<PAGE> 1
As filed with the Securities and Exchange Commission on January 27, 1998
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)
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TENNESSEE 8099 62-1344801
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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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)
--------------------
COPIES TO:
J. CHASE COLE, ESQ. SCOTT L. GELBAND, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PERKINS COIE LLP
A PROFESSIONAL LIMITED LIABILITY COMPANY 1201 THIRD AVENUE
NASHVILLE CITY CENTER 40TH FLOOR
511 UNION STREET, SUITE 2100 SEATTLE, WASHINGTON 98101-3099
NASHVILLE, TENNESSEE 37219 (206) 583-8888
(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:
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
- ---------------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
- ---------------------------------------------
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Amount to be Proposed Maximum Offering Aggregate Offering Amount of
Securities to be Registered Registered Price Per Share(1) Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
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Shares of Common Stock,
no par value 2,549,000 Shares Not Applicable $5,262,852 $1,553
- -----------------------------------------------------------------------------------------------------------------------------------
</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. Based upon the book value of the securities to be
received by the Registrant in exchange for the Common Stock registered.
--------------------
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
CareWise, Inc.
Suite 2600
701 Fifth Avenue
Seattle, Washington 98104-7015
___________________, 1998
Dear CareWise Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Special Meeting") of CareWise, Inc. ("CareWise"), which will be held on
________________, 1998, at _______a.m., at 701 Fifth Avenue, Suite 2600,
Seattle, Washington 98104.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement") among CareWise, PhyCor, Inc. ("PhyCor") and a subsidiary of PhyCor,
and the merger of the PhyCor subsidiary with and into CareWise as provided for
in the Merger Agreement (the "Merger"). As a result of the Merger, each share of
common stock, $.001 par value per share (the "CareWise Common Stock"), and each
share of preferred stock, $.001 par value per share (the "CareWise Preferred
Stock"), of CareWise issued and outstanding immediately prior to the effective
time of the Merger (other than shares held by persons who perfect their
appraisal rights under Delaware law) shall be converted into the right to
receive that number of shares of common stock, no par value per share, of
PhyCor, calculated pursuant to an exchange ratio stated and more fully described
in the accompanying Prospectus--Proxy Statement and Merger Agreement.
Stockholders will receive cash in lieu of fractional shares.
The Merger, as well as the exchange ratio, is more completely described
in the accompanying Notice of Special Meeting of Stockholders and the
Prospectus--Proxy Statement, and a copy of the Merger Agreement is attached as
Annex A thereto.
You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Prospectus--Proxy Statement for details of the Merger and
additional related information, including risk factors associated with becoming
a shareholder of PhyCor as more fully described under the caption "Risk Factors"
contained in pages 16 to 21 of the Prospectus--Proxy Statement.
YOUR BOARD OF DIRECTORS HAS DETERMINED THE MERGER TO BE FAIR AND IN THE
BEST INTERESTS OF CAREWISE AND ITS STOCKHOLDERS, HAS UNANIMOUSLY APPROVED AND
DECLARED ADVISABLE THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS A VOTE FOR
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
<PAGE> 3
The affirmative vote of the holders of shares representing a majority
of the outstanding voting power of the CareWise Common Stock and two-thirds of
the outstanding voting power of the CareWise Preferred Stock is necessary to
approve the Merger Agreement and the Merger. Certain beneficial owners of shares
representing, as of the close of business on __________, 1998, an aggregate of
____% of the voting power of CareWise Common Stock and ____% of the voting power
of CareWise Preferred Stock have granted irrevocable proxies to certain officers
of PhyCor allowing such persons to vote such shares in favor of the Merger
Agreement and the Merger. Accordingly, approval thereof by the CareWise
stockholders is assured.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the enclosed proxy card and return it promptly in the enclosed
postage prepaid envelope. If you attend the Special Meeting, you may vote in
person if you wish, even though you previously have returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Please do not send your share certificates with your proxy card. After
approval of the Merger Agreement and the Merger by CareWise stockholders and
satisfaction of all other conditions to the Merger, you will receive a
transmittal form and instructions for the surrender and exchange of your shares.
Sincerely,
MICHAEL B. WEITZ
Secretary
YOUR VOTE IS IMPORTANT
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
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CAREWISE, INC.
SUITE 2600
701 FIFTH AVENUE
SEATTLE, WASHINGTON 98104-7015
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______________, 1998
TO THE STOCKHOLDERS OF CAREWISE, INC.:
A Special Meeting of the Stockholders (the "Special Meeting") of
CareWise, Inc., a Delaware corporation ("CareWise"), will be held on
___________,1998, at _______a.m., local time, at 701 Fifth Avenue, Suite 2600,
Seattle, Washington 98104, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of December 22, 1997 (the "Merger
Agreement"), among CareWise, PhyCor/Health Merger Corp. ("Subsidiary") and
PhyCor, Inc. ("PhyCor"), pursuant to which Subsidiary will be merged with and
into CareWise upon the terms and subject to the conditions contained in the
Merger Agreement (the "Merger"), with CareWise being the surviving corporation.
Pursuant to the Merger Agreement, CareWise will become a wholly owned subsidiary
of PhyCor, and each share of common stock, $.001 par value per share (the
"CareWise Common Stock"), and each share of preferred stock, $.001 par value per
share (the "CareWise Preferred Stock"), of CareWise issued and outstanding
immediately prior to the effective time of the Merger (other than shares held by
persons who perfect their appraisal rights under Delaware law) shall be
converted into the right to receive that number of shares of common stock, no
par value per share, of PhyCor, calculated pursuant to an exchange ratio stated
and more fully described in the accompanying Prospectus--Proxy Statement and
Merger Agreement. Stockholders will receive cash in lieu of fractional shares.
The Merger, as well as the exchange ratio, is more completely described
in the accompanying Notice of Special Meeting of Stockholders and the
Prospectus--Proxy Statement, and a copy of the Merger Agreement is attached as
Annex A thereto.
2. To transact such other matters relating to the conduct of the
Special Meeting or any adjournments or postponements thereof.
Only holders of record of shares of CareWise Common Stock and CareWise
Preferred Stock at the close of business on _________________, 1998, the record
date for the Special Meeting (the "Record Date"), are entitled to notice of, and
to vote at, the Special Meeting and any adjournments or postponements thereof.
<PAGE> 5
The affirmative vote of the holders of shares representing a majority
of the outstanding voting power of the CareWise Common Stock and two-thirds of
the outstanding voting power of the CareWise Preferred Stock is necessary to
approve the Merger Agreement and the Merger. Certain beneficial owners of shares
representing, as of the Record Date, an aggregate of ____% of the voting power
of CareWise Common Stock and ____% of the voting power of CareWise Preferred
Stock have granted irrevocable proxies to certain officers of PhyCor allowing
such persons to vote such shares in favor of the Merger Agreement and the
Merger. Accordingly, approval thereof by the CareWise stockholders is assured.
Holders of CareWise Common Stock and CareWise Preferred Stock are
entitled to appraisal rights as a result of the Merger. Holders who perfect
appraisal rights may obtain payment of the fair value of their shares in
accordance with Section 262 of the Delaware General Corporation Law, a copy of
which is included in the accompanying Prospectus - Proxy Statement as Annex D.
Management of CareWise anticipates that the Merger will be consummated in the
first calendar quarter of 1998, subject to receipt of regulatory approvals and
expiration of the waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. See "THE MERGER-Conditions to the Merger"
and "-Regulatory Approvals" in the accompanying Prospectus - Proxy Statement.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the enclosed proxy card and return it promptly in the enclosed
postage prepaid envelope. PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS
TIME. Your proxy may be revoked at any time before it is voted by signing and
returning a later dated proxy with respect to the same shares, by filing with
the Secretary of CareWise a written revocation bearing a later date, or by
attending and voting at the Special Meeting.
By Order of the Board of Directors,
MICHAEL B. WEITZ
Secretary
Seattle, Washington
____________, 1998
<PAGE> 6
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated January 27, 1998
PROSPECTUS AND PROXY STATEMENT
2,549,000 Shares
PHYCOR, INC.
Common Stock
This Prospectus-Proxy Statement (the "Prospectus-Proxy Statement") is
being furnished to the holders of common stock, $.001 par value per share
("CareWise Common Stock"), and preferred stock, $.001 par value per share
("CareWise Preferred Stock"), of CareWise, Inc., a Delaware corporation
("CareWise"), in connection with the solicitation of proxies by the Board of
Directors of CareWise, for use in connection with a special meeting of
stockholders of CareWise (the "Special Meeting"), which is to be held on
_____________________, 1998, or any adjournment(s) or postponement(s) thereof.
At such meeting, the stockholders of CareWise will consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger, dated as of
December 22, 1997, by and between PhyCor, Inc. ("PhyCor"), PhyCor/Health Merger
Corp. (the "Subsidiary") and CareWise (the "Merger Agreement"), pursuant to
which the Subsidiary would be merged with and into CareWise (the "Merger"), with
CareWise being the surviving corporation. As a result of the Merger, each share
of common stock, $.001 par value per share (the "CareWise Common Stock"), and
each share of preferred stock, $.001 par value per share (the "CareWise
Preferred Stock"), of CareWise issued and outstanding immediately prior to the
effective time of the Merger (the "Effective Time") (other than Appraisal
Shares, as defined below) shall be converted into the right to receive a number
of shares of common stock, no par value per share, of PhyCor ("PhyCor
Common Stock") equal to (i) 2,549,000 (the "PhyCor Base Shares") divided by (ii)
the sum of the shares of CareWise Common Stock, CareWise Preferred Stock and any
options, rights or warrants to acquire shares of CareWise Common Stock or
CareWise Preferred Stock, outstanding at the Effective Time (the "Exchange
Ratio"). Stockholders will receive cash in lieu of fractional shares.
The number of PhyCor Base Shares issuable as a result of the Merger
(and in certain cases noted below, the Exchange Ratio) are subject to adjustment
as follows:
(i) In the event that the average of the daily closing prices of
PhyCor Common Stock as traded on the Nasdaq National Market (or
such other exchange on which the shares of PhyCor Common Stock
shall then be listed) for the ten (10) trading days immediately
preceding the business day immediately preceding the Effective
Time (the "Average Price") shall be less than $24.00, then the
PhyCor Base Shares shall be the quotient of 61,176,000 divided by
the Average Price. This adjustment shall also affect the Exchange
Ratio.
(ii) In the event that the Average Price is more than $29.00, then
the number of PhyCor Base Shares shall be the quotient of
73,921,000 divided by the Average Price. This adjustment shall
also affect the Exchange Ratio.
(iii) In the event that any holders of shares of CareWise Common Stock
or CareWise Preferred Stock shall have perfected their rights for
appraisal of their shares under Section 262 of the Delaware
General Corporation Law (the "Appraisal Shares"), the PhyCor Base
Shares shall be reduced proportionally, without affecting the
Exchange Ratio.
(iv) If any options, rights or warrants to purchase, or securities
convertible or exchangeable into, shares of any class of capital
stock of CareWise shall remain outstanding at the Effective Time,
whether vested or unvested, the number of PhyCor Base Shares
shall be reduced (without affecting the Exchange Ratio) by the
nearest whole number of shares of PhyCor Common Stock issuable in
the aggregate upon the exercise, conversion or exchange of all
such outstanding securities.
The CareWise Common Stock and CareWise Preferred Stock collectively
shall be referred to as the CareWise Capital Stock.
The affirmative vote of the holders of shares representing a majority
of the outstanding voting power of the CareWise Common Stock and two-thirds of
the outstanding voting power of the CareWise Preferred Stock is necessary to
approve the Merger Agreement and the Merger. Certain beneficial owners of shares
representing, as of the close of business on ___________, 1998 (the "Record
Date"), an aggregate of ____% of the voting power of CareWise Common Stock and
____% of the voting power of CareWise Preferred Stock have granted irrevocable
proxies to certain officers of
<PAGE> 7
PhyCor allowing such persons to vote such shares in favor of the Merger
Agreement and the Merger. Accordingly, approval thereof by the CareWise
stockholders is assured. See "THE SPECIAL MEETING-Votes Required and THE
MERGER--Interests of Certain Persons in the Merger."
This Prospectus-Proxy Statement also constitutes a prospectus of PhyCor
for the issuance of up to 2,549,000 shares of PhyCor Common Stock to be issued
in connection with the Merger. Unless the context otherwise requires, all
references to shares of PhyCor Common Stock in this Prospectus-Proxy Statement
will include the associated preferred share purchase rights issued pursuant to
the Rights Agreement, dated as of February 18, 1994, between PhyCor and First
Union National Bank. PhyCor Common Stock is listed and traded on the Nasdaq
National Market under the symbol "PHYC." On ________________, 1998, the closing
sales price for PhyCor Common Stock as reported on the Nasdaq National Market
was $________ per share. The aggregate merger consideration based on such
closing price is approximately $___________.
This Prospectus-Proxy Statement and the form of Proxy are first being
mailed to stockholders of CareWise on or about ___________________, 1998.
SEE "RISK FACTORS" BEGINNING AT PAGE 16 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF SHARES OF CAREWISE CAPITAL
STOCK.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMIS-
SION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS-PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus-Proxy Statement is
_____________, 1998.
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION.............................................................................................4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................................................................4
SUMMARY...........................................................................................................6
SELECTED CONSOLIDATED FINANCIAL DATA-CAREWISE....................................................................15
RISK FACTORS.....................................................................................................16
Uncertainties in Integrating Business Operations and Achieving Benefits of the Merger.....................16
No Assurance of Continued Rapid Growth....................................................................16
Additional Financings.....................................................................................16
Competition...............................................................................................17
Dependence on Affiliated Physicians.......................................................................17
Ability of CareWise to Secure Additional Contracts and Expand and Retain Existing Contracts...............17
Risks Associated with Managed Care and Capitation; Reliance on Physician Networks.........................17
Risks of Changes in Payment for Medical Services..........................................................17
Additional Regulatory Risks...............................................................................18
Increased Government Scrutiny of Health Care Arrangements.................................................19
Risks Associated with Straub Clinic & Hospital, Incorporated Transaction..................................19
Tax Audit.................................................................................................20
Applicability of Insurance Regulations....................................................................20
Risks Inherent in Provision of Medical Services...........................................................20
Anti-takeover Considerations..............................................................................21
THE SPECIAL MEETING..............................................................................................22
General...................................................................................................22
Date, Place and Time......................................................................................22
Record Date; Quorum.......................................................................................22
Votes Required............................................................................................22
Proxies, Proxy Solicitation...............................................................................23
THE MERGER.......................................................................................................24
Terms of the Merger.......................................................................................24
Background of the Merger..................................................................................25
Reasons for the Merger; Recommendation of the Board of Directors..........................................28
Opinion of BT Alex. Brown Incorporated....................................................................30
Effective Time of the Merger..............................................................................35
Exchange of Certificates..................................................................................35
Representations and Warranties............................................................................36
Conditions to the Merger..................................................................................37
Regulatory Approvals......................................................................................37
Certain Covenants.........................................................................................38
Waiver and Amendment......................................................................................40
Termination...............................................................................................40
Interests of Certain Persons in the Merger................................................................40
Accounting Treatment......................................................................................42
Certain Federal Income Tax Consequences...................................................................42
Resale of PhyCor Common Stock by Affiliates...............................................................45
Expenses..................................................................................................45
Stock Option Plans and Stock Options......................................................................46
Nasdaq National Market Listing............................................................................46
APPRAISAL RIGHTS OF CAREWISE STOCKHOLDERS........................................................................47
General...................................................................................................47
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Actions Necessary to Preserve Appraisal Rights............................................................47
MARKET PRICE DATA................................................................................................49
DIVIDENDS........................................................................................................49
CAREWISE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................50
Overview..................................................................................................50
Results of Operations.....................................................................................51
Liquidity and Capital Resources...........................................................................53
Financial Accounting Standards No. 128....................................................................54
Impact of Year 2000 on Computer Systems...................................................................54
BUSINESS OF CAREWISE.............................................................................................55
General...................................................................................................55
Market for Demand Management..............................................................................55
CareWise Strategy.........................................................................................55
CareWise Products and Services............................................................................56
CareWise Customers........................................................................................57
Marketing and Sales.......................................................................................57
Operations................................................................................................58
Competition...............................................................................................58
Intellectual Property.....................................................................................58
Government Regulation.....................................................................................59
Employees.................................................................................................59
Legal Proceedings.........................................................................................59
Properties................................................................................................60
CAREWISE PRINCIPAL STOCKHOLDERS..................................................................................61
MANAGEMENT OF CAREWISE...........................................................................................64
Executive Officers of CareWise............................................................................64
CAREWISE EXECUTIVE COMPENSATION..................................................................................65
Compensation Summary......................................................................................65
Option Grants in Year Ended March 31, 1997................................................................66
Aggregate Option Values at March 31, 1997.................................................................67
Employment Contracts......................................................................................67
CERTAIN RELATED TRANSACTIONS.....................................................................................68
BUSINESS OF PHYCOR...............................................................................................69
COMPARISON OF RIGHTS OF CAREWISE AND PHYCOR SHAREHOLDERS.........................................................71
Classes and Series of Capital Stock.......................................................................71
Size and Election of the Board of Directors...............................................................71
Removal of Directors......................................................................................72
Conversion and Dissolution................................................................................72
Amendment or Repeal of the Certificate of Incorporation or Charter........................................72
Special Meetings of Shareholders..........................................................................73
Liability of Directors....................................................................................73
Indemnification of Directors and Officers.................................................................73
Change of Control.........................................................................................74
Shareholder Rights Agreement..............................................................................75
EXPERTS..........................................................................................................75
LEGAL MATTERS....................................................................................................75
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ADDITIONAL INFORMATION...........................................................................................76
INDEX TO FINANCIAL STATEMENTS OF CAREWISE, INC..................................................................F-1
Annex A - Agreement and Plan of Merger.................................................................A-1
Annex B - Opinion of BT Alex. Brown Incorporated.......................................................B-1
Annex C - Form of Proxy................................................................................C-1
Annex D - Text of Section 262 of the Delaware General Corporation Law..................................D-1
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iii
<PAGE> 11
AVAILABLE INFORMATION
PhyCor has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of PhyCor Common Stock to be issued in
connection with the Merger (including exhibits and amendments thereto, the
"Registration Statement"). As permitted by the rules and regulations of the
Commission, this Prospectus-Proxy Statement omits certain information contained
in the Registration Statement. For further information pertaining to the
securities offered hereby, reference is made to the Registration Statement.
PhyCor is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Copies of such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven World
Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Citicorp Center, Chicago, Illinois 60601. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The PhyCor Common
Stock is quoted on the Nasdaq National Market, and such reports, proxy
statements and other information with respect to PhyCor can be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. The
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
-------------------------
PhyCor was incorporated in Tennessee in January 1988. Unless the
context requires otherwise, references in this Prospectus-Proxy Statement to
"PhyCor" refer to PhyCor, Inc., and its subsidiaries. PhyCor's executive offices
are located at 30 Burton Hills, Suite 400, Nashville, Tennessee 37215, and its
telephone number is (615) 665-9066.
-------------------------
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus-Proxy Statement incorporates documents by reference
which are not presented herein or delivered herewith. Copies of such reports,
proxy statements and other information filed by PhyCor, other than exhibits to
such documents, unless such exhibits are specifically incorporated herein by
reference, are available without charge, upon written or oral request, from the
Secretary of PhyCor, Inc., 30 Burton Hills Boulevard, Suite 400, Nashville,
Tennessee 37215, telephone (615) 665-9066.
The following documents previously filed by PhyCor with the Commission
are incorporated by reference into this Prospectus-Proxy Statement:
1. PhyCor's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
2. PhyCor's Quarterly Reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1997.
3. PhyCor's Current Report on Form 8-K filed February 3, 1997,
as amended by PhyCor's Current Report on Form 8-K/A filed February 26,
1997.
4
<PAGE> 12
4. PhyCor's Current Report on Form 8-K filed October 31, 1997.
5. PhyCor's Current Report on Form 8-K filed January 8, 1998.
6. PhyCor's Current Report on Form 8-K filed January 16, 1998.
7. The description of PhyCor Common Stock and associated
preferred stock purchase rights contained in PhyCor's Registration
Statements on Form 8-A dated January 8, 1992 and March 8, 1994,
respectively.
All 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-Proxy Statement and
prior to termination of the offering of PhyCor Common Stock hereunder shall be
deemed to be incorporated by reference into this Prospectus-Proxy Statement and
to be made a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for the purpose hereof to the extent that a
statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) is modified or superseded by such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
All information contained in this Prospectus-Proxy Statement or
incorporated herein by reference with respect to PhyCor and the Subsidiary was
supplied by PhyCor, and all information contained in this Prospectus-Proxy
Statement with respect to CareWise was supplied by CareWise. Although neither
PhyCor nor CareWise has actual knowledge that would indicate that any statements
or information (including financial statements) relating to the other party
contained or, with respect to PhyCor, incorporated by reference herein are
inaccurate or incomplete, neither PhyCor nor CareWise warrants the accuracy or
completeness of such statements or information as they relate to the other
party.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS-PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. NEITHER THE DELIVERY OF THIS PROSPECTUS-PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS-PROXY STATEMENT RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION CONCERNING PHYCOR OR CAREWISE CONTAINED IN THIS
PROSPECTUS-PROXY STATEMENT SINCE THE DATE OF SUCH INFORMATION. THIS
PROSPECTUS-PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS-PROXY STATEMENT IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL.
5
<PAGE> 13
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus-Proxy Statement, including the Annexes hereto,
which are a part of this Prospectus-Proxy Statement. This Summary does not
purport to be complete and is qualified in its entirety by reference to the more
detailed information contained in this Prospectus-Proxy Statement, the Annexes
hereto and the documents incorporated by reference herein. Certain capitalized
terms used in this Summary are defined elsewhere in this Prospectus-Proxy
Statement.
THE COMPANIES
PhyCor. PhyCor is a physician practice management ("PPM") company that
acquires and operates multi-specialty medical clinics and develops and manages
independent practice associations ("IPAs"). As of December 31, 1997, PhyCor
managed 55 clinics which employ approximately 3,860 physicians in 28 states and
managed IPAs with over 19,000 physicians in 28 markets. Physicians employed by
clinics managed by PhyCor provide medical services to approximately 1,140,000
members under prepaid health plans, including approximately 177,000 Medicare
members. The clinics managed 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. Under substantially all of its service
agreements, the Company receives a service fee equal to the clinic expenses it
has paid plus percentages of operating income of the clinic (net clinic revenue
less certain contractually agreed upon clinic expenses before physician
distributions) plus, in some cases, percentages of net clinic revenue. As clinic
operating income improves, whether as a result of increased revenue or lower
expenses, PhyCor's service fees increase. 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. See "BUSINESS OF PHYCOR."
Since September 30, 1997, PhyCor has acquired four multi-specialty
clinics with an aggregate of approximately 263 physicians. In December 1997,
PhyCor announced an agreement to purchase Atlanta-based First Physician Care,
Inc., a private physician practice management company operating in seven markets
in Texas, Florida, Illinois, New York and Georgia. On January 12, 1998, PhyCor
announced that it anticipates recording in the first quarter of 1998, a pre-tax
charge to earnings of approximately $15 million relating to the termination of
its proposed merger with MedPartners, Inc. ("MedPartners"). PhyCor also
announced plans to restructure five of its multi-specialty clinic operations
with approximately 300 physicians and provide for the potential sale or closure
of two additional clinics with approximately 70 physicians. In connection with
these plans, PhyCor anticipates recording a pre-tax charge for asset revaluation
of approximately $83 million in the fourth quarter of 1997, of which
approximately $70 million represents intangible asset value. In addition, PhyCor
expects to incur approximately $22 million in the first quarter of 1998 in
pre-tax restructuring charges relating to anticipated costs which are to provide
for consolidating facilities and clinic operations and to reduce overhead costs.
Exclusive of these non-recurring costs, these restructuring plans are not
expected to adversely affect PhyCor's earnings targets for either 1997 or 1998.
The effect of these restructuring plans could vary from PhyCor's expectations
based upon continued developments, including the actual amount of expenditures
required in connection with PhyCor's restructuring plans and other factors,
risks and uncertainties applicable to PhyCor's business described herein. See
"RISK FACTORS."
6
<PAGE> 14
At September 30, 1997, PhyCor had consolidated assets of approximately
$1.5 billion and consolidated shareholders' equity of approximately $744.3
million, and employed, directly or indirectly through wholly-owned subsidiaries,
approximately 18,000 persons.
PhyCor was incorporated under the laws of Tennessee in 1988. Its
principal executives offices are located at 30 Burton Hills Boulevard, Suite
400, Nashville, Tennessee 37215, and its telephone number is (615) 665-9066.
CareWise. CareWise is a national provider of health care
decision-support services that are designed to lower the cost of medical care
while improving plan members' health and satisfaction with their health care
plan. CareWise's programs serve approximately two million individuals from its
Seattle call center and an additional 500,000 under foreign country license
agreements. CareWise's customers include managed care organizations, health care
providers, indemnity health insurers, employers and other group associations. In
addition to traditional demand management services, CareWise also offers a
disease management program for certain health conditions, diseases and chronic
illnesses. CareWise's demand and disease management programs are designed to (i)
reduce inappropriate care and unnecessary expenses; (ii) promote health and
prevention; (iii) improve program compliance with treatment regimens and support
self-care; (iv) enhance member satisfaction and (v) improve the overall quality
of care through member health education.
CareWise's products and services provide members with information and
health care decision making and behavior modification support, including (i)
timely symptom-specific assessment, (ii) information on major diagnoses or
procedures, (iii) physician referrals and (iv) disease- and condition-specific
counseling. All CareWise programs are provided via toll-free numbers by
specially trained nurses 24 hours a day, seven days a week.
At September 30, 1997, CareWise had assets of approximately $11.2
million and stockholders' equity of approximately $5.3 million, and employed
approximately 110 persons.
CareWise was incorporated under the laws of Delaware in 1988. Its
principal executive offices are located at 701 Fifth Avenue, Suite 2600,
Seattle, Washington 98104-7015, and its telephone number is (206) 749-1100.
PhyCor/Health Merger Corp. The Subsidiary was incorporated on December
19, 1997 for purposes of the transactions contemplated by the Merger Agreement.
The Subsidiary engages in no other business. The principal offices of the
Subsidiary are located at 30 Burton Hills Boulevard, Suite 400, Nashville,
Tennessee 37215, and its telephone number is (615) 665-9066.
RISK FACTORS
Certain risks and uncertainties relating to the Merger, PhyCor,
CareWise and the health care industry should be considered carefully by the
holders of CareWise Capital Stock in evaluating the Merger, including, but not
limited to, the businesses of PhyCor and CareWise, PhyCor's future business
prospects, PhyCor's dependence on its affiliated physicians, PhyCor's ability to
acquire additional clinics, the adequacy of PhyCor's capital resources, the
future profitability of PhyCor's capitated fee arrangements and increased
scrutiny of health care arrangements in general. See "RISK FACTORS."
THE SPECIAL MEETING
The Special Meeting to consider and vote on a proposal to approve and
adopt the Merger Agreement and the Merger will be held on ________________,
1998, at _____ a.m., local time, at 701 Fifth Avenue, Suite 2600, Seattle,
Washington. Only holders of record of shares of CareWise Capital Stock at the
close of business on the Record Date, will be entitled to notice of and to vote
at the Special Meeting. As of such date, there were outstanding and entitled to
vote ____ shares of CareWise Common Stock
7
<PAGE> 15
and ____ shares of CareWise Preferred Stock. Each issued and outstanding share
of CareWise Capital Stock is entitled to one vote on each matter to be presented
at the Special Meeting.
For additional information relating to the Special Meeting, see "THE
SPECIAL MEETING."
VOTES REQUIRED
The affirmative vote of the holders of shares representing a majority
of the outstanding voting power of the CareWise Common Stock and two-thirds of
the outstanding voting power of the CareWise Preferred Stock is necessary to
approve the Merger Agreement and the Merger. Certain beneficial owners of shares
representing, as of the Record Date, an aggregate of ____% of the voting power
of CareWise Common Stock and ____% of the voting power of CareWise Preferred
Stock have granted irrevocable proxies to certain officers of PhyCor allowing
such persons to vote such shares in favor of the Merger Agreement and the
Merger. Accordingly, approval thereof by the CareWise stockholders is assured.
In the event that the Merger Agreement is not approved and adopted by
the CareWise stockholders, the Merger Agreement may be terminated by either
PhyCor or CareWise in accordance with its terms. Such approval is also a
condition to PhyCor's and CareWise's obligations to consummate the Merger. See
"THE SPECIAL MEETING-Votes Required," "THE MERGER-Conditions to the Merger" and
"-Termination."
THE MERGER
Terms of the Merger. Pursuant to the Merger Agreement, at the Effective
Time, the Subsidiary will merge with and into CareWise, with CareWise being the
surviving corporation (the "Surviving Corporation"). The Certificate of
Incorporation of the Subsidiary (the "Subsidiary Certificate of Incorporation"),
as amended and existing at the Effective Time, and the Bylaws of the Subsidiary
in effect at the Effective Time, will govern the Surviving Corporation until
amended or repealed in accordance with applicable law. As a result of the
Merger, each share of CareWise Common Stock and each share of CareWise Preferred
Stock issued and outstanding immediately prior to the Effective Time (other than
Appraisal Shares shall be converted into the right to receive a number of shares
of PhyCor Common Stock equal to (i) the PhyCor Base Shares divided by (ii) the
sum of the shares of CareWise Common Stock, CareWise Preferred Stock and any
options, rights or warrants to acquire shares of CareWise Common Stock or
CareWise Preferred Stock, outstanding at the Effective Time.
The number of PhyCor Base Shares issuable as a result of the Merger
(and in certain cases noted below, the Exchange Ratio) are subject to adjustment
as follows:
(i) In the event that the Average Price shall be less than $24.00,
then the PhyCor Base Shares shall be the quotient of 61,176,000
divided by the Average Price. This adjustment shall also affect
the Exchange Ratio.
(ii) In the event that the Average Price is more than $29.00, then the
number of PhyCor Base Shares shall be the quotient of 73,921,000
divided by the Average Price. This adjustment shall also affect
the Exchange Ratio.
(iii) The PhyCor Base Shares shall be reduced proportionally, without
affecting the Exchange Ratio, for any Appraisal Shares.
(iv) If any options, rights or warrants to purchase, or securities
convertible or exchangeable into, shares of any class of capital
stock of CareWise shall remain outstanding at the Effective Time,
whether vested or unvested, the number of PhyCor Base Shares
shall be reduced (without affecting the Exchange Ratio) by the
nearest whole number of shares of PhyCor Common Stock issuable in
the aggregate upon the exercise, conversion or exchange of all
such outstanding securities.
Fractional shares of PhyCor Common Stock will not be issuable in
connection with the Merger. Holders of CareWise Capital Stock will receive cash
(without interest) in lieu of fractional shares of PhyCor Common Stock. See
"THE MERGER."
In addition, at the Effective Time, each option issued pursuant to the
CareWise Amended and Restated 1989 Stock Option Plan (the "CareWise Option
Plan") then outstanding, whether or not vested or exercisable, will, pursuant to
the CareWise Option Plan, be assumed by PhyCor and will constitute an option (a
"Replacement Option") to acquire, on the same terms and conditions as were
applicable under such assumed option, shares of PhyCor Common Stock equal to the
product of the Exchange Ratio and the number of
8
<PAGE> 16
shares of CareWise Common Stock subject to such option, at a price per share
equal to the aggregate exercise price (rounded up to the nearest $0.001) for the
shares of CareWise Common Stock subject to such option divided by the number of
full shares of PhyCor Common Stock deemed to be purchasable pursuant to such
Replacement Option. Notwithstanding the foregoing, any and all Replacement
Options shall be fully vested at the Effective Time in accordance with the
Carewise Option Plan. PhyCor has agreed to file within ten days following the
Effective Time a registration statement on Form S-8 to register, to the extent
necessary, the shares of PhyCor Common Stock issuable pursuant to the
Replacement Options under the Securities Act. See "THE MERGER-Certain
Covenants."
Based upon the number of shares of PhyCor Common Stock outstanding as
of the Record Date (excluding shares issuable upon exercise of options and
convertible securities) and assuming the issuance of an aggregate of 2,549,000
shares of PhyCor Common Stock as a result of the Merger, the holders of CareWise
Capital Stock will receive in the aggregate approximately _____% of the
outstanding shares of PhyCor Common Stock anticipated to be outstanding
immediately after the Effective Time.
Recommendation of the Board of Directors. The Board of Directors of
CareWise has approved the Merger Agreement and the Merger and recommends a vote
FOR approval and adoption of the Merger Agreement and the Merger by the
stockholders of CareWise. The Board of Directors of CareWise believes that the
terms of the Merger are in the best interests of CareWise and its stockholders.
Opinion of BT Alex. Brown Incorporated ("BT Alex. Brown"). BT Alex.
Brown has acted as financial advisor to CareWise in connection with the Merger
and has delivered to the Board of Directors of CareWise its written opinion
dated December 21, 1997 to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein, the Exchange Ratio was
fair, from a financial point of view, to the holders of CareWise Capital Stock.
The full text of the written opinion of BT Alex. Brown, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Annex B to this Prospectus-Proxy Statement and should be read
carefully in its entirety. BT Alex. Brown's opinion is directed only to the
fairness of the Exchange Ratio from a financial point of view, does not address
any other aspect of the Merger or related transactions and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Special Meeting. See "THE MERGER-Opinion of BT Alex. Brown."
Effective Time of the Merger. The Merger will become effective upon the
filing by the Subsidiary and CareWise of a Certificate of Merger under the DGCL,
or at such later time as may be specified in such Certificate of Merger. The
Merger Agreement requires that this filing be made as soon as practicable
following satisfaction or waiver of the various conditions to the Merger set
forth in the Merger Agreement, or at such other time as may be agreed by PhyCor,
the Subsidiary and CareWise. PhyCor, the Subsidiary and CareWise have agreed to
exercise good faith to cause all conditions precedent to the Merger to be
satisfied on or prior to April 15, 1998. See "THE MERGER-Effective Time of the
Merger" and "-Conditions to the Merger."
Exchange of Certificates. As soon as reasonably practicable after the
Effective Time, transmittal materials will be mailed to each holder of record of
CareWise Capital Stock for use in exchanging such holder's stock certificates
representing CareWise Common Stock and CareWise Preferred Stock for certificates
evidencing shares of PhyCor Common Stock and for receiving cash in lieu of
fractional shares and any dividends or other distributions to which such holder
is entitled as a result of the Merger. STOCKHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS. See "THE MERGER-Exchange of Certificates."
9
<PAGE> 17
Representations and Warranties. The Merger Agreement contains certain
representations and warranties made by each of the parties thereto. See "THE
MERGER-Representations and Warranties."
Conditions to the Merger. The obligations of PhyCor and CareWise to
consummate the Merger are subject to the satisfaction of certain conditions,
including, among others, (i) obtaining the requisite CareWise stockholder
approval, (ii) the expiration or termination of the waiting period applicable to
the consummation of the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (iii) the absence of any
material adverse change in the financial condition, business or results of
operations of the other party, other than as a result of changes generally
applicable to the industries in which both PhyCor and CareWise operate, (iv) the
absence of any injunction prohibiting consummation of the Merger, (v) the
receipt of a legal opinion with respect to certain tax consequences of the
Merger and (vi) qualification of the Merger as a pooling of interests. See
"THE MERGER-Certain Federal Income Tax Consequences," "-Accounting Treatment"
and "-Conditions to the Merger."
Regulatory Approvals. The HSR Act provides that certain business
mergers (including the Merger) may not be consummated until certain information
has been furnished to the Department of Justice (the "DOJ") and the Federal
Trade Commission (the "FTC") and certain waiting period requirements have been
satisfied. On January 20, 1998, PhyCor and CareWise made their respective
filings with the DOJ and the FTC with respect to the Merger Agreement. Under the
HSR Act, the filings commenced a 30-day waiting period during which the Merger
cannot be consummated, which waiting period will expire on February 19, 1998.
Notwithstanding the expiration of the HSR Act waiting period, at any time before
or after the Effective Time, the FTC, the DOJ or others could take action under
the antitrust laws, including requesting additional information, seeking to
enjoin the consummation of the Merger or seeking the divestiture by PhyCor of
all or any part of the stock or assets of CareWise. There can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or, if such
a challenge were made, that it would not be successful.
The operations of PhyCor and CareWise are subject to a substantial body
of federal, state, local and accrediting body laws, rules and regulations
relating to the conduct, licensing and development of health care businesses and
facilities. As a result of the Merger, certain of the arrangements between
CareWise and third-party payors may be deemed to have been transferred,
requiring the approval and consent of such payors. See "THE MERGER-Regulatory
Approvals."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Board of Directors of CareWise with respect to the Merger
Agreement, the Merger and the transactions contemplated thereby, stockholders
should be aware that certain members of the management of CareWise and the Board
of Directors of CareWise have interests in the Merger that are in addition to
the interests of stockholders of CareWise generally. Specifically, the executive
officers and directors own options as of the Record Date to purchase shares
of CareWise Common Stock that will become immediately exercisable for shares of
PhyCor Common Stock as a result of the Merger. In addition, John E. Gebhart III,
James O. Steeb, Michael B. Weitz and Craig S. Russell have entered into
employment agreements in connection with their employment following the Merger.
See "THE MERGER-Interests of Certain Persons in the Merger" and "-Certain
Covenants."
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time in a number of circumstances, which include, among others:
(a) by the mutual consent of CareWise and PhyCor; (b) by either CareWise or
PhyCor if (i) the adoption of the Merger Agreement and the approval of the
transactions contemplated thereby by the holders of CareWise Capital Stock shall
not have been obtained, (ii) the Merger shall have not been consummated by July
31, 1998, (iii) a court or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action permanently restraining, enjoining or otherwise prohibiting the Merger
and such order shall have become final and nonappealable or (iv) the other
10
<PAGE> 18
party has materially breached any representation, warranty, covenant or
agreement contained in the Merger Agreement or experienced a material adverse
change which cannot be, or has not been, cured within 30 days after written
notice of such breach; or (c) by either CareWise or PhyCor, if the conditions to
the obligations of such party shall be satisfied and such obligations of the
other party are not capable of being satisfied. See "THE MERGER-Termination."
Irrevocable Proxies. As a condition to the willingness of PhyCor to
execute the Merger Agreement, concurrently with the execution of the Merger
Agreement, certain beneficial owners of shares representing, as of the Record
Date, an aggregate of ____% of the voting power of CareWise Common Stock and
____% of the voting power of CareWise Preferred Stock granted irrevocable
proxies to certain officers of PhyCor allowing such persons to vote such shares
in favor of the Merger Agreement and the Merger. Accordingly, approval thereof
by the CareWise stockholders is assured.
Accounting Treatment. It is intended, and a condition to consummation
of the Merger, that the Merger will be accounted for as a pooling of interests.
See "THE MERGER-Accounting Treatment."
Certain Federal Income Tax Consequences. The Merger is intended to
qualify for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
It is a condition to the obligation of CareWise and PhyCor to consummate the
Merger that they shall have received an opinion from Perkins Coie LLP to the
effect that for federal income tax purposes (i) the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code; (ii) each of
PhyCor, the Subsidiary and CareWise will be a party to the reorganization within
the meaning of Section 368(b) of the Code; (iii) no gain or loss will be
recognized by CareWise, PhyCor or the Subsidiary as a result of the Merger; and
(iv) no gain or loss will be recognized by a stockholder of CareWise as a result
of the Merger with respect to CareWise Capital Stock converted solely into
PhyCor Common Stock (other than with respect to cash issued in lieu of
fractional shares of PhyCor Common Stock). In rendering such opinion, Perkins
Coie LLP will rely upon certain assumptions and upon representations contained
in certificates of CareWise, PhyCor and certain stockholders of CareWise. See
"THE MERGER-Certain Federal Income Tax Consequences" for a more detailed
description of the above federal income tax matters and information with respect
to the applicability of the foregoing to certain taxpayers subject to special
treatment.
Resale Restrictions. All shares of PhyCor Common Stock received by
holders of CareWise Capital Stock in the Merger will be freely transferable,
except that shares of PhyCor Common Stock received by persons who are deemed to
be "affiliates" (as such term is defined under the Securities Act) of CareWise
at the time of the Special Meeting may be resold by such persons only in certain
permitted circumstances. See "THE MERGER-Resale of PhyCor Common Stock by
Affiliates."
Appraisal Rights. Holders of CareWise Capital Stock are entitled to
appraisal rights as a result of the Merger. Holders who perfect appraisal rights
may obtain payment of the fair value of their shares in accordance with Section
262 of the DGCL, a copy of which is included herein as Annex D. See "APPRAISAL
RIGHTS OF CAREWISE STOCKHOLDERS."
Nasdaq Listing. A listing application will be filed with the Nasdaq
National Market to list the shares of PhyCor Common Stock to be issued to the
holders of CareWise Capital Stock in the Merger. Although no assurance can be
given that the Nasdaq National Market will accept such shares of PhyCor Common
Stock for listing, PhyCor and CareWise anticipate that these shares will qualify
for listing. It is a condition to the obligation of PhyCor and CareWise to
consummate the Merger that such shares of PhyCor Common Stock be approved for
listing on the Nasdaq National Market upon official notice of issuance at the
Effective Time. See "THE MERGER-Nasdaq National Market Listing."
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<PAGE> 19
COMPARISON OF RIGHTS OF CAREWISE STOCKHOLDERS AND PHYCOR SHAREHOLDERS
Upon consummation of the Merger, CareWise stockholders will become
PhyCor shareholders. There are differences between the rights of CareWise
stockholders and the rights of PhyCor shareholders. These differences result
from differences between Delaware and Tennessee law and differences between the
governing instruments of CareWise and PhyCor. For a summary of certain
differences between the rights of CareWise stockholders and the rights of PhyCor
shareholders, see "COMPARISON OF RIGHTS OF CAREWISE STOCKHOLDERS AND PHYCOR
SHAREHOLDERS."
MARKET AND MARKET PRICE
As of December 22, 1997, the last business day preceding public
announcement of the execution of the Merger Agreement by CareWise and PhyCor,
the closing sales price of the PhyCor Common Stock as reported by the Nasdaq
National Market was $27.75 per share. The closing sales price of the PhyCor
Common Stock on January 23, 1998 was $20.25 per share. See "MARKET PRICE DATA."
CareWise is a closely-held Delaware corporation. There has been no public
trading market in the securities of CareWise and therefore, there is no
historical per share price for CareWise's securities. The Board of Directors of
CareWise believes that the consideration to be paid by PhyCor in connection with
the Merger Agreement is fair, based upon, among other factors, the fairness
opinion of BT Alex. Brown. See "THE MERGER-Reasons for Merger" and "THE
MERGER-Opinion of BT Alex. Brown." No assurance can be given as to the market
price of PhyCor Common Stock at the Effective Time or at any other time.
COMPARATIVE PER SHARE INFORMATION
The following summary presents selected comparative per share
information (i) for each of PhyCor and CareWise on a historical basis, (ii) for
the combined companies on a pro forma basis giving effect to the Merger as a
pooling of interests and (iii) for CareWise on a pro forma equivalent basis
giving effect to the Merger as a pooling of interests. This financial
information should be read in conjunction with the historical consolidated
financial statements of PhyCor and the historical financial statements of
CareWise and the related notes thereto contained elsewhere herein or in
documents incorporated herein by reference. See "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE."
PhyCor has not paid cash dividends since inception. CareWise has never
declared or paid a dividend on the CareWise Capital Stock. It is anticipated
that PhyCor will retain all earnings for use in the expansion of the business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends will be at the discretion of the Board
of Directors of PhyCor and will depend, among other things, upon PhyCor's
earnings, capital requirements, financial condition and debt covenants. See
"DIVIDENDS."
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
12
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- 1997
1994 1995 1996
---- ---- ---- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net earnings (loss) per common share:
PhyCor historical.................................. $0.32 $0.41 $0.60 $0.61
PhyCor pro forma combined.......................... 0.22 0.34 0.51 0.59
CareWise historical................................ (1.61) (1.06) (1.50) (0.15)
CareWise pro forma equivalent(1)................... 0.06 0.09 0.13 0.15
- --------------
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Book value per common share:
PhyCor historical.................................. $8.23 $11.57
PhyCor pro forma combined.......................... 7.97 11.21
CareWise historical................................ 2.03 1.85
CareWise pro forma equivalent(1)................... 2.04 2.87
</TABLE>
- ---------------
(1) CareWise equivalent pro forma per share amounts are calculated by
multiplying the respective PhyCor pro forma combined per share amounts
by the Exchange Ratio.
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<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA--PHYCOR
The following table sets forth selected consolidated financial data
which have been derived from the consolidated financial statements of PhyCor as
of and for the years ended December 31, 1992 through 1996. The consolidated
financial statements as of and for the years ended December 31, 1992 through
1996 have been audited by KPMG Peat Marwick LLP. The selected consolidated
financial information as of and for the nine month periods ended September 30,
1996 and 1997 are derived from unaudited consolidated financial statements that,
in the opinion of PhyCor, reflect all adjustments necessary for a fair
presentation of the results of PhyCor for those periods. The consolidated
Statements of Operations data for the interim periods are not necessarily
indicative of results for subsequent periods or the full year. The information
set forth below should be read in conjunction with and are qualified in their
entirety by the consolidated financial statements and related notes which have
been incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1996 1997
------------- ---------- ------------ --------- --------- ---------- ----------
(unaudited)
<C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net revenue............... $ 135,866 $167,381 $242,485 $441,596 $766,325 $535,562 $802,297
Net operating expenses.... 145,354 155,580 223,355 395,452 684,593 478,217 712,242
--------- -------- -------- -------- -------- -------- --------
Earnings (loss) from
operations........... (9,488) 11,801 19,130 46,144 81,732 57,345 90,055
Interest expense and
minority interests... 3,852 3,569 2,629 10,347 22,577 16,398 23,073
--------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes......... (13,340) 8,232 16,501 35,797 59,155 40,947 66,982
Income tax expense........ 405 1,092 4,826 13,923 22,775 15,765 25,929
--------- -------- -------- -------- -------- -------- --------
Net earnings (loss).. $ (13,745)(1) $ 7,140(2) $ 11,675(2) $ 21,874 $ 36,380 $ 25,182 $ 41,053
========= ======== ======== ======== ======== ======== ========
Net earnings (loss) per
share................
Primary.............. $ (0.57)(1) $ 0.28(2) $ 0.32(2) $ 0.41 $ 0.60 $ 0.42 $ 0.61
========= ======== ======== ======== ======== ======== ========
Fully diluted $ -- $ -- $ 0.31 $ -- $ -- $ -- $ --
========= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding..........
Primary.............. 23,942 25,869 36,329 53,510 61,096 60,555 66,853
Fully diluted........ -- -- 43,427 -- -- -- --
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------------- ---------- ------------ ---------- ----------- -----------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $ 35,920 $ 46,927 $ 80,533 $ 111,420 $ 212,946 $ 235,161
Total assets............... 141,442 171,174 351,385 643,586 1,118,581 1,502,010
Long-term debt, less
current portion....... 54,087 69,014 94,653 140,633 474,600 464,825
Total shareholders' equity. 53,879 70,005 184,125 388,822 451,703 744,263
- ---------------
</TABLE>
(1) Excluding the effect of 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, and a net operating loss carryforward, PhyCor's net earnings
per share for 1992 would have been approximately $3.2 million and $0.14
per share, respectively.
(2) 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 $0.20 per
share, and $10.2 million, or $0.27 per share, in such years.
<PAGE> 22
SELECTED FINANCIAL DATA-CAREWISE
The following table sets forth selected financial data which have been
derived from the financial statements of CareWise as of and for the years ended
December 31, 1992 through 1996. The financial statements as of and for the years
ended December 31, 1992 thorough 1996 have been audited by KPMG Peat Marwick
LLP. The selected financial information as of and for the nine month periods
ended September 30, 1996 and 1997 are derived from unaudited financial
statements that, in the opinion of CareWise, reflect all adjustments necessary
for a fair presentation of the results of CareWise for those periods. The
Statement of Operations data for the interim periods are not necessarily
indicative of results for subsequent periods or the full year. The information
set forth below should be read in conjunction with and are qualified in their
entirety by the financial statements and related notes which have been included
herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
------------ ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
SERVICE REVENUE $ 1,861,425 $ 3,296,996 $ 6,863,457 $ 6,902,808 $ 9,175,114 $ 6,363,516 $ 10,714,603
OPERATING EXPENSES:
Direct service costs 1,991,543 2,428,499 3,975,605 3,591,062 6,194,231 4,062,418 6,859,304
AT&T per capita fee -- -- -- 119,132 652,624 438,544 --
Sales and marketing 656,563 554,987 922,095 1,665,697 2,802,258 2,057,090 1,718,046
General and administrative 1,153,427 962,627 1,595,477 1,717,998 2,584,674 1,842,820 2,003,947
Product development -- -- 3,379,200 -- 418,321 345,707 621,692
Provision for excess contract
service costs -- 1,308,778 -- -- -- -- --
Write-off of goodwill -- -- -- 556,335 -- -- --
----------- ----------- ----------- ----------- ------------ ----------- ------------
TOTAL OPERATING EXPENSES 3,801,533 3,946,113 9,872,377 8,959,002 12,652,108 8,746,579 11,202,989
----------- ----------- ----------- ----------- ------------ ----------- ------------
Operating loss (1,940,108) (649,117) (3,008,920) (2,056,194) (3,476,994) (2,383,063) (488,386)
OTHER INCOME (EXPENSE):
Interest income 13,745 9,705 21,388 54,883 155,292 80,408 211,863
Interest expense (84,534) (42,108) (314,776) (645,004) (572,018) (440,759) (130,808)
----------- ----------- ----------- ----------- ------------ ----------- ------------
NET LOSS $(2,034,299) $ (681,520) $(3,302,308) $(2,646,315) $ (3,893,720) $(2,743,414) $ (407,331)
=========== =========== =========== =========== ============ =========== ============
NET LOSS PER COMMON SHARE $ (1.25) $ (0.42) $ (1.61) $ (1.06) $ (1.50) $ (1.07) $ (0.15)
=========== =========== =========== =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------ SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------------ ----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 1,313,032 $ 2,121,754 $ 2,909,413 $ 5,547,609 $ 9,596,462 $ 11,217,111
Long-term obligations, net 306,445 259,698 2,925,086 2,769,275 356,207 729,178
Total liabilities 980,162 1,717,768 5,144,575 5,453,133 3,951,772 5,954,259
Total stockholders' equity
(deficit) 332,870 403,986 (2,235,162) 94,476 5,644,690 5,262,852
</TABLE>
15
<PAGE> 23
RISK FACTORS
In addition to the other information in this Prospectus-Proxy
Statement, the following should be considered carefully by holders of CareWise
Capital Stock in evaluating the Merger. 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 and
included herein or incorporated by reference. In particular, forward-looking
statements including, but not limited to, those regarding the integration of the
operations of CareWise, the achievement of certain benefits in the Merger,
future business prospects, the acquisition of additional clinics, the
development of additional IPAs, the adequacy of PhyCor's capital resources, the
future profitability of capitated fee arrangements 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.
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS AND ACHIEVING BENEFITS OF THE
MERGER
The consolidation of functions and the integration of departments,
systems and procedures of PhyCor and CareWise will require the dedication of
management resources, which will temporarily distract attention from the
day-to-day business of both companies. The geographical separation of the
companies' respective operations may hinder efforts to integrate operations.
There can be no assurance that the integration will be completed without
significant disruption of PhyCor's and CareWise's businesses. Should PhyCor and
CareWise not be able to integrate their businesses in a timely and coordinated
fashion, there could be a material adverse effect on operating results.
Moreover, although the primary purpose of such actions will be to realize direct
cost savings and other operating efficiencies, synergies and benefits, there can
be no assurance of the extent to which or whether such cost savings,
efficiencies, synergies and benefits will be achieved.
NO ASSURANCE OF CONTINUED RAPID GROWTH
PhyCor's continued growth will be primarily 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 be successful in acquiring additional
physician practice assets or PPMs, establishing new IPA networks or maintaining
relationships with affiliated physicians.
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 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, in
certain circumstances, has acquired real estate in connection with clinic
acquisitions. PhyCor will require additional financing for the development of
additional IPAs and expansion and management of 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 PhyCor
Common Stock or convertible
16
<PAGE> 24
notes in connection with acquisitions. PhyCor's bank credit facility requires
the lenders' consent for borrowings in connection with the acquisition of
certain clinic assets and their consent prior to consummation of the Merger.
There can be no assurance that sufficient financing will be available on terms
satisfactory to PhyCor or at all.
COMPETITION
The business of providing health care related services is highly
competitive. Many companies, including professionally managed PPM companies like
PhyCor 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 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 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.
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.
ABILITY OF CAREWISE TO SECURE ADDITIONAL CONTRACTS AND EXPAND AND RETAIN
EXISTING CONTRACTS
CareWise's ability to sustain or increase revenues and profitability is
dependent largely on its ability to secure additional contracts for its services
and products and to retain and expand existing contracts. There can be no
assurance that CareWise will be able to secure and implement additional
contracts in a manner consistent with historical results or in a manner
necessary to increase or sustain revenues and profitability in the future.
CareWise could be adversely affected by the termination or nonrenewal of any of
its contracts, as a result of the Merger or otherwise, or by the renegotiation
of the terms of contracts, particularly if the affected contracts cover a large
number of members or represent a significant portion of CareWise's revenue. For
example, CareWise has been notified of the termination of a client contract with
approximately 450,000 members effective April 1, 1998 due to the merger of the
client with a large national health plan. Certain of the existing CareWise
service agreements contain covenants that restrict CareWise's ability to enter
into agreements for the provision of demand management services with competitors
of the existing parties to such agreements. In addition, any factors adversely
affecting the market for CareWise's services and products, including factors
outside the control of CareWise, such as adverse publicity or government
regulatory action, could have a material adverse effect on CareWise.
RISKS ASSOCIATED WITH MANAGED CARE AND CAPITATION; RELIANCE ON PHYSICIAN
NETWORKS
Most of the payor contracts entered into by PhyCor IPAs are based on
capitated fee arrangements. Through its service agreements, PhyCor also shares
in capitation risk assumed by its affiliated physician groups. Under capitation
arrangements, health care providers bear the risk,generally 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. Some
agreements with payors also contain "shared risk" provisions under which
additional compensation can be earned or economic penalties can be incurred
based on utilization of hospital services by members. Any such losses could have
a material adverse effect on PhyCor. The profitability of a capitated fee
arrangement 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. Any loss of revenue 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. Managed care providers and
management entities such as PhyCor are increasingly subject to liability claims
arising from utilization management, provider compensation arrangements and
other activities designed to control costs by reducing services. A successful
claim on this basis against PhyCor or an affiliated clinic or IPA could have a
material adverse effect on PhyCor.
RISKS OF CHANGES IN PAYMENT FOR MEDICAL SERVICES
The United States Congress and many state legislatures routinely
consider proposals to reform or modify the health care system, including
measures that would control health care spending, convert all or a portion of
government reimbursement programs to managed care arrangements and reduce
spending for Medicare and state health programs. These measures can affect a
health care company's cost of doing business and contractual relationships. For
example, recent developments that affect PhyCor's activities include: (i)
federal legislation requiring a health plan to continue coverage for individuals
who are no longer eligible for group health benefits and prohibiting the use of
"pre-existing condition" exclusions that limit the scope of coverage; (ii) a
17
<PAGE> 25
Health Care Financing Administration policy prohibiting restrictions in Medicare
risk HMO plans on a physician's recommendation of other health plans and
treatment options to patients; and (iii) regulations imposing restrictions on
physician incentive provisions in physician provider agreements. There can be no
assurance that such legislation, programs and other regulatory changes will not
have a material adverse effect on PhyCor.
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 managed IPAs, further reductions in payments to physicians generally or
other changes in payment for health care services could have a material adverse
effect on PhyCor.
ADDITIONAL REGULATORY RISKS
The health care industry and physicians' medical practices are highly
regulated at the state and federal levels. 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, or the arranging 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. In addition, federal law prohibits
physicians with certain financial relationships with health care providers from
referring certain types of Medicare or Medicaid reimbursed "designated health
services" to those providers, unless the referral fits within an exception to
the law. One of the exceptions that is used most often requires that physician
groups be included within a definition of "group practice" in order to be
permitted to make referrals within the group. Federal antitrust law also
prohibits conduct that may result in price-fixing or other anticompetitive
conduct. Because of the structure of the relationships of PhyCor with its
affiliated physician groups and 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. In addition to civil and, in some
cases, criminal penalties for violation of Medicare and Medicaid statutes,
violators of these statutes may be excluded from participation in Medicare or
state health programs.
Government regulation at both the federal and state levels relates to
many aspects of CareWise's and its clients' businesses, including the provisions
of health care services, teleservicing, health care referral programs, HMOs and
other similar plans. These statutes and regulations in many cases predate the
development of telephone-based health care information and other interstate
transmission and communication of medical information and services. The language
of certain of these statutes and regulations governing the provisions of health
care services, including, without limitation, the practice of nursing and the
practice of medicine, could be construed by regulatory authorities to apply to
certain of CareWise's teleservicing activities, which use Washington
18
<PAGE> 26
registered nurses to provide care management services such as nursing
assessments and information regarding appropriate sources of care and treatment
time frames. These statutes and regulations could also apply to certain
activities of CareWise's health service customers when operating CareWise's
programs. In addition, the language of the statutes and regulations governing
HMOs and other plans that provide or arrange for the provision of health care
services for a prepaid or periodic charge could be construed by regulatory
authorities to apply to certain activities of CareWise that are provided on a
per-member per-month basis. If regulators seek to apply any of the foregoing
statutory and regulatory requirements to CareWise or to others operating in a
manner substantially similar to CareWise, then CareWise, its employees and/or
its clients could be required to obtain additional licenses or registrations, to
modify or curtail the operation of CareWise's programs, to modify the method of
payment for CareWise's programs, or to pay fines or incur other penalties.
There can be no assurance that CareWise or the use of its products and
services will not be subject to review or challenge by government regulators
under any of the foregoing statutes and regulations that apply to health care
services and products. In addition, additional laws and regulations could be
enacted in the future that would regulate CareWise or the use of its products
and services. Any government investigative or enforcement actions with respect
to CareWise or the use of its products or services could generate adverse
publicity irrespective of the final outcome, and could have a material adverse
effect on CareWise.
INCREASED GOVERNMENT SCRUTINY OF HEALTH CARE ARRANGEMENTS
There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General ("OIG") of the Department of Health and Human Services
("DHHS"), the courts, and the United States Congress of arrangements between
health care providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals and opportunities. Investigators have also demonstrated a
willingness to look behind the documents evidencing a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources. Enforcement actions have increased as evidenced by
recent highly publicized enforcement investigations of certain hospital
activities. Although, to their knowledge, PhyCor and CareWise are not currently
the subject of any investigation which is likely to have a material adverse
effect on their respective businesses, there can be no assurance that they will
not be the subject of investigations or inquiries in the future.
RISKS ASSOCIATED WITH STRAUB CLINIC & HOSPITAL, INCORPORATED ("STRAUB")
TRANSACTION
In January 1997, PhyCor consummated its merger with Straub, an
integrated health care system with a 152-physician multi-specialty clinic and
159-bed acute care hospital located in Honolulu, Hawaii. In connection with the
transaction with Straub, PhyCor agreed to provide certain management services to
both a physician group practice and a hospital owned by the group. 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 and the physician group
could come under increased scrutiny under the Medicare fraud and abuse law. In
late 1995, prior to its association with PhyCor, Straub was served with a
federal search warrant in connection with an investigation into Straub's
billings and receivables practices, including with respect to Medicare, Medicaid
and the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS).
The federal government recently accepted Straub's offer to resolve the
investigation, subject to certain conditions including negotiation of an
acceptable settlement agreement and corporate integrity program. PhyCor is
indemnified by the physician group affiliated with Straub against any
liabilities imposed as a result of the investigation or the settlement thereof,
and PhyCor believes that such indemnity will be sufficient to satisfy any claims
made against PhyCor as a successor to Straub, although no assurance can be given
in that regard. In addition, the federal government could in certain
circumstances suspend or prevent Straub from
19
<PAGE> 27
participating in government programs, which would adversely affect PhyCor's
revenues under its service agreement with Straub.
TAX AUDIT
PhyCor has been subject to an audit by the Internal Revenue Service
(the "IRS") covering the years 1988 through 1993. The IRS has proposed
adjustments relating to the timing of recognition for tax purposes of certain
revenue and deductions relating to uncollectible accounts and PhyCor's
relationship with affiliated physician groups. PhyCor disagrees with the
positions asserted by the IRS including any recharacterization and is vigorously
contesting these proposed adjustments. PhyCor believes that any adjustments
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. For the years under audit and,
potentially, for subsequent years, any such adjustments could result in material
cash payments by PhyCor. 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 matter.
APPLICABILITY OF INSURANCE REGULATIONS
PhyCor's managed IPAs enter into contracts and joint ventures with
licensed insurance companies, such as HMOs, whereby the IPAs may be paid on a
capitated fee basis. Under capitation arrangements, health care providers bear
the risk, subject to certain loss limits, that the aggregate costs of providing
medical services to members will exceed the premiums received. To the extent
that the IPAs subcontract with physicians or other providers for those
physicians or other providers to provide services on a fee-for-service basis,
the managed IPAs may be deemed to be in the business of insurance, and thus,
subject to a variety of regulatory and licensing requirements applicable to
insurance companies or HMOs. In connection with multi-specialty medical clinic
acquisitions, PhyCor has and may continue to acquire HMOs previously affiliated
with such clinics. 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. 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 medical 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.
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 "PhyCor Rights Plan"). The PhyCor Rights Plan is
20
<PAGE> 28
intended to encourage potential acquirers 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. The PhyCor Charter provides for the
classification of its Board of Directors into three classes, with each class of
directors serving staggered terms of three years. 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. 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.
21
<PAGE> 29
THE SPECIAL MEETING
GENERAL
This Prospectus-Proxy Statement is being furnished to holders of
CareWise Capital Stock in connection with the solicitation of proxies by the
Board of Directors for use at the Special Meeting to consider and vote upon a
proposal to approve and adopt the Merger Agreement and the Merger and to
transact such other business as may properly come before the Special Meeting or
any adjournments or postponements thereof. Each copy of this Prospectus-Proxy
Statement mailed to holders of CareWise Capital Stock is accompanied by a form
of Proxy to be used at the Special Meeting (attached hereto as Annex C).
This Prospectus-Proxy Statement is also furnished to holders of
CareWise Capital Stock as a Prospectus in connection with the issuance to them
of the shares of PhyCor Common Stock upon consummation of the Merger.
DATE, PLACE AND TIME
The Special Meeting will be held at the offices of CareWise located at
701 Fifth Avenue, Suite 2600, Seattle, Washington, on __________________, 1998
at ________________ a.m., local time.
RECORD DATE; QUORUM
The Board of Directors of CareWise has fixed the close of business on
_____________, 1998 as the Record Date for the determination of holders of
CareWise Capital Stock entitled to receive notice of and to vote at the Special
Meeting. The presence, in person or by proxy, of a majority of the shares of
CareWise Capital Stock entitled to vote at the Special Meeting will constitute a
quorum at the Special Meeting.
VOTES REQUIRED
As of the Record Date, there were outstanding and entitled to vote
_____ shares of CareWise Common Stock and _____ shares of CareWise Preferred
Stock. Each share of CareWise Capital Stock is entitled to one vote on each
matter that comes before the Special Meeting.
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT BY THE STOCKHOLDERS OF
CAREWISE REQUIRES (I) THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING
SHARES OF CAREWISE COMMON STOCK ENTITLED TO VOTE AT THE SPECIAL MEETING AND (II)
THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE OUTSTANDING SHARES OF CAREWISE
PREFERRED STOCK ENTITLED TO VOTE AT THE SPECIAL MEETING.
As a condition to the willingness of PhyCor to execute the Merger
Agreement, concurrently with the execution of the Merger Agreement, each of John
E. Gebhart III, James O. Steeb, Michael B. Weitz, Craig S. Russell, Thomas O.
Pyle, Rheba de Tornyay, Scott Marber, Kenneth W. Duemig, Frontenac VI, L.P.,
InterWest Partners III, Mohr, Davidow Ventures, Olympic Venture Partners III,
L.P., Franklin Capital Associates II, L.P., CH Partners IV, Fluke Capital
Management, L.P., and New Enterprise Associates VI, Limited Partnership, who own
shares representing an aggregate of ___% of the voting power of the CareWise
Common Stock and __% of the voting power of the CareWise Preferred Stock as of
the Record Date, granted irrevocable proxies to certain officers of PhyCor
allowing such officers to vote such shares (and any other shares of CareWise
Capital Stock acquired by them after the date of the Merger Agreement, including
shares acquired pursuant to the exercise of any rights to purchase or otherwise
acquire shares) in favor of the Merger Agreement and the Merger. As of the
Record Date, neither PhyCor nor its affiliates beneficially owned any shares of
CareWise Capital Stock. See "THE MERGER-Interest of Certain Persons in the
Merger."
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<PAGE> 30
By the unanimous vote of the members of the Board of Directors of
CareWise at a special meeting held on December 21, 1997, the CareWise Board of
Directors determined that the proposed Merger, and the terms and conditions of
the Merger Agreement, were in the best interests of CareWise and its
stockholders. The Merger Agreement was adopted and approved unanimously by the
entire CareWise Board of Directors, which also unanimously recommended that the
holders of CareWise Capital Stock vote FOR approval and adoption of the Merger
Agreement.
In the event that the Merger Agreement is not approved and adopted by
the CareWise stockholders, the Merger Agreement may be terminated by PhyCor or
CareWise in accordance with its terms. Such approval is also a condition to
PhyCor's and CareWise's obligations to consummate the Merger. See "THE
MERGER-Conditions to the Merger" and "-Termination."
PROXIES, PROXY SOLICITATION
The shares of CareWise Capital Stock represented by a Proxy properly
signed and received at or prior to the Special Meeting, unless subsequently
revoked, will be voted in accordance with the instructions thereon. IF A PROXY
FOR THE SPECIAL MEETING IS PROPERLY EXECUTED AND RETURNED WITHOUT INDICATING ANY
VOTING INSTRUCTIONS, SHARES OF CAREWISE CAPITAL STOCK REPRESENTED BY THE PROXY
WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Any Proxy given pursuant to the solicitation may be revoked by the person giving
it at any time before the Proxy is voted by the filing of an instrument revoking
it or of a duly executed Proxy bearing a later date with the Secretary of
CareWise prior to or at the Special Meeting, or by voting in person at the
Special Meeting. Attendance at the Special Meeting will not in and of itself
constitute a revocation of a Proxy. Only votes cast for approval of the Merger
Agreement and the Merger or other matters constitute affirmative votes.
Abstentions and non-votes will, therefore, have the same effect as votes against
approval of the Merger Agreement and the Merger with respect to the Special
Meeting.
Because certain beneficial owners of shares representing, as of the
Record Date, an aggregate of __% of the voting power of CareWise Common Stock
and ___% of the voting power of CareWise Preferred Stock have granted
irrevocable proxies to certain officers of PhyCor allowing such persons to vote
such shares in favor of the Merger Agreement and the Merger, approval thereof by
the CareWise stockholders is assured.
The Board of Directors of CareWise is not aware of any business to be
acted upon at the Special Meeting other than as described herein. If, however,
other matters are properly brought before the Special Meeting, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their best judgment and
subject to applicable rules of Delaware law.
CareWise will bear the cost of soliciting proxies from its
stockholders. In addition to solicitation by mail, directors, officers and
employees of CareWise may solicit proxies by telephone, telegram or otherwise.
Such directors, officers and employees of CareWise will not be additionally
compensated for such solicitation but may be reimbursed for out-of-pocket
expenses incurred in connection therewith.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE PROCEDURE FOR THE EXCHANGE OF SHARES IS SET FORTH ELSEWHERE IN THIS
PROSPECTUS-PROXY STATEMENT. SEE "THE MERGER-EXCHANGE OF CERTIFICATES."
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THE MERGER
The description of the Merger contained in this Prospectus-Proxy
Statement summarizes the material terms of the Merger Agreement; it is not
complete and is qualified in its entirety by reference to the Merger Agreement,
the full text of which is attached hereto as Annex A and incorporated herein by
reference. All stockholders are urged to read Annex A in its entirety.
TERMS OF THE MERGER
The acquisition of CareWise by PhyCor will be effected by means of the
merger of the Subsidiary with and into CareWise, with CareWise being the
Surviving Corporation. The Subsidiary Certificate of Incorporation, as amended
and existing at the Effective Time, and the Bylaws of the Subsidiary in effect
at the Effective Time, will govern the Surviving Corporation until amended or
repealed in accordance with applicable law.
As a result of the Merger, each share of CareWise Common Stock and each
share of CareWise Preferred Stock issued and outstanding immediately prior to
the Effective Time (other than Appraisal Shares) shall be converted into the
right to receive a number of shares of PhyCor Common Stock equal to (i) the
PhyCor Base Shares divided by (ii) the sum of the shares of CareWise Common
Stock, CareWise Preferred Stock and any options, rights or warrants to acquire
shares of CareWise Common Stock or CareWise Preferred Stock, outstanding at the
Effective Time. Stockholders will receive cash in lieu of fractional shares.
The number of PhyCor Base Shares issuable as a result of the Merger
(and in certain cases noted below, the Exchange Ratio) are subject to adjustment
as follows:
(i) In the event that the Average Price shall be less than $24.00,
then the PhyCor Base Shares shall be the quotient of 61,176,000
divided by the Average Price. This adjustment shall also affect
the Exchange Ratio.
(ii) In the event that the Average Price is more than $29.00, then
the number of PhyCor Base Shares shall be the quotient of
73,921,000 divided by the Average Price. This adjustment shall
also affect the Exchange Ratio.
(iii) The PhyCor Base Shares shall be reduced proportionally, without
affecting the Exchange Ratio, for any Appraisal Shares.
(iv) If any options, rights or warrants to purchase, or securities
convertible or exchangeable into, shares of any class of capital
stock of CareWise shall remain outstanding at the Effective Time,
whether vested or unvested, the number of PhyCor Base Shares
shall be reduced (without affecting the Exchange Ratio) by the
nearest whole number of shares of PhyCor Common Stock issuable in
the aggregate upon the exercise, conversion or exchange of all
such outstanding securities.
As of the Effective Time, all outstanding shares of CareWise Capital
Stock shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing such shares shall cease to have any
rights with respect thereto, except the right to receive shares of PhyCor Common
Stock, cash (without interest) in lieu of fractional shares and any dividends or
other distributions to which such holder is entitled as a result of the Merger.
Each share of CareWise Capital Stock that is owned by CareWise or any subsidiary
of CareWise shall automatically be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
The Merger Agreement provides that at the Effective Time each option
issued pursuant to the CareWise Option Plan then outstanding, whether or not
vested or exercisable, will, pursuant to the terms of the CareWise Option Plan,
be assumed by PhyCor and will constitute a Replacement Option to acquire, on the
same terms and conditions as were applicable under such assumed option, shares
of PhyCor Common Stock equal to the product of the Exchange Ratio and the number
of shares of CareWise Common Stock subject to such option, at a price per share
equal to the aggregate exercise price (rounded up to the nearest $0.001) for the
shares of CareWise Common Stock subject to such option divided by the number of
full shares of PhyCor Common Stock deemed to be purchasable pursuant to such
Replacement Option. Notwithstanding the foregoing, all replacement Options
shall be fully vested at the Effective Time in accordance with the CareWise
Option Plan. PhyCor has agreed to file within ten days following the Effective
Time a registration statement on Form S-8 to register, to the extent necessary,
the shares of PhyCor Common Stock issuable pursuant to the Replacement Options
under the Securities Act.
Based upon the number of shares of PhyCor Common Stock outstanding as
of the Record Date (excluding shares issuable upon exercise of options and
convertible securities) and assuming
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the issuance of an aggregate of 2,549,000 shares of PhyCor Common Stock as a
result of the Merger, the stockholders of CareWise Capital Stock will receive in
the aggregate approximately ____% of the outstanding shares of PhyCor Common
Stock anticipated to be outstanding immediately after the Effective Time.
BACKGROUND OF THE MERGER
In light of the continued and increased interest in health care cost
containment, as well as increasing consolidation in the demand management
segment of the health care industry, during the summer and fall of 1996, the
CareWise Board of Directors began to explore strategic alternatives to increase
stockholder value and liquidity, including consideration of an initial public
offering or a strategic alliance of CareWise with a third party.
On September 13, 1996, John Gebhart, CareWise's President and Chief
Executive Officer, was introduced to Paul Keckley, PhyCor's Vice President of
Strategic Development, at an industry conference in Minnesota. In addition, in
October and November of 1996, Mr. Gebhart met with management personnel
associated with two unaffiliated third parties (Party 1 and Party 2,
respectively) to discuss potential business combinations.
On December 2, 1996, Mr. Gebhart and Scott Marber, then CareWise's Vice
President of Sales, traveled to Nashville, Tennessee to meet with Mr. Keckley
and Jerry Howell, Director of The PhyCor Institute, to learn about the
operations and business practices of PhyCor in conjunction with exploring
strategic business opportunities.
On February 4, 1997, CareWise retained BT Alex. Brown to provide
certain investment banking advice and services to CareWise, including assisting
CareWise in evaluating its options to increase stockholder value and liquidity.
At CareWise's direction, BT Alex. Brown contacted a number of prospective
partners for CareWise, including PhyCor. As part of the overall process, several
of the parties so contacted entered confidentiality agreements with CareWise and
conducted preliminary discussions and informational meetings.
On April 30, 1997, Mr. Gebhart, Craig Russell and Sherry Stoll, being,
respectively, CareWise's Vice President of Marketing and Vice President of
Clinical Services, traveled to Nashville, Tennessee to meet with Mr. Keckley,
Joseph Hutts, Thompson Dent, and Ronald Loepke, being, respectively, PhyCor's
President and Chief Executive Officer, Executive Vice President and Medical
Director, as well as other PhyCor personnel, for the purpose of further
familiarizing themselves with PhyCor's business and to explore strategic
opportunities that might exist between the two companies. PhyCor expressed
continued interest in CareWise and in early May, PhyCor executed a
confidentiality agreement and received certain information regarding CareWise.
On May 13, 1997 Mr. Hutts and Mr. Dent traveled to Seattle, Washington
to meet with members of CareWise senior management and become familiar with the
operations of CareWise.
On May 15, 1997, Jim Steeb, CareWise's Chief Operating Officer, visited
Nashville, Tennessee to attend a meeting of The PhyCor Institute and to discuss
with PhyCor senior management the potential benefit of a strategic combination
or alliance between PhyCor and CareWise.
On May 21, 1997, CareWise received a preliminary non-binding offer from
PhyCor to acquire CareWise in a tax-free, stock-for-stock merger valued at
approximately $53,800,000. A meeting of the CareWise Board was held that day
during which a representative of BT Alex. Brown provided an analysis of the
preliminary offer from PhyCor, including the purchase price, as well as the
status of other contacts that had expressed some level of interest in a
transaction with CareWise. After discussion of the PhyCor offer and other
alternatives, the Board authorized Mr. Gebhart to continue to negotiate with
PhyCor and to enter into an exclusive negotiation agreement extending through
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the end of June 1997. After further negotiation, CareWise and PhyCor entered
into a letter agreement memorializing the foregoing on May 27, 1997.
On June 9 and 10, 1997, representatives of PhyCor continued their due
diligence interviews with senior management of CareWise in Seattle, Washington.
On June 12, 1997, CareWise received from PhyCor the initial draft of an
Agreement and Plan of Merger.
On June 13, 1997, Mr. Hutts telephoned Mr. Gebhart and indicated that,
based on the then current results of operations and contingencies associated
with future prospects of CareWise, PhyCor was at that time not able to complete
the transaction on the then current terms, but indicated a desire to continue
discussions in the future.
On June 24, 1997, Mr. Gebhart met with Party 1 to continue informal
discussions about a merger.
A meeting of the CareWise Board was held on July 17, 1997 during which
members of CareWise management reported on the market for demand management
services, results of operations, and sales and financial projections. In
addition, a representative of BT Alex. Brown provided an update regarding the
range of possible valuations of CareWise. At the direction of the Board,
CareWise management ceased further discussions with potential buyers in order to
focus on increasing revenues, attaining profitability and securing and
integrating successfully certain new service agreements.
On September 30, 1997, Messrs. Gebhart, Steeb and Russell met with
Messrs. Hutts, Dent and John Crawford, PhyCor's Vice President and Chief
Financial Officer, in Nashville, Tennessee to discuss recent developments at
CareWise, including the recent Demand Management Services Agreement with
Merck-Medco Management Care, L.L.C., and to re-initiate discussions regarding
the opportunity for a business combination.
On October 29, 1997, an officer of Party 1 contacted Mr. Gebhart to
express an interest in commencing preliminary merger discussions. On November
13, 1997, Mr. Gebhart and Mr. Steeb conducted further discussions with Party 1
regarding a possible merger.
On November 14, 1997, Mr. Gebhart and Mr. Steeb visited Party 2 to
commence preliminary discussions with respect to a potential business
combination.
On November 18, 1997, CareWise received a non-binding offer from Party
2 to acquire CareWise in a tax-free, stock-for-stock merger for aggregate
consideration to be negotiated within a specified range. CareWise rejected this
preliminary proposal, but provided additional information to Party 2 to enable
it to reconsider the terms of its offer.
On November 20, 1997, Mr. Dent called Mr. Gebhart to indicate PhyCor's
interest in re-initiating formal merger discussions with CareWise.
On November 25, 1997, members of senior management of CareWise and
certain representatives of BT Alex. Brown met with senior management of Party 1
and their investment banker. At that time, CareWise received a draft of a
non-binding letter agreement pursuant to which Party 1 offered to acquire
CareWise in a tax-free, stock-for-stock merger with CareWise stockholders
receiving a fixed number of shares of Party 1, subject to due diligence review
and other customary conditions.
Also on November 25, 1997, CareWise received a revised letter from
Party 2 providing for the acquisition of CareWise as noted above with aggregate
consideration within a broader specified range than the original proposal.
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A telephonic meeting of the CareWise Board was held later that day
during which time Mr. Gebhart, representatives from BT Alex. Brown and legal
counsel to CareWise reported on the status of merger discussions with certain
parties generally, and specifically, with respect to the terms of the offers
extended by Party 1 and Party 2.
From the period beginning November 26th through December 5, 1997, Mr.
Gebhart, at the direction of the CareWise Board, continued to negotiate with
Party 1 with respect to the proposed terms of the merger. In addition, Mr.
Gebhart continued to respond to inquiries by other potential acquirers,
including PhyCor. At the direction of the CareWise Board, representatives of BT
Alex. Brown spoke with several potential strategic buyers regarding their
interest, including PhyCor.
On December 4, 1997, Mr. Gebhart and Mr. Russell visited PhyCor's
offices in Nashville, Tennessee to reconvene formal merger discussions.
On December 8, 1997, CareWise received a proposal from PhyCor that
provided for a tax-free, stock-for-stock merger with a fixed transaction value
of $65 million, subject to certain conditions including eligibility for pooling
of interest accounting, a specified walkaway provision and an exclusivity
period. In addition, on December 8, 1997, CareWise received a further revised
proposal from Party 2, which provided for consideration consisting of a fixed
number of shares of Party 2.
A telephonic meeting of the CareWise Board was held on December 8,
1997, during which time Mr. Gebhart reviewed the status of the negotiations with
various parties. Mr. Gebhart and representatives from BT Alex. Brown discussed
the merits of each of the three offers received to date. During this meeting the
CareWise Board authorized management and representatives of BT Alex. Brown to
continue to negotiate with Party 1 and to enter into a letter agreement that
included an exclusivity provision that would extend no later than January 12,
1998.
On December 10, 1997, Mr. Gebhart was contacted by Mr. Hutts regarding
revisions to the terms of PhyCor's proposal, including the addition of a price
"collar" that provided for a guaranteed transaction value of not less than
$61,176,000 or more than $73,921,000. A telephonic meeting of the Board of
Directors was called for the evening of December 10th, 1997, at which Mr.
Gebhart reported that he had not yet signed the letter agreement with Party 1.
At the meeting, Mr. Gebhart, legal counsel to CareWise and representatives of BT
Alex. Brown reviewed the terms of the revised offer from PhyCor and led a
discussion regarding the proposals received from PhyCor, Party 1 and Party 2 in
terms of valuation, exclusivity, structure, strategic fit, quality of
acquisition currency and the certainty of closure on the terms presented. After
a discussion of the issues presented, the CareWise Board directed Mr. Gebhart to
terminate discussions with Party 1 and Party 2 and authorized him to enter into
the letter agreement with PhyCor.
On December 12, 1997, the initial draft of the Merger Agreement was
delivered to CareWise. On December 16 and 17, 1997, representatives of PhyCor,
as well as their financial advisors and legal counsel met in Seattle to conduct
due diligence and negotiate the terms of the proposed merger. Negotiations with
respect to the Merger Agreement continued throughout the week of December 15,
1997.
A telephonic meeting of the CareWise Board was held on December 17,
1997, to report with respect to the progress of the negotiations between
CareWise and PhyCor, during which time Mr. Gebhart, legal counsel to CareWise
and representatives of BT Alex. Brown led a discussion of the due diligence
process and the material terms of the proposed agreement.
On December 19, 1997, Messrs. Gebhart and a representative of BT Alex.
Brown traveled to Birmingham, Alabama to continue due diligence discussions with
members of PhyCor management.
A telephonic meeting of the CareWise Board was held on December 21,
1997 to consider further the proposed merger of CareWise and PhyCor, at which
meeting Mr. Gebhart and a representative of BT Alex. Brown reported on the
results of the due diligence meetings conducted in Alabama. In addition, members
of the CareWise Board participated in a discussion with legal counsel focusing
on the negotiation and documentation process to date and the material terms of
the proposed transaction. As part of the Board meeting,
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representatives of BT Alex. Brown led a discussion with the Board during which
their valuation analysis and fairness opinion with respect to the proposed
transaction was presented. Following BT Alex. Brown's presentation, the Board
unanimously approved the Merger Agreement, recommending the transaction to the
stockholders for their approval.
PhyCor, the Subsidiary and CareWise entered into the definitive Merger
Agreement on December 22, 1997.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
Joint Reasons for the Merger. The PhyCor Board and the CareWise Board
each considered that the combined companies would have the potential for
competitive advantage and improved financial performance. The PhyCor Board and
the CareWise Board each believe that the following potential mutual benefits of
the Merger will contribute to the success of the combined companies:
Increased Exposure to Practice Management and Provider
Segment. CareWise has pursued relationships in the practice management
and provider segment based on its belief that this segment will become
increasingly important as financial risk continues to shift to medical
providers, and that its core competencies can offer competitive and
operational advantages to at-risk medical providers. PhyCor continually
evaluates services and techniques that provide it with greater ability
to manage financial risk and to introduce process improvements in its
medical practices. The proposed Merger provides capabilities that are
consistent with this objective.
Business Synergies in Consolidation. Over the past two years
significant consolidation has occurred among demand management
companies, both with respect to business combinations within the demand
management industry and the combination of demand management companies
with other information service providers. The proposed Merger
strengthens the position of CareWise in the marketplace for the
segments it currently serves while providing PhyCor with expanded
capabilities to improve the operation of its physician practices.
PhyCor. In approving the Merger Agreement and the Merger, the PhyCor
Board considered, among other factors, the following additional advantages that
the Merger would afford PhyCor:
Comprehensive Patient-Oriented Services. PhyCor seeks to
continue improving its position as a comprehensive patient-oriented
practice management company. PhyCor believes that the Merger will
enable it to more effectively manage the needs of the patients of the
physician groups it manages.
Enhanced Competitive Position. PhyCor believes that the Merger
will enhance its future competitive position by facilitating its
ability to manage the clinical, financial and administrative risk
associated with delivering care to various patient populations.
Strategic, financial and operational synergies. PhyCor
believes that the Merger will buttress its leadership position in the
rapidly evolving practice management industry by enabling PhyCor to
provide unique patient care management services which will facilitate
the development of a more cost-effective, high-quality health care
delivery model.
In view of the variety of both positive and negative factors that it
considered, the PhyCor Board did not find it practical to, and did not, quantify
or otherwise assign relative weights to the specific factors considered. After
taking into consideration all the factors set forth above, among
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others, the PhyCor Board determined that the Merger is in the best interests of
PhyCor and the PhyCor shareholders. Accordingly, the PhyCor Board has approved
the Merger Agreement and the Merger.
CareWise. The CareWise Board believes that the following are additional
reasons for the CareWise stockholders to vote "FOR" approval of the Merger
Agreement and the Merger.
Business-To-Business Strategy. CareWise has pursued a
business-to-business strategy to align itself with other health service
providers, thereby enabling it to offer more clinically intensive
services and to create more presence with respect to managing episodes
of care. The proposed Merger is consistent with this strategy.
Access To Financing for Product Development. Increasing
emphasis on episode and disease management imposes on CareWise greater
investment in product development as well as strong integration with
providers for optimal delivery to patients. Through the Merger,
additional financial investment resources are attainable, and
importantly, access to physician practice settings to refine
development specifications.
Greater Financial Resources. PhyCor has the financial
resources to provide CareWise with the funds it requires to pursue
existing market opportunities and support the growth of its business.
Stockholder Liquidity. The Merger will provide the CareWise
stockholders and option holders with increased liquidity by replacing
their illiquid shares of CareWise Common Stock (and options to purchase
such shares) and CareWise Preferred Stock with publicly traded PhyCor
Common Stock and options to purchase such shares, thereby giving the
CareWise stockholders and option holders the opportunity both to
generate cash by selling a portion of their holdings and to continue to
participate in the growth potential of the businesses conducted by the
combined companies.
Employee Incentives. After the Merger, CareWise employees will
be eligible to participate in PhyCor's stock-based compensation plans,
providing them a stake in the further growth of PhyCor.
In the course of its deliberations, the CareWise Board considered and
discussed a number of other factors including the following: (i) the terms of
the Merger Agreement, including the percentage ownership of PhyCor by the
CareWise stockholders following the Merger, and the circumstances under which
the Merger Agreement could be terminated; (ii) information concerning CareWise's
and PhyCor's respective businesses, prospects, financial performances, financial
conditions and operations; (iii) the market price of the PhyCor Common Stock in
the recent past; (iv) reports from management and their advisors on the results
of CareWise's due diligence investigation of PhyCor; (v) the requirements of a
tax-free merger and pooling of interest accounting; and (vi) the execution of
new employment agreements with certain key employees to be effective at the
Effective Time.
The CareWise Board also considered the following actual or potential
material disadvantages of the Merger to CareWise and the CareWise stockholders:
(i) the potential disruption of CareWise's business that might result following
announcement of the Merger; (ii) the risk that benefits sought to be obtained by
the Merger might not be obtained; (iii) the risks associated with the proposed
business combination of PhyCor and MedPartners; and (iv) other risks described
under "RISK FACTORS."
In view of the variety of both positive and negative factors that it
considered, the CareWise Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all the factors set forth above, the
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CareWise Board determined that the Merger is in the best interest of CareWise
and the CareWise stockholders. ACCORDINGLY, THE CAREWISE BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE MERGER AND RECOMMENDS THAT THE CAREWISE
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
OPINION OF BT ALEX. BROWN INCORPORATED
CareWise retained BT Alex. Brown on February 4, 1997, to provide
investment banking advice and services to CareWise, including assisting CareWise
in developing a plan to carry out its strategic objectives, evaluating
candidates for potential business combinations, and advising CareWise with
respect to potential business combinations, including rendering its opinion to
the Board of Directors of CareWise as to the fairness, from a financial point of
view, of the Exchange Ratio to CareWise's stockholders.
At the December 21, 1997 meeting of the CareWise Board of Directors,
representatives of BT Alex. Brown made a presentation with respect to the Merger
and rendered to the CareWise Board its opinion that, as of such date, and
subject to the assumptions made, matters considered and limitations set forth in
such opinion and summarized below, and based on the facts and circumstances as
they existed at the time, the Exchange Ratio was fair, from a financial point of
view, to CareWise's stockholders. No limitations were imposed upon BT Alex.
Brown with respect to the investigations made or procedures followed by it in
rendering its opinion.
THE FULL TEXT OF BT ALEX. BROWN'S WRITTEN OPINION DATED DECEMBER 21,
1997 (THE "BT ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED HERETO AS ANNEX B AND IS INCORPORATED HEREIN BY REFERENCE. CAREWISE
STOCKHOLDERS ARE URGED TO READ THE BT ALEX. BROWN OPINION IN ITS ENTIRETY. THE
BT ALEX. BROWN OPINION IS DIRECTED TO THE CAREWISE BOARD, ADDRESSES ONLY THE
FAIRNESS OF THE EXCHANGE RATIO TO CAREWISE'S STOCKHOLDERS FROM A FINANCIAL POINT
OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY CAREWISE STOCKHOLDER AS
TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE CAREWISE MEETING. THE BT ALEX. BROWN
OPINION WAS RENDERED TO THE CAREWISE BOARD FOR ITS CONSIDERATION IN DETERMINING
WHETHER TO APPROVE THE MERGER AGREEMENT. BT ALEX. BROWN DID NOT RECOMMEND TO THE
CAREWISE BOARD THAT ANY SPECIFIC EXCHANGE RATIOS CONSTITUTED THE APPROPRIATE
EXCHANGE RATIO FOR THE MERGER. THE DISCUSSION OF THE BT ALEX. BROWN OPINION IN
THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE BT ALEX. BROWN OPINION.
In connection with the BT Alex. Brown Opinion, BT Alex. Brown reviewed
certain publicly available financial information and other information
concerning CareWise and PhyCor and certain internal analyses and other
information furnished by CareWise. BT Alex. Brown also held discussions with the
members of the senior managements of CareWise and PhyCor regarding the
businesses and prospects of their respective companies. In addition, BT Alex.
Brown (i) reviewed the reported prices and trading activity for the PhyCor
Common Stock, (ii) compared certain financial information for CareWise and
certain financial and stock market information for PhyCor with similar
information for certain other companies whose securities are publicly traded,
(iii) reviewed the financial terms of certain recent business combinations which
it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement, and (v) performed such other studies and analyses and considered such
other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, BT Alex. Brown
assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of the information furnished to or otherwise reviewed
by or discussed with it for purposes of rendering its opinion. With respect to
the financial projections of CareWise and other information relating to the
prospects of CareWise provided to BT Alex. Brown by CareWise, BT Alex. Brown
assumed that such projections and other information were reasonably prepared and
reflected the best currently
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available judgments and estimates of the management of CareWise as to the likely
future financial performance of CareWise. The financial projections of CareWise
that were provided to BT Alex. Brown were utilized and relied upon by BT Alex.
Brown in the Analysis of Certain Other Publicly Traded Companies, the Analysis
of Selected Mergers and Acquisitions, and the Discounted Cash Flow Analysis
summarized below. BT Alex. Brown did not receive projections prepared by the
management of PhyCor. However, PhyCor's management confirmed to BT Alex. Brown,
and BT Alex. Brown relied upon such confirmation, that the publicly available
financial estimates for PhyCor were generally consistent with the expectations
of PhyCor's management. BT Alex. Brown assumed, with the consent of CareWise,
that the Merger will qualify for pooling of interests accounting treatment and
as a tax-free transaction for the stockholders of CareWise. BT Alex. Brown did
not make and it was not provided with an independent evaluation or appraisal of
the assets of CareWise, nor has BT Alex. Brown been furnished with any such
evaluations or appraisals. The BT Alex. Brown Opinion is based on market,
economic and other conditions as they existed and could be evaluated as of the
date of the opinion letter. In rendering its opinion, BT Alex. Brown was not
asked to consider, and did not address, the relative merits of the Merger as
compared to any alternative business transactions with third parties that might
exist for CareWise or the effect of any such other transaction in which CareWise
might engage. Additionally, BT Alex. Brown did not express any opinion as to the
prices at which shares of PhyCor Common Stock may trade at any future time.
The following is a summary of the report (the "BT Alex. Brown Report")
presented by BT Alex. Brown to the CareWise Board on December 21, 1997, in
connection with rendering the BT Alex. Brown Opinion. The financial information
used in the BT Alex. Brown Report with respect to the publicly-traded and
acquired companies was based on publicly available information. With respect to
earnings per share ("EPS") estimates for publicly-traded companies, BT Alex.
Brown utilized estimated EPS for calendar years 1997 and 1998 as reported by the
Institutional Brokers Estimating System ("IBES"). With respect to EPS estimates
for acquired companies, BT Alex. Brown utilized IBES estimates, if available,
and other publicly available information, including Wall Street research
reports, regarding the acquired company at the time the acquisition of that
company was announced. Financial information used with respect to CareWise for
future periods was based on CareWise management estimates for such future
periods.
Historical and Projected Financial Position. BT Alex. Brown reviewed
and analyzed the historical, current and projected financial condition of
CareWise which included (i) an assessment of CareWise's recent financial
statements, (ii) an analysis of CareWise's historical quarterly and annual
revenue, growth and operating performance trends and (iii) an analysis of
CareWise's projected quarterly and annual financial results through 2002.
Analysis of Certain Publicly-Traded Companies. BT Alex. Brown compared
certain financial information (based on commonly used valuation measurements
described below) relating to CareWise to certain corresponding information for a
group of selected companies in the demand management, health care information
services, pharmacy benefit management and teleservices industries including
Access Health, Inc. ("Access Health"), HCIA, Inc., Healthplan Services
Corporation, Transcend Services, Inc., Advance Paradigm, Inc., Express Scripts,
Inc., APAC Teleservices, Inc., Precision Response Corporation, Sitel
Corporation, and Teletech Holdings, Inc. ("Selected Companies"). Such financial
information included, among other things, (i) market value of the total
outstanding common equity ("Equity Value"); (ii) operating performance; (iii)
ratios of Equity Value adjusted for debt and cash ("Adjusted Value") to revenue;
and (iv) ratios of Equity Value per common share to projected EPS. Additionally,
because of the high level of comparability with CareWise, BT Alex. Brown also
compared certain financial information relating to CareWise to certain
corresponding information for Access Health, one of the Selected Companies.
BT Alex. Brown noted that the consideration to be paid in the Merger to
the CareWise stockholders will be between $61.176 million and $73.921 million
("Merger Equity Values" and, as
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adjusted for estimated cash and debt as of December 31, 1997, and cash proceeds
from the future exercises of outstanding options and warrants, "Merger Adjusted
Values"). BT Alex. Brown noted that the ratio of Merger Adjusted Values to
CareWise's estimated calendar 1997 revenue ranged from 3.3x to 4.1x, compared to
a range for the Selected Companies of 0.8x to 6.1x, with a mean of 2.0x and
further compared to the Access Health ratio of 6.1x. BT Alex. Brown further
noted that the ratio of Merger Equity Values to CareWise's projected,
fully-taxed, 1998 net income ranged from 38.1x to 46.1x, compared to a range for
the Selected Companies of 15.2x to 31.8x and a mean of 22.3x and further
compared to the Access Health ratio of 25.6x. As a result of the foregoing
procedures, BT Alex. Brown noted that the proposed transaction ratios for the
CareWise Merger were higher than the means of the ratios for the Selected
Companies. BT Alex. Brown then applied the Adjusted Value to revenue ratios of
the Selected Companies and of Access Health to CareWise's estimated revenue for
calendar 1997 to derive implied Adjusted Values for CareWise. BT Alex. Brown
then adjusted for CareWise's estimated cash and debt as of December 31, 1997,
and cash proceeds from the future exercises of outstanding options and warrants,
to derive implied Equity Values for CareWise. This analysis derived implied
Equity Values for CareWise ranging from $22.3 million to $104.4 million with a
mean of $40.9 million using the Selected Companies and $104.4 million using
Access Health. BT Alex. Brown further applied the ratio ranges and the mean
ratios of the Selected Companies and Access Health for Equity Values per share
to EPS for calendar year 1998 to CareWise's estimated fully-taxed net income for
calendar year 1998 to derive implied Equity Values for CareWise. This analysis
derived Equity Values for CareWise ranging from $24.4 million to $51.0 million
with a mean of $35.8 million using the Selected Companies and $41.1 million
using Access Health. BT Alex. Brown also derived an implied Equity Value for
CareWise of $63.3 million by applying Access Health's per enrolled life Adjusted
Value of $24.21 to CareWise's 2.2 million enrolled lives and adjusting for
CareWise's estimated cash and debt as of December 31, 1997, and cash proceeds
from the future exercises of outstanding options and warrants. From the per
enrolled life analysis, BT Alex. Brown noted that the imputed Equity Value for
CareWise of $63.3 million was within the range of the Merger Equity Values.
Analysis of Selected Mergers and Acquisitions. BT Alex. Brown reviewed
the financial terms, to the extent publicly available, of 21 proposed, pending
or completed mergers and acquisitions since December 1992 in the health care
information service industry (the "Selected Transactions"). BT Alex. Brown
assessed the offer value for the equity ("Transaction Equity Value") of each of
the Selected Transactions, as well as the Transaction Equity Value adjusted for
cash and debt at the time of each transaction ("Adjusted Transaction Value").
The 21 transactions reviewed, in reverse chronological order of public
announcement, were: HBO & Company ("HBOC")/National Health Enhancement Systems
("NHES")(October 1997); HBO & Company/HPR, Inc. (September 1997); Misys,
plc/Medic Computer Systems, plc (September 1997); Cardinal Health Inc./MediQual
Systems, Inc. (May 1997); IDX Corporation/PHAMIS Inc. (March 1997); HBO &
Company/Enterprise Systems, Inc. (March 1997); Shared Medical Systems
Corporation/American Healthware Systems, Inc. (March 1997); HBO & Company/AMISYS
Managed Care Systems, Inc. (February 1997); HBO & Company/GMIS Inc. (September
1996); Access Health/Informed Access (September 1996); HCIA, Inc./LBA
Health Care Mgmt. (July 1996); Medaphis Corporation/Health Data Sciences Corp.
(May 1996); HBO & Company/CyCare Systems, Inc. (May 1996); Warburg Pincus
Ventures, L.P./Transition Systems, Inc. (December 1995); Medaphis
Corporation/Healthcare Recoveries, Inc. (July 1995); HBO & Company/CliniCom
Incorporated (July 1995); HBO & Company/Health Systems Group (May 1995);
Medaphis Corporation/Atwork Corporation (January 1995); The Thomson
Corporation/The MEDSTAT Group, Inc. (November 1994); HBO & Company/Serving
Software, Inc. (May 1994); and MEDSTAT/Inforum, Inc. (December 1992). BT Alex.
Brown noted that HBOC's pending acquisition of NHES ("NHES/HBOC Transaction"),
one of the Selected Transactions, was the most comparable of the Selected
Transactions. All financial information for the Selected Transactions was based
on public information regarding such transactions and such acquired companies,
without taking into account differing market and other conditions during the
five-year period during which the Selected Transactions occurred.
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BT Alex. Brown noted that the ratios of Merger Adjusted Values to
CareWise's estimated calendar 1997 revenue ranged from 3.3x to 4.1x as compared
to a range for the Selected Transactions of 1.5x to 11.4x and a mean of 5.3x and
further compared to the NHES/HBOC Transaction ratio of 3.0x. BT Alex. Brown
further noted that the ratios of Merger Equity Values to CareWise's projected
fully-taxed 1998 net income ranged from 38.1x to 46.1x, and Merger Equity Values
to CareWise's projected 1998 net income, assuming full benefit of CareWise's net
operating loss tax benefit ("NOL"), ranged from 24.4x to 29.5x, compared to a
range for the Selected Transactions of 12.6x to 46.2x and a mean of 33.1x and
further compared to the NHES/HBOC Transaction ratio of 12.6x. As a result of the
foregoing procedures, BT Alex. Brown noted that these proposed transaction
ratios relating to the CareWise Merger were within the ranges of the ratios for
the Selected Transactions and greater than the ratio for the NHES/HBOC
Transaction. BT Alex. Brown then applied the high and low of the ratio ranges
and the mean ratio of Adjusted Transaction Value to revenues for the Selected
Transactions and the NHES/HBOC Transaction to CareWise's estimated revenue for
calendar 1997 to derive implied Adjusted Values for CareWise. BT Alex. Brown
then adjusted for CareWise's estimated cash and debt as of December 31, 1997,
plus cash proceeds from the future exercises of options and warrants, to derive
implied Equity Values ranging from $33.2 million to $186.5 million with a mean
of $92.0 million based on the Selected Transactions and of $56.4 million based
on the NHES/HBOC Transaction. BT Alex. Brown further applied the high and low of
the ratio range and the mean ratio of Transaction Equity Value to forward net
income for the Selected Transactions and the ratio for the NHES/HBOC Transaction
to CareWise's projected 1998 net income, on a fully-taxed basis and assuming
full benefit of CareWise's NOL, to derive implied Equity Values for CareWise.
Utilizing CareWise's fully-taxed projected calendar 1998 net income and based on
the Selected Transactions, BT Alex. Brown derived implied Equity Values for
CareWise ranging from $20.2 million to $74.1 million with a mean of $53.1
million. Utilizing CareWise's projected 1998 net income, assuming full benefit
of CareWise's NOL, BT Alex. Brown derived implied Equity Values for CareWise
ranging from $31.6 million to $115.8 million with a mean of $83.0 million.
Applying the NHES/HBOC Transaction forward net income ratio to CareWise's
fully-taxed 1998 net income and projected 1998 net income, assuming full benefit
of CareWise's NOL, BT Alex. Brown derived implied Equity Values for CareWise
ranging from $20.2 million and $31.6 million, respectively.
Discounted Cash Flow Analysis. BT Alex. Brown performed two discounted
cash flow analyses for CareWise: a base analysis and a conservative analysis.
The discounted cash flow approach values a business based on the current value
of the future cash flow that the business will generate. To establish a current
value under this approach, future cash flow must be estimated and an appropriate
discount rate determined. For the base analysis, BT Alex. Brown utilized
estimates of projected financial performance for CareWise prepared by CareWise
management for the period beginning with the fourth quarter of fiscal year 1998
and through the end of fiscal year 2002. For the conservative analysis, BT Alex.
Brown utilized estimates of projected financial performance prepared by CareWise
management for the fourth quarter of fiscal 1998 and revised estimates,
adjusting the base analysis to reflect a reduced revenue growth rate, for the
period beginning with fiscal year 1999 and through the end of fiscal year 2002.
In both analyses, BT Alex. Brown aggregated the present value of the cash flows
through 2002 with the present value of a range of terminal values. BT Alex.
Brown discounted these cash flows at discount rates ranging from 15.0% to 25.0%.
The terminal value was computed based on projected revenue in 2002 and a range
of terminal multiples of 1.0x to 3.0x. BT Alex. Brown arrived at such discount
rates based on its judgment of the weighted average cost of capital of the
Selected Companies and arrived at such terminal values based on its review of
the trading characteristics of the common stock of the Selected Companies and
the revenue multiples for the Selected Transactions. The base analysis indicated
a range of Equity Values for CareWise of $80.2 million to $178.6 million with an
average Equity Value of $129.4 million. The conservative analysis indicated a
range of Equity Values for CareWise of $39.2 million to $74.7 million, with an
average Equity Value of $57.0 million.
Review of PhyCor. In addition to the foregoing analyses, BT Alex. Brown
reviewed certain publicly available information regarding PhyCor. BT Alex. Brown
reviewed the daily closing per
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share market prices and trading volume for PhyCor Common Stock from January 22,
1992 (the date of PhyCor's initial public offering) to December 18, 1997. BT
Alex. Brown further analyzed the daily closing per share market prices and
trading volume for PhyCor Common Stock from December 18, 1996 to December 18,
1997. BT Alex. Brown also compared the daily closing share market prices for
PhyCor Common Stock from December 18, 1996 to December 18, 1997 to the S&P 500
and a group of six publicly-traded PPM companies consisting of American Oncology
Resources, Inc., Concentra Managed Care, Inc., FPA Medical Management,
Orthodontic Centers of America, Inc., Pediatrix Medical Group, Inc., and
Physician Reliance Network, Inc. (collectively, the "Selected PPM Companies").
From the foregoing comparison, BT Alex. Brown noted that PhyCor's relative price
performance over the indicated period was -9.3% as compared to +37.7% and +32.0%
for the Selected PPM Companies and the S&P 500, respectively. In addition, BT
Alex. Brown reviewed recent Wall Street analyst research reports regarding
PhyCor. Finally, BT Alex. Brown examined PhyCor's valuation in the public market
as compared to the valuation in the public market of other selected
publicly-traded companies. BT Alex. Brown compared certain financial information
(based on the commonly used valuation measurements described below) relating to
certain corresponding information from the Selected PPM Companies. Such
financial information included, among other things, (i) Equity Value; (ii)
Equity Value ratios; (iii) operating performance; (iv) ratios of Adjusted Value
to revenue, earnings before interest expense and income taxes, and earnings
before interest expense, income taxes, depreciation and amortization, each for
the latest reported period, annualized, as derived from publicly available
information; and (v) ratios of Equity Value per share to EPS. BT Alex. Brown
noted that the PhyCor ratios were generally lower than the mean ratios, but were
within the range of the applicable ratios for the Selected PPM Companies.
Additionally, based on publicly available information, BT Alex. Brown summarized
the financial terms and historical pro forma analysis of PhyCor's proposed
acquisition of MedPartners.
Accretion/Dilution Analysis. BT Alex. Brown analyzed certain pro forma
effects of the Merger. Based on such analysis, BT Alex. Brown computed the
estimated accretion/dilution pursuant to the Merger to the IBES estimate for
PhyCor's EPS for calendar years 1998 and 1999, before taking into account
potential cost savings and other synergies that CareWise and PhyCor could
achieve if the Merger were consummated and before nonrecurring costs related to
the Merger. BT Alex. Brown noted that before taking into account potential cost
savings and other synergies and before certain nonrecurring costs related to the
Merger, the Merger would have little or no impact on the IBES estimate for
PhyCor's EPS for calendar years 1998 and 1999. There can be no assurance that
the combined company will be able to realize savings and synergies in the
amounts identified, or at all, following the Merger.
No company used in the analyses involving the Selected Companies, the
Selected PPM Companies nor any transaction used in the Analysis of Selected
Mergers and Acquisitions summarized above is identical to CareWise, PhyCor or
the Merger. Accordingly, such analyses must take into account differences in the
financial and operating characteristics of the Selected Companies, the Selected
PPM Companies and the acquired companies in the Selected Transactions analyses
and other factors that would affect the public trading value and acquisition
value of the Selected Companies, the Selected PPM Companies and the acquired
companies in the Selected Transactions analyses, respectively.
While the foregoing summary describes all of the material analyses
contained in the BT Alex. Brown Report, it is not a comprehensive description of
all analyses and factors considered by BT Alex. Brown. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. BT Alex. Brown believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the BT Alex. Brown Report and the BT Alex. Brown Opinion. In
performing its
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analyses, BT Alex. Brown considered general economic, market and financial
conditions and other matters, many of which are beyond the control of CareWise
and PhyCor. The analyses performed by BT Alex. Brown are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
Additionally, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be sold.
Pursuant to the letter agreement dated February 4, 1997, between
CareWise and BT Alex. Brown, BT Alex. Brown has received $50,000 as a retainer
fee and $250,000 for rendering the BT Alex. Brown Opinion, both of which will be
credited against the final transaction fee of approximately $1.0 million,
payable upon consummation of the Merger. In addition, CareWise has agreed to
reimburse BT Alex. Brown for its reasonable out-of-pocket expenses incurred in
connection with rendering financial advisory services, including fees and
disbursements of its legal counsel. CareWise has agreed to indemnify BT Alex.
Brown and its directors, officers, agents, employees and controlling persons,
for certain costs, expenses, losses, claims, damages and liabilities related to
or arising out of its rendering of services under its engagement as financial
advisor.
The Board of Directors of CareWise retained BT Alex. Brown to act as
its advisor based upon BT Alex. Brown's qualifications, reputation, experience
and expertise. BT Alex. Brown is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for corporate and other purposes. BT Alex. Brown may actively trade
the equity securities of PhyCor for its own account and for the account of its
customers and accordingly may at any time hold a long or short position in such
securities. BT Alex. Brown regularly publishes research reports regarding the
health care services industry and the business and securities of PhyCor and
other publicly-traded companies in the health care services industry.
Additionally, BT Alex. Brown has in the past acted as underwriter in public
offerings of PhyCor Common Stock and at the time the BT Alex. Brown Report was
delivered was providing financial advisory services to the PhyCor in connection
with PhyCor's proposed acquisition of MedPartners.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing by the Subsidiary and
CareWise of the Certificate of Merger under the DGCL, or at such later time as
may be specified in such Certificate of Merger. The Merger Agreement requires
that this filing be made as soon as practicable following satisfaction or waiver
of the various conditions to the Merger set forth in the Merger Agreement, or at
such other time as may be agreed by PhyCor, the Subsidiary and CareWise. It is
currently anticipated that such filing will be made as soon as reasonably
possible after the Special Meeting and after all regulatory approvals have been
obtained, and that the Effective Time will occur upon such filing. However,
there can be no assurance as to whether or when the Merger will occur. See
"-Conditions to the Merger" and "-Regulatory Approvals."
EXCHANGE OF CERTIFICATES
From and after the Effective Time, each holder of a stock certificate,
which immediately prior to the Effective Time represented outstanding shares of
CareWise Capital Stock (the "Certificates"), will be entitled to receive in
exchange therefor, upon surrender thereof to the Exchange Agent (as defined in
the Merger Agreement), a certificate or certificates representing the number of
whole shares of PhyCor Common Stock into which such holder's shares of CareWise
Capital Stock have been converted, cash in lieu of fractional shares and any
dividends or other distributions to which such holder is entitled as a result of
the Merger.
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As soon as practicable at or after the Effective Time, letters of
transmittal will be furnished to the holders of CareWise Capital Stock by the
Exchange Agent for use by the holders of CareWise Capital Stock in surrendering
their original Certificates. Upon the surrender of such 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 CareWise
Capital 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 Merger Agreement.
No fractional shares of PhyCor Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, will be issued in the
Merger; instead, PhyCor will pay to each holder of shares of CareWise Capital
Stock who would otherwise be entitled to a fractional share of PhyCor Common
Stock an amount of cash determined by multiplying such holder's fractional
interest by the Exchange Ratio.
The certificates representing shares of PhyCor Common Stock, the
fractional share payment (if any) which any holder of shares of CareWise Capital
Stock is entitled to receive, and any dividends or other distributions paid on
such PhyCor Common Stock prior to the delivery to PhyCor of the Certificates,
will not be delivered to such holder of CareWise Capital Stock until the
Certificates are delivered to PhyCor through the Exchange Agent. No interest
will be paid on dividends or other distributions or on any fractional share
payment which the holder of such shares shall be entitled to receive upon such
delivery.
At the Effective Time, holders of CareWise Capital Stock immediately
prior to the Effective Time will cease to be, and shall have no rights as,
holders of CareWise Capital Stock, other than the right to receive the shares of
PhyCor Common Stock into which such shares have been converted and any
fractional share payment and any dividends or other distributions to which they
may be entitled under the Merger Agreement. Holders of shares of CareWise
Capital Stock will be treated as holders of record of PhyCor Common Stock for
purposes of voting at any annual or special meeting of shareholders of PhyCor
after the Effective Time, both before and after such time as they exchange their
Certificates for certificates of PhyCor Common Stock as provided in the Merger
Agreement.
Neither PhyCor nor CareWise will be liable to any holder of shares of
CareWise Capital Stock for any shares of PhyCor Common Stock (or dividends or
other distributions with respect thereto) or cash in lieu of fractional shares
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the parties thereto. The representations and warranties of PhyCor,
the Subsidiary and CareWise include, but are not limited to, representations as
to: (i) the organization and existence of each of PhyCor, the Subsidiary and
CareWise, as applicable, (ii) the capitalization of each of PhyCor, the
Subsidiary and CareWise, as applicable, (iii) the name and state of
incorporation of the subsidiaries and affiliated entities, including
partnerships and limited liability companies, as applicable, (iv) the power and
authority of each party to execute, deliver and perform the Merger Agreement,
(v) the legal proceedings against either of PhyCor or CareWise, (vi) the
validity of PhyCor's or CareWise's material contracts, as applicable, (vii) the
conduct of business, since September 30, 1997, in the ordinary course and the
absence of certain changes or material adverse effects, (viii) certain tax
matters, (ix) CareWise's employee benefit plans and employment matters, (x)
CareWise's compliance with laws in general, (xi) each party's regulatory
approvals, (xii) the pooling of interests of the Merger, (xiii) CareWise's
ownership and good title to its properties and assets, (xiv) CareWise's
compliance with environmental regulations and (xv) CareWise's insurance
coverage.
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CONDITIONS TO THE MERGER
The obligations of each of PhyCor and CareWise to consummate the Merger
are subject to, among others, the fulfillment of each of the following
conditions: (i) the other party shall have performed, in all material respects,
all of its obligations as contemplated by the Merger Agreement at or prior to
the consummation date of the Merger; (ii) the representations and warranties of
the other party set forth in the Merger Agreement shall be true and correct as
of the dates of the Merger Agreement and the Closing Date; (iii) PhyCor and
CareWise shall have received the opinion of Perkins Coie LLP that the Merger
will be treated as a reorganization within the meaning of Section 368(a) of the
Code; (iv) each party shall have received an opinion of the other party's
counsel substantially in the form specified in the Merger Agreement; (v) each
party shall have received a certificate, executed by an authorized officer of
the other party, certifying the fulfillment of the conditions to the Merger and
(vi) PhyCor shall have received letters from those persons deemed Affiliates (as
defined in the Merger Agreement). See "-Resale of PhyCor Common Stock by
Affiliates."
The respective obligations of PhyCor and CareWise to consummate the
Merger are subject to certain additional conditions including the following: (i)
no order, decree or injunction by a court of competent jurisdiction preventing
or materially delaying the consummation of the Merger or imposing any material
limitation on the ability of PhyCor effectively to operate the business of
CareWise or which would have a material adverse effect on CareWise shall be in
effect; (ii) no statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state,
thereof that makes the consummation of the Merger or any other transaction
contemplated by the Merger Agreement illegal; (iii) the waiting period under the
HSR Act shall have expired or shall have been terminated; (iv) the Merger shall
have been approved by the affirmative vote of a majority of the outstanding
shares of CareWise Common Stock and the affirmative vote of two-thirds of the
outstanding shares of CareWise Preferred Stock entitled to vote thereon; (v) the
shares of PhyCor Common Stock to be issued in connection with the Merger shall
have been approved for listing on Nasdaq National Market (or other such exchange
in which the shares of PhyCor Common Stock are then listed) upon official notice
of issuance and shall have been issued in transactions qualified or exempt from
registration under applicable securities of Blue Sky laws; (vi) the Merger shall
qualify for pooling of interests accounting treatment; (vii) PhyCor and CareWise
shall have received all consents, waivers, approvals and authorizations of third
parties with respect to all material contracts, leases, service agreements and
management agreements (except where failure to obtain such consent, approval or
authorization would not have a material adverse effect on the business of
PhyCor); (viii) all consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been obtained; and (ix) the
Registration Statement shall have been declared effective under the Securities
Act and shall not be subject to any stop order.
REGULATORY APPROVALS
The HSR Act prohibits consummation of the Merger until certain
information has been furnished to the Antitrust Division of the DOJ and the FTC
and certain waiting period requirements have been satisfied. On January 20,
1998, PhyCor and CareWise made their respective filings with the DOJ and the FTC
with respect to the Merger Agreement. Under the HSR Act, the filings commenced a
30-day waiting period during which the Merger can not be consummated, which
waiting period will expire on February 19, 1998. Notwithstanding the termination
of the HSR Act waiting period, at any time before or after the Effective Time,
the FTC, the DOJ or others could take action under the antitrust laws, including
requesting additional information, seeking to enjoin the consummation of the
Merger or seeking the divestiture by PhyCor of all or any part of the stock or
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assets of CareWise. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or, if such a challenge were made, that it
would not be successful.
As conditions precedent to the consummation of the Merger, the Merger
Agreement requires, among other things: (i) that the HSR Act waiting period has
expired or been terminated and (ii) that all other governmental approvals
required for the consummation of the Merger have been obtained.
PhyCor and CareWise do not believe that the Merger violates the
antitrust laws and each intends to resist vigorously any assertion to the
contrary by the FTC, the DOJ or others. Any such resistance could delay
consummation of the Merger, perhaps for a considerable period. Prior to the
Merger, the FTC or the DOJ could seek to enjoin the consummation of the Merger
under the federal antitrust laws or require that PhyCor or CareWise divest
certain assets to avoid such a proceeding. The FTC or DOJ could also, following
the Merger, take action under the federal antitrust laws to rescind the Merger,
to require divestiture of assets of either PhyCor or CareWise, or to obtain
other relief.
Certain other persons, such as states' attorneys general and private
parties, could challenge the Merger as violative of the antitrust laws and seek
to enjoin the consummation of the Merger and, in the case of private persons,
also to obtain treble damages. There can be no assurance that a challenge to the
Merger on antitrust grounds will not be made or, if such a challenge is made,
that it would not be successful. CareWise does not intend to seek any further
stockholder approval or authorization of the Merger Agreement as a result of any
action that it may take to resist or resolve any FTC, DOJ or other objections,
unless required to do so by applicable law.
The operations of PhyCor and CareWise are subject to a substantial body
of federal, state, local and accrediting body laws, rules and regulations
relating to the conduct, licensing and development of health care businesses and
facilities. As a result of the Merger, many of the arrangements between CareWise
and third-party payors may be deemed to have been transferred, requiring the
approval and consent of such payors. It is anticipated that, prior to the time
this Prospectus-Proxy Statement is mailed to the stockholders of CareWise, all
filings required to be made prior to such date to obtain the consents and
approvals required from federal and state health care regulatory bodies and
agencies will have been made. However, certain of such filings cannot be made
under the applicable laws, rules and regulations until after the Effective Time.
Although no assurances to this effect can be given, it is anticipated that the
companies will be able to obtain any required consent or approval.
CERTAIN COVENANTS
Alternative Proposals. The Merger Agreement provides that, prior to the
Effective Time, neither CareWise nor any of its subsidiaries will, and CareWise
will use its best efforts to cause its, officers, directors, employees, agents
or representatives not to, initiate, solicit or encourage any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or any equity securities of,
CareWise or any of its significant subsidiaries (any such proposal or offer
being hereinafter referred to as an "Alternative Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal. In addition, CareWise has agreed that it will notify PhyCor
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it.
Preserve Business. The Merger Agreement provides that, during the
period from the date of the Merger Agreement to the Effective Time, except as
provided in the Merger Agreement, PhyCor and CareWise will conduct their
respective businesses in the usual, regular and ordinary course in
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substantially the same manner as previously conducted, and each of CareWise and
PhyCor will use its reasonable best efforts to preserve intact its business
organization, to keep available to PhyCor the services of its present employees
and to preserve for PhyCor its relationships with customers, suppliers and
others having business relations with them and their respective subsidiaries.
Material Transaction. Under the Merger Agreement, CareWise, its
subsidiaries and other affiliated entities may not (other than as required
pursuant to or contemplated by the terms of the Merger Agreement and related
documents), without first obtaining the written consent of the PhyCor, (i) sell,
lease or otherwise dispose of any material assets except in ordinary course,
(ii) except pursuant to the exercise of options, warrants, conversion rights and
other contractual rights disclosed in the Merger Agreement, issue any shares of
its capital stock, effect any stock split or otherwise change its capitalization
as it existed on the date hereof, (iii) grant, confer or award any option (other
than with respect to options to acquire not more than 30,000 shares of CareWise
Common Stock to new hires, which options are to be granted at exercise prices
that are at least 90% of the fair market value of the CareWise Common Stock
based on the implied value thereof assuming consummation of the Merger),
warrant, conversion right or other right not existing on the date of the Merger
Agreement to acquire any shares of its capital stock, (iv) increase any
compensation or enter into or amend any employment agreement with any of its
present or future officers or directors, except for normal increases consistent
with past practice and the payment of cash bonuses to officers pursuant to and
consistent with existing plans or programs, (v) adopt any new employee benefit
plan (including any stock option, stock benefit or stock purchase plan) or amend
any existing employee benefit plan in any material respect, except for changes
which are less favorable to participants in such plans; (vi) declare, set aside
or pay any dividend or make any other distribution or payment with respect to
any shares of its capital stock or other ownership interests or (vii) except in
connection with the use of shares of capital stock to pay the exercise price or
tax withholding in connection with its stock-based employee benefit plans,
directly or indirectly redeem, purchase or otherwise acquire any shares of its
capital stock or capital stock of any of its subsidiaries, or make any
commitment for any such action.
CareWise Benefits Rollover. The Merger Agreement also provides that for
a period of not less than one year after the Effective Time, PhyCor, CareWise as
the surviving corporation in the Merger (the "Surviving Corporation") and their
affiliates shall provide employees of CareWise who become employed by PhyCor or
the Surviving Corporation or any of their affiliates on the Closing Date or as a
result of the transactions contemplated by the Merger Agreement (the "Retained
Employees") with employee benefit plans, policies, programs and arrangements
that in the aggregate are not less favorable than those provided to such
employees by CareWise. For purposes of all employee benefit plans, policies,
programs and arrangements maintained or contributed to by PhyCor, the Surviving
Corporation or any of their affiliates, PhyCor, the Surviving Corporation and
their affiliates shall treat, and shall cause each such plan, policy, program or
arrangement (in each case, once made available to Retained Employees) to treat,
the Retained Employees' prior service with CareWise as service rendered to
PhyCor, the Surviving Corporation and their affiliates for purposes of
determining eligibility to participate and vesting thereunder. Likewise, for
purposes of determining the amount of vacation, sick leave and similar benefits
to which Retained Employees shall be entitled upon becoming employees of PhyCor,
the Surviving Corporation or any of their affiliates, PhyCor, the Surviving
Corporation and each of their affiliates shall treat each Retained Employee's
entire period of employment with CareWise as if it had been employment with
PhyCor, the Surviving Corporation and their affiliates.
PhyCor, the Surviving Corporation and their affiliates shall waive, or
shall cause to be waived, any and all pre-existing condition limitations and
eligibility waiting periods under any health, dental, vision, disability, life
insurance, cafeteria or similar plan, program or arrangement (once such plan,
program or arrangement is made available to Retained Employees) with respect to
(a) Retained Employees who, immediately prior to the Closing Date, participated
in such a plan, program or arrangement maintained or contributed to by CareWise
and (b) their eligible dependents.
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PhyCor or the Surviving Corporation may amend or terminate any employee
benefit plan of PhyCor, the Surviving Corporation or CareWise or any other
contracts, arrangements, commitments or understandings, in accordance with their
terms and applicable law.
Both PhyCor and CareWise have agreed to cooperate in the prompt
preparation and filing of certain documents under federal and state securities
laws with applicable governmental entities.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective
Time, PhyCor and CareWise may (i) extend the time for the performance of any of
the obligations or other acts of the other party contained in the Merger
Agreement; (ii) waive any inaccuracies in the representations and warranties of
the other party contained in the Merger Agreement or in any document delivered
pursuant to the Merger Agreement; and (iii) waive compliance with the agreements
or conditions under the Merger Agreement. In addition, the Merger Agreement may
be amended at any time upon the written agreement of PhyCor and CareWise without
the approval of the shareholders of either party, except that after the Special
Meeting, no amendment may be made which by law requires a further approval by
the stockholders of CareWise without such further approval being obtained.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Time in a number of circumstances, which include, among others: (a) by
the mutual consent of CareWise and PhyCor or (b) by either CareWise or PhyCor if
(i) the adoption of the Merger Agreement and the approval of the transactions
contemplated thereby by the holders of CareWise Capital Stock shall not have
been obtained, (ii) the Merger shall have not been consummated by July 31, 1998,
(iii) a court or governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Merger and such
order shall have become final and nonappealable, (iv) the other party has
breached any representation or warranty contained in the Merger Agreement which
has or is likely to have a material adverse effect on the other party or (v) the
other party has materially breached any of the covenants or agreements set forth
in the Merger Agreement, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment Agreements. John E. Gebhart III, James O. Steeb, Michael B.
Weitz and Craig S. Russell, each an executive officer of CareWise, have entered
into employment agreements with PhyCor that provide for (i) the base salary to
be paid to such individuals, (ii) participation in an incentive compensation
plan, (iii) insurance and other benefits, and (iv) the eligibility of such
individuals for grants of stock options under PhyCor's stock option plan. In
addition, the agreements provide for certain benefits upon termination of
employment.
The employment agreements entered into with Messrs. Gebhart, Steeb,
Weitz and Russell provide such officers with annual base salaries of $200,000,
$200,000, $155,000 and $175,000, respectively. Under the agreements, Messrs.
Gebhart and Steeb are each to be granted options to purchase 100,000 shares of
PhyCor Common Stock and Messrs. Weitz and Russell are each to be granted options
to purchase 45,000 shares of PhyCor Common Stock, with the options to vest over
a period of four years beginning at the Effective Time. In addition, the
agreements contain severance arrangements in the event the employment is
terminated by PhyCor without cause or, under certain circumstances, by Messrs.
Gebhart, Steeb, Weitz or Russell. Pursuant to such arrangements, Messrs. Gebhart
and Steeb will continue to receive annual salary plus insurance for a period of
12 months or until March 31, 2000, whichever is longer; Messrs. Weitz and
Russell will continue to receive annual salary plus insurance for a period of
six months or until March 31, 1999, whichever is longer. Each employment
agreement includes covenants with respect
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to confidential information, trade secrets and non-competition. See "CAREWISE
EXECUTIVE COMPENSATION."
Stock Options. At the Effective Time, each option issued pursuant to
the CareWise Option Plan then outstanding, whether or not vested or exercisable,
will, pursuant to the CareWise Option Plan, be assumed by PhyCor and will
constitute a Replacement Option to acquire, on the same terms and conditions as
were applicable under such assumed option, shares of PhyCor Common Stock equal
to the product of the Exchange Ratio and the number of shares of CareWise Common
Stock subject to such option, at a price per share equal to the aggregate
exercise price (rounded up to the nearest $0.001) for the shares of CareWise
Common Stock subject to such option divided by the number of full shares of
PhyCor Common Stock deemed to be purchasable pursuant to such Replacement
Option. Notwithstanding the foregoing, any and all Replacement Options shall be
fully vested at the Effective Time in accordance with the CareWise Option Plan.
PhyCor has agreed to file within ten days following the Effective Time a
registration statement on Form S-8 to register, to the extent necessary, the
shares of PhyCor Common Stock issuable pursuant to the Replacement Options under
the Securities Act. See "CAREWISE EXECUTIVE COMPENSATION" with respect to
options currently held by certain officers of CareWise.
Bonus Plan. In November 1997, the CareWise Board adopted a bonus plan
pursuant to which John E. Gebhart III, James O. Steeb, Michael B. Weitz, Craig
S. Russell and certain other employees of CareWise are eligible to receive a
bonus equal to a predetermined percentage (ranging from 25% to 60%) of his or
her annual salary, in the event that (i) CareWise achieves certain corporate
performance targets for the fiscal year ending March 31, 1998 or (ii) CareWise
completes a business combination, including the Merger, prior to March 31,
1998.
Indemnification of Directors and Officers Pursuant to the Merger
Agreement. CareWise and PhyCor have agreed that PhyCor shall cause CareWise, as
the surviving corporation in the Merger, to keep in effect provisions in its
Restated Certificate of Incorporation, as amended (the "CareWise Certificate")
and Amended and Restated Bylaws (the "CareWise Bylaws"), providing for
exculpation of director and officer liability and the indemnification of each
director, officer, employee and agent thereof to the fullest extent permitted
under Delaware law, which provisions shall not be amended except as required by
applicable law or except to make changes permitted by law that would enlarge the
indemnified party's right of indemnification. In addition, PhyCor has agreed to
pay all expenses, including attorney's fees, that may be incurred by any
indemnified party in enforcing the indemnity obligations provided for in the
Merger Agreement.
Ownership of PhyCor Common Shares. John E. Gebhart III, CareWise's
Chairman, President and Chief Executive Officer, owns 2,000 shares of PhyCor
Common Stock. Craig S. Russell, CareWise's Vice President of Marketing and
Strategic Alliances, owns 100 shares of PhyCor Common Stock. Darcy Moore, a
director of CareWise, owns 1,500 shares of PhyCor Common Stock.
Ownership by Officers and Directors. As of the Record Date, the
executive officers and directors of CareWise (as a group) owned and had the
right to vote an aggregate of _______ shares of CareWise Common Stock and
_______ shares of CareWise Preferred Stock, and also held options to purchase
an aggregate of _________ shares of CareWise Common Stock pursuant to the
CareWise Option Plan.
Irrevocable Proxies. As a condition to the willingness of PhyCor to
execute the Merger Agreement, concurrently with the execution of the Merger
Agreement, each of John E. Gebhart III, James O. Steeb, Michael B. Weitz, Craig
S. Russell, Thomas O. Pyle, Rheba de Tornyay, Scott Marber, Kenneth W. Duemig,
Frontenac VI, L.P., InterWest Partners III, Mohr, Davidow Ventures, Olympic
Venture Partners III, L.P., Franklin Capital Associates II, L.P., CH Partners
IV, Fluke
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Capital Management, L.P., and New Enterprise Associates VI, Limited Partnership,
who own shares representing, as of the Record Date, an aggregate of ___% of the
voting power of the CareWise Common Stock and __% of the voting power of the
CareWise Preferred Stock, granted irrevocable proxies to certain officers of
PhyCor allowing such officers to vote such shares (and any other shares of
CareWise Capital Stock acquired by them after the date of the Merger Agreement,
including shares acquired pursuant to the exercise of any rights to purchase or
otherwise acquire shares) in favor of the Merger Agreement and the Merger.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the Merger qualifing for
pooling of interests accounting treatment. PhyCor and CareWise have agreed not
to intentionally take or cause to be taken or omit to take any action that would
disqualify the Merger as a pooling of interests for accounting purposes.
Under the pooling of interests method of accounting, the historical
basis of the assets and liabilities of PhyCor and CareWise will be combined at
the Effective Time and carried forward at their previously recorded amounts, the
equity accounts of the holders of PhyCor Common Stock and CareWise Capital Stock
will be combined on PhyCor's consolidated balance sheet and no goodwill or other
intangible assets will be created. Financial statements of PhyCor issued after
the Merger will be restated retroactively to reflect the consolidated operations
of PhyCor and CareWise as if the Merger had taken place prior to the periods
covered by such financial statements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
considerations of the Merger to CareWise, PhyCor and the holders of CareWise
Capital Stock who are citizens or residents of the United States. The discussion
does not purport to be a complete analysis or discussion of all potential tax
considerations or consequences relevant to a decision whether to vote for the
Merger. The discussion does not address all aspects of U.S. federal income
taxation that may be applicable to stockholders in light of their particular
status or circumstances, including, without limitation, foreign persons,
insurance companies, tax-exempt entities, retirement plans, dealers in
securities, persons who acquired their CareWise Capital Stock pursuant to the
exercise of employee stock options or otherwise as compensation, persons subject
to the alternative minimum tax and persons in whose hands the CareWise Capital
Stock does not represent a capital asset.
The Merger is intended to qualify as a reorganization under Section
368(a) of the Code. It is a condition to the obligation of CareWise and PhyCor
to consummate the Merger that they shall have received an opinion from Perkins
Coie LLP, tax counsel to CareWise ("Tax Counsel"), to the effect that for
federal income tax purposes (i) the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code; (ii) each of PhyCor, the
Subsidiary and CareWise will be a party to the reorganization within the meaning
of Section 368(b) of the Code; (iii) no gain or loss will be recognized by
CareWise, PhyCor or the Subsidiary as a result of the Merger; and (iv) no gain
or loss will be recognized by a stockholder of CareWise as a result of the
Merger with respect to CareWise Capital Stock converted solely into PhyCor
Common Stock (other than with respect to cash issued in lieu of fractional
PhyCor Common Stock). In rendering its opinion regarding the Merger as described
above, Tax Counsel shall rely upon certain assumptions, including the
assumptions described below, and shall receive and rely upon representations
contained in certificates of CareWise and PhyCor, as well as representations of
certain stockholders of CareWise, including representations regarding the
continuity of interest requirement discussed below.
Tax Counsel's opinion neither binds the IRS nor precludes the IRS from
adopting a contrary position. An opinion of counsel only represents such
counsel's best legal judgment and has no binding effect or official status of
any kind, and no assurance can be given that contrary positions
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will not be taken by the IRS or a court considering the issues. The parties will
not request a ruling from the IRS in connection with any of the federal income
tax considerations of the Merger.
Assumptions made by Tax Counsel. Tax Counsel's opinion will be based on
certain assumptions and the accuracy of the representations as indicated above.
Among the principal assumptions will be that (i) the Merger will be consummated
in accordance with the Merger Agreement, (ii) CareWise after the Merger will
have retained substantially all its assets, and (iii) after the Effective Time
the parties intend CareWise to continue its business as a wholly-owned
subsidiary of PhyCor.
Continuity of Interest Requirement. To qualify as a reorganization, the
Merger must satisfy certain requirements for tax-free reorganizations, including
the "continuity of interest" requirement. To satisfy the "continuity of
interest" requirement, holders of CareWise Capital Stock must not, pursuant to a
plan or intent existing at or prior to the Merger, dispose of or transfer so
much of either (i) their CareWise Capital Stock in anticipation of the Merger or
(ii) the PhyCor Common Stock to be received in the Merger (collectively,
"Planned Dispositions"), such that the holders as a group, would no longer have
a substantial ongoing equity interest in the business of CareWise being
conducted by PhyCor after the Merger. The precise percentage of acquiring
corporation stock that constitutes a "substantial" equity interest for these
purposes is not known. However, the IRS has established a safe harbor under
which the continuity requirement is deemed satisfied if the value of the
acquiring corporation stock received in the reorganization equals or exceeds 50%
of the aggregate value of the acquired corporation's Capital Stock at the time
of the reorganization (after taking into account Planned Dispositions).
In connection with the continuity of interest requirement, CareWise has
represented to Tax Counsel that, there is no plan or intention on the part of
the stockholders of CareWise owning five percent or more of CareWise Capital
Stock and, to the best of the knowledge of CareWise's management, there is no
plan or intention on the part of the remaining stockholders of CareWise, to
sell, exchange or otherwise dispose of a number of shares of PhyCor Common Stock
received in the Merger that would reduce the holdings of PhyCor Common Stock by
all CareWise stockholders to less than 50% of the total value, measured at the
Effective Time, of the Merger consideration.
Furthermore, certain significant stockholders have represented to Tax
Counsel that they have no plan or intention to sell, transfer or otherwise
dispose of more than a fixed percentage of shares of PhyCor Common Stock to be
received in the Merger. Assuming such stockholders' representations to be true,
the holdings of PhyCor Common Stock received by all CareWise stockholders in the
Merger, after taking into account Planned Dispositions, will equal or exceed 50%
of the total value, measured at the Effective Time, of the Merger consideration.
Additionally, each such stockholder has represented and warranted that he, she
or it will not in fact sell, transfer or otherwise dispose of more than such
previously specified fixed percentage of the PhyCor Common Stock received in the
Merger within one year of the Effective Time without providing satisfactory
assurances to CareWise that such transfer will not cause the Merger to fail to
constitute a reorganization within the meaning of Section 368(a) of Code.
Assuming the accuracy of those representations, as of the Effective Time, the
Merger will meet the continuity of interest requirement. If the representations
or assumptions above prove to be inaccurate, it is possible that the continuity
of interest requirement will not be satisfied, and if such requirement is not
satisfied, the Merger would not be treated as a reorganization. See
"-Consequences of Failure to Qualify as a Tax-Free Reorganization."
In January 1998, the IRS published final regulations that generally
eliminate any requirement under the continuity of interest test that
stockholders of an acquired corporation retain any stock issued in a
reorganization transaction such as the Merger. However, this regulation does not
apply to transactions occurring
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pursuant to a written agreement which is (subject to customary conditions)
binding on the parties on January 28, 1998. Therefore, because the Merger
Agreement is dated as of December 22, 1997, the regulations do not apply to
PhyCor Common Stock to be received by the CareWise stockholders in the Merger.
Consequences of Characterization as a Tax-Free Reorganization. Assuming
the Merger qualifies as a reorganization under Section 368(a) of the Code, the
tax basis of PhyCor Common Stock received by a stockholder in the Merger will be
same as the tax basis of CareWise Capital Stock surrendered in exchange
therefore, reduced by any basis allocable to fractional share interests in
PhyCor Common Stock for which cash is received. Furthermore, the holding period
of the PhyCor Common Stock received in the Merger will include the period during
which the shares of CareWise Capital Stock surrendered in exchange therefor were
held, provided that such shares of CareWise Capital Stock were held as capital
assets at the Effective Time.
The taxable year of CareWise will end for federal income tax purposes
as of the close of business on the Effective Date and CareWise will be required
to file a final federal income tax return for its taxable year ending on such
date. As a result of the Merger, CareWise will experience an ownership change as
defined in Section 382(g) of the Code with the result that any tax credit
carryforwards, NOL carryovers, capital loss carryforwards or built-in deductions
may become subject to the limitations on use provided by Sections 382 and 383 of
the Code. In addition, the Merger may result in the imposition of certain
consolidated return limitations on the ability of the PhyCor consolidated return
group to utilize any CareWise tax credit carryovers, NOL carryovers, capital
loss carryforwards or built-in deductions pursuant to the Treasury regulations
under Section 1502 of the Code.
Cash received by a holder of CareWise Capital Stock in lieu of a
fractional share interest in PhyCor Common Stock or upon the exercise of
dissenters rights will result in the recognition of gain or loss for federal
income tax purposes, measured by the difference between the amount of cash
received and the portion of the basis of the share of CareWise Capital Stock
allocable to such fractional share interest. Such gain or loss will be capital
gain or loss, provided that such share of CareWise Capital Stock was held as a
capital asset at the Effective Time and the receipt of cash is not essentially
equivalent to a dividend. Furthermore, such gain will be a long-term capital
gain or loss if such share of CareWise Capital Stock has been held for more than
eighteen months and mid-term capital gain or loss if such share of CareWise
Capital Stock was held for more than one year but not more than eighteen months.
Consequences of Failure to Qualify as a Tax-Free Reorganization. A
successful IRS challenge to the reorganization status of the Merger (as a result
of a failure of the "continuity of interest" requirement or otherwise) would
result in holders of CareWise Capital Stock being treated as if they sold their
CareWise Capital Stock in a taxable transaction. In such event, each holder of
CareWise Capital Stock would recognize gain or loss with respect to each share
of CareWise Capital Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value, at the Effective
Time, of the PhyCor Common Stock received in exchange therefor (plus any cash
received for fractional shares). In such event, a stockholder's aggregate basis
in the PhyCor Common Stock so received would equal its fair market value, and
the stockholder's holding period for such stock would begin the day after the
Effective Time.
The foregoing discussion is based on the Code, the Treasury Regulations
proposed or promulgated thereunder and administrative interpretations as in
effect on the date hereof and judicial precedents relating thereto, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax considerations discussed herein. The foregoing discussion
addresses neither the effect of any applicable state, local or foreign tax laws,
nor the effect of any federal tax laws other than those pertaining to the U.S.
federal income tax. HOLDERS OF CAREWISE CAPITAL STOCK ARE URGED TO CONSULT WITH
THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN
TAX
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CONSIDERATIONS OF THE MERGER TO THEM AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL AND OTHER TAX LAWS.
RESALE OF PHYCOR COMMON STOCK BY AFFILIATES
The shares of PhyCor Common Stock to be issued to holders of shares of
CareWise Capital Stock in connection with the Merger has been registered under
the Securities Act. PhyCor Common Stock received by the holders of shares of
CareWise Capital Stock upon consummation of the Merger will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed an "Affiliate" (as defined below) of CareWise or PhyCor within
the meaning of Rule 145 under the Securities Act. "Affiliates" are generally
defined as persons who control, are controlled by, or are under common control
with CareWise or PhyCor at the time of the Special Meeting (generally,
directors, certain executive officers and principal stockholders). For two years
following the Effective Time, Affiliates of CareWise or PhyCor may not sell
their shares of PhyCor Common Stock acquired in connection with the Merger
except pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act. In general,
under Rule 145 following the Effective Time, an Affiliate (together with certain
related persons) would be entitled to sell shares of PhyCor Common Stock
acquired in connection with the Merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker", as such terms
are defined in Rule 144 under the Securities Act. Additionally, the number of
shares to be sold by an Affiliate (together with certain related persons and
certain persons acting in concert) within any three-month period for purposes of
Rule 145 may not exceed the greater of 1% of the outstanding shares of PhyCor
Common Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would remain available to
Affiliates only if PhyCor remained current with its information filings with the
Commission under the Exchange Act. One year after the Effective Time, an
Affiliate would be able to sell such PhyCor Common Stock without such manner of
sale or volume limitations, provided that PhyCor were current with its Exchange
Act information filings and such Affiliate had not been an Affiliate of PhyCor
for the three months prior thereto. Two years after the Effective Time, an
Affiliate would be able to sell such PhyCor Common Stock without such manner of
sale or volume limitations, provided such Affiliate had not been an affiliate of
PhyCor for three months prior thereto.
Each of CareWise and PhyCor have agreed to use its reasonable, good
faith efforts to cause each holder of shares of CareWise Capital Stock deemed to
be an Affiliate of CareWise or PhyCor to enter into an agreement providing that
such Affiliate will not sell, pledge, transfer or otherwise dispose of shares of
PhyCor Common Stock to be received by such person in the Merger, (i) except in
compliance with the applicable provisions of the Securities Act and the rules
and regulations thereunder and (ii) until after such time as results covering at
least thirty days of post-Merger combined operations of PhyCor and CareWise have
been published. PhyCor has agreed that it shall publish the combined results in
its first Quarterly Report on Form 10-Q to be filed after the closing which
contains a full calendar month of combined results.
EXPENSES
The Merger Agreement provides that whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses except that (a) the filing fees in connection with the
HSR Act filings shall be shared equally by CareWise and PhyCor and (b) the
filing fee in connection with the filing of the Registration Statement, the
expenses incurred in connection with the printing and mailing of the
Registration Statement and Prospectus-Proxy Statement, and the fees associated
with any audit that PhyCor may request be undertaken by CareWise shall be borne
by PhyCor.
STOCK OPTION PLANS AND STOCK OPTIONS
At the Effective Time, each option issued pursuant to the CareWise
Option Plan then outstanding, whether or not vested or exercisable, will,
pursuant to the CareWise Option Plan, be assumed by PhyCor and will constitute a
Replacement Option to acquire, on the same terms and conditions as were
applicable under such assumed option, shares of PhyCor Common Stock equal to the
product of the Exchange Ratio and the number of shares of CareWise Common Stock
subject to such option, at a price per share equal to the aggregate exercise
price (rounded up to the nearest $0.001) for the shares of CareWise Common Stock
subject to such option divided by the
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number of full shares of PhyCor Common Stock deemed to be purchasable pursuant
to such Replacement Option. Notwithstanding the foregoing, any and all
Replacement Options shall be fully vested at the Effective Time in accordance
with the CareWise Option Plan. PhyCor has agreed to file within ten days
following the Effective Time a registration statement on Form S-8 to register,
to the extent necessary, the shares of PhyCor Common Stock issuable pursuant to
the Replacement Options under the Securities Act. See "CAREWISE EXECUTIVE
COMPENSATION" with respect to options currently held by certain officers of
CareWise.
NASDAQ NATIONAL MARKET LISTING
An application for listing of additional shares will be filed with the
Nasdaq National Market (or such other exchange on which the shares of PhyCor
Common Stock are then listed) to list the shares of PhyCor Common Stock to be
issued to holders of shares of CareWise Capital Stock in connection with the
Merger. Although no assurance can be given that the shares of PhyCor Common
Stock so issued will be accepted for listing, PhyCor and CareWise anticipate
that these shares will qualify for listing on the Nasdaq National Market upon
official notice of issuance thereof. It is a condition to the Merger that such
shares of PhyCor Common Stock be approved for listing on Nasdaq National Market
(or such other exchange on which the shares of PhyCor Common Stock are then
listed) upon official notice of issuance at the Effective Time.
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APPRAISAL RIGHTS OF CAREWISE STOCKHOLDERS
The following summary does not purport to be a complete statement of
the provisions of the DGCL relating to the appraisal rights of CareWise
stockholders and is qualified in its entirety by reference to the applicable
section of the DGCL, which is attached hereto as Annex D. Any holder of CareWise
Common Stock or CareWise Preferred Stock intending to exercise his or her
appraisal rights is urged to review carefully Annex D and to consult with legal
counsel so as to ensure strict compliance with the appraisal rights provisions
of the DGCL.
GENERAL
The holders of shares of any class or series of capital stock of a
constituent corporation in a merger to be effected pursuant to Section 251 of
the DGCL are entitled to appraisal rights under Section 262 of the DGCL
("Section 262"), provided that they comply with the conditions established by
Section 262.
A record holder of shares of CareWise Common Stock or CareWise
Preferred Stock who makes the demand described below with respect to such
shares, and who otherwise complies with the statutory requirements of Section
262, will be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of his or her shares of CareWise Common
Stock or CareWise Preferred Stock. All references in this summary of appraisal
rights to a "stockholder" or "holders of shares of CareWise Common Stock or
CareWise Preferred Stock" are to the record holder or holders of shares of any
class or series of capital stock of CareWise.
Under Section 262, not less than 20 days prior to the Special Meeting,
CareWise must notify each holder of CareWise Common Stock or CareWise Preferred
Stock entitled to appraisal rights of the Merger and that appraisal rights are
available to such stockholders and include in each such notice a copy of Section
262. THE PROSPECTUS-PROXY STATEMENT SHALL CONSTITUTE SUCH NOTICE TO THE RECORD
HOLDERS OF CAREWISE CAPITAL STOCK. ANY SUCH STOCKHOLDER WHO WISHES TO EXERCISE
SUCH APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING DISCUSSION AND ANNEX D
CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES
SPECIFIED WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER THE DGCL.
ACTIONS NECESSARY TO PRESERVE APPRAISAL RIGHTS
In order to be eligible to exercise appraisal rights, a CareWise
stockholder must file with CareWise a written demand for appraisal of his or her
shares. Such notice must be provided by the CareWise stockholder to CareWise
prior to the vote on the Merger. A CareWise stockholder seeking appraisal rights
may not vote his or her CareWise Common Stock or CareWise Preferred Stock in
favor of the Merger at the Special Meeting. If a CareWise stockholder either
fails to provide the necessary written notice prior to the vote on the Merger or
votes in favor of the Merger at the Special Meeting, such CareWise stockholder
may not receive payment for his or her CareWise Common Stock or CareWise
Preferred Stock in accordance with the provisions of the DGCL relating to
appraisal rights.
If the CareWise stockholders approve the Merger by the required vote
pursuant to the CareWise Revised Certificate of Incorporation and in accordance
with the laws of the State of Delaware, CareWise shall notify each qualified
CareWise stockholder within 10 days after the Effective Time that the Merger has
become effective.
Within 120 days after the Effective Time, either CareWise or any
CareWise stockholder who has complied with the required conditions of Section
262 may file a petition in the Delaware Court, with a copy served on CareWise in
the case of a petition filed by a stockholder, demanding a determination of the
fair value of the shares of all dissenting stockholders. Within 120 days after
the
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<PAGE> 55
Effective Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from CareWise a statement setting forth the aggregate number of shares of
CareWise Common Stock and CareWise Preferred Stock not voting in favor of the
Merger and with respect to which demands for appraisal were received by CareWise
and the number of holders of such shares. Such statement must be mailed within
10 days after the written request therefor has been received by CareWise.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which CareWise stockholders are
entitled to appraisal rights. The Delaware Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Delaware Court may
dismiss the proceedings as to such stockholder. Where proceedings are not
dismissed, the Delaware Court will appraise the shares of CareWise Common Stock
or CareWise Preferred Stock owned by such stockholders, determining the fair
value of such shares exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
Holders of shares of CareWise Common Stock or CareWise Preferred Stock
considering seeking appraisal should recognize that the fair value of their
shares determined under Section 262 could be more than, the same as or less than
the consideration they are entitled to receive pursuant to the Merger Agreement
if they do not seek appraisal of their shares. The cost of the appraisal
proceeding may be determined by the Delaware Court and taxed against the parties
as the Delaware Court deems equitable in the circumstances. Upon application of
a dissenting stockholder of CareWise, the Delaware Court may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding, including without limitation, reasonable
attorneys' fees and the fees and expenses of experts, be charged pro rata
against the value of all shares of CareWise Common Stock or CareWise Preferred
Stock entitled to appraisal.
Any holder of shares of CareWise Common Stock or CareWise Preferred
Stock who has duly demanded appraisal in compliance with Section 262 will not be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any stockholder
will have the right to withdraw such demand for appraisal and to accept the
terms offered in the Merger Agreement; after this period, the stockholder may
withdraw such demand for appraisal only with the consent of CareWise. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal shall cease, and all
holders of shares of CareWise Common Stock or CareWise Preferred Stock will be
entitled to receive the consideration offered pursuant to the Merger Agreement.
Inasmuch as CareWise has no obligation to file such a petition, and CareWise has
no present intention to do so, any holder of shares of CareWise Common Stock or
CareWise Preferred Stock who desires such a petition to be filed is advised to
file it on a timely basis. Any stockholder may withdraw such stockholder's
demand for appraisal by delivering to CareWise a written withdrawal of his or
her demand for appraisal and acceptance of the Merger consideration, except that
(i) any such attempt to withdraw made more than 60 days after the Effective Time
will require written approval of CareWise and (ii) no appraisal proceeding in
the Delaware Court shall be dismissed as to any stockholder without the approval
of the Delaware Court, and such approval may be conditioned upon such terms as
the Delaware Court deems just.
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<PAGE> 56
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, 1996 through
January 23, 1998, as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
PHYCOR
COMMON STOCK
---------------------------------
HIGH LOW
------ -------
<S> <C> <C>
1996
First Quarter..................................................... $37.00 $25.50
Second Quarter.................................................... 41.75 26.67
Third Quarter..................................................... 39.25 26.75
Fourth Quarter.................................................... 41.50 26.63
1997
First Quarter..................................................... $35.38 $26.50
Second Quarter.................................................... 35.50 22.88
Third Quarter..................................................... 34.75 27.63
Fourth Quarter.................................................... 33.25 22.75
1998
First Quarter (through January 23, 1998).......................... $28.50 $18.88
</TABLE>
The closing sales price for PhyCor Common Stock as reported by the
Nasdaq National Market was $27.75 on December 22, 1997, the date immediately
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 $20.25 on
January 23, 1998. As of such date, there were approximately 3,166 holders of
record of PhyCor Common Stock. All share prices listed above give effect to
the three-for-two stock split of PhyCor Common Stock effected as a stock
dividend on June 14, 1996.
CareWise is a closely-held Delaware corporation. There has been no
public trading market in the securities of CareWise and, therefore, there is no
historical per share price for such securities for any period. The Board of
Directors of CareWise believes that consideration to be paid by PhyCor in
connection with the Merger Agreement and the Merger is fair, based upon, among
other factors, the BT Alex. Brown Opinion. See "THE MERGER-Reasons for Merger;
Recommendation of the Board of Directors" and "THE MERGER-Opinion of BT Alex.
Brown Incorporated."
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. CareWise has never declared or paid a dividend on the CareWise Capital
Stock.
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<PAGE> 57
CAREWISE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. CAREWISE'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS SET FORTH HEREUNDER AND SUCH DIFFERENCES IN FUTURE OPERATING PERFORMANCE
COULD BE MATERIAL.
The following discussion analyzes the financial condition and the
results of operations of CareWise for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997. The
discussion should be read in conjunction with the financial statements of
CareWise including the accompanying notes and the financial data appearing in
this Prospectus--Proxy Statement.
OVERVIEW
CareWise is a national provider of health care decision-support
programs that are designed to lower the cost of medical care while improving
plan members' health and satisfaction with their health plans. CareWise's
programs serve approximately two million individuals from its Seattle call
center and an additional 500,000 under foreign country license agreements.
CareWise built its initial membership base from the employer sector, then in
1993 added its first managed care organization ("MCO") client, which is the
sector from which most current growth is being derived.
CareWise's revenue is derived from monthly membership-based service
fees. CareWise earns additional revenues on sales of its new member
implementation kits, which include CareWise's books, and on sales of periodic
newsletters and postcards. These implementation and communication revenues are
recorded ratably over the contract year. Revenue per-member per-month (pmpm)
rates have declined in recent years primarily due to increased competition.
Deferred revenue represents advance payment of the last month's contract fees
and revenue for books and other supplies used by customers to implement
CareWise's programs. Advance payments are recognized in the month services are
provided. Deferred revenue on books and other supplies is amortized over the
life of the contract, which is usually twelve months.
Many contracts provide performance guarantees ensuring that the savings
resulting from the CareWise program will exceed the costs of such program by a
stated ratio, with refunds or credits available if such savings do not occur.
The impact on revenues to date of such guarantees has not been material.
Direct service costs represent expenses for operating the company's
call center operations, information technology, customer services,
communications staff and AT&T per capita fees payable to AT&T Systems Leasing
Corporation ("AT&T"). Sales and marketing costs include the cost associated with
product promotion, sales lead generation and sales closing activities. The sales
and implementation cycle for new clients typically ranges from six months to a
year in length. General and administrative expenses include the cost of
corporate and facilities management, finance and human resources. Product
development expenses, which are expensed as incurred, represent the costs
incurred to develop new product offerings or to make significant modifications
to currently existing products.
CareWise's ability to sustain or increase revenues and profitability is
dependent largely on its ability to secure additional contracts for its services
and products and to retain and expand existing contracts. There can be no
assurance that CareWise will be able to secure and implement additional
contracts in a manner consistent with historical results or in a manner
necessary to increase or sustain revenues and profitability in the future.
CareWise could be adversely affected by the termination or nonrenewal of any of
its contracts, as a result of the Merger or otherwise, or by the renegotiation
of the terms of contracts, particularly if the affected contracts cover a large
number of members or represent a significant portion of CareWise's revenue. For
example, CareWise has been notified of the termination of a client contract with
approximately 450,000 members effective April 1, 1998 due to the merger of the
client with a large national health plan. Certain of the existing CareWise
service agreements contain covenants that restrict CareWise's ability to enter
into agreements for the provision of demand management services with competitors
of the existing parties to such agreements. In addition, any factors adversely
affecting the market for CareWise's services and products, including factors
outside the control of CareWise, such as adverse publicity or government
regulatory action, could have a material adverse effect on CareWise.
In 1994, CareWise acquired Acamedica, Inc. ("Acamedica") to
provide medical information content and publishing capabilities. In 1995,
CareWise wrote-off the remaining goodwill associated with the purchase of
Acamedica as certain significant factors expected to generate future service
revenues did not materialize.
In June 1994, CareWise entered into an agreement with AT&T whereby AT&T
assisted in the development of a new computer software program used by CareWise
as an integral part of its business and provided CareWise with certain computer
and telephone equipment and maintenance over the five-year lease term. The
software development costs of $3.4 million were expensed in 1994. The computer
equipment was accounted for as a capital lease. In December 1996, the
outstanding principal of the software obligation of $2.8 million was paid in
full.
Through the second quarter of 1997, CareWise used cash in its operating
activities. CareWise's operations provided cash in the quarter ended September
30, 1997.
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<PAGE> 58
RESULTS OF OPERATIONS
The following table sets forth, certain statement of operations data,
expressed as percentages of total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
SERVICE REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Direct service costs 57.9 52.0 67.5 63.8 64.0
AT&T per capita fee 0.0 1.7 7.1 6.9 0.0
Sales and marketing 13.4 24.1 30.5 32.3 16.0
General and administrative 23.3 24.9 28.2 29.0 18.7
Product development 49.2 0.0 4.6 5.4 5.8
Provision for excess contract service
costs 0.0 19.0 0.0 0.0 0.0
Write-off of goodwill 0.0 8.1 0.0 0.0 0.0
------------ ------------ ------------ ----------- -----------
TOTAL OPERATING EXPENSES 143.8 129.8 137.9 137.4 104.5
------------ ------------ ------------ ----------- -----------
OPERATING LOSS (43.8) (29.8) (37.9) (37.4) (4.5)
OTHER INCOME (EXPENSE):
Interest income 0.3 0.8 1.7 1.3 2.0
Interest expense (4.6) (9.3) (6.2) (6.9) (1.2)
Other 0.0 0.0 0.0 0.0 0.0
------------ ------------ ------------ ----------- -----------
NET (LOSS) (48.1)% (38.3)% (42.4)% (43.0)% (3.8)%
============ ============ ============ =========== ===========
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1997
Service Revenues. Service revenues increased 68.4% from $6.4 million
for the nine months ended September 30, 1996 to $10.7 million for the nine
months ended September 30, 1997. The increase was due primarily to increases in
membership enrollment in the CareWise program and to expansion of enrollments in
BabyWise and CareSupport services. As of September 30, 1997, approximately 2.2
million members were enrolled in CareWise services compared to approximately 1.1
million members enrolled as of September 30, 1996.
Direct Service Costs and AT&T Per Capita Fees. Direct service costs
increased 68.8% from $4.1 million for the nine months ended September 30, 1996
to $6.9 million for the nine months ended September 30, 1997, and represented
63.8% and 64.0% of revenues, respectively. Direct service costs increased at
the same rate as revenue growth in 1997 as declines in "pmpm" rates were offset
by call handling efficiencies related to increases in membership and
utilization. During the nine-month period ended September 30, 1996, CareWise
incurred $438,544 in AT&T per capita fees, which were not incurred during the
same period in 1997 due to the elimination of the software lease obligation and
per capita fee structure in December 1996. See "Liquidity and Capital
Resources."
Sales and Marketing. Sales and marketing expenses decreased 16.5% from
$2.1 million for the nine months ended September 30, 1996 to $1.7 million for
the nine months ended September 30, 1997, and represented 32.3% and 16.0% of
revenues, respectively. The decrease in sales and marketing expenses in the 1997
period resulted primarily from restructuring the sales and marketing
organization with more concentrated efforts on the MCO, employer and union
markets.
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<PAGE> 59
General and Administrative. General and administrative expenses
increased 8.7% from $1.8 million for the nine months ended September 30, 1996 to
$2.0 million for the nine months ended September 30, 1997, and represented 29.0%
and 18.7% of revenues, respectively. The increase in general and administrative
expenses resulted primarily from the hiring of additional finance and corporate
management personnel and related management information systems expenses.
Product Development. Product development expenses increased 79.8% from
$346,000 for the nine months ended September 30, 1996 to $622,000 for the nine
months ended September 30, 1997, and represented 5.4% and 5.8% of revenues,
respectively. The increase in product development expenses in the 1997 period
resulted primarily from costs incurred in the development and launch of CareWise
5.0 and to make significant modifications to BabyWise, CareSupport and
LivingWise.
Other Income (Expense). CareWise incurs interest expense on long-term
debt and capital and software lease obligations and generates interest income
from cash and cash equivalent balances. CareWise had net interest expense
totaling $360,000 for the nine months ended September 30, 1996 as compared to
net interest income of $81,000 for the nine months ended September 30, 1997 and
represented (5.6)% and 0.8% of revenues, respectively. The increase in net
interest income is due to the investment of available cash balances which
increased primarily as a result of the Series F Preferred Stock financing which
occurred in 1996 and due to positive operating cash flows during 1997. The
decrease in interest expense is due primarily to the elimination of the AT&T
lease obligation in December 1996. See "Liquidity and Capital Resources."
Income Taxes. During the nine months ended September 30, 1996 and 1997,
CareWise recorded additional NOL carryforwards. NOL carryforwards totaled
$13.4 million at September 30, 1997, which may be available to offset future
federal taxable income, if any, which expire beginning in 2003. The use of
approximately $7.3 million of NOLs may be limited due to a change of control
under section 382 of the Code such that only approximately $484,000 of such
losses may be utilized each year on a cumulative basis through 2011. The
benefit of these NOL carryforwards has not been reflected in the financial
statements.
Years Ended December 31, 1994, 1995 and 1996
Service Revenues. Service revenues increased 32.9% from $6.9 million in
1994 and 1995 to $9.2 million in 1996. Increases in membership enrollment in
1995 were offset by price declines due to increased competition. The increase in
1996 was due primarily to increases in membership enrollment in the CareWise
product and to expansion of enrollments in BabyWise and CareSupport services.
Membership enrollment at December 31, 1994, 1995 and 1996 was approximately
683,000, 941,000 and 1.2 million, respectively.
Direct Service Costs and AT&T Per Capita Fees. Direct service costs
decreased 9.7% from $4.0 million in 1994 to $3.6 million in 1995 and increased
72.0% to $6.2 million in 1996, and represented 57.9%, 52.0% and 67.5% of
revenues, respectively. The decrease in 1995 was attributable primarily to call
center efficiencies related to the implementation of CareWise's software
platform in the delivery of counseling services. The increase in 1996 was
attributable to increases in membership enrollment and utilization. AT&T per
capita fees increased from $0 in 1994 to $119,000 in 1995 and increased 447.8%
to $653,000 in 1996, and represented 0.0%, 1.7% and 7.1% of revenues,
respectively. During 1994, CareWise did not meet the membership thresholds for
paying per capita fees. See "Liquidity and Capital Resources."
Sales and Marketing. Sales and marketing expenses increased 80.6% from
$922,000 in 1994 to $1.7 million in 1995 and increased 68.2% to $2.8 million in
1996, and represented 13.4%, 24.1% and 30.5% of revenues, respectively. The
increase in sales and marketing expenses from 1994 through 1996 reflects the
increased expenses for promoting and marketing CareWise's products including
expense to expand the organization's sales force and management personal for
sales and marketing efforts.
52
<PAGE> 60
General and Administrative. General and administrative expenses
increased 7.7% from $1.6 million in 1994 to $1.7 million in 1995 and increased
50.4% to $2.6 million in 1996, and represented 23.3%, 24.9% and 28.2% of
revenues, respectively. The increase from 1994 through 1996 reflects increased
expenses for additional finance and corporate management personnel and related
management information systems expenses.
Product Development. Product development expenses decreased 100.0% from
$3.4 million in 1994 to $0 in 1995 and increased to $418,000 in 1996, and
represented 49.2%, 0.0% and 4.6% of revenues, respectively. In 1994, CareWise
expensed $3.4 million related to the development of the CareWise software
platform. During 1995, CareWise maintained the software platform without
significant upgrade and in 1996 modified the CareWise product and expanded the
platform to launch CareWise's BabyWise and CareSupport products.
Provision for Excess Contract Service Costs. In 1995, CareWise entered
into an agreement with a customer to provide services below CareWise's direct
service costs. The total loss on the contract was $1.3 million which was
accrued at the time the loss was identified. CareWise terminated the contract
effective June 30, 1996.
Write-off of Goodwill. During 1995, CareWise wrote off goodwill
totaling $556,000 related to the acquisition of Acamedica, which was acquired in
1994, as certain significant factors expected to generate future service revenue
for CareWise did not materialize.
Other Income (Expense). Net interest expense increased 101.1% from
$293,000 in 1994 to $590,000 in 1995 and decreased 29.4% to $417,000 in 1996,
and represented 4.3%, 8.5% and 4.5% of revenues, respectively. The increase in
net interest expense in 1995 resulted primarily from increased borrowings. The
decrease in net interest expense in 1996 is attributable to the net reduction of
long-term debt and capital lease obligations along with increased interest
income on the investment of cash proceeds resulting from the Series F Preferred
Stock financing in September 1996, and the elimination of the AT&T lease
obligation in December 1996. See "Liquidity and Capital Resources."
Income Taxes. CareWise recorded NOL carryforwards during 1995 and 1996,
totaling $2.1 million and $4.5 million, respectively. At December 31, 1996,
CareWise had tax NOL carryforwards of approximately $12.9 million. These net
operating tax loss carryforwards may be available to offset future federal
taxable income, if any, which expire beginning in 2003. The use of approximately
$7.3 million of NOLs may be limited due to a change of control under section 382
of the Code such that only approximately $484,000 of such losses can be utilized
each year on a cumulative basis through 2011. The benefit of these NOL
carryforwards has not been reflected in the financial statements.
53
<PAGE> 61
LIQUIDITY AND CAPITAL RESOURCES
CareWise has financed its operations primarily through private sales
of its equity securities and to a lesser extent, lease financing, and the
issuance of debt. In 1994, 1995 and 1996, CareWise raised net proceeds of
$390,000, $3.9 million and $8.8 million in connection with private offerings of
its Series D, Series E and Series F Preferred Stock. The Series E offering also
included conversion of $1.0 million of notes payable to stockholders. The
proceeds raised were primarily used to fund operations and to pay down long
term obligations.
As of December 31, 1995 and 1996, CareWise had $3.1 million and $5.6
million in cash which increased to $6.5 million at September 30, 1997. The
increase in cash balances in 1996 is primarily related to the preferred stock
offerings noted above, offset by cash used in operations. The increase at
September 30, 1997 is primarily due to cash provided by operating activities.
Cash used in operating activities increased from $340,000 in 1994 to
$1.2 million in 1995 and $3.4 million in 1996. The increased use of cash was
primarily related to expansion of operations and an increased customer base.
Cash provided by operating activities was $1.4 million for the nine months
ended September 30, 1997 as CareWise's operations became cash flow positive for
the first time due to its increasing customer base and overall operating
efficiencies achieved.
CareWise purchased $44,000, $85,000, $326,000 and $231,000 of
furniture, fixtures and equipment in 1994, 1995, 1996 and the nine months ended
September 30, 1997. CareWise expects to spend approximately $1.3 million to
purchase capital equipment and computer software in 1998 to expand its call
centers and corporate headquarter in Seattle, Washington. CareWise could
increase its expenditures for call center expansion in 1998 depending on the
timing and extent of increases in membership enrollment.
In June 1994, CareWise entered into an agreement with AT&T whereby AT&T
assisted in the development of a new computer software program used by CareWise
as an integral part of its business and provided CareWise with certain computer
and telephone equipment and maintenance over the five-year lease term. The
software development costs of $3.4 million were expensed in 1994. The computer
equipment was accounted for as a capital lease. In December 1996, the
outstanding principal of the software obligation of $2.8 million was paid in
full.
The agreement also called for additional payments based on CareWise
achieving a certain number of subscribers within specified periods. CareWise
issued 200,000 shares of CareWise Common Stock to AT&T in December 1996 to
eliminate the requirement for further per capita payments. The agreement
required a $275,000 deposit, which was recorded in the financial statements as
restricted cash and was released upon payment of the software obligation.
CareWise may incur significantly sales and marketing expenses during
1998 and may devote additional resources to the further development of existing
services. To the extent that CareWise incurs increased expenses, its operating
results will be adversely affected unless revenues and operating margins
increase sufficiently to offset such expenditures.
CareWise believes its current capital resources are adequate to fund
cash needs for anticipated operating levels for at least the next twelve months.
CareWise also may use capital resources in connection with business expansion
that may include the acquisition of complementary product lines or businesses
during 1998.
FINANCIAL ACCOUNTING STANDARDS NO. 128
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per
Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires that dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new
statement, Basic EPS is computed based on weighted average shares outstanding
and excludes any potential dilution. Diluted EPS reflects potential dilution
from the exercise or conversion of securities into common stock or from other
contracts to issue common stock and is similar to the currently required fully
diluted EPS. SFAS 128 is effective for financial statements issued for earlier
periods ending after December 15, 1997, including interim periods, and earlier
application is not permitted. When adopted, CareWise will be required to restate
its EPS data for all prior periods presented. CareWise does not expect the
impact of the adoption of this statement to be material to previously reported
EPS amounts.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS
CareWise's computer systems and infrastructure have been enhanced to
take into account the Year 2000 issue. As a result, management believes that the
Year 2000 issue will be resolved in a timely fashion and will not materially
affect future results, or cause reported financial information to be inaccurate.
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<PAGE> 62
BUSINESS OF CAREWISE
GENERAL
CareWise is a national provider of health care decision-support
services that are designed to lower the cost of medical care while improving
plan members' health and satisfaction with their health care plan. CareWise's
programs serve approximately two million individuals from its Seattle call
center and an additional 500,000 under foreign country license agreements.
CareWise's customers include managed care organizations, health care providers,
indemnity health insurers, employers and other group associations. In addition
to traditional demand management services, CareWise also offers a disease
management program for certain health conditions, diseases and chronic
illnesses. CareWise's demand and disease management programs are designed to (i)
reduce inappropriate care and unnecessary expenses; (ii) promote health and
prevention; (iii) improve program compliance with treatment regimens and support
self-care; (iv) enhance member satisfaction; and (v) improve the overall quality
of care through member health education.
MARKET FOR DEMAND MANAGEMENT
Health care costs in the United States have escalated in recent years
and, according to the Health Care Financing Administration, currently account
for more than 13% of the gross national product. The containment of these costs
has become a national priority, resulting in the restructuring of the health
care industry towards cost-conscious managed health care programs. The market
forces reforming the U.S. health care systems present many opportunities for
innovation in health care information delivery.
One factor in the increase of health care costs in recent years is the
absence of access to health care information. Individuals who lack timely,
reliable health care information may delay needed treatment, self-treat
inappropriately or seek unnecessary care, all of which can lead ultimately to
poorer health outcomes and higher costs. CareWise believes that access to
adequate and timely health care information can promote preventive care and
early intervention, both of which are demonstrably cost-effective and can
influence health and well-being. In addition, CareWise believes that obtaining
health care information can have a significant favorable effect in the
management of episodes of care.
The demand management industry has developed in response to
inefficiencies in the health care system and to take advantage of the
opportunities they present. Demand management programs generally involve
telephone-based health counseling services that are designed to provide
individuals with timely, appropriate, and understandable health care information
delivered in a convenient and supportive manner. Increasingly these programs
also encompass disease, condition and wellness management services. Demand
management programs encourage individuals proactively to manage their own health
and to make informed health care decisions, in order to reduce the health care
costs associated with members most likely to consume a disproportionate share of
medical resources.
CAREWISE STRATEGY
The CareWise strategy is to provide demand and disease management and
health counseling services that address the medical cost containment, market
differentiation, and member satisfaction needs of its customers by:
- Providing customers with lower direct and indirect medical expenses,
high levels of member satisfaction and retention, and improved quality of care;
- Enhancing its products and services to identify, target and
proactively manage the health of those members who are most likely to incur
large medical expenses and who are most likely to benefit from health counseling
and behavior modification;
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<PAGE> 63
- Providing customers with customized private label services designed
to meet their specific program requirements; and
- Continuously upgrading and improving the state-of-the-art health
counseling and behavior modification guidelines underlying its demand and
disease management programs.
CAREWISE PRODUCTS AND SERVICES
CareWise's products and services provide members with information and
health care decision making and behavior modification support, including (i)
timely symptom-specific assessment, (ii) information on major diagnoses or
procedures, (iii) physician referrals and (iv) disease- and condition-specific
counseling. All CareWise programs are provided via toll-free numbers by
specially trained nurses 24 hours a day, seven days a week. All telephone calls
are charted on-line and the behavior-change outcome is noted when the individual
makes a decision about his or her medical concern. CareWise's products and
services are designed to meet the needs of specific customer groups including
(i) indemnity insurers and MCOs; (ii) PPM organizations, physician hospital
organizations, integrated delivery systems and independent physician groups;
(iii) self-insured employers and unions; (iv) pharmaceutical companies and
pharmaceutical benefits management organizations ("PBMs") and (v) consumers and
affinity groups and associations. At the request of a CareWise customer,
CareWise customizes its services such that they are provided to members directly
as if from the health plan or employer itself.
CareWise's proprietary on-line clinical guidelines were developed by
CareWise's clinical staff. The guidelines are reviewed routinely by the College
of Physicians and Surgeons of Columbia University, as is the CareWise-produced
medical information that is provided to members. CareWise's nurses currently use
more than 200 of such guidelines in symptom-, condition-, medication- and
procedure-related counseling sessions.
As part of the CareWise demand and disease management programs, members
are provided with decision counseling, personalized medical and health
information, and frequently, follow-up telephone contact for assessment and
outcome verification and behavior modification support. CareWise's communication
programs employ a multimedia approach including voice, print, video and audio
capabilities. In combination, these services and products are designed to result
in informed decision making, leading to improved health, reduced need for care,
more appropriate use of medical services and lower health care expenses.
CareWise's programs include:
CAREWISE(TM) - CareWise's flagship product, combines communication
materials with voluntary telephone counseling, provided 24 hours a day, 7 days a
week by a registered nurse, to address medical self-care concerns and decisions.
CARESUPPORT(TM) - A specialized disease and condition management
program which identifies and supports patients with chronic illness and assists
and educates individuals in adopting behaviors that will lead to more effective
self-management of chronic illnesses. CareSupport currently supports the
following diseases and conditions: asthma, arthritis, back pain, cardiovascular
disease, chronic obstructive pulmonary disease, diabetes, depression,
gastroesophageal reflux disease/gastrointestinal ("GERD/GI"), hypertension and
osteoporosis.
LIVINGWISE(TM) - Incorporates registered nurse-provided health risk
assessment and stage-based self-care counseling to reduce lifestyle risks and
promote positive behavior change.
BABYWISE(TM) - Provides communications materials and perinatal risk
assessment and counseling to reduce medical and lifestyle risks in supporting
healthy pregnancies.
CareWise's programs are supported by proprietary member communications
materials developed by CareWise. These materials include The CareWise Guide:
Self-Care From Head To Toe
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<PAGE> 64
(winner of a 1995 National Health Information Award for excellence, and the only
self-care guide integrated with a registered nurse counseling service), CareWise
for Older Adults: Self-Care for Lifelong Health (focused on the health care
concerns of the over-55 population, the first self-care guide for older adults
to be integrated with a registered nurse counseling service), the CareWise
Newsletter (published quarterly), CareWise postcards, the new member resource
kit, and other customized materials such as book covers and newsletters.
CareWise's products and services are designed and customized to
complement the health plan sponsors' existing programs, allowing CareWise nurses
to provide callers with summary information about their health plan such as
covered benefits and hospital notification procedures. CareWise also integrates
special features into the delivery software to help health plans meet their
specific goals, such as emergency room notification or screening reminders. In
addition to the basic CareWise product, these customized services help
CareWise's customers meet Health Plan Employer Data and Information Set
("HEDIS") standards and achieve and maintain National Committee for Quality
Assurance ("NCQA") accreditation. HEDIS standards and NCQA accreditation
increasingly are becoming important as qualifying criteria for bidding on
government and employer health plan contracts.
CAREWISE CUSTOMERS
As of September 30, 1997, CareWise had 73 customers representing
approximately 2.2 million members enrolled in CareWise, CareSupport, LivingWise,
and BabyWise. Approximately 67.0% or 1.4 million members, are from MCOs and
traditional indemnity plans 12.0%, or 264,000 members, are from employer
customers, and the remaining 21.0%, or 442,000 members, are from union and other
groups. Customer contracts typically run for one to two years with certain
minimum payments and per member per month adjustments based on volume. Many
contracts provide performance guarantees ensuring that the savings resulting
from the CareWise program will exceed the costs of such program by a stated
ratio, with refunds or credits available if such savings do not occur. The
impact on revenues to date of such guarantees has not been material.
CareWise's three largest customers accounted for approximately 24%, 15%
and 14%, respectively, of service revenues in the nine months ended September
30, 1997 and 16%, 16% and 15% of service revenues in the twelve months ended
December 31, 1996.
MARKETING AND SALES
CareWise markets its services through a direct sales force and
value-added resellers, such as brokers and consultants, to (i) indemnity
insurers and MCOs; (ii) PPM organizations, physician hospital organizations,
integrated delivery systems and independent physician groups; (iii) self-insured
employers and unions; (iv) pharmaceutical companies and PBMs and (v) consumers
and affinity groups and associations. CareWise supplements its direct selling
effort with targeted advertising, conference participation, public relations
activities and direct mail programs.
CareWise's sales staff currently consists of a vice president of sales,
a vice president of marketing, three regional sales directors and four sales
support staff. Sales functions are organized geographically.
Customer service is a priority for CareWise. Each customer is assigned
a CareWise account manager who is responsible for program implementation,
ongoing monitoring of results, and support of the client's efforts to promote
the program. The account manager provides the customer with semiannual reports
on utilization and an annual report on program impact. He or she also
coordinates survey activity and claims analysis and sells additional services.
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<PAGE> 65
OPERATIONS
CareWise provides its members with direct contact with registered
nurses and emphasizes high quality service in all of its programs. All calls are
answered by registered nurses and all callers with medical concerns are offered
follow-up services, frequently with the individual nurse who received the
original call. More than 95% of all calls are answered within 20 seconds,
abandoned calls typically are less than 5%, and CareWise's system is designed so
that no member receives a busy signal when calling the CareWise call center.
CareWise's registered nurses handle calls in more than 140 languages and respond
to deaf or hearing impaired callers through a TDD interface.
COMPETITION
The market for CareWise's services is highly competitive. CareWise's
competition includes independent companies as well as divisions of large health
service and information service organizations. CareWise also faces potential
competition from customers who may elect to develop their own personal health
management solutions, and CareWise expects to face competition from new entrants
to the market. CareWise believes that it competes favorably on the basis of
price and value, operational capabilities, clinical content of its proprietary
clinical algorithms, communications capabilities, ability to rapidly enroll new
members and performance with respect to cost savings and member satisfaction.
CareWise expects to face increased competition from competitors that may have
substantially greater financial, marketing or technical resources, as well as
from industry consolidations that create larger competitors offering new
products and services.
INTELLECTUAL PROPERTY
CareWise uses a custom developed software application for delivering
health care decision counseling services to its clients. The application is a
client/server model system developed using an object oriented architecture and
runs on Windows NT 4.0 workstations connected to two Digital 8200 series cluster
servers running Digital UNIX 4.0a. Data is stored in a shared Oracle RDBMS
instance on the UNIX servers (Oracle version 7.3.2.3). Connectivity between the
client and server is accomplished through EtherNet TCP/IP. Client side
development is done using PowerSoft PowerBuilder version 5.0.02 and the Power
Builder Foundation Classes. The application includes a variety of functional
capabilities, including member verification, administrative call handling, call
history recordation and reporting, health counseling information guidelines,
past medical history recordation, provider referral capability, HEDIS compliance
monitoring, scripted outbound dialing program administration and member view
lists. In addition, and in conjunction with the software application, CareWise
uses proprietary on-line clinical guidelines, audio-text sound clips, abstracts
from peer-reviewed medical journals and proprietary member communications
materials. CareWise's voice system consists of an AT&T Definity G3 with
interflow.
CareWise claims proprietary rights in the software application, as well
as the clinical guidelines, audio-text sound clips, abstracts, member
communications materials and their respective components and related protectable
materials. CareWise has registered software source code copyrights for
originally developed portions of the software application. CareWise also relies
on general copyright, trademark, trade secret laws and restrictions on
disclosure, copying and transferring title. There can be no assurance that third
party competitors, some of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents or other intellectual property rights that will prevent,
limit or interfere with CareWise's ability to market its services either in the
United States or in international markets. Litigation or regulatory proceedings,
which could result in substantial cost and uncertainty to CareWise, may also be
necessary to enforce CareWise's intellectual property rights or to determine the
scope and validity of third party proprietary rights. It is also possible that
CareWise may need to acquire licenses to, or contest the validity of, issued or
pending patents or other registered rights of third parties relating to
CareWise's technology. There can be no assurance that any such licenses
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<PAGE> 66
would be made available to CareWise on acceptable terms, if at all, or that
CareWise, if it were to contest the validity of any issued or pending patents or
other registered rights of third parties, would prevail. In addition, CareWise
could incur substantial costs in defending itself in suits brought against
CareWise on its intellectual property rights or in bringing suits against third
parties to enforce CareWise's intellectual property rights. Further, despite
CareWise's precautions, it may be possible for unauthorized third parties to
copy or independently develop aspects of CareWise's products or to obtain and
use information that CareWise regards as proprietary. CareWise has no patents,
and existing copyright laws afford only limited practical protection. In
addition, the laws of some foreign countries do not protect CareWise's
proprietary rights to the same extent as do the laws of the United States, which
may now be and could become a factor as CareWise continues to expand into
markets outside the United States.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
statutes and regulations relating to many aspects of CareWise's business and the
businesses of CareWise's customers who use CareWise's programs. Although these
statutes and regulations are continually changing and evolving, in many cases
they predate the development of telephone-based health care information services
and other interstate transmission and communication of medical information and
services. Some of these statutes and regulations governing the provision of
health care services, including the practice of nursing and the practice of
medicine, could be construed by governmental authorities to apply to CareWise's
business activities, including without limitation services performed by nurses
licensed as registered nurses in the State of Washington to provide out-of-state
health care information services such as nondirective decision counseling and
information regarding both health care conditions, providers and treatment time
frames. These statutes and regulations could also apply to certain activities of
CareWise's customers who operate CareWise's programs. Other statutes and
regulations, including federal and state anti-kickback statutes, provide
criminal and civil penalties for individuals or entities that knowingly and
willfully offer, pay, solicit or receive remuneration in order to induce
referrals for items or services for which payment may be made under the Medicare
and Medicaid programs and certain other government-funded programs. In addition,
those statutes and regulations governing health maintenance organizations and
other plans that provide or arrange for health care services for a prepaid or
periodic charges could be construed by government authorities to apply to
certain activities of CareWise that are provided on a per-member, per-month
basis. If a government authority seeks to enforce any of the foregoing statutes
or regulations, CareWise, its employees and/or its customers could be required
to obtain additional licenses or registrations, to modify or curtail the
operation of CareWise's programs, to modify the method of payment for CareWise's
programs, or to pay fines or incur other penalties.
Both CareWise and the use of its programs could be subject to review or
challenge by government authorities under any of the above statutes and
regulations that apply to health care services. In addition, new laws and
regulations could be enacted that regulate CareWise or the use of its programs.
Any such action with respect to CareWise or the use of its programs could
generate adverse publicity irrespective of the final outcome, and could have a
material adverse effect on CareWise.
EMPLOYEES
As of September 30, 1997, the Company had 98 full-time and 12
part-time employees, including 60 registered nurses. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
believes that its relations with its employees are good.
LEGAL PROCEEDINGS
From time to time CareWise has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business.
Such claims, even if not meritorious,
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<PAGE> 67
could result in the expenditure of significant financial and managerial
resources. CareWise is not aware of any legal proceedings or claims that it
believes will have, individually or in the aggregate, a material adverse effect
on its business, financial condition or results of operations.
PROPERTIES
CareWise leases approximately 28,000 square feet of office and call
center space in the Seattle business district. The lease on this space extends
through October 2000, with an option for a five-year extension. The Company
leases small sales offices, one in each of California and New York, and office
space in Georgia, which is subleased to third parties.
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<PAGE> 68
CAREWISE PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 31, 1997, certain
information with respect to the beneficial ownership of shares of both classes
of CareWise Capital Stock by (i) each person (or group of affiliated persons)
known to CareWise to be the beneficial owner of 5% or more of CareWise's
outstanding shares of either class of CareWise Capital Stock, (ii) each CareWise
director, (iii) CareWise's Chief Executive Officer and the two other most highly
compensated executive officers of CareWise during the last completed fiscal year
whose total annual salary and bonus exceeded $100,000 (the "CareWise Named
Executive Officers"), and (iv) all directors and executive officers of CareWise
as a group. Except as otherwise noted, CareWise believes that the beneficial
owners of the shares of CareWise Capital Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares.
<TABLE>
<CAPTION>
SHARES OF CAREWISE SHARES OF CAREWISE SHARES OF PHYCOR
COMMON STOCK PREFERRED STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO MERGER (1) PRIOR TO MERGER (1) FOLLOWING MERGER (2)
----------------------- ------------------------ ------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ---------------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen C. Schwartz 427,063 13.7 -- --
3765 Wild Plum Ct.,
Boulder, CO 80304
InterWest Partners III (3) 425,807 13.7 404,761 9.1
3000 Sand Hill Road, Suite #3-255
Menlo Park, CA 94025
CH Partners IV (4) 425,807 13.7 294,749 6.6
9623 S.E. 16th
Bellevue, WA 98004
Mohr, Davidow Ventures II (5) 417,102 13.4 703,858 15.7
Building One, Suite 240
3000 Sand Hill Road
Menlo Park, CA 94025
Kenneth W. Duemig (6) 237,469 7.6 -- --
CareWise, Inc.
701 Fifth Avenue, 26th Floor
Seattle, WA 98104-7015
AT&T Systems Leasing, Inc. 200,000 6.4 -- --
2555 Telegraph Road
Bloomfield Hills, MI 48303
Impilo Limited (7) -- -- 1,105,272 21.2
c/o Sanlam Health (Pty.) Ltd.
Attn: Pieter Swanepoel
2 Strand Road
Belleville 7530
South Africa
Frontenac VI, L.P. (8) -- -- 702,308 15.7
135 S. LaSalle, Suite 3800
Chicago, IL 60603
Olympic Venture Partners III, L.P. (9) -- -- 326,141 7.3
2420 Carillon Point
Kirkland, WA 98033
New Enterprise Associates VI, L.P. (10) -- -- 250,413 5.6
2490 Sand Hill Road
Menlo Park, CA 94025
John E. Gebhart III (11) 177,465 5.4 -- --
CareWise, Inc.
701 Fifth Avenue, 26th Floor
Seattle, WA 98104-7015
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
SHARES OF CAREWISE SHARES OF CAREWISE SHARES OF PHYCOR
COMMON STOCK PREFERRED STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO MERGER (1) PRIOR TO MERGER (1) FOLLOWING MERGER (2)
----------------------- ------------------------ ------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ---------------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Momsen (12) 425,807 13.7 404,761 9.1
Larry Mohr (13) 417,102 13.4 703,858 15.7
Rheba de Tornyay (14) 7,082 ** -- --
Thomas O. Pyle (15) 7,833 ** -- --
Darcy Moore (16) -- -- 702,308 15.7
James O. Steeb (17) 130,000 4.0 -- --
Michael B. Weitz (18) 56,154 1.8 -- --
Craig S. Russell (19) 29,704 ** -- --
All directors and executive officers 1,251,147 40.3 1,810,927 40.5
as a group (9 persons) (20)
</TABLE>
- ---------------
** Less than 1%
(1) Percentage ownership calculations are based on 3,107,313 shares of
CareWise Common Stock and 4,470,598 shares of CareWise Preferred Stock
outstanding as of December 31, 1997. Beneficial ownership is determined
in accordance with the rules of the Commission and includes voting and
investment power with respect to shares. Shares of CareWise Capital
Stock subject to options or warrants currently exercisable or
exercisable within 60 days of December 31, 1997 are deemed outstanding
for computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the
percentage of any other person.
(2) Percentage ownership calculations are based on 64,530,414 shares of
PhyCor Common Stock outstanding as of December 31, 1997 and assume that
an aggregate of 2,549,000 shares of PhyCor Common Stock will be issued
in the Merger. Beneficial ownership after the Merger for each of the
listed CareWise stockholders is calculated by multiplying the Exchange
Ratio by the number of shares of CareWise Common Stock beneficially
owned by such CareWise stockholder and, with respect to CareWise
Preferred Stock, by multiplying the Exchange Ratio by the number of
shares of CareWise Common Stock issuable upon conversion of all of such
stockholder's CareWise Preferred Stock. In addition, percentage
ownership calculations are based in part on the full vesting of
Replacement Options to be issued in connection with the Merger. See
"THE MERGER-Terms of the Merger."
(3) CareWise Preferred Stock consists of 256,726 shares of CareWise Series
C Preferred Stock, 80,798 shares of CareWise Series E Preferred Stock
and 67,237 shares of CareWise Series F Preferred Stock.
(4) CareWise Preferred Stock consists of 257,726 shares of CareWise Series
C Preferred Stock and 38,023 shares of CareWise Series E Preferred
Stock.
(5) CareWise Preferred Stock consists of 233,366 shares of CareWise Series
C Preferred Stock, 380,288 shares of CareWise Series E Preferred Stock
and 90,264 shares of CareWise Series F Preferred Stock.
(6) Includes 221,090 shares of CareWise Common Stock and 16,379 shares of
CareWise Common Stock issuable pursuant to stock options exercisable
within 60 days of the table date.
(7) Consists of 368,424 shares of CareWise Series F Preferred Stock and
736,848 shares of CareWise Series F Preferred Stock issuable pursuant
to a stock warrant exercisable within 60 days of the table date.
(8) Consists of CareWise Series F Preferred Stock.
(9) Consists of 285,171 shares of CareWise Series E Preferred Stock and
25,376 shares of CareWise Series F Preferred Stock. Also includes
15,594 shares (consisting of 14,259 shares of CareWise Series E
Preferred Stock and 1,335 shares of CareWise Series F Preferred Stock)
owned by Olympic Venture Partners III Entrepreneurs Fund, an affiliate
of Olympic Venture Partners III, L.P.
(10) Consists of CareWise Series F Preferred Stock.
(11) Consists of CareWise Common Stock issuable pursuant to stock options
exercisable within 60 days of the table date.
(12) Represents 425,807 shares of CareWise Common Stock and 404,761 shares
of CareWise Preferred Stock held by InterWest Partners III. Mr. Momsen
is a general partner of InterWest Partners III and disclaims beneficial
ownership of such shares, except as to the extent of his proportionate
partnership interest therein.
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(13) Represents 417,102 shares of CareWise Common Stock and 703,858 shares
of CareWise Preferred Stock held by Mohr, Davidow Ventures II. Mr. Mohr
is a general partner of Mohr, Davidow Ventures II and disclaims
beneficial ownership of such shares, except as to the extent of his
proportionate partnership interest therein.
(14) Includes 5,416 shares of CareWise Common Stock and 1,666 shares of
CareWise Common Stock issuable pursuant to stock options exercisable
within 60 days of the table date.
(15) Consists of CareWise Common Stock issuable pursuant to stock options
exercisable within 60 days of the table date.
(16) Represents 702,308 shares of CareWise Preferred Stock held by Frontenac
VI, L.P. Ms. Moore is a general partner of Frontenac VI, L.P. and
disclaims beneficial ownership of such shares, except as to the extent
of her proportionate partnership interest therein.
(17) Consists of CareWise Common Stock issuable pursuant to stock options
exercisable within 60 days of the table date.
(18) Consists of CareWise Common Stock issuable pursuant to stock options
exercisable within 60 days of the table date.
(19) Consists of CareWise Common Stock issuable pursuant to stock options
exercisable within 60 days of the table date.
(20) Consists of the total number of CareWise Common Stock, CareWise
Preferred Stock and options exercisable within 60 days of the table
date beneficially held by executive officers and directors as a group.
See footnotes (11)-(19) above for information regarding stock
beneficially held by John E. Gebhart III, Robert Momsen, Larry Mohr,
Rheba de Tornyay, Thomas O. Pyle, Darcy Moore, James O. Steeb, Michael
B. Weitz and Craig S. Russell.
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MANAGEMENT OF CAREWISE
EXECUTIVE OFFICERS OF CAREWISE
Set forth below is certain information with respect to each person who
currently serves as an executive officer of CareWise who will continue to serve
as such after the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John E. Gebhart III 43 Chairman, President and Chief Executive Officer
James O. Steeb 36 Chief Operating Officer
Michael B. Weitz 47 Senior Vice President and Chief Financial Officer
Craig S. Russell 38 Vice President, Marketing and Development
</TABLE>
John Gebhart joined CareWise as Senior Vice President and Chief
Financial Officer in October 1995, was named President and Chief Executive
Officer in 1996 and was elected Chairman in 1997. Prior to joining CareWise, Mr.
Gebhart was employed by Access Health, a demand management services company,
where he served as the founding Chief Financial Officer from 1989 to 1993 and as
Senior Vice President of Corporate Development from 1993 to 1995.
James Steeb joined CareWise as Chief Operating Officer in January 1997.
Prior to joining CareWise, Mr. Steeb was employed from 1989 to January 1997, by
Access Health, where he held various management positions, including Senior Vice
President and Chief Information Officer, Vice President of Product Development
and Vice President of Technology.
Michael Weitz joined CareWise in March 1996, as Senior Vice President
and Chief Financial Officer. Prior to joining CareWise, Mr. Weitz was Vice
President of Finance from 1991 to 1996 of Hillhaven Corporation, a provider of
long-term health care.
Craig Russell joined CareWise in September 1995, as Regional Sales
Executive and was promoted to Vice President of Marketing and Strategic
Alliances in February 1996 and was named Vice President of Marketing and
Development in November 1997. Prior to joining CareWise, Mr. Russell was a
co-founder and Chief Marketing Officer of Health Decisions, Inc., a demand
management services company, from September 1992 to September 1995.
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<PAGE> 72
CAREWISE EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information concerning
compensation paid by CareWise for services rendered to CareWise during the
fiscal year ended March 31, 1997 to the CareWise Named Executive Officers, each
of whom will serve as an executive officer of CareWise after the Merger.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ($)
- ------------------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John E. Gebhart III
Chairman, President and Chief
Executive Officer 1996 200,000 -- 321,667 35,000 (1)
Michael B. Weitz
Senior Vice President and Chief
Financial Officer 1996 145,000 -- 132,083 --
Craig S. Russell
Vice President of Marketing and
Strategic Alliances 1996 125,000 28,352(2) 59,167 --
</TABLE>
- ---------------
(1) Represents housing assistance paid on a one-time basis pursuant to the
terms of Mr. Gebhart's employment letter.
(2) Represents commissions paid on new business revenue obtained by Mr.
Russell.
Pursuant to the terms of an employment agreement dated January 21, 1997
in connection with his initial employment as Executive Vice President and Chief
Operating Officer, James O. Steeb was granted an annual base salary of $200,000
and options to purchase 400,000 shares of CareWise Common Stock. In connection
therewith, Mr. Steeb received a $35,000 signing bonus, a housing allowance of up
to $100,000 and a credit line of up to $500,000 to be used for the purpose of
exercising stock options of his former employer. The agreement contains
severance arrangements that provide Mr. Steeb with salary and certain benefits
for a period of up to twelve months if he is terminated without cause during the
first year of employment, and six months if he is terminated without cause after
the first year of employment. In addition, the employment agreement contains
covenants with respect to confidential information, trade secrets and
non-solicitation of employees.
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<PAGE> 73
OPTION GRANTS IN YEAR ENDED MARCH 31, 1997
The following table sets forth stock option grants made during the year
ended March 31, 1997, to each of the CareWise Named Executive Officers pursuant
to the CareWise Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS TERM (3)
-------------------------------------------------------- ------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES IN PRICE PER
OPTIONS FISCAL YEAR SHARE EXPIRATION
NAME GRANTED (#) (1) ($) (2) DATE 5% ($) 10% ($)
- --------------------- ----------- ----------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
John E. Gebhart III 196,667(4) 26.2 0.54 9/10/06 66,789 169,256
125,000(5) 0.54 9/03/06 42,450 107,578
Michael B. Weitz 57,083(4) 10.8 0.54 9/10/06 19,386 49,127
75,000(6) 0.54 9/03/06 25,470 64,547
Craig S. Russell 24,167(4) 4.8 0.54 9/10/06 8,207 20,799
35,000(7) 0.54 9/03/06 11,886 30,122
</TABLE>
- ---------------
(1) Based on an aggregate of 1,227,083 options granted pursuant to the
CareWise Option Plan in the year ended March 31, 1997 to employees of
CareWise, including the CareWise Named Executive Officers.
(2) The exercise price per share of each option was equal to the fair
market value of CareWise Common Stock on the date of the grant as
determined by the CareWise Board of Directors.
(3) Represent amounts that may be realized upon exercise of the options
immediately prior to their expiration assuming the specified compounded
rates of appreciation on the base price (5% and 10%) of the CareWise
Common Stock over the option terms. The 5% and 10% amounts are
calculated based on rules required by the Commission and do not reflect
CareWise's estimate of future stock price growth. Actual gains, if any,
on stock option exercises depend on the timing of such exercises and
the future performance of the CareWise Common Stock. There can be no
assurance that the rates of appreciation assumed in these columns can
be achieved or that the amounts reflected will be received by the
individuals.
(4) The options became exercisable as to 25% of the shares on September 10,
1997 and vest as to an additional 2.0833% with each month of continuous
employment thereafter.
(5) The options became exercisable as to 25% of the shares on February 2,
1997 and vest as to an additional 2.0834% with each month of continuous
employment thereafter.
(6) The options became exercisable as to 25% of the shares on March 25,
1997 and vest an additional 2.0834% with each month of continuous
employment thereafter.
(7) The options became exercisable as to 25% of the shares on September 25,
1996 and vest an additional 2.0834% with each months of continuous
employment thereafter.
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<PAGE> 74
AGGREGATE OPTION VALUES AT MARCH 31, 1997
The following table sets forth information with respect to the number
and value of securities underlying unexercised options held by the CareWise
Named Executive Officers at March 31, 1997. No options were exercised by the
CareWise Named Executive Officers in the year ending March 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES SUBJECT TO
UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED IN-THE-MONEY
YEAR END (#) OPTIONS AT FISCAL YEAR END (1)
-------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John E. Gebhart III 60,416 336,251 $266(2) $484(2)
Michael B. Weitz 18,750 113,333 -- --
Craig S. Russell 13,125 46,042 -- --
</TABLE>
- ---------------
(1) The fair market value of the underlying securities at the fiscal year
end was estimated to be approximately $0.54 per share, as determined by
CareWise's Board of Directors.
(2) Represents the value of 75,000 shares of CareWise Common Stock at an
exercise price of $0.53, of which 26,562 were exercisable and 48,438
were unexercisable on March 31, 1997.
EMPLOYMENT CONTRACTS
John E. Gebhart III, Michael B. Weitz and Craig S. Russell, each a
CareWise Named Executive Officer, are parties to the compensation arrangements
with CareWise described below.
Pursuant to the terms of an offer letter dated September 11, 1995
entered into in connection with Mr. Gebhart's initial employment, Mr. Gebhart
was granted an annual base salary of $145,000 and options to purchase 75,000
shares of CareWise Common Stock. In addition, the letter agreement provides Mr.
Gebhart with $35,000 of mortgage assistance. The letter agreement contains a
covenant with respect to confidential and proprietary information. Mr. Gebhart
was promoted to President and Chief Executive Officer of CareWise on February 5,
1996, and currently receives an annual salary of $200,000.
Pursuant to the terms of an offer letter dated March 4, 1996, Mr. Weitz
was granted an annual base salary of $145,000 and options to purchase 75,000
shares of CareWise Common Stock. In addition, the letter agreement contains a
covenant with respect to confidential and proprietary information. Mr. Weitz's
current annual salary remains $145,000.
Pursuant to the terms of an offer letter dated September 26, 1995 in
connection with Mr. Russell's initial hire, Mr. Russell was granted an annual
salary of $85,000 and options to purchase up to 15,000 shares of CareWise Common
Stock, provided certain performance goals were met. The letter agreement
contains a covenant with respect to confidential and proprietary information. On
November 19, 1997, Mr. Russell was promoted to Vice President of Marketing and
Development at an annual salary of $140,000.
For a description of agreements entered into between PhyCor and Messrs.
Gebhart, Steeb, Weitz and Russell, in connection with the Merger, See "CERTAIN
RELATED TRANSACTIONS."
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<PAGE> 75
CERTAIN RELATED TRANSACTIONS
John E. Gebhart III, James O. Steeb, Michael B. Weitz and Craig S.
Russell each have entered into employment agreements with PhyCor that provide
such officers with annual base salaries of $200,000, $200,000, $155,000 and
$175,000, respectively. Under the agreements, Messrs. Gebhart and Steeb are each
to be granted options to purchase 100,000 shares of PhyCor Common Stock and
Messrs. Weitz and Russell are each to be granted options to purchase 45,000
shares of PhyCor Common Stock, with the options to vest over a period of four
years beginning on the Closing Date. In addition, the agreements contain
severance arrangements in the event the employment is terminated by PhyCor
without cause or, under certain circumstances, by Messrs. Gebhart, Steeb, Weitz
or Russell. Pursuant to such arrangements, Messrs. Gebhart and Steeb will
continue to receive annual salary plus insurance for a period of 12 months or
until March 31, 2000, whichever is longer; Messrs. Weitz and Russell will
continue to receive annual salary plus insurance for a period of 6 months or
until March 31, 1999, whichever is longer. Each employment agreement includes
covenants with respect to confidential information, trade secrets and
non-competition.
Pursuant to the terms of an employment agreement with CareWise dated
January 21, 1997, Mr. Steeb received an interest free loan from CareWise in
January 1997 in the amount of $230,087 for the purpose of exercising stock
options of his former employer. Mr. Steeb repaid the loan in full on May 28,
1997.
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<PAGE> 76
BUSINESS OF PHYCOR
PhyCor is a PPM company that acquires and operates multi-specialty
medical clinics and develops and manages IPAs. 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 and patient satisfaction. PhyCor
operates 55 clinics with approximately 3,860 physicians in 28 states. PhyCor
also manages IPAs, which are networks of independent physicians, that include
over 19,000 physicians in 28 markets. PhyCor's affiliated physicians provide
medical services to approximately 1,140,000 members under prepaid health plans,
including approximately 177,000 Medicare members.
PhyCor believes that primary care-oriented physician organizations are
a critical element of organized health care systems, because physician decisions
determine the cost and quality of care. PhyCor believes that physician-driven
organizations, including multi-specialty medical clinics, IPAs and the
combination of such organizations, present more attractive alternatives for
physician consolidation than hospital or insurer/HMO-controlled organizations.
The combination of PhyCor's multi-specialty medical clinic and IPA management
capabilities and new group-formation efforts enables PhyCor to offer physician
practice management services to substantially all types of physician
organizations.
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 its
medical practice, manages clinic operations, employs most of the clinic's
non-physician personnel, other than certain diagnostic technicians, and receives
a service fee. Under substantially all of its service agreements, PhyCor
receives a service fee equal to the clinic expenses it has paid plus percentages
of operating income of the clinic (net clinic revenue less certain contractually
agreed upon clinic expenses before physician distributions) plus, in some cases,
percentages of net clinic revenue. As clinic operating income improves, whether
as a result of increased revenue or lower expenses, PhyCor's service fees
increase.
The 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 PhyCor personnel focuses on strategic and operational planning,
marketing, managed care arrangements and other major issues facing the clinic.
The physician groups offer a wide range of primary and specialty
physician care and ancillary services. Approximately 53% 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 its affiliated physician groups to
recruit new physicians and merge sole practices 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 applicable specialty boards.
PhyCor established its presence in the IPA management business in 1995
and believes that a significant opportunity exists to develop and manage IPAs.
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 and enable previously unaffiliated physicians
to assume and more effectively manage capitated risk.
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<PAGE> 77
Additional information concerning PhyCor is included in the reports,
proxy statements and other information of PhyCor filed with the Commission which
are incorporated by reference in this Prospectus-Proxy Statement. See
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
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<PAGE> 78
COMPARISON OF RIGHTS OF CAREWISE AND PHYCOR SHAREHOLDERS
PhyCor is incorporated in Tennessee and CareWise is incorporated in
Delaware. If the Merger is consummated, holders of the shares of CareWise
Capital Stock whose rights currently are governed by Delaware corporate law and
the CareWise Certificate and the CareWise Bylaws will become holders of PhyCor
Common Stock, and the rights of the former holders of CareWise Capital Stock
will be governed by Tennessee law and the PhyCor Restated Charter (the "PhyCor
Charter") and Amended Bylaws (the "PhyCor Bylaws"). Set forth below is a summary
comparison of the rights of a PhyCor shareholder under Tennessee law, the PhyCor
Charter and PhyCor Bylaws, on the one hand, and the rights of a CareWise
stockholder under Delaware law, the CareWise Certificate and CareWise Bylaws, on
the other hand. The information set forth below is qualified in its entirety by
reference to the Tennessee Business Corporation Act ("TBCA"), the PhyCor
Charter, the PhyCor Bylaws, the DGCL, the CareWise Certificate and the CareWise
Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
CareWise. CareWise is authorized by the CareWise Certificate to issue
up to 20,500,000 shares of capital stock, of which 15,000,000 shares are
designated CareWise Common Stock, par value $.001 per share, of
which were outstanding and 5,500,000 shares are designated CareWise Preferred
Stock, par value $.001 per share, of which are designated CareWise
Series C Convertible Preferred Stock, of which were outstanding, 313,355 of
which are designated CareWise Series D Convertible Preferred Stock, of which
were outstanding, 950,570 of which are designated CareWise Series E Convertible
Preferred Stock, of which were outstanding, and 2,947,392 of which are
designated CareWise Series F Convertible Preferred Stock, of which were
outstanding, all as of the Record Date. As of the Record Date, there also was an
outstanding Warrant to purchase 736,848 shares of CareWise Series F Preferred
Stock. In addition, there were outstanding options under the CareWise Option
Plan to purchase an additional shares of CareWise Common Stock as of the
Record Date. An additional shares of CareWise Common Stock are
reserved for future option grants under the CareWise Option Plan.
PhyCor. PhyCor is authorized by the PhyCor Charter to issue up to
260,000,000 shares of capital stock, of which 250,000,000 shares are designated
PhyCor Common Stock, no par value per share, and 10,000,000 shares are
designated Preferred Stock, no par value per share ("PhyCor Preferred Stock").
As of December 31, 1997, there were approximately 64,530,000 shares of PhyCor
Common Stock outstanding. In addition, there were outstanding options under
PhyCor stock option plans to purchase an additional 13,476,000 shares of PhyCor
Common Stock. An additional 2,386,000 shares of PhyCor Common Stock were
reserved for future option grants under such plans. Furthermore, 7,909,000
shares are currently reserved for issuance upon conversion of the Debentures and
subordinated convertible notes payable to affiliated physicians and physician
groups, and 1,401,000 shares are reserved for issuance upon the exercise of
outstanding warrants. The Board of Directors of PhyCor has the authority to
issue the PhyCor Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions for each such series, without any
further vote or action by the shareholders. As of December 31, 1997, there were
no shares of PhyCor Preferred Stock issued and outstanding, and the Board of
Directors of PhyCor has no present intention of issuing shares of PhyCor
Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
CareWise. The CareWise Bylaws provide that the CareWise Board of
Directors shall consist of not less than one (1) director and not more than
seven (7) directors and that the size of the CareWise Board of Directors may be
fixed by the directors then in office. Currently, there are six persons serving
on the CareWise Board of Directors. The number of directors may be changed by
amendment to the CareWise Bylaws. Directors of CareWise are elected by a
plurality of votes cast at the annual meeting of CareWise stockholders. The
CareWise Certificate provides that the CareWise
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<PAGE> 79
stockholders have the right to cumulate votes in the election of Directors.
Vacancies in the Board of Directors are filled by a majority of the remaining
directors.
PhyCor. The PhyCor Charter provides that the PhyCor Board of Directors
shall consist of at least three (3) directors and not more than fifteen (15)
directors and that the size of the PhyCor Board of Directors may be fixed by the
directors then in office. Directors are divided into three classes with
elections for one class of directors being held at each annual meeting of
shareholders. Directors of PhyCor are elected by a plurality of votes cast at
the annual meeting of shareholders. Vacancies in the Board of Directors and
newly created directorships resulting from any increase in the authorized number
of directors are filled by a majority of directors then in office or the
shareholders. The PhyCor Bylaws also provide for the election of a maximum of
three Advisory Directors by a majority of the Board of Directors. Such Advisory
Directors, who are to assist the Board of Directors in its conduct of the
affairs of PhyCor, hold office for such term as determined by the Board of
Directors.
REMOVAL OF DIRECTORS
CareWise. The CareWise Bylaws provide that a director may be removed,
with or without cause, by a vote of the holders of a majority of the shares of
CareWise Capital Stock then entitled to vote on the election of directors at a
meeting of CareWise stockholders called expressly for that purpose.
PhyCor. The PhyCor Bylaws provide that a director may be removed only
for cause at a shareholders meeting called for the purpose of removing a
director if the number of votes cast to remove a director exceed the number of
votes cast not to remove such director.
CONVERSION AND DISSOLUTION
CareWise. The CareWise Common Stock has no conversion features. The
CareWise Series C Convertible Preferred Stock, the CareWise Series D Convertible
Preferred Stock, the CareWise Series E Convertible Preferred Stock and the
CareWise Series F Convertible Preferred Stock are convertible into shares of
CareWise Common Stock according to the terms and at the prices set forth in the
CareWise Certificate and are also entitled to preferential payments in the event
of a dissolution or similar event as set forth in the CareWise Certificate.
PhyCor. The PhyCor Common Stock has no conversion features. The PhyCor
Charter authorizes 10,000,000 shares of PhyCor Preferred Stock, no par value per
share, and provides that such shares of PhyCor Preferred Stock may have such
voting powers, preferences and other special rights (including, without
limitation, the right to convert the shares of such PhyCor Preferred Stock into
shares of PhyCor Common Stock) as shall be determined by the Board of Directors.
The Board of Directors has designated 500,000 shares of PhyCor Preferred Stock
as Series A Junior Participating Preferred Stock. PhyCor Preferred Stock is
entitled to preferential payments in the event of dissolution of PhyCor.
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION OR CHARTER
CareWise. The DGCL requires approval of holders holding a majority of
the CareWise Capital Stock entitled to vote thereon to amend or repeal the
CareWise Certificate unless a different proportion is specified in the CareWise
Certificate. The CareWise Certificate provides that the CareWise Certificate may
not be amended without the approval of the holders of two-thirds of the
outstanding shares of the CareWise Series C Convertible Preferred Stock, the
CareWise Series D Convertible Preferred Stock, the CareWise Series E Convertible
Preferred Stock and CareWise the Series F Convertible Preferred, acting together
as a single class. The CareWise Certificate and the CareWise Bylaws provide that
a majority of the CareWise Board of Directors or the holders of a
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<PAGE> 80
majority of the outstanding shares of CareWise Capital Stock shall have the
power to adopt, amend or repeal the Bylaws.
PhyCor. With the exception of certain administrative amendments, the
TBCA requires approval by holders of at least a majority of the outstanding
shares entitled to vote thereon to repeal or amend the PhyCor Charter. The
PhyCor Bylaws provide that a majority of the PhyCor Board of Directors or the
holders of a majority of the outstanding shares of capital stock entitled to
vote at a meeting may alter, amend or repeal the PhyCor Bylaws.
SPECIAL MEETINGS OF SHAREHOLDERS
CareWise. The CareWise Bylaws provide that a special meeting of the
CareWise stockholders may be called by the Chairman of the CareWise Board of
Directors, the President of CareWise, the CareWise Board of Directors or the
holders of not less than a majority of all outstanding shares CareWise Capital
Stock of the corporation entitled to vote at such meeting.
PhyCor. The PhyCor Bylaws provide that a special meeting of the PhyCor
shareholders may be called by a majority of the Board of Directors or by the
holders of at least 10% of the outstanding shares of capital stock of PhyCor
entitled to vote on any issue proposed to be considered at the proposed special
meeting.
LIABILITY OF DIRECTORS
CareWise. The CareWise Certificate provides that, to the full extent
provided by the DGCL, the directors of CareWise shall not be liable to CareWise
or the CareWise stockholders for monetary damages for breach of fiduciary duty
as a director, except for any breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation or law, for liability under Section 174 of the DGCL (relating to
certain unlawful dividends, stock repurchases or stock redemptions), or for any
transaction from which the director derived any improper personal benefit. These
provisions do not eliminate a director's duty of care and do not affect the
availability of equitable remedies such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty. Moreover, these provisions do
not apply to claims against a director for violation of certain laws, including
Federal securities laws.
PhyCor. The PhyCor Charter provides that directors of PhyCor shall not
be personally liable to PhyCor or its shareholders for monetary damages for any
breach of fiduciary duty by such director as a director. A director shall be
liable to the extent provided by applicable law for breach of the director's
duty of loyalty to PhyCor or its shareholders, for acts or omissions not in good
faith or which involve intentional misconduct, or for liability pursuant to the
TBCA relating to unlawful distributions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
CareWise. The CareWise Bylaws provide that CareWise will indemnify and
hold harmless to the full extent permitted by the DGCL against all expense,
liability and loss actually incurred by each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any actual or
threatened proceeding by reason of the fact that he or she is or was a director
or officer of the corporation or that, being such a director or officer or an
employee of the corporation, he or she is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise. The right to
indemnification includes the right to be paid by the corporation the expenses
incurred in defending any such proceeding in advance of its final disposition.
PhyCor. The PhyCor Charter provides that PhyCor will indemnify and upon
request shall advance expenses to, any person who was, or is a party to, or is
threatened to be made a party to, any
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<PAGE> 81
such action because such person is or was a director, officer or employee of
PhyCor or is or was serving at the request of PhyCor as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise. This indemnification is subject to the limitations
stated above.
CHANGE OF CONTROL
CareWise. Delaware has enacted a business combination statute that is
contained in Section 203 of the DGCL providing that any person who acquires 15%
or more of a corporation's voting stock (thereby becoming an "interested
stockholder") may not engage in certain "business combinations" with the target
corporation for a period of three years following the time the person became an
interested stockholder, unless (i) prior to such time the board of directors of
the corporation has approved either the business combination or the transaction
that resulted in the person becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the person becoming an
interested stockholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced (excluding
shares owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer),
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66-2/3% of the outstanding voting stock not owned
by the interested stockholder.
For purposes of determining whether a person is the "owner" of 15% or
more of a corporation's voting stock for purposes of Section 203, ownership is
defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A business
combination is also defined broadly to include (i) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested stockholder, (ii) certain transactions resulting in the issuance or
transfer to the interested stockholder of any stock of the corporation or its
subsidiaries, (iii) certain transactions which would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested stockholder, and (iv) receipt by the interested stockholder of
the benefit (except proportionately as a stockholder) of any loans, advances,
guarantees, pledges or other financial benefits.
These restrictions placed on interested stockholders by Section 203 do
not apply under certain circumstances, including, but not limited to, the
following: (i) if the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203 or
(ii) if the corporation, by action of its stockholders, adopts an amendment to
its bylaws or certificate of incorporation expressly electing not to be governed
by Section 203, provided that such an amendment is approved by the affirmative
vote of not less than a majority of the outstanding shares entitled to vote and
that such an amendment will not be effective until 12 months after its adoption
(except for limited circumstances where effectiveness will occur immediately)
and will not apply to any business combination with a person who became an
interested stockholder at or prior to such adoption. The Company has not elected
to take itself outside of the coverage of Section 203.
PhyCor. The Tennessee Business Combination Act (the "Combination Act")
provides that any corporation to which the Combination Act applies, including
PhyCor, shall not engage in any "business combination", as defined in the
Combination Act, with an "interested shareholder" for a period of five years
following the date that such shareholder became an interested shareholder
unless, prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder.
"Interested shareholder" is defined in the Combination Act as any
person that is (a) the beneficial owner of 10% or more of the voting power of
any class or series of stock of the corporation or (b) is an affiliate and at
any time within the five-year period immediately prior to the date in
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question was the beneficial owner of 10% or more of the voting power of any
class of series of stock of the corporation.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition", as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Acquisition Act does not
apply to PhyCor presently, because PhyCor has not elected to be covered by such
act. No assurance can be given that such an election, which must be expressed in
the form of a charter or bylaw provision, will be made by PhyCor.
The Tennessee Greenmail Act prohibits PhyCor from purchasing or
agreeing to purchase any of its securities at a price in excess of fair market
value from a holder of 3% or more of any class of such securities who has
beneficially owned such securities for less than two years, unless such purchase
has been approved by the affirmative vote of a majority of the outstanding
shares of such class of voting stock issued by PhyCor or PhyCor makes an offer
of at least equal value per share to all holders of shares of such class.
SHAREHOLDER RIGHTS AGREEMENT
In February 1994, the Board of Directors of PhyCor declared a dividend
distribution of one right (a "PhyCor Right") for each share of PhyCor Common
Stock. Each Right entitles the holder to purchase from PhyCor one one-hundredth
of a share of Series A Junior Participating Preferred Stock at a price of $150
per one-hundredth of a share, as adjusted. The PhyCor Rights are not initially
exercisable, but will become exercisable upon the acquisition by any person of,
or the announcement of the intention of any person to commence a tender or
exchange offer upon the successful consummation of which such person would be
the beneficial owner of, 15% or more of the shares of PhyCor Common Stock then
outstanding, without the prior approval of PhyCor's Board of Directors. The
PhyCor Rights are generally designed to deter coercive takeover tactics and to
encourage all persons interested in potentially acquiring control of PhyCor to
treat each Shareholder on a fair and equal basis.
EXPERTS
The consolidated financial statements of PhyCor as of December 31, 1996
and 1995, and for each of the years in the three-year period ended December 31,
1996, have been incorporated by reference herein and in the Prospectus - Proxy
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated herein by reference, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of CareWise as of December 31, 1996 and 1995,
and for each of the years in the three-year period ended December 31, 1996, have
been included herein and in the Prospectus - Proxy Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
included herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
The validity of the shares of PhyCor Common Stock to be issued to the
stockholders of CareWise pursuant to the Merger will be passed upon by Waller
Lansden Dortch & Davis, A Professional Limited Liability Company. The federal
income tax treatment of the Merger will be passed upon by Perkins Coie LLP.
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ADDITIONAL INFORMATION
The Board of Directors of CareWise does not know of any matter to be
brought before the Special Meeting other than described in the Notice of Special
Meeting accompanying this Prospectus-Proxy Statement. If any other matter comes
before the Special Meeting, it is the intention of the persons named in the
accompanying proxy to vote the proxy in accordance with their best judgment with
respect to such other matter.
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INDEX TO FINANCIAL STATEMENTS OF CAREWISE, INC.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF CAREWISE, INC.
Independent Auditors' Report...................................... F-2
Balance Sheets.................................................... F-3
Statements of Operations.......................................... F-5
Statements of Stockholders' Equity (Deficit)...................... F-6
Statements of Cash Flows.......................................... F-7
Notes to the Financial Statements................................. F-9
</TABLE>
F-1
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CareWise, Inc.:
We have audited the accompanying balance sheets of CareWise, Inc. as of December
31, 1995 and 1996 and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CareWise, Inc. as of December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
January 14, 1998
F-2
<PAGE> 86
CAREWISE, INC.
BALANCE SHEETS
December 31, 1995 and 1996 (audited) and September 30, 1997 (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------- --------------------------------- ------------------
December 31
--------------------------------- September 30,
Assets 1995 1996 1997
- ---------------------------------------------------------------- ----------------- --------------- ------------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 3,149,771 5,638,631 6,478,050
Accounts receivable, net of allowance for doubtful accounts of
$78,000 at December 31, 1995, $112,365 at December 31,
1996 and $151,616 at September 30, 1997 (unaudited) 178,296 1,054,748 1,222,379
Employee note receivable - 20,000 10,000
Inventories 383,179 348,931 161,071
Prepaid expenses and other current assets 330,969 1,074,043 1,100,120
----------------- --------------- ------------------
Total current assets 4,042,215 8,136,353 8,971,620
Furniture, fixtures and equipment, net of accumulated
depreciation and amortization of $345,524 at December 31,
1995, $797,043 at December 31, 1996 and $1,167,252 at
September 30, 1997 (unaudited) 1,177,524 1,404,564 2,189,068
Deposits 52,870 55,545 56,423
Restricted cash 275,000 - -
- ---------------------------------------------------------------- ----------------- --------------- ------------------
$ 5,547,609 9,596,462 11,217,111
- ---------------------------------------------------------------- ----------------- --------------- ------------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 87
CAREWISE, INC.
BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996 (audited) and September 30, 1997 (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ---------------------------------- -------------------
December 31
---------------------------------- September 30,
Liabilities and Stockholders' Equity 1995 1996 1997
- ------------------------------------------------------------------- ------------------ --------------- -------------------
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 596,350 487,290 383,222
Accrued wages 109,848 394,340 295,092
Accrued contract service costs 386,490 - -
Other accrued liabilities 323,103 431,650 632,489
Convertible debenture 152,134 -
Current portion of long-term debt and capital lease obligations 914,518 301,533 561,439
Deferred revenue 201,415 1,980,752 3,352,839
------------------ --------------- -------------------
Total current liabilities 2,683,858 3,595,565 5,225,081
------------------ --------------- -------------------
Capital lease obligations 803,419 356,207 729,178
Software development obligation 1,965,856 - -
Stockholders' equity:
Convertible preferred stock, $.001 par value.
Authorized 5,500,000 shares; issued and
outstanding 2,453,476, 4,470,597 and 4,470,597
shares in 1995, 1996 and September 30, 1997
(unaudited) (liquidation preference $19,032,945) 2,454 4,471 4,471
Common stock, $.001 par value. Authorized
15,000,000 shares; issued and outstanding
2,570,261, 2,781,060 and 2,885,893 shares in 1995,
1996 and September 30, 1997 (unaudited) 2,570 2,781 2,886
Additional paid-in capital 13,488,424 22,930,130 22,955,518
Accumulated deficit (13,398,972) (17,292,692) (17,700,023)
------------------ --------------- -------------------
Total stockholders' equity 94,476 5,644,690 5,262,852
- ------------------------------------------------------------------- ------------------ --------------- -------------------
$ 5,547,609 9,596,462 11,217,111
- ------------------------------------------------------------------- ------------------ --------------- -------------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 88
CAREWISE, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996 (audited)
and the nine months ended September 30, 1996 and 1997 (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------------------------------ ---------------------------
Nine months ended
Year ended December 31 September 30,
------------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
- ---------------------------------------- ----------------- --------------- -------------- -------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Service revenue $ 6,863,457 6,902,808 9,175,114 6,363,516 10,714,603
---------------- -------------- ------------ -------------- ------------
Operating expenses:
Direct service costs 3,975,605 3,591,062 6,194,231 4,062,418 6,859,304
AT&T per capita fee - 119,132 652,624 438,544 -
Sales and marketing 922,095 1,665,697 2,802,258 2,057,090 1,718,046
General and administrative 1,595,477 1,717,998 2,584,674 1,842,820 2,003,947
Product development 3,379,200 - 418,321 345,707 621,692
Provision for excess contract
service costs - 1,308,778 - - -
Write-off of goodwill - 556,335 - - -
---------------- -------------- ------------ -------------- ------------
Total operating expenses 9,872,377 8,959,002 12,652,108 8,746,579 11,202,989
---------------- -------------- ------------ -------------- ------------
Operating loss (3,008,920) (2,056,194) (3,476,994) 2,383,063 (488,386)
---------------- -------------- ------------ -------------- ------------
Other income (expense):
Interest income 21,388 54,883 155,292 80,408 211,863
Interest expense (314,776) (645,004) (572,018) (440,759) (130,808)
---------------- -------------- ------------ -------------- ------------
(293,388) (590,121) (416,726) (360,351) 81,055
---------------- -------------- ------------ -------------- ------------
Net loss $ (3,302,308) (2,646,315) (3,893,720) (2,743,414) (407,331)
---------------- -------------- ------------ -------------- ------------
Net loss per share $ (1.61) (1.06) (1.50) (1.07) (0.15)
Weighted average common shares
outstanding 2,053,328 2,507,112 2,589,985 2,575,412 2,668,422
- ---------------------------------------- ---------------- -------------- ------------ -------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 89
CAREWISE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994, 1995 and 1996 (audited)
and the nine months ended September 30, 1997 (unaudited)
<TABLE>
<CAPTION>
- -------------------------------------- ----------------------- -------------------------- ------------ --------------- ------------
Total
Convertible Additional shareholders'
preferred stock Common stock paid-in Accumulated equity
Shares Amount Shares Amount capital deficit (deficit)
- -------------------------------------- ------------ ---------- ------------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 1,369,344 $ 1,370 1,552,403 $ 1,552 7,851,413 (7,450,349) 403,986
Purchase of Acamedica, Inc. - - 442,119 442 132,194 - 132,636
Subsequent shares issued related to - - 203,136 203 60,738 - 60,941
purchase of Acamedica, Inc.
Sale of Series D convertible 133,562 133 - - 389,867 - 390,000
preferred stock, net
Exercise of common stock options - - 237,104 237 79,346 - 79,583
Net loss - - - - - (3,302,308) (3,302,308)
----------------------------------------------------------------------------------------------
Balances at December 31, 1994 1,502,906 1,503 2,434,762 2,434 8,513,558 (10,752,657) (2,235,162)
Subsequent shares issued related to - - 73,969 74 22,117 - 22,191
purchase of Acamedica, Inc.
Sale of Series E convertible 950,570 951 - - 4,937,850 - 4,938,801
preferred stock, net
Exercise of common stock options - - 61,530 62 14,899 - 14,961
Net loss - - - - - (2,646,315) (2,646,315)
----------------------------------------------------------------------------------------------
Balances at December 31, 1995 2,453,476 2,454 2,570,261 2,570 13,488,424 (13,398,972) 94,476
Sale of Series F convertible 2,017,121 2,017 - - 8,830,677 - 8,832,694
preferred stock, net
Sale of preferred stock warrants - - - - 500,000 - 500,000
Exercise of common stock options - - 10,799 11 3,229 - 3,240
Shares issued in buy-out of AT&T - - 200,000 200 107,800 - 108,000
agreement
Net loss - - - - - (3,893,720) (3,893,720)
----------------------------------------------------------------------------------------------
Balances at December 31, 1996 4,470,597 4,471 2,781,060 2,781 22,930,130 (17,292,692) 5,644,690
Exercise of common stock options
(unaudited) - - 104,833 105 25,388 - 25,493
Net loss (unaudited) - - - - - (407,331) (407,331)
----------------------------------------------------------------------------------------------
Balances at September 30, 1997
(unaudited) 4,470,597 $ 4,471 2,885,893 $ 2,886 22,955,518 17,700,023 5,262,852
----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 90
CAREWISE, INC.
STATEMENT OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996 (audited) and
the nine months ended September 30, 1996 and 1997 (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------------------- -------------------------------
Nine months ended
Year ended December 31, September 30,
---------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (3,302,308) (2,646,315) (3,893,720) (2,743,414) (407,331)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 187,697 275,085 459,216 256,375 443,514
Software development obligation 3,180,000 -- -- -- --
Write-off of goodwill -- 556,335 -- -- --
Provision for excess contract
service costs -- 1,308,778 -- -- --
Amortization of excess contract
service costs (922,288) (386,490) -- -- --
Other 9,074 45,554 -- -- --
Change in operating assets and
liabilities:
Accounts receivable (187,741) 452,283 (876,452) (627,672) (167,631)
Inventories 279,006 (304,777) 34,248 149,714 187,860
Prepaid expenses and deposits (20,595) (261,838) (745,749) (299,656) (26,955)
Employee note receivable -- -- (20,000) -- 10,000
Deferred revenue (204,290) (138,708) 1,779,337 1,657,163 1,372,087
Accounts payable and accrued
liabilities (281,204) 457,783 283,979 (48,538) (2,477)
-------------- -------------- ------------- ---------------- --------------
Net cash provided by (used in)
operating activities (340,361) (1,178,108) (3,365,631) (1,656,028) 1,409,067
-------------- -------------- ------------- ---------------- --------------
Cash flows from investing activities:
Collection of notes receivable 226,181 -- -- -- --
Furniture, fixtures and equipment
additions (44,440) (85,195) (326,048) (180,066) (231,270)
Acquisition costs associated with
purchase of Acamedica, Inc. (59,070) -- -- -- --
Restricted cash (275,000) -- 275,000 -- --
-------------- --------------- ------------- ---------------- --------------
Net cash used in investing
activities (152,329) (85,195) (51,048) (180,066) (231,270)
-------------- --------------- ------------- ---------------- --------------
Subtotal, carried forward (492,690 (1,263,303) (3,416,679) (1,836,094) 1,177,797
-------------- --------------- ------------- ---------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 91
CAREWISE, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996 (audited) and
the nine months ended September 30, 1996 and 1997 (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------- -------------- ----------------- --------------- ------------------------------
Nine months ended
Year ended December 31, September 30,
------------------------------------------------ ------------------------------
1994 1995 1996 1996 1997
-------------- ----------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
(unaudited)
Subtotal, brought forward $ (492,690) (1,263,303) (3,416,679) (1,836,094) 1,177,797
-------------- ----------------- --------------- ------------------------------
Cash flows form financing activities:
Proceeds from long-term obligations 25,145 1,011,000 -- -- --
Principal payments on long-term
obligations (445,020) (948,642) (3,430,395) (791,738) (363,871)
Proceeds from sales of convertible
preferred stock, net of issuance 390,000 3,927,801 8,832,694 8,832,694 --
costs
Proceeds from sale of preferred
stock warrants -- -- 500,000 500,000 --
Proceeds from exercise of common
stock options 79,583 14,961 3,240 450 25,493
-------------- ----------------- --------------- --------------- --------------
Net cash provided by financing
activities 49,708 4,005,120 5,905,539 8,541,406 (338,378)
-------------- ----------------- --------------- --------------- --------------
Net increase (decrease) in cash (442,982) 2,741,817 2,488,860 6,705,312 839,419
Cash at beginning of period 850,936 407,954 3,149,771 3,149,771 5,638,631
-------------- ----------------- --------------- --------------- --------------
Cash at end of period $ 407,954 3,149,771 5,638,631 9,855,083 6,478,050
-------------- ----------------- --------------- --------------- --------------
Supplemental disclosures of cash
flow information - cash paid
during the period for interest $ 314,772 645,004 572,018 440,759 130,808
-------------- ----------------- --------------- --------------- --------------
Supplemental schedule of noncash
investing and financing
activities:
Furniture, fixtures and equipment
acquired through capital lease
obligations $ 791,057 551,535 360,207 360,207 966,748
Acquisition of Acamedica, Inc. 545,622 -- -- -- --
Conversion of notes payable to
stockholders to Series E
convertible preferred stock -- 1,011,000 -- -- --
Common stock issued to AT&T in
consideration for contract
termination -- -- 108,000 -- --
- ----------------------------------------- -------------- ----------------- --------------- --------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 92
CAREWISE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
CareWise, Inc. (Company) provides health care cost containment services
to employee and retirement groups throughout the United States. The
Company currently has three sales offices across the United States. The
Company's headquarters are in Seattle.
(B) FURNITURE, FIXTURES AND EQUIPMENT
Owned furniture, fixtures and equipment are stated at cost. Furniture
and equipment held under capital leases are stated at the present value
of minimum lease payments at the inception of the lease. Depreciation
and amortization are provided using the straight-line method over the
five-year estimated useful lives of the related assets, or the lease
term, if shorter.
For long-lived assets, including furniture, fixtures and equipment, the
Company evaluates the carrying value of the assets by comparing the
estimated future undiscounted cash flows to be generated from the use
of the assets and their eventual disposition with the assets' reported
net book values. The carrying values of assets are evaluated for
impairment when events or changes in circumstances occur which may
indicate the carrying amount of the assets may not be recoverable.
(C) INVENTORIES
Inventories consist of customer support materials which are stated at
the lower of cost using the first-in, first-out method or market (net
realizable value).
(D) GOODWILL
Goodwill is recorded for the excess of cost over the fair value of net
assets acquired in business combinations. The Company periodically
reviews goodwill to assess recoverability. Impairments would be
recognized in the statement of operations if an impairment were
determined to be other than temporary. Recoverability of goodwill is
determined based on undiscounted future operating cash flows from the
related business unit or activity. The amount of impairment, if any, is
measured based on discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. See note 2.
F-9
<PAGE> 93
(E) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue is recognized in the period services are provided on a
per-member per-month basis. Deferred revenue represents advance payment
of the last month's contract fees and revenue received for books and
other supplies used by customers to implement the Company's programs.
Advance payments are recognized in the month services are provided.
Deferred revenue on books and other supplies is amortized using the
straight-line method over the life of the contract, which is usually
twelve months.
(F) INCOME TAXES
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax
assets when it is more likely than not that such deferred tax assets
will not be realized.
(G) PRODUCT DEVELOPMENT
Product development costs are expensed as incurred and represent the
costs incurred to develop new product offerings or to make significant
modifications to currently existing products.
(H) STOCK BASED COMPENSATION
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, in
1997. This statement permits a company to choose either a new
fair-value-based method or the Accounting Principles Board Opinion
(APB) No. 25 intrinsic-value based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures
of net earnings and earnings per share computed as if the
fair-value-based method had been applied in financial statements of
companies that continue to account for such arrangements under APB
Opinion No. 25. The Company has chosen to continue to apply the
measurement provisions of APB Opinion No. 25.
(I) NET LOSS PER SHARE
Net loss per weighted average common share is calculated based on the
weighted average number of outstanding common shares and dilutive
common share equivalents. Common share equivalents include unexercised
employee stock options. Common share equivalents have been excluded for
all periods as they are antidilutive.
(J) FISCAL YEAR-END
The Company changed its fiscal year-end from December 31 to March 31
effective March 31, 1997.
(K) USE OF ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of
F-10
<PAGE> 94
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(L) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company's management, the September 30, 1996 and
1997 unaudited interim financial statements include all adjustments
consisting only of normal recurring adjustments, necessary for a fair
presentation.
(2) ACQUISITION OF ACAMEDICA, INC. (ACAMEDICA)
On March 25, 1994, the Company acquired all of the issued and
outstanding stock of Acamedica, acquiring net liabilities totaling
$352,045 in exchange for 442,119 shares of the Company's common stock
valued at $.30 per share and other acquisition costs totaling $59,070
for a total purchase price of $543,751. The plan of merger also called
for up to an additional 442,119 shares of common stock to be issued to
the shareholders of Acamedica based on achievement of certain
performance criteria through fiscal year 1995. During 1994 and 1995,
203,136 and 73,969 shares, respectively, were issued under these
criteria.
The acquisition was accounted for as a purchase business combination
and the assets and liabilities of Acamedica were recorded at their
estimated fair value at the date of acquisition. There were no separate
identifiable intangibles at the time of the acquisition and goodwill
of $626,883 was recognized and was amortized over 15 years. The
financial statements include the results of operations of Acamedica
from the date of acquisition.
The remaining unamortized goodwill of $556,335 related to this
acquisition was written off in 1995 as certain significant factors
expected to generate future service revenue for the Company as a result
of the merger did not materialize.
(3) EMPLOYEE NOTE RECEIVABLE
The employee note receivable at December 31, 1996 is noninterest
bearing and due on demand from an officer of the Company.
(4) LEASES
The Company leases office furniture and equipment under capital leases
expiring over the next five years and leases office space and equipment
under operating leases expiring over the next four years. The present
value of future minimum capital lease obligations and future minimum
lease payments under noncancelable operating leases and related
sublease income as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital leases Operating leases Sublease income
----------------- ------------------ ------------------
<S> <C> <C> <C>
Year ending December 31:
1997 $381,723 $ 617,239 $ 90,265
1998 323,036 585,092 112,390
1999 59,366 555,575 84,292
2000 8,390 428,105 --
2001 5,356 -- --
----------------- ------------------ ------------------
$777,871 $2,186,011 $286,947
------------------ ------------------
Less amount representing interest 120,131
-----------------
Present value 657,740
Less current installments 301,533
-----------------
$356,207
-----------------
</TABLE>
F-11
<PAGE> 95
Total rent expense was $321,455, $324,658 and $487,851 for 1994, 1995
and 1996, respectively. Included in furniture, fixtures and equipment
at 1995 and 1996 are $1,049,500 and $1,746,182, respectively, net of
accumulated amortization of $310,875 and $593,758, respectively, of
capitalized leased assets.
(5) CONVERTIBLE DEBENTURE
The convertible debenture plus accrued interest was paid in full during
1996.
(6) LONG-TERM DEBT
Included in the current portion of long-term debt and capital leases at
December 31, 1995 is $54,621 related to an unsecured note payable to
Acamedica bearing interest at 10%. The note was paid in full during
1996.
(7) SHAREHOLDERS' EQUITY
(A) COMMON STOCK
In August 1996, the Company amended its articles of incorporation to
increase the number of authorized shares of common stock from
10,000,000 to 15,000,000.
(B) CONVERTIBLE PREFERRED STOCK
In August 1996, the Company amended its articles of incorporation to
increase the number of authorized shares of convertible preferred stock
from 3,000,000 to 5,500,000.
The Company has Series C, D, E and F preferred stock (Preferred Stock)
that are convertible by the holder at any time into an equal number of
shares of common stock. The Preferred Stock is mandatorily convertible
into common stock upon the successful completion of a public offering
of the Company's common stock with aggregate proceeds of at least
$15,000,000 and a per share price of at least $9.00 or upon voluntary
conversion of a majority of the originally issued shares of Preferred
Stock.
The shares of Series C (1,189,551), Series D (313,355), Series E
(950,570) and Series F (2,017,121) preferred stock have preference in
liquidation of $1.82, $2.92, $5.26 and $5.43 per share, respectively.
The Preferred Stock has the same voting rights as common stock.
Dividends on the Preferred Stock can be declared at the option of the
Board of Directors.
(C) STOCK OPTION PLAN
Under the Company's 1989 Stock Option Plan (Plan), as amended and
restated, options may be designated as qualified or nonqualified at the
discretion of the Board of Directors. Generally, the options may be
exercised over a five-year period, 20% vesting one year from the date
of grant and an additional 1.6667% vesting each month thereafter. All
options expire ten years from the date of grant. Qualified options are
exercisable at the fair market value of the stock at the date of grant
and nonqualified options are exercisable at prices determined at the
discretion of the Board of Directors. In 1996, the Plan was amended to
increase the number of shares reserved to 2,278,642.
As of December 31, 1996, 186,666 shares were available for future grant
under the Plan.
F-12
<PAGE> 96
A summary of the Company's stock option plan as of December 31 is
presented below:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ------------------------- -------------------------
Stock options Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------- -------------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 558,417 $ 0.28 477,904 $ 0.25 603,250 $ 0.30
Granted 166,725 0.30 224,500 0.38 848,083 0.54
Exercised (237,104) 0.34 (61,530) 0.24 (10,799) 0.30
Forfeited (10,134) 0.36 (37,624) 0.31 (30,118) 0.49
------------- ---------- ------------
Outstanding at end of year 477,904 $ 0.25 603,250 $ 0.30 1,410,416 $ 0.48
Options exercisable at year-end 195,993 184,402 491,550
Weighted-average fair value of options
granted during the year $ 0.10 $ 0.10
---------- ------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted-average
Number remaining Weighted- Number Weighted-
Range of exercise outstanding at contractual life in average exercisable average
prices 12/31/96 years exercise price at 12/31/96 exercise price
- -------------------- ------------------ ------------------------ ------------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 0.20 229,092 6.1 $ 0.20 226,884 $ 0.20
0.30 268,125 7.6 0.30 210,975 0.30
0.53 to 0.60 913,199 9.5 0.54 53,691 0.54
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been
recognized for employee stock option awards granted at fair market
value or more on the date of grant. Had compensation cost for the
Company's stock option awards been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------------------------------------------------------
<S> <C> <C>
As reported $ 2,646,315 3,893,720
Pro forma 2,648,021 3,907,188
</TABLE>
The fair value of option grants is estimated using the Black-Scholes
option pricing model with the following weighted average assumptions
used for grants in 1995 and 1996: dividend yield of 0%, expected
volatility 0% and risk free interest rates of 6.6%. The expected lives
are 4.5 years for 1995 grants and 3 years for 1996 grants.
(D) WARRANTS
As of December 31, 1996, the Company had outstanding warrants, expiring
September 30, 2001, to purchase 736,648 shares of Series F preferred
stock which are fully exercisable at $5.43 per share.
F-13
<PAGE> 97
(8) MAJOR CUSTOMERS
Approximately 19% in 1994, 38% in 1995 and 15%, 16% and 16% in 1996 of
the Company's service revenues were earned from each of one, one and
three customers, respectively.
In addition, approximately 43% in 1994 and 27% in 1995 of the Company's
service revenues were earned from another customer. In 1995, the
Company entered into an agreement with this customer to provide
services below the Company's direct service costs. The total estimated
loss on the contract of $1,308,778 was provided for in 1995. Effective
June 30, 1996, the agreement with this customer was terminated.
(9) FEDERAL INCOME TAXES
Federal income taxes for 1994, 1995 and 1996 differ from the amount
computed by applying the U.S. corporate income tax rate of 34% to net
loss primarily due to limitations on utilizing net operating losses.
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred tax assets and liabilities at
December 31 are presented below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 26,538 38,204
Accrued expenses 36,315 60,561
Accrued contract service costs 131,407 --
Deferred revenue, net -- 88,606
Software development costs 975,715 733,971
Net operating loss carryforwards 2,776,848 4,339,831
Other -- 74,800
----------- -----------
Total gross deferred tax assets 3,946,823 5,335,973
Less valuation allowance 3,723,790 5,121,874
----------- -----------
Total deferred tax assets 223,033 214,099
Deferred tax liabilities - depreciation (223,033) (214,099)
----------- -----------
Net deferred tax assets $ -- --
----------- -----------
</TABLE>
The increase in the valuation allowance for deferred tax assets was
$1,240,039, $138,262 and $1,398,084 in 1994, 1995 and 1996,
respectively. At December 31, 1996, the Company had tax net operating
loss carryforwards of approximately $12,700,000 available to offset
future Federal taxable income, if any, which expire beginning in 2003.
The use of approximately $7,300,000 of net operating losses may be
limited due to a change in control under Section 382 of the Internal
Revenue Code such that only approximately $484,000 of such limited
losses can be utilized each year on a cumulative basis through 2011.
(10) COMMITMENTS
(A) LICENSING AGREEMENT
The Company has a licensing agreement expiring in March 1998 for a
computer database and support. Future payments for services under this
agreement are $368,000 at December 31, 1996. Expense related to this
agreement amounted to $199,200 for each of the years 1994, 1995 and
1996.
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(B) LEASING AGREEMENT
In June 1994, the Company entered into an agreement with AT&T Systems
Leasing Corporation (AT&T) whereby AT&T assisted in the development of
a computer software program used by the Company as an integral part
of its business and provided the Company with certain computer and
telephone equipment and maintenance over the five-year lease term. The
development of the computer software was expensed in 1994. The computer
equipment was accounted for as a capital lease. In December 1996, the
outstanding principal of the software obligation was paid in full.
The agreement also called for additional payments based on the Company
achieving a certain number of subscribers within specified periods. The
payments were calculated based on the number of subscribers over
275,000 and included under AT&T per capita fee in the financial
statements. The Company issued 200,000 shares of common stock to AT&T
in December 1996 to eliminate the requirement for further per capita
payments.
The agreement had required a $275,000 deposit, which was recorded as
restricted cash and was released upon payment of the software
obligation.
(C) CLINICAL SERVICES
In June 1994, the Company entered into a consulting agreement
regarding certain clinical services. Future payments under this
agreement are $125,000 at December 31, 1996. Expense related to this
agreement amounted to zero, $175,000 and $237,500 for 1994, 1995 and,
1996, respectively.
(11) SUBSEQUENT EVENT
On December 22, 1997, the Company entered into an Agreement and Plan
of Merger with PhyCor, Inc. ("PhyCor") under which PhyCor would
acquire all of the capital stock of the Company in exchange for
shares of PhyCor Common Stock. The Merger is expected to be accounted
for as a pooling of interests.
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================================================================================
Annex A
AGREEMENT AND PLAN OF MERGER
BETWEEN
PHYCOR, INC.,
PHYCOR/HEALTH MERGER CORP.
AND
CAREWISE, INC.
DATED AS OF DECEMBER 22, 1997
================================================================================
<PAGE> 100
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of December
22, 1997, between PhyCor, Inc., a Tennessee corporation ("PhyCor"),
PhyCor/Health Merger Corp., a newly formed Delaware corporation and a wholly
owned subsidiary of PhyCor ("Merger Sub"), and CareWise, Inc., a Delaware
corporation ("CareWise").
RECITALS
A. The Boards of Directors of PhyCor and CareWise each have determined that
a business combination between PhyCor and CareWise is in the best interests of
their respective companies and stockholders and presents an opportunity for
their respective companies to achieve long-term strategic and financial
benefits, and, accordingly, have agreed to effect the merger provided for herein
upon the terms and subject to the conditions set forth herein.
B. For federal income tax purposes, it is intended that the merger
provided for herein shall qualify as a reorganization within the meaning of
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"),
and for financial accounting purposes shall be accounted for as a pooling of
interests.
C. PhyCor, Merger Sub and CareWise desire to make certain
representations, warranties and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
1. The Merger.
1.1. The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged
with and into CareWise in accordance with this Agreement, and the separate
corporate existence of Merger Sub shall thereupon cease (the "Merger"). CareWise
shall be the surviving corporation in the Merger (sometimes hereinafter referred
to as the "Surviving Corporation"). The Merger shall have the effects specified
in the Delaware General Corporation Law (the "DGCL").
1.2. The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at the
offices of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company, 2100 Nashville City Center, Nashville, Tennessee, at 10:00 a.m., local
time, on the first business day immediately following the day on which the last
to be fulfilled or waived of the conditions set forth in Article 8 shall be
fulfilled or waived in accordance herewith or (b) at such other time, date or
place as PhyCor and CareWise may agree. The parties
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hereto shall exercise good faith to cause each of the conditions to the Merger
set forth in Article 8 to be satisfied on or prior to April 15, 1998. The date
on which the Closing occurs is hereinafter referred to as the "Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed and filed in accordance with such
Section on the Closing Date. The Merger shall become effective at the time of
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the DGCL or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger (the "Effective Time").
ARTICLE 2
2. Charter and Bylaws of the Surviving Corporation.
2.1. Charter. The Charter of Merger Sub in effect immediately prior to
the Effective Time shall be the Charter of the Surviving Corporation, until duly
amended in accordance with applicable law.
2.2. Bylaws. The Bylaws of Merger Sub in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with applicable law.
ARTICLE 3
3. Directors and Officers of the Surviving Corporation.
3.1. Directors. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
3.2. Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time and until their successors are duly appointed or elected in
accordance with applicable law.
ARTICLE 4
4. Effect of the Merger on Securities of Merger Sub and CareWise.
4.1. Merger Sub Stock. At the Effective Time, each share of common
stock, $.01 par value per share, of Merger Sub outstanding immediately prior to
the Effective Time shall be converted into and exchanged for one validly issued,
fully paid and non-assessable share of common stock, $.001 par value per share,
of the Surviving Corporation.
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4.2. CareWise Securities.
(a) At the Effective Time, (i) each share of common stock,
$.001 par value per share (the "CareWise Common Stock"), and (ii) each share of
preferred stock, $.001 par value per share (the "CareWise Preferred Stock") of
CareWise issued and outstanding immediately prior to the Effective Time (other
than the CareWise Appraisal Shares) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into the right to
receive a number of shares, no par value per share, of PhyCor (the "PhyCor
Common Stock") equal to the number of Aggregate Issuable PhyCor Shares divided
by the number of Outstanding CareWise Shares (the "Exchange Ratio"). For
purposes of this section, the capitalized terms shall have the following
definitions:
(i) "Aggregate Issuable PhyCor Shares" shall mean the PhyCor
Base Shares multiplied by a fraction, the numerator of which is the
Outstanding CareWise Shares and the denominator of which is the sum of
Outstanding CareWise Shares and the CareWise Appraisal Shares.
(ii) "PhyCor Base Shares" shall be 2,549,000 shares of
PhyCor Common Stock, assuming that the Average Price (as defined
below) is at or between $24.00 and $29.00 per share. If the Average
Price is less than $24.00, then the number of PhyCor Base Shares shall
be the quotient of 61,176,000 divided by the Average Price. If the
Average Price is more than $29.00 per share, then the number of PhyCor
Base Shares shall be the quotient of 73,921,000 divided by the Average
Price.
(iii) The "Average Price" of PhyCor Common Stock shall mean
the average of the daily closing prices of PhyCor Common Stock as
traded on the Nasdaq National Market ("Nasdaq") (or such other
exchange on which the shares of PhyCor Common Stock shall then be
listed) for the ten (10) trading days immediately preceding the
business day immediately preceding the Closing Date.
(iv) "Outstanding CareWise Shares" shall mean all of the
shares of CareWise Common Stock and CareWise Preferred Stock issued
and outstanding immediately prior to the Effective Time (including any
shares which may have been issued upon exercise of currently
outstanding options or warrants) less CareWise Appraisal Shares.
(v) "CareWise Appraisal Shares" shall mean outstanding
shares of CareWise Common Stock or CareWise Preferred Stock, as the
case may be, the holders of which have perfected their rights to
appraisal of their shares under Section 262 of the DGCL.
(b) Each share of PhyCor Common Stock issued to holders of
CareWise Common Stock or CareWise Preferred Stock, as the case may be, in the
Merger shall be issued together with one associated preferred stock purchase
right (a "Right") in accordance with the Rights Agreement dated as of February
18, 1994, between PhyCor and First Union National Bank of North Carolina, as
Rights
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Agent. References herein to the shares of PhyCor Common Stock issuable in
the Merger shall be deemed to include the associated Rights.
(c) As a result of the Merger and without any action on the
part of the holder thereof, at the Effective Time all shares of CareWise Common
Stock and CareWise Preferred Stock shall cease to be outstanding and shall be
cancelled and retired and shall cease to exist, and each holder of shares of
CareWise Common Stock or CareWise Preferred Stock, as the case may be, shall
thereafter cease to have any rights with respect to such shares of CareWise
Common Stock or CareWise Preferred Stock, as the case may be, except the right
to receive, without interest, the PhyCor Common Stock and cash for fractional
shares of PhyCor Common Stock in accordance with Sections 4.3(b) and 4.3(e) upon
the surrender of a certificate representing such shares of CareWise Common Stock
or CareWise Preferred Stock, as the case may be (a "Certificate").
(d) Each share of CareWise Common Stock issued and held in
CareWise's treasury at the Effective Time shall, by virtue of the Merger, cease
to be outstanding and shall be cancelled and retired without payment of any
consideration therefor.
(e) At the Effective Time, each outstanding option to purchase
CareWise Common Stock (each an "Option") issued pursuant to the CareWise Amended
and Restated 1989 Stock Option Plan (the "CareWise Option Plan"), whether vested
or unvested, shall convert into an Option (a "Replacement Option") to acquire,
except as set forth below, on the same terms and conditions as were applicable
under such replaced Option prior to the Effective Time, the number of shares of
PhyCor Common Stock (rounded up to the nearest whole number except in the case
of incentive stock options in which case the number will be rounded down to the
nearest whole number) equal to the product of the Exchange Ratio and the number
of shares of CareWise Common Stock subject to such Option, at a price per share
equal (rounded up to the nearest $0.001)to the aggregate exercise price for the
shares of CareWise Common Stock subject to such Option divided by the number of
full shares of PhyCor Common Stock deemed to be purchasable pursuant to such
Replacement Option; provided, however, that in no event shall the terms of any
Replacement Option give the employee additional benefits that he or she did not
have under the original Option and provided further that the Replacement Option
shall contain such terms that are necessary for it to be a substitution for a
new option in a transaction to which Section 424(a) of the Code applies.
Notwithstanding the foregoing, any and all Replacement Options shall be fully
vested whether or not the vesting requirements set forth in the Option agreement
have been satisfied. Following the Effective Time, upon surrender of the
outstanding Options, PhyCor shall deliver to the holders of Options appropriate
option agreements representing the Replacement Options.
(f) If any options, rights or warrants to purchase or
securities convertible or exchangeable into shares of any class of capital stock
of CareWise shall remain outstanding at the Effective Time, whether vested or
unvested, the number of PhyCor Base Shares shall be reduced by the nearest whole
number of
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shares of PhyCor Common Stock issuable in the aggregate upon the exercise,
conversion or exchange of all such outstanding securities. From and after the
date of this Agreement, except as provided in Section 7.2(a)(v), no additional
options shall be granted by CareWise or its Subsidiaries (as defined in Section
10.14 hereof).
4.3 Exchange of Certificates Representing CareWise Common Stock.
(a) As of the Effective Time, PhyCor shall deposit, or shall
cause to be deposited, with PhyCor's Transfer Agent, or with such other party
reasonably satisfactory to CareWise (the "Exchange Agent"), for the benefit of
the holders of shares of CareWise Common Stock and CareWise Preferred Stock for
exchange in accordance with this Article 4, certificates representing the shares
of PhyCor Common Stock and the cash in lieu of fractional shares (such cash and
certificates for shares of PhyCor Common Stock, together with any dividends or
distributions with respect thereto (relating to record dates for such dividends
or distributions after the Effective Time), being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 4.2 and paid pursuant to this
Section 4.3 in exchange for outstanding shares of CareWise Common Stock and
CareWise Preferred Stock.
(b) Promptly after the Effective Time, PhyCor shall cause the
Exchange Agent to mail to each holder of record of shares of CareWise Common
Stock and CareWise Preferred Stock (i) a letter of transmittal which shall
specify that delivery shall be effected, and risk of loss and title to such
shares of CareWise Common Stock or CareWise Preferred Stock, as the case may be,
shall pass, only upon delivery of the Certificates representing such shares to
the Exchange Agent and which shall be in such form and have such other
provisions as PhyCor may reasonably specify and (ii) instructions for use in
effecting the surrender of such Certificates in exchange for certificates
representing shares of PhyCor Common Stock or CareWise Preferred Stock, as the
case may be, and cash in lieu of fractional shares. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of the shares represented by such Certificate shall be
entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of PhyCor Common Stock and (y) a check representing the
amount of cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the Certificate surrendered pursuant to the provisions of this Article 4, after
giving effect to any required withholding tax, and the shares represented by the
Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the cash in lieu of fractional shares and unpaid dividends
and distributions, if any, payable to holders of shares of CareWise Common Stock
or CareWise Preferred Stock, as the case may be. In the event of a transfer of
ownership of CareWise Common Stock or CareWise Preferred Stock, as the case may
be, which is not registered in the transfer records of CareWise, a certificate
representing the proper number of shares of PhyCor Common Stock, together with a
check for the cash to be paid in lieu of fractional shares, may be issued to
such a transferee if the Certificate representing such CareWise Common Stock or
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CareWise Preferred Stock, as the case may be, is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid.
(c) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time on PhyCor
Common Stock shall be paid with respect to any shares of CareWise Common Stock
or CareWise Preferred Stock, as the case may be, represented by a Certificate
until such Certificate is surrendered for exchange as provided herein. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificates representing whole shares
of PhyCor Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of PhyCor Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of PhyCor Common Stock, less
the amount of any withholding taxes which may be required thereon.
(d) At or after the Effective Time, there shall be no
transfers on the stock transfer books of CareWise of the shares of CareWise
Common Stock or CareWise Preferred Stock, as the case may be, which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for certificates for shares of PhyCor Common Stock and
cash in lieu of fractional shares, if any, deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in this
Article 4. Certificates surrendered for exchange by any person constituting an
"affiliate" of CareWise for purposes of Rule 145(c) under the Securities Act of
1933, as amended (the "Securities Act"), shall not be exchanged until PhyCor has
received a written agreement from such person as provided in Section 7.11.
(e) No fractional shares of PhyCor Common Stock shall be
issued pursuant hereto. In lieu of the issuance of any fractional share of
PhyCor Common Stock pursuant to Section 4.2(c), cash adjustments will be paid to
holders in respect of any fractional share of PhyCor Common Stock that would
otherwise be issuable, and the amount of such cash adjustment shall be equal to
such fractional proportion of the Average Price of a share of PhyCor Common
Stock as defined in Section 4.2(a)(iii).
(f) Any portion of the Exchange Fund (including the proceeds
of any investments thereof and any shares of PhyCor Common Stock) that remains
unclaimed by the former stockholders of CareWise one year after the Effective
Time shall be delivered to the Surviving Corporation. Any former stockholders of
CareWise who have not theretofore complied with this Article 4 shall thereafter
look only to the Surviving Corporation for payment of their shares of PhyCor
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Common Stock, cash in lieu of fractional shares and unpaid dividends and
distributions on the PhyCor Common Stock deliverable in respect of each share of
CareWise Common Stock or CareWise Preferred Stock, as the case may be, such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
(g) None of PhyCor, CareWise, the Surviving Corporation, the
Exchange Agent or any other person shall be liable to any former holder of
shares of CareWise Common Stock or CareWise Preferred Stock, as the case may be,
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity against
any claim that may be made against it with respect to such Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of PhyCor Common Stock and cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of PhyCor Common Stock
as provided in Section 4.3(c), deliverable in respect thereof pursuant to this
Agreement.
4.4. Adjustment of Exchange Ratio.
In the event that, subsequent to the date of this Agreement but prior
to the Effective Time, the outstanding shares of any of (a) the PhyCor Common
Stock, (b) the CareWise Common Stock, or (c) the CareWise Preferred Stock shall
have been changed into a different number of shares or a different class as a
result of a stock split, reverse stock split, stock dividend, subdivision,
reclassification, split, combination, exchange, recapitalization or other
similar transaction, the Exchange Ratio shall be appropriately adjusted.
ARTICLE 5
5. Representations and Warranties of CareWise.
Except as set forth in the schedules delivered to PhyCor at or prior to
the execution hereof, which schedules shall reference a specific section of this
Article 5 (the "CareWise Schedules"), CareWise represents and warrants to PhyCor
as of the date of this Agreement as follows:
5.1. Existence; Good Standing; Corporate Authority. CareWise is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation. CareWise is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership of its property or the conduct of its business requires
such qualification, except where the failure to be so qualified would not have a
material adverse effect on the business as now conducted, or properties of
CareWise and its Subsidiaries taken as a whole (with
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the exclusion set forth in Section 10.15, a "CareWise Material Adverse Effect").
CareWise has all requisite corporate power and authority to own, operate and
lease its properties and carry on its business as now conducted. Each of
CareWise's Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has the corporate or partnership power and
authority to own its properties and to carry on its business as it is now being
conducted, and is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which the ownership of its property or
the conduct of its business requires such qualification, except where the
failure to be so qualified would not have a CareWise Material Adverse Effect.
5.2. Compliance with Law. Neither CareWise nor any of its Subsidiaries
is in violation of any order of any court, governmental authority or arbitration
board or tribunal, or any law, ordinance, governmental rule or regulation to
which CareWise or any of its Subsidiaries or any of their respective properties
or assets is subject, the violation of which would have a CareWise Material
Adverse Effect. CareWise and its Subsidiaries have obtained all material
licenses, permits and other authorizations currently required and have taken all
material actions required by applicable law or governmental regulations in
connection with their business as now conducted.
5.3 Stockholder's Interests. To the knowledge of CareWise, the
interests of CareWise are owned of record in the manner set forth in the
CareWise Schedules. Except for the transactions contemplated by this Agreement,
to the knowledge of CareWise, there are not any agreements or understandings
among CareWise's stockholders with respect to the voting of its stock on any
matter.
5.4. Authorization, Validity and Effect of Agreements. CareWise has the
requisite corporate power and authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby. Subject only to the
approval of this Agreement and the transactions contemplated hereby by (a) the
holders of a majority of the outstanding shares of CareWise Common Stock and (b)
the holders of two-thirds of the then outstanding Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock,
acting together as a single class, the consummation by CareWise of the
transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of
CareWise, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
5.5. Capitalization. The authorized capital stock of CareWise consists
of 15,000,000 shares of CareWise Common Stock and 5,500,000 shares of CareWise
Preferred Stock. As of the date hereof, there were 3,107,313 shares of CareWise
Common Stock, and 4,470,598 shares of CareWise Preferred Stock, issued and
outstanding. CareWise has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into
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or exercisable for securities having the right to vote) with the stockholders of
CareWise on any matter. All issued and outstanding shares of CareWise Common
Stock are duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. There are not at the date of this Agreement any existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments which obligate CareWise or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock of CareWise
or any of its Subsidiaries. After the Effective Time, the Surviving Corporation
will have no obligation to issue, transfer or sell any shares of capital stock
of CareWise or the Surviving Corporation pursuant to any CareWise Benefit Plan
(as defined in Section 5.15).
5.6. Subsidiaries. CareWise owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such CareWise Subsidiary) of each
of CareWise's Subsidiaries. Each of the outstanding shares of capital stock of
each of CareWise's Subsidiaries is duly authorized, validly issued, fully paid
and nonassessable, and is owned, directly or indirectly, by CareWise free and
clear of all liens, pledges, security interests, claims or other encumbrances.
5.7. Other Interests. Except for interests in the CareWise
Subsidiaries, neither CareWise nor any CareWise Subsidiary owns directly or
indirectly any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity.
5.8. Defaults; No Violation. CareWise 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 Contract (as defined in
Section 5.13) or under any provision of the Certificate of Incorporation or
Bylaws of CareWise. Neither the execution and delivery by CareWise of this
Agreement nor the consummation by CareWise of the transactions contemplated
hereby in accordance with the terms hereof, will: (i) conflict with or result in
a breach of any provisions of the Certificate of Incorporation or Bylaws of
CareWise; (ii) result in a breach or violation of, a default under, or the
triggering of any payment or other obligations pursuant to, or accelerate
vesting under, the CareWise Option Plan, or any grant or award made under any of
the foregoing; (iii) violate, conflict with, result in a breach of any provision
of, constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, result in the termination or in a right
of termination or cancellation of, accelerate the performance required by,
result in the triggering of any payment or other obligations pursuant to, result
in the creation of any lien, security interest, charge or encumbrance upon any
of the properties of CareWise or its Subsidiaries under, or result in being
declared void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any Material Contract or any license, franchise or
permit to which CareWise or any of its Subsidiaries is a party, or by which
CareWise or any of its Subsidiaries or any of their respective properties is
bound or affected which is material to the business of CareWise and its
Subsidiaries taken as a whole; or (iv) other than the filings provided for in
Article 1, applicable federal, state and local regulatory filings, filings
required under the Hart-
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Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act, or
applicable state securities and "Blue Sky" laws or filings in connection with
the maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority.
5.9. Financial Statements. Each of the consolidated balance sheets of
CareWise as of March 31, 1997 and September 30, 1997 (including the related
notes and schedules) fairly presents the consolidated financial position of
CareWise and the CareWise Subsidiaries as of its date, and each of the
consolidated statements of income, shareholders' equity (deficit) and cash flows
of CareWise for the two years ended December 31, 1995, the three months ended
March 31, 1996, the year ended March 31, 1997 and the six months ended September
30, 1997 (including any related notes and schedules) fairly presents the results
of operations, shareholders' equity (deficit) or cash flows, as the case may be,
of CareWise and the CareWise Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which are consistent with prior year audit adjustments, in each case
in accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein). Neither CareWise
nor any of the CareWise Subsidiaries has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on, or reserved against in, a balance sheet of CareWise
or in the notes thereto, prepared in accordance with generally accepted
accounting principles consistently applied, except liabilities arising in the
ordinary course of business since March 31, 1997.
5.10. Litigation. There are no actions, suits or proceedings pending
against CareWise or any of the CareWise Subsidiaries or, to the knowledge of the
executive officers of CareWise, threatened against CareWise or any of the
CareWise Subsidiaries, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality.
5.11. Court Orders, Decrees and Laws. There are no outstanding or, to
the best of CareWise's knowledge, threatened orders, writs, injunctions or
decrees of any court, governmental agency or arbitration tribunal against or
affecting CareWise or its assets. CareWise 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 since 1990 no notices of
alleged violations thereof. No governmental authorities are presently conducting
proceedings against CareWise and no such investigation or proceeding is pending
or, to the knowledge of CareWise, being threatened.
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5.12. Absence of Certain Recent Changes. To the knowledge of CareWise,
CareWise has not, since September 30, 1997, 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 in excess of $100,000,
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 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 CareWise Material Adverse Effect;
(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 $500,000;
(h) disposed of any of its assets having a value in excess of
$100,000 or written down the value of any of its assets with a value prior to
such write down of $100,000, 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 $100,000 (absolute, accrued,
contingent or otherwise);
(j) canceled any debts in excess of $100,000;
(k) entered into, amended or terminated any Material Contract;
(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 5.12.
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5.13. Material Contracts and Leases. The CareWise Schedules include a
list of each contract, lease, sublease, agreement and other instrument to which
CareWise or a Subsidiary 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, copies of
which have been made available to PhyCor (a "Material Contract"). All such
Material Contracts are in full force and effect, there has been no threatened
cancellation thereof to the best of CareWise'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. There are no Material Contracts to which CareWise is a
party or is bound which could inhibit or prevent CareWise in its ability to
consummate the transactions contemplated herein. CareWise 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 with respect to a Material Contract, CareWise 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 CareWise under such contracts. Said consent shall be in a form
reasonably acceptable to PhyCor.
5.14. Taxes. CareWise and each of its Subsidiaries (i) have timely
filed all federal, state, local and foreign tax returns required to be filed by
any of them for tax years ended prior to the date of this Agreement or requests
for extensions have been timely filed and any such request shall have been
granted and not expired, and all such returns are complete in all material
respects, (ii) have paid or accrued all taxes shown to be due and payable on
such returns, (iii) have properly accrued all such taxes for such periods
subsequent to the periods covered by such returns and ending on or before the
date hereof, and (iv) have not consented to the extension of any statute of
limitations with respect to any tax years for federal income tax returns except
as set forth in the CareWise Schedules. There are no tax liens on any of
CareWise's assets except those with respect to taxes not yet due and payable.
CareWise has not received notice of any pending tax examinations of CareWise's
tax returns nor has CareWise 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 for which CareWise has received notice or that
have been asserted against CareWise for unpaid taxes by any federal, state or
other governmental body. There is no tax sharing agreement that will require any
payment by CareWise or any of the CareWise Subsidiaries after the Closing Date.
CareWise has withheld from each payment made to employees of CareWise 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 has set aside all other employee contributions or payments
required to be set aside with respect to such wages and has paid or will pay the
same to, or has deposited or will deposit such payments with, the proper tax
receiving officers or other appropriate authorities, except to the extent of any
liabilities to be assumed by PhyCor hereunder.
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5.15. Employee Benefit Plans. All employee benefit plans and other
benefit arrangements covering employees of CareWise and the CareWise
Subsidiaries (the "CareWise Benefit Plans") and all employee agreements
providing compensation, severance or other benefits to any employee or former
employee of CareWise or any of its Subsidiaries are identified in the CareWise
Schedules. True and complete copies of the CareWise Benefit Plans have been made
available to PhyCor or will be made available to PhyCor prior to the Closing.
The CareWise Benefit Plans comply, in all material respects, with the applicable
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code and any CareWise Benefit Plan intended to be qualified
under Section 401(a) of the Code is the subject of a favorable determination
letter issued by the Internal Revenue Service (the "IRS"). Neither CareWise, its
Subsidiaries nor any ERISA Affiliate (as defined below) of CareWise maintains,
contributes to or has in the past maintained or contributed to any benefit plan
which is covered by Title IV of ERISA or Section 412 of the Code. Neither
CareWise nor any of its Subsidiaries has incurred any material liability or
penalty under Section 4975 of the Code or Section 502(i) of ERISA with respect
to any CareWise Benefit Plan. Each CareWise Benefit Plan has been maintained and
administered substantially in compliance with its terms and with ERISA and the
Code to the extent applicable thereto. To the knowledge of CareWise, there are
no pending or anticipated material claims against or otherwise involving any of
the CareWise Benefit Plans (excluding claims for benefits incurred in the
ordinary course of CareWise Benefit Plan activities) and no suit, action or
other litigation (excluding claims for benefits incurred in the ordinary course
of CareWise Benefit Plan activities) has been brought against or with respect to
any such CareWise Benefit Plan. All contributions required to be made as of the
date hereof to the CareWise Benefit Plans have been made or provided for.
Neither CareWise nor any ERISA Affiliate of CareWise (during the period of its
affiliated status and prior thereto, to the knowledge of CareWise) has
contributed to, or been required to contribute to, any "multiemployer plan" (as
defined in Sections 3(37) and 4001(a)(3) of ERISA). CareWise does not maintain
or contribute to any plan or arrangement which provides or has any liability to
provide life insurance or medical or other employee welfare benefits (within the
meaning of Section 3(1) of ERISA) to any employee or former employee upon his
retirement or termination of employment, and CareWise has never represented,
promised or contracted (whether in oral or written form) to any employee or
former employee that such benefits would be provided, except for benefits
mandated by applicable law, including, but not limited to, continuation coverage
mandated by Section 4980B(f) of the Code or Part 6 of Subtitle B of Title I of
ERISA. The execution of, and performance of the transactions contemplated in,
this Agreement will not, in and, of themselves, constitute an event under any
benefit plan, policy, arrangement or agreement or any trust or loan related
thereto that will result in a material payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee. The only severance agreements or severance policies applicable to
CareWise or its Subsidiaries are the agreements and policies specifically
referred to in the CareWise Schedules (and, in the case of such agreements, the
form of which is attached to the CareWise Schedules). No person who is employed
by or performs services for CareWise or any of its Subsidiaries will
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receive a payment in connection with the transactions contemplated by this
Agreement that will result in a material liability under Section 4999 of the
Code.
For purposes of this Agreement, "ERISA Affiliate" means any business or
entity that, together with CareWise, is treated as a single employer under
Section 414(b), (c), (m) or (o) of the Code; provided, however, that with
respect to any provision of this Agreement relating to a "multiemployer plan"
(as defined in Section 3(37) or Section 4001(a)(3) of ERISA, "ERISA Affiliate"
means any business or entity that is under "common control" (within the meaning
of Section 4001(a)(14) of ERISA) with CareWise.
5.16. Labor Matters. Neither CareWise nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the executive officers of CareWise, threatened against CareWise or
its Subsidiaries relating to their business. To the knowledge of the executive
officers of CareWise, there are no organizational efforts with respect to the
formation of a collective bargaining unit being made or threatened involving
employees of CareWise or any of its Subsidiaries.
5.17. Insurance. The CareWise Schedules include 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. The CareWise Schedules contain a
description of all malpractice liability insurance policies of CareWise since
1990. Since 1990, CareWise has never filed a written application for any
insurance coverage which has been denied by an insurance agency or carrier, and
CareWise has been continuously insured for professional malpractice claims for
at least the past seven (7) years. The CareWise Schedules also contain a list of
all claims for any insured loss in excess of Ten Thousand Dollars ($10,000) per
occurrence, filed by CareWise 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. CareWise is not in 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.
5.18. Environmental Matters. CareWise 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. CareWise 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 CareWise's premises.
5.19. No Brokers. CareWise has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of CareWise or PhyCor to pay any finder's fees, brokerage or agent's
commissions or
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other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that CareWise has retained BT Alex. Brown Incorporated, as its financial
advisor, the arrangements with which have been disclosed in writing to PhyCor
prior to the date hereof. Other than the foregoing arrangements, CareWise is not
aware of any claim for payment of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
5.20. PhyCor Stock Ownership. Neither CareWise nor any of its
Subsidiaries owns any shares of PhyCor Common Stock or other securities
convertible into PhyCor Common Stock.
5.21. Fraud and Abuse. Neither CareWise nor any of CareWise's officers,
directors, or, to the knowledge of CareWise, any of CareWise's agents,
affiliates or employees has engaged in any activities which are prohibited under
U.S.C. Section 1320a-7b, or the regulations promulgated thereunder pursuant to
such statutes, or related state or local statutes or regulations, including, but
not limited to, knowingly or 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 any other federal or state
health care payment programs, or (b) in return for purchasing, leasing, ordering
or arranging for or recommending purchasing, leasing or ordering any good,
facility, service or item for which payment may be made in whole or in part by
Medicare, Medicaid, or any other federal or state health care payment program.
5.22. Pooling of Interests; Tax Reorganization. To the knowledge of the
executive officers of CareWise, CareWise has not taken or failed to take any
action which would prevent the accounting for the Merger as a pooling of
interests in accordance with Accounting Principles Board Opinion No. 16, the
interpretative releases issued pursuant thereto, and the pronouncements of the
Securities and Exchange Commission (the "SEC"). To the knowledge of the
executive officers of CareWise, CareWise has not taken or failed to take any
action which would prevent the Merger from constituting a reorganization within
the meaning of section 368(a) of the Code. The representations of CareWise
contained in the tax certificate of CareWise attached as Exhibit 5.22 (the
"CareWise Tax Certificate") are true and correct, and such representations are
incorporated herein by reference.
5.23. Intellectual Property. CareWise owns all right, title and
interest in and to the computer software, computer hardware, operating system
software, and telecommunications links, or has the requisite licenses necessary
to operate the business of CareWise. CareWise has the right to consummate the
transactions contemplated by this Agreement without violating or infringing upon
any material rights of any third party and without material breach of any
third-party license to CareWise, and there is currently no actual or, to the
knowledge of CareWise, threatened suit by any third party based on an alleged
violation, infringement or
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breach by CareWise. After the Effective Time, CareWise shall continue to have
the right to use such computer software, computer hardware, operating system
software, and telecommunications links after the transfer contemplated by this
Agreement in the operation of the business. In addition, CareWise has
investigated, and is reasonably satisfied, that the software used in its
business will recognize dates for the year 2000 and beyond, and will not
malfunction or abnormally cease to function as a result of the date change from
the year 1999 to the year 2000.
ARTICLE 6
6. Representations and Warranties of PhyCor and Merger Sub.
Except as set forth in the schedules delivered to CareWise at or prior
to the execution hereof, which schedules shall reference a specific section of
this Article 6 (the "PhyCor Schedules") or in the PhyCor Reports (as defined
below), PhyCor and Merger Sub represent and warrant to CareWise as of the date
of this Agreement as follows:
6.1. Existence; Corporate Authority. Each of PhyCor and Merger Sub is a
corporation duly incorporated and validly existing under the laws of its
jurisdiction of incorporation. PhyCor is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership of its property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, as now conducted, or properties of
PhyCor and its subsidiaries taken as a whole (a "PhyCor Material Adverse
Effect"). PhyCor has all requisite corporate power and authority to own, operate
and lease its properties and carry on its business as now conducted. The copies
of PhyCor's Charter and Bylaws previously delivered to CareWise are true and
correct.
6.2. Authorization, Validity and Effect of Agreements. Each of PhyCor
and Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby. The
consummation by PhyCor and Merger Sub of the transactions contemplated hereby
has been duly authorized by all requisite corporate action. This Agreement
constitutes, and all agreements and documents contemplated hereby (when executed
and delivered pursuant hereto for value received) will constitute, the valid and
legally binding obligations of PhyCor and Merger Sub, enforceable in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
6.3. Capitalization.
(a) The authorized capital stock of PhyCor consists of
250,000,000 shares of PhyCor Common Stock and 10,000,000 shares of preferred
stock, no par value (the "PhyCor Preferred Stock"). As of December 11, 1997,
there were 64,530,414 shares of PhyCor Common Stock and no shares of PhyCor
Preferred Stock issued and outstanding. Since such date, no additional shares of
capital stock of PhyCor have been issued except pursuant to the exercise of
options outstanding
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under PhyCor's stock option and employee stock purchase plans (the "PhyCor Stock
Option Plans"). PhyCor has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the stockholders of PhyCor on any matter. All such issued and outstanding shares
of PhyCor Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Except as contemplated by this
Agreement, there are not at the date of this Agreement any existing options,
warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments which obligate PhyCor to issue, transfer or sell any
shares of capital stock of PhyCor.
(b) The authorized capital stock of Merger Sub consists of
1,000 shares of Common Stock, $.01 par value per share, all of which shares are
issued and outstanding and owned by PhyCor. Notwithstanding any provisions to
the contrary, PhyCor may, in its sole discretion, increase the number of shares
of authorized Common Stock of Merger Sub and the number of shares of Common
Stock of Merger Sub issued and outstanding owned by PhyCor. Merger Sub has not
engaged in any activities other than in connection with the transactions
contemplated by this Agreement.
6.4. SEC Documents and Financial Statements. PhyCor has filed all
reports required to be filed with the SEC since January 1, 1997 (collectively,
the "PhyCor SEC Reports") and has previously furnished or made available to
CareWise true and complete copies of all publicly available PhyCor SEC Reports.
None of the PhyCor SEC Reports, as of their respective dates (as amended through
the date hereof), contained any untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of the balance sheets (including the related notes)
included in the PhyCor SEC Reports presents fairly, in all material respects,
the consolidated financial position of PhyCor and its subsidiaries as of the
respective dates thereof, and the other related statements (including the
related notes) included therein present fairly, in all material respects, the
results of operations and the changes in financial position of PhyCor and its
subsidiaries for the respective periods or as of the respective dates set forth
therein, all in conformity with generally accepted accounting principles
consistently applied during the periods involved, except as otherwise noted
therein and subject, in the case of the unaudited interim financial statements,
to normal year-end adjustments and any other adjustments described therein. All
the PhyCor SEC Reports, as of their respective dates (as amended through the
date hereof), complied in all material respects with the requirements of the
Exchange Act and the applicable rules and regulations thereunder.
6.5. No Brokers. PhyCor has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
CareWise or PhyCor to pay any finder's fee, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby, except
that PhyCor has retained Equitable Securities Corporation as its financial
advisor, the arrangements
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with which have been disclosed in writing to CareWise prior to the date hereof.
Other than the foregoing arrangements, PhyCor is not aware of any claim for
payment of any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
6.6. CareWise Stock Ownership. PhyCor does not own any shares of
CareWise Common Stock or other securities convertible into shares of CareWise
Common Stock.
6.7. PhyCor Common Stock. The issuance and delivery by PhyCor of shares
of PhyCor Common Stock in connection with the Merger and this Agreement have
been duly and validly authorized by all necessary corporate action on the part
of PhyCor. The shares of PhyCor Common Stock to be issued in connection with the
Merger and this Agreement, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable.
6.8. Convertible Securities. PhyCor has no outstanding options,
warrants or other securities exercisable for, or convertible into, shares of
PhyCor Common Stock, the terms of which would require any anti-dilution
adjustments by reason of the consummation of the transactions contemplated
hereby.
6.9. Pooling of Interests; Tax Reorganization. To the knowledge of the
executive officers of PhyCor, PhyCor has not taken or failed to take any action
which would prevent the accounting for the Merger as a pooling of interests in
accordance with Accounting Principles Board Opinion No. 16, the interpretative
releases issued pursuant thereto, and the pronouncements of the SEC. To the
knowledge of the executive officers of PhyCor, PhyCor has not taken or failed to
take any action which would prevent the Merger from constituting a
reorganization within the meaning of section 368(a) of the Code. The
representations of PhyCor contained in the tax certificate of PhyCor attached as
Exhibit 6.9 (the "PhyCor Tax Certificate") are true and correct, and such
representations are incorporated herein by reference.
6.10. Defaults; No Violation. PhyCor 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 PhyCor is a party or by which
PhyCor may be bound or under any provision of the Charter or Bylaws of PhyCor.
Neither the execution and delivery by PhyCor of this Agreement nor the
consummation by PhyCor of the transactions contemplated hereby in accordance
with the terms hereof, will: (i) conflict with or result in a breach of any
provisions of the Charter or Bylaws of PhyCor; (ii) result in a breach or
violation of, a default under, or the triggering of any payment or other
obligations pursuant to, or accelerate vesting under, any of its existing PhyCor
Stock Option Plans, or any grant or award made under any of the foregoing; (iii)
violate, conflict with, result in a breach of any provision of, constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, result in the termination or in a right of
termination or cancellation of, accelerate the performance required by, result
in the triggering of any payment or other obligations pursuant to, result in the
creation of any lien, security interest,
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charge or encumbrance upon any of the properties of PhyCor or its subsidiaries
under, or result in being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which PhyCor or any
of its subsidiaries is a party, or by which PhyCor or any of its subsidiaries or
any of their respective properties is bound or affected which is material to the
business of PhyCor and its subsidiaries taken as a whole; or (iv) other than the
filings provided for in Article 1, applicable federal, state and local
regulatory filings, filings required under the HSR Act, the Exchange Act, the
Securities Act, or any Regulatory Filings, require any consent, approval or
authorization of, or declaration, filing or registration with, any domestic
governmental or regulatory authority.
ARTICLE 7
7. Covenants.
7.1. Alternative Proposals. Prior to the Effective Time, CareWise
agrees (a) that neither it nor any of its Subsidiaries shall, and it shall
direct and use its best efforts to cause its officers, directors, employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its stockholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or any equity securities of,
CareWise or any of its Significant Subsidiaries (any such proposal or offer
being hereinafter referred to as an "Alternative Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing, and it will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.1; and (c) that it will notify PhyCor immediately
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it.
7.2. Interim Operations.
(a) Prior to the Effective Time, except as set forth in the
CareWise Schedules or as contemplated by any other provision of this Agreement,
unless PhyCor has consented in writing thereto, CareWise:
(i) Shall conduct its operations according to their usual,
regular and ordinary course as heretofore conducted;
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(ii) Shall preserve intact its business organization and
goodwill, keep available the services of its key officers and
employees and exercise reasonable efforts to maintain satisfactory
relationships with those persons having business relationships with
them;
(iii) Shall not amend its Certificate of Incorporation or
Bylaws or comparable governing instruments (other than with respect to
the proposed amendment to the Certificate of Incorporation amending
Article 4.3.5(d)(iii), a copy of which is attached as part of the
CareWise Schedules, as to which, as of the date hereof, consent
currently is being solicited);
(iv) Shall promptly notify PhyCor of any material emergency
or other material change in its condition (financial or otherwise),
business, properties, assets, liabilities, prospects or the normal
course of its business, any litigation or governmental complaints,
investigations or hearings (or communications indicating that the same
may be contemplated), or the occurrence of a CareWise Material Adverse
Effect.
(v) Shall not (a) except pursuant to the exercise of
options, warrants, conversion rights and other contractual rights
existing on the date hereof and disclosed pursuant to this Agreement,
issue any shares of its capital stock, effect any stock split or
otherwise change its capitalization as it existed on the date hereof,
(b) grant, confer or award any option (other than with respect to
options to acquire not more than 30,000 shares of CareWise Common
Stock to new hires, which options are to be granted at exercise prices
that are at least 90% of the fair market value of the CareWise Common
Stock based on the implied value thereof assuming consummation of the
Merger), warrant, conversion right or other right not existing on the
date hereof to acquire any shares of its capital stock, (c) increase
any compensation or enter into or amend any employment agreement with
any of its present or future officers or directors, except for normal
increases consistent with past practice and the payment of cash
bonuses to officers pursuant to and consistent with existing plans or
programs, or (d) adopt any new employee benefit plan (including any
stock option, stock benefit or stock purchase plan) or amend any
existing employee benefit plan in any material respect, except for
changes which are less favorable to participants in such plans;
(vi) Shall not (i) declare, set aside or pay any
dividend or make any other distribution or payment with respect to any
shares of its capital stock or other ownership interests or (ii)
except in connection with the use of shares of capital stock to pay
the exercise price or tax withholding in connection with its
stock-based employee benefit plans, directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or
capital stock of any of its Subsidiaries, or make any commitment for
any such action;
(vii) Shall not, and shall not permit any of its
Subsidiaries to, sell, lease or otherwise dispose of any material
assets (including capital stock of Subsidiaries), except in the
ordinary course of business; and
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(viii) Shall use its best efforts to obtain, prior to
the Closing, a waiver by Merck-Medco Managed Care, L.L.C. ("MMMC") of
MMMC's rights, if any, that may be exercisable or arise as a result of
the Merger under Sections 13.1(c), 14.4 and 15.1 of the Demand
Management Services and Development Agreement, dated as of August 5,
1997, between MMMC and CareWise.
(b) Prior to the Effective Time, except as set forth in the
PhyCor Schedules or as contemplated by any other provision of this Agreement,
unless CareWise has consented in writing thereto, PhyCor:
(i) Shall promptly deliver to CareWise true and correct
copies of any report, statement or schedule filed with the SEC
subsequent to the date of this Agreement;
(ii) Shall not redeem, purchase or otherwise acquire, or
propose to redeem, purchase or acquire, a material amount of the
outstanding PhyCor Common Stock;
(iii) Shall not declare or make any extraordinary
distributions with respect to its capital stock, which distributions
are individually, or in the aggregate, material;
(iv) Shall, to the extent consistent with its legal
and contractual obligations promptly notify CareWise of any material
change in the status of the proposed business combination with
MedPartners, Inc.;
(v) Shall preserve intact its business organization
and goodwill, keep available the services of its key officers and
employees, and exercise reasonable efforts to maintain satisfactory
relationships with those persons having business relationships with
them; and
(vi) Shall promptly notify CareWise of any material
emergency or other material change in its condition (financial or
otherwise), business, properties, assets, liabilities, prospects or
the normal course of its business or of any material litigation or
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the occurrence of a
PhyCor Material Adverse Effect.
7.3. Approval of CareWise Stockholders; Irrevocable Proxies.
(a) CareWise will take all action necessary in accordance with
applicable law and its Certificate of Incorporation and Bylaws to convene a
meeting of its stockholders or conduct a consent solicitation as promptly as
practicable to consider and vote upon (or consent to, as the case may be) the
approval of this Agreement and the transactions contemplated hereby. The Board
of Directors of CareWise shall recommend such approval and CareWise shall take
all lawful action to solicit such approval, including, without limitation,
timely mailing the Proxy Statement/Prospectus (as defined in Section 7.7).
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(b) Each of the directors, officers and 5% stockholders of
CareWise shall deliver to PhyCor on the date hereof irrevocable proxies
substantially in the form attached hereto as Exhibit 7.3.
7.4. Filings; Other Action. Subject to the terms and conditions herein
provided, CareWise and PhyCor shall: (a) promptly make their respective filings
and thereafter make any other required submissions under the HSR Act with
respect to the Merger; (b) use all reasonable efforts to cooperate with one
another in (i) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby and (ii) timely
making all such filings and timely seeking all such consents, approvals, permits
or authorizations; and (c) use all reasonable efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other things necessary,
proper or appropriate to consummate and make effective the transactions
contemplated by this Agreement. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purpose of this
Agreement, the proper officers and directors of PhyCor and CareWise shall take
all such necessary action.
7.5. Inspection of Records. From the date hereof to the Effective Time,
each of CareWise and PhyCor shall (i) allow all designated officers, attorneys,
accountants and other representatives of the other reasonable access at all
reasonable times to the offices, records and files, correspondence, audits and
properties, as well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to the business and
affairs, of CareWise and PhyCor and their respective Subsidiaries, as the case
may be, (ii) furnish to the other, the other's counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such persons may reasonably request and (iii) instruct
the employees, counsel and financial advisors of CareWise or PhyCor, as the case
may be, to cooperate with the other in the other's investigation of the business
of it and its Subsidiaries.
7.6. Publicity. The initial press release relating to this Agreement
shall be a joint press release and thereafter CareWise and PhyCor shall, subject
to their respective legal obligations (including requirements of the Nasdaq
National Market and regulatory bodies), consult with each other, and use
reasonable efforts to agree upon the text of any press release, before issuing
any such press release or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with any federal or
state governmental or regulatory agency or with any national securities exchange
with respect thereto.
7.7. Registration Statement on Form S-4. PhyCor and CareWise shall
cooperate and promptly prepare and PhyCor shall file with the SEC as soon as
practicable a Registration Statement on Form S-4 (the "Form S-4") under the
Securities Act, with respect to the PhyCor Common Stock issuable in the
Merger, a
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portion of which Registration Statement shall also serve as the proxy or
information statement with respect to the meeting of the stockholders of
CareWise or consent solicitation thereof in connection with the Merger (the
"Proxy Statement/Prospectus"). Each of the respective parties will cause those
portions of the Proxy Statement/Prospectus and the Form S-4 related to it to
comply as to form in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and regulations thereunder.
PhyCor shall use all reasonable efforts, and CareWise will cooperate with
PhyCor, to have the Form S-4 declared effective by the SEC as promptly as
practicable. PhyCor agrees that the Proxy Statement/Prospectus and each
amendment or supplement thereto at the time of mailing thereof and at the time
of the meeting of stockholders of CareWise, or, in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by PhyCor in reliance upon and in conformity with written
information concerning CareWise furnished to PhyCor by or on behalf of CareWise
specifically for use in the Proxy Statement/Prospectus. CareWise agrees that the
written information concerning CareWise provided by it for inclusion in the
Proxy Statement/Prospectus and each amendment or supplement thereto, at the time
of mailing thereof and at the time of the meeting of stockholders of CareWise,
or, in the case of written information concerning CareWise provided by CareWise
for inclusion in the Form S-4 or any amendment or supplement thereto, at the
time it is filed or becomes effective, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. No amendment or supplement to the Proxy
Statement/Prospectus will be made by PhyCor or CareWise without the approval of
the other party. PhyCor will advise CareWise, promptly after it receives notice
thereof, of the time when the Form S-4 has become effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the PhyCor Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Proxy Statement/Prospectus or the Form S-4 or comments thereon
and responses thereto or requests by the SEC for additional information.
7.8. Registration Statement on Form S-8. To the extent necessary to
register such shares, PhyCor shall file a Registration Statement on Form S-8 for
the shares of PhyCor Common Stock issuable with respect to the Replacement
Options no later than ten business days following the Effective Date and shall
keep such Registration Statement effective for so long as the Replacement
Options remain outstanding.
7.9. Listing Application. PhyCor shall promptly prepare and submit to
the Nasdaq (or such other exchange on which the shares of PhyCor Common Stock
shall then be listed) a listing application covering the shares of PhyCor Common
Stock (and associated Rights) issuable in the Merger (including those shares
referenced in
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Section 7.8 hereof), and shall use its best efforts to obtain, prior to the
Effective Time, approval for the listing of such PhyCor Common Stock (and
associated Rights), subject to official notice of issuance.
7.10. Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
7.11. Affiliate Letters. At least 30 days prior to the Closing Date,
CareWise shall deliver to PhyCor a list of names and addresses of those persons
who were, in CareWise's reasonable judgment, at the record date for its
stockholders' meeting (or the date on which the requisite number of consents has
been obtained) to approve the Merger, "affiliates" (each such person, an
"Affiliate") of CareWise within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act. CareWise shall provide PhyCor
such information and documents as PhyCor shall reasonably request for purposes
of reviewing such list. CareWise shall use all reasonable efforts to deliver or
cause to be delivered to PhyCor, prior to the Closing Date, from each of the
Affiliates of CareWise identified in the foregoing list, an Affiliate Letter in
the form attached hereto as Exhibit 7.11. PhyCor shall be entitled to place
legends as specified in such Affiliate Letters on the certificates evidencing
any PhyCor Common Stock to be received by such Affiliates pursuant to the terms
of this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the PhyCor Common Stock, consistent with the terms of such
Affiliate Letters.
7.12. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except as
expressly provided herein and except that (a) the filing fees in connection with
any required HSR Act filings shall be shared equally by CareWise and PhyCor and
(b) the filing fee in connection with the filing of the Form S-4 with the SEC,
the expenses incurred in connection with printing and mailing of the Form S-4
and the Proxy Statement/Prospectus, respectively, and the fees associated with
any audit that PhyCor may request be undertaken by CareWise shall be borne by
PhyCor.
7.13. Insurance; Indemnity.
(a) PhyCor shall cause the Surviving Corporation to keep in
effect provisions in its Charter and Bylaws providing for exculpation of
director and officer liability and its indemnification of each director,
officer, employee and agent thereof (each an "Indemnified Party") to the fullest
extent permitted under the DGCL, which provisions shall not be amended except as
required by applicable law or except to make changes permitted by law that would
enlarge the Indemnified Party's right of indemnification.
(b) PhyCor shall pay all expenses, including attorneys' fees,
that may be incurred by any Indemnified Party in enforcing the indemnity and
other obligations provided for in this Section 7.13.
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(c) The rights of each Indemnified Party hereunder shall be in
addition to any other rights Indemnified Party may have under the Certificate of
Incorporation or Bylaws of CareWise, under the DGCL or otherwise. The provisions
of this Section shall survive the consummation of the Merger and expressly are
intended to benefit each of the Indemnified Parties.
7.14. Pooling; Reorganization. From and after the date hereof and until
the Effective Time, neither PhyCor nor CareWise nor any of their respective
subsidiaries or other affiliates shall (i) knowingly take any action, or
knowingly fail to take any action, that would jeopardize the treatment of the
Merger as a "pooling of interests" for accounting purposes; (ii) knowingly take
any action, or knowingly fail to take any action, that would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code, including any action by PhyCor or CareWise with respect to
their representations in Sections 6.9 and 5.22, respectively, that would cause
such representations not to be true in all material aspects from and after the
date hereof until the Effective Time; or (iii) enter into any contract,
agreement, commitment or arrangement with respect to either of the foregoing.
Following the Effective Time, PhyCor shall use its best efforts to conduct its
business in a manner that would not jeopardize the characterization of the
Merger as a "pooling of interests" for accounting purposes and as a
reorganization within the meaning of Section 368(a) of the Code. CareWise and
PhyCor agree to use their best efforts to deliver certificates substantially in
the form of the CareWise Tax Certificate and the PhyCor Tax Certificate,
respectively, to Perkins Coie in connection with the legal opinion to be
rendered pursuant to Section 8.2(h).
7.15. Supplemented CareWise Schedules. At least two business days prior
to the Closing Date, CareWise shall deliver to PhyCor amended or supplemented
CareWise Schedules reflecting any modifications thereto necessary to make its
representations and warranties true and complete as of the Closing Date. PhyCor
shall have the right, in its reasonable discretion, to either (i) accept the
CareWise Schedules and close the Merger subject to such disclosures or (ii)
reject the CareWise Schedules and exercise its right to terminate this Agreement
to the extent provided in Section 9 hereof.
7.16. Confidentiality. The parties shall, and shall cause their
respective advisers and agents, to maintain the confidentiality of all
non-public information furnished by another party in connection with this
Agreement and shall, upon the termination of this Agreement, promptly return all
such information to the party furnishing such information.
7.17. CareWise Benefits Rollover. At Closing, and for a period of not
less than one year thereafter, PhyCor, the Surviving Corporation and their
affiliates shall provide employees of CareWise who become employed by PhyCor or
the Surviving Corporation or any of their affiliates on the Closing Date or as a
result of the transactions contemplated herein (the "Retained Employees") with
employee benefit plans, policies, programs and arrangements that in the
aggregate are not less favorable than those currently provided to such employees
by CareWise. For purposes of all employee benefit plans, policies, programs and
arrangements
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maintained or contributed to by PhyCor, the Surviving Corporation or any of
their affiliates, PhyCor, the Surviving Corporation and their affiliates shall
treat, and shall cause each such plan, policy, program or arrangement (in each
case, once made available to Retained Employees) to treat, the Retained
Employees' prior service with CareWise as service rendered to PhyCor, the
Surviving Corporation and their affiliates for purposes of determining
eligibility to participate and vesting thereunder. Likewise, for purposes of
determining the amount of vacation, sick leave and similar benefits to which
Retained Employees shall be entitled upon becoming employees of PhyCor, the
Surviving Corporation or any of their affiliates, PhyCor, the Surviving
Corporation and each of their affiliates shall treat each Retained Employee's
entire period of employment with CareWise as if it had been employment with
PhyCor, the Surviving Corporation and their affiliates.
PhyCor, the Surviving Corporation and their affiliates shall waive, or
shall cause to be waived, any and all pre-existing condition limitations and
eligibility waiting periods under any health, dental, vision, disability, life
insurance, cafeteria or similar plan, program or arrangement (once such plan,
program or arrangement is made available to Retained Employees) with respect to
(a) Retained Employees who, immediately prior to the Closing Date, participated
in such a plan, program or arrangement maintained or contributed to by CareWise,
and (b) their eligible dependents.
Nothing in this Section shall prevent PhyCor or the Surviving
Corporation from amending or terminating any employee benefit plan of PhyCor,
the Surviving Corporation or CareWise or any other contracts, arrangements,
commitments or understandings, in accordance with their terms and applicable
law.
In the event that any payments become due to any shareholder, officer,
or highly compensated individual of CareWise as a result of the transactions
contemplated herein which, in the opinion of counsel for PhyCor may result in
the imposition of an excise tax to any such person under section 4999 of the
Code, CareWise shall use its best efforts to obtain the approval of such
payments by its shareholders in a manner described in section 280G(b)(5) of the
Code and Prop. Treas. Reg. Section 1.280G-1, Q/A 6.
ARTICLE 8
8. Conditions.
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall
have been approved in the manner required by applicable law, by the applicable
regulations of the Nasdaq (or such exchange on which the shares of PhyCor Common
Stock shall then be listed) and by any regulatory body, as the case may be, and
by the requisite holders of the issued and outstanding shares of capital stock
of CareWise, respectively.
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(b) The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) Neither of the parties hereto shall be subject to any
order or injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the event
any such order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such injunction lifted.
(d) The Form S-4 shall have become effective and shall be
effective at the Effective Time, and no stop order suspending effectiveness of
the Form S-4 shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and any necessary approvals under state securities
laws relating to the issuance or trading of the PhyCor Common Stock to be issued
to CareWise stockholders in connection with the Merger shall have been received.
(e) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to be
filed after the Effective Time.
(f) PhyCor and CareWise shall each have received from KPMG
Peat Marwick LLP an opinion in form and substance reasonably satisfactory to
PhyCor and CareWise that the Merger will qualify for "pooling of interests"
under applicable accounting standards.
(g) The PhyCor Common Stock to be issued to CareWise
stockholders in connection with the Merger (including those shares referenced in
Section 7.8 hereof) shall have been approved for listing on Nasdaq (or such
exchange on which the shares of PhyCor Common Stock shall then be listed),
subject only to official notice of issuance.
(h) PhyCor and CareWise shall have received an opinion of
Perkins Coie to the effect that for federal income tax purposes (i) the Merger
will be treated as a reorganization within the meaning of Section 368(a) of the
Code; (ii) each of PhyCor, Merger Sub and CareWise will be a party to the
reorganization within the meaning of Section 368(b) of the Code; (iii) no gain
or loss will be recognized by CareWise, PhyCor or Merger Sub as a result of the
Merger; and (iv) no gain or loss will be recognized by a stockholder of CareWise
as a result of the Merger with respect to CareWise shares converted solely into
PhyCor Common Stock (other than with respect to cash issued in lieu of
fractional PhyCor Common Stock). In rendering such opinion, Perkins Coie shall
receive and rely upon certain assumptions and upon representations contained in
certificates of CareWise and PhyCor substantially in the form of the CareWise
Tax Matters Certificate and the PhyCor Tax Matters Certificate, respectively, as
well as representations of certain stockholders of CareWise.
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8.2. Conditions to Obligation of CareWise to Effect the Merger. The
obligation of CareWise to effect the Merger shall be subject to the fulfillment
at or prior to the Closing Date of the following conditions:
(a) PhyCor shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date, the representations and warranties of PhyCor and Merger Sub
contained in this Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing Date, and CareWise shall have
received a certificate of the President or a Vice President of PhyCor, dated the
Closing Date, certifying to such effect; provided however, that notwithstanding
anything herein to the contrary, this Section 8.2(a) shall be deemed to have
been satisfied even if such representations or warranties are not true and
correct, unless the failure of any of the representations or warranties to be so
true and correct has or would be reasonably likely to have a PhyCor Material
Adverse Effect.
(b) CareWise shall have been furnished with an opinion of PhyCor's
Vice President and General Counsel, in form and substance satisfactory to
CareWise, as to the matters set forth in Exhibit 8.2 attached hereto.
(c) CareWise shall have been furnished as of the date hereof with
the opinion of BT Alex. Brown Incorporated as to the fairness, from a financial
point of view, of the consideration payable in connection with the Merger.
(d) John E. Gebhart III, James O. Steeb, Michael B. Weitz and
Craig S. Russell shall have entered into employment agreements with PhyCor
substantially in the form of Exhibits 8.2(d)(i) through (iv), respectively.
(e) From the date of this Agreement through the Effective Time,
there shall not have occurred any event or condition that has or is reasonably
likely to have a PhyCor Material Adverse Effect.
8.3. Conditions to Obligation of PhyCor and Merger Sub to Effect the
Merger. The obligations of PhyCor and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) CareWise shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date, the representations and warranties of CareWise contained in
this Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date, and PhyCor shall have received a
certificate of the President or a Vice President of CareWise, dated the Closing
Date, certifying to such effect; provided, however, that notwithstanding
anything herein to the contrary, this Section 8.3(a) shall be deemed to have
been satisfied even if such representations or warranties are not true and
correct, unless the failure of any of the representations or warranties to be so
true and correct would have or would be reasonably likely to have a CareWise
Material Adverse Effect.
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(b) PhyCor shall have been furnished with an opinion of
Perkins Coie, counsel to CareWise, in form and substance satisfactory to PhyCor,
as to the matters set forth in Exhibit 8.3 attached hereto.
(c) PhyCor shall have received a "comfort" letter from KPMG
Peat Marwick LLP, of the kind contemplated by the AICPA Statement, dated the
Closing Date, in form and substance reasonably satisfactory to PhyCor, in
connection with the procedures undertaken by them with respect to the financial
statements and other financial information of CareWise and its Subsidiaries
contained in the Form S-4 and the other matters contemplated by the AICPA
Statement and customarily included in comfort letters relating to transactions
similar to the Merger or reasonably requested by PhyCor to be included therein.
(d) From the date of this Agreement through the Effective
Time, there shall not have occurred any event or condition that has or is
reasonably likely to have a CareWise Material Adverse Effect.
ARTICLE 9
9. Termination.
9.1. Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time by the
mutual consent of PhyCor and CareWise.
9.2. Termination by Either PhyCor or CareWise. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either PhyCor or CareWise if (a) the Merger shall not have been consummated
by July 31, 1998, or (b) the approval of CareWise's stockholders required by
Section 8.1(a) shall not have been obtained, or (c) a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, that the party seeking to terminate this
Agreement pursuant to this clause (c) shall have used all reasonable efforts to
remove such injunction, order or decree; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the failure to consummate
the Merger by July 31, 1998.
9.3. Termination by CareWise. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
Board of Directors of CareWise, if (a) there has been a breach by PhyCor or
Merger Sub of any representation or warranty contained in this Agreement which
has or is likely to have a PhyCor Material Adverse Effect, or (b) there has been
a material breach of any of the covenants or agreements set forth in this
Agreement on the part
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of PhyCor, which breach is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by CareWise to PhyCor.
9.4. Termination by PhyCor. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
Board of Directors of PhyCor, if (a) there has been a breach by CareWise of any
representation or warranty contained in this Agreement which has or is
reasonably likely to have a CareWise Material Adverse Effect, or (b) there has
been a material breach of any of the covenants or agreements set forth in this
Agreement on the part of CareWise, which breach is not curable or, if curable,
is not cured within 30 days after written notice of such breach is given by
PhyCor to CareWise.
9.5. Effect of Termination and Abandonment. In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article 9,
all obligations of the parties hereto shall terminate, except the obligations of
the parties pursuant to this Section 9.5 and Section 7.12 and except for the
provisions of Sections 10.3, 10.4, 10.6, 10.8, 10.9, 10.12, 10.13 and 10.14.
9.6. Extension; Waiver. At any time prior to the Effective Time, any
party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE 10
10. General Provisions.
10.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger, provided, however, that the agreements contained in Article 4,
Sections 7.8, 7.12, 7.13, and this Article 10 and the agreements delivered
pursuant to this Agreement shall survive the Merger.
10.2. Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
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<TABLE>
<S> <C>
If to PhyCor or Merger Sub: If to CareWise:
Joseph C. Hutts John E. Gebhart III
Chairman, President, and C.E.O. Chairman, C.E.O., and President
30 Burton Hills Blvd., Suite 400 701 Fifth Avenue, 26th Floor
Nashville, Tennessee 37215 Seattle, Washington 98104-7015
Telephone: (615) 665-7804 (direct) Telephone: (206) 749-1840
Telephone: (615) 665-7832 (assistant) Facsimile: (206) 749-1125
Facsimile: (615) 665-7444
With a copy to: With a copy to:
J. Chase Cole, Esq. Charles J. Katz, Jr., Esq.
Waller Lansden Dortch & Davis, PLLC Perkins Coie
Nashville City Center 1201 Third Ave., 40th Floor
511 Union Street, Suite 2100 Seattle, Washington 98101-3099
Nashville, Tennessee 37219 Telephone: (206) 583-8888
Telephone: (615) 244-6380 Facsimile: (206) 583-8500
Facsimile: (615) 244-6804
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
10.3. Assignment; Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Article 4 and Sections 3.1, 7.8, 7.13 and 7.15 nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
10.4. Entire Agreement. This Agreement, the Exhibits, the CareWise
Schedules, the PhyCor Schedules and any documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
10.5. Amendment. This Agreement may be amended by the parties hereto,
by action taken by their respective Boards of Directors, provided that no
amendment shall be made which by law requires the further approval of
stockholders without
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obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
10.6. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws. Each of CareWise and PhyCor hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
10.7. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
10.8. Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
10.9. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
10.10. Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
10.11. Incorporation of Exhibits. The CareWise Schedules, the PhyCor
Schedules and all Exhibits attached hereto and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
10.12. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any
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other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
10.13. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Tennessee Court,
this being in addition to any other remedy to which they are entitled at law or
in equity.
10.14. Subsidiaries. As used in this Agreement, the word "Subsidiary"
when used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization, or any organization of which such party is a
general partner.
10.15. Definition of CareWise Material Adverse Effect. Notwithstanding
anything contained in this Agreement, the parties hereto expressly acknowledge
that the definition of CareWise Material Adverse Effect shall exclude (a)
variations in expectations regarding prospects consistent with historical
fluctuations in prospects that occur in the ordinary course of business and (b)
changes with respect to those matters identified in the CareWise Schedules with
specific reference to this Section 10.15.
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<PAGE> 133
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
PhyCor, Inc.
ATTEST:
By: /s/ Thompson S. Dent By: /s/ Joseph C. Hutts
------------------------ --------------------------------
Thompson S. Dent, Joseph C. Hutts,
Secretary Chairman of the Board, President
and Chief Executive Officer
PhyCor/Health Merger Corp.
ATTEST:
By: /s/ Thompson S. Dent By: /s/ Joseph C. Hutts
------------------------ --------------------------------
Thompson S. Dent, Joseph C. Hutts,
Secretary President
CareWise, Inc.
ATTEST:
By: /s/ Michael B. Weitz By: /s/ John E. Gebhart III
------------------------ --------------------------------
Michael B. Weitz, John E. Gebhart III,
Secretary Chairman of the Board, President
and Chief Executive Officer
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<PAGE> 134
Annex B
December 21, 1997
Board of Directors
CareWise, Inc.
701 Fifth Avenue, Suite 2600
Seattle, WA 98104-7015
Dear Board of Directors:
CareWise, Inc. (the "Company") and PhyCor, Inc. (the "Buyer") propose
to enter into an Agreement and Plan of Merger dated December 22, 1997 (the
"Agreement"), pursuant to which a wholly owned subsidiary of the Buyer will be
merged with and into the Company in a transaction (the "Merger") in which each
outstanding share of the Company's common stock, par value $0.001, and each
outstanding share of the Company's preferred stock, par value $0.001,
(collectively, the "Company's Stock") will be converted into the right to
receive a fraction of a share of the common stock of Buyer, no par value,
("Buyer Common Stock") equal to the quotient of 2,549,000 shares of Buyer
Common Stock divided by the number of all of the shares of Company's Stock,
warrants and options outstanding at the Closing, subject to adjustment as
provided in the Agreement (the "Exchange Ratio"). We have assumed, with your
consent, that the Merger will qualify for pooling-of-interests accounting
treatment and as a tax free reorganization for federal income tax purposes. You
have requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to the Company's stockholders.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
the Company in connection with the transaction described above and will receive
a fee for our services, a portion of which is contingent upon the consummation
of the Merger. BT Alex. Brown regularly publishes research reports regarding
the health care information technology industry and the businesses and
securities of publicly owned companies in the health care services industry. In
the ordinary course of business, BT Alex. Brown may actively trade the
securities of the Buyer for our own account and the account of our customers
and, accordingly, may at any time hold a long or short position in securities
of the Buyer. Additionally, BT Alex. Brown has in the past acted as underwriter
in public offerings of Buyer Common Stock and is currently providing financial
advisory
B-1
<PAGE> 135
CareWise, Inc.
December 21, 1997
Page 2
services to the Buyer in connection with Buyer's proposed acquisition of
MedPartners, Inc.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning the Company and
Buyer and certain internal analyses and other information furnished to us by the
Company. We have also held discussions with the members of the senior
managements of the Company and the Buyer regarding the businesses and prospects
of their respective companies and the joint prospects of the combined company.
In addition, we have (i) reviewed the reported prices and trading activity for
the Buyer Common Stock, (ii) compared certain financial and stock market
information for the Company and Buyer with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combination which we deemed comparable in whole
or in part, (iv) reviewed the terms of the Agreement, and (v) performed such
other studies and analyses and considered such other factors as we deemed
appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to the information relating to the prospects of
the Company and Buyer, we have assumed that such information reflects the best
currently available judgments and estimates of the managements of the Company
and Buyer as to the likely future financial performances of their respective
companies. In addition, we have not made nor been provided with an independent
evaluation or appraisal of the assets of the Company and Buyer, nor have we been
furnished with any such evaluations or appraisals. In rendering this opinion, we
have not been asked to consider, and we do not address, the relative merits of
the Merger as compared to any alternative business transaction with third
parties that might exist for the Company or the effect of any such other
transactions in which the Company might engage. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter. We are not expressing any opinion as to the price or range of
prices at which Buyer Common Stock may trade subsequent to the consummation of
the Merger.
The opinion expressed herein was prepared for the use of the Board of
Directors of the Company and does not constitute a recommendation to the
Company's stockholders as to how they should vote in connection with the Merger.
We hereby consent, however, to the inclusion of this opinion as an exhibit to
any proxy or registration statement distributed to the Company's stockholders in
connection with the Merger.
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<PAGE> 136
CareWise, Inc.
December 21, 1997
Page 3
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Exchange Ratio is fair, from a financial point of
view, to Company's stockholders.
Very truly yours,
BT ALEX BROWN INCORPORATED
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<PAGE> 137
ANNEX C
CAREWISE, INC.
SPECIAL MEETING OF STOCKHOLDERS
___________________, 1998
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF CAREWISE, INC.
The undersigned hereby appoints John E. Gebhart III and Michael B.
Weitz and each of them, with full power of substitution, attorneys and proxies
of the undersigned to vote the shares of Common Stock, par value $.001 per
share, and Preferred Stock, par value $.001 per share, of CareWise, Inc.
("CareWise"), which the undersigned could vote, and with all power the
undersigned would possess, if personally present at the Special Meeting of
Stockholders of CareWise to be held at 701 Fifth Avenue, Suite 2600, Seattle,
Washington, on _______________, 1998, at ___ a.m., local time, and at any
adjournments or postponements thereof (the "Special Meeting"):
1. To approve and adopt the Agreement and Plan of Merger, dated as of
December 22, 1997, attached as Annex A to the Prospectus--Proxy
Statement that has been transmitted in connection with the Special
Meeting, as well as the merger referred to therein, pursuant to which
PhyCor/Health Merger Corp., a wholly-owned subsidiary of PhyCor, Inc.,
will merge with and into CareWise.
FOR AGAINST ABSTAIN
--------- ----------- ----------
(CONTINUED AND TO BE DATED AND SIGNED ON OTHER SIDE)
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<PAGE> 138
(CONTINUED FROM OTHER SIDE)
2. In their discretion, to act upon any matters incidental to the
foregoing and such other business as may properly come before the
Special Meeting.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made, this
Proxy will be voted FOR Item 1 above. Any holder who wishes to withhold the
discretionary authority referred to in Item 2 above should mark a line through
the entire Item. Discretionary authority will not be used to vote in favor of
adjournment.
Receipt of the Prospectus-Proxy Statement
dated ______________, 1998, is hereby
acknowledged.
Dated: __________, 1998
Signature(s)
------------------------------------------
(Please sign exactly and as fully as your
name appears on your stock certificate. If
shares are held jointly, each stockholder
should sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY,
USING THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED.
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<PAGE> 139
ANNEX D
SS. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value the shareholder's stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a non-stock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a non-stock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock in deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251 (g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title.
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
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a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably
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<PAGE> 141
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each
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<PAGE> 142
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the close
of business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by
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<PAGE> 143
the Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any
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<PAGE> 144
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all of the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
120, L. '97, eff. 7-1-97.)
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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.
(c) In addition, the Registrant maintains directors and officers
liability insurance.
II-1
<PAGE> 146
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
2 -- Agreement and Plan of Merger, dated as of December 22, 1997,
by and among the Registrant, PhyCor/Health Merger Corp. and
CareWise, Inc. (included as Annex A to the Prospectus - Proxy
Statement filed as part of this Registration Statement)
3.1 -- Restated Charter of the Registrant (a)
3.2 -- Amendment to Restated Charger of Registrant (b)
3.3 -- Amendment to Restated Charter of Registrant (c)
4.1 -- Amended Bylaws of the Registrant (a)
4.2 -- Form of Common Stock Certificate (d)
4.3 -- Shareholder Rights Agreement, dated February 18, 1994, between
the Registrant and First Union National Bank of North Carolina (e)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company
8 -- Opinion of Perkins Coie LLP as to tax matters
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company (included in Exhibit 5)
23.4 -- Consent of Perkins Coie LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
99 -- Form of Proxy (included as Annex C to the Prospectus - Proxy
Statement filed as a part of this Registration Statement)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
Commission No. 0-19786.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 33-66210.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123
(e) Incorporated by reference to exhibits filed with the Registrant's
Annual 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, 1996.
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-2
<PAGE> 147
(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.
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, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement 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.
(5) 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.
(6) 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.
(7) 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.
II-3
<PAGE> 148
(8) 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 included in the 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 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> 149
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 January 26, 1998.
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, President, Chief January 26, 1998
- ---------------------------------------- Executive Officer (Principal Executive
Joseph C. Hutts Officer) and Director
/s/ John K. Crawford Chief Financial Officer (Principal Financial January 26, 1998
- ---------------------------------------- and Accounting Officer)
John K. Crawford
/s/ Ronald B. Ashworth Director January 26, 1998
- ----------------------------------------
Ronald B. Ashworth
Director
- ----------------------------------------
Sam A. Brooks, Jr.
/s/ Thompson S. Dent Executive Vice President, Operations and January 26, 1998
- ---------------------------------------- Director
Thompson S. Dent
/s/ Winfield Dunn Director January 26, 1998
- ----------------------------------------
Winfield Dunn
/s/ C. Sage Givens Director January 26, 1998
- ----------------------------------------
C. Sage Givens
/s/ Joseph A. Hill, M.D. Director January 26, 1998
- ----------------------------------------
Joseph A. Hill, M.D.
</TABLE>
II-5
<PAGE> 150
<TABLE>
<S> <C> <C>
/s/ Kay Coles James Director January 26, 1998
- ----------------------------------------
Kay Coles James
/s/ James A. Moncrief, M.D. Director January 26, 1998
- ----------------------------------------
James A. Moncrief, M.D.
/s/ Derril W. Reeves Executive Vice President, Development and January 26, 1998
- ---------------------------------------- Director
Derril W. Reeves
/s/ Richard D. Wright Executive Vice President, Corporate Services January 26, 1998
- ---------------------------------------- and Director
Richard D. Wright
</TABLE>
II-6
<PAGE> 151
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
2 -- Agreement and Plan of Merger, dated as of December 22, 1997,
by and among the Registrant, PhyCor/Health Merger Corp. and
CareWise, Inc. (included as Annex A to the Prospectus - Proxy
Statement filed as part of this Registration Statement)
3.1 -- Restated Charter of the Registrant (a)
3.2 -- Amendment to Restated Charger of Registrant (b)
3.3 -- Amendment to Restated Charter of Registrant (c)
4.1 -- Amended Bylaws of the Registrant (a)
4.2 -- Form of Common Stock Certificate (d)
4.3 -- Shareholder Rights Agreement, dated February 18, 1994, between
the Registrant and First Union National Bank of North Carolina (e)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company
8 -- Opinion of Perkins Coie LLP as to tax matters
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of KPMG Peat Marwick LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company (included in Exhibit 5)
23.4 -- Consent of Perkins Coie LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
99 -- Form of Proxy (included as Annex C to the Prospectus - Proxy
Statement filed as a part of this Registration Statement)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
Commission No. 0-19786.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 33-66210.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123
(e) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 8-K dated February 18, 1994, Commission No.
0-19786.
II-7
<PAGE> 1
EXHIBIT 5
January 27, 1998
PhyCor, Inc.
30 Burton Hills Boulevard
Suite 400
Nashville, Tennessee 37215
Re: Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to PhyCor, Inc., a Tennessee corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, of an aggregate of 2,549,000 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 opinions 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 this firm
under the caption "Legal Matters" in the Prospectus.
Very truly yours,
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
<PAGE> 1
Exhibit 8
March __, 1998
<TABLE>
<S> <C>
CareWise, Inc. PhyCor, Inc.
Suite 2600 Suite 400
701 Fifth Avenue 30 Burton Hills Blvd.,
Seattle, WA 98104-7015 Nashville, TN 37219
Attn: John E. Gebhart III, President and Attn: Joseph C. Hutts, President and Chief
Chief Executive Officer Executive Officer
</TABLE>
RE: TAX OPINION REGARDING MERGER OF PHYCOR/HEALTH MERGER
CORP. INTO CAREWISE, INC.
Ladies and Gentlemen:
We have been asked, as counsel to Carewise, Inc., a Delaware
corporation ("Carewise"), to render this opinion regarding certain matters
related to the U.S. federal income tax consequences of the merger (the "Merger")
of PhyCor/Health Merger. Corp. (the "Subsidiary"), a Delaware corporation and
100% subsidiary of PhyCor, Inc., a Tennessee corporation ("PhyCor"), pursuant to
that certain Agreement and Plan of Merger, dated as of December 22, 1997 by and
between Carewise, the Subsidiary and PhyCor (the "Agreement"). Capitalized terms
not otherwise defined herein shall have the same meanings given to them in the
Agreement or, if not defined therein, as described in the Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on January
, 1998 relating to the Merger (the "S-4"). This opinion letter is rendered
pursuant to Section 8.1(h) of the Agreement.
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the relevant documents related to the Merger, including the Agreement and the
S-4. Furthermore, we have examined that certain PhyCor Tax Matters Certificate,
dated as of the date hereof, (the "PhyCor Tax Certificate"), that certain
Carewise Tax Matters Certificate, dated as of the date hereof, (the "Carewise
Tax Certificate") and the representations of certain stockholders contained in
those Stockholders Representation Letters regarding the Merger from certain
significant CareWise stockholders to Perkins Coie LLP (the "Stockholder
Representation Letters").
Our opinion is conditioned on, among other things, the initial and
continuing accuracy of the facts, information, covenants and representations set
forth in the documents referred to above, the representations given by PhyCor in
the PhyCor Tax Certificate, the representations given by Carewise in the
Carewise Tax Certificate, and the representations of certain Carewise
stockholders in the Stockholder Representation
<PAGE> 2
March __, 1998
Page 2
Letters. In rendering our opinion, we have assumed the accuracy of all
information and representations and the performance of all undertakings
contained in the reviewed documents as set forth above, the conformity of all
copies to the original documents, and the genuineness of all signatures. We have
not attempted to verify independently the accuracy of any information in any
such document, and we have assumed that such documents accurately and completely
set forth all material facts relevant to this opinion. If any of these facts or
assumptions are not correct, please advise us at once as our advice may be
affected by a change in such facts or assumptions.
Based upon the foregoing and subject to the limitations discussed
below, it is our opinion that the statements made under the headings "SUMMARY
Certain U.S. Federal Income Tax Consequences" and "THE MERGER - Certain U.S.
Federal Income Tax Consequences" in the Proxy Statement/Prospectus, to the
extent that they constitute matters of law or legal conclusions, are correct in
all material respects. However, as discussed above and as indicated in the S-4,
if any of the assumptions or representations set forth above prove incorrect,
then the conclusions set forth above may not be accurate, with the consequences
discussed in the S-4 under the heading "MERGER--Federal Income Tax
Consequences--Consequences of Failure to Qualify as a Tax-Free Reorganization."
Our opinion is limited to the specific matters described in the S-4
under the caption "THE MERGER--Certain Federal Income Tax Consequences." We give
no opinion with respect to other tax matters, whether federal, state or local,
that may relate to the Merger. Our opinion may not address issues that are
material to an individual stockholder based on his or her particular tax
situation. No ruling will be requested from the Internal Revenue Service ("IRS")
regarding the Merger. Our opinion is not binding on the IRS and does not
constitute a guarantee that the IRS will not challenge the tax treatment of the
Merger.
In rendering our opinion, we have considered the applicable provisions
of the Code, Treasury Regulations promulgated thereunder and the pertinent
judicial authorities and interpretative rulings of the IRS. We caution that our
opinion is based on the federal income tax laws as they exist on the date
hereof. It is possible that subsequent changes in the tax law could be enacted
and applied retroactively to the Merger and that such changes could result in a
materially different result than the result described in the opinions above.
-2-
<PAGE> 3
March __, 1998
Page 3
This opinion is furnished in connection with the Merger. We consent to
the reference to our firm under the caption "SUMMARY--Certain Federal Income Tax
Consequences" and "THE MERGER--Certain Federal Income Tax Consequences" and to
the filing of this opinion as an exhibit to the S-4.
Very truly yours,
-3-
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
PhyCor, Inc.:
We consent to the use of our report dated February 4, 1997, except for
note 12(a) which is as of March 7, 1997, incorporated by reference herein and
to the reference to our firm under the heading "Experts" and "Selected
Consolidated Financial Data - PhyCor" in the registration statement on Form S-4
of PhyCor, Inc.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
January 27, 1998
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
CareWise, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data -- CareWise" and "Experts" in
the prospectus.
KPMG Peat Marwick LLP
Seattle, Washington
January 27, 1998
