect
consequences for the HMO industry. There can be no assurance that developments
in any of these areas will not have an adverse effect on PhyCor's wholly-owned
HMOs or on HMOs in which PhyCor has a partial ownership interest or other
financial involvement.
Risks Inherent in Provision of Medical Services. The physician groups
with which PhyCor affiliates and the physicians participating in networks
developed and managed by PhyCor are involved in the delivery of health care
services to the public and, therefore, are exposed to the risk of professional
liability claims. Claims of this nature, if successful, could result in
substantial damage awards to the claimants which may exceed the limits of any
applicable insurance coverage. Insurance against losses related to claims of
this type can be expensive and varies widely from state to state. PhyCor does
not control the practice of medicine by affiliated physicians or the compliance
with certain regulatory and other requirements directly applicable to
physicians, physician networks and physician groups. PhyCor is indemnified
under its service agreements for claims against the physician groups, maintains
liability insurance for itself and negotiates liability insurance for the
physicians affiliated with its clinics and under its management agreements for
claims against the IPAs and physician members. Successful malpractice claims
asserted against the physician groups, the managed IPAs, or PhyCor, however,
could have a material adverse effect on PhyCor.
Impact of Health Care Reform. Although proposed federal legislation to
provide greater control on health care spending has not been enacted by
Congress to date, there can be no assurance that federal health care
legislation will not be adopted in the future. Some states are also adopting
health care programs and initiatives as a replacement for Medicaid. There can
be no assurance that the adoption of such legislation, programs or initiatives
will not have a material adverse effect on PhyCor.
Dependence on Affiliated Physicians. Substantially all of PhyCor's
revenue is derived from service or management agreements with PhyCor's
affiliated clinics, the loss of certain of which could have a material adverse
effect on PhyCor. In addition, any material decline in revenue by PhyCor's
affiliated physician groups, whether as a result of physicians leaving the
affiliated physician groups or otherwise, could have a material adverse effect
on PhyCor. PhyCor and one of its smallest affiliated physician groups, with
respect to which PhyCor has an investment representing less than 1% of PhyCor's
total assets, are in discussions which may result in the sale of the clinic
assets. While discussions are in a preliminary stage and PhyCor
does not believe the ultimate outcome of this situation will have a material
adverse effect on PhyCor, there can be no certainty at this time as to the
resolution of this matter and its impact on PhyCor.
Risk Associated with PhyCor Management Corporation ("PMC"). PMC, an
entity in which PhyCor owns a minority interest, has been organized to develop
and manage IPAs and provide development and management services to physician
organizations, including assisting in the formation of prospective PhyCor
clinics. PMC is managed by PhyCor and a PhyCor executive officer sits on PMC's
Board of Directors. PMC expects to operate at a loss during its first few years
of operations. PhyCor will recognize a pro rata portion of PMC's losses equal
to PhyCor's minority equity interest in PMC. PMC has been organized so as not
to be consolidated with PhyCor. Changes in structure or accounting rules or the
exercise by PhyCor of its option to purchase PMC's Class B Common Stock prior
to such time, if any, as PMC shall have become profitable could result in
PhyCor being required to consolidate the operations of PMC. Such consolidation
could cause PhyCor to recognize a greater
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<PAGE> 20
percentage of PMC's operating losses which could have a material adverse effect
on PhyCor. See "PhyCor, Inc.-Physician Networks."
Anti-takeover Considerations. PhyCor is authorized to issue up to
10,000,000 shares of preferred stock, the rights of which may be fixed by the
Board of Directors. In February 1994, the Board of Directors approved the
adoption of a Shareholder Rights Plan (the "Plan"). The Plan is intended to
encourage potential acquirors to negotiate with PhyCor's Board of Directors and
to discourage coercive, discriminatory and unfair proposals. PhyCor's stock
incentive plans provide for the acceleration of the vesting of options in the
event of a change in control, and PhyCor's Restated Charter provides for the
classification of its Board of Directors into three classes, with each class of
directors serving staggered terms of three years. In May 1996, PhyCor's
shareholders approved an increase in the number of authorized shares of Common
Stock to 250,000,000. Provisions in the executive officers' employment
agreements provide for post-termination compensation, including payment of
certain of the executive officers' salaries for 24 months, following a change
in control. Most physician groups may terminate their service agreements with
PhyCor in certain events, including a change in control of PhyCor which is not
approved by a majority of PhyCor's Board of Directors. The former shareholders
of North American Medical Management, Inc., an entity acquired by PhyCor in
January 1995 which develops and manages IPAs ("North American"), have the right
to repurchase the capital stock of North American in the event of a change of
control. A change in control of PhyCor also constitutes an event of default
under PhyCor's bank credit facility. The foregoing matters may, together or
separately, have the effect of discouraging or making more difficult an
acquisition or change of control of PhyCor.
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<PAGE> 21
SELECTED FINANCIAL DATA
The following tables set forth certain pro forma combined financial
information for PhyCor and for Straub and certain historical consolidated
financial information for PhyCor and for Straub.
The Merger will be treated for purposes of accounting as a purchase.
The information set forth below is derived from, and should be read in
conjunction with, the historical financial statements and the unaudited pro
forma combined financial statements and the respective notes thereto appearing
elsewhere in this Prospectus and Proxy Statement or incorporated herein by
reference.
PHYCOR PRO FORMA COMBINED(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA: 1995 1996
------------ --------------
<S> <C> <C>
Net revenue . . . . . . . . . . . . . . . . . . . . $ 850,006 $ 473,511
Direct clinic expenses . . . . . . . . . . . . . . 630,234 349,054
General corporate expenses . . . . . . . . . . . . 14,191 10,275
Rents and leases . . . . . . . . . . . . . . . . . 66,238 37,901
Interest, net . . . . . . . . . . . . . . . . . . . 20,614 10,900
Depreciation and amortization . . . . . . . . . . . 43,785 24,838
Minority interest in earnings of consolidated
partnerships . . . . . . . . . . . . . . . . . . . 6,933 5,244
--------- ---------
Earnings before income taxes . . . . . . . . . . . 68,011 35,299
Income tax expense . . . . . . . . . . . . . . . . 26,487 13,590
--------- ---------
Net earnings . . . . . . . . . . . . . . . $ 41,524 $ 21,709
========= =========
Earnings per share . . . . . . . . . . . . . . . . $ .73 $ .35
========= =========
Weighted average number of shares outstanding . . . 56,926 62,694
========= =========
BALANCE SHEET DATA: JUNE 30, 1996
-------------
Working capital . . . . . . . . . . . . . . . . . . $ 192,311
Total assets . . . . . . . . . . . . . . . . . . . 1,317,499
Long-term debt, capital leases and convertible 620,949
debentures and notes . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . 422,257
</TABLE>
_______________
(1) Assumes consummation of the Merger, acquisitions completed by PhyCor
during 1995 and 1996 and the pending acquisition of Guthrie Clinic Ltd.
and clinics in Ohio, Virginia and Florida as of the beginning of the
periods presented.
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<PAGE> 22
PHYCOR HISTORICAL
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------------------------- --------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue . . . . . . . . . . . . . . . . $90,065 $135,866 $167,381 $242,485 $441,596 $191,910 $339,144
Operating Expenses:
Clinic Salaries, wages and benefits . . 36,440 51,264 63,202 88,443 166,031 71,812 129,766
Clinic supplies . . . . . . . . . . . . 13,289 19,265 25,031 37,136 67,596 29,100 51,076
Purchased medical services . . . . . . 6,201 10,122 8,920 11,778 17,572 8,102 9,924
Other clinic expenses . . . . . . . . . 15,010 22,813 28,174 40,939 71,877 30,673 56,546
General corporate expenses . . . . . . 2,993 3,717 5,418 9,417 14,191 6,923 10,275
Rents and lease expense . . . . . . . . 7,077 13,210 16,441 23,413 36,740 15,798 28,039
Depreciation and amortization . . . . . 4,228 6,397 8,394 12,229 21,445 9,552 17,562
Interest income . . . . . . . . . . . . (348) (629) (309) (1,334) (1,816) (571) (2,037)
Interest expense . . . . . . . . . . . 3,842 4,481 3,878 3,963 5,230 2,958 6,555
Minority interest in earnings of
consolidated partnerships . . . . . . -- -- -- -- 6,933 3,210 5,244
Provision for clinic restructuring(1) . -- 18,566 -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net operating expenses . . . . 88,732 149,206 159,149 225,984 405,799 177,557 312,950
------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary item . . . . . . . 1,333 (13,340) 8,232 16,501 35,797 14,353 26,194
Income tax expense . . . . . . . . . . . . 575 405 1,092 4,826 13,923 5,560 10,085
------- -------- -------- -------- -------- -------- --------
Earnings (loss) before extraordinary
item . . . . . . . . . . . . . . . . . 758 (13,745) 7,140 11,675 21,874 8,793 16,109
Extraordinary item - tax benefit . . . . . 297 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings (loss) . . . . . . . . . . $ 1,055 $(13,745)(2) $ 7,140(3) $ 11,675(3) $ 21,874 $ 8,793 $ 16,109
======= ======== ======== ======== ======== ======== ========
Earnings (loss) before extraordinary
item per share. . . . . . . . . . . . . . . $ .05 $ (.57) $ .28 $ .32 $ .41 $ .18 $ .27
Extraordinary item per share . . . . . . . .02 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per share
Primary . . . . . . . . . . . . . . . . $ .07 $ (.57)(2) $ .28(3) $ .32(3) $ .41 $ .18 $ .27
======= ======== ======== ======== ======== ======== ========
Fully diluted . . . . . . . . . . . . . -- -- -- $ .31 -- -- --
======= ======== ======== ======== ======== ======== ========
Weighted average shares outstanding(4) 14,236 23,942 25,869 36,329 53,510 48,141 60,377
Primary . . . . . . . . . . . . . . . .
Fully diluted . . . . . . . . . . . . . -- -- -- 43,427 -- -- --
DECEMBER 31, JUNE 30,
----------------------------------------------------------- --------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Working capital . . . . . . . . . . . . . . $21,833 $ 35,920 $ 46,927 $ 80,533 $ 111,420 $158,873
Total assets . . . . . . . . . . . . . . . 92,538 141,442 171,174 351,385 643,586 886,364
Long-term obligations . . . . . . . . . . . 49,344 54,087 69,014 94,653 140,633 322,646
Total shareholders' equity . . . . . . . . 25,466 53,879 70,005 184,125 388,822 414,590
</TABLE>
_____________________
(1) Relates to the non-recurring pre-tax charge to earnings of $18.6 million
incurred in connection with the restructuring and sale of assets of the
Miller Medical Clinic, which was formerly affiliated with PhyCor.
(2) Excluding the effect of the restructuring charge described in note (1)
and a net operating loss carryforward, PhyCor's net earnings and net
earnings per share for 1992 would have been approximately $3.2 million
and $.13 per share, respectively.
(3) Excluding the effect of the utilization of a net operating loss
carryforward to reduce income taxes in 1993 and 1994, net earnings and
net earnings per share would have been $5.1 million, or $.20 per share,
and $10.2 million, or $.28 per share, in such years.
(4) Per share amounts and weighted average shares outstanding have been
adjusted for the three-for-two stock splits effected in December 1994,
September 1995 and June 1996.
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<PAGE> 23
STRAUB HISTORICAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- -------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Patient services, net . . . . . . $138,000 $143,069 $159,745 $170,989 $169,856 $86,729 $85,067
Capitation premiums earned . . . . 15,678 14,124 16,657 24,061 28,574 14,003 15,694
Other operating revenues and other 13 2,043 2,447 8,960 2,965 1,854 1,683
income . . . . . . . . . . . . . . -------- -------- -------- -------- -------- ------- -------
Total revenue . . . . . . . . . 153,694 159,236 178,849 204,010 201,395 102,586 102,444
Operating expenses:
Salaries and wages . . . . . . . . 82,645 89,027 85,513 96,031 95,801 47,736 47,983
Drugs, medical and surgical
supplies . . . . . . . . . . . . . 12,477 14,421 15,090 17,098 17,418 8,633 8,483
Taxes, other than income . . . . . 11,456 11,857 12,477 14,056 14,357 7,678 7,421
Rent . . . . . . . . . . . . . . . 7,486 9,443 10,580 10,763 10,057 3,993 4,080
Bad debts . . . . . . . . . . . . 4,631 25,437 8,669 6,809 8,462 4,982 3,281
Interest . . . . . . . . . . . . . 4,796 4,427 5,113 5,745 6,522 3,392 2,959
Depreciation and amortization . . 3,642 3,487 3,474 3,522 3,410 1,727 1,748
Provision for professional
liability claims . . . . . . . . 2,732 2,007 2,274 4,617 3,371 2,466 2,012
Other . . . . . . . . . . . . . . 33,704 31,958 32,720 41,320 39,395 20,148 21,341
-------- -------- -------- -------- -------- ------- -------
Total expenses . . . . . . . . . 163,569 192,064 175,910 199,961 198,793 100,755 99,308
Income (loss) before income taxes (9,875) (32,828) 2,939 4,049 2,602 1,831 3,136
Income tax expense (benefit) . . . (3,536) (4,570) (30) (4,278) (2,991) - 1,380
-------- -------- -------- -------- -------- ------- -------
Net income (loss) . . . . . . . . ($6,339) ($28,258 $2,969 $8,327 $5,593 $1,831 $1,756
======== ======== ======== ======== ======== ======= =======
DECEMBER 31, JUNE 30,
------------------------------------------------------ ----------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
Working capital (deficiency) . . . $ 16,043 $(33,289) $(2,006) $13,886 ($1,878) 11,120 ($1,527)
Total assets . . . . . . . . . . . 105,880 80,198 83,056 86,366 88,881 79,948 88,217
Total liabilities . . . . . . . . . 104,208 107,056 106,750 113,657 110,740 105,459 108,167
Total shareholders' equity 1,672 (26,858) (23,694) (27,291) (21,859) (25,511) (19,950)
(deficit) . . . . . . . . . . . . .
</TABLE>
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<PAGE> 24
GENERAL INFORMATION
This Prospectus and Proxy Statement is furnished to the Straub
Shareholders in connection with the solicitation of proxies by the Board of
Directors of Straub for use at the Special Meeting anticipated to be held at
the Thomas Square Conference Room at Straub located at 846 South Hotel Street,
Honolulu, Hawaii on or about December ___, 1996, and at any adjournment
thereof, to consider and vote upon, as separate matters, (1) a Plan of
Corporate Separation and Reorganization pursuant to which (i) the assets and
liabilities of Straub constituting the Medical Practice will be transferred to
New Straub P.C., (ii) New Straub P.C. Common Stock will be distributed, pro
rata, to the holders of Straub Common Stock, and (iii) the holders of Series C
Preferred Stock will exchange their shares for an equivalent number of shares
of New Straub P.C. Series A Preferred Stock; and (2) the Agreement of Merger
pursuant to which Straub, following the Spin-Off Transaction, will be merged
with and into PhyCor, and the holders of Straub Common Stock will exchange
their shares for shares of PhyCor Common Stock.
The information contained in this Prospectus and Proxy Statement with
respect to PhyCor and Straub has been provided by the respective entities. The
Board of Directors of Straub currently anticipates that this Prospectus and
Proxy Statement and the enclosed proxy will be sent to the Straub Shareholders
on or about November __, 1996.
THE BOARD OF DIRECTORS OF STRAUB BELIEVES THAT THE SPIN-OFF TRANSACTION
AND THE MERGER ARE IN THE BEST INTERESTS OF STRAUB AND THE STRAUB SHAREHOLDERS
AND RECOMMENDS A VOTE FOR THE APPROVAL OF THE SPIN-OFF TRANSACTION AND THE
MERGER.
PROXIES
Shares of Straub Common Stock and Series C Preferred Stock, represented
by properly executed proxies, will be voted at the Special Meeting in
accordance with the instructions on the proxies. The form of Proxy is set forth
as Annex C hereto. Shares of Straub Common Stock will be entitled to vote with
respect to the Spin-Off Transaction. Shares of Straub Common Stock and Series C
Preferred Stock, voting as a single class, will be entitled to vote with
respect to the Merger. If no instructions are indicated, the shares will be
voted FOR approval of the Spin-Off Transaction and the Merger. It is not
anticipated that additional business will be conducted at the Special Meeting,
and it is not anticipated that other matters will be brought before the Special
Meeting. If, however, other appropriate matters are duly brought before the
Special Meeting, the persons appointed as proxies will have discretion to vote
or act on those matters according to their best judgment.
A Straub Shareholder executing and returning a proxy has the power to
revoke it at any time before it is voted. A Straub Shareholder who wishes to
revoke a proxy can do so by executing a later dated proxy and delivering it to
the Secretary of Straub prior to the vote, delivering written notice of the
revocation to the Secretary of Straub prior to the vote, or appearing in person
at the Special Meeting and voting in person.
SOLICITATION OF STRAUB PROXIES
Straub will bear the costs of soliciting proxies for the Special
Meeting, except that PhyCor will pay the printing expenses incurred in
connection with the preparation of this Prospectus and Proxy Statement.
RECORD DATE AND VOTE REQUIRED
It is currently anticipated that holders of record of Straub Common
Stock and Series C Preferred Stock at the close of business on November ___,
1996 will be entitled to notice of, and to vote at, the Special Meeting and any
adjournment thereof. Shares of Straub Common Stock will be entitled to vote
with respect to the Spin-Off Transaction. Although the shares of the Series
C Preferred Stock are normally non-voting, holders of shares of the Series C
Preferred Stock are entitled to vote, as a single class together with the
Straub Common Stock, on the Merger at the Special Meeting. As of October 31,
1996, there were 2,074,976 shares of Straub Common Stock issued and outstanding
and 10,199,288 shares of Straub Series C Preferred Stock issued and
outstanding. Each share of Straub Common Stock and Series C Preferred Stock is
entitled to one vote at the Special Meeting on those matters on which such
shares may be voted. In accordance with Hawaii law, the affirmative vote of at
least 75% of the issued and outstanding shares of (i) Straub Common Stock is
required to approve the Spin-Off Transaction and (ii) Straub Common Stock and
Series C Preferred Stock, voting as a single class, is required to approve the
Merger. Shares of Straub Series B Preferred Stock will be redeemed by Straub
for cash prior to the Record Date and such shares will not be voted at the
Special Meeting. See "Merger -- Redemption of Straub Series B Preferred Stock."
20
<PAGE> 25
MERGER
This section of the Prospectus and Proxy Statement describes the
material aspects of the proposed Spin-Off Transaction and the subsequent Merger
of Straub with and into PhyCor. With respect to the terms of the Plan of
Corporate Separation and Reorganization and Agreement of Merger, the following
brief description summarizes the material terms of the agreements and is
qualified in its entirety by reference to the Plan of Corporate Separation and
Reorganization, which is set forth as Annex H to this Prospectus and Proxy
Statement, and the Agreement of Merger, which is set forth as Annex D to this
Prospectus and Proxy Statement, and are incorporated by reference into this
Prospectus and Proxy Statement. The brief description which follows also
summarizes the material terms of the proposed Service Agreement to be entered
into between PhyCor-Hawaii and New Straub P.C. and is qualified in its entirety
by reference to the Service Agreement, the form of which is set forth as Annex
E to this Prospectus and Proxy Statement. All Straub Shareholders are urged to
read the Plan of Corporate Separation and Reorganization, Agreement of Merger
and Service Agreement.
GENERAL
At the Special Meeting, the holders of (i) Straub Common Stock will be
asked to consider and vote in favor of the Spin-Off Transaction and (ii) Straub
Common Stock and Series C Preferred Stock, voting as a single class, will be
asked to consider and vote in favor of the Merger. If the Spin-Off Transaction
is approved by the required vote of the holders of Straub Common Stock and
other conditions in the Plan of Corporate Separation and Reorganization are
satisfied, (i) the assets of Straub's clinic and hospital businesses designated
to be transferred to New Straub P.C. on Schedule 2.2 of the Plan of Corporate
Separation and Reorganization (including the leases, the capital stock of New
Straub P.C. subsidiaries and the real property set forth on Schedule 2.2
thereto), subject to the liabilities allocable to the clinic and hospital
businesses and designated to be assumed by New Straub P.C. on Schedule 2.2
thereto, will be transferred to New Straub P.C., (ii) the New Straub P.C.
Common Stock will be distributed, pro rata, to the holders of Straub Common
Stock, and (iii) the holders of Series C Preferred Stock will exchange their
shares for an equivalent number of shares of New Straub P.C. Series A Preferred
Stock. New Straub P.C. will be the entity through which health care services
will be delivered and, as a condition to the Merger, each of the physicians
will enter into a new employment agreement with New Straub P.C. containing the
restrictive covenant provisions described in the Service Agreement. If the
Agreement of Merger and Plan of Merger are approved by the vote of the Straub
Shareholders and other conditions to the Merger contained in the Agreement of
Merger are satisfied, (i) the Spin-Off Transaction will be consummated, (ii)
New Straub P.C. will enter into the Service Agreement with PhyCor-Hawaii and
receive $32,083,000 in consideration for entering into the Service Agreement,
and (iii) on the effective date of the Merger, each outstanding share of Straub
Common Stock as to which dissenters' rights have not been perfected will
automatically convert into the right to receive PhyCor Common Stock based upon
the conversion ratio described in the Agreement of Merger. See "Exchange of
Straub Common Stock; Issuance of PhyCor Common Stock." Thereafter, the Straub
Shareholders will no longer maintain any interest in, or rights as shareholders
of, Straub. PhyCor will not issue any fractional shares in connection with the
exchange of Straub Common Stock into PhyCor Common Stock but will deliver cash
in lieu thereof. After consummation of the Merger, all of the holders of Straub
Common Stock will surrender all certificates evidencing their Straub Common
Stock in accordance with the procedures described below and as described in the
Agreement of Merger. See "Exchange of Straub Common Stock; Issuance of PhyCor
Common Stock."
MERGER BACKGROUND
In February 1996, PhyCor and Straub began discussions regarding a
possible transaction between PhyCor and Straub. Between March and September
1996, the advisors representing Straub, along with Straub executive management,
met with PhyCor management on several occasions to discuss a potential
transaction. Straub was also in discussions with other unrelated third parties
regarding possible acquisitions of or other transactions with Straub. In
evaluating Straub's alternatives, Straub retained Morrison & Foerster, LLP,
H&Q, Ernst & Young, LLP, Torkildson, Katz, Fonseca, Jaffe, Moore &
Hetherington, Attorneys At Law, a Law Corporation, and Coopers & Lybrand, LLP,
to analyze the various proposals and alternative structures that would be
beneficial to Straub Shareholders. In August and September 1996, PhyCor
management made several detailed presentations and proposals to Straub
management and Straub's Board of Directors which outlined, among other things,
the terms and conditions of a transaction between the two companies. PhyCor
management also made several presentations to Straub Shareholders essentially
describing PhyCor's vision and terms and conditions of how it would work with
Straub physicians following consummation of the Merger with PhyCor. During this
period, Straub management
21
<PAGE> 26
obtained approval from its Board of Directors to complete negotiations with
PhyCor management, authorizing management to negotiate a transaction that
followed the general outlines of a tax-deferred spin-off and merger. The
negotiations were completed by Straub management and their team of advisors.
Subsequent to the completion of negotiations, Straub management and advisors
presented for review and approval to the Straub Board of Directors the proposed
Agreement of Merger, Service Agreement and Administrative Services Agreement.
On October 1, 1996, the Board of Directors of Straub voted unanimously in favor
of approving the terms of the Agreement of Merger, Service Agreement and
Administrative Services Agreement. A public announcement of the Merger was made
by Straub and PhyCor on October 2, 1996. Prior to the Record Date, Straub
management and advisors presented for review and approval to the Straub Board
of Directors the proposed Plan of Corporate Separation and Reorganization.
REASONS FOR THE MERGER
The Board of Directors of Straub believes that the consideration to be
received by the Straub Shareholders in the Spin-Off Transaction and the Merger
is fair to such holders from a financial point of view and that the terms of
the Spin-Off Transaction and the Merger are fair to, and in the best interests
of, Straub and the Straub Shareholders. In determining the amount and nature of
the consideration to be received by the Straub Shareholders, the Board of
Directors of Straub considered the history, financial condition and results of
operations of Straub and PhyCor, the market value of the PhyCor Common Stock
and the prospects of Straub both as an independent entity and as an affiliated
entity of PhyCor, and the value of the assets and liabilities related to the
Medical Practice transferred to New Straub P.C. in connection with the Spin-Off
Transaction.
Straub's Board of Directors recognizes that Straub has a substantial
and immediate need for additional capital. Additional capital is needed for
working capital to increase the number of physicians affiliated with Straub, to
expand current facilities in the State of Hawaii, to increase the scope of
clinic and hospital services and to implement a new HMO product in Hawaii. It
is anticipated that these initiatives will have the net effect of substantially
increasing the patient days and admissions to the hospital portion of the
enterprise, although there can be no assurance that an increase in patient days
or admissions will occur. The Board of Directors of Straub believes that
strategic primary care practice acquisitions are essential to the growth of the
practice of Straub because of current market, competitive and regulatory
conditions. Such conditions, together with anticipated health care reforms,
require significantly increased levels of financial and management expertise,
and the Board of Directors of Straub believes PhyCor can provide such
expertise.
The Board of Directors of Straub believes that the health care industry
is undergoing dramatic changes in the delivery and reimbursement of medical
services, and recently proposed health care reform proposals contain measures
to control both private and public spending on health care, as well as to
provide expanded access to the health care system. Providers of health care,
including Straub, are increasingly facing intense competition and must provide
quality health care in a cost effective manner in order to succeed. To respond
to these increasing demands, the Board of Directors of Straub believes that
PhyCor provides the organizational model which best responds to the trends in
health care reform by assisting physicians in delivering quality medical
services in a cost effective manner.
The PhyCor Board of Directors believes that the greater financial
resources of PhyCor, its organizational model and the combination of Straub and
PhyCor as a result of the Merger will provide the Straub Shareholders an
opportunity to better and more effectively serve the medical needs of the
citizens of Hawaii. The PhyCor Board of Directors also believes that Straub,
known for its provision of quality medical care to patients in Hawaii, provides
an opportunity for PhyCor to affiliate with an outstanding physician group with
a national reputation.
An important consideration by the Board of Directors in recommending
the Spin-Off Transaction and the Merger is management's concern that current
physician compensation levels would likely decline significantly in the event
that Straub was unable to complete the Spin-Off Transaction and the Merger.
Because the Straub Board of Directors believes that the maintenance of
appropriate physician compensation levels is critical to attracting and
retaining qualified physicians, the Board of Directors considered the
anticipated impact of the Spin-Off Transaction and the Merger on physician
compensation levels. Assuming the proposed Spin-Off Transaction and the Merger
are consummated, Straub management currently anticipates that if there is a
shortfall in the amount of revenue available for physician compensation, such
shortfall may be offset, in whole or part, by, among other things, reducing
Clinical/Hospital Expenses (as such term is defined in the Service Agreement,
see "Merger -- Service Agreement") and by taking other actions in conjunction
with PhyCor-Hawaii to ensure the availability of additional
22
<PAGE> 27
capital. There can be no assurance that any such shortfall will be offset
sufficiently to maintain current physician compensation levels or that any such
shortfall will not materially exceed current estimates.
In determining to enter into the Agreement of Merger, the Straub Board
of Directors also considered several factors, including, but not limited to,
(i) Straub's need for capital and PhyCor's access to capital, (ii) PhyCor's
management and practice asset acquisition expertise, (iii) Straub's desire to
acquire the assets of primary care practices in the area, (iv) changes in the
health care industry, (v) the amount of the consideration being paid to the
holders of Straub Common Stock, (vi) the fact that the PhyCor Common Stock
which will be exchanged for the Straub Common Stock will have greater liquidity
than the Straub Common Stock, (vii) the tax-free nature of the Spin-Off
Transaction and the Merger, (viii) the value of the assets and liabilities
related to the Medical Practice transferred to New Straub P.C. in the Spin-Off
Transaction, and (ix) the common goals and desires shared by PhyCor and the
Straub Shareholders in providing quality health care services in Hawaii. Of
these factors, Straub's need for capital and PhyCor's management expertise were
the most important considerations. The Board of Directors of Straub concluded
that PhyCor offered the necessary capital and expertise to accomplish many of
the goals of the Straub Shareholders and that the consideration to be received
by Straub Shareholders is fair.
Affiliates and non-affiliates of Straub will receive the same benefits
and be subject to the same consequences as a result of the consummation of the
Merger. In connection with the Merger, the holders of Straub Common Stock are
entitled to receive shares of PhyCor Common Stock in the same proportion as
their ownership in Straub Common Stock. Any resales of the shares of PhyCor
Common Stock received by Affiliates of Straub must be made in compliance with
Rule 145 of the Securities Act. With the exceptions of Blake E. Waterhouse and
Louise L. Liang, who are expected to become the Chief Executive Officer and
Chief Operating Officer, respectively, of PhyCor-Hawaii, no officer or director
of Straub or New Straub P.C. will be an employee, officer or director of PhyCor
following the consummation of the Merger. The officers and directors of Straub
as a group hold approximately 8.2% of the Straub Common Stock and 12.3% of the
Series C Preferred Stock and, therefore, a significant number of the
non-affiliated Straub Shareholders must vote in favor of the Spin-Off
Transaction and the Merger for their approval.
OPINION OF STRAUB INVESTMENT BANKER
The Board of Directors of Straub retained H&Q to act as its financial
advisor in connection with (i) the formation of New Straub P.C. in connection
with the Spin-Off Transaction, (ii) the proposed Merger and (iii) the
consideration to be received by New Straub P.C. at the time it enters into the
Service Agreement with PhyCor-Hawaii. See "Spin-Off Transaction." The Spin-Off
Transaction and the Merger are hereinafter collectively referred to as the
"Transaction."
The Board of Directors of Straub selected H&Q after interviewing other
investment banking firms. Straub's Board of Directors selected H&Q as its
financial advisor because H&Q is an internationally recognized investment
banking firm, which, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, corporate restructurings,
strategic alliances, secondary distributions of listed and unlisted securities,
private placements and valuations for, corporate and other purposes.
H&Q rendered its oral opinion (subsequently confirmed in writing) on
October 1, 1996 to the Board of Directors of Straub that, as of such date, the
consideration to be received by the holders of Straub Common Stock in the
Transaction is fair to such holders from a financial point of view. A copy of
the H&Q opinion dated October 1, 1996 which sets forth the assumptions made,
matters considered, the scope and limitations of the review undertaken and the
procedures followed by H&Q is attached as Annex A to this Prospectus and Proxy
Statement. Straub Shareholders are advised to read the H&Q Opinion in its
entirety.
No limitations were placed on H&Q by the Board of Directors of Straub
with respect to the investigation made or the procedures followed in preparing
and rendering the H&Q Opinion. H&Q was not requested to and did not solicit
third party indications of interest in acquiring all or any part of Straub.
Straub Shareholders should note that the opinion expressed by H&Q was provided
for the information of the Board of Directors in its evaluation of the
Transaction and does not constitute a recommendation to any Straub Shareholder
as to how such Straub Shareholder should act with respect to the Transaction.
23
<PAGE> 28
In connection with its opinion, H&Q has, among other things, (i)
reviewed the publicly available consolidated financial statements of Straub for
recent years and interim periods to date and certain other relevant financial
and operating data of Straub made available to H&Q from the internal records of
Straub; (ii) discussed with certain members of the management of Straub the
business, financial condition and prospects of Straub; (iii) reviewed certain
financial and operating information, including certain projections provided by
the management of Straub, relating to Straub, and discussed such projections
with certain members of the management of Straub; (iv) reviewed publicly
available consolidated financial statements of PhyCor for recent years and
interim periods to date; (v) discussed with certain members of the management
of PhyCor the business, financial condition and prospects of PhyCor; (vi)
reviewed the recent reported prices and trading activity for the PhyCor Common
Stock and compared such information and certain financial information of Straub
and PhyCor with similar information for certain other companies engaged in
businesses H&Q considered comparable to those of Straub and PhyCor; (vii)
reviewed the terms, to the extent publicly available, of certain comparable
transactions; (viii) reviewed the Agreement of Merger; (ix) discussed the tax
and accounting treatment of the proposed Transaction with Straub and Straub's
accountants and lawyers; and (x) performed such other analyses and examinations
and considered such other information, financial studies, analyses and
investigations and financial, economic and market data as they deemed relevant.
In connection with its review, H&Q assumed and relied, without
independent verification, upon the accuracy and completeness of all of the
information concerning Straub and PhyCor considered in connection with their
review of the Transaction. H&Q was informed, and has assumed, that the
consummation of the Spin-Off Transaction and the Merger are dependent on each
other. Further, H&Q has noted that the Agreement of Merger contains a condition
precedent to consummation of the Merger, among other conditions to
consummation, that the execution of the Service Agreement shall have taken
place. H&Q did not prepare or obtain any independent evaluation or appraisal of
any of the assets or liabilities of Straub or PhyCor, nor did H&Q conduct a
physical inspection of the properties or facilities of Straub or PhyCor. With
respect to financial forecasts and projections made available to H&Q and used
in its analysis, H&Q has assumed that they were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the expected
future financial performance of Straub on a stand alone basis and as merged
with PhyCor. H&Q assumed that neither Straub nor PhyCor was party to any
pending transactions, including external financings, recapitalizations or
merger discussions, other than the Transaction and those in the ordinary course
of conducting their respective businesses. H&Q's opinion was necessarily based
upon market, economic, financial and other conditions as they existed and could
be evaluated as of the date of the H&Q Opinion. H&Q expressed no opinion as to
the price at which PhyCor Common Stock would trade subsequent to the
Transaction.
The summary set forth below does not purport to be a complete
description of the analyses performed by H&Q. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. H&Q believes that its
analyses and the summary set forth below must be considered as a whole and that
selecting portions of its analyses could create an incomplete view of the
evaluation process underlying the analyses set forth in H&Q's opinion. In
performing its analyses, H&Q made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of Straub and PhyCor. The analyses performed by
H&Q are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, analyses relating to the values of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold.
The following are some of the financial and comparative analyses which
were performed by H&Q in arriving at its opinion as to the fairness of the
consideration to be received in the Transaction.
Analysis of Selected Merger Transactions. H&Q reviewed certain publicly
available financial data related to 17 of PhyCor's previous acquisitions of the
assets of physician clinics (the "Selected Transactions"). H&Q derived from
analysis of these transactions a range of values for aggregate consideration as
a multiple of each of the following financial data (collectively, the "Selected
Financial Benchmarks"): (i) clinic net collected revenue, (ii) earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the twelve-month
period preceding the acquisition, (iii) EBITDA for the 12 months following the
acquisition, including adjustments for synergies based on actual reported
amounts (where available) or an assumed 5% improvement in operating profit
(where actual results were not available), (iv) earnings before interest and
taxes ("EBIT") for the twelve-month
24
<PAGE> 29
period preceding the acquisition, and (v) EBIT for the 12 months following the
acquisition, including adjustments for synergies based on actual reported
amounts (where available) or an assumed 5% improvement in operating profit
(where actual results were not available). The analysis showed that the implied
enterprise value and the implied common equity value in the Transaction would
be substantially higher than the average implied enterprise value and the
average implied common equity value in the Selected Transactions, in each case
expressed as a multiple of the Selected Financial Benchmarks.
In addition, H&Q reviewed certain publicly-available information in
connection with the acquisition of certain clinics and physician practice
management companies by physician practice management companies other than
PhyCor. The analysis showed that the implied enterprise value and the implied
common equity value in the Transaction would be lower than the average implied
enterprise value and the average implied common equity value in the Selected
Transactions, in each case expressed as a multiple of the Selected Financial
Benchmarks.
Comparable Company Analysis. Using publicly-available information, H&Q
reviewed selected financial data, including revenues, historical and projected
earnings per share and historical and projected EBITDA for several publicly
traded physician practice management companies. Specifically, H&Q included in
its review several primary care physician practice management companies (AHI
Healthcare Systems Inc., Coastal Physician Group Inc., Emcare Holdings Inc.,
FPA Medical Management Corp., Medpartners Inc., PhyCor and Sheridan Healthcare
Inc.) and several specialty care physician practice management companies
(American Oncology Resources Inc., Imphynet Medical Management Inc., Medcath
Inc., Occusystems, Inc., Pediatrix Medical Group, Inc., Physician Reliance
Network, Physician's Resource Group Inc. and Response Oncology). These
companies collectively are referred to as the "Public Company Group." H&Q
calculated, among other things, the current market value of the Public Company
Group as a multiple (the "P.E. Multiple") of the last 12 months earnings per
share and estimated 1996 and 1997 earnings per share, as well as enterprise
value (defined as market value plus debt, capitalized leases, redeemable
preferred stock and minority interest less cash and marketable securities).
This analysis indicated that PhyCor's last 12 months', estimated 1996 and
estimated 1997 P.E. Multiples were 74.2, 61.9 and 45.4, respectively, compared
to a mean of 62.0, 37.7 and 29.9, respectively, for the Public Company Group.
In addition, H&Q applied the average revenue, EBITDA and EBIT multiples for the
Public Company Group to the corresponding financial data for Straub (assuming
the Transaction did not occur), applied a 50% discount to the resulting implied
enterprise valuation and implied equity valuation (assumed to represent the
discount applicable to a smaller, privately held company) and compared these
results with the implied enterprise valuation and implied equity valuation for
Straub (assuming the Transaction did not occur) in the Transaction. This
analysis indicated that the implied enterprise valuation and implied equity
valuation in the Transaction would be somewhat lower than the equivalent
figures for the Public Company Group, even after the 50% smaller private
company discount.
Discounted Cash Flow Analysis. H&Q estimated the present value of the
future streams of free cash flow that Straub would produce through the year
2001, assuming Straub performed in accordance with the financial projections
provided by Straub (assuming the Transaction did not occur). Free cash flows
were calculated as the net income of Straub plus projected depreciation and
amortization less projected net repayment of long-term debt, projected net
changes in non-cash working capital and projected capital expenditures. H&Q
estimated the terminal values of Straub (assuming the Transaction did not
occur) by applying multiples ranging from 6 to 9 times EBIT. The free cash
flow streams were discounted to present values using discount rates ranging
from 14% to 18%. This discounted cash flow analysis indicated a net
present value of Straub (assuming the Transaction did not occur) of
approximately $34,618,000 to $108,633,000.
Stock Price and Volume Analysis. H&Q examined the trading history of
the PhyCor Common Stock for the period from September 26, 1994 to September 26,
1996. H&Q also examined the volume of shares of PhyCor Common Stock traded
during these periods.
In the ordinary course of business, H&Q acts as a market maker and
broker in the publicly traded securities of PhyCor and receives customary
compensation in connection therewith, and also provides research coverage for
PhyCor. In the ordinary course of business, H&Q actively trades in the equity
securities of PhyCor for its own account and for the accounts of its customers
and, accordingly may at any time hold a long or short position in such
securities. H&Q may in the future provide additional investment banking or
other financial advisory services to PhyCor.
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Pursuant to an engagement letter dated May 19, 1996, Straub agreed to
pay H&Q a fee for its services in providing financial advice with respect to
the proposed Merger, Spin-Off Transactions and Service Agreement and for
providing the H&Q Opinion, in accordance with the following schedule: (i) an
initial retainer of $50,000 payable upon execution of the engagement letter,
which fee will be netted against fees payable as a part of the engagement; (ii)
a fee, payable in cash upon delivery of the H&Q Opinion (orally or in writing,
whichever occurs first), equal to $250,000; and (iii) an additional fee,
payable in cash at the closing of the Merger, equal to $250,000 plus 3% of the
amount, if any, by which the aggregate consideration received in connection
with the proposed Merger, Spin-Off Transaction and Service Agreement exceeds
$130,000,000. The actual fee will vary slightly depending upon the price of
PhyCor Common Stock immediately prior to the closing of the Transaction. Straub
has also agreed to reimburse H&Q for its out-of-pocket expenses, including fees
and disbursements of its counsel, which reimbursement shall not exceed $25,000
without the consent of Straub, and to indemnify H&Q against certain liabilities
arising out of or in connection with the services rendered by H&Q under the
engagement letter.
REDEMPTION OF STRAUB SERIES B PREFERRED STOCK
On October 1, 1996, the date the Agreement of Merger was executed, 38
Straub Shareholders each held 25 shares of Series B Preferred Stock, $100 par
value per share, of Straub. Pursuant to the Agreement of Merger, these shares
will be redeemed by Straub prior to the Record Date for $100 per share, or an
aggregate of $95,000, in accordance with Straub's Articles of Incorporation. On
October 16, 1996, pursuant to an action taken by the Straub Board of Directors
on October 1, 1996, Straub issued a letter to all holders of Series B Preferred
Stock notifying them of Straub's determination to redeem such shares prior to
the anticipated Record Date.
THE SPIN-OFF TRANSACTION
The Spin-Off Transaction is required as a condition to the Merger
because PhyCor cannot acquire the Medical Practice in the State of Hawaii. If
the Spin-Off Transaction is approved by the affirmative vote of the holders of
at least 75% of the issued and outstanding shares of Straub Common Stock, and
other conditions in the Plan of Corporate Separation and Reorganization are
satisfied, (i) the assets of Straub's clinic and hospital businesses designated
to be transferred to New Straub P.C. on Schedule 2.2 of the Plan of Corporate
Separation and Reorganization (including the leases, the capital stock of New
Straub P.C. subsidiaries and the real property set forth on Schedule 2.2
thereto), subject to the liabilities allocable to the clinic and hospital
businesses and designated to be assumed by New Straub P.C. on Schedule 2.2
thereto, will be transferred to New Straub P.C., (ii) the New Straub P.C.
Common Stock will be distributed, pro rata, to the holders of Straub Common
Stock, and (iii) the holders of Series C Preferred Stock will exchange their
shares for an equivalent number of shares of New Straub P.C. Series A Preferred
Stock. Straub will also license the use of the name "Straub" to New Straub P.C.
New Straub P.C. will be the entity through which health care services will be
delivered.
All Straub Shareholders have dissenters' rights pursuant to Hawaii law
in connection with the Spin-Off Transaction. See "Rights of Dissenting Straub
Shareholders." It is a condition to the consummation of the Spin-Off
Transaction that holders of Straub Common Stock perfecting dissenters' rights
with respect to the Spin-Off Transaction and the Merger collectively own not
more than 5% of the issued and outstanding Straub Common Stock and holders of
Series C Preferred Stock perfecting dissenters' rights with respect to the
Spin-Off Transaction and the Merger collectively own not more than 5% of the
issued and outstanding Series C Preferred Stock.
It is a condition to the consummation of the Spin-Off Transaction that
Straub receive an opinion of its special counsel, Morrison & Foerster LLP, that
the Spin-Off Transaction will be tax-free to the Straub Shareholders under
Sections 355 and 368(a)(1)(D) of the Code. See "Certain Federal Income Tax
Consequences." The opinion of Morrison & Foerster LLP will be delivered for the
benefit of the Board of Directors of Straub and the Straub Shareholders, and
the opinion will provide expressly that it may not be relied upon by PhyCor in
its own right or as successor to Straub in the Merger.
In connection with the Spin-Off Transaction, all physicians of New
Straub P.C. shall enter into new employment agreements with New Straub P.C.
containing restrictive covenant provisions. These restrictive covenant
provisions will provide that upon termination of the employment agreement for
any reason and for eighteen (18) months thereafter (or such shorter period as
provided in the Service Agreement if appropriate notice of termination is
given), physicians may not compete with Straub within a 10-mile radius of such
physician's primary
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practice location or pay liquidated damages as described in the Service
Agreement to be released from such restrictive covenant.
The Articles of Incorporation and the Bylaws of New Straub P.C., in
substantially the forms as will be in effect immediately after the consummation
of the Spin-Off Transaction and the Merger, are attached to this Prospectus and
Proxy Statement as Annex F and Annex G, respectively. New Straub P.C.'s
Articles of Incorporation will be substantially similar to those of Straub,
except for differences in the number of shares of authorized capital stock.
There are material differences between the Bylaws of Straub and New
Straub P.C. Straub's Bylaws currently provide for a board of directors
consisting of nine members serving staggered three year terms, all of whom are
elected at-large by the shareholders. The Bylaws of New Straub P.C. will
provide for an initial board of directors consisting of ten members. Following
the annual shareholders' meeting, in 1997, the board of directors will be
reduced to eight members serving staggered four year terms, four of whom shall
be general internal medicine, family practice, general practice, pediatrician,
OB-GYN, emergency room, occupational medicine or hospital service physicians
("Group A physicians") and the other four of whom shall be physicians
practicing primarily in other fields ("Group B physicians"). The Group A
physicians will provide nominees for any vacant Group A physician director
positions, and the Group B physicians will provide nominees for any vacant
Group B physician director positions, provided, however, that the shareholders
may vote on the election of every director, regardless of whether the
shareholder is a Group A physician or a Group B physician. The Bylaws of New
Straub P.C. also contain provisions for the staggering of the terms of the
initial board of directors.
The Bylaws of Straub currently provide for the election of a
CEO/President and Chairman of the Board/Vice President, each of whom serves for
an indefinite term and also serves as a non-voting, ex-officio member of the
board of directors. The Bylaws of Straub also provide for the election of a
Secretary for a term of one year and a Treasurer for a term of three years. The
Bylaws of New Straub P.C. will provide for the election of a President, Vice
President, Secretary and Treasurer for terms of two years each.
The Bylaws of New Straub P.C. also provide for the appointment of its
representatives to serve on the Joint Policy Board. See "Service Agreement."
In order to amend the Bylaws of Straub, the Bylaws currently require a
vote of the shareholders holding a majority of the voting power. The Bylaws of
New Straub P.C. will require a vote of the shareholders holding at least 75% of
the voting power in order to amend the Bylaws.
Other nonmaterial differences exist between the Articles of
Incorporation and Bylaws of Straub and New Straub P.C. Straub Shareholders
should read carefully the Articles of Incorporation and Bylaws of New Straub
P.C. attached to this Prospectus and Proxy Statement.
SERVICE AGREEMENT
Concurrently with the consummation of the Merger, PhyCor-Hawaii and New
Straub P.C. will enter into a 40-year Service Agreement. Pursuant to the
Service Agreement, PhyCor-Hawaii will be responsible for the day-to-day
operational and financial management of New Straub P.C. and provide a variety
of management services and access to capital resources. For services rendered,
PhyCor-Hawaii will receive a management fee equal to reimbursement of expenses
plus 18% of the result of "Net Revenues," less (i) "Clinic/Hospital Expenses,"
as such terms are defined in the Service Agreement, subject to certain
reductions based upon interest expense incurred by New Straub P.C. from certain
capital loans from PhyCor-Hawaii as well as any excess operating income of
PhyCor-Hawaii from Net Revenues generated by PhyCor-Hawaii (excluding the
management fee) and (ii) the amounts related to the real property discussed
below.
In general, Clinic/Hospital Expenses will include the costs and
expenses of maintaining and operating the medical practice and business of the
clinic and hospital. Any obligation of PhyCor-Hawaii or New Straub P.C. arising
from severance payments to any employee of PhyCor-Hawaii, Straub or New Straub
P.C. who terminates employment on or after the effective date of the Merger
will be a Clinic/Hospital Expense. For purposes of calculating PhyCor-Hawaii's
fee, the Clinic/Hospital Expenses will not include physician and certain
employee salaries and benefits for New Straub P.C., separate legal and
accounting expenses of New Straub P.C., and certain other costs. Accordingly,
these additional expenses will be payable by New Straub P.C. from revenues
remaining after payment of Clinic/Hospital Expenses and the management fees of
PhyCor-Hawaii.
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Upon execution of the Service Agreement, New Straub P.C. will receive
from PhyCor in cash $32,083,000 in consideration for entering into the Service
Agreement. New Straub P.C. will use the payment to pay liabilities assumed in
the Spin-Off Transaction and for other corporate purposes. There is no present
plan or intention to distribute any of the payment to the shareholders of New
Straub P.C.
Pursuant to the Service Agreement, PhyCor-Hawaii will also agree to
make working capital and other loans to New Straub P.C. to be used in
connection with the operations of New Straub P.C. Any such loans would be
secured by the accounts receivable and all other non-real estate assets of New
Straub P.C. and would bear interest at variable rates described in the Service
Agreement.
Each year, the parties will calculate one-half the amount of (i)
PhyCor-Hawaii's Earnings Before Income Taxes times (ii) 61% (which percentage
represents the difference between 100% and PhyCor's effective tax rate) plus
cash flow relating to recognition of depreciation expense and amortization
expense (other than with respect to real estate) resulting from mergers
contemplated in the Service Agreement. Interest expense with respect to such
amounts will be deducted from the management fee payable to PhyCor-Hawaii
pursuant to the Service Agreement.
The parties to the Service Agreement will designate three members each
to serve on the Joint Policy Board, which shall be responsible for developing
management and administrative policies for the overall operation of New Straub
P.C. The Joint Policy Board will have the responsibility of reviewing annual
budgets, approving certain capital expenditures, approving ancillary services
and reviewing and adopting fee schedules for all physician and ancillary
services.
Pursuant to the Service Agreement, PhyCor-Hawaii will employ the Straub
System Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Development Officer. All other personnel necessary to carry out the
duties of PhyCor-Hawaii under the Service Agreement or reasonably necessary for
the conduct of New Straub's operations will be employees of New Straub, but
will be under the supervision of the Straub System Chief Executive Officer or
his designee.
Pursuant to the Service Agreement, PhyCor-Hawaii shall have access to
the facilities and premises of New Straub P.C. During the first year of the
Service Agreement, in calculating PhyCor's fee, $4,707,121 shall be deducted
from the Net Revenues generated by New Straub P.C. in 12 equal monthly amounts
and shall be retained by New Straub P.C. on account of the facility and
premises owned by it. For years after the first year, amounts related to the
facility and premises set forth in the Service Agreement will also be deducted
from Net Revenues.
In connection with the Service Agreement, New Straub P.C. agrees to
indemnify PhyCor-Hawaii and the officers, directors, shareholders and employees
of PhyCor-Hawaii from liability arising from the acts of New Straub P.C. or the
shareholders, agents, employees and/or subcontractors of New Straub P.C. New
Straub P.C. would also agree to guarantee the payment of, collect and indemnify
PhyCor-Hawaii against liabilities asserted against PhyCor as a result of
PhyCor's assumption of liabilities in connection with the Merger and would
indemnify PhyCor-Hawaii for any claim for medical malpractice, including
amounts in excess of policy limits. PhyCor-Hawaii would indemnify New Straub
P.C. for liabilities arising from the acts of PhyCor-Hawaii or the officers,
shareholders, directors or employees of PhyCor-Hawaii. See "Expenses and
Indemnification."
The Service Agreement could be terminated prior to its expiration upon
the filing of a petition in voluntary bankruptcy or an assignment for the
benefit of creditors by either party, the material breach of the terms of the
Service Agreement by either party or a change in control of PhyCor which is not
approved by PhyCor's Board of Directors. In the event of the termination of
the Service Agreement, New Straub P.C. would purchase from PhyCor-Hawaii at
book value the "service agreement costs," as such term is referenced in the
Service Agreement, the name "Straub" (which is being licensed to New Straub
P.C. by Straub) and any other intangible assets as well as all leasehold
improvements and equipment. In addition, New Straub P.C. would purchase any
real estate owned by PhyCor and associated with New Straub P.C. at the greater
of the appraised fair market value or book value and would assume all debt and
contracts of PhyCor-Hawaii which related to the operation of New Straub P.C.
The purchase price for the assets purchased upon termination of the Service
Agreement would be reduced by the debt and contracts of PhyCor-Hawaii assumed
by New Straub P.C., with the balance paid in cash, except the purchase price
for any intangible asset may be paid with a promissory note payable in 24 equal
monthly installments with interest at the prime rate published by CitiBank,
N.A.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The officers and directors of Straub as of October 31, 1996 held, as a
group, 170,080 shares, or 8.2%, of Straub Common Stock and 1,259,302 shares, or
12.3% of Series C Preferred Stock, respectively. Following the consummation of
the Merger, each of the Straub Shareholders individually and all of Straub's
Shareholders together will own less than 1% of the issued and outstanding
shares of PhyCor Common Stock.
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In connection with and prior to the consummation of the Merger, each of
the Straub Shareholders, except for dissenting shareholders, will become a
shareholder and employee of New Straub P.C. Certain officers and directors of
Straub will be appointed to serve as representatives on the Joint Policy Board.
Such members of the Joint Policy Board will receive no compensation for such
membership. See "Service Agreement."
With the exceptions of Blake E. Waterhouse and Louise L. Liang, who are
expected to become the Chief Executive Officer and Chief Operating Officer,
respectively of PhyCor-Hawaii, no officer or director of Straub or New Straub
P.C. will be an employee, officer or director of PhyCor or PhyCor-Hawaii
following the consummation of the Merger.
EFFECTIVE DATE OF MERGER
The Merger shall become effective upon (i) approval by the Straub
Shareholders of the Merger, (ii) the satisfaction or waiver of all of the
conditions contained in the Agreement of Merger, including consummation of the
Spin-Off Transaction, and (iii) the filing of the Articles of Merger with each
of the Secretary of State of the State of Tennessee and the Department of
Commerce and Consumer Affairs of the State of Hawaii and the acceptance of such
filings by the Secretary of State of the State of Tennessee and the Department
of Commerce and Consumer Affairs of the State of Hawaii. See "Conditions to
Consummation of the Merger."
No assurance can be given that the conditions precedent to the Merger
contained in the Agreement of Merger can or will be satisfied or waived, as the
case may be. The Agreement of Merger may also be terminated and abandoned under
certain conditions by either PhyCor or Straub prior to the consummation of the
Merger. See "Termination."
EXCHANGE OF STRAUB COMMON STOCK; ISSUANCE OF PHYCOR COMMON STOCK
As of the effective date, as described above under "Effective Date of
Merger", each of the issued and outstanding shares of Straub Common Stock,
except for the Straub Common Stock held by dissenting Straub Shareholders, will
be converted into the right to receive 0.1091 share of PhyCor Common Stock
(based on a per share price of $33.88 and based on the 2,074,976 outstanding
shares of Straub Common Stock), which conversion ratio is calculated by
dividing the number of shares of PhyCor Common Stock issuable pursuant to the
Agreement of Merger by the number of shares of Straub Common Stock outstanding
as of the effective date of the Merger. Such ratio assumes the issuance of
226,299 shares of PhyCor Common Stock under the Agreement of Merger. The Merger
Agreement provides that in the event the Closing Market Price is less than
$33.88 per share, PhyCor will deliver as of the effective date of the Merger
the number of shares of PhyCor Common Stock having an aggregate value equal to
$7,667,000 divided by the Closing Market Price. Cash based on the applicable
per share price will also be delivered in lieu of fractional shares.
As soon as practicable at or after the effective date of the Merger,
letters of transmittal will be furnished to the holders of Straub Common Stock
by the Exchange Agent for use by the holders of Straub Common Stock in
surrendering their original stock certificates representing their Straub Common
Stock. Upon the surrender of such original stock certificates for cancellation
along with the delivery of the properly completed and executed letter of
transmittal, PhyCor will issue and mail to such holder of Straub Common Stock,
through the Exchange Agent, a certificate or certificates representing the
whole number of shares of PhyCor Common Stock that the holder is entitled to
pursuant to the terms of the Agreement of Merger.
Unless and until all outstanding certificate or certificates held by a
Straub Shareholder that prior to the effective date, represent Straub Common
Stock are surrendered for exchange as provided above, no dividend or other
distribution payable to the holders of record of shares of PhyCor Common Stock
as of any time subsequent to the effective date, if any, shall be paid to the
holder of any such outstanding certificate. Upon surrender of any such
outstanding certificate, PhyCor may, at its option, pay to the record holder of
such certificate for shares of PhyCor Common Stock issued therefor the amount
of dividends or other distributions, if any, without interest, which became
payable after the effective date and prior to the date of issue with respect to
the number of shares of PhyCor Common Stock represented by such certificate or
certificates.
Any Straub Shareholder whose certificate or certificates representing
Straub Common Stock have been lost or destroyed may nevertheless obtain a
certificate or certificates representing the shares of PhyCor Common Stock
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to which such Straub Shareholder is entitled, provided that such Straub
Shareholder delivers to PhyCor and to the Exchange Agent a sworn affidavit
certifying such loss or destruction and providing an indemnity satisfactory to
PhyCor and the Exchange Agent against any loss or expense which either PhyCor
or the Exchange Agent may incur as a result of such lost or destroyed
certificate or certificates being thereafter presented to the Exchange Agent
for exchange.
The holders of Straub Common Stock, excluding any holder who exercises
dissenter's rights, will be responsible for any and all federal, state and
local sales and transfer taxes, if any, associated with and incurred as a
result of their receipt of PhyCor Common Stock pursuant to the Merger.
CONDITIONS TO CONSUMMATION OF MERGER
The obligations of PhyCor and of Straub to consummate the Merger are
subject to the satisfaction, or the waiver thereof, of certain conditions
described in the Agreement of Merger. The following is a brief description of
certain of the conditions set forth therein.
Necessary Corporate Approvals of Merger; Dissenting Shareholders. The
Straub Shareholders shall have approved the Merger by the necessary vote
pursuant to the terms of the Bylaws of Straub and in accordance with the laws
of the State of Hawaii, and the Boards of Directors of each of Straub and
PhyCor shall have approved the Merger and the transactions related thereto. In
addition, holders of Straub Common Stock perfecting dissenters' rights to the
Spin-Off Transaction and the Merger collectively own not more than 5% of the
outstanding Straub Common Stock and holders of Series C Preferred Stock
perfecting dissenters' rights to the Spin-Off Transaction and the Merger
collectively own not more than 5% of the outstanding Series C Preferred Stock.
Spin-Off Transaction Completed. The Spin-Off Transaction shall have
been completed in all material respects. See "Spin-Off Transaction."
Service Agreement Entered Into. New Straub P.C. and PhyCor-Hawaii will
have entered into the Service Agreement. See "Service Agreement."
Governmental Approvals Obtained. All necessary filings, registrations,
notifications and consents shall have been made with or obtained from all
federal and state authorities including, but not limited to, the expiration or
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act (if a filing is required), the satisfactory conclusion of the
certificate of need review procedures by Hawaii state agencies, and the filings
required by the Securities Act. The Registration Statement, of which this
Prospectus and Proxy Statement is a part, shall have been declared effective by
the Securities and Exchange Commission, no stop orders with respect to such
filings shall have been issued, and all material state securities permits and
approvals shall have been obtained.
Consents and Approvals. All consents and approvals necessary to
consummate the Spin-Off Transaction and the Merger shall have been obtained,
including the obtaining by PhyCor of the consent of the banks under PhyCor's
bank credit facility.
Delivery of Certain Documents; Opinions of Counsel. Both of Straub and
PhyCor shall have delivered to the other party, in form satisfactory to the
receiving party, certain documents, including an officer's certificate from the
President of each of Straub and PhyCor as to the information contained in the
Agreement of Merger, representations as to the completion of certain
transactions described above, and opinions of counsel of each of Straub and
PhyCor.
Fairness Opinion. Straub shall have received a fairness opinion from
H&Q in form and substance satisfactory to Straub as to the fairness of the
Spin-Off Transaction and the Merger from a financial point of view. H&Q
rendered its oral opinion (subsequently confirmed in writing) to Straub on
October 1, 1996 in satisfaction of this condition, which opinion is attached to
this Prospectus and Proxy Statement as Annex A. See "Opinion of Straub
Investment Banker".
Tax Opinions. Straub shall have received an opinion of Morrison &
Foerster LLP, special counsel to Straub, concerning the tax consequences of the
Spin-off Transaction and Merger. The opinion will be delivered by Morrison &
Foerster LLP in satisfaction of the condition, subject to the receipt of
certain customary
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representations from officers of Straub and PhyCor and subject to the receipt
of representations from the Straub Shareholders who hold more than 1% of the
outstanding Straub Common Stock ("1% Shareholders") that they have no present
plan or intention to dispose of the shares of New Straub P.C. or more than 50%
of the shares of PhyCor Common Stock to be received in the Merger. The opinion
of Morrison & Foerster LLP will be delivered to Straub for the benefit of the
Straub Shareholders and the Board of Directors of Straub, and the opinion will
provide expressly that it may not be relied upon by PhyCor in its own right or
as successor to Straub in the Merger. In addition, PhyCor shall have received
an opinion satisfactory to it concerning the tax consequences of the Merger.
See "Certain Federal Income Tax Consequences."
No Actions Instituted; No Adverse Changes. No action or proceeding to
prevent the consummation of the Merger shall have been brought or threatened,
and no governmental authority shall have asserted that the Merger constitutes a
violation of law or gives rise to liability on the part of Straub or PhyCor.
With the exception of the Spin-Off Transaction, Straub shall not have suffered
any material adverse change to its financial condition or results of operations
as reflected in its August 31, 1996 financial statements. PhyCor shall not have
suffered any material adverse change to its financial condition or results of
operations as reflected in its June 30, 1996 financial statements.
No assurance can be given that all necessary approvals will be obtained
or that all of the conditions precedent to the Merger will be satisfied, waived
or modified by the party the obligation of which is subject to satisfaction of
the condition.
TERMINATION
The Agreement of Merger provides that in certain circumstances the
Agreement of Merger may be terminated and the Merger abandoned at any time by
either Straub or PhyCor prior to the effective date, whether before or after
being submitted to a vote for approval by the Straub Shareholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Spin-Off Transaction and the Merger to the Straub
Shareholders. The federal income tax discussion set forth in this section below
is included for general information purposes only and may not apply to
particular categories of Straub Shareholders subject to special treatment under
the Code, including, without limitation, foreign holders and holders whose
Straub securities were acquired as compensation. The factual nature of the
incidents upon which the tax consequences of the Merger depend make it
particularly important that each Straub Shareholder consult his or her own tax
advisor concerning the tax consequences to such person, including the effect of
state and local taxes.
EACH HOLDER OF STRAUB COMMON STOCK OR SERIES C PREFERRED STOCK IS URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
HIM OR HER OF THE SPIN-OFF TRANSACTION AND THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX LAWS.
Intended Tax Consequences. Neither Straub nor PhyCor has requested or
will receive an advance ruling from the Internal Revenue Service (the
"Service") as to the federal income tax consequences of the Spin-Off
Transaction or Merger. It is a condition to the obligations of Straub to
consummate the Spin-Off Transaction and the Merger that Straub shall have
received an opinion of Morrison & Foerster LLP, special counsel to Straub, to
the effect that (i) the Spin-Off Transaction will result in a tax-free
distribution of the stock of New Straub P.C. to the Straub Shareholders
pursuant to Sections 355 and 368(a)(1)(D) of the Code; and (ii) the Merger will
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Code which generally is tax-free to the holders of Straub Common Stock. An
opinion of counsel is not binding on the Service or the courts, and represents
counsel's best legal judgment. Further, the opinion of Morrison & Foerster LLP
will be based on, among other things, existing provisions of the Code, existing
and proposed Treasury Regulations and existing administrative interpretations
and court decisions. The opinion of Morrison & Foerster LLP will be delivered
to Straub for the benefit of the Straub Shareholders and the Board of Directors
of Straub, and the opinion will provide expressly that it may not be relied
upon by PhyCor in its own right or as successor to Straub in the Merger.
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On March 19, 1996, President Clinton proposed certain amendments to the
Code relating to corporate transactions. One proposal would amend Section 355
of the Code to impose tax on a distributing corporation in a spin-off
transaction unless the shareholders of the distributing corporation control
both the distributing corporation and the controlled corporation at all times
during a 4-year period commencing two years before and ending two years after
the distribution. "Control" for purposes of the proposal would be defined as
ownership of at least 50% of the total combined voting power of all classes of
stock entitled to vote and at least 50% of the total value of shares of all
classes of stock. As proposed, the new provision would be effective for
distributions after March 19, 1996. The President's proposal, if enacted with a
March 19, 1996 effective date, would adversely affect the Spin-Off Transaction,
since, following the Merger, the former Straub Shareholders will not "control"
PhyCor. No action was taken by Congress with respect to the President's
proposal prior to adjournment on October 4, 1996. The opinion of Morrison &
Foerster LLP assumes that any such legislative proposal, if ultimately enacted,
will have an effective date which would not adversely affect the Spin-Off
Transaction; however, there can be no assurances that any such provision, if
enacted, will not have retroactive effect.
The opinion of Morrison & Foerster LLP will also be based upon certain
assumptions and representations of factual matters made by, among others,
Straub, PhyCor and 1% Straub Shareholders which, if incorrect in certain
material respects, would jeopardize the conclusions reached by counsel in its
opinion. Such assumptions and representations include, among others, that
Straub has actively conducted its group medical practice and HMO administration
businesses for at least five years immediately prior to the Spin-Off
Transaction, that New Straub P.C. will continue to actively conduct its group
medical practice and that PhyCor-Hawaii will continue to actively conduct the
Straub HMO administration business following the Merger, that the Spin-Off
Transaction is being undertaken because PhyCor is unable to acquire the group
medical practice and hospital operations of Straub and that the Merger is being
concluded for valid business reasons. In addition, such assumptions and
representations include that the cash consideration paid to all dissenting
shareholders will not exceed 5% of the Merger consideration, that the fair
market value of PhyCor Common Stock to be received by the holders of Straub
Common Stock at the time of the Merger will be approximately equal to the fair
market value of the Straub Common Stock surrendered, that each of the parties
will pay its respective expenses of the transactions, that none of the
consideration payable under the Service Agreement will be separate
consideration for the Straub Common Stock surrendered in the Merger, and that
the payments by PhyCor-Hawaii and New Straub P.C. to each other under the
Service Agreement will be fair market value for the services or property
transferred under the Service Agreement and were determined by the parties in
arm's-length negotiations. Additional representations include PhyCor's
representation that it has no plan or present intention to sell or liquidate
the assets of Straub acquired by PhyCor or PhyCor-Hawaii, except in the
ordinary course of business, and neither PhyCor nor PhyCor-Hawaii has any plan
or present intention to reacquire any of the PhyCor Common Stock to be issued
in the Merger. The opinion of Morrison & Foerster LLP will be conditioned upon
the receipt of certifications from 1% Straub Shareholders that they have no
present plan or intention to dispose of their New Straub P.C. Shares and that
they have no present plan or intention to sell, exchange or otherwise dispose
of the shares of PhyCor Common Stock received in the Merger that would reduce
their ownership of PhyCor Common Stock to a number of shares having a value, as
of the date of the Merger, of less than 50% of the value of the Straub Common
Stock surrendered in the Merger. If any of the assumptions and representations
as to any material facts are not true as of the consummation of the Merger,
which is not anticipated by Straub or PhyCor as of the date hereof based upon
currently available information, the tax consequences may be materially
different than set forth in Morrison & Foerster LLP's opinion.
In their opinion, Morrison & Foerster LLP will opine that the federal
income tax consequences of the Spin-Off Transaction and the Merger to the
Straub Shareholders are as follows:
(a) No income, gain or loss will be recognized by a Straub
Shareholder upon receipt of the New Straub P.C. Shares;
(b) Following the Spin-Off Transaction, the tax basis of a holder
of Series C Preferred Stock in a share of New Straub P.C. Series A Preferred
Stock will equal his or her tax basis in the share of Series C Preferred Stock
exchanged therefor;
(c) Following the Spin-Off Transaction, a Straub Shareholder will
apportion the tax basis of his or her shares of Straub Common Stock between
such Straub Common Stock and the New Straub P.C. Common Stock received in the
Spin-Off Transaction in proportion to the relative fair market values of such
New Straub P.C. Common Stock and the Straub Common Stock on the distribution
date;
32
<PAGE> 37
(d) A Straub Shareholder's holding period for the New Straub P.C.
Common Stock and New Straub P.C. Series A Preferred Stock received in the
Spin-Off Transaction will include the period during which such shareholder held
the Straub Common Stock and Series C Preferred Stock with respect to which the
New Straub P.C. Common Stock and New Straub P.C. Series A Preferred Stock was
received, provided that such Straub Common Stock and Straub Series C Preferred
Stock is held as a capital asset by such shareholder as of the time of the
distribution.
(e) Except for any cash received in lieu of fractional shares, no
gain or loss will be recognized by the holders of Straub Common Stock upon the
exchange of their Straub Common Stock for the PhyCor Common Stock;
(f) The tax basis of the PhyCor Common Stock received by each
holder of Straub Common Stock, including any fractional share interest for
which cash is received, will be the same as the basis of his or her Straub
Common Stock surrendered in the Merger, after the adjustment provided for in
paragraph (c) above;
(g) The holding period of the PhyCor Common Stock received by each
holder of Straub Common Stock in the Merger, including any fractional share
interest for which cash is received, will include the holding period of the
Straub Common Stock surrendered in the Merger, provided the Straub Common Stock
is held as a capital asset by such holder upon the date of the Merger.
(h) A holder of Straub Common Stock who receives cash in lieu of a
fractional share interest in PhyCor Common Stock will be treated as if such
cash had been received in redemption of the fractional share interest. The
receipt of such cash generally should result in gain or loss in an amount equal
to the difference between the amount of the cash received and the portion of
the tax basis in the PhyCor Common Stock that is allocable to such fractional
share. Such gain or loss generally will be treated as capital gain or loss,
provided such fractional share is held by the shareholder as a capital asset at
the time of the Merger.
ANY SHAREHOLDER WHO ELECTS TO DISSENT SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE HIS OR HER TAX TREATMENT.
Failure to Qualify as A Tax-Free Transaction.
Spin-Off Transaction. In the event the Spin-Off Transaction
does not qualify as a tax-free transaction, Straub will recognize gain (but not
loss) equal to the difference between the value of the New Straub P.C. Shares
and its adjusted tax basis in such shares. Straub's adjusted basis in the New
Straub P.C. Shares will be equal to the adjusted tax basis of the property
contributed to New Straub P.C. by Straub decreased by the liabilities of Straub
assumed by New Straub P.C. and increased by any gain recognized by Straub on
the contribution of the property to New Straub P.C. Each holder of Series C
Preferred Stock exchanging Series C Preferred Stock for New Straub P.C. Series
A Preferred Stock should recognize gain or loss equal to the difference between
his or her tax basis in the Series C Preferred Stock and the fair market value
of the New Straub P.C. Series A Preferred Stock. Each holder of Straub Common
Stock will be treated as receiving a distribution with respect to his or her
Straub Common Stock in an amount equal to the value of the New Straub P.C.
Common Stock he or she receives, and will recognize ordinary income in an
amount up to the lesser of the value of the New Straub P.C. Shares he or she
receives or his or her pro rata share of Straub's current and accumulated
earnings and profits. If the value of the New Straub P.C. Shares received by a
Straub Shareholder exceeds his or her pro rata share of Straub's current or
accumulated earnings and profits, the excess will reduce his or her tax basis
in his or her Straub Common Stock. To the extent the value of the New Straub
P.C. Shares also exceeds a Straub Shareholder's adjusted tax basis in his or
her Straub Common Stock, he or she will recognize a capital gain or ordinary
income equal to such excess depending upon whether the Straub Common Stock was
a capital asset in his or her hands.
Merger. In the event the Merger does not qualify as a tax-free
reorganization, Straub will be treated as if it sold its assets and liquidated.
The deemed purchase price will equal the value of the consideration received by
Straub plus the indebtedness assumed or discharged by PhyCor in the transaction
(the "Deemed Purchase Price"). The Deemed Purchase Price will include the value
of the PhyCor Common Stock issued in the Merger. Straub will recognize a gain
equal to the difference between the Deemed Purchase Price and its adjusted tax
basis in its assets and will have a resulting state and federal tax liability.
33
<PAGE> 38
As a result of the Merger, PhyCor, as Straub's successor, will be
primarily liable for any tax owed by Straub as a result of a determination that
the Spin-Off Transaction or the Merger does not qualify as a tax-free
reorganization. New Straub P.C. has agreed to indemnify PhyCor for such tax
liability in certain circumstances.
Each Straub Shareholder will be treated as having sold his or her
Straub Common Stock for a purchase price equal to the value of the Merger
consideration he or she receives and will recognize a gain equal to the
difference between his or her adjusted tax basis in his or her Straub Common
Stock and the value of the Merger consideration he or she receives reduced by
any transferee liabilities he assumes.
Characterization of Straub Shareholder Gain. If gain recognized by a
Straub Shareholder is treated as capital gain, it will be long term or short
term depending upon whether the Straub Common Stock have been held for more
than 12 months.
Conclusion. The factual nature of the incidents upon which the tax
consequences of the Spin-Off Transaction and Merger depend make it particularly
important that each Straub shareholder consult his or her own tax advisor
concerning the tax consequences to such shareholder, including the effect of
state or local taxes.
CONDUCT OF BUSINESS PENDING THE MERGER
The Agreement of Merger provides that, pending the consummation of the
Merger, Straub shall not, with respect to itself or any subsidiary of Straub,
(a) fail to maintain in effect casualty, public liability, professional
malpractice and workers' compensation insurance coverage; (b) fail to use its
best efforts (i) to maintain the material assets (except in the normal course
of business) in their present condition, (ii) to comply with all laws and
regulations of governmental agencies or authorities, including tax laws and
regulations applicable to them, (iii) to operate its business in the manner
reasonably necessary to maintain its current reputation and the good will of
its patients and physicians and (iv) to keep in force all licenses, permits and
approvals necessary to the operation of its business as now conducted; (c) to
enter into, renew, amend, breach or terminate any contract or agreement without
the consent of PhyCor; (d) declare or make any distributions to the Straub
Shareholders which would cause Straub to breach the representations and
warranties contained in the Agreement of Merger; (e) increase the salary of or
declare or pay any bonus to any employee (except in the normal course of
business); (f) sell, lease or transfer any of its material assets, other than
in the ordinary course of business or subject such assets to a mortgage, pledge
or other encumbrance; (g) make any prepayment on any outstanding indebtedness
secured by the real property of Straub; (h) except as set forth on Schedule
4.05 to the Agreement of Merger, make any adjustments to the financial
statements of Straub which is not an adjustment in the ordinary course of
business based on historical practices of Straub; (i) engage in any other
transaction other than in the regular and customary course of business; (j)
fail to deliver to PhyCor any notice of any defaults or noncompliance, cease
and desist order, notice of review, or requests for information received from
lessors, mortgage holders, Blue Cross/Blue Shield, CHAMPUS and other third
party payors, governmental bodies or insurers relating to Straub or the
operation of its business; (k) fail to deliver to PhyCor any notice or other
information regarding pending or threatened litigation in respect of Straub or
the operation of its business; or (l) issue any press release or other public
statement relating to the Agreement of Merger or the Merger or the related
transactions except as may be required by law.
The Agreement of Merger also provides that Straub shall use its best
and most diligent efforts to preserve and maintain the business organization
and the personnel and physician relationships of Straub, keep available to
PhyCor the services of Straub's employees, and preserve the goodwill of
physicians, patients and all others having business relations with Straub.
ACCOUNTING TREATMENT OF THE MERGER
The Merger is intended to be treated as a purchase for accounting
purposes under generally accepted accounting principles.
34
<PAGE> 39
EXPENSES AND INDEMNIFICATION
Each of Straub and PhyCor shall bear their own expenses incurred in
connection with the Merger. Each of the parties will continue to bear their own
expenses even if the Agreement of Merger is terminated and the Merger is
abandoned. In the event of a material breach of the terms of the Agreement of
Merger by either party prior to consummation of the Merger, the non-breaching
party may seek indemnification for actual costs and expenses reasonably
incurred by such non-breaching party. In addition, New Straub P.C. will agree
to indemnify PhyCor and its officers, directors, shareholders and employees for
any breach caused by Straub of the terms, covenants or provisions of the
Agreement of Merger for such amounts of liabilities to PhyCor in excess of
$250,000. Any amount of liability below $250,000 will be the responsibility of
PhyCor.
RESALES OF PHYCOR COMMON STOCK; PAYMENT OF BROKERAGE FEES AND EXPENSES
PhyCor has registered under the Securities Act, the shares of PhyCor
Common Stock to be issued to the holders of Straub Common Stock in connection
with the Merger as described in this Prospectus and Proxy Statement. Such
shares issued to persons not deemed Affiliates of Straub or PhyCor for purposes
of Rule 145 of the Commission will be freely transferable without restriction,
except as described herein. Straub shall obtain from at least 50% of the Straub
Shareholders a representation that the Straub Shareholder has no present intent
to sell, assign, transfer, pledge, distribute or encumber the PhyCor Common
Stock received by him or her, unless necessitated or warranted by a change in
financial or economic circumstances or based upon a prudent investment
decision.
Each Affiliate of Straub prior to the consummation of the Merger shall
have executed and delivered a certificate to PhyCor providing that the PhyCor
Common Stock to be issued to the Affiliate will be held pursuant to the
provisions of the Securities Act, that no sale or disposition of such PhyCor
Common Stock will be made except pursuant to the Registration Statement of
which this Prospectus and Proxy Statement is a part, and pursuant to Rule
145(d) under the Securities Act, and the understanding that the certificates
evidencing the PhyCor Common Stock will bear a restrictive legend setting forth
the above-described restrictions.
PhyCor will bear all expenses associated with the preparation of the
documents required by the Securities Act and state securities laws in
connection with the exchange of the Straub Common Stock for the PhyCor Common
Stock.
BENEFIT PLANS
Straub and PhyCor will mutually agree upon what actions will be taken
with respect to Straub's benefit plans. It is the intention of the parties that
New Straub P.C. will adopt the PhyCor, Inc. Savings and Profit Sharing Plan
(the "PhyCor Plan") and that certain of Straub's benefit plans will be frozen
or terminated and the assets of the remaining plans merged with or into the
PhyCor Plan, subject to a review by PhyCor of the eligibility of such assets to
be merged with and into the PhyCor Plan.
35
<PAGE> 40
RIGHTS OF DISSENTING STRAUB SHAREHOLDERS
The following summary does not purport to be a complete statement of
the provisions of the Hawaii Revised Statutes relating to the rights of
dissenting Straub Shareholders and is qualified in its entirety by reference to
the applicable sections of the Hawaii Revised Statutes, which are attached
hereto as Annex B. Any holder of Straub Common Stock or Series C Preferred
Stock intending to exercise his or her dissenters' rights is urged to review
carefully Annex B and to consult with legal counsel so as to insure strict
compliance with the dissenters' rights provisions of the Hawaii Revised
Statutes.
GENERAL
Under the laws of the State of Hawaii, the Straub Shareholders have a
right to dissent from the Spin-Off Transaction and/or the Merger and to
receive, instead of the New P.C. Shares, in connection with the Spin-Off
Transaction, and the PhyCor Common Stock, in the case of the Merger, the fair
value of their Straub Common Stock and Series C Preferred Stock (collectively,
"Straub Stock") in cash if they fully comply with the provisions of the Hawaii
Revised Statutes (the "Hawaii Statute") relating to dissenters' rights and if
the proposed Spin-Off Transaction and the Merger are approved by the necessary
vote of Straub Shareholders and are consummated. The following summary of the
provisions of the Hawaii Statute relating to dissenters' rights is qualified in
its entirety by reference to Sections 415-80 and 415-81 of the Hawaii Statute,
a copy of which is attached hereto as Annex B.
In order to be eligible to exercise dissenter's rights, a Straub
Shareholder must file with Straub a written statement that such Straub
Shareholder intends to dissent if the proposed Spin-Off Transaction and the
Merger are effected. Such notice must be provided by the Straub Shareholder to
Straub prior to the vote on the proposed Spin-Off Transaction and the Merger. A
dissenting Straub Shareholder may not vote his or her Straub Stock in favor of
the proposed transaction to which the Straub Shareholder is dissenting (the
Spin-Off Transaction and/or the Merger) at the Special Meeting. If a Straub
Shareholder either fails to provide the necessary written notice prior to the
vote on the proposed Spin-Off Transaction and the Merger or votes in favor of
the transaction to which the Straub Shareholder is dissenting (the Spin-Off
Transaction and/or the Merger) at the Special Meeting, such Straub Shareholder
may not receive payment for his or her Straub Stock in accordance with the
provisions of the Hawaii Statute relating to dissenters' rights.
If the Straub Shareholders approve the Spin-Off Transaction and the
Merger by the required vote pursuant to the Bylaws of Straub and in accordance
with the laws of the State of Hawaii, Straub shall mail to each qualified
dissenting Straub Shareholder, a written notice which shall set forth (i) where
and when the demand for payment must be sent and where and when certificates
representing the dissenting Straub Shareholder's Straub Stock must be deposited
in order to obtain payment, (ii) a statement informing holders of
uncertificated Straub Stock to what extent transfer of such shares will be
restricted after the payment demand is received, (iii) a form for demanding
payment, which will include a request for certification of the date that the
dissenting Straub Shareholder acquired beneficial ownership of the Straub
Stock, and (iv) the date by which Straub must receive the payment demand and
the deposit of the Straub Stock, which date may not be less than 30 days after
the date the notice described herein was mailed. The written notice to each
qualified dissenting Straub Shareholder shall be accompanied by a copy of the
provisions of the Hawaii Statute relating to dissenters' rights.
If a Straub Shareholder fails to demand payment or fails to deposit his
or her certificates for the Straub Stock as provided for in the dissenters'
notice from Straub, such Straub Shareholder shall not be entitled to receive
payment for the Straub Stock and will instead be entitled to receive PhyCor
Common Stock in accordance with the Agreement of Merger and New Straub P.C.
Shares in accordance with the Plan of Corporate Separation and Reorganization.
If the proposed Spin-Off Transaction and the Merger have not been
consummated and payment for the Straub Stock has not been made within 60 days
after the date set for demanding payment and depositing certificates, Straub
shall return to the Straub Shareholder any certificates that have been
deposited.
Upon the consummation of the proposed Spin-Off Transaction and the
Merger or the receipt by Straub of a demand for payment if the proposed
Spin-Off Transaction and the Merger have already been consummated, Straub shall
pay to each dissenter who has complied with requirements of the notice from
Straub and has deposited his or her certificates, the amount which Straub
estimates to be the fair value of the Straub Stock held by the dissenter,
36
<PAGE> 41
plus any accrued interest. The payment from Straub must be accompanied by (i)
Straub's balance sheet and statement of income for the fiscal year ending as of
December 31, 1995 and Straub's latest available interim financial statements,
(ii) a statement of Straub's estimate of the fair value of the Straub Shares,
and (iii) a statement of the dissenter's right to demand supplemental payment
and a copy of the provisions of the Hawaii Statute relating to dissenters'
rights.
If Straub fails to remit payment to a dissenting Straub Shareholder or
if a dissenting Straub Shareholder is dissatisfied with the payment for his or
her Straub Stock or the calculation of the interest due, the Straub Shareholder
may send to Straub his or her written estimate of the fair value of the Straub
Stock and the amount of interest due and demand payment of such amount. If such
dissenting Straub Shareholder does not send to Straub his or her demand for
supplemental payment within 30 days after Straub's payment to the dissenting
Straub Shareholder, such dissenting Straub Shareholder shall not be entitled to
any supplemental payment from Straub.
In the event that a payment demand from a dissenting Straub Shareholder
remains unresolved, Straub shall file, within 60 days after receiving the
payment demand, a petition in the Circuit Court of the First Circuit, State of
Hawaii requesting that the court determine the fair value of the Straub Stock
and the interest thereon. The court may appoint appraisers to establish the
fair value of the Straub Stock. All dissenters whose demands have not been
settled are entitled to payment of the amount by which the fair market value of
the Straub Stock established by the court exceeds the amount previously paid by
Straub, with interest. If Straub fails to file a petition with the Circuit
Court of the First Circuit, State of Hawaii, within 60 days after receiving a
payment demand, each dissenting Straub Shareholder who has not settled his or
her claim against Straub shall be paid by Straub the amount demanded, with
interest.
ACTION NECESSARY TO PRESERVE DISSENTERS' RIGHTS
To preserve the dissenter's rights described above, a Straub
Shareholder must (i) file the written notice described above prior to the vote
on the approval of the Spin-Off Transaction and the Merger, (ii) not vote in
favor of the transaction to which the Straub Shareholder is dissenting (the
Spin-Off Transaction and/or the Merger) at the Special Meeting, (iii) file the
payment demand notice described above, and (iv) deliver to Straub the Straub
Shareholder's certificates representing the Straub Stock. A formal dissent
pursuant to the Hawaii Statute involves several steps, the satisfaction of each
of which is required for a Straub Shareholder to perfect his or her right to
dissent.
37
<PAGE> 42
MARKET PRICE DATA
PhyCor Common Stock is quoted on the Nasdaq National Market under the
symbol PHYC. The following table sets forth the range of high and low sales
prices on the Nasdaq National Market for the period from January 1, 1994,
through October 31, 1996, as reported by Nasdaq:
<TABLE>
<CAPTION>
PhyCor
Common Stock
------------
High Low
1994 ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . $ 10.74 $ 8.30
Second Quarter . . . . . . . . . . . . . . . . 10.22 7.48
Third Quarter . . . . . . . . . . . . . . . . . 10.30 7.63
Fourth Quarter . . . . . . . . . . . . . . . . 12.44 9.19
1995
First Quarter . . . . . . . . . . . . . . . . . $ 15.89 $ 10.89
Second Quarter . . . . . . . . . . . . . . . . 17.06 12.00
Third Quarter . . . . . . . . . . . . . . . . . 23.17 15.22
Fourth Quarter . . . . . . . . . . . . . . . . 34.00 19.92
1996
First Quarter . . . . . . . . . . . . . . . . . $ 37.00 $ 25.50
Second Quarter . . . . . . . . . . . . . . . . 41.75 26.67
Third Quarter . . . . . . . . . . . . . . . . . 39.25 26.75
Fourth Quarter (through October 31, 1996) . . . 41.50 26.75
</TABLE>
The closing sales price for PhyCor Common Stock as reported by the
Nasdaq National Market was $35.50 on October 1, 1996, the date immediatley
prior to the public announcement of the proposed Merger. The closing sales
price for PhyCor Common Stock as reported by the Nasdaq National Market was
$31.00 on October 31, 1996. As of October 23, 1996, there were approximately
2,225 holders of record of PhyCor Common Stock. All share prices listed above
give effect to the three-for-two stock splits of PhyCor Common Stock effected
as stock dividends on December 15, 1994, September 15, 1995 and June 14, 1996.
Straub is a closely-held Hawaii professional corporation. There
has been no public trading market in the securities of Straub and, therefore,
there is no historical per share price for such securities for any period. The
Board of Directors of Straub believes that consideration to be paid by PhyCor
in connection with the Agreement of Merger and the Service Agreement is fair,
based upon, among other factors, the H&Q Opinion. See "Merger -- Reasons for
Merger" and "Merger -- Opinion of Straub Investment Banker."
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<PAGE> 43
DIVIDENDS
PhyCor has never declared or paid a dividend on its common stock.
PhyCor intends to retain its earnings to finance the growth and development of
its business. PhyCor's bank credit facility currently prohibits the declaration
of dividends. It is anticipated that any loan agreements which PhyCor may enter
into in the future will also contain restrictions on the payment of dividends
by PhyCor. Straub has never declared or paid a dividend on the Straub Common
Stock.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying pro forma combined capitalization and balance sheet
as of June 30, 1996 and the related pro forma combined statement of operations
for the six months ended June 30, 1996, give effect to the Merger, all
completed 1996 acquisitions and the pending acquisitions of Guthrie Clinic Ltd.
and clinics in Ohio, Virginia and Florida, as if such transactions had been
completed on the first day of the period. Since January 1, 1995, PhyCor has
acquired the assets of 18 clinics. The accompanying pro forma consolidated
statement of operations for the year ended December 31, 1995 reflects the pro
forma results of operations of these clinics, Straub and the pending
acquisitions, as if all of these clinics had been acquired on January 1, 1995.
The pro forma information is based on the historical financial statements of
PhyCor and the clinics giving effect to the Merger and other acquisitions under
the purchase method of accounting and the assumptions and adjustments in the
accompanying notes to the pro forma consolidated financial information.
The pro forma statements have been prepared by management of PhyCor
based on the unaudited financial statements of the clinics, adjusted when
necessary to the basis of accounting used in the historical financial
statements of PhyCor. Such adjustments include modifying the pro forma
consolidated statements of operations to reflect operations as if the related
service agreement had been in effect during the year presented. Additional
general corporate expenses which would have been required to support the
operations of the acquired clinics are not included in the consolidated pro
forma results of operations. These pro forma statements may not be indicative
of the results that would have occurred if the Spin-Off Transaction, Merger and
other acquisitions had been in effect on the date indicated or which may be
obtained in the future. The pro forma financial statements should be read in
conjunction with the consolidated financial statements and notes of PhyCor,
Inc. and subsidiaries and Straub and subsidiaries contained elsewhere or
incorporated by reference herein.
39
<PAGE> 44
PHYCOR, INC. AND STRAUB CLINIC & HOSPITAL, INCORPORATED
PRO FORMA COMBINED CAPITALIZATION
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996
Other Pending
Straub Transactions
Historical Historical
---------- -------------
<S> <C> <C>
Long-term debt:
Revolving credit agreement . . . . . . . . . . . . . . . . $ -- $ --
Mortgages and other notes payable . . . . . . . . . . . . . 27,485 61,908
Obligations under capital leases . . . . . . . . . . . . . . 2,463 257
4.5% Convertible Subordinated Debentures due 2003 . . . . . . -- --
Subordinated convertible notes payable to
physician groups . . . . . . . . . . . . . . . . . . . . . -- --
Due to physician groups . . . . . . . . . . . . . . . . . . . -- --
Preferred Stock, subject to mandatory
redemption requirements:
Series C, Preferred Shares (1) . . . . . . . . . . . . . . . 10,199 --
Shareholders' equity:
Preferred stock (2) . . . . . . . . . . . . . . . . . . . . 155 --
Common stock (3) . . . . . . . . . . . . . . . . . . . . . 2,007 1,267
Additional paid in capital . . . . . . . . . . . . . . . . -- 4,436
Retained earnings (deficit) . . . . . . . . . . . . . . . . (12,071) 8,005
Excess of redemption amount over basis of
assets acquired . . . . . . . . . . . . . . . . . . . . . . (9,981) --
Treasury stock . . . . . . . . . . . . . . . . . . . . . . (60) (259)
-------- --------
Total shareholders' equity (deficiency) . . . . . . . . . (19,950) 13,449
-------- --------
Total capitalization . . . . . . . . . . . . . $ 20,197 $ 75,614
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
Pro Forma Adjustments
---------------------
PhyCor Other Pending Pro Forma
Historical Straub Transactions Combined
--------- ------ ------------- ---------
<S> <C> <C> <C> <C>
Long-term debt:
Revolving credit agreement . . . . . . . . $ 8,000 $ 36,583(A) $137,173(D) $ 181,756
Mortgages and other notes payable . . . . . 4,392 7,637(B) 26,292(E) 38,321
Obligations under capital leases . . . . . . 1,306 2,463(B) 395(E) 4,164
4.5% Convertible Subordinated Debentures
due 2003 . . . . . . . . . . . . . . . . . 200,000 -- -- 200,000
Subordinated convertible notes payable to
physician groups . . . . . . . . . . . . . 61,371 -- 48,896(F) 110,267
Due to physician groups . . . . . . . . . . . 47,577 -- 42,988(G) 90,565
Preferred Stock, subject to mandatory
redemption requirements:
Series C, Preferred Shares (1) . . . . . . . -- -- -- --
Shareholders' equity:
Preferred stock (2) . . . . . . . . . . . . -- -- -- --
Common stock (3) . . . . . . . . . . . . . 372,870 7,667(C) -- 380,537
Additional paid in capital . . . . . . . . -- -- -- --
Retained earnings (deficit) . . . . . . . . 41,720 -- -- 41,720
Excess of redemption amount over basis of
assets acquired . . . . . . . . . . . . . . -- -- -- --
Treasury stock . . . . . . . . . . . . . . -- -- -- --
--------- --------- -------- ----------
Total shareholders' equity (deficiency) . 414,590 7,667 -- 422,257
--------- --------- -------- ----------
Total capitalization . . . . . $ 737,236 $ 54,350 $255,744 $1,047,330
========= ========= ======== ==========
</TABLE>
(1) Straub has 15,000,000 shares, $1 par value per share, of Series C
Preferred Stock authorized, of which 10,199,288 shares were
issued and outstanding as of June 30, 1996.
(2) PhyCor has 10,000,000 shares, no par value per share, of
preferred stock authorized, of which no shares are outstanding.
PhyCor has reserved for issuance pursuant to its Shareholder
Rights Plan 500,000 shares of its Series A Junior Participating
Preferred Stock in the event rights issued pursuant to the
Shareholder Rights Plan are converted into shares of preferred
stock. Straub has 2,500 shares, $100 par value per share, of
Series B Preferred Stock authorized, of which 1,550 shares were
issued and 950 shares outstanding as of June 30, 1996.
(3) PhyCor has 250,000,000 shares of common stock, no par value per
share, authorized, of which 54,334,000 shares were issued and
outstanding as of June 30, 1996. Straub has 50,000,000 shares of
common stock, $1 par value per share, authorized, of which
2,006,944 shares were issued and outstanding as of June 30, 1996.
40
<PAGE> 45
PHYCOR, INC. AND STRAUB CLINIC & HOSPITAL, INCORPORATED
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
STRAUB
-----------------------------
EFFECTS
ASSETS OF
ACQUIRED ACQUISITION PRO
AND AND FORMA
PHYCOR LIABILITIES RELATED COMBINED
HISTORICAL ASSUMED FINANCINGS SUBTOTALS
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 37,594 $ 1,711 $ -- $ 39,305
Accounts receivable, net . . . . . . . . . . . . 216,156 31,294 -- 247,450
Other current assets . . . . . . . . . . . . . . 40,914 2,500 -- 43,414
--------- -------- -------- ----------
Total current assets . . . . . . . . . . . . . 294,664 35,505 -- 330,169
Property and equipment, net. . . . . . . . . . . . . . . . 132,709 9,484 -- 142,193
Intangible assets. . . . . . . . . . . . . . . . . . . . . 446,037 -- 58,940 504,977
Other assets . . . . . . . . . . . . . . . . . . . . . . . 12,954 18,442 -- 31,396
--------- -------- -------- ----------
Total assets . . . . . . . . . . . . . . . . . . $ 886,364 $ 63,431 $ 58,940 $1,008,735
========= ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt . . . . . $ 305 $ 7,412 -- $ 7,717
Current installments of obligations under. . . . 1,514 717 -- 2,231
capital leases . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . 19,175 4,849 -- 24,024
Due to physician groups. . . . . . . . . . . . . 59,082 -- -- 59,082
Other accrued expenses and liabilities 55,715 32,400 -- 88,115
--------- -------- -------- ----------
Total current liabilities. . . . . . . . . . . 135,791 45,378 -- 181,169
Long-term debt, excluding current installments . . . . . . 12,392 7,637 36,583 56,612
Obligations under capital leases, excluding current
installment. . . . . . . . . . . . . . . . . . . . . . . 1,306 2,463 -- 3,769
Convertible subordinated debentures . . . . . . . . . . . 200,000 -- -- 200,000
Convertible subordinated notes payable to physician
groups . . . . . . . . . . . . . . . . . . . . . . . . . 61,371 -- -- 61,371
Due to physician groups . . . . . . . . . . . . . . . . . 47,577 -- -- 47,577
Other long-term liabilities. . . . . . . . . . . . . . . . 13,337 22,643 -- 35,980
--------- -------- -------- ----------
Total liabilities . . . . . . . . . . . . . . . 471,774 78,121 36,583 586,478
Shareholders' equity:
Common stock. . . . . . . . . . . . . . . . . . 372,870 -- 7,667 380,537
Retained earnings . . . . . . . . . . . . . . . 41,720 -- -- 41,720
--------- -------- -------- ----------
Total shareholders' equity. . . . . . . . . . 414,590 -- 7,667 422,257
--------- -------- -------- ----------
Total liabilities and shareholders' equity. . 886,364 $ 78,121 $ 44,250 $1,008,735
========= ======== ======== ==========
<CAPTION>
OTHER PENDING TRANSACTIONS
-------------------------------------
ASSETS
ACQUIRED EFFECTS OF PRO
AND ACQUISITION FORMA
LIABILITIES AND RELATED COMBINED
ASSUMED FINANCINGS TOTALS
----------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 13,472 $ -- $ 52,777
Accounts receivable, net . . . . . . . . . . . . 80,180 -- 327,630
Other current assets . . . . . . . . . . . . . . 6,803 -- 50,217
--------- --------- ----------
Total current assets . . . . . . . . . . . . . 100,455 -- 430,624
Property and equipment, net. . . . . . . . . . . . . . . . 47,979 -- 190,172
Intangible assets. . . . . . . . . . . . . . . . . . . . . -- 158,353 663,330
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,977 -- 33,373
--------- --------- ----------
Total assets . . . . . . . . . . . . . . . . . . $ 150,411 $ 158,353 $1,317,499
========= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt . . . . . $ 595 -- $ 8,312
Current installments of obligations under. . . .
capital leases . . . . . . . . . . . . . . . . 19 -- 2,250
Accounts payable . . . . . . . . . . . . . . . . 18,906 -- 42,930
Due to physician groups. . . . . . . . . . . . . 4,674 21,618 85,374
Other accrued expenses and liabilities . . . . . 11,332 -- 99,447
--------- --------- ----------
Total current liabilities. . . . . . . . . . . 35,526 21,618 238,313
Long-term debt, excluding current installments . . . . . . 22,168 137,173 215,953
Obligations under capital leases, excluding current
installments . . . . . . . . . . . . . . . . . . . . . . 395 -- 4,164
Convertible subordinated debentures . . . . . . . . . . . -- -- 200,000
Convertible subordinated notes payable to physician
groups . . . . . . . . . . . . . . . . . . . . . . . . . -- 48,896 110,267
Due to physician groups . . . . . . . . . . . . . . . . . -- 42,988 90,565
Other long-term liabilities. . . . . . . . . . . . . . . . -- -- 35,980
--------- --------- ----------
Total liabilities . . . . . . . . . . . . . . . 58,089 250,675 895,242
Shareholders' equity:
Common stock. . . . . . . . . . . . . . . . . . -- -- 380,537
Retained earnings . . . . . . . . . . . . . . . -- -- 41,720
--------- --------- ----------
Total shareholders' equity. . . . . . . . . . -- -- 422,257
--------- --------- ----------
Total liabilities and shareholders' equity. . $ 58,089 $ 250,675 $1,317,499
========= ========= ==========
</TABLE>
See accompanying notes to pro forma financial information.
41
<PAGE> 46
PHYCOR, INC. AND STRAUB CLINIC & HOSPITAL, INCORPORATED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(All Amounts Expressed in Thousands, Except for Earnings Per Share)
(Unaudited)
<TABLE>
<CAPTION>
Combined
Results for Straub
Phycor 1995 and 1996 1995 and 1996 ------------------------
Historical Transactions Adjustments Transactions Historical Adjustments
---------- ------------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Net revenue . . . . . . . $339,144 $ 1,622 $ 66,099 (B) $ 406,865 $ -- $ 6,051 (B)
Net patient service
revenue . . . . . . . . -- 108,262 (108,262)(A) -- 99,163 (99,163)(A)
-------- -------- --------- ---------- -------- ---------
339,144 109,884 (42,163) 406,865 99,163 (93,112)
Direct clinic expenses . . 247,312 52,200 -- 299,512 66,931 (66,931)(G)
Physician compensation and
benefits . . . . . . . . -- 42,972 (42,972)(A) -- 20,309 (20,309)(A)
General corporate expenses 10,275 -- -- 10,275 -- --
Rents and leases . . . . . 28,039 6,408 -- 34,447 4,080 (4,080)(G)
Interest, net . . . . . . . 4,518 939 2,188 (D) 7,645 2,959 (1,246)(D)
Depreciation and
amortization . . . . . . 17,562 1,541 1,218 (E) 20,321 1,748 747 (E)
(448)(G)
Minority interests in
earnings of consolidated
partnerships. . . . . . . 5,244 -- -- 5,244 -- --
-------- -------- --------- ---------- -------- ---------
Earnings before income
taxes . . . . . . . . . 26,194 5,824 (2,597) 29,421 3,136 (845)
Income tax expense. . . . . 10,085 -- 1,242 (C) 11,327 1,380 (498)(C)
-------- -------- --------- ---------- -------- ---------
Net earnings . . . . . . $ 16,109 $ 5,824 $ (3,839) $ 18,094 $ 1,756 $ (347)
======= ===== ====== ====== ===== ====
Earnings per share . . . . $.27 $.30
=== ===
Weighted average number of
shares outstanding . . . 60,377 60,957
====== ======
<CAPTION>
Pro Forma Other Pending Transactions Pro Forma
Combined -------------------------- Combined
Subtotals Historical Adjustments Totals
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue
Net revenue . . . . . . . $412,916 $ -- $ 89,429 (B) $474,136
(28,209) (F)
Net patient service
revenue . . . . . . . . -- 140,853 (140,853) (A) --
------- ------- --------- --------
412,916 140,853 (79,633) 474,136
Direct clinic expenses . . 299,512 70,686 (21,144) (F) 349,054
Physician compensation and
benefits . . . . . . . . -- 56,003 (56,003) (A) --
General corporate expenses 10,275 -- -- 10,275
Rents and leases . . . . . 34,447 5,460 (2,006) (F) 37,901
Interest, net . . . . . . . 9,358 1,285 1,161 (D) 10,900
(904) (F)
Depreciation and
amortization . . . . . . 22,368 2,304 1,523 (E) 24,838
(1,357) (F)
Minority interests in
earnings of consolidated
partnerships. . . . . . . 5,244 -- -- 5,244
------- ------- --------- --------
Earnings before income
taxes . . . . . . . . . 31,712 5,115 (903) 35,924
Income tax expense. . . . . 12,209 -- 1,621 (C) 13,830
------- ------- --------- --------
Net earnings . . . . . . $19,503 $ 5,115 $ (2,524) $ 22,094
======= ======= ========= ========
Earnings per share . . . . $.32 $.35
==== ====
Weighted average number of
shares outstanding . . . 61,183 62,694
====== ======
</TABLE>
See accompanying notes to pro forma financial information
42
<PAGE> 47
PHYCOR, INC. AND STRAUB CLINIC & HOSPITAL, INCORPORATED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(All Amounts Expressed in Thousands, Except for Earnings Per Share)
(Unaudited)
<TABLE>
<CAPTION>
Combined
Results for 1995 Straub
PhyCor 1995 and 1996 and 1996 ------------------------
Historical Transactions Adjustments Transactions Historical Adjustments
---------- ------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Net revenue . . . . . . . . . . $ 441,596 $ 2,478 $231,721 (B) $675,795 $ -- $11,303 (B)
Net patient service revenue . . -- 381,243 (381,243)(A) -- 192,933 (192,933)(A)
-------- ------- ------- ------- ------- --------
441,596 383,721 (149,522) 675,795 192,933 (181,630)
Direct clinic expenses . . . . . 323,076 179,957 -- 503,033 131,115 (131,115)(G)
Physicians' compensation and
benefits . . . . . . . . . . . -- 166,195 (166,195)(A) -- 39,227 (39,227)(A)
General corporate expenses . . . 14,191 -- -- 14,191 -- --
Rents and leases . . . . . . . . 36,740 18,664 -- 55,404 10,057 (10,057)(G)
Interest, net . . . . . . . . . . 3,414 3,254 5,730 (D) 12,398 6,522 (3,097)(D)
Depreciation and amortization . . 21,445 6,326 4,648 (E) 32,419 3,410 1,474 (B)
(810)(G)
Minority interest in earnings of
consolidated partnerships . . . 6,933 -- -- 6,933 -- --
-------- ------ ------- ------- ------- --------
Earnings before income taxes . . 35,797 9,325 6,295 51,417 2,602 1,202
Income tax expense . . . . . . . 13,923 425 5,667 20,015 (2,991) 4,475 (C)
-------- ------ ------- ------- ------- -------
Net earnings . . . . . . . . . $ 21,874 $8,900 $628 $31,402 $5,593 $(3,273)
======== ====== ======= ======= ======= =======
Earnings per share . . . . . . . $.41 $.57
======== =======
Weighted average number of
shares outstanding . . . . . . 53,510 55,190
======== =======
<CAPTION>
Pro Forma Other Pending Transactions Pro Forma
Combined -------------------------- Combined
Subtotals Historical Adjustments Totals
--------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Revenue:
Net revenue . . . . . . . . . . $687,098 $ -- $167,421 (B) $850,006
(4,513)(F)
Net patient service revenue . . -- 266,505 (266,505)(A) --
------- ------- -------- -------
687,098 266,505 (103,597) 850,006
Direct clinic expenses . . . . . 503,033 130,631 (3,430)(F) 630,234
Physicians' compensation and
benefits . . . . . . . . . . . -- 122,203 (122,203)(A) --
General corporate expenses . . . 14,191 -- -- 14,191
Rents and leases . . . . . . . . 55,404 10,920 (86)(F) 66,238
Interest, net . . . . . . . . . . 15,823 3,172 1,722 (D) 20,614
(103)(F)
Depreciation and amortization . . 36,493 4,577 3,045 (E) 43,785
(330)(F)
Minority interest in earnings of
consolidated partnerships . . . 6,933 -- -- 6,933
------- ------- ------- -------
Earnings before income taxes . . 55,221 (4,998) 17,788 68,011
Income tax expense . . . . . . . 21,499 -- 4,988 26,487
------- ------- ------- -------
Net earnings . . . . . . . . . $33,722 $(4,998) $12,800 $41,524
======= ======= ======= =======
Earnings per share . . . . . . . $.61 $.73
======= =======
Weighted average number of
shares outstanding . . . . . . 55,416 56,926
======= =======
</TABLE>
See accompanying notes to pro forma financial information.
43
<PAGE> 48
The accompanying pro forma combined financial information presents the
pro forma financial position of PhyCor and subsidiaries and Straub and
subsidiaries as of June 30, 1996 and the results of their operations for the
six months ended June 30, 1996 and the year ended December 31, 1995.
PhyCor acquired Tidewater Physicians Multispecialty Group, Northeast
Arkansas Clinic, PAPP Clinic, Ogden Clinic, Arnett Clinic, Casa Blanca Clinic,
South Texas Medical Clinics and North American Medical Management, Inc.
("North American") in 1995. In 1996, PhyCor acquired South Bend Clinic, APC
Arizona Physicians Center, Clinics of North Texas, Carolina Primary Care,
Harbin Clinic, Clark-Holder Clinic, Focus Health Services, Wilmington Health
Associates, Medical Arts Clinic, SPACO Management Company, Gulf Coast Medical
Group and Hattiesburg Clinic. In addition, PhyCor expects to acquire the assets
of Guthrie Clinic Ltd. and clinics in Ohio, Virginia and Florida. The
accompanying pro forma combined balance sheet includes the acquired assets,
assumed liabilities and effects of financing, as if the Spin-Off Transaction,
the Merger and other pending transactions had been completed on June 30, 1996.
The accompanying pro forma combined statements of operations reflects the pro
forma results of operations of PhyCor and Straub, as adjusted, as if the
Spin-Off Transaction, Merger and other pending transactions had been completed
on the first day of the period presented.
PRO FORMA COMBINED CAPITALIZATION
The adjustments reflected to the pro forma capitalization are as
follows:
(A) Represents the financing of cash paid in connection with the
entering into of the Service Agreement.
(B) Represents mortgages, other notes payable and capital lease
obligations assumed pursuant to the Merger.
(C) Represents PhyCor Common Stock issued in the Merger.
(D) Represents the financing of cash paid in connection with the
acquisitions.
(E) Represents mortgages, other notes payable and capital lease
obligations assumed pursuant to the acquisitions.
(F) Represents convertible notes issued pursuant to the
acquisitions.
(G) Represents deferred payments to the physician groups.
PRO FORMA COMBINED BALANCE SHEET
The adjustments reflected in the pro forma consolidated balance sheet
are to reflect the values of assets acquired and liabilities assumed in
connection with the Merger, transactions completed after June 30, 1996, and
other pending transactions, and to reflect the effects of borrowings, the
issuance of subordinated convertible notes and common stock and to reflect the
recording of intangible assets acquired.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Certain amounts in the historical columns have been combined and
reclassified in order to conform to the PhyCor presentation. The adjustments
reflected to the pro forma consolidated statements of operations are as
follows:
44
<PAGE> 49
(A) To eliminate net patient service revenue and physician
compensation and benefits in total as such will be retained
by the physician groups.
(B) To accrue net revenue resulting from service agreements
related to clinics acquired. Amounts were calculated based
upon actual clinic results for the period, as adjusted, under
the terms of the related service agreements.
(C) To record estimated federal and state income taxes at a
combined rate of 39% in 1995 and 38.5% in 1996.
(D) To reflect interest on acquisition-related borrowings.
Interest was calculated at an annual rate of 6.25%.
(E) To record amortization of the intangible assets. The asset is
amortized over a period of 40 years.
(F) To remove the results of the Guthrie Clinic while under the
management agreement.
(G) To remove expenses retained by Straub under terms of the
Service Agreement.
45
<PAGE> 50
STRAUB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion analyzes the financial condition and the
results of operations of Straub and its subsidiaries for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996. The discussion should be read in conjunction with the consolidated
financial statements of Straub, including the accompanying notes and the
consolidated financial data appearing elsewhere in this Prospectus and Proxy
Statement.
OVERVIEW
Straub has provided continuous medical services in Hawaii since its
founding in 1921. In 1973, Straub Clinic constructed a 159-bed acute care
facility at the original site of "The Clinic," and became known as Straub
Clinic & Hospital, Incorporated as a result of that expansion. Today, Straub
operates what is commonly referred to as an integrated health care delivery
system, which encompasses clinic and physician services, acute care hospital
services, a network of stand-alone clinics and services, insurance products and
the full range of ancillary and support services. This structure is designed
to provide the most cost-effective and coordinated care to patients and to
improve the quality of a patient's health outcome or status. Straub physicians
represent the full spectrum of health care primary and tertiary care
specialties, which is essential in providing patients with integrated and
highly-accessible services.
Straub sees patients from many destinations given the significant
number of tourists visiting Hawaii, and the number of patients who come to
Straub and Hawaii specifically for medical services. Most patients who come to
Straub, however, live and work in Oahu, the most populous island in the State
of Hawaii. Straub obtains payments and reimbursement from a variety of third
party insurance companies and payors, representing over 80% of total revenue in
1995.
Straub currently offers three managed care options, which included
Straub Employee Plan, Straub HMO (in conjunction with HMSA) and Straub Quest
(State of Hawaii Medicaid managed care). Straub obtained approval to market a
Plan A HMO. The Plan A is required to be offered as an option to every
employer, but requires a significant investment in marketing and sales
activity.
Under these various managed care contracts, capitation premiums earned
amounted to $28,574,000 in 1995, $24,061,000 in 1994 and $16,657,000 in 1993.
The trend indicates a shift of business to managed care contracts, especially
after the State of Hawaii instituted the Quest program in 1994.
Below is a table indicating the payor mix of gross revenues earned by
Straub from its hospital and clinic operations for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
-------------------------------------------------- --------------------------------
1995 1994 1993 1996 1995
-------------- -------------- -------------- -------------- --------------
Payor: Hosp. Clinic Hosp. Clinic Hosp. Clinic Hosp. Clinic Hosp. Clinic
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medicare 49% 28% 48% 27% 47% 27% 51% 28% 49% 28%
Medicaid 3% 1% 4% 2% 3% 2% 2% 1% 3% 1%
Managed
Care 6% 13% 5% 10% 5% 10% 7% 14% 6% 12%
Commercial/
Other 42% 58% 43% 61% 45% 61% 40% 57% 42% 59%
--- --- --- --- --- --- --- --- --- ---
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === === === ===
</TABLE>
46
<PAGE> 51
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
income data expressed as percentages of total revenues for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue
Net patient service 89.32% 83.81% 84.34% 84.54% 83.04%
Capitation 9.31 11.79 14.19 13.65 15.32
Other 1.37 4.40 1.47 1.81 1.64
------ ------ ------ ------ ------
Total revenue 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Operating Expenses
Salaries and wages 47.81% 47.07% 47.57% 46.53% 46.84%
Drugs, medical and surgical supplies 8.44 8.38 8.65 8.42 8.28
Taxes, other than income taxes 6.98 6.89 7.13 7.48 7.24
Rent 5.92 5.28 4.99 3.89 3.98
Bad debts 4.85 3.34 4.20 4.86 3.20
Interest 2.86 2.82 3.24 3.31 2.89
Depreciation and amortization 1.94 1.73 1.69 1.68 1.71
Provision for professional liability claims 1.27 2.26 1.67 2.40 1.96
Other 18.29 20.25 19.57 19.65 20.84
------ ------ ------ ------ ------
98.36% 98.02% 98.71% 98.22% 96.94%
====== ====== ====== ====== ======
Income before income taxes 1.64% 1.98% 1.29% 1.78% 3.06%
Income tax expense (credit) (0.02) (2.10) (1.49) 0.00 1.35
------ ------ ------ ------ ------
Net income 1.66% 4.08% 2.78% 1.78% 1.71%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Patient Services and Capitation Premiums. Total patient services
revenue and capitation premiums were $100.7 million for both the six months
ended June 30, 1996 and 1995. There was an overall decline in patient volumes
in both the hospital and clinics. Hospital occupancy decreased to 67% for the
six months ended June 30, 1996 from 78% for the six months ended June 30, 1995.
Patient encounters decreased by 3.5% to 281,729 for the six months ended June
30, 1996 from 291,863 for the six months ended June 30, 1995. This decrease was
offset by an increase in capitation premiums as a result of Straub's
participation in the State of Hawaii's Quest program, a medicaid managed care
program started in August, 1994. The membership increased by 22.6% to 4,665
members as of June 30, 1996 from 3,804 members as of June 30, 1995.
Other Operating Revenues and Other Income. Other operating revenues
and other income decreased by 9.2% to $1.7 million for the six months ended
June 30, 1996 from $1.9 million for the six months ended June 30, 1995. This
decrease was primarily the result of lower investment income from an affiliate
of Straub.
Salaries and Wages. Salaries and wages increased to $48.0 million for
the six months ended June 30, 1996 from $47.7 million for the six months ended
June 30, 1995. This increase was a result of adding physicians to several
departments and practice areas, including Doctors on Call, the primary care
network of clinics in Waikiki.
47
<PAGE> 52
Drugs, Medical and Surgical Supplies. Drugs and medical and surgical
supplies decreased by 1.7% to $8.5 million for the six months ended June 30,
1996 from $8.6 million for the six months ended June 30, 1995. This decrease
was primarily attributable to favorable pricing for various drugs and supplies.
Taxes, Other Than Income Taxes. Taxes, other than income taxes,
decreased by 3.3% to $7.4 million for the six months ended June 30, 1996 from
$7.7 million for the six months ended June 30, 1995. This decrease was
primarily attributable to reduced state general excise taxes owed by Straub for
such six month period.
Rent. Rent increased by 2.2% to $4.1 million for the six months ended
June 30, 1996 from $4.0 million for the six months ended June 30, 1995. This
increase was primarily due to various occupancy lease rate increases.
Bad Debts. Bad debts decreased by 34.1% to $3.3 million for the six
months ended June 30, 1996 from $5.0 million for the six months ended June 30,
1995. The reduction in bad debts resulted from a reduction during 1996 of the
bad debt reserve to better reflect net medical accounts receivable.
Interest. Interest expense decreased 12.8% to $3.0 million for the six
months ended June 30, 1996 from $3.4 million for the six months ended June 30,
1995. The decrease is primarily attributable to lower interest cost associated
with the refinancing of certain bank debt.
Depreciation and Amortization. Depreciation and amortization expense
was $1.7 million for both the six months ended June 30, 1996 and 1995.
Provision for Professional Liability Claims. Provision for
professional liability claims decreased by 18.4% to $2.0 million for the six
months ended June 30, 1996 from $2.5 million for the six months ended June 30,
1995. This decrease was primarily the result of obtaining a new professional
liability insurance policy with lower premiums and favorable loss experience.
Other. Other expenses increased by 5.9% to $21.3 million for the six
moths ended June 30, 1996 from $20.1 million for the six months ended June 30,
1995. Marketing expenses related to Straub's 75th anniversary, additional lines
of insurance coverage, and an increase in the 401(k) matching contribution were
the primary reasons for this increase.
Income Taxes. Straub's income tax expense was $1.4 million for the six
months ended June 30, 1996. There was no income tax provision for the six
months ended June 30, 1995, due to net operating loss carryforwards available
to offset current income taxes and a re-evaluation of the recoverability of the
net deferred tax assets.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Patient Services and Capitation Premiums. Total patient services
revenue and capitation premiums increased by 1.7% to $198.4 million in 1995
from $195.0 million in 1994. The increase is primarily attributable to
increased capitation revenue as a result of Straub's participation in the State
of Hawaii's Quest program, a medicaid managed care program started in August
1994. Membership in Straub's program doubled from approximately 2,500 enrollees
at the program's inception to approximately 5,000 members at the end of 1995.
Other Operating Revenues and Other income. Other operating revenues
and other income decreased by 66.9% to $3.0 million in 1995 from $9.0 million
in 1994. The decrease is primarily
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<PAGE> 53
attributable to a curtailment gain of $5.6 million recognized by Straub in 1994
as a result of an amendment made to Straub's pension plan which froze benefits
payable to participants at the December 31, 1994 levels.
Salaries and Wages. Salaries and wages decreased to $95.8 million in
1995 from $96.0 million in 1994. The decrease was primarily attributable to
limited staff reductions and permitting vacancies in all departments to remain
unfilled. No major reductions in force or layoffs were instituted.
Drugs, Medical and Surgical Supplies. Drugs and medical and surgical
supplies increased by 1.9% to $17.4 million in 1995 from $17.1 million in 1994.
A modest price increase in the cost of drugs and supplies implemented by
vendors was the primary reason for the increase in expense.
Taxes, Other Than Income Taxes. Taxes, other than income taxes,
increased by 2.1% to $14.4 million in 1995 from $14.1 million in 1994. The
increase was primarily attributable to higher payroll and employment taxes.
Rent. Rent decreased by 6.6% to $10.1 million in 1995 from $10.8
million in 1994. The decrease was primarily attributable to the repayment of
approximately $1.0 million of equipment leases at the end of 1994.
Bad Debts. Bad debts increased by 24.2% to $8.5 million in 1995 from
$6.8 million in 1994. The increase in bad debt expense was primarily
attributable to an increase in the allowance for uncollectible accounts
provided for by Straub in anticipation of higher write-offs resulting from a
downturn in the Hawaii economy.
Interest. Interest expense increased by 13.5% to $6.5 million in 1995
from $5.7 million in 1994. The increase was primarily attributable to increases
in the obligations owed to participants in Straub's non-qualified retirement
plan.
Depreciation and Amortization. Depreciation and amortization decreased
by 3.2% to $3.4 million in 1995 from $3.5 million in 1994. The decrease was
primarily attributable to the full depreciation of certain equipment and
improvements during 1994.
Provision for Professional Liability Claims. Provision for
professional liability claims decreased by 27% to $3.4 million in 1995 from
$4.6 million in 1994. The decrease was primarily caused by lower reserves
required for open claims. In addition, several large claims were settled in
1994.
Other. Other expenses decreased by 4.7% to $39.4 million in 1995 from
$41.3 million in 1994. In 1995, management initiated organizational-wide
cost savings measures. In addition, Straub recorded a net pension benefit of
$400,000 compared to an expense of $1.3 million in 1993. The decrease in
pension expense was the result of freezing Straub's defined benefit plan.
Credit for Income Taxes. Straub's credit for income taxes was $3.0
million and $4.3 million in 1995 and 1994, respectively. The credit for income
taxes was primarily attributable to reductions made to the valuation allowance
of $3.8 million and $6.7 million at the end of 1995 and 1994, respectively. The
reductions were based on management's evaluation of the ability to realize the
next year's deferred tax assets. A partial valuation allowance of $3.8 million
was provided for in 1994. As a result of continued operating profits, however,
no valuation allowance was provided for in 1995.
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<PAGE> 54
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Patient Services and Capitation Premiums. Total patient services
revenue and capitation premiums increased by 10.5% to $195.0 million in 1994
from $176.4 million in 1993. The increase was primarily attributable to
significant patient volume increases in both the hospital and clinic.
Admissions to the hospital increased by 4.7% to 6,578 in 1994 from 6,282 in
1993. Hospital occupancy increased to 81% in 1994 from 74% in 1993. Clinic
patient encounters increased by 5.8% to 543,134 in 1994 from 513,198 in 1993.
Also contributing to the increase was capitation premiums of $5.3 million
related to medical coverage provided to Straub's employees.
Other Operating Revenues and Other Income. Other operating revenues
and other income increased by 266.2% to $9.0 million in 1994 from $2.4 million
in 1993. The increase is primarily attributable to a curtailment gain of $5.6
million recognized by Straub in 1994 as a result of an amendment made to
Straub's pension plan which froze benefits payable to participants at the
December 31, 1994 levels.
Salaries and Wages. Salaries and wages increased by 12.2% to $96.0
million from $85.5 million in 1993. In 1994, Straub reacquired the business
office operation that was previously outsourced resulting in the addition of
approximately 130 employees to Straub's payroll.
Drugs, Medical and Surgical Supplies. Drugs and medical and surgical
supplies increased by 13.3% to $17.1 million in 1994 from $15.1 million in
1993. Increases in the patient volumes for both the hospital and clinics were
the primary sources for the increase in drugs and supplies expense.
Taxes, Other Than Income Taxes. Taxes, other than income taxes,
increased by 12.6% to $14.1 million in 1994 from $12.5 million in 1993. The
increase was primarily attributable to higher payroll and employment taxes and
higher Hawaii state general excise taxes resulting from a corresponding
increase in patient care revenues and capitation premiums.
Rent. Rent increased by 1.7% to $10.8 million in 1994 from $10.6
million in 1993. Equipment purchased under operating leases was the primary
reason for the increase in rent expense.
Bad Debts. Bad debts decreased by 21.5% to $6.8 million in 1994 from
$8.7 million in 1993. The decrease was primarily attributable to better
realization on receivables due to improvements made to collection processes and
more focused collection efforts during 1994.
Interest. Interest expense increased by 12.3% to $5.7 million in 1994
from $5.1 million in 1993. The increase was primarily attributable to
borrowings made during 1994 by Straub for medical equipment totalling $1.0
million. In addition, Straub assumed notes payable totalling $2.4 million
pursuant to the liquidation and dissolution of a partnership in which Straub
had an interest.
Depreciation and Amortization. Depreciation and amortization was $3.5
million for both 1993 and 1994. There was no material change to depreciation
expense because the majority of equipment purchased during 1994 was financed
through operating leases.
Provision for Professional Liability Claims. Provision for
professional liability claims increased by 103.1% to $4.6 million in 1994 from
$2.3 million in 1993. The increase was primarily caused by several large claim
settlements made in 1994.
Other. Other expenses increased by 26.3% to $41.3 million in 1994 from
$32.7 million in 1993. The increase was primarily attributable to recording of
Straub's group health insurance costs totalling $5.3 million. In 1993, this
cost was offset against capitation premiums.
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<PAGE> 55
Credit for Income Taxes. Straub's credit for income taxes was $30,000
and $4.3 million in 1993 and 1994, respectively. The credit for income
taxes was primarily attributable to reductions made to the valuation allowance
of $6.7 million and $1.0 million at the end of 1994 and 1993, respectively. The
reductions were based on management's evaluation of the ability to realize the
next year's deferred tax assets. A partial valuation allowance of $3.8 million
and $10.5 million was provided for in 1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1993, 1994 and 1995, net cash
provided by operating activities was $3.1 million, $4.1 million and $16.2
million, respectively. The increases are primarily due to improved operating
performance, increased collection of third party accounts receivable and
overall reduction of operating costs. For the six months ended June 30, 1996,
net cash provided by operating activities was $6.0 million as compared to $8.0
million for the comparable period of 1995. The decrease is primarily a result
of lower patient volumes in both the hospital and clinics.
For the years ended December 31, 1993, 1994 and 1995, net cash used in
investing activities was $49,000, $2.9 million and $3.2 million, respectively.
For the six months ended June 30, 1996, net cash used in investing activities
was $1.7 million as compared to $1.1 million for the comparable period of 1995.
The increases are attributable to Straub's increased level of investment in
capital equipment and investments in affiliated entities of Straub.
In December 1993, net assets of $2.0 million were transferred from
Straub Partnership to Straub. Included in the transfer was the land underlying
Straub's hospital and main facility clinics. The land transfer enhanced
Straub's ability to manage its financial affairs and keep pace with its capital
requirements. In December 1994, Straub restructured both long-term and current
debt with its lead creditor bank, Bank of Hawaii. The Bank of Hawaii loan is
collateralized by substantially all of Straub's personal property, including
furniture, fixtures, equipment and inventory. In addition, the bank holds a
first mortgage on the land, hospital and clinic buildings and improvements
occupying Straub's main campus. The loan agreement requires Straub to maintain
certain debt service coverage and net income levels. Straub has been in
compliance with these financial covenants throughout the term of the agreement.
Simultaneously with the restructuring of the Bank of Hawaii debt,
Straub obtained a revolving line of credit with Congress Financial Corporation
(CFC) (the "CFC Credit Facility") using current net accounts receivable as
collateral. The maximum available under the CFC Credit Facility is the lesser
of $20.0 million or a percentage of Straub's net accounts receivable. At June
30, 1996, $2.2 million was outstanding under the CFC Credit Facility. The loan
agreement requires Straub to maintain certain working capital and net worth
levels. Straub has been in compliance with these financial covenants throughout
the term of the CFC Credit Facility.
Straub has various standby letters of credit in connection with its
malpractice and workers compensation insurance programs, participation in the
State of Hawaii Quest program and an occupancy lease. These letters of credit
have various expiration dates, ranging from October 31, 1997 through October
31, 1999. The total commitment for these standby letters of credit is $5.1
million. There were no borrowings under these letters of credit at June 30,
1996.
Straub has a promissory note from The Doctors' Clinic,
a multi-specialty practice located in the Territory of Guam. Straub
owns a 50% interest in the partnership that owns The Doctors' Clinic and manages
The Doctors' Clinic through a wholly-owned subsidiary pursuant to a long-term
service agreement. As of June 30, 1996, the note, which was amended in August
1996 and matures on November 30, 1996, had an outstanding balance of $3.6
million. The note is secured by the remaining 50% interest in The Doctors'
Clinic. Straub anticipates that The Doctors' Clinic will not be able to repay
its outstanding indebtedness to Straub on the scheduled maturity date of
November 30, 1996. Accordingly, Straub and The Doctors' Clinic are currently
negotiating a restructuring of the outstanding debt. Straub and PhyCor are also
involved in negotiations for the acquisition by either of them of 100% of the
partnership interest in the partnership which owns The Doctors' Clinic. There
can be no assurance, however, that either the restructuring of the debt or the
acquisition of 100% of the partnership interest will be successfully consummated
in conjunction with the Merger or otherwise.
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<PAGE> 56
The CFC Credit Facility and cash flow provided by operations are
Straub's principal sources of funding capital needs for equipment acquisitions,
expansion and refurbishment of the facilities, and developing new services.
Straub believes that its liquidity and capital resources are adequate to
continue to meet liquidity requirements for the foreseeable future.
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<PAGE> 57
STRAUB CLINIC & HOSPITAL, INCORPORATED
HISTORY
Straub was founded in 1921 by George F. Straub, M.D. and began as a
5-physician practice in the Honolulu, Hawaii area. Since that time, Straub has
added additional physicians, medical specialties and services and is today one
of the oldest and largest private multi-specialty group medical practices in
Hawaii. Upon the completion of its 159-bed acute care hospital in 1973, Straub
became a fully integrated clinic and hospital system.
Straub employs approximately 200 doctors, and over 1,800 nurses,
medical staff and employees. Together, they provide services to more than
550,000 outpatients at Straub's main clinic facility and 11 additional
locations throughout Hawaii, almost 47,000 days of hospital care, and over
20,000 emergency care treatments each year.
After nearly eight decades of service, Straub has emerged as a leading
integrated health care system in Hawaii. Outside of Hawaii, Straub operates
The Doctors' Clinic in Guam and treats a significant number of patients from
other Pacific island communities, including the Commonwealth of Northern
Marianna Islands, American Somoa and Federated States of Micronesia.
OPERATIONS
Straub is governed by a nine-member board of directors. Several
standing committees have been established by the Board of Directors to provide
information to the Board of Directors. They include the Executive Management
Committee, Medical Executive Committee, Quality Council, and Operations
Management Committee. Other ad hoc committees are established from time to time
to review special issues and make recommendations to the Board.
The daily operations of the clinic are carried out by a management
staff composed of a Chief Executive Officer and three Vice Presidents.
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<PAGE> 58
The medical staff of the clinic is divided into the following
departments, with each department supervised by a Department Chief:
<TABLE>
<CAPTION>
Number of
Physicians
Practicing in
Department Department
---------- ----------
<S> <C>
Allergy 1
Anesthesiology 5
Cardiology 4
Chest Diseases 3
Dermatology 5
Doctors on Call 22
Emergency Services 14
Endocrinology and Metabolism 2
Family Practice 10
Gastroenterology 4
Geriatric Medicine 2
Hospital Services 6
Infectious Diseases 1
Internal Medicine 21
Nephrology 4
Neurology 3
Neurosurgery 2
Neurological Evaluation and Consultation 1
Ningen Dock (Human Dry Dock) 1
Nuclear Medicine 1
Obstetrics & Gynecology 9
Occupational Health Programs 8
Oncology/Hematology 3
Ophthalmology 5
Orthopedics, Sports Medicine and Rehabilitation 7
Otolaryngology (ENT) 3
Pathology 3
Pediatrics 10
Plastic Surgery 3
Psychiatry/Psychology 5
Radiology 7
Rheumatology 3
Surgery 8
Urology 3
Urgent Care 11
---
Total 200
===
</TABLE>
SERVICES
Straub offers a broad range of specialty and ancillary services.
They include Allergy, Anesthesiology, Burn Unit, Cardiology/Cardiosurgery,
Dermatology, Emergency/Urgent Care, Family Practice, Gastroenterology,
Geriatric medicine/Home Care, Infectious Diseases, Internal Medicine, Joslin
Center for Diabetes, Neurology and Neurosurgery, Ningen Dock, Nuclear Medicine,
Obstetrics and Gynecology, Occupational Health, Oncology and Hematology,
Ophthalmology, Orthopedics, Sports Medicine and Rehabilitation, Otolaryngology,
Pathology, Pediatrics, Plastic and Reconstructive Surgery,
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<PAGE> 59
Psychiatry and Psychology, Pulmonary Medicine, Radiology, Respiratory Care
Services, Rheumatology, Sleep Disorder Center of the Pacific, Surgery and
Urology.
Over its 75-year history, Straub has been an innovative leader in
advancing medical care in Hawaii. It has achieved many medical "firsts" in the
state through the introduction of new surgical procedures, technologies and
treatment programs. The following are examples of how Straub has been a leader
in the medical community.
BURN UNIT. The only one of its kind in the Pacific Basin, Straub's
Burn Unit treats burn victims, prevents potentially fatal infections
and minimizes and corrects deformities with special equipment and
specially trained medical professionals. Established in 1983, the Burn
Unit has treated more than 500 people in Hawaii, many of whom would
not have received necessary care unless transferred to a mainland burn
center.
JOSLIN CENTER FOR DIABETES. The Joslin Center for Diabetes was opened
in 1995 at Straub. The Joslin Diabetes Center in Boston has been the
premier diabetes research and treatment center in the nation for 100
years. World-renowned for its outstanding research and innovative
methods in treating diabetes, Joslin's collaboration with Straub is a
major milestone in the treatment of diabetes in Hawaii and throughout
the Pacific.
SURGERY. Straub introduced the use of endoscopic surgery in Hawaii,
which involves the insertion of a thin telescope-like tube that
provides a video image of the procedure and avoids the need for a
large surgical incision. Straub was the first to perform bariatric
surgery in Hawaii, a gastric bypass procedure that compartmentalizes
the stomach. Straub was the first in Hawaii to do arthroscopic surgery
of the knee, a breakthrough in sports medicine. Straub was the first
to perform mohs surgery in Hawaii, a highly specialized technique for
the total removal of skin cancers.
VALVULOPLASTY. Straub was the first in the world to offer the
valvuloplasty procedure invented by Straub's Dr. Robert Kistner to
repair the valve located in the femoral vein of the thigh. This
procedure opened up a field of medicine worldwide for venous repair.
CARDIOLOGY. Straub was one of the first to perform heart bypass
surgery in Hawaii. It was the first to perform electrophysiological
studies to detect and treat irregular heart rhythm; the first to do
cardiac ablations, which clear abnormal electric pathways in the
heart; and the first to perform Arthrectomy, a procedure for scraping
the inside of blood vessels to remove cholesterol deposits. Straub was
also the first to offer mobile screening for cardiac risk through its
CardioVisit program. Straub Cardiology continues to offer a full range
of the most modern services in adult cardiology. These include
diagnostic evaluation and intervention using such procedures as
angiograms, echocardiograms, Holter monitoring, exercise tolerance
testing, thallium stress testing, coronary angioplasty and
electrophysiology testing.
NEUROLOGICAL SERVICES. Straub established the first full-service
Neurophysiology Lab, which records and monitors stimulus to the brain.
Straub has the only ambulatory EEG/EKG unit, which tracks abnormal
brain waves of outpatients likely to experience seizures and the only
Topographical Brain Mapping computer to reveal abnormal brain waves
and brain dysfunctions. Straub was the first in Hawaii to provide
neighbor island clinics with Electroencephalographs to record brain
waves; the first medical center in Hawaii to perform surgery that stops
facial twitch; and the only medical center to offer a full range of
Evoked Response procedures to elicit information about diseases of the
lower brain, spinal cord and the eyes.
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<PAGE> 60
SLEEP DISORDERS CENTER. Straub is the only medical center in the
Pacific Basin to establish an accredited Sleep Disorders Center, which
offers comprehensive diagnostic and treatment services to patients
with sleep-related disorders, including insomnia, excessive daytime
sleepiness, sleep apnea, heavy snoring, narcolepsy, nightmares,
sleepwalking and sleeptalking.
CHEMOTHERAPY. Straub's outpatient treatment center was the first in
Hawaii to use ambulatory infusion pumps for chemotherapy, which
increases the cancer patient's independence. Such treatment was
previously administered to patients in the hospital only.
RADIOLOGY. Straub is the only provider in Hawaii to offer
interventional radiology. This new branch of radiology uses special
catheters and guide wires to perform therapeutic procedures that would
otherwise require surgery. Straub was the first medical facility to
offer a phased array MRI scanner that produces very clear images of
internal organs.
OCCUPATIONAL HEALTH. Since 1966, Straub has been helping Hawaii
companies control health care costs through occupational health
services. Straub continues to be a leader in this area, helping to
contain workers compensation costs through its sponsorship of an
occupational-related program called Straub HealthWorks. Straub also
provides ADA-compliant physical examinations, quality care of injured
workers, physicals for workers and executives, work-site surveys and
drug screening services, health education and wellness classes on many
topics, including back injury prevention and smoking cessation.
Straub recently launched the "Back to Work" program that introduces a
managed care approach to workers' compensation. A product of Straub
HealthWorks, the program is designed to work closely with both
employers and health care providers to prevent on-the-job injuries and
to help injured employees return to work as quickly as possible.
NINGEN DOCK. In 1995, Straub opened Hawaii's first Ningen Dock program
in conjunction with the Noguchi Medical Research Institute of Japan.
This "human dry dock" consists of a thorough physical examination for
executives from Japan and will help secure Hawaii's position as the
health center of the Pacific.
DOCTORS ON CALL. Since the late 1980s, Straub has operated several
primary care clinic locations in Waikiki which predominately serve
the Japanese visitor population. The clinics provide immediate urgent
care services in hotel locations. Doctors on Call is staffed by full
and part-time physicians and nursing personnel, offering 24-hour
service in one facility. Doctors on Call has full-time marketing and
administrative personnel to work with the appropriate Japanese tour
and insurance companies to promote Doctor on Call's services.
Straub provides several managed health care programs for more than
20,000 Hawaii residents. StraubCare Quantum participates under the state's
Quest medicaid program on the islands of Oahu and Lanai. StraubCare Plus
provides comprehensive health care services to the people of Hawaii at a
reasonable cost, including preventative care, outpatient professional care,
health education, home health and hospice care, hospital services, a skilled
nursing facility, emergency care, and mental health and substance abuse
services. Through the StraubCare Advantage program, Straub is one of the few
medical organizations licensed to contract directly with companies in order to
provide health care services for their employees. Straub also provides coverage
to its 2,000 employees and over 1,200 of their dependents.
Straub's hospital services include a full range of acute care tertiary
and routine services. The 159-bed facility is located on the main campus of
Straub, providing one major service location for patients. The hospital
provides a full range of services described above through a traditional
departmental system
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<PAGE> 61
of physicians. The hospital does not provide obstetrical and tertiary pediatric
services; Straub physicians primarily use Kapiolani Hospital for those
services. The hospital is unique in that all inpatient rooms are private.
EMPLOYEES
Straub employs approximately 200 multi-specialty physicians and 1,800
employees.
PROPERTIES
Straub's main hospital, clinic and emergency room facilities are
located at 888 South King Street, Honolulu, Hawaii. These facilities along with
a parking garage and parking lot occupy an aggregate of 259,759 square feet.
The land and improvements on this site are owned by Straub with the exception
of 31,498 square feet of land under the parking garage which is owned by the
pension plan for the employees of Straub and leased to Straub.
In addition to the King Street facilities, Straub provides urgent and
out-patient clinic care in the Oahu communities of Aiea, Waikiki, Westridge,
Pali Momi, Mililani, Kapolei, Kaneohe, Kailua, Hawaii Kai and the Financial
District of downtown Honolulu. Straub also established a clinic in Kailua-Kona,
Hawaii and is the sole commercial medical provider on the island of Lanai. The
occupancy leases for the satellite clinics are for varying periods, different
terms and at different rental rates.
LITIGATION
In late 1995, Straub was served with a federal search warrant
in connection with an investigation of Straub's billings and receivables
practices, including with respect to Medicare, Medicaid and CHAMPUS. The
government has not completed its investigation. Straub believes that the
billing errors resulted from a system conversion and took steps to eliminate
further billing problems upon discovering the errors. Straub is cooperating
with the government's continuing investigation. It is not possible at this time
to predict the nature or value of any claim the government may assert against
Straub or New Straub P.C.
In February 1993, Straub instituted a lawsuit in the Circuit Court of
the First Circuit, State of Hawaii, against KPMG Peat Marwick LLP for damages
suffered as a result of wrongful acts and omissions by KPMG Peat Marwick LLP in
performing a feasibility study and implementation work that led Straub to enter
into a partnership with Kapiolani Systems, Inc., known as "Infotech." The
lawsuit alleges that KPMG Peat Marwick LLP is liable to Straub for breach of
contract, fraud, negligent misrepresentation, and breach of fiduciary duty in
connection with that feasibility study and implementation work. Because
discovery is not yet completed, it is not feasible to predict the outcome of
this dispute. KPMG Peat Marwick LLP has filed a counterclaim against Straub
seeking money damages for unpaid fees billed, plus interest and attorneys'
fees.
There are various other claims and lawsuits pending against Straub
involving complaints which arose in the normal course of its operations.
Straub believes the resolution of these claims will not have a material adverse
effect on the business, operating results, or financial position of PhyCor.
MATERIAL AGREEMENTS BETWEEN STRAUB AND PHYCOR
As of October 1, 1996, Straub and PhyCor-Hawaii, entered into the
Administrative Services Agreement. The Administrative Services Agreement
provides for the provision of certain consulting services by PhyCor to Straub
in connection with the operations of Straub prior to the consummation of the
Merger and the payment to PhyCor-Hawaii of a monthly fee for performing such
services, the first payment of which is due as of November 1, 1996. The
Administrative Services Agreement terminates on the
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<PAGE> 62
earlier of (i) the effective date of the Merger, (ii) the termination of the
Agreement of Merger or (iii) February 28, 1997. The Administrative Services
Agreement may also be terminated by either party upon the filing of a petition
in voluntary bankruptcy or an assignment for the benefit of creditors or upon a
material default in the performance of any duty or obligation unless cured
within thirty (30) days. In the event that the Administrative Services
Agreement terminates as a result of the consummation of the Merger, any accrued
but unpaid fees shall be assumed by PhyCor as a result of the Merger.
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<PAGE> 63
STRAUB PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding
beneficial ownership as of June 30, 1996 by (i) each director of Straub and
(ii) all directors and officers of Straub as a group. No shareholder
beneficially owns more than 5% of the outstanding capital stock of Straub. The
persons or entities listed below have sole voting and investment power with
respect to all shares shown to be beneficially owned by them.
<TABLE>
<CAPTION>
Shares of
Percent of Outstanding PhyCor
Name of Shares of Straub Capital Straub Common
Beneficial Owner Stock Beneficially Owned Capital Stock Stock Percent of
---------------- ------------------------ ------------- Beneficially PhyCor
Series C Series C Owned After Stock to be
-------- -------- the Owned After
Common Preferred (1) Common Preferred (1) Merger(2) the Merger
------ ------------- ------ ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Flair, M.D. 17,008 202,616 * 2.0 1,855 *
Robert W. Schulz, M.D. 17,008 141,877 * 1.4 1,855 *
Cedric K. Akau, M.D. 17,008 31,241 * * 1,855 *
William T. Tsushima, M.D. 17,008 234,739 * 2.3 1,855 *
Jay L. Grekin, M.D. 17,008 106,260 * 1.0 1,855 *
John T. Berthiaume, M.D. 17,008 80,235 * * 1,855 *
George O. McPheeters, M.D. 17,008 48,224 * * 1,855 *
Steven Y. Orimoto, M.D. 17,008 24,203 * * 1,855 *
Gerald W. Mayfield, M.D. 17,008 140,331 * 1.4 1,855 *
All officers and directors as a
group (10 persons) 170,080 1,259,302 8.2 12.3 18,550 *
</TABLE>
- ------------------------
* Less than 1%
(1) The shares of Series C Preferred Stock are non-voting securities but
are eligible to vote on the Merger at the Special Meeting.
(2) Based upon the product of the number of shares of Straub Common Stock
held by each shareholder as of June 30, 1996 and the conversion ratio
described in the Agreement of Merger. In the event the number of
shares of PhyCor Common Stock issuable to the holders of Straub Common
Stock is adjusted pursuant to the terms of the Agreement of Merger,
these share amounts would be adjusted accordingly.
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<PAGE> 64
PRINCIPAL DIFFERENCES BETWEEN RIGHTS OF
HOLDERS OF COMMON STOCK UNDER THE GOVERNING
INSTRUMENTS OF PHYCOR AND STRAUB
The Bylaws, as amended, of Straub (the "Straub Bylaws") provide for
the redemption of a shareholder's shares following the death or
disqualification of the shareholder to practice medicine. No such redemption
rights exist in PhyCor's Restated Charter, as amended (the "PhyCor Charter") or
its Amended Bylaws (the "PhyCor Bylaws"). Under the Articles of Incorporation,
as amended, of Straub (the "Straub Articles"), and Hawaii law, only individuals
licensed to practice medicine may be shareholders of Straub. PhyCor's Charter
and Bylaws do not restrict its shareholders to only those individuals
practicing medicine in a particular area.
The Straub Articles provide for common stock and preferred stock,
including the Series C Preferred Stock, which has no voting powers. The Straub
Articles also provide that Straub maintain an irrevocable option to repurchase
all shares of Straub Common Stock.
The PhyCor Charter and PhyCor Bylaws do not contemplate more than one
class of common stock, and all such shares of PhyCor Common Stock have the same
voting rights and the same rights to receive assets of PhyCor upon its
dissolution. The PhyCor Charter provides for the creation of multiple series of
preferred stock which may be given preferences over holders of PhyCor
Common Stock as to dividends, redemption, payments on liquidation, conversion
privileges and voting rights.
While holders of 20% of the outstanding shares of Straub are necessary
to call a special meeting of Straub Shareholders, PhyCor's Bylaws only require
holders of 10% of the outstanding shares to call a special meeting.
The PhyCor Charter and PhyCor Bylaws provide for a classified board on
which directors serve staggered terms of up to three years. The Straub Bylaws
provide for nine members who shall be shareholders of Straub and shall serve
for staggered terms of three years.
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MANAGEMENT OF STRAUB
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Blake E. Waterhouse, M.D. 60 President and Chief Executive Officer
William H. Montgomery, M.D. 58 Vice President
Louise L. Liang, M.D. 47 Chief Operating Officer
Merle A. Ryland 46 Chief Financial Officer
Robert C. Flair, M.D. 60 Secretary and Director
Robert W. Schulz, M.D. 58 Treasurer and Director
Cedric K. Akau, M.D. 41 Director
William T. Tsushima, M.D. 58 Director
Jay L. Grekin, M.D. 49 Director
John T. Berthiaume, M.D. 44 Director
George O. McPheeters, M.D. 43 Director
Steven Y. Orimoto, M.D. 44 Director
Gerald W. Mayfield 64 Director
</TABLE>
All directors are elected to the Board of Directors by the vote of the
holders of the Straub Common Stock. Directors serve staggered terms of three
years. Directors receive annual compensation of $10,000 for their service on
the Board of Directors. The Board of Directors has several standing committees,
including the following: Heads of Sections Committee, Building Committee,
Education and Research Committee, Quality Assurance Committee and Physician
Standards Committee. Members of Straub's Board of Directors serve on one or
more of these standing committees. Additional members of the committees are
selected by the Board of Directors from other physicians of Straub who are not
currently serving on the clinic's Board. These committees review certain
matters and make recommendations to the Board of Directors. The Board of
Directors may also from time to time create other special committees to review
particular issues and make recommendations to the Board.
Dr. Waterhouse has served as President of Straub since 1990. Dr.
Waterhouse is a non-practicing physician who specialized in the practice of
internal medicine. Dr. Waterhouse joined Straub in 1990.
Dr. Montgomery has served as Vice President of Straub since 1990. Dr.
Montgomery is a physician specializing in the practice of anesthesiology. Dr.
Montgomery joined Straub in 1971.
Dr. Liang joined Straub in 1992 and has served as COO since then. She
is a non-practicing physician who was trained as a pediatrician.
Mr. Ryland has served at Straub since 1991. He currently also serves
as President and Director of Straub Development Corp., and as President and
Director of The Doctors' Clinic (Guam).
Dr. Flair has served as Secretary of Straub since 1989. Dr. Flair is a
physician specializing in the practice of pathology. Dr. Flair joined Straub in
1974.
Dr. Schulz has served as Treasurer of Straub since 1989. Dr. Schulz is
a physician specializing in the practice of plastic and reconstructive surgery.
Dr. Schulz joined Straub in 1977.
Dr. Akau has served as a Director of Straub since 1993. Dr. Akau is a
physician specializing in the practice of sports medicine and rehabilitation.
Dr. Akau joined Straub in 1987.
Dr. Tsushima has served as a Director of Straub since 1995. Dr.
Tsushima is a doctor of psychology. Dr. Tsushima joined Straub in 1969.
61
<PAGE> 66
Dr. Grekin has served as a Director of Straub since 1990. Dr. Grekin
is a physician specializing in the practice of dermatology. Dr. Grekin joined
Straub in 1979.
Dr. Berthiaume has served as a Director of Straub since 1995. Dr.
Berthiaume is a physician specializing in the practice of internal medicine.
Dr. Berthiaume joined Straub in 1981.
Dr. McPheeters has served as a Director of Straub since 1996. Dr.
McPheeters is a physician specializing in the practice of general surgery. Dr.
McPheeters joined Straub in 1985.
Dr. Orimoto has served as a Director of Straub since 1994. Dr. Orimoto
is a physician specializing in the practice of internal medicine. Dr. Orimoto
joined Straub in 1987.
Dr. Mayfield has served as a Director of Straub since 1995. Dr.
Mayfield is a physician specializing in the practice of orthopedics. Dr.
Mayfield joined Straub in 1977.
EMPLOYMENT AGREEMENTS AND RESTRICTIVE COVENANTS
PhyCor and Straub currently anticipate that, in connection with the
consummation of the Merger, substantially all of the approximately 200 Straub
physicians, including most of the physician officers and directors of Straub,
will enter into new employment agreements with the New Straub P.C. containing
restrictive covenants. Physicians hired in the future by the New Straub P.C.
will also be subject to employment agreements containing restrictive covenants
substantially similar to those executed in connection with the Spin-Off
Transaction and the Merger.
In general, the restrictive covenants contained in such employment
agreements prohibit competition with Straub in the practice of medicine or
surgery within a 10-mile radius of the facility at which the departing
physician primarily practiced at the time of termination. The restrictive
covenants apply for a period of 18 months following separation of employment
with Straub (or such shorter period as provided in the Service Agreement if
appropriate notice of termination is given). See "Merger -- Spin-Off
Transaction" and the Service Agreement for a description of the terms of the
restrictive covenant provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Straub has no compensation committee and, therefore, all compensation
decisions concerning officers and physicians of Straub have been made by the
Board of Directors of Straub.
62
<PAGE> 67
PHYCOR, INC.
COMPANY OVERVIEW
As of October 31, 1996, PhyCor operated 42 clinics with approximately
2,850 physicians in 24 states and managed IPAs with over 8,700 physicians in 15
markets. PhyCor's clinics and IPAs provide capitated medical services to
approximately 761,000 members, including approximately 92,000 Medicare members.
PhyCor's objective is to organize physicians into professionally managed
networks that assist physicians in assuming increased responsibility for
delivering cost-effective medical care while attaining high-quality clinical
outcomes.
Since June 30, 1996, PhyCor has acquired six multi-specialty clinics
with an aggregate of approximately 330 physicians and one IPA management
company with approximately 1,000 affiliated physicians. As of October 31, 1996,
PhyCor has agreements in principle to affiliate with four additional
multi-specialty physician clinics with an aggregate of approximately 320
physicians within the next three months.
MULTI-SPECIALTY MEDICAL CLINICS
A multi-specialty medical clinic provides a wide range of primary and
specialty physician care and ancillary services through an organized physician
group practice representing various medical specialties. Multi-specialty
medical clinics historically have been locally owned organizations managed by
practicing physicians.
PhyCor, in conjunction with its affiliated physician organizations,
achieves growth through the expansion of managed care relationships, the
addition of physicians and the addition and expansion of ancillary services. In
addition, PhyCor develops physician networks around its physician groups to
enhance managed care contracting and to provide the physician component of
organized health care systems. Effective January 1, 1995, PhyCor acquired all
of the outstanding shares of capital stock of North American, which operates
and manages IPAs. Physicians in affiliated physician groups may participate in
IPAs developed and managed by North American. See "Physician Networks." PhyCor
is also positioning the clinics for participation in organized health care
systems by establishing strategic alliances with health maintenance
organizations, insurers, hospitals and other health care providers and by
enhancing medical management systems.
Upon the acquisition by PhyCor of a clinic's operating assets the
affiliated physician group simultaneously enters into a long-term service
agreement with PhyCor. PhyCor, under the terms of the service agreement,
provides the physician group with the equipment and facilities used in their
medical practice, manages clinic operations, employs most of the clinic's
non-physician personnel, other than certain diagnostic technicians, for which
it receives a service fee.
The physician groups offer a wide range of primary and specialty
physician care and ancillary services. Approximately one-half of PhyCor's
affiliated physicians are primary care providers. The primary care physicians
are those in family practice, general internal medicine, obstetrics, pediatrics
and emergency and urgent care. PhyCor works closely with the physician groups
in targeting and recruiting physicians from outside the community and merging
physicians in sole practice or single specialty groups, especially primary care
groups, into the clinics' physician groups. Substantially all of the physicians
practicing in the clinics are certified or eligible to be certified by the
applicable specialty boards.
63
<PAGE> 68
PhyCor's affiliated physicians maintain full professional control over
their medical practices, determine which physicians to hire or terminate and
set their own standards of practice in order to promote high quality health
care. Pursuant to its service agreements with physician groups, PhyCor manages
all aspects of the clinic other than the provision of medical services, which
is controlled by the physician groups. At each clinic, a joint policy board
equally comprised of physicians and Company personnel focuses on strategic and
operational planning, marketing, managed care arrangements and other major
issues facing the clinic. The joint policy board involves experienced health
care managers in the decision-making process and brings increased discipline
and accountability to clinic operations.
PhyCor negotiates national arrangements that provide cost savings to
the clinics through economies of scale in malpractice insurance, supplies and
equipment. PhyCor has a productivity resource program that aligns staffing with
volume and service needs. Upon assuming the operations of a clinic, PhyCor
implements a standard set of business policies and reviews the procedure coding
practices in each clinic. PhyCor's new information processing system is now
available in several of PhyCor's clinics and is expected to be implemented in
additional clinics in the future. This system provides an expanded capability
for accounting, billing, receivables tracking, scheduling, and management
reporting.
PHYSICIAN NETWORKS
IPAs offer physicians an opportunity to participate in expanding
organized health care systems and assistance in contracting with insurance and
HMO organizations and other large purchasers of health care services. IPAs
consolidate independent physicians by providing general organizational
structure and management to the physician network. IPAs provide or contract for
medical management services to assist physician networks in obtaining and
servicing managed care contracts. Physicians affiliated with IPAs often seek
additional practice management services, including billing, staffing and
financial management services, which are provided in certain circumstances by
management service organizations ("MSOs").
Primarily through North American, PhyCor establishes management
companies through which all health plan contracts are negotiated. These
management companies, in which physicians may have an equity interest, provide
information and operating systems, actuarial and financial analysis, medical
management and provider contract services to the IPA. PhyCor assists physicians
in forming networks to develop a managed care delivery system in which the IPA
accepts fiscal responsibility for providing a wide range of medical services.
PhyCor intends to continue to develop primary care-oriented health delivery
systems. It is anticipated that PhyCor will target markets that do not have
established managed care networks but are in need of physician networks.
In June 1995, PhyCor purchased a minority interest in PMC by acquiring
all the outstanding shares of PMC's Class C Common Stock, and PhyCor and PMC
completed an offering of units consisting of shares of PMC Class B Common Stock
and ten-year warrants to purchase 348,004 shares of PhyCor's Common Stock at
$15.39 per share. PMC intends to develop and manage networks of physicians
through IPAs and MSOs with which PMC will enter into long-term relationships.
PhyCor provides services to PMC pursuant to a ten-year administrative services
agreement and has an option to purchase the remaining equity interest of PMC
prior to the end of May 2005.
64
<PAGE> 69
EXPERTS
The consolidated financial statements and schedules of PhyCor, Inc.
and subsidiaries as of December 31, 1995 and 1994, and for each of the years in
the three-year period ended December 31, 1995, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated balance sheets as of December 31, 1995 and 1994 and
the consolidated statements of operations, changes in shareholders deficiency
and cash flows for each of the three years in the period ended December 31,
1995 of Straub included in the Prospectus and Proxy Statement and Registration
Statement are included in reliance upon the report of Coopers & Lybrand, LLP,
independent certified public accountants, upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the Merger will be passed upon by
N. Carolyn Forehand, Esq., Vice President and General Counsel to PhyCor.
Torkildson, Katz, Fonseca, Jaffe, Moore and Hetherington, Attorneys At Law, A
Law Corporation, will pass on certain legal matters concerning the Spin-Off
Transaction and the Merger on behalf of Straub. Morrison & Foerster LLP will
pass on certain tax matters concerning the Spin-Off Transaction and the Merger
to Straub for the benefit of Straub Shareholders. Waller Lansden Dortch &
Davis, A Professional Limited Liability Company, will pass on the validity of
the shares of PhyCor Common Stock to be issued to the Straub Shareholders in
connection with the Merger and certain tax matters concerning the Merger to
PhyCor.
65
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS OF STRAUB
CONSOLIDATED FINANCIAL STATEMENTS OF STRAUB CLINIC:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Deficiency . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-6
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . F-8
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Straub Clinic & Hospital, Incorporated
We have audited the accompanying consolidated balance sheets of Straub Clinic &
Hospital, Incorporated and subsidiaries (the Company) as of December 31, 1995
and 1994, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Straub Clinic &
Hospital, Incorporated and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
April 23, 1996
F-2
<PAGE> 72
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1995 1994
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Restricted cash $ 1,898 $ 2,122 $ 1,729 $ 898
Receivables from customers 27,720 32,795 30,646 41,036
Receivables from related parties 2,891 2,334 2,806 1,200
Prepaid expenses and other 3,885 2,267 3,669 2,088
------------ ------------- ------------- -------------
Total current assets 36,394 39,518 38,850 45,222
Property And Equipment, Net 31,751 29,968 31,790 30,574
Deferred Income Taxes 10,218 4,247 9,496 4,247
Cash Surrender Value of Life Insurance 3,524 1,558 3,051 1,178
Receivables from Related Parties 979 962 898 917
Other Assets 5,351 3,695 4,796 4,228
------------ ------------- ------------- -------------
$ 88,217 $ 79,948 $ 88,881 $ 86,366
============ ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 13,544 $ 12,411 $ 15,871 $ 14,571
Notes payable 7,412 3,882 8,723 3,882
Accrued payroll and vacation 8,793 7,952 9,086 7,984
Taxes, other than income 2,457 2,290 2,517 3,061
Deferred income taxes 1,641 -- 1,622 --
Current obligation under capital leases 717 -- 717 --
Income taxes payable 1,737 -- 571 --
Other accrued liabilities 1,620 1,863 1,621 1,838
------------ ------------- ------------- -------------
Total current liabilities 37,921 28,398 40,728 31,336
------------ ------------- ------------- -------------
Noncurrent Liabilities:
Notes payable, excluding current
installments 25,661 38,686 28,231 43,068
Notes payable to stockholders 1,824 1,879 1,852 1,962
Deferred compensation payable 22,303 20,647 21,703 20,523
Obligation under capital leases,
excluding current installments 2,463 -- 2,797 --
Other noncurrent liabilities 7,796 5,650 5,230 5,430
------------ ------------- ------------- -------------
Total noncurrent
liabilities 60,047 66,862 59,813 70,983
------------ ------------- ------------- -------------
Commitments And Contingent Liabilities
Preferred Stock, Subject to Mandatory
Redemption
Requirements:
Series C, Preferred shares 10,199 10,199 10,199 11,338
------------ ------------- ------------- -------------
Stockholders' Equity:
Preferred stock 155 155 155 155
Common stock 2,007 1,837 1,854 1,820
Retained earnings (deficit) (12,071) (17,377) (13,827) (19,208)
Excess of redemption amount over
basis of assets acquired (9,981) (9,981) (9,981) (9,981)
Treasury stock (60) (145) (60) (77)
------------ ------------- ------------- -------------
Total stockholders'
deficiency (19,950) (25,511) (21,859) (27,291)
------------ ------------- ------------- -------------
$ 88,217 $ 79,948 $ 88,881 $ 86,366
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 73
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME:
Patient services, net $ 42,614 $ 42,704 $ 85,067 $ 86,729
Capitation premiums earned 7,954 7,077 15,694 14,003
Other operating revenues and other
income 772 685 1,683 1,854
------------- -------------- -------------- --------------
Total income 51,340 50,466 102,444 102,586
------------- -------------- -------------- --------------
Costs And Expenses:
Salaries and wages 24,278 23,488 47,983 47,736
Drugs, medical and surgical supplie 4,182 4,291 8,483 8,633
Taxes, other than income 3,381 3,524 7,421 7,678
Rent 2,021 2,065 4,080 3,993
Bad debts 776 2,545 3,281 4,982
Interest 1,502 1,685 2,959 3,392
Depreciation and amortization 930 873 1,748 1,727
Provision for professional
liability claims 1,045 1,154 2,012 2,466
Other 10,616 9,357 21,341 20,148
------------- -------------- -------------- --------------
Total expenses 48,731 48,982 99,308 100,755
------------- -------------- -------------- --------------
Income before income taxes 2,609 1,484 3,136 1,831
PROVISION (CREDIT) FOR INCOME TAXES 1,148 -- 1,380 --
------------- -------------- -------------- --------------
NET INCOME $ 1,461 $ 1,484 $ 1,756 $ 1,831
============= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C>
INCOME:
Patient services, net $ 169,856 $ 170,989 $ 159,745
Capitation premiums earned 28,574 24,061 16,657
Other operating revenues and other
income 2,965 8,960 2,447
------------- ------------- -------------
Total income 201,395 204,010 178,849
------------- ------------- -------------
Costs And Expenses:
Salaries and wages 95,801 96,031 85,513
Drugs, medical and surgical supplie 17,418 17,098 15,090
Taxes, other than income 14,357 14,056 12,477
Rent 10,057 10,763 10,580
Bad debts 8,462 6,809 8,669
Interest 6,522 5,745 5,113
Depreciation and amortization 3,410 3,522 3,474
Provision for professional
liability claims 3,371 4,617 2,274
Other 39,395 41,320 32,720
------------- ------------- -------------
Total expenses 198,793 199,961 175,910
------------- ------------- -------------
Income before income taxes 2,602 4,049 2,939
PROVISION (CREDIT) FOR INCOME TAXES (2,991) (4,278) (30)
------------- ------------- -------------
NET INCOME $ 5,593 $ 8,327 $ 2,969
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 74
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
RETAINED
PREFERRED COMMON EARNINGS
STOCK STOCK (DEFICIT)
<S> <C> <C> <C>
Equity (Deficit) , December 31, 1992 $ 1,930 $ 1,752 $ (30,260)
Net income for the year -- -- 2,969
9% Series B dividends -- -- (8)
Retirement of 7% preferred stock (1,775) -- --
Issuance of Series C preferred stock -- -- --
Purchase of 153,072 shares treasury common stock -- -- --
Issuance of 136,064 shares treasury common stock -- -- --
Purchase of 125 shares treasury Series B preferred stock -- -- --
------------- ------------- ---------------
Equity (Deficit), December 31, 1993 155 1,752 (27,299)
Net income -- -- 8,327
9% Series B dividends -- -- (8)
2% Series C dividends -- -- (228)
Issuance of common stock -- 68 --
Purchase of 68,032 shares treasury common stock -- -- --
Issuance of 306,144 shares treasury common stock -- -- --
Purchase of 50 shares treasury Series B preferred stock -- -- --
------------- ------------- ---------------
Equity (Deficit), December 31, 1994 155 1,820 (19,208)
Net income -- -- 5,593
9% Series B dividends -- -- (8)
2% Series C dividends -- -- (204)
Issuance of common stock -- 34 --
Purchase of 119,056 shares treasury common stock -- -- --
Issuance of 136,064 shares treasury common stock -- -- --
------------- ------------- ---------------
Equity (Deficit), December 31, 1995 155 1,854 (13,827)
Net income (Unaudited) -- -- 1,756
Issuance of stock (Unaudited) -- 153 --
------------- ------------- ---------------
Balance, June 30, 1996 (Unaudited) $ 155 $ 2,007 $ (12,071)
============= ============= ===============
</TABLE>
<TABLE>
<CAPTION>
EXCESS OF
REDEMPTION
AMOUNT
OVER BASIS
OF ASSETS TREASURY
ACQUIRED STOCK TOTAL
<S> <C> <C> <C>
Equity (Deficit) , December 31, 1992 $ -- $ (281) $ (26,859)
Net income for the year -- -- 2,969
9% Series B dividends -- -- (8)
Retirement of 7% preferred stock -- -- (1,775)
Issuance of Series C preferred stock (9,981) -- (9,981)
Purchase of 153,072 shares treasury common stock -- (153) (153)
Issuance of 136,064 shares treasury common stock -- 136 136
Purchase of 125 shares treasury Series B preferred stock -- (13) (13)
-------------- ------------- ---------------
Equity (Deficit), December 31, 1993 (9,981) (311) (35,684)
Net income -- -- 8,327
9% Series B dividends -- -- (8)
2% Series C dividends -- -- (228)
Issuance of common stock -- -- 68
Purchase of 68,032 treasury common stock -- (68) (68)
Issuance of 306,144 shares treasury common stock -- 307 307
Purchase of 50 shares treasury Series B preferred stock -- (5) (5)
-------------- ------------- ---------------
Equity (Deficit), December 31, 1994 (9,981) (77) (27,291)
Net income -- -- 5,593
9% Series B dividends -- -- (8)
2% Series C dividends -- -- (204)
Issuance of common stock -- -- 34
Purchase of 119,056 shares treasury common stock -- (119) (119)
Issuance of 136,064 shares treasury common stock -- 136 136
-------------- ------------- ---------------
Equity (Deficit), December 31, 1995 (9,981) (60) (21,859)
Net income (Unaudited) -- -- 1,756
Issuance of stock (Unaudited) -- -- 153
-------------- ------------- ---------------
Balance, June 30, 1996 (Unaudited) $ (9,981) $ (60) $ (19,950)
============== ============= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 75
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1996 1995 1995 1994 1993
UNAUDITED
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from patients and others $ 104,246 $ 109,693 $ 208,475 $ 200,037 $ 164,855
Cash paid to suppliers and employees (94,402) (98,301) (185,845) (190,131) (156,566)
Interest paid (2,959) (3,392) (6,434) (5,843) (5,180)
Income tax (paid) received, net (917) -- (26) 22 --
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 5,968 8,000 16,170 4,085 3,109
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,709) (1,121) (3,025) (3,933) (552)
Proceeds from sale of equipment -- -- -- 446 139
Other investments -- -- (232) 527 364
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities (1,709) (1,121) (3,257) (2,960) (49)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- -- 747 32,369 2,655
Payments of long-term debt (1,160) (1,071) (4,796) (45,224) (5,753)
Payments on capital lease obligations (334) -- (35) -- --
Net borrowings (payments) on the revolving line of
credit agreement (2,748) (4,533) (7,911) 12,869 --
Issuance of treasury stock -- -- 136 306 136
Purchase of treasury stock -- (68) (119) (73) (104)
Increase in restricted cash (170) (1,224) (830) (898) --
Issuance of common stock 153 17 34 -- --
Other -- -- (139) (474) 6
---------- ---------- ---------- ---------- ----------
Net cash used in financing activities (4,259) (6,879) (12,913) (1,125) (3,060)
---------- ---------- ---------- ---------- ----------
CASH INCREASE (DECREASE) IN CASH AND EQUIVALENTS -- -- -- -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR -- -- -- -- --
---------- ---------- ---------- ---------- ----------
CASH AND EQUIVALENTS AT END OF YEAR $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 76
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1996 1995 1995 1994 1993
UNAUDITED
<S> <C> <C> <C> <C> <C>
Net income $ 1,756 $ 1,831 $ 5,593 $ 8,327 $ 2,969
---------- ----------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pension curtailment gain $ -- $ -- $ -- $ (5,603) $ --
Depreciation and amortization 1,748 1,727 3,410 3,522 3,474
Deferred pension and other compensation 599 107 (866) 2,218 2,304
Provision for losses from patient claims 450 233 (709) 411 (868)
Income taxes 1,380 -- (2,991) (4,278) (30)
Other 1,068 135 (91) (561) (1,089)
Decrease (increase) in -
Accounts receivable 1,862 7,107 7,850 1,892 (3,990)
Prepaid expenses and other (216) (179) 321 (730) 212
Increase (decrease) in -
Accounts payable and other accrued expenses (2,326) (2,158) 3,094 (2,355) (898)
Accrued payroll and vacation (293) (32) 1,102 1,119 695
Taxes, other than income, payable (60) (771) (544) 123 330
---------- ----------- ----------- ------------- ---------
Total adjustments 4,212 6,169 10,576 (4,242) 140
---------- ----------- ----------- ------------- ---------
Net cash provided by operating activities $ 5,968 $ 8,000 $ 16,169 $ 4,085 $ 3,109
========== =========== =========== ============= =========
Supplemental Schedule of Noncash Investing Activities:
Obligations under capital lease for acquisition of
equipment and computer software $ -- $ -- $ 3,549 $ -- $ --
========== =========== =========== ============= =========
</TABLE>
The Straub Partnership Plan of Complete Liquidation and Dissolution was executed
in 1993. In conjunction with this Plan, the following assets and liabilities of
the Partnership were transferred to Straub Clinic & Hospital, Incorporated at
December 31, 1993:
<TABLE>
<S> <C>
Cash $ 16
Investment in Straub Clinic & Hospital, Incorporated 1,775
Land 3,169
Other assets 17
Notes payable (2,405)
Accrued interest payable to partners and former partners (178)
Deferred rental income (384)
---------
$ 2,010
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 77
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
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 dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Significant estimates by management include the following:
- Allowance for doubtful accounts receivable and contractual adjustments.
- Estimated useful lives of property and equipment and computer software.
- Realizability of deferred tax assets.
- Liability for patient malpractice claims.
It is reasonably possible that the estimates by management may change in
the near term and that such changes would be significant to the financial
position and operations of the Company.
RESTRICTED CASH -
The Company maintains restricted cash accounts as required under the
Company's revolving line of credit agreement and a certain equipment
lease.
INVESTMENTS -
Cash equivalents include investments in various money market funds and
other highly liquid debt instruments purchased with a maturity of three
months or less. Instruments with original maturities over three months are
presented as short-term investments. Such investments are carried at cost
which approximates market.
The Company participates in medical partnerships and accounts for its
investments at cost adjusted for its equity in the partnerships' income or
losses.
F-8
<PAGE> 78
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
PROPERTY AND EQUIPMENT -
Property and equipment are recorded at cost, with depreciation and
amortization computed principally on the straight-line method over the
estimated useful lives.
INCOME TAXES -
Provisions for income taxes are based on revenues and expenses included in
the consolidated statements of operations for the period in which the
provision is made. Deferred tax liabilities and assets are determined
based on the differences between the financial statement carrying amounts
and tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. Recurring
temporary differences arise principally from reporting on an accrual
method for financial reporting purposes and on the cash basis for income
tax purposes; capitalization of certain interest costs for financial
reporting purposes and the expensing of such costs for tax purposes; and
the use of accelerated cost recovery rates for certain property and
equipment for tax purposes.
REVENUES FROM SERVICES -
The Company provides both inpatient and outpatient hospital services and
clinic services in Hawaii. Revenues are recorded at established billing
rates net of contractual allowances which represent the differences
between billing rates and amounts receivable under Medicare, Medicaid,
cost-based programs and other contractual agreements.
Medicare and Medicaid provide for reimbursement of hospital patients
principally at a predetermined specific rate for each discharge based on
the patient's diagnosis. The Medicaid payment rate excludes certain
capital and medical education related costs which are reimbursed based on
reasonable cost.
Revenue from services reimbursed under Medicare, Medicaid and other
contractual programs are recorded at the estimated reimbursable amounts.
Final determination of the amounts earned may be subject to review by the
fiscal intermediary or a peer review organization. Final determinations by
the fiscal intermediary have been made through the year ended December 31,
1992 (December 31, 1994 as of June 30, 1996) for Medicare and Medicaid
programs. Subsequent years' reviews have not been finalized by the fiscal
intermediary. In the opinion of management, adequate provision has been
made for any adjustments that may result from such reviews.
F-9
<PAGE> 79
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
COMPUTER SOFTWARE -
Capitalized computer software costs for software development, included in
deferred charges and other assets, are amortized using the straight-line
method over five to seven years. At December 31, 1995 and 1994, the amount
capitalized net of amortization was $2,144 and $1,831, respectively. At
June 30, 1996 and 1995 these amounts were $1,938 and $1,456, respectively.
PENSION COSTS -
The Company uses the projected unit credit actuarial method for
determining pension costs for financial reporting purposes.
The Company's funding policy is to contribute annually an amount not less
than the minimum required by the Employee Retirement Income Security Act
of 1974 plus additional amounts which may be approved by the Company.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
NONCURRENT RECEIVABLES -
Noncurrent receivables consist primarily of notes receivable from
physician stockholders. The carrying amount approximates fair value based
on interest rates currently extended to the physician stockholders for
receivables with similar maturities.
CASH SURRENDER VALUE OF LIFE INSURANCE
The carrying amount approximates fair value based on the amount that would
be paid upon surrender of the policy.
LONG-TERM DEBT
The carrying value of notes payable approximates fair value based on
interest rates currently available to the Company for loans with similar
maturities.
F-10
<PAGE> 80
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
3. RECEIVABLES
Receivables consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Current -
Accounts, net of allowances for doubtful accounts
and contractual adjustments of $54,200 and
$44,822 at June 30, 1996 and 1995, $47,223
in December 31, 1995 and $49,545 in
December 31, 1994 $ 27,720 $ 32,795 $ 30,604 $ 40,998
Other -- -- 42 38
---------- ---------- --------- ----------
27,720 32,795 30,646 41,036
---------- ---------- --------- ----------
Noncurrent -
Other 322 200 306 346
---------- ---------- --------- ----------
$ 28,042 $ 32,995 $ 30,952 $ 41,382
========== ========== ========= ==========
</TABLE>
Accounts receivable are due primarily from hospital and clinic patients
residing in the State of Hawaii and various health care insurance providers.
RECEIVABLES FROM RELATED PARTIES -
Receivables from stockholders and employees bearing annual interest at 12% and
payable in monthly installments consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1995 1994
(Unaudited)
<S> <C> <C> <C> <C>
Stockholders and employees - current $ 151 $ 168 $ 108 $ 130
Stockholders and employees - noncurrent 979 962 898 917
-------- --------- --------- ----------
$ 1,130 $ 1,130 $ 1,006 $ 1,047
======== ========= ========= ==========
</TABLE>
Amounts currently due from The Doctors Clinic for management fees,
unreimbursed expenses and cash advances consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1995 1994
(Unaudited)
<S> <C> <C> <C> <C>
Receivable from The Doctors Clinic, net of
estimated allowance for uncollectible
amounts of $1,312 as of June 30, 1996
and $1,600 as of December 31, 1995 $ 2,740 $ 2,166 $ 2,698 $ 1,070
======== ========= ========= ==========
</TABLE>
F-11
<PAGE> 81
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
4. PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Hospital and Clinic buildings and $ 32,732 $ 31,338 $ 32,524 $ 31,295
Parking garage and improvements 2,232 2,232 2,232 2,232
Furniture and equipment 20,770 25,112 20,592 24,674
Leasehold improvements 8,717 7,423 7,585 7,292
Equipment under capital leases 2,812 -- 2,812 --
-------------- -------------- -------------- --------------
67,263 66,105 65,745 65,493
Less accumulated depreciation and
amortization (39,781) (40,542) (38,613) (38,816)
-------------- -------------- -------------- --------------
27,482 25,563 27,132 26,677
Construction in progress 639 775 1,028 267
Land 3,630 3,630 3,630 3,630
-------------- -------------- -------------- --------------
$ 31,751 $ 29,968 $ 31,790 $ 30,574
============== ============== ============== ==============
</TABLE>
F-12
<PAGE> 82
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
5. Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Bank loans -
Note payable $368 monthly including interest (10.5625% at
December 31, 1995) maturing January 1, 2004. The
interest rate is fixed through December 1997 and will be
adjusted in 1998 and 2001 at the bank's then prevailing
interest rate on similar loans or at a floating rate of 1.5%
over the bank's prime rate. The Company must maintain
certain net income levels and other stipulated covenants
during the term of the loan. Certain property and
equipment, and a general security agreement for
substantially all Company assets are pledged as
collateral.
$ 22,880 $ 24,731 $ 23,837 $ 25,600
--------- --------- --------- ---------
Balance carried forward 22,880 24,731 23,837 25,600
</TABLE>
F-13
<PAGE> 83
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance brought forward $ 22,880 $ 24,731 $ 23,837 $ 25,600
Revolving line of credit agreement expiring in January 1998.
The maximum available under this agreement is the
lesser of $20,000 or a percentage of the Company's
patient accounts receivable as defined in the agreement.
At December 31, 1995 the maximum available was
approximately $13,000. Interest rate at the bank's prime
rate plus 1.5% (10.25% at December 31, 1995). The
interest calculated is added to the outstanding balance of
the credit agreement. The Company must maintain
certain net worth and working capital levels and comply
with certain stipulated covenants throughout the term of
the agreement. The entire patient accounts receivable of
the Company is pledged as collateral. The Company is
required to maintain a restricted cash deposit account
which amounted to $1,541 at December 31, 1995. All
cash receipts from patient accounts receivable are
required to be deposited into the restricted cash deposit
account. All withdrawals from this account must be
authorized by the bank. The bank withdraws all amounts
in this account on a daily basis to reduce outstanding
borrowings of the Company. At December 31, 1995,
certain cash receipts were not deposited into the restricted
cash deposit account. The Company has informed the
bank of this violation. The bank has not taken any action
against the Company as a result of the violation.
2,211 8,335 4,958 12,869
Loan payable with interest (9.75% at December 31, 1995) at
1.25% over bank prime rate. The loan is repayable in
monthly payments of principal and interest of $57
through April 1997. Certain office leases are pledged as
collateral.
494 1,137 800 1,366
-------- -------- -------- --------
Total bank loans 25,585 34,203 29,595 39,835
-------- -------- -------- --------
</TABLE>
F-14
<PAGE> 84
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Former stockholders and administrators -
7% unsecured notes payable to former stockholder;
approximately $38 payable monthly plus interest. $ 2,607 $ 3,088 $ 2,832 $ 2,609
10% unsecured promissory notes, payable to present or
former stockholders maturing at various dates. 1,092 1,275 1,169 1,388
2% unsecured promissory notes, payable to former
stockholders maturing at various dates. 1,545 1,712 1,628 616
Other notes payable to former stockholders including
amounts due for land appreciation. 688 819 776 882
------- ------- ------- -------
Total former stockholders and administrators notes 5,932 6,894 6,405 5,495
------- ------- ------- -------
Other -
8% promissory note. The loan was repaid in 1995. -- 472 -- 457
8.81% note payable with monthly payments of principal and
interest of $18,450 through May 2000. Certain medical
equipment is pledged as collateral. 729 813 805 881
8.62% note payable with monthly payments of principal and
interest at $1,852 through May 2000. Certain medical
equipment is pledged as collateral. 72 88 80 95
8.6% note payable with monthly payments of principal and
interest at $428 through August 2000. Certain medical
equipment is pledged as collateral. 18 21 20 23
------- ------- ------- -------
Balance carried forward 819 1,394 905 1,456
------- ------- ------- -------
</TABLE>
F-15
<PAGE> 85
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance brought forward $ 819 $ 1,394 $ 905 $ 1,456
Other 737 77 49 164
-------- -------- -------- --------
Total other 1,556 1,471 954 1,620
-------- -------- -------- --------
Total notes payable 33,073 42,568 36,954 46,950
Less current portion 7,412 3,882 8,723 3,882
-------- -------- -------- --------
Long-term portion $ 25,661 $ 38,686 $ 28,231 $ 43,068
======== ======== ======== ========
</TABLE>
The $23.8 million note payable and $5 million outstanding under the revolving
line of credit agreement require the Company to comply with certain subjective
covenants. These subjective covenants allow the lending banks to accelerate
repayment of debt if there is a "material adverse change" in the Company's
financial condition or operations. Management is not aware of any events that
would cause the lending banks to accelerate repayment of the debt.
In November 1995, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board concluded in Issue No. 95-22 that borrowings
outstanding under a revolving credit agreement that includes both a subjective
acceleration clause and a requirement to maintain a lock-box arrangement,
whereby remittances from the borrower's customers reduce the debt outstanding,
are considered short-term obligations. Based on the EITF's conclusion, the
amount outstanding on the revolving line of credit of $4,958 was included in the
current portion of notes payable as of December 31, 1995. Management is not
aware of any events that would cause the lending bank to demand repayment of the
debt outstanding before January 1998.
F-16
<PAGE> 86
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
At December 31, 1995 annual maturities of notes payable subsequent to 1996 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 -
<S> <C>
1997 $ 3,536
1998 3,564
1999 3,826
2000 3,871
Thereafter 13,434
-------------
$ 28,231
=============
</TABLE>
Notes Payable To Stockholders -
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Unsecured notes payable to stockholders and administrators requiring monthly
interest payments, at 2% over the bank base rate but not more than 13% and not
less than 9%, for the first ten years and at 9.75% thereafter; principal
payable upon termination of employment or twenty-five years from date of note,
whichever occurs first. $ 1,824 $ 1,879 $ 1,852 $ 1,962
========== ========= ========== =========
</TABLE>
At December 31, 1995 annual maturities of notes payable to stockholders
subsequent to 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 -
<S> <C>
1996 $ --
1997 --
1998 --
1999 --
2000 --
Thereafter 1,852
-----------
$ 1,852
===========
</TABLE>
F-17
<PAGE> 87
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, YEARS ENDED DECEMBER 31,
1996 1995 1996 1995 1995 1994 1993
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Current -
Federal $ 1,278 $ 2,984 $ 2,102 $ 3,284 $ 5,931 $ 219 $ --
State 226 452 314 498 798 33 --
-------- -------- ------- ------- -------- -------- -------
1,504 3,436 2,416 3,782 6,729 252 --
-------- -------- ------- ------- -------- -------- -------
Benefit from operating loss
carryforward -
Federal -- (2,984) (290) (3,284) (5,264) (219) --
State -- (452) (43) (498) (798) (33) --
-------- -------- ------- ------- -------- -------- -------
-- (3,436) (333) (3,782) (6,062) (252) --
-------- -------- ------- ------- -------- -------- -------
Hawaii capital goods excise
tax credit -- -- -- -- (31) (31) (30)
-------- -------- ------- ------- -------- -------- -------
1,504 -- 2,083 -- 636 (31) (30)
-------- -------- ------- ------- -------- -------- -------
Deferred -
Federal (303) 517 (612) 669 149 2,128 887
State (53) 77 (91) 100 23 322 134
-------- -------- ------- ------- -------- -------- -------
(356) 594 (703) 769 172 2,450 1,021
-------- -------- ------- ------- -------- -------- -------
Change in valuation allowance -
Federal -- (517) -- (669) (3,299) (5,816) (887)
State -- (77) -- (100) (500) (881) (134)
-------- -------- ------- ------- -------- -------- -------
-- (594) -- (769) (3,799) (6,697) (1,021)
-------- -------- ------- ------- -------- -------- -------
$ 1,148 $ -- $ 1,380 $ -- $ (2,991) $ (4,278) $ (30)
======== ======== ======= ======= ======== ======== =======
</TABLE>
F-18
<PAGE> 88
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Deferred compensation $ 8,345 $ 7,846 $ 8,376 $ 8,073
Liability for patient claims 1,958 2,145 1,787 2,056
Obligation under capital leases 1,208 -- 1,335 --
Net operating loss carryforward -- 2,614 333 6,395
Alternative minimum tax credit carryforward 658 -- 658 --
------------- ------------- ------------- -------------
12,169 12,605 12,489 16,524
Deferred tax liabilities:
Book over tax current assets (3,199) (4,543) (3,804) (7,703)
Tax over book depreciation (393) (785) (811) (775)
------------- ------------- ------------- -------------
(3,592) (5,328) (4,615) (8,478)
------------- ------------- ------------- -------------
8,577 7,277 7,874 8,046
Valuation allowance -- (3,030) -- (3,799)
------------- ------------- ------------- -------------
$ 8,577 $ 4,247 $ 7,874 $ 4,247
============= ============= ============= =============
</TABLE>
F-19
<PAGE> 89
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
A reconciliation of the Company's effective tax rate with the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
JUNE 30,
1996 1995 1996 1995 1995 1994 1993
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statutory Federal income tax
rate 34% 34 % 34% 34 % 34 % 34 % 34 %
Statutory Hawaii income tax
rate, net of Federal income
tax benefit 4 4 4 4 4 4 4
Hawaii capital goods excise
tax credit -- -- -- -- (1) (1) (1)
Nondeductible penalty -- -- -- -- -- 15 --
Keyman life insurance proceeds -- -- -- -- (7) -- --
Change in valuation allowance -- (40) -- (41) (146) (165) (35)
Other items, net 6 2 6 3 1 7 (3)
--- --- --- --- ---- ---- ---
44% -- % 44% -- % (115)% (106)% (1)%
=== === === === ==== ==== ===
</TABLE>
The valuation allowance at December 31, 1995 and 1994, was reduced by $3,799
and $6,697, respectively, as a result of a $172 and $2,450, respectively,
decrease in net deferred tax assets and management's re-evaluation of the
realizability of the net deferred tax assets. A partial valuation allowance of
$3,799 was provided for in 1994. Due to continued operating profits and
expected future operating profits, management believes that it is more likely
than not that the Company will realize all of the tax benefit associated with
future deductible temporary differences and net operating loss carryforwards
prior to their expiration, therefore, no valuation allowance was provided for
as of June 30, 1996 and December 31, 1995. If the Company's estimates of future
taxable income are reduced, a valuation allowance will be required through a
charge to expense.
F-20
<PAGE> 90
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
The alternative minimum tax credit carryforward can be carried forward
indefinitely and used to reduce future Federal income taxes.
At December 31, 1995, the Company has unused tax operating loss carryforwards
amounting to $876,000 which expire in the following years:
2007 $ 428
2010 448
-----------
$ 876
===========
At June 30, 1996 and December 31, 1995, the Company's current income taxes
payable amounted to $1,737 and $571, respectively.
7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS
The Company's Series C 2% cumulative nonvoting preferred stock has a par value
of $1 per share and is nonparticipating with preference in dissolution at par
value. The stock has a mandatory sale and redemption feature triggered by one
or more of the following events: (i) the holder dies; (ii) the holder becomes
insolvent, makes an assignment for the benefit of creditors, is declared
bankrupt, or has his/her assets administered in any type creditors' proceeding;
(iii) the holder's employment with the corporation is terminated; or (iv) the
holder loses his/her license to practice medicine in the State of Hawaii. Upon
any of the proceeding events, the holder or the holder's beneficiary is
required to sell and the Company is required to purchase all of the holder's
stock. The purchase price of stock under the mandatory redemption feature will
be the par value of the shares plus accumulated but unpaid dividends accrued
through the date of purchase. There were 15,000,000 shares authorized. At June
30, 1996, December 31, 1995, 1994 and 1993, shares issued and outstanding
amounted to 10,199,288, 10,199,288, 11,337,572 and 11,990,870, respectively.
F-21
<PAGE> 91
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
Changes in Series C, 2% preferred stock for June 30, 1996 and December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C>
Series C, 2%
Balance at beginning of period $ 10,199 $ 11,338 $ 11,991 $ --
Issuance of shares -- -- -- 11,991
Retirement of shares -- (1,139) (653) --
-------------- -------------- -------------- --------------
Balance at end of period $ 10,199 $ 10,199 $ 11,338 $ 11,991
============== ============== ============== ==============
</TABLE>
8. STOCKHOLDERS' EQUITY
In 1993, the Company retired all 17,750 authorized, issued and outstanding
shares of 7% noncumulative, nonvoting and nonparticipating preferred stock at
the par value of $100 per share.
The Company's Series B 9% cumulative nonvoting preferred stock has a par value
of $100 per share, redeemable at the option of the Company at par value. There
were 2,500 shares authorized and 1,550 shares issued at June 30, 1996, December
31, 1995, 1994 and 1993.
Changes in Series B, 9% preferred stock for June 30, 1996 and December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
(Unaudited)
<S> <C> <C> <C> <C>
Series B, 9%
Balance at beginning of period $ 155 $ 155 $ 155 $ 155
Issuance of shares -- -- -- --
Retirement of shares -- -- -- --
----------- ----------- ----------- -----------
Balance at end of period $ 155 $ 155 $ 155 $ 155
=========== =========== =========== ===========
</TABLE>
F-22
<PAGE> 92
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
The Company's common stock has a par value of $1 per share. At June 30, 1996
there were 50,000,000 shares authorized. At December 31, 1995, 1994 and 1993,
there were 2,000,000 shares authorized. At June 30, 1996, there were 2,006,944
shares issued. At December 31, 1995, 1994 and 1993, there were 1,853,872,
1,819,856 and 1,751,824 shares issued, respectively.
Treasury stock, recorded primarily at par value, consisted of 600 Series B
preferred shares at June 30, 1996, December 31, 1995 and 1994, and 550 Series B
preferred shares at December 31, 1993 and 17,008 and 255,120 common shares at
December 31, 1994 and December 31, 1993, respectively.
Changes in treasury stock Preferred Series B and common stock shares at June
30, 1996 and December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
(Unaudited)
<S> <C> <C> <C> <C>
PREFERRED SERIES B
Balance at beginning of period $ 60 $ 60 $ 55 $ 42
Purchase of 125 shares -- -- -- 13
Purchase of 50 shares -- -- 5 --
---------- ---------- ---------- ----------
Balance at end of period 60 60 60 55
----------- ---------- ---------- ----------
COMMON STOCK
Balance at beginning of period -- 17 255 238
Purchase of 153,072 shares -- -- -- 153
Issuance of 136,064 shares -- -- -- (136)
Purchase of 68,032 shares -- -- 68 --
Issuance of 306,144 shares -- -- (306) --
Purchase of 119,056 shares -- 119 -- --
---------- ---------- ---------- ----------
Issuance of 136,064 shares -- (136) -- --
---------- ---------- ---------- ----------
Balance at end of period -- -- 17 255
---------- ---------- ---------- ----------
Total treasury stock $ 60 $ 60 $ 77 $ 310
=========== ========== ========== ==========
</TABLE>
F-23
<PAGE> 93
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
9. EMPLOYEE BENEFITS
PROFIT-SHARING AND 401(K) AND PENSION PLANS -
The Company has noncontributory profit-sharing and 401(k) savings and
defined benefit pension plans covering substantially all of its employees.
The contribution to the profit-sharing and 401(k) savings plan is determined
by the Board of Directors. The pension benefits are based on years of
service and specified percentages of the employee's final average
compensation.
Net pension expense (benefit) included in other costs and expenses for
1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost representing benefits earned during
the year $ -- $ 1,484 $ 1,542
Interest cost on the projected benefit obligation 1,935 2,157 2,206
Return on plan assets (4,698) (2,204) (586)
Net amortization and deferral 2,401 (88) (1,942)
------------- ------------- -------------
Net pension expense (benefit) $ (362) $ 1,349 $ 1,220
============= ============= =============
</TABLE>
F-24
<PAGE> 94
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
The funded status and accrued (prepaid) pension expense at December 31, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Actuarial present value of projected benefit obligation
based upon employment service to date and current
salary levels -
Vested employees $ 28,026 $ 23,503
Nonvested employees 835 839
--------- ----------
Accumulated benefit obligation 28,861 24,342
Additional amounts related to projected salary
increases -- --
--------- ----------
Projected benefit obligation 28,861 24,342
Plan assets available for benefits consisting of listed
marketable equity securities, guaranteed and other
investment contracts and real estate (including land
with fair value of $9,500 leased to the
Company) 29,063 24,586
--------- ----------
Excess of projected benefit obligation over plan
assets (assets over projected benefit obligation)
at year end (202) (244)
Unrecognized differences in actual plan assets
and projected benefit obligations from that assumed (1,420) 214
Unrecognized net assets, amortized over 15 years 283 340
Excess benefit (unrecognized prior service cost) for
plan amendments, amortized over 13 years 795 827
Accrued (prepaid) pension expense at
--------- ----------
December 31 $ (544) $ 1,137
========= ==========
</TABLE>
The actuarial computation of projected benefit obligation at December 31, 1995
and 1994 was based upon a 7% and 8% discount rate, respectively. Upon
consideration of historical returns on plan assets and future expectations, the
assumed long-term rate of return on plan assets was 9% in 1995 and 1994. In
addition, there was no assumed salary increase over the remaining service lives
of employees in 1995 and 4% was assumed for 1994.
Effective December 31, 1994, the Board of Directors approved an amendment to
the pension plan which resulted in the freezing of benefits due to participants
at the December 31, 1994 levels. As a result, the Company recognized a
curtailment gain of $5,602 in
F-25
<PAGE> 95
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995
ARE UNAUDITED.
1994. The curtailment gain was included in other operating revenues and
other income in the Company's consolidated financial statements.
The Company's profit sharing and 401(k) savings plan provides for
employees to voluntarily defer compensation until retirement, disability
or termination. The plan also provides for employer matching of employee
contributions up to levels specified in the agreement. Matching
contributions amounted to $775, $882 and $612 in 1995, 1994 and 1993,
respectively.
DEFERRED COMPENSATION PLANS
The Company has several voluntary deferred compensation plans for doctors
and administrators. These plans enable participants to defer receipt of a
portion of their compensation until retirement or termination from the
Company. One of the plans provides for a pre-retirement or post-retirement
survivor benefit payable to a designated beneficiary.
In 1974, the Company adopted a stock plan for its doctors/stockholders
which provided for the repurchase of the Company's common stock upon
termination and payment of stock appreciation based on length of service.
In 1991, the plan was amended, effective January 1, 1991 to freeze
participation in the plan and to set the participants' benefits at the
vested levels at December 31, 1990.
At December 31, 1995 and 1994, the deferred compensation liability of the
above plans amounted to $22,043 and $21,244, respectively.
10. LEASED ASSETS AND LEASE COMMITMENTS
At December 31, 1995, the Company was committed under long-term real property
and equipment leases expiring at various dates to 2010. On one of the real
property leases with the Company's Pension Plan the provisions of the lease
require renegotiated rentals beginning 1987 and every five years thereafter,
but in no event would the rentals be less than the rentals in the preceding
period. Certain leases for operating and medical equipment and computer
software are classified as capital leases.
Substantially all leases require that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the leased
property.
F-26
<PAGE> 96
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
Following is a schedule of future rental commitments under capital leases,
together with the present value of the net rental commitment as of December 31,
1995:
<TABLE>
<S> <C>
1996 $ 1,051
1997 1,051
1998 749
1999 725
2000 667
-------------
4,243
Less amount representing interest 729
Present value of lease payments -------------
Less current obligation 3,514
717
-------------
$ 2,797
=============
</TABLE>
The total remaining minimum commitments under operating leases, including $696
to the Pension Plan, as of December 31, 1995, based on present effective rates
are as follows:
<TABLE>
<CAPTION>
Year Real Property Equipment Total
<S> <C> <C> <C>
1996 $ 3,795 $ 1,982 $ 5,777
1997 2,367 1,446 3,813
1998 2,310 1,200 3,510
1999 1,540 1,153 2,693
2000 752 26 778
Thereafter 5,819 -- 5,819
------------- ------------- --------------
$ 16,583 $ 5,807 $ 22,390
============= ============= ==============
</TABLE>
For 1995, 1994 and 1993, rental expenses (including rent to the Pension Plan of
$696) for operating leases amounted to $10,057, $10,763 and $10,580,
respectively.
F-27
<PAGE> 97
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
11. CONTINGENCIES AND COMMITMENTS
PROFESSIONAL LIABILITY CLAIMS AND OTHER LEGAL PROCEEDINGS -
The Company is insured for professional liability risk on a claims-made
basis. At December 31, 1995, such coverage included $1,000 per claim and
$3,000 in the annual aggregate with a self-insurance retention limit of
$250 per claim with no annual aggregate limit.
To provide for the Company's share of professional liability risks for
incurred and incurred but not reported claims, the Company has provided
for accrued patient claims amounting to $4,702 and $5,411 at December 31,
1995 and 1994, respectively, which are discounted using 7.5%. The
undiscounted liability was $5,905 and $6,803 as of December 31, 1995 and
1994, respectively. The liability is estimated by management based upon
the Company's historical loss experience and recommendations from an
outside actuary. While management believes that liability is adequate, the
ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are reflected in
earnings currently.
There are various other claims and lawsuits pending against the Company
involving complaints which arose in the normal course of the Company's
operations. In the opinion of management, the resolution of these claims
will not have a material adverse effect on the business, operating
results, or financial position of the Company.
OTHER COMMITMENTS
In connection with its participation in the State of Hawaii QUEST program,
the Company has a $1,000 standby letter of credit in favor of the State of
Hawaii, Department of Human Services. The maximum commitment from the bank
for the standby letter of credit is $1,200. There were no drawings under
this letter of credit at December 31, 1995 and 1994.
At December 31, 1995, the Company was also a guarantor on borrowings of
$213 of certain doctors and administrators.
F-28
<PAGE> 98
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
OTHER -
In 1995 an investigative agency of the Federal government initiated an
investigation of the Company's Medicare billings and receivables. The
Company is also conducting its own internal investigation of any
wrongdoing in this matter. The investigations are not yet complete and it
is uncertain whether any assertions for any wrongdoing will be made by the
government. The Company has engaged Arent Fox, a law firm in Washington
D.C., and Strategic Management Systems to assist in its internal
investigation.
12. INVESTMENTS IN AFFILIATES
At December 31, 1995 and 1994, the Company had investments in the following
partnerships as general partner:
<TABLE>
<CAPTION>
DIRECT
OWNERSHIP
1995 1994
<S> <C> <C>
Kidney Stone Center 33% 33%
The Doctors Clinic 45% 45%
Combined Technologies 34% 50%
</TABLE>
Condensed financial information based upon the latest available financial
statements (unaudited) relating to the Company's investments in affiliates is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
(UNAUDITED)
<S> <C> <C>
Assets (principally accounts receivable,
property, plant and equipment) $ 11,560 $ 4,988
Liabilities 9,303 2,830
-------------- -------------
Equity $ 2,257 $ 2,158
============== =============
Revenues $ 13,754 $ 9,213
Costs and expenses 13,165 8,711
-------------- -------------
Net income $ 589 $ 502
============== =============
</TABLE>
F-29
<PAGE> 99
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
ALL AMOUNTS SHOWN AS OF AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995 ARE
UNAUDITED.
The Company's equity in net income of these affiliates is included in other
operating revenues and other income.
13. DISSOLUTION OF STRAUB PARTNERSHIP
On December 31, 1993, the Executive Committee of Straub Partnership executed
the plan of complete liquidation and dissolution of the Partnership (the Plan).
The Plan provided for the transfer of all the Partnership's assets and
liabilities to the Company. In exchange for this transfer, the Partners
collectively received 11,990,870 shares of $1 par Series C 2% nonvoting,
cumulative, nonparticipating preferred stock (Preferred Stock) of the Company.
The excess of the value of preferred stock issued over the historical cost of
the assets and liabilities assumed of $9,981 was charged to stockholders'
equity. A substantial portion of the assets transferred include land previously
leased by the Company. At December 31, 1992, the land was appraised at $25,000.
F-30
<PAGE> 100
ANNEX A
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415) 476-3300
October 1, 1996
The Board of Directors
Straub Clinic and Hospital, Incorporated
888 South King Street
Honolulu, HI 96813
Ladies & Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of common stock of Straub Clinic and
Hospital, Incorporated ("Straub") of the consideration to be received by them
in the proposed merger of a wholly-owned subsidiary ("PhyCor Hawaii") of
PhyCor, Inc. with and into Straub, the related transfer of certain assets and
liabilities of Straub into a new corporation ("New Straub"), the distribution
to stockholders of Straub of the shares of New Straub and the agreements
between PhyCor, Inc. and New Straub, as more fully described below.
We understand that Straub intends to transfer certain assets and liabilitites
to New Straub in exchange for all of the stock of New Straub, and then intends
to transfer this stock to the stockholders of Straub in a transaction designed
to qualify as a tax-free spinoff pursuant to Section 355 of the United States
Internal Revenue Code (the "Spinoff"). In addition, Straub and PhyCor, Inc.
propose to enter into a Merger Agreement (the "Merger Agreement") pursuant to
which, immediately following the Spinoff, PhyCor will merge with and into
Straub and the holders of shares of common stock of Straub will receive in
consideration of the Merger an aggregate of approximately $7,667,000 worth of
PhyCor, Inc. common stock. The stock to be so received will be valued on the
basis of the average closing price for the 20 trading days preceding the
signing of an Administrative Services Agreement between Straub and PhyCor,
Inc., which signing is expected to occur in the first five days of October,
1996. Immediately following the Spinoff, PhyCor Hawaii will enter into a
Service Agreement (the "Service Agreement") with New Straub, pursuant to which
New Straub will purchase, and PhyCor Hawaii will provide, management and
support services. PhyCor Hawaii will pay New Straub a lump sum of $32,083,000
in consideration of New Straub entering into the Service Agreement. The
foregoing transactions collectively constitute the "Proposed Transaction." For
the purposes of this opinion, we have assumed that the merger of Straub with
and into PhyCor, Inc. will qualify as a tax-free reorganization under the
United States Internal Revenue Code, and that the Spinoff will qualify as a
tax-free spinoff under the United States Internal Revenue Code.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, corporate
restructurings, strategic alliances, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as financial
advisor to the Board of Directors of Straub in connection with the Proposed
Transaction and will receive a fee for our services (including the rendering of
this opinion). In the ordinary course of its business, Hambrecht & Quist acts
as a market maker and broker in the publicly traded securities of PhyCor, Inc.
and
SAN FRANCISCO . NEW YORK . BOSTON
MEMBERS NEW YORK STOCK EXCHANGE . AMERICAN STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
<PAGE> 101
The Board of Directors
Straub Clinic and Hospital, Incorporated
October 1, 1996
Page 2
receives customary compensation in connection therewith, and also provides
research coverage for PhyCor, Inc. Because Hambrecht & Quist actively trades
in the equity and derivative securities of PhyCor, Inc. for its own account and
for the accounts of its customers, it may at any time hold long or short
positions in such securities. Hambrecht & Quist may in the future provide
investment banking or other financial advisory services to Straub, PhyCor, Inc.
or their respective affiliates.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Straub for recent years and interim periods to date and certain
other relevant financial and operating data of Straub made
available to us from the internal records of Straub;
(ii) discussed with certain members of the management of Straub the
business, financial condition and prospects of Straub;
(iii) reviewed certain financial and operating information, including
certain projections provided by the management of Straub,
relating to Straub, and discussed such projections with certain
members of the management of Straub;
(iv) reviewed publicly available consolidated financial statements of
PhyCor, Inc. for recent years and interim periods to date;
(v) discussed with certain members of the management of PhyCor, Inc.
the business, financial condition and prospects of PhyCor, Inc.;
(vi) reviewed the recent reported prices and trading activity for the
common stock of PhyCor, Inc. and compared such information and
certain financial information of Straub and PhyCor, Inc. with
similar information for certain other companies engaged in
businesses we consider comparable to those of Straub and PhyCor,
Inc.;
(vii) reviewed the terms, to the extent publicly available, of certain
comparable transactions;
(viii) reviewed the Merger Agreement;
(ix) discussed the tax and accounting treatment of the Proposed
Transaction with Straub and Straub's accountants and lawyers; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations
and financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Straub and PhyCor, Inc.
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have been informed, and have assumed, that the consummation of
the Merger and the execution of the Service Agreement are dependent on each
other and that the Transaction is being structured in this manner to
accomplish the business objectives of Straub and the Straub Shareholders.
Further, we note that the Merger Agreement contains a condition precedent to
consummation of the Merger that the execution of the Service Agreement take
place. We have not prepared or obtained any independent evaluation or
<PAGE> 102
The Board of Directors
Straub Clinic and Hospital, Incorporated
October 1, 1996
Page 3
appraisal of any of the assets or liabilities of Straub or PhyCor, Inc., nor
have we conducted a physical inspection of the properties and facilities of
Straub or PhyCor, Inc.. With respect to the financial forecasts and
projections made available to us and used in our analyses, we have assumed that
they were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the expected future financial performance of Straub
on a stand alone basis and as merged with PhyCor. We have assumed that neither
Straub nor PhyCor, Inc. is a party to any pending transactions, including
external financings, recapitalizations or merger discussions, other than the
Proposed Transaction and those in the ordinary course of conducting their
respective businesses. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the
date of this letter, and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
PhyCor, Inc. Common Stock will trade subsequent to the Transaction. We were
not requested to, and did not, solicit indications of interest from any other
parties in connection with a possible acquisition of, or business combination
with, Straub.
It is understood that this letter is for the information of the Board of
Directors of Straub only and may not be used for any other purpose without our
prior written consent. This letter does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the common stock of Straub
in the Proposed Transaction is fair to such holders from a financial point of
view. We express no opinion, however, as to the adequacy of any consideration
received in the Proposed Transaction by PhyCor, Inc. or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ Paul B. Cleveland
----------------------
Paul B. Cleveland
Managing Director
<PAGE> 103
ANNEX B
HAWAII REVISED STATUTES
415-80 RIGHT OF SHAREHOLDERS TO DISSENT. - (a) Any
shareholder of a corporation shall have the right to dissent from, and to
obtain payment for his shares in the event of, any of the following corporate
actions:
(1) Any plan of merger or consolidation to which the
corporation is a party, except as provided in subsection (c);
(2) Any sale or exchange of all or substantially all
of the property and assets of the corporation not made in the
usual and regular course of its business, including a sale in
dissolution, but not including a sale pursuant to an order of
a court having jurisdiction in the premises or a sale for cash
on terms requiring that all or substantially all of the net
proceeds of sale be distributed to the shareholders in
accordance with their respective interests within one year
after the date of sale;
(3) Any plan of exchange to which the corporation is
a party as the corporation the shares of which are to be
acquired;
(4) Any amendment of the articles of incorporation
which materially and adversely affects the rights appurtenant
to the shares of the dissenting shareholder in that it:
(A) Alters or abolishes a preferential right of
the shares;
(B) Creates, alters, or abolishes a right in
respect of the redemption of the shares, including a
provision respecting a sinking fund for she
redemption or repurchase of the shares;
(C) Alters or abolishes a preemptive right of
the holder of the shares to acquire shares or other
securities; or
(D) Excludes or limits the right of the holder
of the shares to vote on any matter, or to cumulate
his votes, except as the right may be limited by
dilution through the issuance of shares or other
securities with similar voting rights; or
(5) Any other corporate action taken pursuant to a
shareholder vote with respect to which the articles of
<PAGE> 104
incorporation, the bylaws, or a resolution of the board of
directors directs that dissenting shareholders shall have a
right to obtain payment for their shares.
(b) (1) A record holder of shares may assert dissenters'
rights as to less than all of the shares registered in his name only if he
dissents with respect to all the shares beneficially owned by any one person,
and discloses the name and address of the person or persons on whose behalf he
dissents. In that event, his rights shall be determined as if the shares as to
which he has dissented and his other shares were registered in the names of
different shareholders.
(2) A beneficial owner of shares who is not the
record holder may assert dissenters' rights with respect to
shares held on his behalf, and shall be treated as a
dissenting shareholder under the terms of this section and
section 415-31 if he submits to the corporation at the time of
or before the assertion of these rights a written consent of
the record holder.
(c) The right to obtain payment under this section shall
not apply to the shareholders of the surviving corporation in a merger if a
vote of the shareholders of the corporation is not necessary to authorize the
merger.
(d) A shareholder of a corporation who has a right under
this section to obtain payment for his shares shall have no right at law or in
equity to attack the validity of the corporate action that gives rise to his
right to obtain payment nor to have the action set aside or rescinded, except
when the corporate action is unlawful or fraudulent with regard to the
complaining shareholder or to the corporation.
415-81 RIGHTS OF DISSENTING SHAREHOLDERS. - (a) As used in
this section:
"Dissenter" means a shareholder or beneficial owner who is
entitled to and does assert dissenters' rights under section 415-80, and who
has performed every act required up to the time involved for the assertion of
such rights.
"Corporation" means the issuer of the shares held by the
dissenter before the corporate action, or the successor by merger or
consolidation of that issuer.
"Fair value" of shares means their value immediately before
the effectuation of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless the exclusion would be inequitable.
2
<PAGE> 105
"Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans, or, if none, at such rate as is
fair and equitable under of all the circumstances.
(b) If a proposed corporate action which would give rise
to dissenters' rights under section 80(a) is submitted to a vote at a meeting
of shareholders, the notice of meeting shall notify all shareholders that they
have or may have a right to dissent and obtain payment for their shares by
complying with the terms of this section, and shall be accompanied by a copy of
sections 80 and 81 of this chapter.
(c) If the proposed corporate action is submitted to a
vote at a meeting of shareholders, any shareholder who wishes to dissent and
obtain payment for the shareholder's shares must file with the corporation,
prior to the vote, a written notice of intention to demand that the shareholder
be paid fair compensation for the shareholder's shares if the proposed action
is effectuated and shall refrain from voting the shareholder's shares in
approval of the action. A shareholder who fails in either respect shall acquire
no right to payment for the shareholder's shares under this section or section
415-80.
(d) If the proposed corporate action is approved by the
required vote at a meeting of shareholders, the corporation shall mail a
further notice to all shareholders who gave due notice of intention to demand
payment and who refrained from voting in favor of the proposed action. The
proposed corporate action is to be taken without a vote of shareholders, the
corporation shall send to all shareholders who are entitled to dissent and
demand payment for their shares a notice of the adoption of the plan of
corporate action. The notice shall: (1) state where and when a demand for
payment must be sent and certificates of certificated shares must be deposited
in order to obtain payment; (2) inform holders of uncertificated shares to what
extent transfer of shares will be restricted from the time that demand for
payment is received: (3) supply a form for demanding payment which includes a
request for certification of the date on which the shareholder, or the person
on whose behalf the shareholder dissents, acquired beneficial ownership of the
shares; and (4) be accompanied by a copy of sections 415-80 and 415-81 of this
chapter. the time set for the demand and deposit shall not be less than thirty
days from the mailing of the notice.
(e) A shareholder who fails to demand payment, or fails
(in the case of certificated shares) to deposit certificates, as required by a
notice pursuant to subsection (d) shall have no right under this section or
section 80 to receive payment for his shares. If the shares are not represented
by certificates, the corporation
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may restrict their transfer from the time of receipt of demand for payment
until effectuation of the proposed corporate action, or the release of
restrictions under the terms of subsection (f). The dissenter shall retain all
other rights of a shareholder until these rights are modified by effectuation
of the proposed corporate action.
(f)(1) Within sixty days after the date set for demanding
payment and depositing certificates, if the corporation has not effectuated the
proposed corporate action and remitted payment for shares pursuant to paragraph
(3), it shall return any certificates that have been deposited, and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment.
(2) When uncertificated shares have been released from
transfer restrictions, and deposited certificates have been returned, the
corporation may at any later time send a new notice conforming to the
requirements of subsection (d), with like effect.
(3) Immediately upon effectuation of the proposed
corporate action, or upon receipt of demand for payment if the corporate action
has already been effectuated, the corporation shall remit to dissenters who
have made demand and (if their shares are certificated) have deposited their
certificates the amount which the corporation estimates to be the fair value of
the shares, with interest if any has accrued. The remittance shall be
accompanied by:
(i) The corporation's closing balance sheet and statement
of income for a fiscal year ending not more than sixteen months before the date
of remittance, together with the latest available interim financial statements;
(ii) A statement of the corporation's estimate of fair
value of the shares; and
(iii) A notice of the dissenter's right to demand
supplemental payment, accompanied by a copy of sections 80 and 81 of this
chapter.
(g)(1) If the corporation fails to remit as required by
subsection (f), or if the dissenter believes that the amount remitted is less
than the fair value of his shares, or that the interest is not correctly
determined, he may send the corporation his own estimate of the value of the
shares or of the interest, and demand payment of the deficiency.
(2) If the dissenter does not file such an estimate
within thirty days after the corporation's mailing of its
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remittance, he shall be entitled to no more than the amount remitted.
(h)(1) Not more than sixty days after receiving a demand for
payment pursuant to subsection (g), if any such demands for payment remain
unsettled, the corporation shall file in an appropriate court a petition
requesting that the fair value of the shares and interest thereon be determined
by the court.
(2) An appropriate court shall be a court of competent
jurisdiction in the county of this State where the principal office of the
corporation is located. If, in the case of a merger or consolidation or share
exchange, the corporation is a foreign corporation without a registered office
in this State, the petition shall be filed in the county where the principal
office of the domestic corporation was last located.
(3) All dissenters, wherever residing, whose demands have
not been settled shall be made parties to the proceeding as in an action
against their shares. A copy of the petition shall be served on each dissenter;
if a dissenter is a nonresident, the copy may be served on the dissenter by
registered or certified mail or by publication as provided by law.
(4) The jurisdiction of the court shall be plenary and
exclusive. The court may appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as shall be specified in the order of their
appointment or in any amendment thereof. The dissenters shall be entitled to
discovery in the same manner as parties in other civil suits.
(5) All dissenters who are made parties shall be entitled
to judgment for the amount by which the fair value of their shares is found to
exceed the amount previously remitted, with interest.
(6) If the corporation fails to file a petition as provided in
paragraph (1) of this subsection, each dissenter who made a demand and who has
not already settled the dissenter's claim against the corporation shall be paid
by the corporation the amount demanded by the dissenter with interest, and may
sue therefor in an appropriate court.
(i)(1) The costs and expenses of any proceeding under
subsection (h), including the reasonable compensation and expenses of
appraisers appointed by the court, shall be determined by the court and
assessed against the corporation, except that any part of the, costs and
expenses may be apportioned and assessed as the court may deem equitable
against all or some of the dissenters who
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<PAGE> 108
are parties and whose action In demanding supplemental payment the court finds
to be arbitrary, vexatious, or not in good faith.
(2) Fees and expenses of counsel and of experts for the
respective parties may be assessed as the court may deem equitable against the
corporation and in favor of any or all dissenters if the corporation failed to
comply substantially with the requirements of this section, and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith in respect to the rights
provided by this section and section 80.
(3) If the court finds that the services of counsel for
any dissenter were of substantial benefit to other dissenters similarly
situated, and should not be assessed against the corporation, it may award to
these counsel reasonable fees to be paid out of the amounts awarded to the
dissenters who were benefitted.
(j)(1) Notwithstanding the foregoing provisions of this
section, the corporation may elect to withhold the remittance required by
subsection (f) from any dissenter with respect to shares of which the dissenter
(or the person on whose behalf the dissenter acts) was not the beneficial owner
on the date of the first announcement to news media or to shareholders of the
terms of the proposed corporate action. With respect to such shares, the
corporation shall, upon effectuating the corporate action, state to each
dissenter its estimate of the fair value of the shares, state the rate of
interest to be used (explaining the basis thereof), and offer to pay the
resulting amounts on receiving the dissenter's agreement to accept them in full
satisfaction.
(2) If the dissenter believes that the amount offered is
less than the fair value of the shares and interest determined according to
this section, the dissenter may within thirty days after the date of mailing of
the corporation's offer, mail to the corporation the dissenter's own estimate
of fair value and interest, and demand their payment. If the dissenter fails to
do so, the dissenter shall be entitled to no more than the corporation's offer.
(3) If the dissenter makes a demand as provided in
paragraph (2), the provisions of subsections (h) and (i) shall apply to further
proceedings on the dissenter's demand. (Last amended by Act 373, L. '88, eff.
6-15-88.)
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ANNEX C
STRAUB CLINIC & HOSPITAL, INCORPORATED
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
DECEMBER ___, 1996
The undersigned shareholder of Straub Clinic & Hospital, Incorporated
("Straub") hereby appoints Blake E. Waterhouse M.D. and Merle A. Ryland, and
each of them, as proxies, with full power of substitution, and authorizes them,
and each of them, to vote and act with respect to all shares of Common Stock
("Straub Common Stock") and Series C Preferred Stock ("Series C Preferred
Stock") of Straub which the undersigned is entitled to vote at the special
meeting of Shareholders to be held on December __, 1996, at 5:00 p.m., local
time, at the Thomas Square Conference Room at Straub located at 846 South Hotel
Street, Honolulu, Hawaii, and at any and all adjournments thereof.
The Board of Directors recommends a vote FOR the following proposals:
(1) Proposal for the holders of Straub Common Stock to approve and
adopt a Plan of Corporate Separation and Reorganization
pursuant to which (i) the assets and liabilities of Straub
constituting the medical practice and hospital components of
Straub's business operations and related real property,
including the real property located at 888 South King Street,
Honolulu, Hawaii, all of which assets are identified in the
Plan of Corporate Separation and Reorganization, will
be transferred to a newly-formed subsidiary of Straub ("New
Straub P.C."), (ii) the Common Stock of New Straub P.C. will
be distributed, pro rata, to the holders of Straub Common
Stock, and (iii) the holders of Series C Preferred Stock of
Straub will exchange their shares for an equivalent number of
shares of Series A Preferred Stock of New Straub P.C.
(collectively, the "Spin-Off Transaction").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) Proposal for the holders of Straub Common Stock and Series C
Preferred Stock, voting as a single class, to approve
and adopt an Amended and Restated Agreement of Merger and Plan
of Merger pursuant to which Straub, following the Spin-Off
Transaction, will be merged with and into PhyCor, Inc., and the
holders of shares of Straub Common Stock will exchange their
shares for shares of PhyCor Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such
other matters as may properly come before the meeting.
<PAGE> 110
VOTED AS DIRECTED. IF NO VOTING DIRECTIONS ARE SPECIFIED, THIS PROXY
WILL BE VOTED "FOR" THE PROPOSALS AS RECOMMENDED BY THE BOARD OF
DIRECTORS.
--------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF STRAUB AND MAY
BE REVOKED PRIOR TO ITS EXERCISE.
Dated: , 1996
-------------
------------------------------------
(Signature of Shareholder)
------------------------------------
(Printed Name of Shareholder)
Name should be exactly as shown on the
stock certificate(s). Title should be
added if signing as executor,
administrator, trustee, etc.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ACCOMPANYING ENVELOPE.
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ANNEX D
AMENDED AND RESTATED
AGREEMENT OF MERGER
THIS AMENDED AND RESTATED AGREEMENT OF MERGER ("Agreement") is made
and entered into as of the 1st day of October, 1996, by and among PhyCor, Inc.,
a Tennessee corporation ("PhyCor"), and Straub Clinic & Hospital, Incorporated,
a Hawaii professional corporation ("Straub") .
W I T N E S S E T H :
WHEREAS, PhyCor and Straub have determined that it is desirable and in
the best interests of their respective corporations and shareholders that
Straub merge with and into PhyCor (hereinafter referred to as the "Merger"),
with PhyCor as the surviving corporation, on the terms and subject to the
conditions set forth in this Agreement and the corresponding Plan of Merger
(the "Plan of Merger") in the form attached hereto as Exhibit A;
WHEREAS, the Board of Directors of PhyCor has approved the entering
into of this Agreement and the adoption of the Plan of Merger; and
WHEREAS, the Board of Directors of Straub has approved the entering
into of this Agreement and the adoption of the Plan of Merger;
WHEREAS, PhyCor and Straub intend that the Merger shall qualify as a
tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code") and intend this Agreement along with the Plan
of Merger to constitute a "plan of reorganization" within the meaning of
Section 368 of the Code;
WHEREAS, PhyCor is unable to acquire the group medical practice and
hospital license of Straub;
WHEREAS, prior to the Merger, Straub intends to transfer certain
assets and liabilities relating to the group medical practice and hospital
operations of Straub to a newly formed professional services corporation ("New
P.C.") in exchange for all of its stock and to transfer the common stock of New
P.C. to the common stock shareholders of Straub and the Series A Preferred
Stock of New P.C. to the Series C Preferred Stock shareholders of Straub
in a transaction designed to qualify as a tax-free spinoff pursuant to
Sections 355 and 368(a)(1)(D) of the Code;
<PAGE> 112
WHEREAS, the parties previously entered into an Agreement of Merger,
dated as of October 1, 1996, and desire to amend and restate such agreement in
its entirety, effective as of October 1, 1996; and
WHEREAS, the parties do not intend for this Agreement to be a binding
obligation of either party hereto unless and until the provisions of Section
8.01 of this Agreement are satisfied.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements herein contained, and in
accordance with the applicable provisions of the Tennessee Business Corporation
Act and the Hawaii Revised Statutes, the parties hereby agree as follows:
I.
THE MERGER
1.01. Merger. PhyCor shall enter into the Plan of Merger upon
adoption of the Plan of Merger by the Board of Directors of PhyCor and the
satisfaction of the conditions precedent set forth in this Agreement. Straub
shall enter into the Plan of Merger upon adoption of the Plan of Merger by the
Board of Directors and shareholders of Straub (the "Straub Shareholders"). Upon
all other conditions herein being satisfied or waived in accordance with the
terms of this Agreement, Articles of Merger in the form of Exhibit B attached
hereto, shall be executed and filed with the Secretary of State of Tennessee
and the Department of Commerce and Consumer Affairs of the State of Hawaii,
together with all certificates or documents as may be required to be filed
under the laws of the State of Tennessee and the State of Hawaii to effect the
Merger. Thereafter, the separate corporate existence of Straub shall cease, and
Straub shall be merged with and into PhyCor.
1.02. The Effective Date. The Articles of Merger shall be filed with
and recorded by the Secretary of State of Tennessee and the Department of
Commerce and Consumer Affairs of the State of Hawaii on or before the Closing
(as defined herein), but shall not be effective until the Closing. The date on
which the Merger shall be effective in accordance with Tennessee and Hawaii law
is herein referred to as the "Effective Date".
1.03. Effect of Merger. (a) The Merger shall have the effect set
forth under Section 48-21-106 of the Tennessee Business Corporation Act and
Section 415-76 of the Hawaii Revised Statutes.
(b) Each share of PhyCor Common Stock, no par value per share
(hereinafter, the "PhyCor Common Stock") outstanding immediately prior to the
Effective Date shall continue to be outstanding following, and shall be
unaffected by, the Merger.
(c) Each share of Straub Common Stock (as herein defined)
outstanding immediately prior to the Effective Date or
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<PAGE> 113
held by Straub as treasury stock immediately prior to the Effective Date shall,
by virtue of the Merger, be converted or cancelled as the case may be in
accordance with Section 1.04 below, it being understood that no later than
immediately prior to the Effective Date, (i) all then issued and outstanding
shares of Straub's Series B Preferred Stock (as herein defined) shall be
redeemed by Straub and authorized but unissued shares of Series B Preferred
Stock will be cancelled, and (ii) all then issued and outstanding shares of
Straub's Series C Preferred Stock (as herein defined) shall be exchanged for
shares of Series A Preferred Stock of New P.C. or be subject to dissenters
rights pursuant to Section 415-80 of the Hawaii Revised Statutes in connection
with the Transaction described in Section 4.04 below (each as defined herein).
(d) The Restated Charter and Amended Bylaws of PhyCor in effect
immediately prior to the Effective Date shall continue to be in effect in the
same forms as if and following the Effective Date of the Merger, and the
officers and directors of PhyCor immediately prior to the Effective Date shall
be the officers and directors of PhyCor as of and following the Effective Date
of the Merger.
1.04. Conversion of Common Stock. (a) For purposes of this
Agreement, "Merger Consideration" means 226,299 shares of common stock, no par
value per share (the "PhyCor Common Stock"), of PhyCor (the "PhyCor Shares"),
which number of PhyCor Shares are based on a per share price of $33.88
(representing the average closing prices of PhyCor's Common Stock as reported
by the Nasdaq National Market in The Wall Street Journal for the twenty (20)
trading days ending on the second trading day immediately prior to the date
hereof) (the "Agreement Date Market Value"). In the event the Closing Market
Value (as defined below) is less than the Agreement Date Market Value as of the
Effective Date, thereby reducing the value of the PhyCor Shares referred to
above to less than $7,667,000, then PhyCor shall increase the number of shares
of PhyCor Common Stock delivered as the Merger Consideration (which then shall
be included in the term "PhyCor Shares") such that the aggregate number of
PhyCor Shares delivered as of the Effective Date is equal to $7,667,000,
divided by the Closing Market Value.
(b) As of the Effective Date, as a result of the Merger and
without any further action on the part of PhyCor or Straub:
(i) All shares of Common Stock, $1.00 par value per share
of Straub (the "Straub Common Stock") outstanding immediately prior to the
Effective Date, other than (A) Straub Common Stock held by Straub as treasury
stock, (B) shares held by any subsidiary of Straub, (C) shares held by
Straub shareholders who exercise and perfect their dissenters rights under
Hawaii law with respect to the Transaction described in Section 4.04 below
(the "Transaction Dissenting Shares"), and (D) shares held by Straub
shareholders who exercise and perfect their dissenters rights under Hawaii law
with respect to the Merger (the "Merger Dissenting Shares") (the Transaction
Dissenting Shares and the Merger Dissenting Shares are sometimes hereinafter
referred to together as the "Dissenting Shares"), shall be converted into and
become the right to receive, PhyCor Shares in accordance with Section 1.05
below.
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(ii) All shares of Straub Common Stock held at the Effective
Date by Straub as treasury stock shall be cancelled and no payment shall be
made with respect thereto.
(iii) All Dissenting Shares shall be handled in accordance
with Section 1.05 below.
(c) For purposes of this Agreement, "Closing Market Value" of
PhyCor Common Stock shall mean the average of the closing prices of PhyCor
Common Stock on The Nasdaq National Market as reported in The Wall Street
Journal for the twenty (20) trading days ending on the second trading day prior
to the Effective Date.
(d) The Merger Consideration shall be allocated among the holders
of shares of Straub Common Stock outstanding immediately prior to the Effective
Date whose name and address appear on Exhibit 1.04(d) by allocating among such
holders that number of PhyCor Shares deliverable as of the Effective Date
determined by multiplying the number of shares of Straub Common Stock held by
each such holder by the "Conversion Ratio", which shall mean the quotient
obtained by dividing the aggregate number of PhyCor Shares deliverable as of
the Effective Date by number of shares of Straub Common Stock outstanding
immediately prior to the Effective Date. As provided for above, PhyCor Shares
otherwise issuable based on the foregoing calculation to dissenting
shareholders of Straub shall not be issued by PhyCor, and the provisions of
Section 1.05 shall apply in lieu thereof.
(e) If the outstanding shares of PhyCor Common Stock are increased
or decreased or are changed into or exchanged for a different number or kind of
shares or securities after the date of this Agreement and on or before the
Effective Date as a result of a reorganization, stock dividend, stock split,
reverse stock split or other recapitalization, then an appropriate adjustment
shall be made in the number or kind of the Merger Consideration to be issued as
the Merger Consideration without changing the dollar value of such Merger
Consideration; subject, however, to any other rights which Straub may have as a
result of the transactions causing such increase or decrease.
1.05. Dissenting Shares. Shares of capital stock of Straub held
by a shareholder who has properly exercised dissenters rights with respect
to the Transaction or the Merger in accordance with Sections 415-80 and 415-81
of the Hawaii Revised Statute shall not be converted into shares of PhyCor
Shares, thereby reducing the total number of shares of PhyCor Shares issuable
by PhyCor pursuant to the terms of Section 1.04, but shall, from and after the
Effective Date, represent only the right to receive such consideration as may
be determined to be due such dissenting shareholder pursuant to the Hawaii
Revised Statutes. From and after the Effective Date, a Straub shareholder who
has properly exercised such dissenters rights shall no longer retain any rights
of a shareholder of Straub
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<PAGE> 115
or PhyCor, except those provided under Hawaii general corporate law.
1.06. Exchange of Certificates. (a) Each holder of a
certificate or certificates outstanding immediately prior to the Effective Date
theretofore representing a share or shares of Straub Common Stock (other than
shares as to which dissenters' rights have been perfected and not withdrawn or
otherwise forfeited) upon surrender thereof to First Union National Bank of
North Carolina (the "Exchange Agent"), as Exchange Agent for PhyCor, in
accordance with the procedures set forth in Section 1.06(b) below, shall be
entitled to receive in exchange therefor a certificate or certificates
representing the number of whole shares of PhyCor Common Stock into which such
holder's shares of Straub Common Stock were converted pursuant to Section 1.05
and a check representing the amount of cash in lieu of fractional shares, if
any, which such holder has the right to receive in respect of the certificate
so surrendered. Until so surrendered, each certificate representing Straub
Common Stock outstanding immediately prior to the Merger shall be deemed for
all purposes, other than as provided below with respect to the payment of
dividends or other distributions, if any, in respect of PhyCor Common Stock, to
represent the number of whole shares of PhyCor Common Stock into which the
shares of Straub Common Stock theretofore represented thereby shall have been
converted. PhyCor may, at its option, refuse to pay any dividend or other
distribution, if any, payable to the holders of shares of PhyCor Common Stock
to the holders of certificates representing Straub Common Stock until such
certificates are surrendered for exchange; provided, however, that, subject to
the rights of PhyCor under its Restated Charter, upon surrender and exchange of
such Straub certificates, there shall be paid to the record holders of the
PhyCor stock certificate or certificates issued in exchange therefor the
amount, without interest, of dividends and other distributions, if any, which
have become payable with respect to the number of whole shares of PhyCor Common
Stock into which the shares of Straub Common Stock theretofore represented
thereby shall have been converted and which have not previously been paid.
(b) To exchange the Straub certificates for PhyCor certificates
representing the Straub Shareholder's portion of the Merger Consideration, each
Straub Shareholder shall deliver to the Exchange Agent such Straub
Shareholder's original Straub certificates representing his or her Straub
Common Stock and an executed copy of the letter of transmittal to be prepared
and approved by PhyCor and Straub. Each Straub Shareholder shall be entitled to
request the denominations of the certificates representing his or her Merger
Consideration.
(c) In the event that any certificate representing shares of stock
of Straub, other than Dissenting Shares, after the Effective Date shall have
been lost, stolen or destroyed, upon (i) the making of an affidavit of that
fact by the person claiming such
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<PAGE> 116
certificate to be lost, stolen or destroyed, which affidavit shall be in a form
acceptable to the Exchange Agent and PhyCor and (ii) the payment by such
shareholder of any amounts required by the Exchange Agent or PhyCor for the
cost of any indemnity bond, PhyCor will issue or cause to be issued in exchange
for such lost, stolen or destroyed certificate the number of whole PhyCor
Shares into which the shares of Straub Common Stock represented by the
certificate are converted in the Merger in accordance with this Article I. When
authorizing such issuance in exchange therefor, PhyCor may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate to give a bond in such sum as it may
direct as indemnity, as provided above, or such form of indemnity, as it shall
direct, against any claim that may be made against PhyCor with respect to the
certificate alleged to have been lost, stolen or destroyed.
1.07. No Fractional Shares. No fractional PhyCor Shares shall be
issued pursuant to the Merger. In lieu of the issuance of any such fractional
PhyCor Shares, cash adjustments will be paid to holders in respect of any
fractional PhyCor Shares that would otherwise be issuable. The amount of such
adjustment shall be the product of such fraction of a PhyCor Share multiplied
by the applicable price per share utilized as of the Effective Date pursuant to
Section 1.04.
1.08. Closing. Subject to Article VIII of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of
Straub, in Honolulu, Hawaii, or at such other location as the parties shall
mutually agree, on January 2, 1997, or as soon thereafter as is practicable,
upon satisfaction of all conditions of Closing set forth in Articles VI and VII
of this Agreement have been met or as soon thereafter as practicable.
II.
REPRESENTATIONS AND WARRANTIES OF STRAUB
Straub hereby represents and warrants to PhyCor as follows:
2.01. Organization and Qualification. Straub is a professional
corporation duly organized, validly existing and in good standing under the
laws of the State of Hawaii and has full corporate power to own, lease and
operate its properties and assets and to carry on its business as now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties make such qualification necessary. A copy of Straub's Articles
of Incorporation and all amendments thereto as of the date hereof, and a copy
of Straub's Bylaws, as amended to the
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<PAGE> 117
date hereof, are included as Schedule 2.01 and are true, accurate and complete
as of the date hereof.
2.02. Stockholder's Interests. The interests of Straub are owned
in the manner set forth in Schedule 2.02 and, except as set forth on such
Schedule, there are no outstanding options, warrants, rights or commitments for
the sale or issuance of any additional interests in Straub. Except for the
transactions contemplated by this Agreement, insofar as is known to Straub,
there are not any agreements or understandings among Straub's stockholders with
respect to the voting of its stock on any matter.
2.03. Capitalization; Prior Issuance of Straub Common Stock. As of
the date of this Agreement, the authorized capital stock of Straub consisted of
(i) 50,000,000 shares of Straub Common Stock, of which 2,023,952 were issued and
outstanding, (ii) 17,250 shares of preferred stock (without class designation),
of which no shares were issued and outstanding, (iii) 2,500 shares of Series A
Preferred Stock, of which no shares were issued and outstanding, (iv) 2,500
shares of Series B Preferred Stock, of which 950 shares were issued and
outstanding, all of which share will be redeemed by Straub prior to the
Effective Date as described in Section 4.13 hereof, and (v) 49,977,250 shares
of Straub Series C Preferred Stock, of which 10,199,288 were issued and
outstanding, all of which shares will be exchanged for shares of Series A
Preferred Stock of New P.C., as described in Section 4.14 hereof (together, the
"Straub Shares"). All such Straub Shares were validly issued. All such Straub
Shares were fully paid and nonassessable, and free of preemptive rights. Except
as set forth above, there are no other shares of capital stock of Straub
authorized or outstanding. Except as shown on Schedule 2.03(a), to the best of
Straub's knowledge, the Straub Shareholders are the record and beneficial
owners and holders of, and have good title to, such shares free and clear of
any adverse claim of any other person. Except as set forth on Schedule 2.03(b)
hereto, there are no existing agreements, options, warrants, rights, calls or
commitments of any character in regard to Straub to which the Straub
Shareholders or Straub are a party or by which any of them are bound providing
for the issuance of any additional shares, the sale of treasury shares, or for
the repurchase or redemption of Straub Shares, other than as contemplated, as
described above, and there are no outstanding securities or other instruments
convertible into or exchangeable for shares of such capital stock and no
commitments to issue such securities or instruments.
2.04. Subsidiaries, Affiliates, Affiliated Companies and Joint
Venture. Straub has no direct or indirect interest in, by way of stock
ownership or otherwise, any corporation, partnership, joint venture,
association or business enterprise except as listed in Schedule 2.04.
2.05. Financial Statements. (a) The audited balance sheets of
Straub at December 31, 1993, 1994 and 1995 and the unaudited balance sheet at
May 31, 1996, and the related statements
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of income and changes in cash flows for the periods then ended, are included as
Schedule 2.05 (the financial statements and the related notes being herein
called "Financial Statements"). The Financial Statements present fairly the
assets, liabilities and financial condition of Straub at the respective dates
thereof and the results of its operations for the periods ended and, except as
set forth on Schedule 2.05, have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved, except as otherwise stated therein and subject, in the case
of interim financial statements, to normal year end audit adjustments which are
consistent with prior year audit adjustments.
2.06. Absence of Undisclosed Liabilities. Except as and to the
extent reflected or reserved against in the Financial Statements and except for
commitments and obligations incurred in the ordinary course of business,
consistent with past practice, accruing after the date of the Financial
Statements, Straub has no liabilities, claims or obligations which would have a
material adverse effect on its operations (whether accrued, absolute,
contingent or otherwise) of Straub other than such liabilities that have been
specifically disclosed on Schedule 2.06.
2.07. Absence of Certain Recent Changes. To the best of Straub's
knowledge, except as disclosed on Schedule 2.07, or reflected on the Financial
Statements, Straub has not, since December 31, 1995, except in the ordinary
course of business consistent with past practice:
(a) incurred any indebtedness or other liabilities (whether
accrued, absolute, contingent or otherwise), guaranteed any indebtedness or
sold any of its assets in excess of $100,000;
(b) suffered any damage, destruction or loss, to any of its
tangible assets, whether or not covered by insurance;
(c) increased the regular rate of compensation payable by it to
any employee, or any physician; or increased such compensation by bonus,
percentage, compensation service award or similar arrangement theretofore in
effect for the benefit of any of its employees, and no such increase is
required;
(d) established or agreed to establish any pension, retirement
or welfare plan for the benefit of its employees not theretofore in effect;
(e) suffered any change in its financial condition, assets,
liabilities or business or suffered any other event or condition of any
character which individually or in the aggregate has or might reasonably be
expected to have a material adverse effect on its business;
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(f) experienced any labor organizational efforts, strikes
or formal complaints or entered into any collective bargaining agreements with
any union;
(g) made any single capital expenditure which exceeded
$100,000 or made aggregate capital expenditures which exceeded $100,000;
(h) disposed of any of its assets having a value in excess of
$10,000 or written down the value of any of its assets with a value prior to
such write down of $10,000, or written off as uncollectible any of its accounts
receivable, or revalued any of its assets;
(i) paid, discharged, waived, or satisfied any claims,
liabilities or obligations with an estimated value exceeding $10,000 (absolute,
accrued, contingent or otherwise);
(j) canceled any debts of substantial value;
(k) entered into, amended or terminated any material contract,
agreement or license to which it is a party;
(l) entered into a material transaction or made any change in
any method of accounting or accounting practice;
(m) canceled, or failed to continue, insurance coverages; or
(n) agreed, whether in writing or otherwise, to take any action
described in this Section 3.6.
2.08. Title to Assets.
(a) Except for the Transferred Assets (as defined in Section
4.04 below) and as disclosed in Schedule 2.08(a), Straub has, or will have on
the Closing Date, good and marketable title to all of its assets (other than
marketable title to leased assets), free and clear of all Encumbrances. For
purposes of this Agreement, "Encumbrances" shall mean all security interests,
liens, pledges, claims, charges, escrows, encroachments, rights of first
refusal, conditional sales agreements, options, mortgages, indentures,
easements, licenses, restrictions or other covenants, agreements,
understanding, obligations, defects or irregularities affecting title to any of
the assets of Straub.
(b) The assets of Straub PhyCor will acquire in the Merger
consisting of owned personal property are subject to no Encumbrances except the
security interests of record set forth on Schedule 2.08(b), which Schedule is a
copy of a UCC search duly obtained by Straub and which search shows security
interests of record relating to such assets in every place where such security
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interests are legally required to be filed and includes copies of all such
financing statements.
2.09. Contracts and Leases. Schedule 2.09 is a copy of each
contract, lease, sublease, agreement and other instrument to which Straub is a
party or are bound that is for an amount in excess of $100,000 or for a term in
excess of twelve (12) months in duration. Except as noted in such Schedule, all
such contracts, leases, subleases and agreements are in full force and effect,
there has been no threatened cancellation thereof to the best of Straub's
knowledge, there are no outstanding disputes thereunder, each is with unrelated
third parties and was entered into on an arms-length basis in the ordinary
course of business and, assuming the receipt of the appropriate consents, all
will continue to be binding in accordance with their terms after consummation
of the transaction contemplated herein; except as noted in such Schedule, there
are no contracts, subleases, agreements or other instruments to which Straub is
a party or is bound (other than physician employment contracts and insurance
policies) which could inhibit or prevent Straub in its ability to consummate
the transactions contemplated herein; and, except as disclosed, and except for
physician employment contracts, Straub is not a party to or bound by any
employment agreements or any agreements that contain any bonus, severance or
termination pay liabilities or obligations or by any agreements to loan to or
guarantee any loan to an employee. In every instance where consent is
necessary, Straub shall, on or before the Closing Date, obtain and deliver to
PhyCor in writing, effective as of the Closing Date, such consents as are
necessary to effect a valid and binding transfer or assignment so as to enable
PhyCor to enjoy all of the rights now enjoyed by Straub under such contracts.
Said consent shall be in a form reasonably acceptable to PhyCor.
2.10. Defaults and Consents. Except as disclosed in Schedule 2.10,
Straub is not in default under, nor has any event occurred which, with notice
or the lapse of time or action by a third party, could result in a default
under, any material outstanding indenture, mortgage, contract, lease or
agreement to which Straub is a party or by which Straub may be bound or under
any provision of the Articles of Incorporation or Bylaws of Straub. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated by this Agreement will not, unless otherwise
disclosed in Schedule 2.10 (i) constitute a violation of or a default under, or
a conflict with, (A) any term or provision of the Articles of Incorporation or
Bylaws of Straub or (B) any order, writ, injunction or decree of any court,
governmental agency or arbitration tribunal, or (C) any contract, commitment,
indenture, lease, sublease or other agreement, or (D) any other restriction of
any kind to which Straub is a party or by which Straub is bound which is
material to the operations of Straub; (ii) cause, or give any party grounds to
cause (with or without notice, the passage of time or both) the
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maturity of any liability or obligation of Straub in excess of $10,000 to be
accelerated, or increase any such liability or obligation; or (iii) require any
consent, approval or authorization of, or declaration, filing or registration
with any governmental or regulatory authority, except under applicable
requirements of the Hart-Scott-Rodino Antitrust Improvement Act, the Securities
Act (as defined below), state securities laws and the filing and recordation of
the Article of Merger as required by the Hawaii Revised Statutes.
2.11. Litigation, Etc. Except as disclosed in Schedule 2.11, there
is no litigation, arbitration, governmental claim, investigation or proceeding
pending or, to the best knowledge of Straub, threatened against Straub at law
or in equity, before any court, arbitration tribunal or governmental agency.
Except as disclosed on Schedule 2.11, Straub knows of no facts based on which
material claims may be hereafter made against it. Straub has not been informed
by its carriers that any claims and litigation against Straub and its employees
involving allegations of medical malpractice are not fully covered by
insurance, less co-payments and deductibles.
2.12. Court Orders, Decrees and Laws. There are no outstanding or,
to the best of Straub's knowledge, threatened orders, writs, injunctions or
decrees of any court, governmental agency or arbitration tribunal against or
affecting Straub or its assets. Straub is in compliance with all applicable
federal, state and local laws, regulations and administrative orders which are
material to the operation of its business, including, without limitation,
matters relating to antitrust and anti-competitive practices, discrimination,
employment, and health and safety, and has received no notices of alleged
violations thereof except as disclosed in Schedule 2.12(a) hereof. No
governmental authorities are presently conducting proceedings against Straub
and no such investigation or proceeding is pending or, to the best of Straub's
knowledge, being threatened. Straub has all federal, state and local permits,
certificates, licenses, approvals and other authorizations, the absence of
which would have a material adverse effect on the conduct and operation of its
business. Schedule 2.12(b) contains a list of all such governmental licenses
and permits. All such licenses and permits of Straub are in full force and
effect, except where the failure to have such a license or permit in effect
would not have a material adverse effect on the conduct and operations of
Straub's business and no violations are or have been recorded in respect
thereof for which a fine or penalty has been levied, and no proceeding is
pending or threatened to revoke or limit any thereof. Straub shall cooperate
with and assist PhyCor in all respects concerning the transfer or re-issuance
to PhyCor of all permits, licenses, consents or approvals required by all
applicable laws.
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2.13. Taxes. All federal, state and other tax returns of Straub
required by law to be filed have been timely filed, and Straub has paid or, to
the best of Straub's knowledge, adequately provided for all taxes (including
taxes on properties, income, franchises, licenses, sales and payrolls) which
have become due pursuant to such returns or pursuant to any assessment, except
for any taxes and assessments, the amount, applicability or validity of which
is currently being contested in good faith by appropriate proceedings and with
respect to which Straub has set aside on its books adequate reserves. There are
no tax liens on any of Straub's assets except those with respect to taxes not
yet due and payable. There are no pending tax examinations of Straub's tax
returns nor has Straub received a revenue agent's report asserting a tax
deficiency in the last twelve (12) months. There are not and will not be at the
Closing Date, any claims pending or asserted against Straub for unpaid taxes by
any federal, state or other governmental body. Straub has withheld from each
payment made to employees of Straub the amount of all taxes (including, but not
limited to, federal, state and local income taxes and Federal Insurance
Contribution Act taxes) required to be withheld therefrom and all amounts
customarily withheld therefrom, and has set aside all other employee
contributions or payments customarily set aside with respect to such wages and
has paid or will pay the same to, or has deposited or will deposit such payment
with, the proper tax receiving officers or other appropriate authorities,
except to the extent of any liabilities to be assumed by PhyCor hereunder.
2.14. Authority for Entering into Agreement. Subject to and
contingent upon receipt of a favorable fairness opinion from Hambrecht & Quist,
LLC, the Board of Directors of Straub has, or prior to the Closing will have,
taken all actions required by Hawaii law, or Straub's Articles of Incorporation
and Bylaws to authorize the execution and delivery on behalf of Straub of this
Agreement, the performance by Straub of its obligations hereunder and the
consummation of the transactions contemplated hereby. Other than the approval
of the Straub Shareholders, no other corporate proceedings on the part of
Straub is necessary to authorize this Agreement or to complete the transactions
contemplated thereby. This Agreement constitutes the legal, valid and binding
obligation of Straub enforceable against Straub in accordance with its terms.
Straub has the requisite corporate right, power, authority and capacity to
execute and deliver this Agreement and to perform its obligations hereunder.
2.15. Employee Matters. Included as Schedule 2.15 is a list of all
current non-physician employees, officers and consultants of Straub whose total
annual compensation in the last twelve (12) months was in excess of Forty
Thousand Dollars ($40,000).
2.16. Labor Matters. Except as disclosed in Schedule 2.16, Straub
has no collective bargaining agreements with any labor
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union and is not currently negotiating with a labor union. No employee of
Straub has petitioned for a representation election within the two (2) year
period ending ten (10) days prior to the date of this Agreement. Straub is in
compliance with all applicable material laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and is not engaged in any unfair labor practice. There is no unfair labor
practice complaint against Straub pending before the National Labor Relations
Board or strike, dispute, slowdown or stoppage actually pending or, to its
knowledge, threatened against or affecting Straub.
2.17. Insurance; Malpractice. Schedule 2.17(a) is a list and brief
description of all policies or binders of fire, liability, product liability,
worker's compensation, health and other forms of insurance policies or binders
currently in force insuring against risks which will remain in full force and
effect at least through the Closing Date. Schedule 2.17(b) contains a
description of all malpractice liability insurance policies of Straub since
1990. Except as set forth on Schedule 2.17(c), (i) since 1990, Straub has never
filed a written application for any insurance coverage which has been denied by
an insurance agency or carrier and (ii) Straub has been continuously insured
for professional malpractice claims for at least the past seven (7) years.
Schedule 2.17(c) also sets forth a list of all claims for any insured loss in
excess of Twenty Thousand Dollars ($20,000) per occurrence, filed by Straub
during the three (3) year period immediately preceding the Closing Date,
including but not limited to, worker's compensation, general liability,
environmental liability and professional malpractice liability claims. Straub
is not in material default with respect to any provision contained in any such
policy and has not failed to give any notice or present any claim under any
such policy in due and timely fashion.
2.18. No Finders or Brokers. Straub has not engaged any finder or
broker in connection with the transactions contemplated hereunder, but has
retained Hambrecht & Quist, LLC, as its investment advisor. No commitments have
been made to any individuals for payments or stock options in connection with
this Agreement except for distributions to shareholders of Straub in their
capacities as shareholders.
2.19. Books and Records; Equipment. The books of account of Straub
are in reasonable detail and accurately and fairly reflect its transactions and
the disposition of its assets consistent with the past practice of Straub. All
equipment is located at facilities owned or leased by Straub and is in
substantially good condition, except for reasonable wear and tear, and is
sufficient for the purposes for which such equipment is currently being used.
Such equipment is reflected in the Financial Statements at book value.
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2.20. Accounts Receivable. Except as disclosed in Schedule 2.20,
all of the accounts receivable of Straub are, and will be on the Closing Date,
recorded in the ordinary course of business and such accounts receivable have
been carried on the books of Straub at values in conformity with past practices
and reflect all facts known to Straub as of the date hereof pertaining to the
valuation thereof. Schedule 2.20 contains an aging of all Accounts Receivable.
2.21. Employee Benefit Plans.
(a) Straub has delivered to PhyCor true and complete copies of
each pension, retirement, profit-sharing, stock purchase, stock option,
severance, vacation, deferred compensation, bonus or other incentive plan, or
other employee benefit program, arrangement, agreement or understanding, or
medical, vision, dental or other health plan, or life insurance or disability
plan, retiree medical or life insurance plan or any other employee benefit
plans or fringe benefit arrangements, including, without limitation, any
"employee benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which Straub contributes
or is a party or by which it is bound or under which it may have liability and
under which employees or former employees of Straub (or their beneficiaries)
are eligible to participate or derive a benefit (the "Plans"). Each Plan which
is a "group health plan" (as such term is defined in Section 4980B(g)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")) satisfies the
applicable requirements in order to avoid the imposition of tax under Section
4980B of the Code. Except as set forth on Schedule 2.21, Straub has no formal
plan or commitment, whether legally binding or not, to create any additional
plan, practice or agreement or modify or change any existing plan, practice or
agreement that would affect any of the employees or former employees of Straub.
Benefits under all Plans are as represented and will not be increased
subsequent to the date documents are provided.
(b) Subject to the information contained in Schedule 2.21, the
following representations are made with regard to the Plans:
(i) any and all Plans which are pension plans within the
meaning of Section 3(2) of ERISA ("Pension Plans") are intended to be qualified
plans under Sections 401 and 501 of the Code, have remained qualified under the
Code since inception and have been determined by the Internal Revenue Service
("IRS") to be so qualified, and the IRS has taken no action to revoke such
determination or qualification;
(ii) Straub has, in all material respects, performed all
obligations, whether arising by operation of law, contract, or past custom,
required to be performed under or in
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connection with the Plans, and Straub has no knowledge of any default or
violation by any other party with respect to the Plans;
(iii) Straub has complied in all material respects, where
applicable, with ERISA and, where applicable, the Code, regarding the Plans;
(iv) all reports and disclosures relating to the Plans
required to be filed with or furnished to governmental agencies, plan
participants or plan beneficiaries have been or will be filed or furnished in
accordance with applicable law in a timely manner;
(v) there are no actions, suits or claims (other than
routine claims for benefits) pending, or, to the best of Straub's knowledge,
threatened, against any Plan or against the assets funding any Plan;
(vi) no transactions have occurred with respect to the
Plans or the assets thereof which could result in the imposition on Straub,
PhyCor, the administrators or trustees under the Pension Plans or the assets
funding the Pension Plans, either directly or indirectly, of taxes or penalties
imposed under Section 4975 of the Code or Section 502(i) of ERISA;
(vii) no Pension Plan is a "defined benefit plan" as defined
in Section 3(35) of ERISA;
(viii) other than applications for determination, no action
is pending with respect to the Plans before the IRS, the Department of Labor,
or before any state or local governmental agency;
(ix) no act or omission constituting a breach of fiduciary
duties has occurred with respect to the Plans or the assets thereof which could
subject Straub, PhyCor, or their assets, either directly or indirectly, to any
liability;
(x) any bonding required by applicable provisions of ERISA
with respect to any of the Plans has been obtained and is in full force and
effect;
(xi) the transactions contemplated by this Agreement will
not result in liability for severance pay, or for events occurring or expenses
incurred after termination of employment (except as required to avoid tax under
Section 4980B of the Code), or any similar payment to the employees of Straub;
and
(xii) no Plan is a "multi-employer plan" within the meaning
of Section 3(37) of ERISA.
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(c) Straub has delivered to PhyCor and its counsel prior to the
Closing Date, true and complete copies of: (i) all documents governing the
Plans, including, without limitation, all amendments thereto which will become
effective at a later date; (ii) the latest IRS determination letter obtained
with respect to each of the Pension Plans; (iii) Form 5500 for the most recent
completed plan year for each of the Plans, together with all schedules forming
a part thereof; (iv) all summary plan descriptions relating to the Plans; (v)
annuity contracts funding obligations of any Plan; (vi) all employment manuals;
and (vii) insurance policies or contracts with respect to the Plans.
2.22. Operation of the Hospital. With respect to the operations
of the Hospital, Straub hereby represents and warrants as follows:
(a) Licenses. The Hospital is duly licensed by the Hawaii
Department of Health as a 157-bed general, acute care hospital. The
ancillary departments located at the Hospital which are required to be
specifically licensed are duly licensed by the appropriate state agencies.
Straub has delivered to PhyCor an accurate list and summary description
and copy (included in Schedule 2.12(b)) of all such licenses and permits
and of all other franchises, certificates of need and certificate of need
applications, trademarks, trade names, service marks, patents, patent
applications and copyrights, owned or held by Straub relating to the
ownership, development or operations of the Hospital, all of which are in
good standing and, to the best of Straub's knowledge, not subject to
meritorious challenge. There are no provisions in, or agreements relating
to any such licenses and permits that would preclude or limit the
operations of PhyCor as described in the Service Agreement. Attached to
Schedule 2.22(a) is a copy of all licensure survey reports of the Hospital
by the Hawaii Department of Health on or after January 1, 1995 (all
violations, if any, set forth in such reports or of which Straub shall
have notice prior to the Closing Date having been or to be corrected by
Straub at its expense prior to the Closing Date). To the best of Straub's
knowledge, there are no existing fire code violations in the Hospital.
Schedule 2.22(a) also lists and contains copies of all Certificate of Need
approvals held by Straub. Each such Certificate of Need is valid and in
good standing and, to the best of Straub's knowledge, is not subject to
meritorious challenge. All progress and similar reports required to be
filed to date related thereto have been filed.
(b) Medicare Participation: Accreditation. Except as set forth
on Schedule 2.22(b), the Hospital is qualified for participation in the
Medicare and Medicaid programs, has a current and valid provider contract
with the Medicare and Medicaid programs (the "Programs"), is in compliance
with the
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conditions of participation in such programs and has received all
approvals or qualifications necessary for capital reimbursement on its
assets. Except as set forth on Schedule 2.22(b), no notice, written or
otherwise, of any pending or threatened proceeding or investigation under
the Programs involving the Hospital or Straub has been received or
communicated to the Hospital or Straub. The cost reports of the Hospital
for the Programs and for reimbursement of any other receivables from
governmental third party payors ("Agency Receivables") for the fiscal
years through 1995 have been filed. The cost reports of the Hospital since
January 1, 1995, were filed when due and such reports do not claim, and
neither the Hospital nor Straub has received reimbursement in excess of
the amount provided by law or any applicable agreement which exceed
$100,000 in the aggregate. Except as set forth on Schedule 2.22(b), Straub
has not received any notice of any dispute between the Hospital and any
governmental authority, any fiscal intermediary or any other party
regarding such costs reports for periods subsequent to January 1, 1995
other than with respect to adjustments thereto made in the ordinary course
of business which do not involve amounts in excess of $100,000 in the
aggregate. If the Hospital were resurveyed for Medicare and Medicaid
certification, the facilities, equipment and operations of the Hospital
would satisfy all minimum requirements for participation in the Programs.
The Hospital is duly accredited, with no contingencies, by the Joint
Commission on Accreditation of Healthcare Organizations (the "JCAHO") for
the three (3)-year period ending December 31, 1995. Straub has attached to
Schedule 2.24(b) true and complete copies of the Hospital's two most
recent JCAHO accreditation survey reports and deficiency lists, if any,
the Hospital's most recent Statement of Deficiencies and Plan of
Correction, and the Hospital's most recent state licensing report and list
of deficiencies, if any. Straub has taken all necessary steps to correct
all deficiencies noted therein.
(c) Special Funds. None of Straub's assets are subject to
any liability in respect of amounts received by Straub or others for the
purchase or improvement of Straub's assets or any part thereof under
restricted or conditioned grants and donations, including, without
limitation, monies received under the Public Health Service Act, 42 U.S.C.
Section 291 et seq.
2.23. Straub's Disclosures; Knowledge. (a) No
representations, warranties or disclosures of information made by Straub,
including disclosures made in any Exhibit, Schedule or certificate or other
writing delivered or to be delivered in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of a
material fact or omits to state any material fact which is necessary in order
to make the
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disclosures not misleading. All schedules to this Agreement shall be deemed
part of the representations and warranties, and any disclosure on any schedule
shall be deemed to be a disclosure on all other applicable schedules.
(b) For purposes of this Agreement, "knowledge" shall
refer only to the information actually known or which should have been known
after reasonable inquiry in the ordinary course of their duties by such
individuals listed or described on Schedule 2.23(b) attached hereto.
(c) The information relating to Straub and its
subsidiaries to be contained in the Registration Statement on Form S-4 to be
filed with the Securities and Exchange Commission (the "SEC") by PhyCor under
the Securities Act of 1933, as amended (the "Securities Act") for purposes of
registering the PhyCor Shares to be issued in the Merger pursuant to this
Agreement (the "Registration Statement") will not contain as of the date on
which the Registration Statement is declared effective by the SEC under the
Securities Act any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, other than (i) any information provided by PhyCor relating to
PhyCor and its subsidiaries and their respective operations, financial or
otherwise, (ii) any financial statements and the related notes thereto relating
to Straub and its subsidiaries, and (iii) any financial statements and related
notes thereto relating to PhyCor and its subsidiaries, for which information
Straub makes no representation or warranty.
2.24. Power of Attorney. Straub has not given any power of
attorney, whether limited or general, to any person which is continuing in
effect.
2.25. Bank Accounts; Officers. Schedule 2.25 sets forth a
list of all bank accounts and safe deposit boxes in the name of or controlled
by Straub and details about the persons having access thereto. Schedule 2.25
also contains a list of all officers of Straub as such have been designated or
elected by the Board of Directors of Straub.
2.26. Environmental Matters. Straub is in compliance in all
material respects with all federal, state and local environmental laws, rules,
regulations, standards and requirements, including, without limitation, those
respecting hazardous or biomedical materials and/or wastes. Except as disclosed
on Schedule 2.26, Straub has not engaged in any storage, holding, release,
emission, discharge, generation, processing, disposition, handling or
transportation of any biomedical wastes or hazardous substances or materials,
as defined in any applicable federal or state law or regulation from, into or
on any portion of Straub's
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premises, except in the course of Straub's business and in compliance with all
applicable federal, state and local environmental laws.
2.27. Fraud and Abuse. Except as set forth on Schedule
2.27, neither Straub, its officers and directors, nor, to the best of Straub's
knowledge, persons and entities providing professional services for Straub,
have engaged in any activities which are prohibited under 42 U.S.C. Sec.
1320a-7b, or the regulations promulgated thereunder pursuant to such statutes,
or related state or local statutes or regulations, or which are prohibited by
rules of professional conduct, including but not limited to the following: (i)
knowingly and willfully making or causing to be made a false statement or
representation of a material fact in any application for any benefit or
payment; (ii) knowingly and willfully making or causing to be made any false
statement or representation of a material fact for use in determining rights to
any benefit or payment; (iii) failure to disclose knowledge by a claimant of
the occurrence of any event affecting the initial or continued right to any
benefit or payment on its own behalf or on behalf of another, with intent to
fraudulently secure such benefit or payment; and (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (a) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of
any item or service for which payment may be made in whole or in part by
Medicare or Medicaid, or (b) in return for purchasing, leasing, or ordering or
arranging for or recommending purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made in whole or in part by
Medicare or Medicaid.
2.28. Real Estate. All real property and structures owned
or leased by Straub are structurally sound and in good operating condition and
repair (ordinary wear and tear excepted) in all material respects, taking into
account their respective ages and consistent with their past uses, and are
adequate for the uses to which they are being put. Straub has not received any
notice of any violation of any building, zoning or other law, ordinance or
regulation in respect of such real property or structures or their use by
Straub.
2.29. Certain Representations with Respect to Straub Health
Plan. Straub hereby represents and warrants that Straub Health Plan (the "HMO")
is duly licensed by the Department of Insurance of the State of Hawaii as a
qualified health maintenance organization and has all required licenses,
permits, certificates and authorizations to operate its business. The HMO is in
compliance with all the material terms, conditions and provisions of all such
licenses and permits, copies of which are set forth on Schedule 2.29, and in
compliance with all applicable material
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federal, state and local laws and provisions of governmental bodies and
agencies having jurisdiction over the HMO.
2.30. Deferred Compensation. Straub's liability for
deferred compensation as of the date of this Agreement is payable to each of
the recipients set forth on Schedule 2.30 attached hereto in the amounts and at
such times as are set forth on such schedule.
III.
REPRESENTATIONS AND WARRANTIES OF PHYCOR
PhyCor represents and warrants as follows:
3.01. Organization and Standing of PhyCor. PhyCor is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee and has full corporate power to own, lease and
operate its properties and assets and to carry on its business as and where it
is now being conducted, to enter into this Agreement and to consummate the
transactions contemplated hereby.
3.02. Authority; Binding Effect. PhyCor has full power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. PhyCor has taken all action required by law and by
PhyCor's Articles of Incorporation and Bylaws to authorize the execution and
delivery of this Agreement and the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement and the Guaranty of the
Service Agreement entered into pursuant to Section 7.06 hereof constitute the
valid and binding agreements of PhyCor enforceable in accordance with its
terms.
3.03. No Finders or Brokers. Neither PhyCor nor any officer
or director thereof has engaged any finder or broker in connection with the
transactions contemplated hereunder.
3.04. Validity of Agreement. Upon execution and delivery of
this Agreement and all documents executed in connection herewith, they will
constitute the valid and binding obligation of PhyCor and be binding against
PhyCor in accordance with its terms.
3.05. Registration Statement. The information relating to
PhyCor and its subsidiaries to be contained in the Registration Statement to be
filed with the SEC by PhyCor under the Securities Act for purposes of
registering the PhyCor Shares to be issued in the Merger pursuant to this
Agreement will not contain as of the date on which the Registration Statement
is declared effective by the SEC under the Securities Act any untrue statement
of a material fact or omit to state any material fact required to
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be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, other
than (i) any information provided by Straub relating to Straub and its
subsidiaries and their respective operations, financial or otherwise, (ii) any
financial statements and the related notes thereto relating to Straub and its
subsidiaries, and (iii) any financial statements and related notes thereto
relating to PhyCor and its subsidiaries, for which information PhyCor makes no
representation or warranty.
3.06. Exchange Act Filings. The PhyCor Common Stock,
including the Merger Consideration, has been registered with the Commission
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), and
PhyCor has filed with the Commission all forms and reports required by the
Commission in a timely fashion.
3.07. PhyCor Shares. The PhyCor Shares to be issued as the
Merger Consideration, when issued and delivered to the shareholders of Straub
pursuant to the Merger or otherwise in accordance with the provisions of this
Agreement, will be (i) validly issued, fully paid and non-assessable, and free
of pre-emptive rights, (ii) registered pursuant the effective Registration
Statement, (iii) registered or exempt from registration under applicable state
securities or "Blue Sky" laws, (iv) included for trading on the Nasdaq National
Market upon official notice of issuance, and (v) except with respect to
"affiliates" of Straub as defined in Section 6.10 hereof or pursuant to any
contractual obligation agreed to by the shareholders of Straub, will be freely
tradeable without any restrictions upon transfer.
IV.
COVENANTS OF STRAUB
Straub hereby covenants and agrees as follows:
4.01. Securities Act Compliance. Neither Straub nor any
Straub Shareholder shall dispose of the Merger Consideration except in
accordance with the provisions of the Registration Statement and the provisions
of Rule 145(d) adopted by the Commission under the Act. In any disposition of
the Merger Consideration, Straub and the Straub Shareholders will comply with
the prospectus delivery requirements and any other applicable requirements of
the Act.
4.02. Proxy Statements; Written Consents; Shareholder
Approvals. Straub, acting through its Board of Directors, shall, in accordance
with applicable law and its Articles of Incorporation and Bylaws:
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(a) promptly solicit the written consent of its
shareholders or promptly and duly call, give notice of, convene and hold as
soon as practicable following the date upon which the Registration Statement is
declared effective a meeting of shareholders in each case for the purpose of
voting to approve and adopt this Agreement and the Transaction described in
Section 4.04 below and shall use its best efforts (subject to the fiduciary
duties of the Board of Directors of Straub) under applicable law as advised by
its independent counsel, to obtain such shareholder approval;
(b) except to the extent required in the exercise of the
fiduciary duties of the Board of Directors of Straub, under applicable law as
advised by independent counsel, recommend approval and adoption of this
Agreement and the Transaction by the shareholders of Straub and include in the
Proxy Statement such recommendation and take all lawful action to solicit such
approval;
(c) to respond promptly, and use its reasonable efforts
to cause its directors, officers, employees, accountants and affiliates to
respond promptly, to requests by PhyCor or its counsel for information for
inclusion in the prospectus and proxy statement to be filed by PhyCor with its
Registration Statement in connection with the Merger and the issuance of the
Merger Consideration, and after becoming aware of any statement or omission
which renders the information provided by Straub for inclusion in the
Registration Statement not to be true and correct, Straub shall promptly amend,
supplement or revise such material in order to make the statement set forth in
the Registration Statement true and correct; and
(d) secure, to the reasonable satisfaction of PhyCor and
its counsel, any necessary approvals of the holders of Straub's capital stock.
4.03. Examination by PhyCor. Straub will accord to
PhyCor, its counsel, accountants, and other representatives full access during
normal business hours throughout the period prior to the Effective Date to all
of Straub's and its Subsidiaries' properties, books, accounts, contracts,
commitments, records and all other relevant documents, and will make available,
and use their reasonable efforts to cause their independent auditors to make
available, copies of all such documents and information with respect to the
business and properties of Straub and its Subsidiaries as representatives of
PhyCor may from time to time reasonably request, including, without limitation,
the working papers used to prepare the Financial Statements and income tax
returns filed and in preparation, all in such manner as not unduly to disrupt
Straub's normal business activities. Such access shall include consultations
with the employees of Straub and its Subsidiaries. Until the Effective Date,
Straub shall confer on a regular and frequent basis with one or more
representatives of
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PhyCor to report material operational matters and to report the general status
of on-going operations. Straub shall notify PhyCor of any material adverse
change in the financial position, earnings or business of Straub or its
Subsidiaries after the date hereof and prior to the Effective Date and any
unexpected emergency or other material unanticipated change in the business of
Straub or its Subsidiaries and of any governmental complaints, investigations
or hearings or adjudicatory proceedings (or communications indicating that the
same may be contemplated) or of any other matter which may be material to
Straub or its Subsidiaries or which would cause the representations contained
in Article 2 not to be true and correct and shall keep PhyCor informed of such
events.
4.04. Transfer of Assets to New P.C.; Exchange of Preferred
Stock. On or prior to the Effective Date (but in any case prior to the
effective time of the Merger), Straub shall have (i) completed the transfer of
the assets listed on Schedule 4.04(a) (the "Transferred Assets") to the New
P.C. to be formed by Straub, the common and preferred stock of which will be
transferred to the Straub Shareholders in a manner designed to qualify as a tax
free spinoff pursuant to Sections 355 and 368(a)(1)(D) of the Code and the
Series A Preferred Stock of which will be exchanged for the issued and
outstanding Series C Preferred Stock of Straub and caused the New P.C. to
assume the liabilities set forth in Schedule 4.04(a) (the "Transaction"), (ii)
transferred valid title to such Transferred Assets to the New P.C., (iii)
executed all necessary documents to effect the Transaction, including the form
of documents attached hereto collectively as Schedule 4.04(b), (iv) obtained
the authorizations of its Board of Directors and the approval of the Straub
Shareholders to complete the Transaction, and (v) obtained all necessary
consents of third parties and federal, state and local authorities to complete
the Transaction.
4.05. Conduct of Business. Except as otherwise contemplated
in this Agreement, pending the Closing of the Merger, Straub shall not with
respect to itself and the Subsidiaries, without the prior written approval of
PhyCor, (a) fail to maintain in effect casualty, public liability, professional
malpractice and workers' compensation insurance coverage; (b) fail to use its
reasonable efforts (i) to maintain its material assets in their present
condition (ordinary wear and tear excepted), (ii) to comply with all laws and
regulations of governmental agencies or authorities, including tax laws and
regulations applicable to them, (iii) to operate its business in the manner
reasonably necessary to maintain its current reputation and good will, of its
patients and physicians and (iv) to keep in force all licenses, permits and
approvals necessary to the operation of its business as now conducted; (c)
enter into, renew, amend, breach or terminate any contract or agreement to
which Section 2.09 applies without the consent of PhyCor; (d) declare or make
any distributions to the
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Straub Shareholders (other than salaries and compensation at levels in effect
on the date of this Agreement) which would either (i) cause Straub to breach
the representations and warranties contained in Article II or (ii) be
distributions in excess of distributions made in the ordinary course of
business based on historical practice of Straub; (e) increase the salary of or
declare or pay any bonus to any employee (except for increases or bonuses in
the normal course of business at levels in effect on the date of this
Agreement); (f) sell, lease or transfer any material assets, other than in the
ordinary course of business or subject its assets, including its real estate
assets, to a mortgage, pledge or other encumbrance not already applicable to
such assets or required to effect the Transaction; (g) make any prepayment on
any outstanding indebtedness secured by the real property of Straub; (h) except
as set forth on Schedule 4.05, make any adjustment to the financial statements
of Straub which is not an adjustment in the ordinary course of business based
on historical practices of Straub; (i) engage in any other material transaction
other than in the regular and customary course of business; (j) fail to deliver
to PhyCor any notices of any defaults or noncompliance cease and desist order,
notice of review, or requests for information received from lessors, mortgage
holders, Blue Cross/Blue Shield, CHAMPUS and other third party payors,
governmental bodies or insurers relating to Straub or the operation of its
business; (k) fail to deliver to PhyCor any notice or other information
regarding pending or threatened litigation in respect of Straub or the
operation of its business; or (l) issue any press release or other public
statement relating to this Agreement or the Merger or the transactions
contemplated hereby except as may be required by law or with PhyCor's consent.
Straub shall use its best and most diligent efforts to preserve and maintain
the business organization and the personnel and physician relationships of
Straub, keep available to PhyCor the services of Straub's employees, and
preserve the goodwill of physicians, patients and all others having business
relations with Straub.
4.06. Corporate Action; Consents. Except as set forth on
Schedule 4.06 and except for the Transferred Assets, Straub shall take all
necessary corporate actions, and shall obtain and deliver to PhyCor in writing,
effective as of the Effective Date, such consents as are necessary to effect a
valid and binding transfer or assignment of all material contracts so as to
enable PhyCor to enjoy all of the rights now enjoyed by Straub under such of
its contracts. Said consents shall be in a form acceptable to PhyCor and shall
contain an acknowledgement by the consenting party that Straub is in compliance
with and is not in default under any provision of the particular contract or
agreement. In addition, Straub shall use its reasonable efforts to obtain all
consents and approvals of third parties required to carry out the Merger and
the transactions contemplated by this Agreement and to satisfy the conditions
specified herein.
4.07. Notice of Adverse Change; Amendments or Supplements
to Exhibits and Schedules. Straub will advise PhyCor in writing, with respect
to itself and its Subsidiaries, of any
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material adverse change in their properties or business from the date of this
Agreement to the Effective Date.
4.08. Confidential Information. Except for disclosure to
its bankers, investment bankers or lenders, Straub shall not disseminate or
release to any third party or use in competition against PhyCor or PhyCor's
affiliates, any information regarding any provision of this Agreement, or any
financial information regarding PhyCor (past, present or future) that was
obtained by Straub in the course of the negotiation of this Agreement or in the
course of the performance of this Agreement, without PhyCor's written approval;
provided, however, the foregoing shall not apply to information which (i) is
generally available to the public other than as a result of a breach of
confidentiality provisions; (ii) becomes available on a non-confidential basis
from a source other than PhyCor or its affiliates or agents, which source was
not itself bound by a confidentiality agreement, or (iii) which is required to
be disclosed by law including securities laws, or pursuant to court order.
4.09. Violations. Straub shall make all reasonable attempts
to comply with all notices of violations of law or municipal ordinances, orders
or requirements noted in or issued by government agencies or departments having
authority with respect to buildings, fire, labor, health, or any other federal,
state or municipal department having jurisdiction against or affecting the
operation of Straub's business or its assets prior to the Effective Date unless
contesting the same in good faith. All such notices, after the date hereof and
prior to the Effective Date, unless contested in good faith or compliance
cannot reasonably occur prior to the Effective Date, shall be complied with by
Straub prior to the Effective Date. Upon written request, Straub shall furnish
PhyCor with an authorization to make the necessary searches for such notices.
4.10. Benefit Plans. The parties shall mutually agree upon
what actions will be taken after the date hereof but prior to the Effective
Date hereof as to the benefit plans of Straub set forth on Schedule 4.10
attached hereto, it being the intention of the parties that the New P.C. shall
adopt the PhyCor, Inc. Savings and Profit Sharing Plan following the Effective
Date and that certain of the plans set forth on Schedule 4.10 shall be frozen
or terminated after the Effective Date and the assets of the remaining plans
set forth thereon shall be merged with and into the PhyCor Plan after the
Effective Date.
4.11. Exclusivity. Straub will not, nor will it permit any
Straub Subsidiary to, nor will it authorize or knowingly permit any officer,
director or employee of Straub or of any Straub Subsidiary, except in
accordance with their fiduciary duties, or any investment banker, attorney,
accountant or other representative retained by Straub or any Straub Subsidiary
(i) to solicit or encourage, directly or indirectly (including by way of
furnishing any information), any inquiries or the making of any proposal which
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could reasonably be expected to lead to any takeover proposal relating to
Straub or any significant Straub Subsidiary, (ii) to engage in any negotiations
with respect to a takeover proposal, (iii) except to the extent required by
applicable law, to provide any non-public information concerning Straub or any
Straub Subsidiary to any person in connection with any takeover proposal, or
(iv) to reach any agreement or understanding for any other takeover proposal.
Straub will promptly advise PhyCor orally and in writing of any such inquiries
or proposals of which its executive officers become aware. As used in this
Section 4.11, "takeover proposal" shall mean any proposal for merger,
acquisition of all of the stock or assets of, or other business combination
involving Straub or any Straub Subsidiary or the acquisition of a substantial
equity interest in any of them, or a substantial portion of the assets of any
of them.
4.12. Tax Covenant. It is contemplated by the parties that
the Merger and the Transaction will qualify as tax free transactions pursuant
to Sections 368(a)(1)(A), 355 and 368(a)(1)(D) of the Code ("Tax Free
Transaction"), respectively, with the exception of any cash payable thereunder
for stock purchased pursuant to Section 1.05(d) hereof. Both prior to the
Merger and thereafter, Straub shall: (1) prepare its books and records and file
all tax returns and schedules thereto reflecting the Merger and the Transaction
in a manner consistent with the treatment of those transactions as a Tax Free
Transaction; (2) provide timely to PhyCor, the Straub Shareholders, and New
P.C. such tax information, reports, returns, or schedules as they may
reasonably require to assist them in reporting the Merger and the Transaction
as a Tax Free Transaction; and (3) aid PhyCor, New P.C. and the Straub
Shareholders in defense of any assertion by the Internal Revenue Service
("IRS") that the Merger and the Transaction are not a Tax Free Transaction and
defend against any assertion by the IRS that the Transaction is not a Tax Free
Transaction. This covenant shall survive the Closing. Straub represents and
warrants to PhyCor that the assumptions made in any legal opinion rendered to
Straub concerning the tax consequences of the Merger and Transaction regarding
factual matters will be true and correct at the time such legal opinion is
rendered.
4.13. Provision of Schedules to Agreement. As of the date
hereof, the parties hereto understand that certain schedules of Straub referred
to herein shall not be included as part of this Agreement and that certain
schedules of Straub which are included as part of this Agreement as of the date
hereof may require certain additions and deletions from time to time after the
date hereof but prior to the Effective Date. After the date hereof but no later
than fifteen (15) days prior to the Effective Date, Straub shall provide to
PhyCor for its review all of the schedules of Straub referred to in this
Agreement, including supplements, additions, deletions and corrections to
schedules provided by Straub as of the date of this Agreement. Straub shall
make available to PhyCor and its representatives all necessary information and
access to personnel PhyCor deems appropriate in completing its review of the
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Straub schedules described above. Upon completion of the foregoing process and
subject to any termination rights of the parties or rights not to consummate
the transactions contemplated herein, the Straub Schedules and Exhibits shall
become a part of this Agreement.
4.14. Redemption of Series B Preferred Stock, Exchange of
Series C Preferred Stock. All shares of Straub Series B Preferred Stock,
$100.00 par value per share (the "Series B Preferred Stock"), outstanding
immediately prior to the Effective Date shall have been redeemed for cash by
Straub and all authorized and unissued shares of Series B Preferred Stock shall
have been cancelled. All shares of Straub Series C Preferred Stock, $1.00 par
value per share (the "Series C Preferred Stock") outstanding immediately prior
to the Effective Date shall have been exchanged for shares of Series A
Preferred Stock, $1.00 par value per share of New P.C. (as defined in Section
4.04) (or be subject to dissenters rights pursuant to Section 415-80 of the
Hawaii Revised Statutes) in connection with the Transaction (as defined in
Section 4.04) and all authorized and unissued shares of Series C Preferred
Stock shall have been cancelled.
V.
COVENANTS OF PHYCOR
PhyCor hereby covenants and agrees as follows (as used herein,
"PhyCor" shall mean "PhyCor, Inc." and shall not include any PhyCor subsidiary
unless expressly provided):
5.01. Registration Statement. As promptly as practicable,
PhyCor and Straub shall cooperate and prepare and PhyCor shall file with the
SEC the Registration Statement and use reasonable efforts to respond as
promptly as practicable to any comments on the Registration Statement by the
staff of the SEC, with the assistance and cooperation of Straub and its
representatives. PhyCor shall also use reasonable efforts to take any action
required to have the Registration Statement declared effective by the SEC as
soon as is practicable and to take any action required to be taken under state
securities or "Blue Sky" laws in connection with the issuance of the PhyCor
Shares pursuant to this Agreement. Straub shall furnish PhyCor as promptly as
practicable with all information concerning Straub and the holders of its
capital stock required for inclusion in the Registration Statement and shall
take such other action as PhyCor may reasonably request in connection with such
Registration Statement and the issuance of the PhyCor Shares.
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5.02. Nasdaq National Market. PhyCor shall file with the
Nasdaq National Market an application for the listing of the PhyCor Shares to
be issued pursuant to the Merger and use its best efforts to cause the PhyCor
Shares to be listed on the Nasdaq National Market, subject to notice of
official issuance thereof.
5.03. Antitrust Filings. As promptly as practicable, Straub
and PhyCor shall make all filings and submissions under the Hart-Scott-Rodino
Antitrust Improvement Act as may be reasonably required to be made in
connection with this Agreement and the transactions contemplated hereby. Straub
will furnish to PhyCor, and PhyCor will furnish to Straub, such information and
assistance as the other may reasonably request in connection with the
preparation of any such filings or submissions.
5.04. Information. PhyCor shall provide to Straub and to
the Straub Shareholders promptly after a request therefor any information or
documents reasonably necessary for Straub and the Straub Shareholders to make
an informed judgment as to the advisability of consummating the Merger and the
related transactions contemplated thereby, including delivery in a timely
manner of the prospectus contained in the Post-Effective Amendment, and to
verify the representations and warranties of PhyCor contained herein. Until the
Effective Date, PhyCor shall notify Straub of any matter which may be
materially adverse to PhyCor and its subsidiaries considered as a whole and
shall keep Straub informed of such events.
5.05. Corporate Action; Consents. PhyCor shall take all
necessary corporate action and use its reasonable efforts to obtain all
consents and approvals required to carry out the Merger and the transactions
contemplated by this Agreement and to satisfy the conditions specified herein.
5.06. Confidential Information. Except for disclosure to
its bankers, underwriters or lenders, and except for disclosure by PhyCor of
information concerning Straub contained in PhyCor's Registration Statement,
PhyCor shall not disseminate or release to any third party or use in
competition against Straub or Straub's affiliates, any information regarding
any provision of this Agreement, or any financial information regarding Straub
(past, present or future) that was obtained by the PhyCor in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without Straub's written approval; provided, however, the foregoing
shall not apply to information which (i) is generally available to the public
other than as a result of a breach of confidentiality provisions; (ii) becomes
available on a non-confidential basis from a source other than Straub or its
affiliates or agents, which source was not itself bound by a confidentiality
agreement, or (iii) which is required to be disclosed by law including
securities laws, or pursuant to court order.
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5.07. Examination by Straub. PhyCor will accord to Straub,
its counsel, accountants, and other representatives full access during normal
business hours throughout the period prior to the Effective Date to all of
PhyCor's and the PhyCor Subsidiaries' properties, books, accounts, contracts,
commitments, records and all other relevant documents, and will make available,
and use their reasonable efforts to cause their independent auditors to make
available, copies of all such documents and information with respect to the
business and properties of PhyCor and the PhyCor Subsidiaries as
representatives of Straub may from time to time reasonably request, including,
without limitation, the working papers used to prepare the PhyCor Financial
Statements and income tax returns filed and in preparation, all in such manner
as not to unduly disrupt PhyCor's normal business activities. Such access shall
include consultations with the employees of PhyCor and the PhyCor Subsidiaries
after coordination with a Vice President of PhyCor. Until the Effective Date,
PhyCor shall confer on a regular and frequent basis with one or more
representatives of Straub to report material operational matters and to report
the general status of on-going operations. PhyCor shall notify Straub of any
material adverse change in the financial position, earnings or business of
PhyCor and the PhyCor Subsidiaries, taken as a whole, after the date hereof and
prior to the Effective Date and any unexpected emergency or other material
unanticipated change in the business of PhyCor and the PhyCor Subsidiaries,
taken as a whole, and of any governmental complaints, investigations or
hearings or adjudicatory proceedings (or communications indicating that the
same may be contemplated) or of any other matter which may be material to
PhyCor and the PhyCor subsidiaries, taken as a whole, or which would cause the
representations contained in Article III not to be true and correct and shall
keep Straub informed of such events.
5.08. Conduct of Business. Pending the Closing of the
Merger, PhyCor shall not, with respect to PhyCor and its subsidiaries taken as
a whole, except as set forth on Schedule 5.08, (a) fail to maintain in effect
casualty, public liability, and workers' compensation insurance coverage; (b)
fail to use its reasonable efforts (i) to comply with all material laws and
regulations of governmental agencies or authorities, including tax laws and
regulations applicable to them, (ii) to operate their business in the manner
reasonably necessary to maintain their current reputation and good will, (iii)
maintain their assets in their present condition in all material respects
(ordinary wear and tear excepted) and (iv) to keep in force all licenses,
permits and approvals necessary to the operation of their business as now
conducted; (c) fail to deliver to Straub any notice or other information
regarding pending or threatened litigation in respect of PhyCor or the
operation of the business of PhyCor and its Subsidiaries; and (d) issue any
press release or other public statement relating to this Agreement or the
Merger or the transactions contemplated hereby except as may be required by law
or with Straub's consent.
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5.09. Notice of Adverse Change; Amendments or Supplements
to Exhibits and Schedules. PhyCor will advise Straub in writing of any material
adverse change in the properties or business of PhyCor and its Subsidiaries,
taken as a whole, from the date of this Agreement to the Effective Date. PhyCor
shall, with written notice to Straub, supplement or amend all Exhibits and
Schedules with respect to any matter hereafter arising or discovered which, if
existing or known as of the date of this Agreement, would have been required to
be set forth or described in such Exhibit or Schedule.
5.10. Tax Covenant. It is contemplated by the parties that
the Merger and the Transaction will qualify as tax free transactions pursuant
to Sections 368(a)(1)(A), 355 and 368(a)(1)(D) of the Code ("Tax Free
Transaction"), respectively, with the exception of any cash payable thereunder
for stock purchased pursuant to Section 1.05(d) hereof. Both prior to the
Merger and thereafter, PhyCor shall: (1) prepare its book and records and file
all tax returns and schedules thereto reflecting the Merger and the Transaction
in a manner consistent with the treatment of those transactions as a Tax Free
Transaction; (2) provide timely to Straub, the Straub Shareholders, and New
P.C. such tax information, reports, returns, or schedules as they may
reasonably require to assist them in reporting the Merger and the Transaction
as a Tax Free Transaction; and (3) aid Straub, New P.C. and the Straub
Shareholders in defense of any assertion by the Internal Revenue Service
("IRS") that the Merger and the Transaction are not a Tax Free Transaction and
defend against any assertion by the IRS that the Transaction is not a Tax Free
Transaction. After the Merger, PhyCor intends to transfer all of the assets of
Straub to its wholly-owned subsidiary, PhyCor of Hawaii, Inc. PhyCor agrees
that, for so long as is necessary to not adversely impact the Merger and the
Transaction as Tax Free Transactions, it will (1) retain "control" of PhyCor of
Hawaii, Inc. (within the meaning of Section 368(c) of the Code); (2) not
reacquire any shares of PhyCor Common Stock issued in the Merger; and (3) cause
PhyCor of Hawaii, Inc. to continue the active conduct of the trade or business
of Straub conducted by Straub immediately prior to the Merger as described more
completely elsewhere in this Agreement and the documents executed in connection
herewith. This covenant shall survive the Closing.
5.11. Investment Information. PhyCor agrees to deliver to
Straub copies of the following and Straub agrees to deliver such copies to the
Straub Shareholders with the notice of the shareholders meeting to consider and
act upon the Merger:
(a) A current prospectus and proxy statement relating to the
PhyCor Common Stock as filed with the SEC as part of PhyCor's effective
Registration Statement, which will contain information relating to the Merger
Consideration and describing the Merger, the Transaction and describing PhyCor
and Straub, which prospectus will be filed with the SEC as part of PhyCor's
Registration Statement;
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(b) The latest Annual Report on Form 10-K filed by PhyCor with
the SEC;
(c) Any Quarterly Report on Form 10-Q and each current report
on Form 8-K filed by PhyCor with the SEC after the date of the Annual Report
furnished pursuant to clause (c) above;
(d) The latest proxy statement filed by PhyCor with the
SEC in connection with the solicitation of proxies for an annual meeting of
shareholders; and
(e) Such other publicly available information relating to
PhyCor as Straub may reasonably request.
5.12. Availability of Filings. For a period of three
(3) years following the Effective Date, for so long as PhyCor is a reporting
company under the Exchange Act, PhyCor shall make available current public
information (as defined in Rule 144(c) promulgated under the Securities Act or
as otherwise required by Rule 145(d) promulgated under the Securities Act) and
take any other actions reasonably required by it to facilitate resales, if any,
of the PhyCor Shares by the shareholders of Straub (including, but not limited
to, those shareholders who are deemed "Affiliates" under Rule 145); provided,
however, nothing contained herein shall require registration of any resale
where the rules of the SEC provide a procedure other than registration for
resales.
5.13. Advise as to Knowledge of Breach. PhyCor hereby
covenants to advise Straub as soon as is practicable under the applicable
circumstances if PhyCor has any actual knowledge after the date hereof and
prior to the Effective Date that any of the representations or warranties of
Straub set forth in Article II hereof are not accurate.
VI.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PHYCOR
All obligations of PhyCor which are to be performed under this
Agreement at the Closing are subject to the performance prior to the Closing of
all covenants and agreements contained herein which are to be performed by
Straub at or prior to the Closing and to the fulfillment at or prior to the
Closing of each of the following conditions (unless expressly waived in writing
by PhyCor at any time at or prior to the Closing):
6.01. Representations and Warranties True. All of the
representations and warranties made by Straub contained in Article II of this
Agreement shall be true and correct as of the date of this Agreement, shall be
deemed to have been made again at and as of the Closing, and shall be true and
correct at and as of the Closing in all material respects. Straub shall have
performed and complied in all material respects with all covenants and
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conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
6.02. Officer's Certificate. The President of Straub shall
have delivered to PhyCor a certificate on behalf of Straub stating that the
representations and warranties of Straub set forth in this Agreement were true
and correct as of the date of this Agreement and as of the Closing and the
covenants of Straub set forth in the Agreement have been complied with in all
material respects as of the Closing. The President's Certificate shall be in
the form of Exhibit 6.02 attached hereto.
6.03. Opinion of Counsel. PhyCor shall have been furnished
with an opinion of Torkildson, Katz, Fonseca, Jaffe, Moore & Hetherington,
counsel to Straub, in form and substance satisfactory to PhyCor, as to the
matters set forth in Exhibit 6.03 attached hereto. In addition, either PhyCor
shall have received an opinion of counsel satisfactory to PhyCor concerning the
tax consequences of the Merger and Transaction to Straub or PhyCor shall be
entitled to rely after the Closing on the opinion issued to Straub.
6.04. Consents and Approvals. All necessary consents and
approvals required by this Agreement and necessary to consummate the Merger
shall have been obtained by Straub and PhyCor and copies of such consents and
approvals shall have been delivered to PhyCor.
6.05. Corporate and Shareholder Action. Straub shall have
taken all corporate action and the Straub Shareholders shall have taken all
action necessary to be taken by them to approve the Merger and the transactions
contemplated thereby and certified copies of all resolutions duly adopted by
the Board of Directors of Straub and the Straub Shareholders shall have been
delivered to PhyCor evidencing such approval. PhyCor shall have received the
representations and warranties provided for in Section 1.05(c) hereof.
6.06. New P.C. Transaction. The Transaction shall have been
completed in all material respects on or before the Effective Date and an
officer's certificate executed by the President of Straub in the form of
Exhibit 6.06 attached hereto shall state, among other things, that the
Transaction has been completed no later than as of the Effective Date.
6.07. Service Agreement. The New P.C. and PhyCor of Hawaii,
Inc. shall have entered into a Service Agreement in the form of Exhibit 6.07.
6.08. Government Approvals. All material approvals and
authorizations of, filings and registrations with, and notifications to, all
federal and state authorities required for the consummation of the Merger and
the transactions contemplated thereby as provided for in this Agreement,
including, but not
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limited to, expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act, shall have been duly obtained or
made and shall not have been cancelled or rescinded.
6.09. Dissenting Shareholders. Shareholders dissenting from
the Merger, and the Transaction described in Section 4.04, and validly
exercising their dissenters' rights pursuant to the Hawaii Revised Statutes
shall collectively own not more than 5% in the aggregate of the issued and
outstanding Straub Common Stock. Shareholders of Straub Series C Preferred
Stock dissenting from the Transaction described in Section 4.04 above and
validly exercising their dissenters rights pursuant to the Hawaii Revised
Statutes shall own not more than 5% in the aggregate of the issued and
outstanding Straub Series C Preferred Stock.
6.10. Affiliates. Each person who is an "Affiliate" of
Straub, as that term is defined in the Securities Act, shall have executed and
delivered to PhyCor, in a form reasonably satisfactory to PhyCor, a certificate
that provides for the following: (i) the PhyCor Shares issuable to such
Affiliate will be held by such Affiliate pursuant to the provisions of the
Securities Act and the rules and regulations thereunder, (ii) no sale or
disposition of such PhyCor Shares will be made except pursuant to the terms of
the Registration Statement, and the prospectus and proxy statement contained
therein, the Securities Act, and Rule 145(d) thereunder, and (iii) each such
certificate representing the PhyCor Shares issued to an Affiliate will bear a
restrictive legend setting forth the restrictions on transfer referred to
above.
6.11. Registration Statement and Blue Sky Approvals. The
Registration Statement shall have been declared effective under the Securities
Act by the SEC and no stop orders with respect to such Registration Statement
shall have been issued. All material state securities permits and approvals
required to carry out the transactions contemplated by this Agreement shall
have been obtained.
6.12. No Action, Etc. No action or proceeding shall have
been brought or threatened before any court or administrative agency to prevent
the consummation of, or to seek damages by reason of, the transactions
contemplated hereby, and no governmental authority shall have asserted that
these transactions constitute a violation of law or give rise to liability on
the part of the parties hereto.
6.13. No Adverse Change. There shall have been no material
adverse change in the financial condition or results of operations of Straub as
reflected in the Financial Statements, and there shall have been no material
change in the amount of the assets of Straub or liabilities of Straub reflected
in the most recently updated financial statements prepared by Straub and
provided to PhyCor prior to the Effective Date as compared to the May 31, 1996
financial statements of Straub.
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6.14. Restrictive Covenants. PhyCor shall have received
copies of new restrictive covenant agreements entered into between the
physicians employed by Straub and the New P.C. and the opinion of Torkildson
Katz Jossem Fonseca Jaffe Moore & Hetherington in form and substance
satisfactory to PhyCor, that such new restrictive covenant agreements are
enforceable against employees of Straub covered thereby.
6.15. Financing. PhyCor shall have obtained the consent of
Citibank, N.A., as agent for the banks participating in PhyCor's Fifth Amended
and Restated Revolving Line of Credit Agreement, to carry out the transactions
contemplated by this Agreement and the Service Agreement.
6.16. State Tax Filings. All necessary state and local tax
filings required by the laws of the State of Hawaii as a result of the
transactions contemplated by this Agreement and the Service Agreement shall
have been made and accepted by the applicable Hawaii governmental agency.
6.17. Due Diligence; Schedules. PhyCor and its
representatives shall have completed, to their reasonable satisfaction, their
due diligence review of Straub and shall have completed their review of the
schedules attached hereto as of the date hereof (the "Existing Schedules") and
shall have accepted, to their reasonable satisfaction and based upon the
procedures set forth in Section 4.13, substitute schedules to the Existing
Schedules, supplements or partial additions or deletions to the Existing
Schedules, or new schedules which were not included as part of the Existing
Schedules.
6.18. HMO. All necessary filings in connection with the
change of ownership of the HMO required by the laws of the State of Hawaii
shall have been filed and all approvals by the applicable Hawaii governmental
agencies relating to the change of ownership of the HMO shall have been
obtained.
VII.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF STRAUB
All obligations of Straub which are to be performed under this
Agreement at the Closing are subject to the performance prior to the Closing of
all covenants and agreements of contained herein which are to be performed by
PhyCor at or prior to the Closing and to the fulfillment at or prior to the
Closing of each of the following conditions (unless expressly waived in writing
by Straub at any time at or prior to the Closing):
7.01. Representations and Warranties True. All of the
representations and warranties made by PhyCor contained in Article III of this
Agreement shall be true and correct as of the date of this Agreement, shall be
deemed to have been made again at and as of the Closing, and shall be true and
correct at and as of the Closing in all material respects. PhyCor shall have
performed and complied in all material respects with all covenants and
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conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing.
7.02. Officer's Certificate. The President of PhyCor shall
have delivered to Straub a certificate on behalf of PhyCor stating that the
representations and warranties of PhyCor set forth in this Agreement were true
and correct as of the date of this Agreement and as of the Closing and the
covenants of PhyCor set forth in the Agreement have been complied with in all
material respects as of the Closing. The Officer's Certificate shall be in the
form of Exhibit 7.02 attached hereto.
7.03. Opinions of Counsel. Straub shall have been furnished
with an opinion of PhyCor's Vice President and General Counsel, in form and
substance satisfactory to Straub, as to the matters set forth in Exhibit 7.03
attached hereto. In addition, Straub shall have received an opinion of Morrison
& Foerster LLP in form and substance satisfactory to Straub concerning the tax
consequences of the Merger and Transaction to Straub and the Straub
Shareholders.
7.04. Consents and Approvals. All necessary consents and
approvals necessary to consummate the Merger and Transaction shall have been
obtained by Straub and PhyCor and copies of such consents and approvals shall
have been delivered to Straub.
7.05. Corporate Action. PhyCor shall have taken all
corporate action necessary to be taken by it to approve the Merger and the
transactions contemplated thereby, and certified copies of all resolutions duly
adopted by the Board of Directors of PhyCor shall have been delivered to Straub
evidencing such approval.
7.06. Service Agreement. PhyCor of Hawaii, Inc. and the New
P.C. shall have entered into a Service Agreement in the form of Exhibit 6.07,
and PhyCor shall have entered into a Guaranty of Service Agreement in the form
of Exhibit 7.06(b).
7.07. Government Approvals. All material approvals and
authorizations of, filings and registrations with, and notification to, all
federal and state authorities required for the consummation of the Merger and
the transactions contemplated thereby as provided for in this Agreement,
including, but not limited to, expiration or early termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act, shall have been
duly obtained or made and shall not have been cancelled or rescinded.
7.08. Registration Statement and Blue Sky Approvals. The
Registration Statement shall have been declared effective under the Securities
Act and no stop orders with respect to such Registration Statement shall have
been issued. All material state securities permits and approvals required to
carry out the transactions contemplated by this Agreement shall have been
obtained.
7.9. No Action, Etc. No action or proceeding shall have
been brought or threatened before any court or administrative
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agency to prevent the consummation of, or to seek damages by reason of, the
transactions contemplated hereby, and no governmental authority shall have
asserted that these transactions constitute a violation of law or give rise to
liability on the part of the parties hereto.
7.10. Receipt of Merger Consideration. The Straub
Shareholders shall have received that portion of the Merger Consideration
required to be paid by PhyCor as of the Effective Date.
7.11. Fairness Opinion. Straub shall have received an
opinion from Hambrecht & Quist in form and substance satisfactory to Straub to
the effect that the Merger and Service Agreement are fair from a financial
point of view to the Straub Shareholders and such opinion shall not have been
withdrawn.
7.12. Dissenting Shareholders. Shareholders dissenting from
the Merger, and the Transaction described in Section 4.04, and validly
exercising their dissenters' rights pursuant to the Hawaii Revised Statutes
shall collectively own not more than 5% in the aggregate of the issued and
outstanding Straub Common Stock. Shareholders of Straub Series C Preferred
Stock dissenting from the Transaction described in Section 4.04 above and
validly exercising their dissenters rights pursuant to the Hawaii Revised
Statutes shall own not more than 5% in the aggregate of the issued and
outstanding Straub Series C Preferred Stock.
7.13. No Adverse Change. Straub shall have received and had
three days to review any additional information provided by PhyCor in
supplements to the Schedules or Exhibits provided for herein. There shall have
been no material adverse change in the financial condition or results of
operations of PhyCor as reflected in the Financial Statements.
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VIII.
AGREEMENT EFFECTIVE DATE; TERMINATION
8.01. Date of Effectiveness of Agreement. This Agreement
shall be a binding obligation of and shall be in full force and effect against
the parties hereto only upon the attachment by the mutual consent of the
parties hereto of the Service Agreement as Exhibit 6.07, the terms and
provisions of which Service Agreement shall be substantially agreed upon by the
parties as of the date upon which the Service Agreement is attached to this
Agreement and made a part hereof; provided, however, PhyCor may, upon written
notice to Straub, delay the date on which this Agreement is deemed to be
binding obligations of the parties hereto if PhyCor notifies Straub of
information PhyCor has discovered in connection with its due diligence efforts
and requests amendments to the provisions of Article II and/or Article IV
hereof.
8.02. Termination. This Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Date, whether before or
after submitted to a vote for approval by the Straub Shareholders, as follows:
(a) by mutual written consent of PhyCor and Straub;
(b) by PhyCor, upon no less than five (5) days prior
written notice to Straub, if there shall have occurred any event,
change or development which has caused a material adverse change with
respect to Straub or if Straub materially breaches any representation,
warranty or covenant in this Agreement or upon failure or nonwaiver
of any condition precedent set forth in Article VI unless within five
(5) days after the written notice from PhyCor, Straub shall have
cured such breach or failure;
(c) by Straub, upon no less than five (5) days
prior written notice to PhyCor, if there shall have occurred any
event, change or development which has caused a material adverse
change with respect to PhyCor of if PhyCor materially breaches any
representation, warranty or covenant in this Agreement or upon failure
or nonwaiver of any condition precedent set forth in Article VII
unless within five (5) days after the written notice from Straub,
PhyCor shall have cured such breach or failure;
(d) by either PhyCor or Straub immediately upon written
notice to the other if any regulatory agency whose approval is
required with respect to the Merger, the Transaction or the Service
Agreement denies such application for approval by final order or
ruling (which order or ruling shall not be considered final until
expiration or waiver of all periods for review or appeal);
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(e) by either PhyCor or Straub if the Merger, the
Transaction or Service Agreement shall violate any non-appealable
final order, decree or judgment of any court or governmental body
having competent jurisdiction;
(f) by either PhyCor or Straub upon the bankruptcy,
insolvency or assignment for the benefit of creditors of Straub or
PhyCor, respectively;
(g) by either PhyCor or Straub, if the shareholders of
Straub shall fail to approve the Merger by the vote required under
the Hawaii Revised Statutes and the Articles of Incorporation and
Bylaws of Straub;
(h) by either Straub or PhyCor, immediately upon
written notice to the other, if prior to the Closing Straub has not
obtained a favorable tax opinion of counsel satisfactory in form and
substance to it in regard to the tax consequences of the Merger and
Transaction, and PhyCor is either not entitled to rely on such opinion
after the Closing or has not received a similar opinion on which it
may rely after the Closing;
(i) by either PhyCor or Straub immediately upon
written notice to the other if the Effective Date has not occurred by
February 28, 1997; or
(j) by either PhyCor or Straub in the event the
parties are unable to agree on the schedules to be added to this
Agreement pursuant to the provisions of Sections 4.13 and 6.17 hereof.
8.03. Effect of Termination. In the event of the
termination of this Agreement by either Straub or PhyCor pursuant to this
Article VIII, there shall be no liability on the part of any party hereto
against any other party hereto, or their respective directors, officers,
shareholders or agents, except that (i) Sections 4.08 and 5.04 relating to
confidentiality and Article IX relating to indemnification shall continue in
full force and effect notwithstanding such termination; provided, however, a
party shall not be liable to the other party under the provisions of Article IX
hereof if the accused party had grounds for terminating this Agreement under
this Article VIII, whether or not such party elected to terminate this
Agreement on those grounds and (ii) each of the parties hereto shall provide
the other party hereto with a copy of any proposed public announcement
regarding the occurrence of such termination and an opportunity to comment
thereon prior to its dissemination.
8.04. Return of Information. In the event of the
termination of this Agreement for any reason, each party shall deliver to the
other party, and shall require each of its officers, agents, employees and
independent advisers (including legal, financial and accounting advisers) to
deliver to the other party
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all documents, work papers, and other material obtained from such other party
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof. Each party agrees that notwithstanding any other
provision contained in this Agreement, the undertakings and covenants regarding
confidentiality contained in Sections 4.08 and 5.04 shall survive termination
of this Agreement.
IX.
INDEMNIFICATION
9.01. Indemnification by Straub and PhyCor Prior to
Effective Date.
(a) Subject to the provisions of Section 8.03 hereof,
from the date of this Agreement until the Effective Date, if any,
Straub shall indemnify and hold harmless PhyCor, each officer,
director, employee and agent thereof, and their respective estates,
successors and assigns (each an "Indemnified Party") in respect of any
actual costs and expenses (including without limitation attorneys'
fees), reasonably incurred by such Indemnified Party as a result of
any inaccuracy in or breach of any representation or warranty by
Straub contained in this Agreement or the nonfulfillment or breach of
any covenant, agreement or obligation of Straub contained in this
Agreement.
(b) Subject to the provisions of Section 8.03
hereof, from the date of this Agreement until the Effective Date, if
any, PhyCor shall indemnify and hold harmless Straub, each officer,
director, employee and agent thereof, and their respective estates,
successors and assigns (each an "Indemnified Party") in respect of any
actual costs and expenses (including without limitation attorneys'
fees), reasonably incurred by such Indemnified Party as a result of
any inaccuracy in or breach of any representation or warranty by
PhyCor contained in this Agreement or the nonfulfillment or breach of
any covenant, agreement or obligation of PhyCor contained in this
Agreement.
9.02. Limitations of Liability of Straub. Notwithstanding
anything in this Agreement that may be construed to the contrary, each of the
following limitations shall apply to the indemnity obligations of Straub under
this Agreement:
(a) "Claims" shall include claims, losses, damages,
liabilities and expenses (including, without limitation, settlement
costs, attorneys' fees and any legal or other expenses for
investigating or defending any actions or threatened actions) only to
the extent actually suffered, reduced by any offsetting benefits,
assets or services received and recoveries (or entitlements to
recoveries) from any insurers or third parties (it being the
obligation of the
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Indemnified Parties to make timely and appropriate claims against
insurers and third parties and any failure to do so being at the
Indemnified Parties' risk hereunder);
(b) Straub shall not be liable to the PhyCor
Indemnified Parties for any Claims under Section 9.01 above until such
Claims exceed in the aggregate $250,000 that would otherwise be
subject to indemnification under said provisions, and then only for
the amount by which such Claims exceed $250,000.
9.03. PhyCor's Indemnification Upon Consummation of the
Merger. Upon consummation of the Merger, PhyCor shall indemnify and hold
harmless Straub, its controlling persons, officers, directors, employees and
agents, each Straub Shareholder, New P.C. and their respective estates,
successors and assigns (each an "Indemnified Party") in respect of any and all
Claims (as defined above), reasonably incurred by Straub, any Straub
Shareholder, New P.C. or other Indemnified Party, as a result of each and all
of the following:
(a) any inaccuracy in or breach of any representation
or warranty contained in this Agreement of which Straub was not
advised in writing by PhyCor before or at the time of Closing;
(b) the nonfulfillment or breach of any covenant,
agreement or obligation contained in this Agreement; or
(c) any liability or obligation of Straub assumed
by PhyCor as a result of the Merger disclosed by Straub in this
Agreement.
9.04. Notification. Whenever any claim shall arise for
indemnification, the Indemnified Party shall notify the indemnifying party
promptly after such Indemnified Party has actual knowledge of the facts
constituting the basis for such claim or charge, except that in the event of
any claim for indemnification or charge hereunder resulting from or in
connection with any claim or legal proceedings by a third party, such
Indemnified Party shall give prompt notice to the indemnifying party of such
claim or the commencement of legal proceedings in respect of which recovery may
be sought against the indemnifying party pursuant to the provisions of this
Article IX. The notice to the indemnifying party shall specify, if known, the
amount or an estimate of the amount of the liability or charge arising
therefrom. The Indemnified Party shall not settle or compromise any such claim
without the prior written consent of the indemnifying party unless suit shall
have been instituted against the Indemnified Party and the indemnifying party
shall have failed, within fifteen (15) days after notice of institution of the
suit, to take control of such suit as provided in Section 9.06 below.
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9.05. Defense of Actions. In connection with any claim
giving rise to indemnity resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the indemnifying
party, at its sole cost and expense, may, upon written notice to the
Indemnified Party, assume the defense of such claim or legal proceedings. If
the indemnifying party assumes the defense of any such claim or legal
proceeding, the obligations of the indemnifying party hereunder as to such
claim or legal proceeding shall be limited to taking all steps necessary in the
defense of settlement thereof and, to the extent provided in this Agreement,
holding the Indemnified Party harmless from and against any losses, damages,
expenses or liability caused by or arising out of the settlement approved by
the indemnifying party or any judgment in connection with such claim or legal
proceeding. Each Indemnified Party agrees that it will cooperate with the
indemnifying party in the defense of any such action, the defense of which is
assumed by the indemnifying party. Except with the consent of the Indemnified
Party, the indemnifying party shall not consent to the entry of any judgment
arising from any such claim or legal proceeding which, in each case, does not
include as an unconditional term thereof the delivering by the claimant or the
plaintiff to the Indemnified Party of a release from all liability in respect
thereof, unless the indemnifying party has actually paid to the Indemnified
Party the full amount of such judgment or settlement. If the indemnifying party
does not assume the defense of any claim or litigation, any Indemnified Party
may defend against such claim or litigation in such manner as it may deem
appropriate, including, but not limited to, settling such claim or litigation,
after giving notice of the same to the indemnifying party, on such terms as the
Indemnified Party may deem appropriate. The indemnifying party will promptly
reimburse the Indemnified Party in accordance with the provisions hereof. The
Indemnified Party shall not make any settlement of any claims without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld.
9.06. Payment. All indemnification hereunder shall be
effected by payment of cash or delivery of a certified or official bank check
in the amount of the indemnification liability; provided, however, that the
Straub Shareholders may at their sole option elect to pay any indemnification
in 48 equal monthly instruments commencing on the date such indemnification is
conclusively determined to be due, together with interest at a fixed rate per
annum equal to PhyCor's cost of funds on the date the indemnification is first
conclusively determined to be due. Interest shall be computed on the basis of
actual days elapsed over calendar years. The Straub Shareholders may prepay
their indemnification liability in whole or in part at any time without premium
or penalty.
9.07. Contract Remedies Exclusive. The remedies provided
for in this Article IX for inaccuracies in or breaches of representations and
warranties contained in this Agreement and nonfulfillment or breaches of
covenants, agreements and obligations
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contained in this Agreement shall be exclusive with respect to such matters and
shall preclude assertion by any party of any other rights or the seeking of any
other rights or remedies against any other party hereto with respect to such
matters; provided, however, nothing contained in this Agreement shall be deemed
to limit, exclude, impair or otherwise affect any rights or remedies of any
party under applicable securities laws.
9.08. Attorneys' Fees. If legal action is commenced to
enforce this Agreement, each party shall pay its own costs and attorneys' fees
in connection with such action, and such costs and attorneys' fees shall not be
covered by the indemnities provided in this Article IX.
X.
MISCELLANEOUS
10.01. Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be sufficiently given if
delivered in person or mailed by certified mail, postage prepaid, addressed to
the parties at their respective addresses reflected on Schedule 10.01 hereto.
10.02. Expenses. PhyCor and Straub shall pay their own costs
and expenses (including, without limitation, the fees and expenses of their
counsel, auditors, accountants, investment advisors and any finders' fees)
incidental to the preparation and carrying out of this Agreement.
10.03. Entire Agreement. This Agreement and the related
agreements described herein, including the Plan of Merger and Service Agreement
and Schedules and Exhibits hereto, express the whole agreement between the
parties with respect to the subject matter hereof, there being no
representations, warranties or other agreements not herein expressly set forth
or provided for herein.
10.04. Amendments and Waivers. This Agreement may be
amended, only in writing, signed by the parties hereto. No provision of this
Agreement may be waived except in a writing signed by the party to be charged.
10.05. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
10.06. Survival of Representations and Warranties. All
statements contained in any certificate delivered by or on behalf of any of the
parties to this Agreement pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties made
by the respective parties hereunder. The covenants, representations and
warranties
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made by the parties each to the other in this Agreement or pursuant hereto
shall survive the Merger or termination of this Agreement.
10.07. Section Headings. The section headings are for
reference only and shall not limit or control the meaning of any provision of
this Agreement.
10.08. Severability. If any provision of this Agreement
shall be held invalid under any applicable laws, such invalidity shall not
affect any other provision of this Agreement that can be given effect without
the invalid provision, and, to this end, the provisions hereof are severable.
10.09. Governing Law. This Agreement shall be construed and
governed by the laws of the State of Hawaii except to the extent the laws of
the State of Tennessee apply to the Merger.
10.10. Successors and Assigns. This Agreement shall inure to
the benefit of and bind the respective successors and assigns of the parties
hereto. Nothing expressed or referred to in this Agreement is intended or shall
be construed to give any person other than the parties to this Agreement or
their respective successors or permitted assigns any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision
contained herein, it being the intention of the parties to this Agreement that
the Agreement be for the sole and exclusive benefit of such parties or such
successors and assigns and not for the benefit of any other person.
Notwithstanding the above, neither PhyCor nor Straub shall have the right to
assign their rights and obligations hereunder, except that PhyCor may assign
this Agreement to (a) a wholly-owned subsidiary, provided that PhyCor shall
remain liable for all of its obligations hereunder, and guarantees the
obligations of such subsidiary in a form of guaranty reasonably acceptable to
Straub, and (b) Citibank, N.A., as agent, pursuant to the terms of the Credit
Agreement, among PhyCor, the banks parties thereto and Citibank, N.A., as
agent, provided that PhyCor shall remain liable for all of its obligations
hereunder or (c) any other lending institution(s) with whom PhyCor shall enter
into a credit agreement.
10.11. Press Releases. PhyCor and Straub shall each approve
any press releases regarding this Agreement and its consummation; provided,
however, PhyCor shall be entitled to release any information it deems necessary
or appropriate as a public company by giving Straub prior written notice.
10.12. Access to Records After Closing. Straub and New P.C.
will cause its counsel and certified public accountants to afford to the
representatives of PhyCor, including its counsel and accountants, reasonable
access to, and copies of, any records not transferred to PhyCor, including, but
not limited to, audit and tax work papers. PhyCor will afford to the
representatives of Straub and New P.C. reasonable access to, and copies of, the
records transferred to PhyCor at the Closing during normal business hours
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after the Closing Date. Copies furnished to the party gaining such access shall
be furnished at the cost of the recipient.
10.13. Exhibits. All Exhibits and Schedules referred to in
this Agreement or included in the Exhibit Volume are an integral parts of this
Agreement as if fully set forth herein and all statements appearing therein
shall be deemed to be representations.
10.14. Disclosure of Certain Information. Straub grants
PhyCor authorization to disclose aggregate financial history and financial and
other information about Straub as an entity and about the business of Straub in
order for PhyCor to comply with disclosure requirements in connection with the
sale and registration of its securities and to lenders, investment bankers,
other acquisition candidates, and other officials as deemed necessary by
PhyCor.
10.15. Third Party Beneficiaries. PhyCor and Straub
acknowledge and agree that the Indemnified Parties are third-party
beneficiaries of this Agreement and this Agreement shall inure to their benefit
and be enforceable by them.
10.16. Cure of Default. PhyCor shall have the right, but not
the obligation, upon notice to Straub and upon such party's failure to cure
within a reasonable time, to cure any default of Straub and to satisfy any
condition precedent to PhyCor's obligation to close which can be cured and to
deduct the amount so paid from the amounts payable by PhyCor at the Closing.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the day and year first written above.
PHYCOR, INC.
By:
-------------------------------
Title:
----------------------------
STRAUB CLINIC & HOSPITAL, INCORPORATED
By:
-------------------------------
Title:
----------------------------
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Exhibits:
Exhibit A Form of Plan of Merger
Exhibit B Form of Articles of Merger
Exhibit 1.04(d) List and Addresses of Straub Shareholders
Exhibit 6.02 Form of President's Certificate (Straub)
Exhibit 6.03 Form of Opinion of Torkildson, Katz,
Fonseca, Jaffe, Moore & Hetherington
Exhibit 6.06 Form of Officer's Certificate (New P.C.)
Exhibit 6.07 Form of Service Agreement
Exhibit 7.02 Form of Officer's Certificate (PhyCor)
Exhibit 7.03 Form of Opinion of Counsel (PhyCor)
Form of Tax Opinion for Morrison & Foerster LLP
Exhibit 7.06(b) Form of Guaranty of Service Agreement
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SCHEDULES:
1.04(d) List of Names and Addresses of Straub Common Shareholders
immediately prior to the Effective Date.
2.01(a) Copies of Articles of Incorporation, as amended, and
Bylaws, as amended
2.02 List of shareholdings
2.03(a) List of Shareholders that are not the record and
beneficial owners of such shares
2.03(b) List of existing agreements, options, warrants, rights,
calls or commitments to which the Straub Shareholders
or Straub are a party
2.04 List of stock ownership by Straub in any corporation,
partnership, J.V., association or business enterprise
2.05 Copies of financial statements and May 31, 1996
unaudited balance sheet; exceptions to conformity with
GAAP
2.06 Undisclosed liabilities
2.07 Certain recent changes
2.08(a) List of assets without title
2.08(b) Mortgages and security interests of record
2.09 Copy of each contract, lease, sublease, agreement etc.
which Straub is a party or bound for amount in excess
of $100,000 or for terms in excess of 12 months threats
of cancellation; employment agreements or agreements
containing bonus, severance, termination pay
liabilities or obligations or agreements to guaranty an
employee loan; defaults and conflicts
2.10 Violations of Articles of Incorporation or Bylaws;
conflicts of contracts; liens on assets under contract;
violations of statutes or laws
2.11 Litigation; material claims
2.12(a) Notice of noncompliance with federal, state or other
governmental laws, regulations or administrative orders
2.12(b) Licenses, permits, certificates and authorization
2.15 List of current non-physician employees, officers and
consultants whose total annual compensation was in
excess of $40,000 in last 12 months
2.16 Collective bargaining agreements
2.17(a) List of all policies or binders of fire, liability,
product liability, workers' compensation, health and
other forms of insurance policies
2.17(b) Malpractice liability insurance policies since 1990
2.17(c) Denied insurance coverage and claims of insured loss in
excess of $20,000
2.20 Aging report on accounts receivables and list of
accounts receivable outside ordinary course
2.21 Employee Benefit Plans exceptions to representations
46
<PAGE> 157
2.22(a) Copy of licensure survey reports of Straub Hospital by
Hawaii Department of Health after January 1, 1995;
copies of Certificate of Need approvals held by Straub
2.22(b) Restrictions on participation in the Medicare and
Medicaid programs; notices of pending or threatened
proceeding against Hospital; notice of dispute between
Straub Hospital and any governmental authority; copies
of Hospital's two most recent JCAHO accreditation
survey reports and deficiency lists for 3 years ending
December 31, 1995
2.23 List of officers with "knowledge"
2.25 Bank accounts; officers
2.26 Storage, discharge or handling of hazardous waste
2.27 Fraud and abuse
2.29 HMO jurisdiction and copy of license
2.30 Deferred compensation payable by Straub
4.04(a) List of assets transferred to New P.C.
4.04(b) Copies of documents necessary to effect transfer
4.05 Adjustments to financial statements outside ordinary course
4.06 Exceptions to Straub's consent to effect a valid and
binding transfer or assignment of all material
contracts to PhyCor
4.10 Benefit plans
5.08 Conduct of business by PhyCor
47
<PAGE> 158
SCHEDULE 4.04(a)
TRANSFERRED ASSETS AND LIABILITIES
ASSETS:
1. Assets appearing on the Balance Sheet attached hereto as
Schedule I.
2. Partnership and subsidiary interests attached hereto as Schedule II.
Except as otherwise indicated, whenever Straub transfers stock of the
entities to New Straub, it will also transfer assets and liabilities
to New Straub.
3. Licenses for the provision of health care services attached hereto as
Schedule III.
4. Contracts under which Straub Clinic & Hospital, Inc. provides medical
services, attached as Schedule IV.
5. Real property leases set forth on Schedule V.
6. Equipment leases set forth on Schedule VI.
7. The employment agreements and restrictive covenants attached as
Schedule VII.
8. All medical and professional records, and all privileged and
confidential legal documents and communication with attorneys.
9. All benefit plans of Straub, including any retirement plan, profit
sharing plan and defined benefit plan.
10. Any rights or recoveries from any claim or litigation existing on the
date hereof by or against KPMG Peat Marwick LLP.
11. Guam Interest (subject to further negotiation between the parties)
12. $2 million cash
<PAGE> 159
LIABILITIES:
1. Liabilities appearing on the Balance Sheet attached hereto as
Schedule I.
2. Any liabilities arising under any benefit plan of Straub, including any
retirement plan, profit sharing plan or defined benefit plan.
3. Any liability under any government investigation into MediCare or other
billing practices of Straub and any sanctions imposed by any regulatory
agency as a result thereof.
4. Any liability from any claim or litigation existing on the date hereof
by or against KPMG Peat Marwick LLP.
5. Guam Interest (subject to further negotiation between the parties)
<PAGE> 160
Schedule I
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1038000 BOH -- CERTIFICATE OF DEPOSIT 187,500.00 187,500.00 (1)
1039000 BOH SAVINGS (FSM) 50,687.35 50,687.35
1042000 BOH -- CD (HMO DEPOSIT) 150,000.00 150,000.00
-------------------------------------------------
388,187.35 200,687.35 187,500.00
1000100 BOH -- PATIENT A/R COLLECTIONS 1,510,231.53 1,510,231.53
1001000 BOH -- DISBURSEMENTS (4,757.96) (4,757.96)
1002000 BOH -- PAYROLL (263,329.58) (263,329.58)
1003000 BOH -- RECEIPTS 1,474,761.52 1,474,761.52
1004000 BOH -- REG. STRAUB WAIKIKI 0.00 0.00
1006000 SAVINGS 6,226.26 6,226.26
1007000 BOH -- ACCOUNTS PAYABLE (4,037,217.38) (4,037,217.38)
1008000 BOH -- REG. EMP REIMB ACCT 0.00 0.00
1010000 CHANGE FUND 7,066.00 7,066.00
1011000 BOH -- KEAUHOU (32.00) (32.00)
1012000 BOH -- STRAUB H. PLAN SVCS 780.00 780.00
1013000 FHB -- REGULAR SOHS 0.00 0.00
1015000 BOH -- STRAUB PROF SVCS 8,210.00 8,210.00
1016000 BOH -- DOCS CONCENTRATION 0.00 0.00
1017000 BOH -- PATIENT REFUNDS (138,584.84) (138,584.84)
1019000 FIRST FED -- LANAI 44,131.47 44,131.47
1020000 BOH -- REGULAR SPI 14,916.04 14,916.04
1026000 BOH -- DOCS (O) (61,754.58) (61,754.58)
1027000 BOH -- DOCS (S) 30,393.83 30,393.83
1030000 FHB -- REGULAR SPI 0.00 0.00
1031000 BOH -- STRAUB CARE QUANTUM (273,723.50) (273,723.50)
1033000 CITIZENS SECURITY SDC(G) 76,276.28 76,276.28
1034000 CITIZENS SECURITY SDC(H) 0.00 0.00
1035000 BOH -- SPI DISBURSEMENTS (136,366.36) (136,366.36)
1036000 BOH CHECKING -- SDC GUAM 0.00 0.00
1037000 BOH CHECKING -- SDC HAWAII 536.21 536.21
1038000 HAWAIIAN TRUST CASH FUND 1,058,646.42 1,058,646.42
1040000 PAINE WEBBER -- CASH ACCOUNT 0.32 0.32
1050000 MARKETABLE SECURITIES 0.00 0.00
1070000 DEF COMP (OLD) -- SHEARSON 0.00 0.00
1080000 DEF COMP (NEW) -- SHEARSON 0.00 0.00
1095000 SHEARSON -- PROFESSIONAL LIAB 0.00 0.00
-------------------------------------------------
(683,590.32) (683,590.32) 0.00
1210000 ACCOUNTS RECEIVABLE (ACCRUAL) (1,892,510.00) (1,892,510.00)
1211000 PATIENT A/R SOHS 639,323.09 639,323.09
1212000 PATIENT A/R -- INDEPENDENCE 54,505,296.36 54,505,296.36
1214000 A/R -- MISC BILLINGS 419,651.29 419,651.29
1215000 A/R SUSPENSE 0.00 0.00
1216000 A/R CLEARING INDEPENDENCE 1,644,941.58 1,644,941.58
1217000 A/R CLEARING SIGNATURE 4,853,539.86 4,853,539.86
1218000 A/R SIGNATURE 25,879,301.64 25,879,301.64
1219000 A/R -- LANAI 147,750.14 147,750.14
1222000 A/R -- STRAUB KALUA 65,127.84 65,127.84
1223000 A/R -- DOCS 518,845.02 518,845.02
1224000 A/R -- PHARM HOME INFUSION 288,497.16 288,497.16
1225000 A/R HOME HEALTH 646,070.29 646,070.29
1229000 A/R -- UNAPPLIED CASH (6,762,868.40) (6,762,868.40)
1231000 DUE FROM THE DOCTORS CLINIC 1,773,752.50 1,773,752.50
1231100 RESERVE -- TDC MANAGEMENT FEES (1,312,004.00) (1,312,004.00)
1230000 INTERCOMPANY SCHI/SDC(3) 0.00 0.00
1233000 DUE FROM TDCDC 834,330.00 834,330.00
1245000 AMOUNTS COLLECTED FOR SPI 955,141.31 955,141.31
1246000 DUE TO/FROM STRAUS WAIKIKI, INC 0.00 0.00
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1248000 RETURNED CHECKS 8,196.65 8,196.65
1252000 DUE TO/FROM H PLAN SVCS 0.00 0.00
1256300 RECLASS TDC NOTE TO CURRENT 2,278,671.00 2,278,671.00
1257000 ALLOWANCE -- CLINIC INDUSTRIAL (257,500.00) (257,500.00)
1257100 ALLOWANCE CLINIC MVA (65,300.00) (65,300.00)
1258000 ALLOWANCE -- COMMERCIAL (2,305,800.00) (2,305,800.00)
1259000 ALLOWANCE -- CLINIC OTHER (568,158.27) (568,158.27)
1259100 ALLOWANCE CLINIC TRICARE (2,300.00) (2,300.00)
1259200 ALLOWANCE CLINIC CONTRACTS (675,200.00) (675,200.00)
1259300 ALLOWANCE CLINIC PIMS (1,456,600.00) (1,456,600.00)
1260000 ALLOW -- DOUBTFUL ACCT (12,233,400.00) (12,233,400.00)
1261000 ALLOWANCE -- HOSPITAL MEDICARE (13,671,100.00) (13,671,100.00)
1262000 ALLOWANCE -- CLINIC MEDICAID (911,825.29) (911,825.29)
1263000 ALLOWANCE -- HOSPITAL OTHER (863,200.00) (863,200.00)
1264000 ALLOWANCE -- CLINIC MEDICARE (3,278,137.22) (3,278,137.22)
1265000 ACCOUNTS RECEIVABLE -- SCHI 0.00 0.00
1266000 ALLOWANCE -- HOSPITAL MEDICAID (3,204,700.00) (3,204,700.00)
1267000 ALLOWANCE -- CLINIC HMSA (2,723,394.33) (2,723,394.33)
1268000 ALLOWANCE -- HOSPITAL HMSA PPS (2,008,100.00) (2,008,100.00)
1269000 ALLOWANCE -- HOSPITAL HMSA AMB 0.00 0.00
1270000 OTHER RECEIVABLES 3,166.93 3,166.93
1273000 ALLOWANCE HOSPITAL PIMS (3,324,700.00) (3,324,700.00)
1274000 ALLOWANCE HOSPITAL CHAMPUS (238,700.00) (238,700.00)
1275000 ALLOWANCE -- STARS (1,990,941.45) (1,990,941.45)
1276000 ALLOWANCE HOSPITAL JAPANESE (108,000.00) (108,000.00)
1279000 ALLOWANCE -- OTHER (461,667.96) (461,667.96)
1280000 ALLOWANCE -- HOSPITAL HMO (CHP) (1,843,000.00) (1,843,000.00)
1282000 ALLOWANCE -- HOSPITAL HMO (SHP) (197,600.00) (197,600.00)
1284000 ALLOWANCE -- HOSPITAL HMO (SSP) 0.00 0.00
1286000 ALLOWANCE -- HOSPITAL HMO (SEHP) (380,300.00) (380,300.00)
1289000 ALLOWANCE -- INDUSTRIAL (838,100.00) (838,100.00)
1290000 PROVIDER ADJ -- SIGNATURE 0.00 0.00
1291000 ALLOWANCE -- CLINIC HMO (19,842.95) (19,842.95)
1292000 ALLOWANCE -- HOSP QUANTUM (572,500.00) (572,500.00)
--------------------------------------------------
31,294,152.79 31,294,152.79 0.00
1310000 DRUGS 388,331.49 388,331.49 (2)
1247000 DUE TO/FROM SDC 0.00 0.00
1272000 OTHER RECEIVABLE -- CITICORP 0.00 0.00
1301000 MED & SURG SUPPLIES 225,675.53 225,675.53 (2)
1302000 X-RAY FILM & SUPPLIES 3,321.54 3,321.54 (2)
1305000 CENTRAL SUPPLY INVENTORY 29,368.43 29,368.43 (2)
1320000 OFFICE SUPPLIES 15,732.22 15,732.22 (2)
1321000 STATIONERY & FORMS 2,371.48 2,371.48 (2)
1322000 CIC FORMS & SUPPLIES 1,953.50 1,953.50 (2)
1323000 MTKG FORMS & BROCHURES 0.00 0.00 (2)
1340000 DIETARY SUPPLIES 280.27 280.27 (2)
1341000 FOOD 24,418.52 24,418.52 (2)
1371000 HOUSEKEEPING SUPPLIES 760.08 760.08 (2)
1399000 OTHER SUPPLIES 841.26 841.26 (2)
1401000 INSURANCE -- GEN LIAB 277,167.73 277,167.73
1402000 INSURANCE -- PROF LIAB 0.00 0.00
1420000 DEPOSITS 486,302.25 486,302.25 (3)
1421000 DEPOSITS -- FIXED ASSET PURCH 93,318.30 93,318.30 (4)
1440000 REAL PROPERTY TAXES 0.00 0.00 (5)
1450000 PROF DUES & MEMBERSHIPS 20,938.18 20,938.18 (6)
1460000 MAINTENANCE SERVICE CONTRACT 91,770.85 91,770.85 (7)
1499000 OTHER PREPAIDS 1,044,799.20 1,044,799.20
2723000 ACCRUED PSP & RETIREMENT PLAN 695,791.50 695,791.50
--------------------------------------------------
3,014,810.84 2,017,758.43 997,052.41
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1501000 LEASHOLD IMPROV 2,530,889.43 2,530,889.43
1502000 PROFESSIONAL EQUIP 12,200,895.33 12,200,895.33
1503000 BUSINESS EQUIPMENT 5,733,605.20 5,733,605.20
1504000 FURNITURE & FIXTURES 3,372,644.24 3,372,644.24
1505000 DIETARY SERVICE EQUIPMENT 524,994.03 524,994.03
1506000 AUTOMOBILES 105,710.31 105,710.31
1510000 DEVELOPMENT COST -- CLINIC 43,385.50 43,385.50
1511000 DEVELOPMENT COST -- HOSPITAL 119,258.48 119,258.48
1512000 DEVELOPMENT COST -- OTHER 476,100.11 476,100.11
1514000 DEVELOPMENT COST -- MAKAI 0.00 0.00
1515000 HOSP BUILDING & IMPROVEMENTS 11,258,476.46 11,258,476.46
1516000 CLINIC BLDG & IMPROV 7,348,746.86 7,348,746.86
1517000 GARAGE 2,231,819.57 2,231,819.57
1518000 MAKAI BUILDING & IMPROVEMENTS 15,202,538.05 15,202,538.05
1519000 LEASEHOLD IMPROVEMENTS -- HI KAU 569,646.38 569,646.38
1520000 LEASEHOLD IMPROVEMENTS -- KANE 946,209.93 946,209.93
1521000 LEASEHOLD IMPROVEMENTS -- KAILU 1,552,520.35 1,552,520.35
1522000 LEASEHOLD IMPROVEMENTS -- FINAN 386,208.04 386,208.04
1526000 LEASEHOLD IMPROVEMENTS -- HUAL 200,118.40 200,118.40
1527000 LEASEHOLD IMPROVEMENTS -- MILILA 1,018,919.08 1,018,919.08
1528000 LEASEHOLD IMPROV -- PALI MOMI 342,087.21 342,087.21
1529000 LEASEHOLD IMPROV -- WESTRIDGE 21,054.10 21,054.10
1530000 LEASEHOLD IMPROV -- BERETANIA 1,149,674.88 1,149,674.88
1580000 FULLY DEPRECIATED ASSETS 567,100.11 567,100.11
--------------------------------------------------
67,902,602.05 31,222,277.02 36,680,325.03
1601000 LEASHOLD IMPROV (1,988,497.22) (1,988,497.22)
1602000 PROFESSIONAL EQUIP (9,244,529.37) (9,244,529.37)
1603000 BUSINESS EQUIPMENT (3,218,279.06) (3,218,279.06)
1604000 FURNITURE & FIXTURES (2,360,125.94) (2,360,125.94)
1605000 DIETARY SERVICE EQUIPMENT (325,984.07) (325,984.07)
1606000 AUTOMOBILES (95,911.20) (95,911.20)
1615000 HOSPITAL BLDG & IMPROVEMENTS (5,825,396.44) (5,825,396.44)
1616000 CLINIC BLDG & IMPROVEMENTS (5,257,836.29) (5,257,836.29)
1617000 GARAGE (1,129,878.44) (1,129,878.44)
1618000 MAKAI BUILDING & IMPROVEMENTS (5,829,682.46) (5,829,682.46)
1619000 HI KAI LEASEHOLD IMPROVEMENTS (484,909.09) (484,909.09)
1620000 LEASEHOLD IMPROVEMENTS -- KANE (618,064.25) (618,064.25)
1621000 LEASEHOLD IMPROVEMENTS -- KAILU (1,401,842.27) (1,401,842.27)
1622000 LEASEHOLD IMPROVEMENTS -- FINAN (382,488.86) (382,488.86)
1626000 LEASEHOLD IMPROVEMENTS -- HUAL (193,992.62) (193,992.62)
1627000 LEASEHOLD IMPROVEMENTS -- MILILA (544,920.29) (544,920.29)
1628000 LEASEHOLD IMPROV -- PALI MOMI (101,378.46) (101,378.46)
1629000 LEASEHOLD IMPROV -- WESTRIDGE (18,047.77) (18,047.77)
1630000 LEASEHOLD IMPROV -- BERETANIA (192,226.55) (192,226.55)
1650000 FULLY DEPRECIATED ASSETS (567,100.11) (567,100.11)
--------------------------------------------------
(39,781,090.76) (21,738,297.13) (18,042,793.63)
1800000 LAND 3,629,826.63 3,629,826.63
1102000 STRAUB PHARMACY INC 0.00 0.00
1107000 KIDNEY STONE CENTER 766,977.00 766,977.00
1114000 PACIFIC HEALTHCARE MGMT ASSOC 4,042.08 4,042.08
1115000 COMBINED TECHNOLOGIES (191,431.48) (191,431.48)
1115000 INVESTMENT IN SDC -- GUAM 0.00 0.00
1119000 INVESTMENT IN TDC 367,114.00 367,114.00
--------------------------------------------------
946,701.60 0.00 946,701.60
1100000 INVESTMENTS 90,019.33 90,019.33
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
1465000 COMPUTER SOFTWARE 1,937,831.16 1,937,831.16
1509000 DEVELOPMENT COSTS -- SOFTWARE 0.00 0.00
--------------------------------------------------
1,937,831.16 1,937,831.16 0.00
1491000 DEFERRED FINANCE FEE 377,154.60 377,154.60
1494000 DEF FINANCE FEES 0.00 0.00
1498000 OTHER PREPAIDS PT REFUNDS 0.00 0.00
--------------------------------------------------
377,154.60 377,154.60 0.00
1680000 ACCUM AMORT -- GOODWILL (38,000.10) (38,000.10)
1700000 GOODWILL 880,313.41 880,313.41
--------------------------------------------------
842,313.31 842,313.31 0.00
1240000 NOTES RECEIVABLE -- EMPLOYEES 42,456.90 42,456.90
1241000 ACCOUNTS REC -- EMPLOYEES 47,800.04 47,800.04
1242000 ACCOUNTS RECEIVABLE -- DOCTORS 13,515.22 13,515.22
1249000 PAYROLL ADVANCE 36,801.58 36,801.58
1255000 NOTES REC -- CAPITAL STOCK 831,545.60 831,545.60
1256100 SECOND MORTGAGE NOTE REC 92,941.67 92,941.67
1256200 DUE FROM FORMER PHYSICIANS 65,099.08 65,099.08
1256300 NOTES REC -- OTHER 2,600,781.01 2,600,781.01
1256300 RECLASS TDC NOTE TO CURRENT (2,278,671.00) (2,278,671.00)
--------------------------------------------------
1,452,270.10 1,452,270.10 0.00
1495000 CASH SURR VALUE -- DEF COMP RETI 247,613.59 247,613.59
1495100 CSV -- SEAP 3,001,793.45 3,001,793.45
1497000 CSB RESERVE OCRP 272,366.02 272,366.02
1497100 CSV RESERVE -- SERP 2,900.00 2,900.00
--------------------------------------------------
3,524,673.06 3,524,673.06 0.00
1271000 DEFERRED INCOME TAXES 10,218,000.00 10,218,000.00
--------------------------------------------------
85,542,193.23 60,755,249.70 24,786,943.53
==================================================
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
- ------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
2701000 ACCOUNTS PAYABLE TRADE (4,848,811.66) (4,848,811.66)
2111000 DISCRETIONARY FUND LIABILITY (604,149.33) (604,149.33)
2190000 OTHER PAYABLE (66,000.00) (66,000.00)
2706000 AGENCY PAYABLE SPI 0.00 0.00
2708000 UNAMORTIZED DISCOUNT 11,279.02 11,279.02
2722000 ACCRUED INTEREST (87,624.15) (87,624.15)
2724000 OTHER ACCRUALS (5,484,658.69) (5,484,658.69)
2726000 BOOK ALLOWANCE (7,473.20) (7,473.20)
2727000 STRAUB EDUCATION SEMINAR 0.00 0.00
2734000 HEALTH INS WITHHELD 0.00 0.00
2735000 PROFIT-SHARING WITHHELD 421.50 421.50
2736000 AUF WITHHELD 0.00 0.00
2737000 CREDIT UNION WITHHELD 191.00 191.00
2738000 TDI WITHHELD (1,088.11) (1,088.11)
2739000 DRUG ACCOUNT WITHHELD 36.14 36.14
2740000 PHRI WITHHELD 0.00 0.00
2741000 OTHER WITHHELD (82,430.40) (82,430.40)
2744000 401K WITHHELD 5,869.13 5,869.13
2745000 FLEX BENEFITS WITHHELD (140,911.14) (140,911.14)
2746000 UNIVERSAL LIFE WITHHELD (6,634.70) (6,634.70)
2750000 DEFERRED INCOME (1,374,836.64) (1,374,836.64)
2652000 DEFERRED INCOME TAXES 0.00 0.00
2770000 REFUND CLEARING 41,872.52 41,872.52
2772000 REFUND CLEARING PHOENIX (3,695.27) (3,695.27)
2781000 AMTS DUE TO 3RD PARTY AGENCIES (30,153.70) (30,153.70)
ACCRUED WC (95 AUDIT RJE 11) 1,810,000.00 1,810,000.00
------------------------------------------------------
(6,019,986.02) (6,019,986.02) 0.00
2720000 ACCRUED PAYROLL (2,718,809.57) (2,718,809.57)
2721000 ACCRUED VACATION (6,074,188.79) (6,074,188.79)
------------------------------------------------------
(8,792,998.36) (8,792,998.36) 0.00
2705000 INCOME TAX PAYABLE (1,736,600.00) (1,736,600.00)
2702000 FUTA PAYABLE (10,894,36) (10,894.36)
2703000 SUTA PAYABLE (208,924.97) (208,924.97)
2704000 GET PAYABLE (690,434.19) (690,434.19)
2730000 FED INCOME TAX WITHHELD 5,765.74 5,765.74
2731000 FICA WITHHELD (143,072.34) (143,072.34)
2732000 STATE TAX WITHHELD (559,769.35) (559,769.35)
2820000 GROSS INCOME TAX DEFERRED (849,673.30) (849,673.30)
------------------------------------------------------
(4,193,602.77) (4,193,602.77) 0.00
2709000 RESERVE FOR PATIENT CLAIMS (5,152,000.00) (5,152,000.00)
2752000 DEFERRED INCOME TAXES (1,641,000.00) (1,641,000.00)
2724000 ACCRUED WC (95 AUDIT RJE 11) (1,810,000.00) (1,810,000.00)
2724000 OTHER ACCRUALS (MEDICARE) (1,404,309.01) (1,404,309.01)
2724000 OTHER ACCRUALS (PEAT MARWICK) (711,312.19) (711,312.19)
------------------------------------------------------
(2,115,621.20) (1,404,309.01) (711,312.19)
2440000 CAPITAL LEASE - LONG TERM (2,462,951.37) (2,462,951.37)
2450000 CAPITAL LEASE - CURRENT (716,932.00) (716,932.00)
------------------------------------------------------
(3,179,883.37) (3,179,883.37) 0.00
2711200 C/S APPRECIATION (ACTIVE SH) (6,610,303.00) (6,610,303.00)
2725000 OTHER DEFERRED COMPENSATION (29,532.08) (29,532.08)
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
JUNE 30, 1996 NEW FOOT-
ACCT # DESCRIPTION UNAUDITED PHYCOR STRAUB NOTES
- ------ ----------- ------------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
2810000 PENSION PLAN - SUPPLEMENTAL (110,600.11) (110,600.11)
2811000 PENSION PLAN - DISCOUNT 38,370.28 38,370.28
2821000 DEFERRED COMPENSATION PAY (134,439.00) (134,439.00)
2823000 NON-QUAL RETIRE PLAN-VOLUNTAR (521,920.06) (521,920.06)
2824000 DEF COMP RETIREMENT PLAN PAY (31,874.27) (31,874.27)
2825000 SUPPL PENSION & PROFIT SHARING (302,640.88) (302,640.88)
2826000 NON-QUAL RETIRE PLAN-MANDATO (249,582.91) (249,582.91)
2827000 DEF COMP RETIRE PLAN - 5/88 (11,039,994.33) (11,039,994.33)
2828000 SUPP DEF COMP RETIRE PLAN (243,923.44) (243,923.44)
2829000 SUPPLEMENTAL EMP RETIRE PLAN (3,406,204.39) (3,406,204.39)
-----------------------------------------------------
(22,642,644.19) (22,642,644.19) 0.00
2710000 NOTES PAYABLE - BANKS 0.00 0.00
2711000 N/P COMMON STK & APPRECIATION (2,606,963.81) (2,606,963.81)
2711100 N/P PREFERRED C STOCK (1,545,419.37) (1,545,419.37)
2713000 NOTES PAYABLE - OTHER 0.00 0.00
2717000 DUE TO HMSA 0.00 0.00
2801000 NOTES PAYABLE - BOH (22,879,785.21) (6,250,000.00) (16,629,785.21)
2802000 N/P CONGRESS FINANCIAL CORP (2,211,075.97) (2,211,075.97)
2804000 N/P - GE MEDICAL (MRI) (818,899.85) (818,899.85)
2805000 STOCKHOLDER BUILDING LOANS (1,824,152.14) (1,824,152.14)
2807000 N/P FIRST HAWAIIAN BANK (493,690.25) (493,690.25)
2809000 NOTES PAYBLE - OTHER (737,531.45) (737,531.45)
2832000 N/P FORMER PARTNERS - LAND APP (829,101.05) (829,101.05)
2833000 DEFERRED INTEREST LAND APPR 141,620.70 141,620.70
2834000 N/P FORMER PARTNERS - CAPITAL (385,025.98) (385,025.98)
2835000 REAL ESTATE TRUST NOTE PAYABLE (707,321.76) (707,321.76)
-----------------------------------------------------
(34,897,346.14) (15,048,606.68) (19,848,739.46)
-----------------------------------------------------
(95,293,893.71) (74,733,842.06) (20,560,051.65)
=====================================================
</TABLE>
<PAGE> 166
FOOTNOTES:
- ----------
The assets and liabilities set forth in Schedule I are unaudited and subject to
change at closing.
(1) Represents security deposit for hospital cooling tower lease with Bank of
Hawaii. Lease will be transferred to New Straub.
(2) Drug and supplies inventories to be used in operations of New Straub.
(3) Represents primarily deposits on occupancy and equipment leases which will
be transferred to New Straub.
(4) Fixed asset purchases to be recorded on New Straub's books.
(5) Real property taxes on real estate transferred to New Straub.
(6) Represents primarily dues and memberships for physicians of New Struab.
(7) Represents maintenance contracts on plant and equipment to be used in the
operations of New Straub.
<PAGE> 167
Schedule II
STRAUB CLINIC & HOSPITAL, INC.
SUBSIDIARIES AND PARTNERSHIPS TO NEW STRAUB
<TABLE>
<CAPTION>
NAME ENTITY OWNERSHIP INTEREST
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Straub Pharmacy, Inc. Corporation Straub Clinic & Hospital, Inc. 100.0%
Straub Imaging, Inc. Corporation Straub Clinic & Hospital, Inc. 100.0%
Kidney Stone Center of the Pacific Partnership Straub Imaging, Inc. 33.0%
Straub Professional Services, Inc. Corporation Straub Clinic & Hospital, Inc. 100.0%
Combined Technologies Partnership Straub Professional Services, Inc. 50.0%
Pacific Health Care Management Associates Partnership Straub Professional Services, Inc. 50.0%
Pacific Radiopharmacy, Ltd. Corporation Straub Clinic & Hospital, Inc. 20.0%
Straub Development Corp. Corporation Straub Clinic & Hospital, Inc. 100.0%
The Doctors' Clinic Development Company Partnership Straub Development Corp. 50.0%
The Doctors' Clinic Corporation The Doctors' Clinic Development Company 99.3%
</TABLE>
<PAGE> 168
STRAUB CLINIC & HOSPITAL, INC.
SUBSIDIARIES AND PARTNERSHIPS TO PHYCOR
<TABLE>
<CAPTION>
NAME ENTITY OWNERSHIP INTEREST
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Straub Development -- Guam Corporation Straub Development Corp. 99.7%
Straub Health Plan Services, Inc. Corporation Straub Clinic & Hospital, Inc. 100.0%
Kapiolani-Straub Children's Center Non-profit Corp Straub Clinic & Hospital, Inc. 50.0%
Health Management Systems, Inc. Corporation Straub Clinic & Hospital, Inc. 50.0%
HMA Partners Ltd Partnership Straub Clinic & Hospital, Inc. 2.0%
</TABLE>
<PAGE> 169
Schedule III
LICENSES, PERMITS, CERTIFICATES,
ACCREDITATIONS, ETC.
1. 1994 - 1997 JCAHO Certificate
Straub Hospital and Clinic, Inc.
2. 1994 - 1997 JCAHO Certificate
Straub Clinic and Hospital, Home Health
3. State of Hawaii, Department of Health
Hospital and Medical Facilities Branch
Home Health Agency
(letter recommending recertification of agency to HCFA)
4. State of Hawaii
Department of Health, Hospital and Medical Facilities Branch
License to operate a Hospital
Expires 5/31/97
5. Nuclear Regulatory Commission Letter dated 5/23/96
Nuclear Medicine License
(License #53-18126-01, Docket #3014529)
One-time extension of license expiration date
Expires 2/28/05
6. College of American Pathologists Letter dated 6/7/96
(official notice of accreditation)
Lab Accreditation (Lab #24356-01)
Expires 3/13/98
Hermatology, Clinical Chemistry, Urinalysis, Clinical
Toxicology, Special Chemistry, Microbiology (Bacteriology,
Micybacteriology, Parasitology), Transfusion Medicine/Blood
Bank, Diagnostic Immunology (Syphilis serology), Anatomic
Pathology (surgical pathology, autopsy pathology,
cytopathology), and Point of Care Testing.
U.S. DEPARTMENT OF HEALTH & HUMAN SERVICES
PUBLIC HEALTH SERVICE, FOOD AND DRUG ADMINISTRATION
CERTIFIED MAMMOGRAPHY FACILITY
7. Certified Mammography Facility
Straub Clinic & Hospital, Inc. (Facility ID #155861)
888 South King Street, Honolulu, HI 96813
Expires 6/15/98
8. Certified Mammography Facility
Straub Clinic & Hospital, Inc. (Facility ID #155861)
888 South King Street, Honolulu, HI 96813
Expires 09/19/99
<PAGE> 170
LICENSES, PERMITS, CERTIFICATES,
ACCREDITATIONS, ETC.
9. Certified Mammography Facility
Straub Clinic - Hawaii Kai (Facility ID #198739)
Expires 06/03/98
10. Certified Mammography Facility
Straub Clinic - Kaneohe (Facility ID #198747)
Expires 9/6/98
11. Certified Mammography Facility
Straub Clinic - Mililani (Facility ID #210955)
Expires 9/22/99
12. Certified Mammography Facility
Straub Clinic - Financial District (Facility ID #140905)
Expires 8/10/99
13. Certified Mammography Facility
Straub Clinic - Westridge (Facility ID #176818)
Expires 05/18/98
CERTIFICATE OF INSPECTION - X-RAY SYSTEM
GE MEDICAL SYSTEMS
14. Straub Clinic & Hospital at Hawaii Kai
(System ID 808396SDMR)
Inspection date 8/23/96
15. Straub Clinic & Hospital (Straub Financial)
(System ID 808545MAMO)
Inspection date 8/23/96
DIAGNOSTIC IMAGING EQUIPMENT
DHHS INSPECTION REPORTS
16. Patient Dose Measurements
888 South King Street (9/12/95)
17. Digital Subtraction Angiography Performance Test Report
888 South King Street (8/30/95)
18. X-Ray Machine Performance Test Report
888 South King Street (8/25/95)
19. Computerized Tomography Performance Test Report
888 South King Street (9/21/95)
20. X-ray Machine Performance Test Report
Docs on Call- Hilton and Outrigger Hotels (9/7/95)
- 2 -
<PAGE> 171
LICENSES, PERMITS, CERTIFICATES,
ACCREDITATIONS, ETC.
--------------------
STATE OF HAWAII, DEPARTMENT OF HEALTH
RADIOLOGICAL HEALTH INSPECTION REPORTS
--------------------------------------
21. Mammography - Hawaii Kai (9/22/95)
22. Radiographic, X-Ray (1/18/95 - 2/22/95)
23. WorkOrders
Rad Units Mobile "C" (5/15/95)
Rad/Fluor Unit Mobile (5/17/95)
Rad/Flour Unit Mobile (5/17/95)
Rad/Flour Spec Proc (5/30/95)
Rad Unit Tomographic (5/31/95)
Rad Unit Head (6/26/95)
Rad Unit Chest (6/26/95)
24. Corrective Action Completion Forms
DEPARTMENT OF HEALTH & HUMAN SERVICES
HEALTH CARE FINANCING ADMINISTRATION
CLIA LABORATORY CERTIFICATES OF ACCREDITATION
--------------------------------------------
25. CLIA Laboratory Certificate of Accreditation
Clinical Lab Straub FDC (ID #12D0662957)
Original certificate is lost, computer screen printout
confirms license
Expires 8/31/98
26. CLIA Laboratory Certificate of Accreditation
Clinical Lab Straub Hawaii Kai (ID #12D0621367)
Expires 11/30/97
27. CLIA Laboratory Certificate of Waiver
Clinical Lab Straub Kailua (ID #12D0662962)
Expires 8/31/98
28. CLIA Laboratory Certificate of Accreditation
Clinical Lab Straub Kaneohe (ID #12D0662960)
Expires 11/30/97
29. CLIA Laboratory Certificate of Accreditation
Clinical Lab, Straub Clinic & Hospital (ID #12D0620427)
Expires 2/27/97
30. CLIA Laboratory Certificate of Accreditation
Clinical Lab Straub Mililani (ID #12D0662958)
Expires 11/30/97
-3-
<PAGE> 172
LICENSES, PERMITS, CERTIFICATES,
ACCREDITATIONS, ETC.
--------------------
31. CLIA Laboratory Certificate of Accreditation
Clinical Lab Straub Pali Momi (ID #12D0662961)
Expires 11/30/97
32. CLIA Laboratory Certificate of Accreditation
Clinical Lab, Straub Westridge (ID #12D0662959)
Expires 11/30/97
33. CLIA Laboratory Certificate of Accreditation
Docs on Call - Hilton Haw'n Village (ID #12D089440)
Expires 5/23/98
34. CLIA Laboratory Certificate of Accreditation
Docs on Call - Outrigger (ID #12D0704975)
Expires 1/2/97
35. CLIA Laboratory Certificate of Accreditation
Straub Royal Hawaiian (ID #12D0886492)
Expires 1/2/97
36. Temporary Certificate of Accreditation
POL Straub Kapolei (ID #12D0919717)
License is pending payment of fees
37. CLIA Laboratory Certificate of Accreditation
Straub Financial Dist Health Cntr (ID #12D0620428)
Expires 1/2/97
38. CLIA Laboratory Certificate of Accreditation
POL Kailua Family Health Center (ID #12D0858129)
Expires 2/28/97
39. CLIA Laboratory Certificate of Accreditation
POL Straub Kaneohe Family Health (ID #12D0860243)
Expires 01/02/97
40. CLIA Laboratory Certificate of Accreditation
POL Straub Hawaii Kai Fam Hlth Center (ID #12D0858156)
Expires 1/2/97
41. CLIA Laboratory Certificate of Accreditation
Straub Home Health Agency (ID #12D0721009)
Expires 8/31/98
42. CLIA Laboratory Certificate of Accreditation
POL Straub Clinic & Hospital Inc (ID #12D060800)
Expires 1/2/97
-4-
<PAGE> 173
LICENSES, PERMITS, CERTIFICATES,
ACCREDITATIONS, ETC.
--------------------
43. CLIA Laboratory Certificate of Accreditation
POL Straub Specialty Center (ID #12D0868174)
Expires 1/2/97
44. CLIA Laboratory Certificate of Accreditation
POL Straub Lanai Family Health Center (ID #12D0620105)
Expires 1/2/97
45. CLIA Laboratory Certificate of Accreditation
POL Straub Mililani Family Health (ID #12D0861232)
Expires 1/2/97
46. CLIA Laboratory Certificate of Accreditation
POL Straub Pali Momi (ID #12D0618789)
Expires 1/2/97
47. CLIA Laboratory Certificate of Accreditation
POL Straub Westridge (ID #12D0883072)
Expires 2/23/98
PHARMACY
--------
48. Controlled Substances Registration Certificate
United States Department of Justice
Drug Enforcement Administration
DEA Registration #BS1268603
Expires 2/28/97
49. Controlled Substances Registration Certificate
United States Department of Justice
Drug Enforcement Administration
DEA Registration #AS6157398
Expires 2/28/97
50. State of Hawaii
Department of Commerce and Consumer Affairs
License #PHY-77
Expires 12/31/97
-5-
<PAGE> 174
Schedule IV
To be Prepared Prior to the Closing Date
<PAGE> 175
Schedule V
REAL PROPERTY LEASES FOR NEW STRAUB
<TABLE>
<CAPTION>
PROPERTY ADDRESS
TMK NO. DOCUMENT
- ---------------- --------
<S> <C>
Fennel Lab. Dated May 1, 1996
932 Ward Ave., Ste 104 Lessor: Honolulu Club Limited Partners
Honolulu, HI Lessee: SCHI
Financial District Clinic Dated June 16, 1995
Queen's Plaza Landlord: Ronald A. Petty, dba Queen's Plaza
801 Alaksa St., Ste 104 Tenant: SCHI
Honolulu, HI
Hawaii Kmi Clinic Dated June 29, 1981
7192 Kalanianaole Hwy. Landlord: Deans, Inc., a HI corp.
Honolulu, HI Tenant: SCHI
Doctors on Call No document available
2552 Kalakaus Ave. Month-to-month tenancy
Honolulu, HI
Doctors on Call Dated February 15, 1994
Hilton Hawalian Village Landlord: Hilton Hawaiian Village Joint
2005 Kalia Rd. Venture
Honolulu, HI Tenant: SCHI dba Doctors on Call
Doctors on Call Dated June 14, 1989
2424 Kalakaua Avenue Landlord: Asabu Buildings Co., Ltd.
Honolulu, HI Tenant: Doctors on Call
Physical Therapy Sublessor: 800 South King Street Partners
800 South King St. Sublessee: SCHI
Honolulu, HI
Kailua Clinic Dated October 3, 1986
641 Kailua Rd. Landlord: Francis Hughes
Kailua, HI Tenant: SCHI
TMK NO. (1) 4-2-038-30
Dated March 23, 1987, as amended
Sublandlord: SCHI
Subtenant: Hawaii Medical Service
Association
Kailua Physical Therapy Dated Nov. 23, 1981
Kailua Professional Center Lessor: Kailua Professional Center
40 Aulike St., Ste 211 Lessee: John S. Acki, M.D.
Kailua, HI Assignment of Lease: Aug. 10, 1984
to John E. Aoki, M.D., Inc.
Kaneohe Clinic Dated January 2, 1995, as amended
46-056 Kansehameha Hwy. Landlord: Windward Mall Shopping Center
Kansohe, HI Tenant: SCHI dba Straub Family Health Center
Kapolei Clinics Dated May 31, 1996, as amended
1001 Kamokila Blvd. Landlord: The Trustees of the Estate of
Suite 115, Kapolei Bldg. James Campbell, Deceased
Kapolei, HI Tenant: SCHI
</TABLE>
<PAGE> 176
REAL PROPERTY LEASES FOR NEW STRAUB
<TABLE>
<CAPTION>
PROPERTY ADDRESS
TMK NO. DOCUMENT
- ---------------- --------
<S> <C>
Kailua-Kona Clinic Dated April 1, 1987, as amended
75-710 Hualalai Landlord: Hualalai Center
Kona, Hi Tenant: SCHI
TMK No. (3) 7-5-08-23
Landlord: Izumiya Tokyo Tan Co., Ltd.
Tenant: SCHI
Lanai Clinic Dated May 1, 1992, as amended
628-B Seventh St. Landlord: Dole Food Company, Inc.
TMK No. (2) 4-9-11-3 Tenant: SCHI
Landlord: Lanai Company, Inc.
Tenant: SCHI
Lanai Physician's House Dated March 9, 1994
Iwlola Hala Landlord: Lanai Company, Inc.
181 Lanai Avenue Tenant: SCHI
Apt. 6F
Mililani Clinic Dated August 21, 1987
95-1249 Meheula Parkway Landlord: Mililani Town, Inc.
Mililani, HI Tenant: SCHI
Doctors on Call Dated December 11, 1991
2335 Kalakaua Avenue Landlord: Outrigger Hotels Hawaii
Honolulu, HI Tenant: Doctors on Call
Pali Momi Clinic Dated June 1, 1991
98-1079 Moanalua Rd. Landlord: Pali Momi Medical Center
Aisa, HI Tenant: SCHI
Dated January 1, 1989
Landlord: HMC Hawaii, Inc.
Tenant: SCHI
Doctors on Call Dated March 16, 1995
2259 Kalakaua Ave. Lessor: Kyo-ya Company, Ltd.
Honolulu, HI Tenant: SCHI
Straub Beretania Dated October 1, 1986
839 S. Beretania Grantor: Thomas-Beretania Investors
Honolulu, HI Grantee: Atoz, Inc.
Dated September 6, 1972
Dated April 13, 1985
Landlord: Thomas-Beretania Investors
Tenant: The Frank Clinic, Inc.
</TABLE>
- 2 -
<PAGE> 177
REAL PROPERTY LEASES FOR NEW STRAUB
<TABLE>
<CAPTION>
PROPERTY ADDRESS
TMK NO. DOCUMENT
- ---------------- --------
<S> <C>
Straub Parking Dated October 26, 1984
Lessor: American Trust Company of Hawaii, Inc.
Lessee: The Beall Investment Corporation
Westridge Clinic Dated April 2, 1985, as amended
98-150 Kaonohi St. Landlord: Cormax Corporation
Aisa, HI Tenant: The Fronk Clinic, Inc.
</TABLE>
- 3 -
<PAGE> 178
PHYCOR REAL PROPERTY LEASES
<TABLE>
<CAPTION>
PROPERTY ADDRESS
TMK NO. DOCUMENT
- ---------------- --------
<S> <C>
Employee Assistance Dated October 1, 1994
Program Sublessor: Maui Plastic Surgery
10 Mohala St. Sublessee: Straub ReSource
Kaunakakai, HI
Administrative Offices Dated July 30, 1982, as amended
1100 Ward Ave. Lessor: The Continental Insurance Company
Ste Nos. 1100, 1010, Lessee: SCHI
940, 950, 920, 710
Honolulu, HI
Child Care Center Space Lease: September 1, 1988
930 Lunalilo St. Lessor: Saint Constantine and Helen Greek
Honolulu, HI 96822 Orthodox Church
Lessee: Kapiolani-Straub Children's Center
Parking Space Lease: August 26, 1988
Lessor: Saints Constantine and Helen Greek
Orthodox Church
Lessee: SCHI
Materials Management Dated November 2, 1995
2818 Kaihikapu St. Lessor: Martin Warehousing and Distribution, Inc.
Honolulu, HI Lessee: SCHI
Information Systems Dated December 6, 1971
Center Lessor: Robert M. Matsushita & Teruko
826 S. King St. Matsushita
Honolulu, HI Lessee: SCHI
Thomas Square Center Lessor: Norpac Group, Inc.
846 S. Hotel St. Lessee: SCHI
Honolulu, HI
</TABLE>
<PAGE> 179
Schedule VI
STRAUB ASSETS/LIABILITIES TO NEW STRAUB
<TABLE>
<CAPTION>
VENDOR EQUIPMENT EXP. DATE
------ --------- ---------
<S> <C> <C>
Bank of Hawaii Honeywell Hospital Cooling Tower 12/2000
Linc Anthem Corporation Servolift Equipment 10/2
Linc Anthem Corporation Nurse Call System 10/2
</TABLE>
<PAGE> 180
STRAUB ASSETS/LIABILITIES TO PHYCOR
<TABLE>
<CAPTION>
VENDOR EQUIPMENT EXP. DATE
------ --------- ---------
<S> <C> <C>
Alce Capital Resource, Cannon Copier 11/97
Inc. (ND-6016)
Colonial Pacific Leasing/ Smart Dial Tel System 6/2000
Smart Dial
Comdisco (SL47921) IBM Controller/Display 09/98
First Security Bank Sunquest Lab (CE2) 10/96
GTE Leasing Phone Equipment Misc. Month to
month
Key Corp. FKA: Sun Fiber optic network P.C.'s and 12/97
Financial printers, software and
hardware for Medic replacement
Acuson Corporation Ultrasound Scanner 3/99
Advanced Tech Lab. Inc. Ultrasound Scanner 2/99
AT & T Capital Corp. Olympus Colonscope 2/99
#2361811
AT & T Capital Corp. Medlite Yag Derm. Laser System 12/98
#378339
Baltimore Therapeutic BTE Simulator 30 days
Equipment Co. notice to
cancel.
Colonial Pacific Leasing Anesthesiology Equip. 9/99
#99527001
Comdisco (70-SL00390-00) Adac Genesys 12/98
Copelco Leasing Seiss/Microscope 6/98
Corporation
Coulter Corporation Ticket Printer 7/98
CTS Lease Receivables Noguchi Medical Equipment 4/2
FKA: Facility Cap./DVI
Fidelity Capital Group Diasonic "C" Arm 1/97
First Hawaiian Leasing, Pacemaker Defibrillator 8/98
Inc. #65281
</TABLE>
<PAGE> 181
STRAUB ASSETS/LIABILITIES TO PHYCOR
EQUIPMENT
<TABLE>
<S> <C> <C>
First Hawaiian Leasing, Amaco Table Quantum 11/98
Inc. #64629
First Hawaiian Leasing, Electra Stereotactic 11/98
Inc. #64662
First Hawaiian Leasing, *Keiss Surgical Micro 12/96
Inc. #64658 *Xomed MPS 2000 Drill System
*Keiss Video System
*RF Lasion Generator
*Ruggles Headrest
GE Medical Systems DMR Senographic 10/2
HI Kai #507135-001 Mammography Unit
GE Medical Systems DMR Senographic 3/99
Kaneohe #507136 Mammography Unit
GE Medical Systems MR Windows Work Station 11/99
#502701-002
GE Medical Systems CT9800 Scanner System 10/2
#8501701-004
GE Medical Systems Prestilyx R/F Unit 1/97
#8506599-001
GE Medical Systems LU/C Cardiac System 9/99
#506864-001/002
GE Medical Systems DMR Senographic 3/99
#506292-001 Mammography Unit
GE Medical Systems MRI System 4/2
#505928-001
GE Medical Systems Beta Tilting Table 1/2
#8507509
HP 4124-27754 Echo 3/97
HP 4124-27759 Echo Upgrade 4/97
HP 4124-11853 Omniplance Tee 5/97
HP 4131-4419A New HP 10/96
HP FBCO-76620 Defibrillator 9/96
Hill Roe Beds 3/2
Northwest Financial Sensor Medics 5/98
</TABLE>
<PAGE> 182
STRAUB ASSETS/LIABILITIES TO PHYCOR
EQUIPMENT
<TABLE>
<S> <C> <C>
Northwest Financial Puritan Ventilator 5/98
Siemens Credit Corp. Ultrasound System 4/98
Valey Lab Cusa System 200 8/2000
</TABLE>
<PAGE> 183
Schedule VII
To be Prepared Prior to the Closing Date
<PAGE> 184
ANNEX E
-----------------------------------------------------------------
PHYCOR OF HAWAII, INC.
----------------------------
SERVICE AGREEMENT
-----------------------------------------------------------------
<PAGE> 185
PHYCOR OF HAWAII, INC.
SERVICE AGREEMENT
THIS SERVICE AGREEMENT dated as of _______________, 1996, by and
between PHYCOR OF HAWAII, INC., a Tennessee corporation ("PhyCor") and STRAUB
CLINIC & HOSPITAL, INC., a Hawaii professional corporation ("New Straub").
RECITALS:
WHEREAS, New Straub is a multi-specialty group medical practice in the
Honolulu, Hawaii area which provides comprehensive professional medical care to
the general public through the operation of a multi-specialty medical clinic
and an acute care hospital;
WHEREAS, PhyCor is in the business of owning certain assets of and managing
and administering operations and associated businesses of multi-specialty
medical groups, and providing support services to medical practices;
WHEREAS, New Straub desires to obtain the services of PhyCor in performing
such management functions so as to permit New Straub to devote its efforts on a
concentrated and continuous basis to the rendering of medical services to its
patients;
WHEREAS, PhyCor, Inc. ("Parent") and Straub Clinic and Hospital
Incorporated ("Old Straub") entered into a transaction (the "Merger") pursuant
to which Old Straub transferred certain assets and liabilities to New Straub;
Parent and Old Straub merged as of the date hereof; and Parent transferred to
PhyCor the assets acquired in the Merger which will be utilized by PhyCor in
the provision of services to New Straub hereunder;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and the consideration set forth in Article 12 below, New
Straub hereby agrees to purchase the management and support services herein
described and PhyCor agrees to provide such services on the terms and
conditions provided in this Agreement.
ARTICLE 1.
RELATIONSHIP OF THE PARTIES
1.1. Independent Relationship. New Straub and PhyCor
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties.
<PAGE> 186
Notwithstanding the authority granted to PhyCor herein, PhyCor and New Straub
agree that New Straub shall retain the authority to direct the medical,
professional, and ethical aspects of its medical practice. Each party shall be
solely responsible for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party;
it being understood that PhyCor shall provide services to New Straub to assist
New Straub in satisfying its obligations described above.
1.2. Responsibilities of the Parties. As more
specifically set forth herein, PhyCor shall provide New Straub with the
management, advisory and financial services specifically set forth herein. As
more specifically set forth herein, New Straub shall be responsible for the
recruitment and hiring of physicians and all issues related to medical practice
patterns and documentation thereof. Notwithstanding anything herein to the
contrary, any clinical laboratory or other service shall be operated in full
compliance with Section 6204 of the Omnibus Budget Reconciliation Act of 1989,
as amended. PhyCor shall neither exercise control over nor interfere with the
physician- patient relationship, which shall be maintained strictly between the
physicians of New Straub and their patients.
1.3. New Straub's Matters. Except as otherwise set
forth herein, matters involving the internal agreements of New Straub and its
Physician Shareholders (as hereafter defined) shall remain the sole
responsibility of New Straub and the individual Physician Shareholders.
1.4. Patient Referrals. The parties agree that the
benefits to New Straub hereunder do not require, are not payment for, and are
not in any way contingent upon the admission, referral or any other arrangement
for the provision of any item or service offered by PhyCor to any of New
Straub's patients in any facility or laboratory controlled, managed or operated
by PhyCor.
ARTICLE 2.
DEFINITIONS
2.1. Definitions. For the purposes of this Agreement, the
following definitions shall apply:
2.1.1. "Additional Managed Care Payments"
shall mean (i) all fees and revenues recorded by or on behalf
of New Straub or PhyCor for profits, whether from the
assumption of institutional or professional risk in managed
care risk assumption arrangements or otherwise,
2
<PAGE> 187
including bonus, incentive and surplus payments from capitated
services, and (ii) dividends and distributions resulting from
an ownership interest by PhyCor and/or New Straub in a managed
care entity.
2.1.2. "Adjustments" shall mean any adjustments
for uncollectible accounts, discounts, Medicare and Medicaid
disallowances, worker's compensation, employee/dependent
healthcare benefit programs, professional courtesies and other
activities that do not generate a collectible fee and excise
taxes assessed against PhyCor's or New Straub's gross revenues
by the Hawaii Department of Taxation (it being understood that
excise taxes assessed against the service fees paid to PhyCor
as well as any Net Revenue generated by PhyCor shall be
included in Adjustments; provided, however, during the first
two years of this Agreement, the excise taxes assessed against
the service fees paid to PhyCor hereunder shall be allocated
equally between PhyCor and New Straub).
2.1.3. An "Affiliate" of a corporation means (a)
any person or entity directly or indirectly controlled by such
corporation, (b) any person or entity directly or indirectly
controlling such corporation, (c) any subsidiary of such
corporation if the corporation has a fifty percent (50%) or
greater ownership interest in the subsidiary, or (d) such
corporation's parent corporation if the parent has a fifty
percent (50%) or greater ownership interest in the
corporation. For purposes of this Section 2.1.3, New Straub is
not an affiliate of PhyCor.
2.1.4. "Ancillary and Other Revenues" shall
mean all fees or revenues actually recorded each month (net of
Adjustments) by or on behalf of New Straub or PhyCor which are
not Physician Services Revenues, Hospital Revenues or
Capitation Revenues, including medical director fees, global
and technical fees from medical ancillary services, and fees
for medical management and utilization, and other
distributions to New Straub from health care related
investments, and, except as provided below, including any
interest, investment, rental or similar payments or income
made or payable to New Straub, but excluding (1) rental income
on any leases or subleases between PhyCor and New Straub, (2)
any investment income on excess funds to New Straub resulting
from the reduction in Net Revenue referred to in Section 3.1
and (3) any investment income on funds of New Straub
segregated from the bank accounts referred to herein and
available to New Straub for Provider compensation.
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2.1.5. "Capitation Revenues" shall mean all
payments to New Straub or PhyCor from managed care
organizations where payment is made periodically on a per
member basis for the partial or total medical care needs of a
patient, co-payments and all HMO incentive bonuses including
hospital incentive bonuses.
2.1.6. "Clinic" shall mean facilities,
including satellite locations, related businesses and all
medical group business operations.
2.1.7 "Clinic/Hospital Expenses" shall be
determined and quantified for purposes of calculating the
service fee to be paid to PhyCor under Article 8 hereof.
Clinic/Hospital Expenses shall be calculated using GAAP.
Clinic/Hospital Expenses shall be the aggregate of (1) all
operating and non- operating expenses (which shall include
depreciation and amortization) of PhyCor incurred in the
operation of the Clinic or the Hospital plus (2) all operating
and non-operating expenses of New Straub incurred in the
operation of the Clinic and Hospital which are either
identified below or identified elsewhere in this Agreement.
Examples of Clinic/Hospital Expenses are included below:
(a) Salaries, benefits, (including contributions
under the PhyCor, Inc. Savings and Profit Sharing
Plan), severance benefits and other direct costs
of all employees of PhyCor or New Straub at the
Clinic or Hospital and the Medical Director of New
Straub (but excluding all other Providers and
Physician Extender Employees), and such amount
shall specifically include any severance
obligations due to employees of Old Straub, New
Straub (to the extent their salaries would be a
Clinic Expense) or PhyCor whose employment
terminates on or after the Closing Date under the
Merger;
(b) Direct costs of all outside consultants
retained by PhyCor, Parent or New Straub and
engaged by the Policy Board to provide services at
or in connection with the Clinic or the Hospital
or who actually provide services at or in
connection with the Clinic or Hospital required
for improved performance; provided, however, only
that portion of such consultant's costs without
mark-up that is allocable to work performed at or
for the benefit of the Clinic or Hospital will be
a Clinic/Hospital Expense;
(c) Obligations of PhyCor or Parent under leases
or subleases relating to Clinic or Hospital
property, and obligations of New Straub under
leases or subleases relating to Clinic or Hospital
property;
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(d) Interest expense or prepayment premiums on
indebtedness incurred by PhyCor or Parent to
finance or refinance any of its obligations
hereunder or services provided (interest expense
will be charged for funds borrowed from outside
sources as well as from Parent or Parent's finance
subsidiary; in the latter case, charges will be
computed at a floating rate that is equal to the
current blended borrowing rate in effect for
actual and available outside borrowings of Parent
or its finance subsidiary; and such rate will be
computed as the sum of interest and related costs
divided by the related total of all borrowings);
(e) Insurance expenses to the extent provided in
Article 10;
(f) Other expenses incurred by PhyCor in carrying
out its obligations under the Service Agreement or
incurred by New Straub which are specifically
referenced herein or otherwise budgeted as
Clinic/Hospital Expenses;
(g) In the event an opportunity arises for
additional physicians in the State of Hawaii to
become employed by, acquired by, or merge with
("Acquisition") New Straub, and in the event such
Acquisition is completed, amortization of
intangible asset value as a result of each such
Acquisition;
(h) Except as excluded in (D) below, the
depreciation expense or amortization expense
associated with the assets of PhyCor, whether
acquired as a result of the Merger or otherwise,
and the depreciation expense of any equipment of
New Straub used by the Clinic or Hospital in their
operations and either owned by New Straub on the
date hereof or purchased by New Straub after
approval of the Policy Board, and the write-off of
any asset or any portion thereof on the balance
sheet of PhyCor; and
(i) amortization expense resulting from the
amortization of an amount of service agreement
costs (as set forth on the financial statements of
PhyCor and Parent) equal to the balance of the
accounts set forth in Schedule 2.7 hereof on the
date hereof.
"Clinic/Hospital Expenses" shall not include:
(A) Any corporate overhead charges, other than the
kind of items listed above, from the Parent;
(B) Except as provided in (d) above, any federal
or state income taxes of PhyCor or New Straub;
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(C) Any expenses or responsibilities of New Straub
which are not expressly designated herein as
Clinic/Hospital Expenses;
(D) Except as set forth in (i) above, any
amortization expense resulting from the
amortization of service agreement costs (as set
forth on the financial statements of PhyCor and
Parent) in connection with the Merger and
execution of this Agreement;
(E) Interest expense or prepayment premiums on
indebtedness incurred by PhyCor or Parent to
refinance any liabilities incurred or assumed as a
result of the Merger; and
(F) Any amounts paid by PhyCor or New Straub under
their respective indemnification obligations
hereunder.
2.1.8. "GAAP" shall mean generally accepted
accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other
entity or other practices and procedures as may be approved by
a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of
determination. For purposes of this Agreement, GAAP shall be
applied in a manner consistent with the historic practices
used by Parent.
2.1.9. "Hospital" shall mean the 157 bed acute
care hospital known as "Straub Hospital" licensed in the name
of New Straub, including its outpatient and ancillary
departments but not its professional services.
2.1.10. "Hospital Revenues" shall mean all
revenues actually recorded each month (net of Adjustments), by
or on behalf of New Straub as a result of services provided by
the Hospital to patients.
2.1.11. "Net Revenues" shall mean the difference
between (a) sum of Ancillary and Other Revenues, Hospital
Revenues, Physician Services Revenues, Capitation Revenues and
Additional Managed Care Payments, as calculated using GAAP and
(b) the amounts referred to in the last paragraph of Section
3.1.
2.1.12. "Opening Balance Sheet" shall mean the
Adjusted Balance Sheet of PhyCor immediately after the
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Effective Date of the Merger (as defined in the Merger
Agreement) prepared in accordance with GAAP (except for the
absence of certain note information).
2.1.13. "Parent" shall mean PhyCor, Inc., a
Tennessee corporation, which is the sole shareholder of
PhyCor.
2.1.14. "Physician Employees" shall mean (i) those
individuals (A) who are employees or shareholders of New
Straub, on a full-time or part-time basis or are otherwise
under contract with New Straub to provide professional
services to Clinic or Hospital patients and (B) whose services
are billed or billable by and in the name of New Straub and
(C) who are duly licensed to provide professional medical
services in the State of Hawaii or are duly licensed as
Psychologists ("Providers"), (ii) Physician Extender
Employees, (iii) Technical Employees and (iv) all other
employees referred to in Section 5.7 providing services at or
in connection with the Clinic or the Hospital.
2.1.15. "Physician Extender Employees" shall mean
Nurse Anesthetists, Physician Assistants, Nurse Practitioners,
Podiatrists and other such positions, examples of which are
set forth on Exhibit 2.1.15, and any position that generates a
professional charge, but excluding Technical Employees.
2.1.16. "Physician Services Revenues" shall mean
all fees actually recorded each month (net of Adjustments), by
or on behalf of New Straub as a result of professional medical
services personally furnished to patients by Physician
Employees or other professionals under control of New Straub
and other fees or income generated in their capacity as
professionals, whether rendered in an inpatient or outpatient
setting.
2.1.17. "Physician Shareholders" shall mean those
physicians who are shareholders of New Straub.
2.1.18. "Policy Board" shall mean a six (6) member
board established pursuant to Section 4.1.
2.1.19. "Technical Employees" shall mean
technicians who provide services in the diagnostic areas of
New Straub's practice, such as employees of the laboratory,
radiology technicians and cardiology technicians, examples of
which are set forth on Exhibit 2.1.19 attached hereto. All
Technical Employees shall be Physician Employees.
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ARTICLE 3.
FACILITIES TO BE PROVIDED BY PHYCOR
3.1. Facilities. During the term of this Agreement,
PhyCor shall, on behalf of New Straub, arrange to maintain the properties and
facilities owned by New Straub on the date of this Agreement more fully
described in Exhibit 3.1(a) hereto to New Straub, including but not limited to,
all costs of repairs, maintenance and improvements, utility (telephone,
electric, gas, water) expenses, normal janitorial services, refuse disposal and
all other costs and expenses reasonably incurred in conducting operations in
the Clinic or Hospital during the term of this Agreement, including, but not
limited to, related real or personal property lease cost payments and expenses,
taxes and insurance. Such costs shall be Clinic/Hospital Expenses, however, the
costs of debt service on any real property owned by New Straub and the costs of
any matters relating to title to any real property owned by New Straub shall
not be a Clinic/Hospital Expense. Nothing contained herein is intended to
require New Straub to provide the foregoing services if such services are
required to be provided by the landlord under a lease for a specific property.
The Policy Board shall make all determinations regarding the condition, use and
needs for the offices, facilities and improvements. The Policy Board shall
determine any changes to the office and facility locations of the Clinic.
Without the express written consent of Policy Board, New Straub shall not sell,
transfer, mortgage or refinance any debt relating to any real property owned by
New Straub, and any such transaction shall be in accordance with the Articles
and Bylaws of New Straub.
During the first year of this Agreement, $4,707,121 shall be
deducted from Net Revenues generated by New Straub (such deduction shall be in
12 equal monthly installments) and shall be retained by New Straub on account
of the real property owned by it. PhyCor shall not be responsible for payment
of any such amount and no additional amounts shall be deducted from Net
Revenues or paid by PhyCor with respect to the real property owned by New
Straub; provided, however, Clinic/Hospital Expenses attributable to such real
property shall be paid as provided elsewhere in this Agreement. Thereafter, the
amount set forth in Exhibit 3.1(b) shall be deducted from Net Revenues
generated by New Straub (in equal monthly installments).
3.2. Right to Use Property. PhyCor shall have access to
the foregoing facilities and premises of New Straub during the term of this
Agreement, or with respect to property leased by New Straub, during the term of
any lease or sublease of such premises and any additional premises leased,
subleased or acquired by New Straub during the term of this Agreement. New
Straub shall not
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enter into any new leases or subleases or agree to amend any currently existing
lease or sublease without the express written consent of Policy Board. The
right to have access to the premises shall not constitute a lease or sublease
of the premises, shall not constitute an assignment of any of New Straub's
rights under existing leases, and shall not be construed as an assignment or
other transfer of any rights of New Straub to its owned property or any rights
of its lessors under any existing leases.
3.3. Use of Facilities. Voluntary abortions will not be
performed in facilities which PhyCor or any of its Affiliates have the right to
use in accordance with Section 3.2 above or which are owned or leased by PhyCor
or any of its Affiliates in whole or in part. PhyCor and New Straub agree that
New Straub, as an independent contractor, is a separate organization that
retains the authority to direct the medical, professional, and ethical aspects
of its medical practice. If a Physician Stockholder or a Physician Employee
performs abortion procedures in any facility, PhyCor shall not receive service
fees from the revenue generated from such procedures.
ARTICLE 4.
DUTIES OF THE POLICY BOARD
4.1. Formation and Operation of the Policy Board. The
parties shall establish a Policy Board which shall be responsible for
developing management and administrative policies for the overall operation of
the Clinic and the Hospital. No party shall have the authority to undertake any
actions described in Section 4.2 below without the authority of the Policy
Board. The Policy Board shall consist of six (6) members. PhyCor shall
designate, in its sole discretion, three (3) members of the Policy Board, one
of which shall be the Straub System Chief Executive; provided, however, in
PhyCor's sole discretion, PhyCor may replace the Straub System Chief Executive
as one of its designees in the event PhyCor institutes disciplinary measures
against the Straub System Chief Executive in connection with his employment
with PhyCor. New Straub shall designate, in its sole discretion, three (3)
physician members of the Policy Board. The Chairman of the Policy Board shall
be a designee of New Straub selected by New Straub. Except as may otherwise be
provided, the act of a majority of the members of the Policy Board shall be the
act of the Policy Board. Attached hereto as Exhibit 4.1 are the initial Bylaws
to be used by the Policy Board until such time as the Policy Board amends such
Bylaws. The Chairman of the Policy Board shall be responsible for organizing
the agenda for the Policy Board meetings referred to in Article 4.
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4.2. Duties and Responsibilities of the Policy Board.
The Policy Board shall have the following duties and obligations:
4.2.1. Capital Improvements and Expansion.
Any renovation and expansion plans and capital equipment
expenditures with respect to the Clinic or the Hospital shall
be reviewed and approved by the Policy Board and shall be
based upon economic feasibility, physician support,
productivity and then current market conditions.
4.2.2. Annual Budgets. All annual capital and
operating budgets prepared by PhyCor, as set forth in Section
5.2, shall be subject to the review and approval of the Policy
Board.
4.2.3. Exceptions to Inclusion in the Net
Revenue Calculation. The exclusion of any revenue from Net
Revenues, whether now or in the future, shall be subject to
the approval of the Policy Board, and the treatment of any
expense as Clinic/Hospital Expense which is not otherwise
addressed herein or in any budget shall be subject to the
approval of the Policy Board.
4.2.4. Advertising. All advertising and other
marketing of the services performed at the Clinic or Hospital
shall be subject to the prior review and approval of the
Policy Board.
4.2.5. Fees. As a part of the annual
operating budget, in consultation with New Straub and PhyCor,
the Policy Board shall review and adopt the fee schedule or
capitation arrangement for all hospital, physician and
ancillary services rendered by New Straub, the Clinic or the
Hospital.
4.2.6. Provider and Payor Relationships.
Decisions regarding the establishment or maintenance of
relationships with institutional health care providers and
payors shall be made by the Policy Board in consultation with
New Straub.
4.2.7. Strategic Planning. The Policy Board
shall develop long-term strategic planning objectives.
4.2.8. Capital Expenditures. The Policy
Board shall determine the priority of major capital
expenditures.
4.2.9. Physician Hiring. The Policy Board
shall determine the number and type of physicians required for
the efficient operation of the Clinic and the Hospital.
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The approval of the Policy Board shall be required for any
variations to, or exclusions from, the restrictive covenants
in any physician employment contract.
4.2.10. Hospital. To the extent not otherwise
addressed by the Hospital Board of Directors pursuant to
Section 6.10 hereof, the Policy Board shall determine the
strategies and policies to be implemented by the Hospital and
address other matters regarding Hospital operations not
addressed by the Hospital Board of Directors.
4.2.11. Straub System Chief Executive. The
retention, and/or selection of the Straub System Chief
Executive pursuant to Section 5.6 by PhyCor shall be subject
to the reasonable approval of the Policy Board. If New Straub
is dissatisfied with the services provided by the Straub
System Chief Executive, New Straub shall refer the matter to
the Policy Board. PhyCor and the Policy Board shall each in
good faith determine whether the performance of the Straub
System Chief Executive could be brought to acceptable levels
through counsel and assistance, or whether the Straub System
Chief Executive should be terminated. PhyCor shall have the
ultimate authority to terminate the Straub System Chief
Executive.
4.2.12. Grievance Referrals. The Policy Board
shall consider and make final decisions regarding grievances
pertaining to matters not specifically addressed in this
Agreement as referred to it by New Straub's Board of
Directors.
ARTICLE 5.
ADMINISTRATIVE SERVICES TO BE PROVIDED BY PHYCOR
5.1. Performance of Management Functions. PhyCor shall
provide or arrange for the services set forth in this Article 5, the cost of
all of which shall be included in Clinic/Hospital Expenses. PhyCor is hereby
expressly authorized to perform its services hereunder in whatever manner it
deems reasonably appropriate, exercising reasonable judgment, to meet the
day-to-day requirements of Clinic and Hospital operations in accordance with
the provisions of this Agreement and the general standards approved by the
Policy Board, including, without limitation, incurring obligations in the name
of New Straub to be paid by New Straub as Clinic/Hospital Expenses and the
performance of some of the business office functions at locations other than
the Clinic or the Hospital. New Straub will not act in a manner which would
prevent PhyCor from efficiently managing the day-to-day operations of the
Clinic or the Hospital in a business-like manner.
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5.2. Financial Planning and Goals. PhyCor shall prepare
annual capital and operating budgets reflecting in reasonable detail the
anticipated revenues and expenses, sources and uses of capital for growth. Said
budgets shall be presented to the Policy Board for approval at least thirty
(30) days prior to the end of the preceding fiscal year. PhyCor shall recommend
the targeted profit margin for the Clinic and Hospital for inclusion in the
overall budget which shall be subject to the approval of the Policy Board.
PhyCor realizes that the Clinic and the Hospital have opportunities to provide
new services and utilize new technologies that will require capital
expenditures and anticipates that such opportunities may include new and
replacement equipment as may be economically justified.
5.3. Audits and Statements. PhyCor shall prepare annual
financial statements for the operations of PhyCor and shall cause the financial
statements to be audited by a certified public accountant selected by PhyCor in
connection with the audit of the financial statements of Parent. New Straub
shall pay for the cost of that portion of such audit relating to the operations
of PhyCor as a Clinic/Hospital Expense. If New Straub desires an audit in
addition to the audit provided by the certified public accountant selected by
PhyCor in connection with the audit of the financial statements of Parent, New
Straub may obtain such an audit at its own expense. Annual financial statements
for the operations of New Straub shall be audited by a certified public
accountant selected by PhyCor, and New Straub shall pay for the cost of such
audit as a Clinic/Hospital Expense. If New Straub desires an audit in addition
to the audit provided by the certified public accountant selected by PhyCor in
connection with the audit of the financial statements of New Straub, New Straub
may obtain such an audit at its own expense. PhyCor shall prepare monthly
unaudited financial statements containing a balance sheet and statements of
income from Clinic and Hospital operations, which shall be delivered to the New
Straub members of the Policy Board within thirty (30) days after the close of
each calendar month.
5.4. Inventory and Supplies. PhyCor shall order on New
Straub's behalf and at New Straub's expense (which shall be a Clinic/Hospital
Expense), inventory and supplies, and such other ordinary, necessary or
appropriate materials which PhyCor shall deem to be necessary in the operation
of the Clinic and the Hospital and which are requested by New Straub to deliver
quality medical services in a cost-effective manner.
5.5. Management Services and Administration.
(a) New Straub hereby appoints PhyCor as its sole and
exclusive manager and administrator of all day-to-day business functions. New
Straub agrees that the purpose and intent of this Service Agreement is to
relieve the Physician Shareholders and
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Providers to the maximum extent possible of the administrative, accounting,
personnel and business aspects of its operations, with PhyCor assuming
responsibility and being given all necessary authority to perform these
functions, including, without limitation, the authority to incur obligations in
the name of New Straub to be paid by New Straub as Clinic/Hospital Expenses in
accordance with the policies and procedures adopted by the Policy Board. New
Straub hereby appoints PhyCor for the term hereof to be its true and lawful
attorney-in-fact to incur such expenses in the name and on behalf of New
Straub. PhyCor agrees that New Straub and only New Straub will perform the
medical functions of its practice. PhyCor will have no authority, directly or
indirectly, to perform, and will not perform, any medical function. PhyCor
may, however, advise New Straub as to the relationship between its performance
of medical functions and the overall administrative and business functioning of
its practice.
(b) (1) Billing and Collecting. PhyCor shall, on
behalf and for the account of New Straub, bill patients and collect the fees
for medical services rendered by New Straub in the Clinic, for professional
services performed outside the Clinic for New Straub's hospitalized patients,
for hospital services and for all other Clinic or Hospital services. PhyCor may
perform its obligations hereunder through the supervision by PhyCor employees
of New Straub employees in the Clinic's and Hospital's billing and collecting
departments. New Straub hereby appoints PhyCor for the term hereof to be its
true and lawful attorney-in-fact, for the following purposes: (i) to bill
patients in New Straub's name and on its behalf; (ii) to collect accounts
receivable resulting from such billing in New Straub's name and on its behalf;
(iii) to receive payments from Blue Cross, Blue Shield, insurance companies,
prepayments received from health care plans, Medicare, Medicaid and all other
third party payors; (iv) to take possession of and endorse in the name of New
Straub (and/or in the name of an individual physician, such payment intended
for purpose of payment of a bill) any notes, checks, money orders, insurance
payments and other instruments received in payment of accounts receivable; and
(v) to initiate the institution of legal proceedings in the name of New Straub
to collect any accounts and monies owed to the Clinic or the Hospital, to
enforce the rights of New Straub as creditors under any contract or in
connection with the rendering of any service, and to contest adjustments and
denials by governmental agencies (or its fiscal intermediaries) as third-party
payors. All adjustments made for uncollectible accounts, professional
courtesies and other activities that do not generate a collectible fee shall be
done in a reasonable and consistent manner approved by PhyCor's independent
certified public accountants.
(2) Bank Account. All funds received from such billings shall
be placed in an account in the name of New Straub selected by PhyCor and
segregated from any other account of New Straub. New
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Straub shall ensure that at least one of PhyCor's employees designated by
PhyCor shall have authority to sign checks on behalf of such account. New
Straub agrees that the funds used in such account shall not be used for any
purpose other than (i) to pay Clinic/Hospital Expenses, (ii) to pay the
compensation of Providers and Physician Extender Employees in accordance with
the budgets approved by the Policy Board (which amount shall not exceed 82% of
the difference between Net Revenues less Clinic/Hospital Expenses, (iii) to pay
the fee due to PhyCor pursuant to Article 8 hereof, (iv) to be transferred to
New Straub to represent amounts to be retained by New Straub pursuant to the
last paragraph of Section 3.1 hereof, and (v) to repay the Loans. PhyCor is
hereby authorized to make payments from such account on behalf of New Straub
for the purposes set forth above. Upon any default under the Loans described
below, PhyCor shall have the authority to remove funds from such account as may
be necessary to cure such default and to otherwise take control over such
account.
(c) PhyCor shall supervise and maintain custody at
Straub premises of all files and records relating to the operation of the
Clinic and the Hospital, including but not limited to accounting, billing,
patient medical records, and collection records. Patient medical records shall
at all times be and remain the property of New Straub and shall be located at
Clinic or Hospital facilities so that they are readily accessible for patient
care. The management of all files and records shall comply with applicable
state and federal statutes. PhyCor shall use its reasonable efforts to preserve
the confidentiality of patient medical records and use information contained in
such records only for the limited purpose necessary to perform the services set
forth herein; provided, however, in no event shall a breach of said
confidentiality be deemed a default under this Agreement.
(d) PhyCor shall arrange for, at New Straub's expense
(which shall be a Clinic/Hospital Expense), necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication services,
medical transcribing services and any other ordinary, necessary or appropriate
service for the operation of the Clinic and the Hospital.
(e) Subject to the provisions of Section 4.2.4, PhyCor
shall supervise the design and implementation of an appropriate public
relations program on behalf of New Straub, with appropriate emphasis on public
awareness of the availability of services at the Clinic and the Hospital. The
public relations program shall be conducted at New Straub's expense (which
shall be a Clinic/Hospital Expense) and in compliance with applicable laws and
regulations governing advertising by the medical profession.
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(f) PhyCor shall arrange for the preparation of the
data necessary for New Straub to prepare its annual federal and state income
and general excise tax tax returns and shall arrange for the preparation of
such returns. The cost of preparing such data and tax returns shall be paid by
New Straub as a Clinic/Hospital Expense. PhyCor shall have no responsibility
for the payment of such income taxes and such income taxes shall not be
Clinic/Hospital Expenses.
(g) PhyCor shall assist New Straub in recruiting
additional physicians, carrying out such administrative functions as may be
appropriate such as advertising for and identifying potential candidates,
checking credentials, and arranging interviews; provided, however, New Straub
shall interview and make the ultimate decision as to the suitability of any
physician to become associated with New Straub. All physicians recruited by
PhyCor and accepted by New Straub shall be the sole employees of New Straub, to
the extent such physicians are hired as employees. Subject to the provisions
of Section 6.3, any expenses incurred in the recruitment of physicians,
including, but not limited to, employment agency fees, relocation and
interviewing expenses shall be budgeted Clinic/Hospital Expenses and shall be
paid by New Straub. Such expenses shall be pre-approved by the Straub System
Chief Executive.
(h) PhyCor shall negotiate and administer all managed
care contracts on behalf of New Straub and shall consult with New Straub on all
professional or clinical matters relating thereto and shall act as an
intermediary for the payment of medical claims to New Straub.
(i) Subject to the provisions of Sections 5.3 and
5.5(f), PhyCor shall arrange for legal and accounting services related to
Clinic and Hospital operations the expense for which has been incurred
traditionally in the ordinary course of business, including the attorneys' fees
and other costs of enforcing any physician contract containing restrictive
covenants and attorneys' fees and other costs and expenses of litigation,
arbitration or such other proceeding for malpractice suits against the Clinic
or Hospital and its personnel other than Providers to the extent such fees,
costs and expenses are not covered by insurance, but excluding such fees, costs
and expenses which are not covered by insurance for malpractice suits against
the Providers and/or the Clinic solely in its capacity as employer of a
Provider against whom suit is brought, provided such services shall be approved
in advance by the Straub System Chief Executive. Such expenses shall be paid by
New Straub and shall be Clinic/Hospital Expenses.
(j) PhyCor shall supervise the proper cleanliness of
the premises, and maintenance and cleanliness of the equipment,
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furniture and furnishings located upon such premises, all at New Straub's
expense (which shall be a Clinic/Hospital Expense).
(k) PhyCor shall arrange for payment, at New Straub's
expense (which shall be a Clinic/Hospital Expense), of professional licensure
fees and board certification fees of physicians associated with New Straub, and
of governmental filings for licenses such as Hospital licensure fees, and of
filings for certifications such as JCAHO certification and other Hospital
certifications.
(l) PhyCor shall supervise the preparation and filing
of all Medicare cost reports and other governmental reports, the cost of which
shall be paid by New Straub as a Clinic/Hospital Expense.
(m) PhyCor shall negotiate for the insurance provided
for in Section 10.1. Premiums and deductibles with respect to such policies
shall be paid by New Straub and shall be a Clinic/Hospital Expense.
5.6. Straub System Chief Executive. Subject to the
provisions of Section 4.2.11, PhyCor shall hire and appoint the Straub System
Chief Executive who shall serve as a Vice President of PhyCor and as the market
chief executive officer and manage and administer all of the day-to-day
business functions of the Clinic and Hospital. PhyCor shall determine the
salary and fringe benefits of the Straub System Chief Executive. At the
direction, supervision and control of PhyCor, the Straub System Chief
Executive, subject to the terms of this Agreement, shall implement the policies
established by the Policy Board and shall generally perform the duties and have
the responsibilities of a market chief executive officer.
5.7. Personnel. In addition to the Straub System Chief
Executive, the Chief Operating Officer, Chief Financial Officer and the
Development Officer will be employees of PhyCor. All other personnel necessary
to carry out the duties of PhyCor hereunder or reasonably necessary for the
conduct of the Clinic and Hospital operations shall be employees of New Straub
but shall be under the supervision of the Straub System Chief Executive or his
designee. PhyCor shall determine the salaries and fringe benefits of all such
personnel, within the budget policies and procedures adopted by the Policy
Board, the cost of which shall be paid by New Straub as a Clinic/Hospital
Expense. Personnel performing patient care services shall be subject to the
professional supervision of New Straub. If New Straub is dissatisfied with the
services of any person, New Straub shall consult with PhyCor. PhyCor shall in
good faith determine whether the performance of that employee could be brought
to acceptable levels through counsel and assistance, or whether such employee
should be terminated. All of PhyCor's
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obligations regarding staff shall be governed by the overriding principle and
goal of providing high quality medical care. Employee assignments shall be made
to assure consistent and continued rendering of high quality medical support
services and to ensure prompt availability and accessibility of individual
medical support personnel to physicians in order to develop constant, familiar
and routine working relationships between individual physicians and individual
members of the medical support personnel. PhyCor shall maintain established
working relationships wherever possible and PhyCor shall make every effort
consistent with sound business practices to honor the specific requests of New
Straub with regard to the assignment of its employees. PhyCor shall provide
administrative services such as scheduling, personnel policies and payroll
administration for all Physician Employees other than Providers and shall
provide payroll administration for Providers.
5.8.1. Capital Loans. All capital expenditures shall be
approved by the Policy Board. PhyCor shall determine whether approved capital
expenditures shall be funded by PhyCor through loans described below or
borrowings, leases or other financing methods through independent third-party
financial institutions, or investments by PhyCor for reinvestment. Capital
expenditures approved by the Policy Board to be funded by PhyCor will be funded
through loans from PhyCor to New Straub ("Capital Loans"). Capital Loans shall
be made by PhyCor from funds received through intracompany borrowings from
Parent (at the rate set forth in Section 2.1.7(d), which rate shall also be the
rate of the Capital Loans). Except where the interest expense is deducted from
the fees to be paid to PhyCor as provided below, interest expense associated
with the Capital Loans will be a Clinic/Hospital Expense.
5.8.2 Working Capital Loans. In the event the
obligations of New Straub (i) to pay the Clinic/Hospital Expenses which are the
obligations of New Straub hereunder and which are arranged for or incurred by
PhyCor on New Straub's behalf, (ii) to pay the service fees to PhyCor under
Article 8 hereof, and (iii) to pay the salaries and benefits of other New
Straub Employees (up to a maximum amount under this item (iii) equal to 82% of
Net Revenues less Clinic/Hospital Expenses) exceed the revenues available to
New Straub through Clinic and Hospital operations, then the balance will be
provided by PhyCor through loans to New Straub (the "Working Capital Loans").
All Working Capital Loans shall bear interest at a rate equal to the rate
described in Section 2.7)e).
5.8.3. Loan Terms. All Capital Loans and Working Capital
Loans (collectively, the "Loans") will be made pursuant to the terms of Credit
Agreements and promissory notes on terms acceptable to PhyCor and New Straub in
the form of Exhibit 5.8.3(a). All proceeds from any loans shall be deposited in
the bank account referred to in Section 5.5(b)(2). The Loans shall be repaid
with
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any excess proceeds received by New Straub from Clinic and Hospital operations
in excess of the amounts payable by New Straub out of the bank account referred
to in Section 5.5(b)(2) hereof. PhyCor's obligations to make the Capital Loans
and the Working Capital Loans shall terminate upon notice of termination of
this Agreement by either party for any reason. Upon notice of termination of
this Agreement by either party for any reason, all amounts outstanding under
the Loans shall be immediately due and payable.
New Straub will secure the amounts outstanding from time to
time under the Loans by granting to PhyCor a security interest in the accounts
receivable and all other non-real estate assets of New Straub. New Straub is
concurrently herewith entering into a Security Agreement in the form attached
as Exhibit 5.8.3(b). In addition, New Straub shall cooperate with PhyCor and
execute all necessary documents in connection with the pledge of such accounts
receivable and assets to PhyCor or at PhyCor's option, its lenders. All
collections in respect of such accounts receivable shall be deposited in the
bank account referred to in Section 5.5(b)(2) hereof unless otherwise provided
in the Security Agreement. To the extent New Straub comes into possession of
any payments in respect of such accounts receivable, New Straub shall direct
such payments to PhyCor for deposit in the bank account referred to in Section
5.5(b)(2) hereof unless otherwise provided in the Security Agreement.
Each year, the parties will calculate one-half the amount of
(i) PhyCor's Earnings Before Income Taxes times (ii) 61% (which percentage
represents the difference between 100% and Parent's effective tax rate) plus
cash flow relating to recognition of depreciation expense and amortization
expense (other than with respect to real estate) resulting from mergers
contemplated in Section 2.1.7(g) herein. Interest expense with respect to such
amounts will be deducted from the service fee payable to PhyCor pursuant to
Article 8 hereof.
5.9. Events Excusing Performance. PhyCor shall not be
liable to New Straub for failure to perform any of the services required herein
in the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which PhyCor has no control for so long as such
events continue, and for a reasonable period of time thereafter.
5.10. Compliance with Applicable Laws. PhyCor shall
comply with all applicable federal, state and local laws, regulations and
restrictions in the conduct of its obligations under this Agreement.
5.11. Quality Assurance. PhyCor shall assist New Straub
in fulfilling its obligations to its patients to maintain a high quality of
medical and professional services.
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5.12. Ancillary Services. PhyCor shall operate such
ancillary services as approved by the Policy Board.
5.13. Certain Contracting. The parties agree that in
the event the Policy Board determines to pursue the formation of an IPA, other
physician organization or hospital network, or enter into risk assumption
contractual arrangements, the parties will structure the IPA, hospital network
or such arrangements in the manner in which the Policy Board determines unless
otherwise specifically addressed in this Agreement. The IPA or hospital network
will be managed by PhyCor or an Affiliate of PhyCor. In the event a management
agreement is entered into for the management of an IPA or hospital network, the
management agreement will provide for a management fee to be paid to the
management organization by the IPA. Such management fee shall be approved by
the Policy Board and set at a level to cover the costs of the management
agreement.
5.14. Intermediary Contracts. PhyCor shall utilize New
Straub as the principal provider of all clinic, hospital and ancillary
services, including professional services, to the extent such services are
available at New Straub for the managed care plans sponsored or administered by
PhyCor in the State of Hawaii. PhyCor further agrees to act as an
"intermediary", as that term is defined in HRS Section 237-13(6), between New
Straub and the subscribers and enrollees in PhyCor's managed care plans.
ARTICLE 6.
OBLIGATIONS OF NEW STRAUB
6.1. Professional Services. New Straub shall provide
professional services to patients in compliance at all times with ethical
standards, laws and regulations applying to the medical profession. New Straub
shall ensure that each physician associated with New Straub to provide medical
care to patients of New Straub is licensed by the State of Hawaii. In the event
that any disciplinary actions or medical malpractice actions are initiated
against any such physician, New Straub shall immediately inform the Straub
System Chief Executive of such action and the underlying facts and
circumstances. New Straub shall carry out a program to monitor the quality of
medical care practiced at the Clinic and the Hospital.
6.2. Medical Practice. New Straub shall use and occupy
the Clinic exclusively for the practice of medicine and shall use and occupy
the Hospital exclusively for the provision of services consistent with its
current business, and shall comply with all applicable local rules, ordinances
and all standards of medical care. It is expressly acknowledged by the parties
that the medical practice or practices conducted at the Clinic shall be
conducted
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solely by physicians associated with New Straub, and no other physician or
medical practitioner shall be permitted to use or occupy the Clinic without the
prior written consent of PhyCor; provided, however, that nothing contained
herein is intended to prohibit current sublease arrangements with businesses
located within the Clinic or Hospital in effect on the date of this Agreement
or approved by the Policy Board. The parties understand that certain physicians
will be granted courtesy privileges from time to time at the Hospital.
6.3. Employment of Physician Employees. New Straub
shall have complete control of and responsibility for the hiring, compensation,
supervision, evaluation and termination of its Physician Employees, although at
the request of New Straub, PhyCor shall consult with New Straub respecting such
matters. New Straub shall be responsible for the payment of such Physician
Employees' salaries and wages, benefits, payroll taxes and all other taxes and
charges now or hereafter applicable to them. With respect to physicians, New
Straub shall only employ and contract with licensed physicians meeting
applicable credentialling guidelines established by New Straub.
6.4. Professional Dues and Education Expenses. New
Straub and its Physician Employees shall be solely responsible for the cost of
membership in professional associations, and continuing professional education.
New Straub shall ensure that each of its Physician Employees participates in
such continuing medical education as is necessary for such physician to remain
current.
6.5. Professional Insurance Eligibility. New Straub
shall cooperate in the obtaining and retaining of professional liability
insurance by assuring that its Physician Employees are insurable, and
participating in an on-going risk management program.
6.6. Events Excusing Performance. New Straub shall not
be liable to PhyCor for failure to perform any of the services required herein
in the event of strikes, lock-outs, calamities, acts of God, unavailability of
supplies or other events over which New Straub has no control for so long as
such events continue, and for a reasonable period of time thereafter.
6.7. Restrictions on Use of Clinic and Hospital. New
Straub shall at all times during the term of this Agreement comply with the
policy of PhyCor stated in Section 3.3 herein.
6.8. Clinic Profit Sharing Plan.
(a) Effective ____________, 1996, New Straub shall become an
adopting employer to the PhyCor, Inc. Savings and Profit Sharing Plan ("PhyCor
Plan") and either freeze the New Straub
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Profit Sharing Plan and Trust ("New Straub Plan") or amend the New Straub Plan
to make it a "Supplemental Plan", or terminate the New Straub Plan as New
Straub in its sole discretion determines. New Straub will not make
contributions to the New Straub Plan or any Supplemental Plan that would cause
either the New Straub Plan or the PhyCor Plan to become disqualified.
(b) Unless such action would have no adverse effect on
the PhyCor Plan whatsoever, New Straub shall not enter into any new "employee
benefit plan" within the meaning of Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), without the express written
agreement of PhyCor. New Straub shall not amend the New Straub Plan, except to
terminate or freeze the New Straub Plan or as required by law after
consultation with PhyCor, without the express written agreement of PhyCor to
such amendment.
(c) The compensation of counsel, accountants,
corporate trustees, and other agents necessary in the administration of the New
Straub Plan or any subsequent plan or supplemental plan adopted by New Straub
shall be an expense of New Straub or the New Straub Plan and not a
Clinic/Hospital Expense or an expense of PhyCor. All such expenses necessary in
the administration of the PhyCor Plan, which are not, pursuant to the terms of
the PhyCor Plan, expenses of the PhyCor Plan or of individual participants,
shall be a Clinic/Hospital Expense.
(d) Parent shall have the sole and exclusive authority
to appoint the Trustees, Custodian and Administrator of the PhyCor Plan and to
remove the Trustees, Custodian and Administrator of the PhyCor Plan and appoint
successor Trustees, Custodians and Administrators.
(e) From and after the Closing, PhyCor's employees
shall receive credit for prior service with Old Straub. From and after the
Closing, New Straub's employees shall receive credit for prior service with Old
Straub. PhyCor shall make contributions to the PhyCor Plan, as a
Clinic/Hospital Expense, on behalf of such eligible employees of PhyCor who
perform services at the Clinic or the Hospital. New Straub shall be responsible
and liable for contributions to the PhyCor Plan for Plan Years (or parts
thereof) occurring after the Closing on behalf of Physician Employees who are
participating in the PhyCor Plan, and with respect to Physician Employees whose
salaries are included as Clinic/Hospital Expenses, such contributions shall be
Clinic/Hospital Expenses.
6.9. Fees for Professional Services. New Straub shall
be solely responsible for legal, accounting and other professional services
fees incurred by New Straub, except as set forth in Article 5 herein.
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6.10. Hospital. New Straub agrees that it is the intent
of the parties that the Policy Board have the same authority over Hospital
matters as the Policy Board has over Clinic matters, all as described in
Article 4 hereof. In the event for regulatory, accreditation or other reasons,
New Straub is not able to permit the Policy Board to have control over those
matters delegated to the Policy Board, then New Straub shall take such action
as may be necessary to effect the intent of the parties.
ARTICLE 7.
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that the services to be provided by
PhyCor shall be feasible only if New Straub operates an active medical practice
to which the physicians associated with New Straub devote their full time and
attention to the extent of their arrangement with New Straub. To that end:
7.1. Restrictive Covenants by New Straub. During the
term of this Agreement, New Straub shall not, unless pursuant to this
Agreement, establish, operate or provide physician services at any medical
office, clinic or other health care facility providing services substantially
similar to those provided by New Straub pursuant to this Agreement on any
island in the State of Hawaii on which New Straub operates or owns any interest
in a facility at the time of termination. In addition, New Straub shall not
enter into any ownership or management relationship under a managed care or
risk assumption program other than as described in Section 5.12 hereof.
7.2. Restrictive Covenants By Current Physician
Shareholders and Providers. New Straub shall obtain and enforce (subject to
PhyCor's obligations under Section 5.5(i) of this Agreement) formal agreements
from its current Physician Shareholders and Providers, pursuant to which the
Physician Shareholders and Providers agree that during the term of their
employment and for a period of eighteen (18) months after any termination of
employment with New Straub, they will not establish, operate or provide
physician services at any medical office, clinic or outpatient and/or
ambulatory treatment or diagnostic facility (other than routine hospital
medical staff services to patients admitted to a hospital within the restricted
area) providing services substantially similar to those provided by New Straub
within a 10 mile radius of the New Straub facility at which such physician's
primary practice was located at the time of termination. Notwithstanding the
foregoing, in the event a Provider notifies New Straub of his or her intent to
terminate employment with New Straub by September 1 of a calendar year and
agrees to honor the terms of the foregoing covenant from January 1 through
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September 30 of the following year, then the foregoing 18 month period shall be
reduced to the period from termination until such following September 30;
provided, however, in such case, the Provider shall not terminate employment
prior to December 31 of the year in which notice is given, and the Provider
shall be an employee at will thereafter until the restrictive period has
terminated. The foregoing provisions are not intended to be a guaranty by New
Straub that it will be successful in its attempt to enforce the foregoing
agreements.
7.3. Restrictive Covenants By Future Providers. New
Straub shall obtain and enforce formal agreements from each of its future
Providers (and future Physician Shareholders who are not currently Providers),
hired or contracted, pursuant to which such Providers agree that during the
term of said Provider's employment with New Straub and for a period of eighteen
(18) months thereafter, such Provider will not establish, operate or provide
physician services at any medical office, clinic or outpatient and/or
ambulatory treatment or diagnostic facility providing services substantially
similar to those provided by New Straub within a 10 mile radius of the New
Straub facility at which such Provider's primary practice was located at the
time of termination. Notwithstanding the foregoing, in the event a Provider
notifies New Straub of his or her intent to terminate employment with New
Straub by September 1 of a calendar year and agrees to honor the terms of the
foregoing covenant from January 1 through September 30 of the following year,
then the foregoing 18 month period shall be reduced to the period from
termination until such following September 30; provided, however, in such case,
the Provider shall not terminate employment prior to December 31 of the year in
which notice is given, and the Provider shall be an employee at will thereafter
until the restrictive period has terminated.
7.4. Physician Stockholder and Provider Liquidated
Damages. The Restrictive Covenants described above may provide that the
Physician Shareholders and Providers (existing or future) may be released from
their Restrictive Covenants by paying liquidated damages in an amount as
follows:
Liquidated Damages shall mean the lesser of (i) such
Provider's average annual income, as shown on the W-2 forms prepared by New
Straub, for the two most recent years or (ii) $300,000; provided, however, in
the case of Providers recruited from outside the New Straub service area,
during the first 60 days of such Provider's employment with New Straub,
"Liquidated Damages" shall mean the actual cost of recruiting such Provider.
Such payment received by New Straub with respect to Providers,
other than Providers employed as a result of a transaction contemplated by
Section 2.1 7(g) hereof, shall be made to PhyCor by New Straub simultaneously
with the Provider being
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released from the restrictive covenants and shall become an additional service
fee to be paid to PhyCor pursuant to Article 8 hereof. Such payment received by
New Straub with respect to Providers employed as a result of a transaction
contemplated by Section 2.1 7(g) hereof, shall be Net Revenues hereunder. In
either event, such payment shall be first applied to all costs incurred by
PhyCor or New Straub in the enforcement of the restrictive covenants for that
departing Provider and in recruiting a replacement Provider for that departing
Provider. The accounting treatment of such funds shall be consistently applied
and approved by PhyCor's independent certified public accountants and the
Policy Board.
7.5. Restrictive Covenants of PhyCor. During the term
of this Agreement, PhyCor shall not, unless pursuant to this Agreement,
establish, operate or enter into a service agreement with, or provide services
similar to those provided under this Agreement to, any multi-specialty or
single specialty group (including a primary care group), IPA, PHO or other
provider group or association within the State of Hawaii.
7.6. Enforcement. PhyCor and New Straub acknowledge and
agree that since a remedy at law for any breach or attempted breach of the
provisions of this Article 7 shall be inadequate, either party shall be
entitled to specific performance and injunctive or other equitable relief in
case of any such breach or attempted breach, in addition to whatever other
remedies may exist by law. All parties hereto also waive any requirement for
the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. If any provision of Article 7
relating to the restrictive period, scope of activity restricted and/or the
territory described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted or
geographical area such court deems reasonable and enforceable under applicable
law, the time period, scope of activity restricted and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the
restrictive period, scope of activity restricted and/or the territory
applicable to the restrictive covenant provisions in this Article 7. The
invalidity or non-enforceability of this Article 7 in any respect shall not
affect the validity or enforceability of the remainder of this Article 7 or of
any other provisions of this Agreement.
ARTICLE 8.
FINANCIAL ARRANGEMENTS
8.1 Service Fees: New Straub and PhyCor agree that the
compensation set forth in this Article 8 is being paid to
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PhyCor in consideration of the substantial commitment made by PhyCor hereunder
and that such fees are fair and reasonable. PhyCor shall be paid the following
service fees:
(a) PhyCor shall be reimbursed the amount of all
Clinic/Hospital Expenses paid by PhyCor other than those associated with Net
Revenue generated in the name of PhyCor described below;
(b) During each year of the Agreement, PhyCor shall
receive a fee equal to 18% of Net Revenues less Clinic/Hospital Expenses.
The foregoing fee shall be reduced by (i) the interest expense
on Capital Loans to the extent set forth in Section 5.8.1 hereof and (ii) any
profits of PhyCor from Net Revenues generated in the name of PhyCor, which
profits shall be defined as such Net Revenue less Clinic/Hospital Expenses
associated therewith, and the foregoing fee shall be increased by any losses of
PhyCor from Net Revenues generated in the name of PhyCor, which losses shall be
defined as such Net Revenue less Clinic/Hospital Expenses associated therewith.
In addition, in the event that Net Revenues generated by PhyCor are
insufficient to cover all adjustments made to such Net Revenues, then New
Straub shall pay PhyCor such difference.
8.2. Calculation of Payments. The amounts to be paid to
PhyCor under this Article 8 shall be payable monthly. The amounts shall be
estimated based upon the previous month's operating results of the Clinic and
the Hospital. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under this Article 8, by the end of the following month
during each calendar quarter. Upon preparation of quarterly financial
statements, final adjustments to the service fee for the quarter shall be made
and any additional payments owing to PhyCor or New Straub shall then be made.
Any audit adjustments shall be reflected in the calculation for the fourth
quarter.
ARTICLE 9.
RECORDS
9.1. Patient Records. Upon termination of this
Agreement, New Straub shall retain all patient medical records maintained by
New Straub or PhyCor in the name of New Straub. New Straub shall, at its
option, be entitled to retain copies of financial and accounting records
relating to all services performed by New Straub.
9.2. Records Owned by PhyCor. All records relating in
any way to the operation of the Clinic or the Hospital which are
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not the property of New Straub under the provisions of Section 9.1 above, shall
at all times be the property of PhyCor.
9.3. Access to Records. During the term of this
Agreement, and thereafter, New Straub or its designee shall have reasonable
access during normal business hours to New Straub's and PhyCor's financial
records, including, but not limited to, records of collections, expenses and
disbursements as kept by PhyCor in performing PhyCor's obligations under this
Agreement, and New Straub may copy any or all such records.
ARTICLE 10.
INSURANCE AND INDEMNITY
10.1. Insurance to be Maintained by New Straub.
Throughout the term of this Agreement, subject to the provisions of Section
5.5(l) providing for malpractice premiums and deductibles to be a
Clinic/Hospital Expense, New Straub shall maintain comprehensive professional
liability insurance with limits of not less than $1,000,000 per claim and with
aggregate policy limits of not less than $3,000,000 per physician and a
separate limit for the New Straub with such carrier as is determined by PhyCor.
New Straub shall be responsible for all liabilities in excess of the limits of
such policies. PhyCor shall have the option, with Policy Board approval, of
providing such professional liability insurance through an alternative program,
provided such program meets the requirements of the Insurance Commissioner of
the State of Hawaii. If New Straub's existing professional liability insurance
program is cancelled and replaced by a professional liability insurance program
initiated by PhyCor, PhyCor shall pay over to New Straub any unearned
professional liability insurance premiums paid by New Straub to the extent New
Straub's carrier pays such amounts to PhyCor. Any insurance program for New
Straub shall include tail insurance with respect to Old Straub and director and
officer liability insurance for New Straub, and the cost of such coverages
shall be a Clinic/Hospital Expense.
10.2. Insurance to be Maintained by PhyCor. Throughout
the term of this Agreement, PhyCor will use reasonable efforts, unless
determined not necessary by the Policy Board, to provide and maintain, as a
Clinic/Hospital Expense, comprehensive general liability and property insurance
covering the Clinic and Hospital premises and operations.
10.3. Tail Insurance Coverage. New Straub will cause
each individual physician associated with the Clinic or the Hospital to enter
into an agreement with New Straub that upon termination of such physician's
relationship with New Straub, for any reason, tail insurance coverage will be
purchased by the
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individual physician to the extent not otherwise available. Such provisions may
be contained in employment agreements, restrictive covenant agreements or other
agreements entered into by New Straub and the individual physicians, and New
Straub hereby covenants with PhyCor to enforce such provisions relating to the
tail insurance coverage or to provide such coverage at the expense of New
Straub which will not be a Clinic/Hospital Expense.
10.4. Additional Insureds. New Straub and PhyCor agree
to use their reasonable efforts to have each other named as an additional
insured on the other's respective professional liability insurance programs at
New Straub's expense (which will be a Clinic/Hospital Expense).
10.5. Indemnification.
10.5.1. New Straub Indemnification.
(a) New Straub shall indemnify, hold harmless and defend
PhyCor, its officers, directors, shareholders and employees, from and against
any and all liability, loss, damage, claim, causes of action, and expenses
(including reasonable attorneys' fees), to the extent not covered by insurance
in the name of New Straub, caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of medical services or the
performance of any intentional acts, negligent acts or omissions by New Straub
and/or its shareholders, agents, employees and/or subcontractors (other than
PhyCor) during the term hereof.
(b) In addition, in consideration for the assets transferred
pursuant to Section 4.04 of the Merger Agreement, New Straub shall guarantee
the payment of, and act as collecting agent for, and indemnify, hold harmless
and defend PhyCor, its Affiliates, officers, directors, shareholders and
employees, from and against any and all liability, loss, damage, claim, causes
of action, and expenses (including reasonable attorneys' fees) caused by any
claim against PhyCor or Parent based upon
(i) liabilities transferred to New Straub pursuant
to Section 4.04 of the Merger Agreement, including, but not
limited to, liabilities arising under any MediCare
investigation, liabilities relating to Old Straub's dispute
with KPMG Peat Marwick, and any benefit plan transferred to
New Straub from New Straub's predecessor on or prior to the
effective date under the Merger Agreement;
(ii) any inaccuracy in or breach of any
representation or warranty made by Old Straub in the Merger
Agreement of which PhyCor was not advised in writing by Old
Straub before or at the time of Closing;
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(iii) any claims of malpractice against Old Straub
or New Straub in excess of insurance coverage limits
(including without limitation self-insurance coverages and
reserves);
(iv) any liabilities of Old Straub resulting from
activities of Old Straub prior to the Effective Date of the
Merger which were not disclosed by Old Straub in the Merger
Agreement;
(v) Old Straub's transactional costs and expenses
incidental to the preparation and carrying out of the Merger
Agreement in excess of $2,500,000; and
(vi) any liability of PhyCor or Old Straub for
taxes resulting from or assessed in connection with the Merger
and the transactions contemplated thereby, but only to the
extent that such taxes result from actions taken by New Straub
or the Straub Shareholders (as defined in the Merger
Agreement) after the Effective Date of the Merger.
(c) New Straub shall not be liable to PhyCor for any claims
under Section 10.5.1(b)(ii) above until such claims exceed in the aggregate
$250,000 that would otherwise be subject to indemnification under said
provisions, and then only for the amount by which such claims exceed $250,000.
10.5.2. PhyCor Indemnification. PhyCor shall indemnify, hold
harmless and defend New Straub, its officers, shareholders, directors and
employees, from and against any and all liability, loss, damage, claim, causes
of action, and expenses (including reasonable attorneys' fees), to the extent
not covered by insurance in the name of PhyCor, caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of any
intentional acts, negligent acts or omissions by PhyCor and/or its
shareholders, agents, employees and/or subcontractors (other than New Straub)
during the term of this Agreement. In addition, PhyCor shall indemnify, hold
harmless and defend New Straub, its officers, shareholders, directors and
employees, from and against any and all liability, loss, damage, claim, causes
of action, and expenses (including reasonable attorneys' fees) caused by any
claim against New Straub relating to liabilities of Old Straub assumed by
PhyCor or Parent as a result of the Merger which were disclosed by Old Straub
in the Merger Agreement and for which New Straub does not have an obligation to
indemnify PhyCor as provided above.
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ARTICLE 11.
TERM AND TERMINATION
11.1. Term of Agreement. This Agreement shall commence
on the date hereof and shall expire on the 40th anniversary hereof unless
earlier terminated pursuant to the terms hereof.
11.2. Extended Term. Unless earlier terminated as
provided for in this Agreement, the term of this Agreement shall be
automatically extended for additional terms of five (5) years each, unless
either party delivers to the other party, not less than twelve (12) months nor
earlier than fifteen (15) months prior to the expiration of the preceding term,
written notice of such party's intention not to extend the term of this
Agreement.
11.3. Termination by New Straub. New Straub may terminate this
Agreement as follows:
(a) In the event of the filing of a petition in
voluntary bankruptcy or an assignment for the benefit of creditors by PhyCor,
or upon other action taken or suffered, voluntarily or involuntarily, under any
federal or state law for the benefit of debtors by PhyCor, except for the
filing of a petition in involuntary bankruptcy against PhyCor which is
dismissed within thirty (30) days thereafter, New Straub may give notice of the
immediate termination of this Agreement.
(b) In the event PhyCor shall materially default in
the performance of any duty or obligation imposed upon it by this Agreement and
such default shall continue for a period of forty-five (45) days after written
notice thereof has been given to PhyCor by New Straub (or in the event such
default can not be cured within such period and PhyCor is diligently pursuing a
cure, for a period of sixty (60) days after written notice thereof has been
given to PhyCor by New Straub), or PhyCor shall fail to remit the payments due
as provided in this Agreement and such failure to remit shall continue for a
period of fifteen (15) days after written notice thereof, New Straub may
terminate this Agreement. Termination of this Agreement pursuant to this
subsection (b) by New Straub shall require the affirmative vote of seventy-five
percent (75%) of Physician Shareholders.
(c) In the event that any person or persons (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934) acquires or acquires the right to vote, through acquisition, tender
offer, proxy solicitation, merger or consolidation, fifty percent (50%) or more
of Parent's then issued and outstanding Common Stock, or securities
representing fifty percent (50%) or more of the combined voting power of
Parent's then issued and outstanding securities; provided, however, New Straub
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shall have no right to terminate this Agreement hereunder if any such
transaction referred to above has been previously authorized and approved by
Parent's directors or is subsequently authorized and approved by two-thirds of
Parent's directors who neither are officers or employees of Parent nor are
affiliated with such persons or persons who have acquired the voting power
described above. Termination of this Agreement pursuant to this Section 11.3(c)
shall be made within 60 days of written notice of the transaction giving rise
to the termination event.
11.4. Termination by PhyCor. PhyCor may terminate this
Agreement as follows:
(a) In the event of the filing of a petition in
voluntary bankruptcy or an assignment for the benefit of creditors by New
Straub, or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by New Straub, except
for the filing of a petition in involuntary bankruptcy against New Straub which
is dismissed within thirty (30) days thereafter, PhyCor may give notice of the
immediate termination of this Agreement.
(b) In the event New Straub shall materially default
in the performance of any duty or obligation imposed upon it by this Agreement,
and such default shall continue for a period of forty-five (45) days after
written notice thereof has been given to New Straub by PhyCor (or in the event
such default can not be cured within such period and New Straub is diligently
pursuing a cure, for a period of sixty (60) days after written notice thereof
has been given to New Straub by PhyCor), or New Straub shall fail to remit the
payments due as provided in this Agreement and such failure to remit shall
continue for a period of fifteen (15) days after written notice thereof, PhyCor
may terminate this Agreement.
11.5. Actions after Termination. Upon termination of
this Agreement by either party or upon expiration of this Agreement, New Straub
shall:
(a) Purchase from PhyCor at book value the "service
agreement costs" and any other intangible assets set forth on the Opening
Balance Sheet, as adjusted through the last day of the month most recently
ended prior to the date of such termination in accordance with GAAP to reflect
amortization or depreciation of the "service agreement costs" and intangibles;
(b) Purchase from PhyCor any real estate owned by
PhyCor and associated with the Clinic or the Hospital at the greater of (i) the
appraised fair market value thereof, or (ii) the then book value thereof. In
the event of any repurchase of such real property, the appraised value shall be
determined by PhyCor and New Straub each selecting a duly qualified appraiser,
who in
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turn will agree on a third appraiser. This agreed upon appraiser shall perform
the appraisal which shall be binding on both parties. In the event either party
fails to select an appraiser within fifteen (15) days of the selection of an
appraiser by the other party, the appraiser selected by the other party shall
make the selection of the third-party appraiser;
(c) Purchase all improvements, additions or leasehold
improvements which have been made by PhyCor and which relate solely to the
performance of its obligations under this Agreement at book value;
(d) Assume all debt and all contracts, payables
incurred as Clinic/Hospital Expenses and leases which are obligations of PhyCor
and which relate principally to the performance of its obligations under this
Agreement or the properties subleased by PhyCor; and
(e) Purchase from PhyCor at book value all of the
equipment acquired in the Merger, including all replacements and additions
thereto made by PhyCor pursuant to the performance of its obligations under
this Agreement, and all other assets, including inventory, accounts receivable
and supplies, tangibles and intangibles, set forth on the Opening Balance
Sheet, as adjusted through the last day of the month most recently ended prior
to the date of such termination in accordance with GAAP to reflect operations
of the Clinic and the Hospital (including physician practice acquisitions),
depreciation, amortization and other adjustments of assets shown on the Opening
Balance Sheet.
11.6. Closing of Repurchase by New Straub and Effective
Date of Termination. New Straub shall pay cash for the repurchased assets;
provided, however, with respect to any intangible asset, New Straub shall be
permitted to pay the repurchase price or any portion thereof it elects by
delivering its promissory note, payable in 24 equal monthly installments,
bearing interest at the rate of prime rate published by CitiBank, N.A. (payable
monthly). The amount of the purchase price shall be reduced by the amount of
debt and liabilities of PhyCor assumed by New Straub and shall also be reduced
by any payment PhyCor has failed to make under this Agreement. New Straub and
any physician associated with New Straub shall execute such documents as may be
required to assume the liabilities set forth in Section 11.5(d) and to remove
PhyCor from any liability with respect to such repurchased assets and with
respect to any property leased or subleased by PhyCor. The closing date for the
repurchase shall be determined by New Straub, but shall in no event occur later
than 180 days from the date of the notice of termination. The termination of
this Agreement shall become effective upon the closing of the sale of the
assets and the repayment in full of the outstanding principal and accrued and
unpaid interest on the Loans. On the effective date of termination,
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New Straub and PhyCor shall be released from the Restrictive Covenants provided
for in Article 7 on the closing date. PhyCor shall have the right, in its sole
and absolute discretion, to waive the repurchase requirements of New Straub, in
which event, the termination of this Agreement shall become effective upon the
execution and delivery of such waiver. From and after any termination, each
party shall provide the other party with reasonable access to books and records
then owned by it to permit such requesting party to satisfy reporting and
contractual obligations which may be required of it.
ARTICLE 12.
CONSIDERATION
Subject to the adjustments provided below, as consideration
for the execution of this Agreement by New Straub, PhyCor shall pay New Straub
$32,083,000, payable in cash upon execution of this Agreement.
ARTICLE 13.
GENERAL PROVISIONS
13.1. Assignment. PhyCor shall have the right to assign
its rights hereunder to any person, firm or corporation under common control
with PhyCor and to any lending institution, for security purposes or as
collateral, from which PhyCor or the Parent obtains financing, including
without limitation, Citibank, N.A., as agent, or its successors and assigns
under the credit agreement among the Parent, the bank parties thereto and
Citibank, N.A., for itself and as agent, as amended. Except as set forth above,
neither PhyCor nor New Straub shall have the right to assign their respective
rights and obligations hereunder without the written consent of the other
party. In the event of a permitted assignment by PhyCor, Parent shall not be
relieved of its guaranty obligations under this Agreement.
13.2. Whole Agreement; Modification. This Agreement
constitutes the entire agreement between the parties. There are no other
agreements or understandings, written or oral, between the parties regarding
this Agreement, the Exhibits and the Schedules, other than as set forth herein.
This Agreement shall not be modified or amended except by a written document
executed by both parties to this Agreement, and such written modification(s)
shall be attached hereto.
13.3. Notices. All notices required or permitted by this
Agreement shall be in writing and shall be addressed as follows:
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To PhyCor: PhyCor of Hawaii, Inc.
30 Burton Hills Blvd., Suite 400
Nashville, Tennessee 37215
Attn: President
To New Straub: Straub Clinic & Hospital, Inc.
888 South King Street
Honolulu, Hawaii 96813
Attn: President
or to such other address as either party shall notify the other.
13.4. Binding on Successors. Subject to Section 13.1,
this Agreement shall be binding upon the parties hereto, and their successors,
assigns, heirs and beneficiaries.
13.5. Waiver of Provisions. Any waiver of any terms and
conditions hereof must be in writing, and signed by the parties hereto. The
waiver of any of the terms and conditions of this Agreement shall not be
construed as a waiver of any other terms and conditions hereof.
13.6. Governing Law. The validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the laws of the State of Hawaii. The parties acknowledge that PhyCor is
not authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of PhyCor in this Agreement should be construed or deemed, by any
governmental authority, agency or court to constitute the practice of medicine,
the performance of said act or service by PhyCor shall be deemed waived and
forever unenforceable and the provisions of Section 13.12 shall be applicable.
13.7. Severability. The provisions of this Agreement
shall be deemed severable and if any portion shall be held invalid, illegal or
unenforceable for any reason, the remainder of this Agreement shall be
effective and binding upon the parties.
13.8. Additional Documents. Each of the parties hereto
agrees to execute any document or documents that may be requested from time to
time by the other party to implement or complete such party's obligations
pursuant to this Agreement.
13.9. Attorneys' Fees. If legal action is commenced by
either party to enforce or defend its rights under this Agreement, the
prevailing party in such action shall be entitled to recover
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its costs and reasonable attorneys' fees in addition to any other relief
granted.
13.10. Time is of the Essence. Time is hereby expressly
declared to be of the essence in this Agreement.
13.11. Confidentiality. Except for disclosure to its
bankers, underwriters or lenders, or as necessary or desirable for conduct of
business, including negotiations with other acquisition candidates, neither
party hereto shall disseminate or release to any third party any information
regarding any provision of this Agreement, or any financial information
regarding the other (past, present or future) that was obtained by the other in
the course of the negotiation of this Agreement or in the course of the
performance of this Agreement, without the other party's written approval;
provided, however, the foregoing shall not apply to information which (i) is
generally available to the public other than as a result of a breach of
confidentiality provisions; (ii) becomes available on a non-confidential basis
from a source other than the other party or its affiliates or agents, which
source was not itself bound by a confidentiality agreement, or (iii) which is
required to be disclosed by law, including securities laws or pursuant to court
order.
13.12. Contract Modifications for Prospective Legal
Events and Cost Reductions. In the event any state or federal laws or
regulations, now existing or enacted or promulgated after the effective date of
this Agreement, are interpreted by judicial decision, a regulatory agency or
legal counsel in such a manner as to indicate that the structure of this
Agreement may be in violation of such laws or regulations, New Straub and
PhyCor shall amend this Agreement as necessary. To the maximum extent possible,
any such amendment shall preserve the underlying economic and financial
arrangements between New Straub and PhyCor. In addition, the parties agree that
in the event an opportunity is presented to reduce the tax costs of either
party, the parties will present such matter to the Policy Board, and the
parties will cooperate with each other to reduce such costs to the other party,
including considering and negotiating in good faith amendments to this
Agreement.
13.13. Remedies Cumulative. No remedy set forth in this
Agreement or otherwise conferred upon or reserved to any party shall be
considered exclusive of any other remedy available to any party, but the same
shall be distinct, separate and cumulative and may be exercised from time to
time as often as occasion may arise or as may be deemed expedient.
13.14. Language Construction. The language in all parts
of this Agreement shall be construed, in all cases, according to its fair
meaning, and not for or against either party hereto.
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The parties acknowledge that each party and its counsel have reviewed and
revised this Agreement and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
13.15. No Obligation to Third Parties. None of the
obligations and duties of PhyCor or New Straub under this Agreement shall in
any way or in any manner be deemed to create any obligation of PhyCor or of New
Straub to, or any rights in, any person or entity not a party to this
Agreement.
13.16. Communications. New Straub and PhyCor agree that
good communication between the parties is essential to the successful
performance of this Agreement, and each pledges to communicate fully and
clearly with the other on matters relating to the successful operation of the
Clinic and the Hospital.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
STRAUB CLINIC & HOSPITAL, INC.:
-----------------------------------
By:
--------------------------------
Title:
-----------------------------
PhyCor:
PHYCOR OF HAWAII, INC.
By:
--------------------------------
Title:
-----------------------------
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LIST OF EXHIBITS
NUMBER DESCRIPTION
2.1.15 Examples of Physician Extender Employees
2.1.19 Examples of Technical Employees
3.1(a) Description of Facilities
3.1(b) Amounts Included in Clinic/Hospital Expenses
4.1 Policy Board Bylaws
5.8.3(a) Form of Loan Agreement and Promissory Notes
5.8.3(b) Security Agreement
LIST OF SCHEDULES
NUMBER DESCRIPTION
2.1.7 Accounts
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SCHEDULE 2.1.7
The following accounts from the Old Straub general ledger trial balance:
Account 1038000 Certificate of Deposit
Accounts 1310000 through 1460000 Drugs and Inventories
<PAGE> 222
ANNEX F
STATE OF HAWAII
DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
In the Matter of the )
Incorporation )
) CHAPTER 415A
of ) HAWAII PROFESSIONAL CORPORATION
) ACT
Straub Clinic & Hospital, )
Inc. )
)
A Professional Corporation. )
)
ARTICLES OF INCORPORATION
TORKILDSON, KATZ, FONSECA ROGER W. FONSECA
JAFFE, MOORE & HETHERINGTON Amfac Building, 15th Floor
Attorneys at Law, A Law Corporation 700 Bishop Street
Honolulu, Hawaii 96813
OF COUNSEL Attorney for Incorporation
<PAGE> 223
STATE OF HAWAII
DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
In the Matter of the )
Incorporation )
)
of )
)
Straub Clinic & Hospital, )
Inc. )
)
A Professional Corporation. )
)
ARTICLES OF INCORPORATION
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned, desiring to become incorporated as a professional
corporation under the Hawaii Professional Corporation Act and to obtain the
benefits conferred on professional corporations under the laws of the State of
Hawaii, hereby enter into the following Articles of Incorporation, the terms of
which shall be equally obligatory upon the parties hereto as well as upon all
other persons who from time to time may be stockholders in the corporation.
ARTICLE I
The name of the corporation shall be: Straub Clinic & Hospital, Inc.
ARTICLE II
The place of the principal office of the corporation shall be in
Honolulu, Island of Oahu, State of Hawaii. Upon its incorporation, the mailing
address of the principal office of the corporation shall be: 888 South King
Street, Honolulu, Hawaii 96813.
The corporation may maintain such other office or offices within and
without the State of Hawaii as its business may from time to time require.
<PAGE> 224
ARTICLE III
1. The Corporation shall be a professional corporation organized
under Chapter 415A of the Hawaii Revised Statutes for the purpose of engaging
in the practice of medicine and psychology and in the provision of services
ancillary thereto. The corporation may not engage in any other profession or
business activity except as may be permitted from time to time by the licensing
laws and rules applicable to the corporation's principal professions. The
foregoing restriction shall not, however, preclude the corporation from
investing and reinvesting its assets in stocks, bonds, options, margin
accounts, real estate mortgages, securities and other property of every kind,
so long as such investment does not involve the corporation in substantial
business activity prohibited by the preceding sentences of this Section.
2. The corporation shall have all powers, rights, privileges and
immunities conferred by law on corporations of this nature necessary or proper
to carry on its purpose as described above.
3. The corporation may carry on its purpose directly in its
corporate capacity through a partnership or joint venture, or in any other
capacity permitted by law.
ARTICLE IV
1. The following individuals shall be the initial officers and
directors of the corporation:
<TABLE>
<CAPTION>
Name Position(s) Residence Address
- ---- ----------- -----------------
<S> <C> <C>
Robert Schulz President 2051 Makiki Street
Treasurer Honolulu, HI 96822
Director
Jay L. Grekin Vice President 2636 Aaliamanu Place
Director Honolulu, HI 96813
Robert C. Flair Secretary 1362 Kukana Place
Director Kailua, HI 96734
William H. Montgomery Director 533 Ahakea Street
Honolulu, HI 96816
John T. Berthiaume Director 98-1005 Alania Street
Aiea, HI 96701
Steven Y. Orimoto Director 95-1027 Kuahewa Street
Mililani, HI 96789
</TABLE>
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<PAGE> 225
<TABLE>
<S> <C> <C>
George McPheeters Director 4959-2 Maunalani Circle
Honolulu, HI 96816
Gerald W. Mayfield Director 3690-2 Waokanaka Street
Honolulu, HI 96817
Cedric K. Akau Director 1332-B Alewa Drive
Honolulu, HI 96817
William T. Tsushima Director 4309 Koae Place
Honolulu, HI 96816
</TABLE>
2. The initial Board of Directors shall consist of 10, which number
may be increased or decreased as provided in the By-laws; provided, however,
that (i) the Board of Directors shall be one or more in number if the
corporation has only one stockholder; (ii) if the corporation has two
stockholders, the corporation shall have two or more directors; (iii) if the
corporation has three or more stockholders, the corporation shall have three or
more directors; and (iv) throughout the duration of the Corporation's
existence, at least one director shall be a resident of the State of Hawaii.
3. Directors and officers shall be elected or appointed in the
manner provided by the By-Laws and shall have the powers given to them in the
By-Laws. Any person may hold two or more offices in the corporation unless
forbidden to do so by the By-Laws or law.
4. The officers of the corporation shall be a President, a
Vice-President, a Treasurer, and a Secretary along with such other officers who
shall be appointed by the Board of Directors as shall be provided for in the
By-Laws.
5. The Board of Directors shall, except as limited in the By-Laws,
have all power necessary or proper to carry out all of the business of the
corporation, and the Directors may delegate such powers as they see fit, so
long as such delegation is not prohibited by law, these Articles of
Incorporation, or in the By-Laws of the corporation.
6. All directors of the corporation and all officers of the
corporation shall be Qualified Persons (as defined in Section 415A-2 of the
Hawaii Revised Statutes) licensed to practice medicine or psychology in the
State of Hawaii and current employees of the corporation.
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ARTICLE V
1. The corporation shall have authority to issue an aggregate of
15,000,000 shares of common stock of a par value of $1.00 each and 15,000,000
shares of preferred stock of a par value of $1.00 each, for an aggregate par
value of $30,000,000. The preferred stock shall have the rights, privileges and
preferences set forth in Exhibit A attached hereto.
2. The shares of this corporation may be owned only by individuals
authorized by law in the State of Hawaii or in any other state or territory of
the United States or the District of Columbia to render a professional service
permitted under Article III above; provided, however, that this provision does
not prohibit the transfer of shares by operation of law or court decree or to a
revocable living or inter vivos trust described in Section 415A-9 of the Hawaii
Revised Statutes. The corporation may purchase its own shares as and to the
extent permitted by law.
ARTICLE VI
1. No stockholder shall be liable for the debts of the
corporation beyond the amount which may be due or unpaid upon any share or
shares of stock of said corporation owned by him.
2. Stockholders shall not have pre-emptive rights.
ARTICLE VII
The corporation shall have perpetual duration.
I certify that I have read the above statements and that the same are
true and correct to the best of my knowledge.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation on this ____ day of _____________, 1996.
___________________________
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EXHIBIT A
TERMS OF PREFERRED SHARES
The preferred shares shall be referred to as Series A Preferred
Shares. The rights, preferences, restrictions and other matters relating to the
Series A Preferred Shares are as follows:
1. Dividend Provision. The holders of Series A Preferred Shares
shall receive in each year annual dividends at the rate of two percent (2%) of
the aggregate par value of the shares of Series A Preferred Shares owned by
such holder, prior and in preference to any declaration or payment of dividends
on any other classes or series of stock of the corporation. The dividends shall
be cumulative, so that if in or for any year dividends in the amount of two
percent (2%) of the aggregate par value of the Series A Preferred Shares are
not paid to the holders of Series A Preferred Shares, such amount shall be a
charge upon the future earning or profits of the corporation and be payable
subsequently, and no dividends shall, at any time, be declared or paid on any
other classes or series of stock of the corporation until the full amount per
share accumulated and unpaid up to that time on all of the Series A Preferred
Shares shall have been paid.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the corporation, either voluntary or involuntary, the holders of Series A
Preferred Shares shall receive in full, out of funds legally available for
distribution to shareholders, a dollar amount in cash equal to the aggregate
par value of the shares of Series A Preferred Shares owned by such holders,
plus all accumulated and unpaid dividends thereon, accrued through the date of
the distribution thereof, prior to the return by the corporation of the stated
capital and unpaid dividends on any other stock of the corporation.
(b) After the distributions described in section 2(a) above have
been paid, the remaining assets of the corporation available for distribution
to shareholders shall be distributed among the holders of the other classes and
series of stock, pro rata.
(c) A consolidation or merger of the corporation with or into any
other corporation or corporations, or a sale, conveyance or disposition of all
or substantially all of the assets of the corporation or the effectuation by
the corporation of a transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the corporation is
disposed of, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this Section 2, but shall instead be treated pursuant to
Section 4 hereof.
<PAGE> 228
3. Mandatory Sale and Redemption of Shares.
(a) Events Triggering Sale and Redemption. Upon the occurrence
of any one or more of the following events relating to a holder of Series A
Preferred Shares, such holder (or his/her personal representative, in the event
of the death of the holder) shall be required to sell, and the corporation
shall be required to purchase, all of holder's shares of Series A Preferred
Shares in the corporation, upon the terms and conditions hereinafter set forth:
(i) The holder dies;
(ii) The holder becomes insolvent, makes an assignment
for the benefit of creditors, is declared bankrupt, or has his/her assets
administered in any type of creditors' proceedings;
(iii) The holder's employment with the corporation is
terminated; or
(iv) The holder becomes a "disqualified person" as
defined in Hawaii Revised Statutes Section 415A-2.
(b) Purchase Price of Shares. The price at which the shares of
Series A Preferred Shares shall be purchased by the corporation upon the
occurrence of any event described in Section 3(a) shall be equal to the par
value of the shares of Series A Preferred Shares owned by the holder, plus all
accumulated but unpaid dividends with respect to those shares, accrued through
the date of purchase.
(c) Payment of Purchase Price. In the event of any sale by a
holder and redemption by the corporation of shares of Series A Preferred
Shares, the purchase price for the shares, together with simple interest
thereon accrued at a rate of two percent (2%) per annum, shall be paid in one
hundred-twenty (120) equal monthly installments, with the first payment due on
the first day of the second full month following the month in which the event
described in Section 3(a) above has occurred. The corporation shall execute and
deliver to the shareholder one or more negotiable promissory notes to evidence
such indebtedness.
4. Merger, Consolidation.
(a) At any time, in the event of:
(i) Any consolidation or merger of the corporation with
or into any other corporation or other entity or person, or any other corporate
reorganization in which the corporation shall not be the continuing or
surviving entity of such consolidation, merger or reorganization, or any
transaction or series of related
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transactions by the corporation in which more than fifty percent (50%) of the
corporation's voting power is transferred, or
(ii) a sale of all or substantially all of the assets of the
corporation,
then, at the closing of such transaction, the holders of Series A Preferred
Shares shall first receive in exchange for their shares, cash or debt or equity
securities, or any combination thereof, consistent with the provisions of
Section 4(b) below, having an aggregate value equal to the par value of the
Series A Preferred Shares owned by the holders, together with all accumulated
but unpaid dividends with respect to such shares, and the remaining
consideration to be distributed in connection with such transaction shall be
distributed to the holders of other classes and series of stock, pro rata. Such
payments, exchanges or distributions shall be made with respect to the Series A
Preferred Shares (A) by redemption of such Series A Preferred Shares pursuant
to Section 3 hereof, or (B) by purchase of such Series A Preferred Shares by
the surviving corporation, entity or person or by the corporation, or (C) by
exchange of such Series A Preferred Shares for cash or debt or equity
securities in the surviving corporation or entity, or any combination thereof.
In the event the amount of cash, securities or other property to be received by
the holders of the Series A Preferred Shares shall be insufficient to permit
the payment of the aforesaid preferential amounts, then the entire amount
payable or otherwise transferable in respect of the proposed transaction shall
be distributed among the holders of the Series A Preferred Shares in proportion
to the amount of shares owned by each such holder.
(b) Any securities to be delivered to the holders of the Series A
Preferred Shares pursuant to Section 4(a) above, shall have the terms specified
in this Section 4(b) and shall be valued as follows:
(i) Debt securities shall be valued at face value. All
such debt securities shall be in negotiable form, shall bear minimum interest
at the rate of two percent (2%) per annum and shall have a maturity date no
longer than ten (10) years from the issue date thereof.
(ii) As to equity securities that are registered under the
Securities Act of 1933, as amended (the "Securities Act"), or that are of the
same class or series as equity securities that are registered under the
Security Act, but are issued pursuant to an exemption from registration:
(A) If traded on a securities exchange, the
average of the closing prices of the securities on such exchange over the
30-day period ending three (3) days prior to the closing;
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(B) If quoted on the National Association of
Securities Dealers Automated Quotation System, the average of the closing bid
prices over the 30-day period ending three (3) days prior to the closing; and
(C) If traded over-the-counter, the average of
the closing bid prices over the 30-day period ending three (3) days prior to
the closing.
(iii) If the equity securities are not registered under the
Securities Act, then the equity securities shall have the same rights,
preferences and privileges as the Series A Preferred Shares, and shall be
valued at their par value.
5. No Voting Rights. The holders of Series A Preferred Shares
shall have no voting rights except as required by Hawaii law.
6. Change of Dividend Rate. The Board of Directors shall have the
right, power and authority to increase, but not to decrease, the amount of
dividend payable with respect to the Series A Preferred Shares. No other right,
preference or other matter relating to the Series A Preferred Shares may be
changed, amended, or altered except by consent of the holder of the issued and
outstanding Series A Preferred Shares which are to be affected by such change.
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ANNEX G
BY-LAWS
STRAUB CLINIC & HOSPITAL, INC.
Section 1. BOARD OF DIRECTORS' MEETINGS.
Meetings of the Board of Directors shall be held at such dates and times
as shall be set by the Board of Directors.
Section 2. NUMBER OF DIRECTORS.
The authorized number of corporate directors shall be 8; provided,
however, that the initial Board of Directors serving between the date of
incorporation and the second annual meeting in 1997 shall consist of 10
directors.
Section 3. SHARES: ISSUE AND TRANSFER.
A. ISSUANCE OF ADDITIONAL SHARES. The authority to issue additional
shares of stock of the corporation shall be vested in the Board of Directors.
Stock of the corporation may only be issued or transferred to current employees
of the corporation who are "qualified persons" with respect to the corporation
under Section 415A-2 of the Hawaii Revised Statutes (or any successor provision
of law), or to trusts established by such employees in accordance with Section
415A-9(c) of the Hawaii Revised Statutes (or any successor provision of law).
Such stock may be either common or preferred, and shall have such privileges
and conditions as the Board shall establish in conformity with the
corporation's Articles, these By-Laws and applicable law. The stockholders of
the corporation shall be issued an equal number of shares of commons stock.
B. RESTRICTIONS ON TRANSFER. All shares of stock of the corporation
shall be issued pursuant to the redemption provisions set out in section 10 of
these By-Laws.
Section 4. STOCKHOLDERS' MEETING.
A. REGULAR STOCKHOLDERS' MEETING. Regular meetings of the
stockholders shall be held at such dates and times as shall be set by the Board
of Directors. The Board shall designate one such meeting in each calendar year
to be the annual meeting, at which directors are elected; provided, however,
that two (2) such annual meetings shall be held in 1997: One within ninety (90)
days of the day on which the corporation commences to do business and one by
December 31, 1997.
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B. PLACE OF MEETINGS. Unless the Board of Directors specifies a
different place, meetings of the stockholders will be held at the principal
business office of the corporation.
C. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes whatsoever, may be called at any time by the President,
or by the Board of Directors, or by any two or more members thereof or by one
or more stockholders holding not less than one-fifth (1/5) of the voting power
of the corporation.
D. NOTICE OF MEETINGS. Notices of regular meetings or properly-called
special meetings, shall be given in writing to stockholders entitled to vote by
the Secretary or an Assistant Secretary, or if there be no such officer, or in
case of his neglect or refusal, by any director or stockholder.
Such notices shall be mailed to the stockholder's address appearing on
the books of the corporation not less than five (5) days before such meeting or
such stockholder may be informed in person at any time before such meeting.
Notice of any meeting of stockholders shall specify the place, the day
and the hour of meeting, and in case of special meeting, the general nature of
the business to be transacted. If the meeting has been designated as the annual
meeting of the stockholders, the notice shall so state.
When a meeting is adjourned for thirty (30) days or more, notice of
the adjourned meeting shall be given as in case of an original meeting. Save,
as aforesaid, it shall not be necessary to give any notice of the adjournment
or of the business to be transacted at an adjourned meeting other than by
announcement at the meeting at which such adjournment is taken.
E. CONSENT TO STOCKHOLDERS' MEETINGS. The transactions of any
meeting of stockholders, however called and noticed, shall be valid as though
had at a meeting duly held after regular call and notice if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
of the stockholders entitled to vote, not present in person or by proxy, signs
a written waiver of notice, or a consent to the holding of such meeting, or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Any action which may be taken at a meeting of the stockholders, may be
taken without a meeting if authorized by a writing signed by all of the holders
of shares who would be entitled to vote at a meeting for such purpose, and
filed with the Secretary of the corporation.
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F. QUORUM. The holders of a majority of the shares entitled to
vote threat, present in person, or represented by proxy, shall be requisite and
shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by law, by the Articles of
Incorporation, or by these By-Laws. If, however, such majority shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person, or by proxy, shall have power to
adjourn the meeting from time to time, until the requisite amount of voting
shares shall be present. At such adjourned meeting at which the requisite
amount of voting shares shall be represented, any business may be transacted
which might have been transacted at the meeting as originally notified.
G. VOTING RIGHTS; CUMULATIVE VOTING. Only persons in whose names
shares entitled to vote stand on the stock records of the corporation on the
day of any meeting of stockholders, unless some other day be fixed by the Board
of Directors for the determination of stockholders of record, then on such
other day, shall be entitled to vote at such meeting.
Every stockholder entitled to vote shall be entitled to one vote for
each of said shares and shall have the right to cumulate his votes as provided
in Hawaii Revised Statutes Section 415-33.
H. PROXIES. Every stockholder entitled to vote, or to execute
consents, may do so, either in person or by written proxy, provided that the
holder of such proxy must also be a stockholder of the corporation.
Section 5. DIRECTORS; MANAGEMENT.
A. POWERS. Subject to the limitation of the Articles of
Incorporation, of the By-Laws and of the laws of the State of Hawaii as to
action to be authorized or approved by the stockholders, all corporate powers
shall be exercised by or under authority of, and the business and affairs of
this corporation shall be controlled by, a Board of Directors.
B. NUMBER AND QUALIFICATIONS. The initial directors shall be
those ten (10) persons named in the Articles of Incorporation, all of whom are
employees and stockholders of the corporation. From and after the second annual
stockholders' meeting in 1997, all directors shall be employees and
stockholders of the corporation who devote more than half ( 1/2) of their
working time to the practice of medicine or psychology on behalf of the
corporation; and there shall be only eight (8) directors, four (4) of whom
shall be general internal medicine, family practice, general practice,
pediatrician, OB-GYN, emergency room, occupational medicine or hospital service
physicians (hereinafter
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called "Group A physicians") and the other four (4) of whom shall be physicians
practicing primarily in other fields (hereinafter called "Group B physicians").
C. NOMINATION. Prior to each annual meeting, the Board of Directors
shall poll all stockholders for nominations to fill the Board positions
expiring at that meeting. Group A physicians may only be nominated by other
Group A physicians (or by themselves); Group B physicians may only be nominated
by other Group B physicians (or by themselves). Each Group may (by meeting,
mail or electronic communication) reduce the number of nominees from such Group
to be presented at the annual meeting (but not below twice the number of
positions to be filled by physicians in that Group). Additional nominations
will not be taken from the floor for positions to be filled by a particular
Group unless the stockholders in that Group decide otherwise by the vote of a
majority of the stockholders in that Group present and voting at the annual
meeting.
D. ELECTION AND TENURE. Each stockholder shall be entitled to
vote on the election of every director, regardless of whether the stockholder
is a Group A or Group B physician; but the stockholders may only vote for
candidates duly nominated under the process described in Section 5C above, and
a Group A director position may only be filled by a Group A physician and a
Group B director position may only be filled by a Group B physician.
Of the ten (10) initial directors, the terms of William H. Montgomery,
Jay L. Grekin, Steven Y. Orimoto and Cedric K. Akau shall expire at the first
annual meeting in 1997. Their four (4) Board positions shall be filled by two
(2) Group A physicians and two (2) Group B physicians. The Group A and the
Group B physician receiving the most votes at the annual meeting shall each
serve a four (4) year term, until the 2001 annual meeting. The Group A and the
Group B physician receiving the next most votes shall each serve a three (3)
year term, until the 2000 annual meeting.
The terms of the remaining six (6) initial directors shall expire at
the second annual meeting in 1997. Two (2) of their Board positions shall not
be filled (so that the Board is reduced from ten (10) to eight (8) directors as
described in Section 5B above), and the other four (4) Board positions shall be
filled by two (2) Group A physicians and two (2) Group B physicians. The
Group A and the Group B physician receiving the most votes at the second annual
meeting in 1997 shall each serve a two (2) year term, until the 1999 annual
meeting; the Group A and the Group B physician receiving the next most votes
shall each serve a one (1) year term, until the 1998 annual meeting. At each
annual meeting after 1997, the stockholders shall fill all director positions
whose terms expire at that meeting by electing
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qualified candidates (Group A physicians to fill Group A positions and Group B
physicians to fill Group B positions) nominated in accordance with Section 5C
above to serve staggered four (4) year terms.
E. VACANCIES. A vacancy on the Board of Directors shall be deemed
to exist in case of the death, resignation, disqualification or removal of a
director. During 1997, a vacancy may be filled by the Board. Thereafter, the
stockholders shall fill any vacancy that arises, using the procedures described
in Sections 5C and D above. Each director so elected shall serve out the
unexpired term of the director whose vacancy he or she has filled.
If the Board of Director accepts the resignation of a director tendered
to take effect at a future time, the Board or the stockholders shall have
power to elect a successor to take office when the resignation shall become
effective, as described above.
No reduction of the number of directors shall have the effect of
removing any director prior to the expiration of his or her term of office.
F. REMOVAL OF DIRECTORS. After 1997, the entire Board of Directors
or any individual director may be removed from office by the stockholders at
any time with or without cause.
G. PLACE OF MEETINGS. Meetings of the Board of Directors shall be
held at the principal business office of the corporation or at such other place
as may be designated for that purpose, from time to time, by resolution of the
Board of Directors or written consent of all of the members of the Board. Any
meeting shall be valid, wherever held, if held by written consent of all of the
directors, given either before or after the meeting and filed with the
Secretary of the corporation.
H. ANNUAL MEETINGS. The annual meetings of the Board of Directors
shall be held immediately following the adjournment of the annual meetings of
the stockholders.
I. SPECIAL MEETINGS-NOTICES. Special meetings of the Board of
Directors for any purpose or purposes shall be called at any time by the
President, or if he or she is absent or unable or refuses to act, by the Vice
President or by any two directors.
Written notice of the time and place of special meetings shall be
delivered personally to the directors or sent to each director by letter or by
telegram, charges prepaid, addressed to him at his address as it is shown upon
the records of the corporation, or if it is not shown on such records or is not
readily ascertainable, at the place in which the meetings of the
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directors are regularly held. In case such notice is mailed or telegraphed, it
shall be deposited in the United States mail or delivered to the telegraph
company in the place in which the principal office of the corporation is
located at least forty-eight (48) hours prior to the time of the holding of the
meeting. In case such notice is delivered as above provided, it shall be so
delivered at least four (4) hours prior to the time of the holding of the
meeting. Such mailing, telegraphing or delivery as above provided shall be due,
legal and personal notice to such director.
J. WAIVER OF NOTICE. When all the directors are present at any
directors' meeting, however called or noticed, and sign a written consent
thereto on the records of such meeting, or, if a majority of the directors are
present, and if those not present sign in writing a waiver of notice of such
meeting, whether prior to or after the holding of such meeting which said
waiver shall be filed with the Secretary of the corporation, the transactions
thereof are as valid as if had at a meeting regularly called and noticed.
K. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given to absent directors if the time and
place be fixed at the meeting adjourned.
L. QUORUM. A majority of the directors (present either in person
or by means of a telephone conference or other similar communication equipment
at which all directors can hear each other simultaneously) shall be necessary
to constitute a quorum for the transaction of business, and the action of a
majority of the directors present at any meeting at which there is a quorum,
when duly assembled, is valid as a corporate act; provided that a minority of
the directors, in the absence of a quorum, may adjourn from time to time, but
may not transact any business. No ex officio Board member shall be considered
in determining whether or not a quorum is present at any meeting of the
directors.
M. DIRECTORS ACTING WITHOUT MEETING. Notwithstanding anything to
the contrary contained in these By-Laws, any action required to permitted to be
taken by the Board of Directors may be taken without a meeting, if all members
of the Board of Directors shall individually or collectively consent in writing
to such action. Such written consent or consents shall be filed with the
minutes of the proceedings of the Board. Such action by written consent shall
have the same force and effect as a unanimous vote of such directors.
N. CONFLICTS OF INTEREST. Whenever a director has personal interest
in a contract or other transaction to which the corporation is or will become
a party, whether because of an
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employment or investment relationship with an entity with which the corporation
is dealing or for any other reason, the director shall:
(1) disclose the existence of such interest and describe
the nature thereof (e.g., financial, family
relationship, professional or business affiliation,
etc.) to the other directors prior to the time any
action is taken by the Board of Directors with
respect to the transaction; and
(2) abstain from voting thereon.
Section 6. OFFICERS.
A. OFFICERS. The officers of the corporation shall be a President, a
Vice President, a Secretary and a Treasurer, and such assistant and subordinate
officers as the Board of Directors may elect from time to time. All officers
must be directors of the corporation.
B. ELECTION AND TERM OF OFFICE. The initial officers of the
corporation are set forth in the Articles of Incorporation and they shall serve
until the first annual Board meeting in 1997. The officers shall be elected by
a simple majority of the directors then in office at the first annual Board
meeting in 1997, to serve until the second annual meeting in 1997. The officers
shall be elected by a simple majority of the directors then in office at the
second annual Board meeting in 1997, to serve two (2) year terms until the
annual Board meeting in 1999. At that meeting and at the annual Board meeting
in each odd-numbered year thereafter, the Board by simple majority vote shall
elect officers to serve two (2) year terms.
C. COMPENSATION. The compensation of all of the officers of the
corporation shall be fixed by the Board of Directors.
D. REMOVAL AND RESIGNATION. Any officer may be removed, either
with or without cause, at any regular or special meeting of the Board, by a
simple majority of the directors then in office.
The Board of Directors may empower an officer to remove any assistant
or subordinate officers.
Any officer may resign at any time by giving written notice to the
Board of Directors or to the President or Secretary of the corporation. Any
such resignation shall take effect at the date of the receipt of such notice or
at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
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E. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or other cause may be filled at any time by the
directors or by the empowered officer, and each officer so appointed shall
serve out the unexpired term of the officer whose vacancy he or she
filled.
F. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision, direction and control of the
business and affairs of the corporation, and shall have such other powers and
duties as may be prescribed by the Board of Directors or the By-Laws.
G. VICE PRESIDENT. The Vice President shall at the discretion of
the Board of Directors, in the absence or disability of the President, perform
the duties and exercise the powers of the President, and shall perform such
other duties as the Board of Directors may prescribe.
H. SECRETARY. The Secretary shall keep, or cause to be kept, a
book of minutes, at the principal office or such other place as the Board of
Directors may order, of all meetings of directors and stockholders, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at directors'
meetings, the number of shares of stock present or represented at stockholders'
meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office
of the corporation or at the office of the corporation's transfer agent, a
stock register, or a duplicate stock register, showing the names of the
stockholders and their addresses; the number and classes of shares of stock
held by each; the number and date of certificates issued for the same; and the
number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required by the By-Laws or by
law to be given; he shall have such other powers and perform such other duties
as may be prescribed by the Board of Directors or by the By-Laws.
I. TREASURER. The Treasurer shall receive and keep all the funds
of the corporation, and pay them out only on the check of the corporation,
signed in the manner authorized by the Board of Directors.
J. ASSISTANTS. Any assistant secretary or assistant treasurer,
respectively, created by the Board of Directors may exercise any of the powers
of Secretary or Treasurer as directed by the Board of Directors, and shall
perform such other duties as the Board of Directors may direct.
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K. SUBORDINATE OFFICERS. The Board of Directors may from time to
time appoint such subordinate officers or agents as the business of the
corporation may require, fix their tenure of office and allows them suitable
compensation.
Section 7. COMMITTEES AND BOARDS.
A. COMMITTEES OF THE BOARD. The Board of Directors shall appoint
such committees as may be necessary from time to time, consisting of such
number of its members and (if the Board so decides) other stockholders of the
corporation and with such powers as it may designate, consistent with the
Articles of Incorporation and By-Laws and the laws of the State of Hawaii. The
duties normally associated with a Compensation Committee shall be performed by
the Board as a whole.
B. JOINT POLICY BOARD. The Board of Directors shall appoint two
(2) directors to serve at the pleasure of the Board as two (2) of its three (3)
representatives on the Joint Policy Board. The President of the corporation
shall be the third representative. The initial corporation representatives on
the Joint Policy Board shall be Robert Schulz, Jay L. Grekin and Gerald W.
Mayfield, and shall serve until their successors are appointed at the first
annual Board meeting in 1997. At such meeting, the Board of Directors shall
appoint two (2) of its members to serve on the Joint Policy Board until the
second annual Board meeting in 1997. At that meeting and at each annual meeting
in an odd-numbered year after 1997, the Board of Directors shall appoint two
(2) of its members to serve two (2) year terms on the Joint Policy Board. Such
members may be removed or replaced at the discretion of the Board of Directors.
The Board of Directors shall also fill any of those two (2) positions which
become vacant because of resignation, removal, death, disqualification or for
any other reason, and the person so appointed shall serve out the remaining
term on the Joint Policy Board. The third corporation representative on the
Joint Policy Board shall be the then-serving President of the corporation. Only
directors of the corporation shall be eligible to serve as any of the
corporation representatives on the Joint Policy Board.
Section 8. CORPORATE RECORDS AND REPORTS--INSPECTION.
A. RECORDS. The corporation shall maintain adequate and correct
accounts, books and records of its business and properties. All of such books,
records and accounts shall be kept at its principal place of business in the
State of Hawaii, as fixed by the Board of Directors from time to time.
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B. INSPECTION OF BOOKS AND RECORDS. The books and records of the
corporation shall be open at all reasonable times for inspection by the
stockholders.
The original or a copy of these By-Laws, as amended or otherwise
altered to date, certified by the Secretary, shall be open at all reasonable
times for inspection by the stockholders.
C. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
D. CONTRACTS, ETC. The Board of Directors, except as otherwise
provided in the By-Laws, may authorized any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances. Unless so authorized by the Board of Directors, no officer,
agent or employee shall have any power or authority to bind the corporation by
any contract or engagement, or to pledge its credit, or to render it liable for
any purpose or to any amount.
E. ANNUAL REPORTS. The Board of Directors shall cause annual
reports to be made to the Hawaii Department of Commerce and Consumer Affairs as
required by law.
Section 9. CERTIFICATES AND TRANSFER OF SHARES.
A. CERTIFICATES FOR SHARES. Certificates for shares shall be of
such form as the Board of Directors may designate and shall state the name of
the record holder of the shares represented thereby; its number; date of
issuance; the number of shares for which it is issued; the par value, if any,
or a statement that such shares are without par value; a statement of the
rights, privileges, preferences and restrictions, if any; a statement as to
redemption or conversion, if any; a statement of liens or restrictions upon
transfer or voting, if any; if the shares be assessable, or, if assessments are
collectible by personal action; a plain statement of such facts.
Every certificate for shares must be signed by the President or the
Vice President and the Secretary or an assistant secretary.
B. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession,
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assignment or authority to transfer, it shall be the duty of the corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
C. LOST OR DESTROYED CERTIFICATES. Any person claiming a certificate
or stock to be lost or destroyed shall make an affidavit or affirmation of that
same fact and advertise the same in such manner as the Board of Directors may
require, and shall if the directors so require give the corporation a bond of
indemnity, in form and with one or more sureties satisfactory to the Board, in
at least double the market value of the stock represented by said certificate,
whereupon a new certificate may be issued of the same tenor and for the same
number of shares as the one alleged to be lost or destroyed.
D. CLOSING STOCK TRANSFER BOOKS. The Board of Directors may close
the transfer books in their discretion for a period not exceeding thirty days
preceding any meeting, annual or special, of the stockholders, or the day
appointed for the payment of a dividend.
Section 10. STOCK REDEMPTION.
A. PURCHASE OF SHARES. Upon the occurrence of any one or more of
the following events relating to a stockholder:
(1) Death of a stockholder;
(2) Whenever a stockholder shall become a "disqualified
person," as defined in Hawaii Revised Statutes Section 415A-2;
(3) Whenever a stockholder becomes insolvent, makes an
assignment for the benefit of creditors, is declared bankrupt, or his or her
assets are administered in any type of creditors' proceedings;
(4) Termination of a stockholder's employment with the
corporation;
any such stockholder (or his personal representative in the case of the death
of a stockholder) shall be required to sell all his or her shares in the
corporation to the corporation, and shall immediately assign and deliver such
shares to the corporation, and the corporation shall be required to purchase
such shares, upon the terms and conditions hereinafter set forth in this
Section.
B. PURCHASE PRICE. The purchase price for each share of common
stock shall be the par value of that share. The purchase
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price of each share of preferred stock shall be the price set forth in Exhibit
A to the corporation's Articles of Incorporation.
C. PAYMENT OF PURCHASE PRICE FOR SHARES. The purchase price for
common shares shall be paid by the corporation to the stockholder or the
executor or administrator of his estate at a monthly rate to be determined by
the Board of Directors; provided that the period of payment shall not be longer
than ten (10) years from the date of the purchase of such shares or, if the
purchase price is less than ten thousand dollars ($10,000.00), one (1) year
from the date of the purchase of such shares. An interest rate of 7% (or such
greater rate s the Board of Directors may determine) shall be payable on the
unpaid balance, for which a promissory note of the corporation shall be issued.
As a condition of such issuance or of payment, the Board of Directors may
require the execution and delivery to it of such documents as may be necessary
or desirable to protect the corporation. The purchase price for preferred
shares shall be paid as provided in Exhibit A to the Articles of Incorporation.
D. RESTRICTIONS ON TRANSFER OF SHARES. Except as provided in
paragraph E or F below, no stockholder shall sell, assign, pledge or otherwise
transfer or encumber in any manner or by any means whatever, any interest in
all or any part of his capital stock of the corporation without the prior
written consent of all the other stockholders, and any transfer or purported
transfer in violation of this restriction shall be null and void and of no
effect.
E. TRANSFERABILITY OF SHARES--RIGHT OF FIRST REFUSAL. A stockholder
may sell or dispose of all or any portion of the shares of the corporation's
capital stock owned or held by him, to any person qualified to be a stockholder
of this corporation under Hawaii law, and regulations authorized thereunder,
pursuant to a bona fide offer from such person provided that such stockholder
shall first give written notice to the corporation by registered mail stating
that the offer to the selling stockholder is bona fide, the number of shares
desired to be sold or disposed of, the name and address of the person or
persons offering to purchase such shares, the purchase price per share and the
proposed terms of sale. Upon receipt of such notice by the corporation, it
shall have the first right, privilege and option to purchase from the selling
stockholder all or any part of the stock so designated for sale or disposition,
payment therefor to be made at the purchase price and upon the terms set froth
in the offer to the selling stockholder or at the price and terms described in
paragraphs B and C of this Section, whichever shall produce the lower price,
such option to be exercised by notice in writing to the selling stockholder
within thirty (30) days after the corporation's receipt of such notice from
said selling stockholder.
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If the corporation does not purchase al of such shares under the option
given and granted it in this paragraph E, the selling stockholder may sell or
dispose of the same, or so much thereof as shall not have been so purchased, to
the person or persons named in the aforementioned notice; provided, however,
that he or she shall not sell or dispose of such stock (1) at a lower price or
on more favorable terms to the purchaser or transferee than the price and upon
the terms set forth in such bona fide offer to purchase, or (2) in a greater
quantity than that offered to the corporation. If the selling stockholder does
not, within sixty (60) days after termination of the last of the options
hereinabove given and granted to the corporation, sell or dispose of the share
of stock so designated for sale or disposition, then such proceedings for sale
or attempted sale shall thereupon terminate and the foregoing right of the
selling stockholder to sell or dispose of such shares of stock to others shall
likewise terminate; thereafter, such offering party, or order to sell or
dispose of all or any portion of his or her shares, shall again give the same
notice and the corporation shall again have the same right, privilege and
option, all as hereinabove specified in this paragraph E.
F. EXCEPTION FOR DISPOSITION TO CERTAIN TRUSTS. Notwithstanding
any other provisions of this Section 11, any stockholder shall be permitted to
transfer all or part of his shares to a revocable living or inter vivos trust
described in Section 415-A9 of the Hawaii Revised Statutes. If a trust becomes
a stockholder hereunder, any event described in paragraph A above with respect
to the grantor of such trust shall trigger the purchase and sale of the trust's
shares as provided therein.
G. RESTRICTIONS APPLY. Any persons acquiring shares of this
corporation pursuant to the terms of paragraph E or F above shall acquire such
shares subject to all the terms, conditions and restrictions contained in this
Section.
H. WAIVER OF RIGHTS. Money damages awarded to the corporation or
the stockholders as the result of the violation of this Section would be
inadequate and insufficient under the circumstances; therefore, the
stockholders waive the defense, in a suit in equity for Specific Performance,
that legal remedies or damages would be sufficient.
I. TERM. This Section shall terminate upon the occurrence of any
of the following events:
(1) Cessation of the corporation's business;
(2) Bankruptcy, receivership or dissolution of the
corporation;
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(3) The effective date of the dissolution or liquidation
of the corporation or upon a merger, consolidation, acquisition of property or
stock, separation or reorganization of the corporation with one or more
corporations as a result of which corporation is not the surviving corporation,
or of a sale of substantially all of the property or stock of the corporation
to another corporation;
(4) The mutual written consent of all of the stockholders
of the corporation.
J. ENDORSEMENT ON STOCK CERTIFICATES. The certificates of stock
subject hereto shall, in addition to any other endorsement on said
certificates, be endorsed with a legend setting forth the fact that the
certificate is transferable only upon compliance with the provisions of this
Section, a copy of which is on file in the office of the Secretary of the
corporation. All shares of stock hereinafter issued to the stockholders shall
be subject to the terms of this Section and all certificates representing such
shares shall be endorsed with the legend referred to in this paragraph.
Section 11. AMENDMENTS TO BY-LAWS.
New By-Laws may be adopted or these By-Laws may be repealed or amended
by the stockholders at their annual meeting or at any other meeting of the
stockholders called for that purpose, by a vote of stockholders entitled to
exercise at least 75% of the voting power of the corporation.
-14-
<PAGE> 245
ANNEX H
PLAN OF CORPORATE SEPARATION AND REORGANIZATION
THE PLAN OF CORPORATE SEPARATION AND REORGANIZATION (the "Plan") set
forth below was duly adopted by the Board of Directors of STRAUB CLINIC &
HOSPITAL, INCORPORATED, a Hawaii professional corporation ("Old Straub"), at a
meeting held on the _____ day of _____________, 1996, for shareholder approval
at a special shareholders' meeting.
R E C I T A L S
WHEREAS, as of October 1, 1966, PhyCor, Inc., a Tennessee corporation
("PhyCor"), and Old Straub entered into a certain Agreement of Merger (the
"Merger Agreement"), wherein PhyCor agreed to acquire certain businesses of Old
Straub, including Old Straub's managed care businesses, by merging Old Straub
into PhyCor in a tax-free statutory merger under the provisions of Code Section
368(a)(1)(A) (the "Merger");
WHEREAS, under Hawaii laws governing the corporate practice of
medicine, only Hawaii professional corporations and Hawaii nonprofit
corporations may operate medical clinics and hospitals in the State of Hawaii;
WHEREAS, in order to satisfy the conditions of the Merger, Old Straub
is required to incorporate a new Hawaii business corporation ("New Straub"),
which will ultimately be named "Straub Clinic & Hospital, Inc.", and to
separate its clinic and hospital businesses from its administration and managed
care businesses (the "Spin-Off Transaction");
WHEREAS, it is in the best interests of Old Straub and its shareholders
to accomplish the Spin-Off Transaction in a tax-free distribution and exchange
under the provisions of Code Sections 368(a)(1)(D) and 355 (the
"Distribution"), with New Straub amending its Articles of Incorporation
immediately after the Distribution in order to convert itself into a Hawaii
professional corporation;
WHEREAS, prior to the Distribution, Old Straub will be the holder of
all of the issued and outstanding shares of Common Stock, $1.00 par value per
share, of New Straub (the "New Straub Common Stock"), and all of the issued and
outstanding shares of Series A Preferred Stock, $1.00 par value per share, of
New Straub (the "New Straub Preferred Stock"); and
WHEREAS, the Merger Agreement requires that all of the shares of New
Straub Common Stock be distributed to the holders of the Common Stock, $1.00
par value per share, of Old Straub (the "Old Straub Common Stock"), and that
concurrently therewith all of the shares of New Straub Preferred Stock be
exchanged with
<PAGE> 246
the holders of the Series C Preferred Stock, $1.00 par value per share, of Old
Straub (the "Old Straub Preferred Stock");
NOW, THEREFORE, Old Straub hereby adopts this Plan of Corporate
Separation and Reorganization:
ARTICLE ONE
DEFINITIONS
1.1 General. As used in this Plan, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
1.1.1 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.1.2 "DCCA" shall mean the Department of Commerce and Consumer
Affairs of the State of Hawaii.
1.1.3 "Distribution" shall have the meaning described in the recitals
to this Agreement.
1.1.4 "Distribution Agent" shall mean Title Guaranty Escrow Services,
Inc.
1.1.5 "Distribution Agent Agreement" shall mean the Agreement between
Old Straub and the Distribution Agent, the form of which is attached hereto as
Annex 1.
1.1.6 "Distribution Date" shall mean the date, prior to the Merger, as
determined by the Old Straub Board or a committee thereof on which the
Distribution takes place by delivery of the shares of New Straub Common Stock
and New Straub Preferred Stock to the holders of Old Straub Common Stock and
Old Straub Preferred Stock by the Distribution Agent.
1.1.7 "HRS" means the Hawaii Revised Statutes, as amended.
1.1.8 "Leases" means those leases set forth on Schedule 2.2.
1.1.9 "Merger" shall have the meaning described in the recitals to
this Agreement.
1.1.10 "Merger Agreement" shall have the meaning described in the
recitals to this Agreement.
1.1.11 "New Straub Common Stock" shall have the meaning described in
the recitals to this Agreement.
<PAGE> 247
1.1.12 "New Straub Preferred Stock" shall have the meaning described
in the recitals to this Agreement.
1.1.13 "New Straub Subsidiaries" means those corporations set forth on
Schedule 2.2.
1.1.14 "Old Straub Board" shall mean the Board of Directors of Old
Straub.
1.1.15 "Old Straub Common Stock" shall have the meaning described in
the recitals to this Agreement.
1.1.16 "Old Straub Preferred Stock" shall have the meaning described
in the recitals to this Agreement.
1.1.17 "Old Straub Subsidiaries" means those corporations set forth on
Schedule 2.2.
1.1.18 "Real Property" means those items of real property set forth on
Schedule 2.2.
1.1.19 "Record Date" shall mean the close of business on the date to
be determined by the Old Straub Board or a committee thereof as the record date
for the determination of shareholders of record of Old Straub entitled to
receive the Distribution.
1.1.20 "Subsidiaries" as used herein, shall mean with respect to any
entity, unless otherwise indicated, both direct and indirect subsidiaries of
such entity; provided that, with respect to Old Straub, such term shall not
include New Straub and the New Straub Subsidiaries.
ARTICLE TWO
TRANSFER OF CLINIC AND HOSPITAL BUSINESSES
2.1 Formation of New Straub. Prior to the Distribution Date, Old
Straub shall cause the Articles of Incorporation of New Straub attached hereto
as Annex 2 to be executed and filed with the DCCA, and cause New Straub to
adopt the By-Laws attached hereto as Annex 3.
2.2 Capital Contribution. In exchange for all of the New Straub
Common Stock and all of the New Straub Preferred Stock, Old Straub shall, prior
to the Distribution, transfer to New Straub the assets of its clinic and
hospital businesses designated to be transferred to New Straub on Schedule 2.2
(including the leases, the capital stock of the New Straub Subsidiaries, and
the Real Property set forth on Schedule 2.2),
- 3 -
<PAGE> 248
subject to the liabilities allocable to such clinic and hospital businesses and
designated to be assumed by New Straub on Schedule 2.2. Old Straub shall
retain the capital stock of the Old Straub Subsidiaries designated to be
retained by PhyCor on Schedule 2.2.
ARTICLE THREE
THE DISTRIBUTION
3.1 Conditions to Distribution. The Old Straub Board shall in its
discretion establish the Record Date and the Distribution Date and all
appropriate procedures in connection with the Distribution. The Distribution
shall be subject to satisfaction of each of the following conditions:
3.1.1 approval of the Distribution by the holders of at least 75% of
the outstanding shares of Old Straub Common Stock and approval of the Merger by
the holders of at least 75% of the outstanding shares of Old Straub Common
Stock and the outstanding shares of Old Straub Preferred Stock voting as a
single class;
3.1.2 old Straub receives an opinion of its special counsel Morrison &
Foerster LLP, in form and substance satisfactory to the Old Straub Board, that
the Spin-Off Transaction will generally be tax-free to the Old Straub
shareholders under Sections 355 and 368(a)(1)(D) of the Code. The opinion of
Morrison & Foerster LLP will be delivered for the benefit of the Board of
Directors of Old Straub and the Old Straub shareholders, and the opinion will
provide expressly that it may not be relied upon by PhyCor in its own right or
as successor to Old Straub in the Merger;
3.1.3 there not being in effect any statute, rule, regulation or order
of any court, governmental or regulatory body which prohibits or makes illegal
the Distribution or the Merger, or the transactions contemplated by the
Distribution or the Merger; and
3.1.4 if dissenters' rights to the Distribution and the Merger are
available under Hawaii law, shareholders dissenting from the Distribution and
the Merger and validly exercising their dissenters' rights shall collectively
own not more than 5% in the aggregate of the Old Straub Common Stock and
shareholders dissenting from the Distribution and the Merger and validly
exercising their dissenters' rights shall collectively own not more than 5% in
the aggregate of the Old Straub Preferred Stock; provided, that the Old Straub
Board may waive any condition to the Distribution other than those set forth in
Sections 3.1.2 and 3.1.3; provided further, that satisfaction of
- 4 -
<PAGE> 249
such conditions shall not create any obligation on the part of Old Straub or
any other party hereto to effect the Distribution.
3.2 The Distribution. On the Distribution Date or as soon thereafter
as practicable, subject to the conditions set forth in this Plan, Old Straub
shall deliver to the Distribution Agent a certificate or certificates
representing the number of then outstanding shares of New Straub Common Stock
and New Straub Preferred Stock to be distributed in the Distribution, endorsed
in blank, and shall instruct the Distribution Agent to:
3.2.1 distribute, on behalf of Old Straub, to each holder of record of
Old Straub Common Stock on the Record Date (except those holders of Old Straub
Common Stock who have properly asserted their rights of dissent in accordance
with HRS Sections 415-80 and 81, in the event that such rights are available) a
certificate or certificates representing one share of New Straub Common Stock
for each share of Old Straub Common Stock so held; and
3.2.2 on behalf of Old Straub, pursuant to the provisions of HRS
Section 415-6 and subject to the provisions HRS Section 415-45:
(a) collect from each holder of record of Old Straub Preferred Stock
on the Record Date (except those holders of Old Straub
Preferred Stock who have properly asserted their rights or dissent
in accordance with HRS Sections 415-80 and 81, in the event that
such rights are available) the certificate or certificates
representing his or her shares of Old Straub Preferred Stock (or a
Lost Stock Certificate Affidavit in the form of Annex 4 attached
hereto); and
(b) distribute to such holders a certificate or certificates
representing one share of New Straub Preferred Stock for each
share of Old Straub Preferred Stock so collected.
3.2.3 New Straub agrees to provide all certificates for shares of New
Straub Common Stock and New Straub Preferred Stock that the Distribution Agent
shall require in order to effect the Distribution.
ARTICLE FOUR
TRANSACTIONS RELATING TO THE DISTRIBUTION
4.1 Amendment of New Straub Articles. Prior to the Distribution, Old
Straub shall cause New Straub to adopt (a) the
- 5 -
<PAGE> 250
Amendment to the Articles of Incorporation of New Straub substantially in the
form of Annex 5 hereto, which shall convert New Straub into a Hawaii
professional corporation and which shall become effective upon its filing with
the DCCA subsequent to the Distribution and prior to the Merger, and (b) the
Amended and Restated Articles of Incorporation of New Straub substantially in
the form of Annex 6 hereto, which shall change the name of New Straub to
"Straub Clinic & Hospital, Inc." as authorized under the terms of the License
Agreement described in Section 4.3 hereof, which shall become effective upon
its filing with the DCCA subsequent to the Merger.
4.2 Amendment of New Straub By-Laws. Prior to the Distribution, Old
Straub shall cause New Straub to adopt the Amended and Restated By-Laws of New
Straub substantially in the form of Annex 7 hereto, which shall become
effective upon the filing of the Amendment to Articles of Incorporation of New
Straub attached as Annex 5 with the DCCA.
4.3 License Agreement. Prior to the Distribution, Old Straub and New
Straub shall enter into a License Agreement substantially in the form of Annex
8 hereto, which shall authorize New Straub to use as its corporate name "Straub
Clinic & Hospital, Inc." and which shall become effective immediately after the
Merger.
ARTICLE FIVE
MISCELLANEOUS
5.1 Termination. This Plan may be terminated and the Distribution
abandoned at any time prior to the Distribution Date by and in the sole
discretion of the Old Straub Board without the approval of New Straub or the
shareholders of Old Straub. In the event of such termination, no party shall
have any liability of any kind to any other party on account of such
termination.
- 6 -
<PAGE> 251
CERTIFICATE
The undersigned Secretary of STRAUB CLINIC & HOSPITAL, INCORPORATED, a
Hawaii professional corporation, hereby certifies that the attached PLAN OF
CORPORATE SEPARATION AND REORGANIZATION was duly adopted by the shareholders of
STRAUB CLINIC & HOSPITAL, INCORPORATED at a special meeting held on the ____
day of __________________, 1996.
DATED: Honolulu, Hawaii, _______________________________.
STRAUB CLINIC & HOSPITAL, INCORPORATED
By: ___________________________
Its Secretary
- 7 -
<PAGE> 252
TABLE OF ANNEXES
ANNEX 1 Form of Distribution Agent Agreement
ANNEX 2 Form of Articles of Incorporation
ANNEX 3 Form of By-Laws
ANNEX 4 Form of Lost Stock Certificate Affidavit
ANNEX 5 Form of Amendment to Articles of Incorporation
ANNEX 6 Form of Amended and Restated Articles of Incorporation
ANNEX 7 Form of Amended and Restated By-Laws
ANNEX 8 Form of License Agreement
<PAGE> 253
Schedule 2.2
Included as Schedule 4.04(a) to the Amended and Restated Agreement of Merger
<PAGE> 254
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Article 8 of the Registrant's Amended Bylaws provides as follows:
The Corporation may indemnify, and upon request may advance
expenses to, any person (or the estate of any person) who was or
is a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding,
whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by
reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred in the action, suit or
proceeding, despite the fact that such person has not met the
standard of conduct set forth in Section 48-18-502(a) of the
Tennessee Business Corporation Act (the "Act") or would be
disqualified for indemnification under Section 48-18-502(d) of
the Act, if a determination is made by the person or persons
enumerated in Section 48-18-502(b) of the Act that the director
or officer seeking indemnification is liable for (i) any breach
of the duty of loyalty to the Corporation or its shareholders,
(ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law or (iii)
voting for or assenting to a distribution in violation of the
Act.
Section 7 of the Registrant's Restated Charter provides as
follows:
The Corporation shall indemnify, and upon request shall advance
expenses to, in the manner and to the full extent permitted by
law, any person (or the estate of any person) who was or is a
party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil,
criminal, administrative, investigative or otherwise, by reason
of the fact that such person is or was a director, officer, or
employee of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (an "indemnitee"). The
indemnification provided herein shall not be deemed to limit the
right of the Corporation to indemnify any other person for any
such expenses to the full extent permitted by law, nor shall it
be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may have or
hereafter acquire under this Charter or the Bylaws of the
Corporation or under any agreement or vote of shareholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office; provided, however, that the Corporation
shall not indemnify any such indemnitee in connection with a
proceeding (or part thereof) if a judgment or other final
adjudication adverse to the indemnitee establishes his liability
(i) for any breach of the duty of loyalty to the Corporation or
its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of
law or (iii) under Section 48-18-304 of the Tennessee Business
Corporation Act.
(b) In addition to the foregoing provisions of the Amended Bylaws and
Restated Charter of the Registrant, directors, officers, employees and agents
of the Registrant may be indemnified by the Registrant, pursuant to the
provisions of Section 48-18-501 et seq. of the Tennessee Code Annotated.
II-1
<PAGE> 255
(c) In addition, the Registrant maintains directors and officers
liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C> <C>
2 -- Amended and Restated Agreement of Merger, dated as of October 1, 1996, by and
between the Registrant and Straub (included as Annex D to the Prospectus and Proxy
Statement filed as part of this Registration Statement)
4 -- Shareholder Rights Agreement, dated February 18, 1994, between the Registrant and
First Union National Bank of North Carolina (a)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
8 -- Opinion of Morrison & Foerster, LLP as to tax matters
21 -- List of subsidiaries of the Registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Coopers & Lybrand, LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
(included in Exhibit 5)
23.4 -- Consent of Morrison & Foerster LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
</TABLE>
_______________
(a) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K dated February 18, 1994, Commission No.
0-19786.
(b) Financial Statement Schedules
All financial statement schedules are incorporated herein by
reference to the Annual Report on Form 10-K for the year ended
December 31, 1995.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement.
II-2
<PAGE> 256
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(5) That every prospectus: (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and include dint eh Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in
II-3
<PAGE> 257
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 258
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nashville,
State of Tennessee, on October 31, 1996.
PHYCOR, INC.
By: /s/ Joseph C. Hutts
----------------------------------
Joseph C. Hutts
Chairman of the Board, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Joseph C. Hutts and John K. Crawford his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as each might or could do in
person hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph C. Hutts Chairman of the Board, October 31, 1996
--------------------------------- President, Chief Executive
Joseph C. Hutts Officer (Principal Executive
Officer) and Director
/s/ John K. Crawford Vice President, Treasurer and October 31, 1996
--------------------------------- Chief Financial Officer
John K. Crawford (Principal Financial and
Accounting Officer)
/s/ Ronald B. Ashworth Director October 31, 1996
---------------------------------
Ronald B. Ashworth
/s/ Sam A. Brooks, Jr. Director October 31, 1996
---------------------------------
Sam A. Brooks, Jr.
</TABLE>
II-5
<PAGE> 259
<TABLE>
<S> <C> <C>
/s/ Thompson S. Dent Executive Vice President, October 31, 1996
--------------------------------- Corporate Services and
Thompson S. Dent Director
/s/ Winfield Dunn Director October 31, 1996
---------------------------------
Winfield Dunn
/s/ C. Sage Givens Director October 31, 1996
---------------------------------
C. Sage Givens
/s/ Joseph A. Hill, M.D. Director October 31, 1996
---------------------------------
Joseph A. Hill, M.D.
/s/ James A. Moncrief, M.D. Director October 31, 1996
---------------------------------
James A. Moncrief, M.D.
--------------------------------- Executive Vice President,
Derril W. Reeves Development and Director
/s/ Richard D. Wright Executive Vice President, October 31, 1996
--------------------------------- Operations and Director
Richard D. Wright
</TABLE>
II-6
<PAGE> 260
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
- ------ ----------------------- ------
<S> <C> <C> <C>
2 -- Amended and Restated Agreement of Merger, dated as of October 1, 1996, by and
between the Registrant and Straub (included as Annex D to the Prospectus and Proxy
Statement filed as part of this Registration Statement)
4 -- Shareholder Rights Agreement, dated February 18, 1994, between the Registrant and
First Union National Bank of North Carolina (a)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
8 -- Opinion of Morrison & Foerster, LLP as to tax matters
21 -- List of subsidiaries of the Registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Coopers & Lybrand, LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
(included in Exhibit 5)
23.4 -- Consent of Morrison & Foerster LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
</TABLE>
- --------------------
(a) Incorporated by reference to exhibits filed with the Registrant's Current
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
II-7
<PAGE> 1
EXHIBIT 5
November 1, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PhyCor, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel to PhyCor, Inc., a Tennessee corporation (the
"Company"), in connection with the registration under the Securities Act of
1933 (the "Act") of an aggregate of 300,000 shares of the Company's Common
Stock, no par value per share (the "Shares"), pursuant to a Registration
Statement on Form S-4 (the "Registration Statement"). We have examined and
relied upon such records, documents and other instruments as in our judgment
are necessary and appropriate in order to express the opinion hereinafter set
forth, and have assumed the genuineness of all signatures, the authenticity of
all documents submitted to us as originals, and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the Shares, when
issued and delivered in the manner and on the terms described in the
Registration Statement (after the Registration Statement is declared
effective), will be duly authorized, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to us under the
caption "Legal Matters" in the prospectus included in the Registration
Statement.
Very truly yours,
Waller Lansden Dortch and Davis
A Professional Limited Liability Company
<PAGE> 1
EXHIBIT 8
November 1, 1996
Straub Clinic & Hospital, Incorporated
888 South King Street
Honolulu, HI 96813
Re: Prospectus and Proxy Statement of PhyCor, Inc. and Straub Clinic &
Hospital, Incorporated.
Ladies and Gentlemen:
We have acted as special counsel to Straub Clinic & Hospital,
Incorporated ("Straub") in connection with the Registration Statement on Form
S-4 (the "Registration Statement") of PhyCor, Inc. ("PhyCor") which includes
the Prospectus and Proxy Statement of Straub and PhyCor. Unless otherwise
indicated, any defined terms used herein shall have the meaning ascribed to
them in the Prospectus and Proxy Statement. We hereby confirm that, assuming
the due receipt of customary representations as described under the caption
"Merger - Certain Federal Income Tax Consequences" in the Prospectus and Proxy
Statement, the discussion under the caption "Merger - Certain Federal Income
Tax Consequences" in the Prospectus and Proxy Statement expresses our opinion
as to the material federal income tax consequences to Straub and the Straub
Shareholders with respect to the Spin-Off Transaction and the Merger, if the
Spin-Off Transaction is effected in accordance with the terms of the Plan of
Corporate Separation and Reorganization and the Merger is effected in
accordance with the terms of the Agreement of Merger.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Merger -
Certain Federal Income Tax Consequences" in the Prospectus and Proxy Statement.
In providing this consent, we do not thereby admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 21
PHYCOR, INC.
SUBSIDIARIES/AFFILIATES
As of September 30, 1996
All entities are Tennessee corporations except as noted.
ALPHABETICAL LISTING
<TABLE>
<CAPTION>
NAME OF ENTITY STATE OF QUALIFICATION
- -------------- ----------------------
<S> <C>
IPA Executive Company, Inc. Tennessee
NAMM/Texas Investments, Inc. Texas
North American Medical Management, Inc. Tennessee
PhyCor, Inc. Tennessee
PhyCor - Lafayette, LLC Indiana
PhyCor/Lexington Real Estate, LLC Kentucky
PhyCor Management Corporation Tennessee
PhyCor of Birmingham, Inc. Alabama
PhyCor of Boulder, Inc. Colorado
PhyCor of Charlotte, Inc. North Carolina
PhyCor of Chickasha, Inc. Oklahoma
PhyCor of Cleburne, Inc. Texas
PhyCor of Columbia, Inc. South Carolina
PhyCor of Conroe, Inc. Texas
PhyCor of Corsicana, Inc. Texas
PhyCor of Dallas, Inc. Texas
PhyCor of Denver, Inc. Colorado
PhyCor of Dixon, Inc. Illinois
PhyCor of Eugene, Inc. Oregon
PhyCor of Fort Collins, Inc. Colorado
PhyCor of Fort Smith, Inc. Arkansas, Oklahoma
PhyCor of Freeport, Inc. Tennessee
PhyCor of Greeley, Inc. Colorado
PhyCor of Harlingen, Inc. Texas
PhyCor of Hattiesburg, Inc. Mississippi
PhyCor of Hawaii, Inc. Hawaii
PhyCor of Irving, Inc. Texas
PhyCor of Jacksonville, Inc. Florida
PhyCor of Kentucky, LLC Kentucky
PhyCor of Kingsport, Inc. Virginia
PhyCor of Laconia, Inc. New Hampshire
PhyCor of Lafayette, Inc. Indiana (withdrew qualification)
PhyCor of LaGrange, Inc. Georgia
PhyCor of Madisonville, Inc. Kentucky (not qualified yet)
PhyCor of Mesa, Inc. Arizona
PhyCor of Minot, Inc. North Dakota
PhyCor of Nashville, Inc. Tennessee
</TABLE>
1
<PAGE> 2
PHYCOR, INC.
SUBSIDIARIES/AFFILIATES
As of September 30, 1996
All entities are Tennessee corporations except as noted.
ALPHABETICAL LISTING
<TABLE>
<CAPTION>
NAME OF ENTITY STATE OF QUALIFICATION
- -------------- ----------------------
<S> <C>
PhyCor of Newnan, Inc. Georgia
PhyCor of Northeast Arkansas, Inc. Arkansas
PhyCor of Northern Michigan, Inc. Michigan
PhyCor of Ogden, Inc. Utah
PhyCor of Olean, Inc. New York
PhyCor of Phoenix, Inc. Arizona
PhyCor of Pueblo, Inc. Colorado
PhyCor of Richmond, Inc. Virginia
PhyCor of Roanoke, Inc. Virginia
PhyCor of Rome, Inc. Georgia
PhyCor of Ruston, Inc. (LA) Louisiana only
PhyCor of San Antonio, Inc. Texas
PhyCor of Sayre, Inc. Pennsylvania, New York
PhyCor of South Bend, LLC Indiana
PhyCor of Tidewater, Inc. Virginia
PhyCor of Toledo, Inc. Ohio, Michigan
PhyCor of Vero Beach, Inc. (FL) Florida only
PhyCor of West Houston, Inc. Texas
PhyCor of Wharton, Inc. Texas
PhyCor of Wichita Falls, Inc. Texas
PhyCor of Wilmington, Inc. North Carolina
PhyCor of Winter Haven, Inc. Florida
PhyCor-Texas Gulf Coast, Inc. Texas
PMC of Arizona, Inc. Arizona
PMC of Colorado, Inc. Colorado
PMC of Maryland, Inc. Maryland
PMC of Michigan, Inc. Michigan
The Member Corporation, Inc. Tennessee
</TABLE>
2
<PAGE> 3
PHYCOR, INC.
SUBSIDIARIES/AFFILIATES
As of September 30, 1996
All entities are Tennessee corporations except as noted.
BY STATE OF QUALIFICATION
<TABLE>
<CAPTION>
NAME OF ENTITY STATE OF QUALIFICATION
- -------------- ----------------------
<S> <C>
PhyCor of Birmingham, Inc. Alabama
PhyCor of Fort Smith, Inc. Arkansas, Oklahoma
PhyCor of Northeast Arkansas, Inc. Arkansas
PhyCor of Mesa, Inc. Arizona
PhyCor of Phoenix, Inc. Arizona
PMC of Arizona, Inc. Arizona
PhyCor of Boulder, Inc. Colorado
PhyCor of Denver, Inc. Colorado
PhyCor of Fort Collins, Inc. Colorado
PhyCor of Greeley, Inc. Colorado
PhyCor of Pueblo, Inc. Colorado
PMC of Colorado, Inc. Colorado
PhyCor of Jacksonville, Inc. Florida
PhyCor of Vero Beach, Inc. (FL) Florida only
PhyCor of Winter Haven, Inc. Florida
PhyCor of LaGrange, Inc. Georgia
PhyCor of Newnan, Inc. Georgia
PhyCor of Rome, Inc. Georgia
PhyCor of Hawaii, Inc. Hawaii
PhyCor of Dixon, Inc. Illinois
PhyCor of Lafayette, Inc. Indiana (withdrew qualification)
PhyCor - Lafayette, LLC Indiana
PhyCor of South Bend, LLC Indiana
PhyCor/Lexington Real Estate, LLC Kentucky
PhyCor of Kentucky, LLC Kentucky
PhyCor of Madisonville, Inc. Kentucky (not qualified yet)
PhyCor of Ruston, Inc. (LA) Louisiana only
PMC of Maryland, Inc. Maryland
PhyCor of Northern Michigan, Inc. Michigan
PhyCor of Toledo, Inc. Michigan, Ohio
PMC of Michigan, Inc. Michigan
PhyCor of Hattiesburg, Inc. Mississippi
PhyCor of Laconia, Inc. New Hampshire
PhyCor of Olean, Inc. New York
PhyCor of Charlotte, Inc. North Carolina
PhyCor of Wilmington, Inc. North Carolina
PhyCor of Minot, Inc. North Dakota
PhyCor of Chickasha, Inc. Oklahoma
</TABLE>
3
<PAGE> 4
PHYCOR, INC.
SUBSIDIARIES/AFFILIATES
As of September 30, 1996
All entities are Tennessee corporations except as noted.
BY STATE OF QUALIFICATION
<TABLE>
<CAPTION>
NAME OF ENTITY STATE OF QUALIFICATION
- -------------- ----------------------
<S> <C>
PhyCor of Eugene, Inc. Oregon
PhyCor of Sayre, Inc. Pennsylvania, New York
PhyCor of Columbia, Inc. South Carolina
IPA Executive Company, Inc. Tennessee
North American Medical Management, Inc. Tennessee
PhyCor, Inc. Tennessee
PhyCor Management Corporation Tennessee
PhyCor of Freeport, Inc. Tennessee
PhyCor of Nashville, Inc. Tennessee
The Member Corporation Tennessee
NAMM/Texas Investments, Inc. Texas
PhyCor-Texas Gulf Coast, Inc. Texas
PhyCor of Cleburne, Inc. Texas
PhyCor of Conroe, Inc. Texas
PhyCor of Corsicana, Inc. Texas
PhyCor of Dallas, Inc. Texas
PhyCor of Harlingen, Inc. Texas
PhyCor of Irving, Inc. Texas
PhyCor of San Antonio, Inc. Texas
PhyCor of Wharton, Inc. Texas
PhyCor of West Houston, Inc. Texas
PhyCor of Wichita Falls, Inc. Texas
PhyCor of Ogden, Inc. Utah
PhyCor of Kingsport, Inc. Virginia
PhyCor of Richmond, Inc. Virginia
PhyCor of Roanoke, Inc. Virginia
PhyCor of Tidewater, Inc. Virginia
</TABLE>
4
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PhyCor, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-4 of PhyCor, Inc. of our reports dated February 13, 1996, with respect to the
consolidated balance sheets of PhyCor, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995, and all related schedules, which reports appear in the
December 31, 1995 annual report on Form 10-K of PhyCor, Inc., and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
November 1, 1996
<PAGE> 1
EXHIBIT NO. 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
PhyCor, Inc. of our report dated April 23, 1996, on our audits of the
consolidated financial statements of Straub Clinic & Hospital, Incorporated and
subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
October 31, 1996
